Income Tax Appellate Tribunal - Chandigarh
Punjab Con-Cast Steel Ltd. vs Assistant Commissioner Of Income-Tax on 19 March, 1993
Equivalent citations: [1994]49ITD430(CHD)
ORDER
J. Kathuria, Accountant Member
1. 1 to 15. [These paras are not reproduced here as they involve minor issues.]
16. Now we come to the main ground in the assessee's appeal which is regarding the relief under Section 80-1 of the Act. Before discussing the issue regarding relief under Section 80-1, it will be necessary to give a brief history of the assessee's case. The assessee is a limited company having as many as 8 units. These units are steel melting shop (in short, SMS-I), SMS-II, SMS-III, SMS-IV, SMS-V, Oxygen Plant, C.I. Foundry and Steel Rolling Mill. SMS-I was installed in December 1973 and it had an electric arc furnace. SMS-II was better type arc furnace of high quality and efficiency which was added nearly 8 years after the installation of SMS-I. SMS-III came into existence in June 1986 and had an induction furnace which was more efficient than the electric arc furnace. SMS-IV was added in March 1988. It had also an induction furnace. SMS-V was also added in 1988. Steel Rolling Mill was started in 1976-77. C.I. Foundry Unit was added in 1980 and the Oxygen Plant Unit was set up in September 1983.
17. The assessee-company claimed deduction under Section 80-1 amounting to Rs. 1,96,26,951 in respect of four units as per the following details :
(i) SMS-II Rs. 1,14,75,095
(ii) SMS-III Rs. 54,57,021
(iii) SMS-IV Rs. 14,72,070
(iv) Oxygen Plant Rs. 12,22,765
Rs. 1,96,26,951
18. The Assessing Officer asked the assessee to give separate manufacturing and profit and loss account of all the units. He noticed that expenses were debited in SMS-I which was the head office of the assesse-company and that these expenses were manifold as compared to the other units. This expenditure included manufacturing expenses, personal expenses, administrative expenses, financial expenses and even depreciation. Such expenses were considered higher by the Assessing Officer as compared to units like SMS-II, SMS-III and SMS-IV. It appeared to the Assessing Officer that the assessee had done this to increase the profits of the other units for claiming higher deduction under Section 80-1. The Assessing Officer further noted that the purchases of raw-material, consumable stores etc. of all the units had been made in SMS-I and from this unit, these consumable stores and raw material etc. were transferred to the various other units and the cost of this was debited to those units. It was also noticed that sale of all the steel ingots from different units was routed through SMS-I and that the sales had been made at the average price of month at which the ingots were sold by SMS-I in the market. As regards the manufacturing expenses, it was noted that only directly relatable manufacturing expenses and other nominal expenses had been put in the various units and so the transfer price of goods of the other units was held to be excessive by the Assessing Officer. The Assessing Officer invoked the provisions of Section 80-1(8) and made certain adjustments on the basis of production in terms of tonnage of each unit. Thus, the Assessing Officer re-cast the profit and loss account of the various units for the purposes of allowing relief under Section 80-1. This is indicated and illustrated in Annexure 'A' to the assessment order. From the profits thus arrived at, the Assessing Officer reduced the claim of the assessee under Section 32AB of the Act in respect of SMS-II and Oxygen Plant. He also made an adjustment on account of depreciation as per Income-tax Rules and allowed deduction under Section 80-1 of Rs. 15,61,250 in respect of SMS-II and Rs. 9,78,500 in respect of Oxygen Plant, aggregating in all to Rs. 25,39,750. This is amply illustrated in Annexure 'B' to the assessment order. This deduction was as against the original claim of Rs.. 1,96,26,951 and against the claim as per the re-casted profit and loss account worked out at Rs. 1,80,20,000 as per the chart produced before us.
19. The learned CIT(A) looked into the matter very comprehensively. Various arguments were advanced by the assessee before the learned CIT(A). One argument was that Section 80-1(8) was not applicable at all and, therefore, no adjustments were permitted or warranted by law because the Assessing Officer had accepted the transfer price of ingots as the market price. It was also pointed out that there was no inflation or suppression in respect of the cost of raw-material and the consumable stores. The learned CIT(A) impliedly accepted the argument of the assessee that the provisions of Section 80-1(8) were not applicable in the instant case. She, however, held that the provisions of Section 80-1(6) were applicable and hence adjustments in respect of certain expenses had to be made.
20. Before the learned CIT(A) it was further argued by the assessee that the Assessing Officer's method of allocation of various expenses on the basis of production and not on the basis of value was not correct and yielded distorted results. The learned CIT(A), however, embarked upon her own method of allocation in respect of various items of expenses and decided the issue accordingly. In respect of insurance expenses and some other expenses, it appears that the assessee agreed to the allocation as suggested by the learned CIT(A).
21. As regards reduction of claim under Section 32AB