Income Tax Appellate Tribunal - Mumbai
Lic Housing Finance Ltd. vs Deputy Commissioner Of Income-Tax, ... on 17 April, 2006
Equivalent citations: [2007]105ITD86(MUM), [2008]303ITR101(MUM)
ORDER
K.K. Boliya, Accountant Member
1. This appeal has been filed by the assessee against the order dated 16-12-1998 of CIT(A)-XXVI, Mumbai. The assessee has raised the following grounds of appeal:
On the facts and circumstances of the case and in law, the Id. CIT(A) erred in upholding the disallowance of Rs. 74,42,187 claimed for deduction under Section 35D of the IT Act.
Without prejudice to the above ground, the Id. CIT(A) erred in upholding the disallowance of the entire amount of Rs. 74,42,187 under Section 35D(1)(a) although the said amount included Rs. 3,56,990 which was claimed on the assessment record under Section 35D(1)(f) and was as such being correction allowed in the earlier assessment years.
2. The assessee is a public sector undertaking of the Government of India and the grounds of appeal have been permitted by the Cabinet Committee on Disputes as per the copy of the Minutes of the Meeting of COD held on 2-2-2006, filed by the assessee. The grounds of appeal raised are inter-connected. The facts are that the assessee-company is exclusively engaged in the business of providing housing finance. It was incorporated in the financial year 1989-90 and during the previous year relevant to the assessment year under appeal, the assessee came up with public issue of 189 lakhs equity shares of Rs. 10 each at a premium of Rs. 50 per share, aggregating to Rs. 113.50 crores. In connection with the aforesaid public issue, the assessee incurred total expenditure of Rs. 7,08,51,925. 1/10th of the above expenditure was claimed during the present assessment year under Section 35D(ii) of the IT Act. It was claimed before the Assessing Officer that the deduction is allowable as the aforesaid expenditure was in connection with the extention of the assessee's industrial undertaking. The claim of the assessee rested on definition of 'industry' as per Section 2(f) of the Industrial Disputes Act, 1947. It was claimed that under the aforesaid Act, 'industry' means any business, trade, undertaking, manufacture and includes any calling service, employment and handicraft or industrial occupation or vocation. The claim of the assessee was disallowed by the Revenue authorities on the ground that the assessee is not engaged in the manufacturing or production or processing of any goods or article and, therefore, it cannot be said that the assessee owned any industrial undertaking. The deduction was also disallowed on the ground that the public issue was only for the purpose of raising additional working capital and it was not a case of extension of the industrial undertaking by setting up of a new unit. The disallowance made by the Assessing Officer also included a sum of Rs. 3,56,990 (which is the subject-matter of ground No. 2), pertaining to preliminary expenses incurred prior to the commencement of the assessee's business, which was allowed in earlier years and 1/10th thereof being Rs. 3,56,990 was deductible under Section 35D(zz).
3. In the backdrop of the above-mentioned facts, the Id. counsel, Ms. Padmini Khare, attending on behalf of the assessee-company forcefully argued before us that the term 'industrial undertaking' is of wider connotation and its meaning cannot be restricted to an undertaking which is engaged in the manufacturing or processing. It is pointed out that the term has not been defined under Section 35D and, therefore, its ordinary meaning should be adopted for the purposes of Section 3 5D. The Id. counsel relied on the Kerala High Court judgment in the case of P. Alikunju, M.A. Nazeer Cashew Industries v. CIT . This case arose in connection with the interpretation of Section 54D wherein also the term 'industrial undertaking' occurs. The Id. counsel invited our attention to the ratio of this case, which is reproduced below from the headnote:
A provision for exemption or relief in a fiscal statute should be construed liberally and in favour of the assessee. Words used in a statute dealing with matters relating to the general public arc presumed to have been used in their popular rather than their narrow legal or technical sense. Loquiturut vulgus, that is, according to the common understanding and acceptation of the terms, is the doctrine that should be applied in construing the words used in statutes dealing with matters relating to the public in general. The IT Act is of general application. It, therefore, follows that the words used therein should be given their popular meaning. Section 54D of the IT Act, which grants an exemption must be construed liberally and the expression 'industrial undertaking' occurring in Section 54D must be given its popular meaning. An undertaking mentioned in Section 54D must be one maintained by a person for the purpose of carrying on his business. 'Undertaking' for the purpose of this section, however, must be 'an industrial undertaking'. The demonstrative adjective 'industrial' qualifying the word 'undertaking' unmistakably and with precision shows that the undertaking must be one which partakes of the character of a business. The word 'business' connotes some real, substantial and systematic or organized course of activity with a set purpose. The word 'business' is a word of wide import and in fiscal statutes must be construed in a broad rather than a restricted sense. The words 'industrial undertaking', therefore, should be understood to have been used in Section 54D in a wide sense, taking in its fold any project or business a person may undertake.
The Government acquired the land and building forming part of an ice factory belonging to the assessee. The ITO assessed the long-term capital gain arising from the transfer. The assessee claimed exemption from tax under Section 54D on the ground that he had invested the capital gain in the construction of a lodging house. The Appellate Asstt. Commissioner and the Tribunal disallowed the claim. On a reference:
Held, that the running of a lodge could be said to be an industrial undertaking within the meaning of Section 54D. The assessee was entitled to the exemption under Section 54D.
4. The Id. counsel has also referred to the Calcutta High Court decision in the case of CIT v. Peerless Consultancy Services (P.) Ltd. . The ratio of this case is reproduced from the headnote:
The term 'industrial company' has been described as including a company engaged in the processing of goods. The word 'processing' has not been defined in the Act and so it has to be assigned its dictionary meaning according to which it refers to the treatment to which a commodity is subjected in order to prepare it for the market. The nature and extent of processing may vary from case to case. In one case, the processing may be slight and in another, it may be extensive.
Held, (i) that the assessee which carried on the business of providing technical and industrial consultancy on the basis of computers and of undertaking electronic data processing was an industrial company within the meaning of Section 2(7)(c) of the Finance Act, 1981.
The Id. counsel also drew support from the Supreme Court judgment in the case of Bangalore Water Supply & Sewerage Board v. A. Rajappa . The Id. counsel for the assessee was requested by the Bench to place on record a copy of the full text of the aforesaid decision. However, the same has not been made available and the Id. counsel only referred to the ratio of this case, which is incorporated at page 2 of the written submission and the same is reproduced below from the written submission:
Where there is (i) systematic activity, (ii) organized by cooperation between employer and employee (the direct and substantial element) is chimerical, (iii) for the production and/or distribution of goods and services calculated to satisfy human wants and wishes (not spiritual or religious but inclusive of material things or services, geared to celestial bliss, e.g., making, on a large scale, prasad or food), prima facie, there is an 'industry' in that enterprise.
Absence of profit motive or gainful objective is irrelevant, be the venture in the public, joint, private or other sector.
The true focus is functional and the decisive test is the nature of the activity with special emphasis on the employer-employee relations.
If the organization is a trade or business it does not cease to be one because of philanthropy animating the undertaking.
Undertaking must suffer a contractual and associational shrinkage as explained in , so also, service, calling and the like. This yields the inference that all organized activity possession the triple elements above-mentioned, although not trade or business, may still be industry provided the nature of the activity, viz., the employer-employee basis, bears resemblance to what is found in trade or business. This takes into the fold of 'industry' undertaking, calling and services, adventures analogous to the carrying on of trade or business. All features, other than the methodology of carrying on the activity, viz., in organizing the co-operation between employer and employee, may be dissimilar. It does not matter, if on the employment terms there is analogy.
5. The Id. counsel for the assessee has also relied on the Bombay High Court decision in the case of CIT v. Chanda Diesels . She invited our attention to the ratio of this case, relevant part of which is reproduced below from the headnote:
Under Section 80HH of the IT Act, the profits and gains from newly established industrial undertakings in backward areas which fulfil the conditions prescribed by the said section are entitled to the deduction to the extent of 20 per cent of such profits. The IT Act does not define the expression 'industrial undertaking'. Section 80HH is intended to encourage the setting up of new industrial enterprises and hence will have to be construed liberally in a broad commercial sense keeping its object in view. The basic concepts of 'industrial undertaking', 'manufacture', 'produce' occur even in Section 32A. If a unit having new machinery amounted to industrial undertaking and the process amounted to manufacture for the purposes of Section 32A, it is difficult to see how any different legislative intent could be attributed to identical expressions used in Section 80HH. Sub-section (2) of Section 80HH refers to 'industrial undertaking' and not to the assessee or his other business. If a new industrial unit is established as a part of an already existing industrial establishment and if the newly established unit is itself an integrated independent unit in which new plant and machinery is put up and that by itself is capable of production of goods independently of the old unit, the said unit could be classified as a newly established industrial undertaking and will qualify for the relief.
Drawing support from the above-mentioned judicial pronouncements, Ms. Padmini Khare contended that the term 'industrial undertaking' as appearing in Section 35D should be considered to mean any business activity and, therefore, it is contended that the assessee-company is entitled to deduction under Section 35D.
6. The Id. CIT DR, Shri R.K. Rai and the Id. DR Shri Vijay Shankar appeared on behalf of the Department and strongly supported the orders of the Revenue authorities. It is contended on behalf of the Department that in the absence of any definition of the term 'industrial undertaking' under Section 35D, the definition of the same term provided in various other sections of the IT Act should be considered. The Id. CIT(A) has already referred to the definition of 'industrial undertaking' as contained in the Explanation to Section 33B. The said Explanation is reproduced below:
In this section, 'industrial undertaking' means any undertaking which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture of processing of goods or in mining.
The Id. DRs also drew support from the definitions contained in various sections of Chapters VI-A, viz., Sections 80HH, 80-I, 80-IA, 80J etc. Our attention is invited to the Supreme Court decision in the case of Indian Hotels Co. Ltd. v. ITO '. In this case, it was held by the Supreme Court that the condition precedent for special deduction under Section 80J is that the industrial undertaking must engage in the manufacturing or processing of an article. It is argued that a company which is purely a finance company cannot be said to be owning an industrial undertaking or an industrial unit. It is also contended that there is no case for extension of the industrial undertaking or setting up of a new unit as the public issue is meant for raising only additional capital. It is contended that if no new industrial unit is established and there is no expansion of the existing industrial unit, deduction under Section 35D(ii) is not allowable. For this proposition, reliance is placed on the Madras High Court decision in the case of CIT v. Sakthi Finance Ltd. . It is also submitted that the onus is on the assessee to establish that the conditions of Section 35D have been fulfilled by the assessee. In this connection, reliance is placed on the Madras High Court decision in the case of Agrocargo Transports Ltd, v. CIT .
7. We have given a careful consideration to the rival submissions and have gone through the relevant facts in the light of the precedents cited before us. First of all, a reference must be made to the relevant provisions of Section 35D. Sub-section (1) of Section 35D reads as under:
35D. (1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, incurs, after the 31st day of March, 1970, any expenditure specified in Sub-section (2),-
(i) before the commencement of his business, or
(ii) after the commencement of his business, in connection with the extension of his industrial undertaking or in connection with his setting up a new industrial unit, the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of the industrial undertaking is completed or the new industrial unit commences production or operation.
From the above, it may be seen that deduction under Section 35D is admissible under two situations. Firstly, the eligible expenditure is incurred before commencement of business. It is significant that there is no condition here that the assessee must own any industrial undertaking or industrial unit. Thus, if the case is covered under Clause (i), the assessee will be entitled to deduction irrespective of the business activity carried on by the assessee, if the eligible expenditure is incurred before commencement of the business. Once the business is commenced, deduction in a case will be available only under Clause (ii) of Section 35D(1). There is no dispute that the case of the assessee is covered in the second category. It is significant to note that deduction in respect of first instalment of the expenditure is allowable in the year in which the extension of the industrial undertaking is completed or the new industrial unit commenced production or operation. Thus, it is unambiguously mentioned under Section 35D itself that the new industrial unit must commence production or operation. In our view, the phraseology employed under Section 35D implies that the industrial undertaking or the industrial unit must be engaged in some manufacturing, producing or processing activity. In our view, the cases relied upon by the Id. counsel for the assessee and distinguishable on facts. In the case of P. Alikunju, M.A. Nazeer Cashew Industries (supra), the question pertained to deduction allowable under Section 54D. In that case, the capital gain arising to the assessee was invested in construction of lodging house. It was held that running of lodging house can be said to be industrial undertaking within the meaning of Section 54D. In the case of Peerless Consultancy Services (P.) Ltd. (supra) which is also relied upon by the Id. counsel lor the assessee, the High Court observed that the term 'industrial company' has been described as including a company engaged in processing of goods. It was held that business of providing technical and industrial consultancy on the basis of computers and of undertaking electronic data processing can be said to be satisfying the criteria of an industrial company. The Bombay High Court decision in the case of Chanda Diesels (supra) referred to by the Id. counsel for the assessee does not have any relevance to the issue before us. The Id. counsel for the assessee has also relied on the Supreme Court decision in the case of Bangalore Water Supply & Sewerage Board(supra). In the absence of full text of this judgment, we are unable to appreciate the relevance of this case as applicable to (he facts of the present case. The ratio of this case as reproduced above from the written submission shows that the facts are substantially different and distinguishable. In our view, the term 'industrial undertaking' or 'industrial unit' occurring in Section 35 D must be interpreted keeping in view the purpose and object of Section 35D, which is reflected under Sub-section (1) itself. As already discussed by us above, deduction under Section 35D is available in respect of two different situations. Whenever the expenditure has been incurred prior to commencement of the business, the Legislature has been lenient in allowing such deduction in respect of any business and there is no condition that the business must own any industrial undertaking or industrial unit. Apparently, this concession is given to encourage setting up of new commercial activities and ventures. However, once business is already in existence and any expenditure is incurred which is of the nature as stipulated under Section 35D, deduction is restricted as in a case of extension of industrial undertaking or setting up of new industrial unit. It is further clarified in the section itself that deduction will be allowed in the year in which the extension of the industrial undertaking is completed or the new industrial unit commences production or operation. In our view, this clearly indicates to some manufacturing activity or processing activity. The only business of the assessee-company is providing housing finance. In our view, the assessee is not entitled to deduction under Section 35D. We, therefore, confirm the order of the Id. CIT (A) on this issue.
8. Coming to ground No. 2, in our view, the facts have to be verified by the Assessing Officer. If the assessee has already been allowed deduction of 1/10th of the eligible expenditure prior to commencement of business, under Section 35D(1)(i) of the IT Act, such deduction at 1/10th of the expenditure has to be allowed for a period of 10 years. It is claimed that the deduction of Rs. 3,56,990 is the 1/10th of such expenditure and there is no basis for disallowance. The Assessing Officer is directed to verify this fact and if the deduction has been allowed in earlier years, the same shall also be allowed during this year under Section 35D(1)(i).
9. In the result, the assessee's appeal stands partly allowed.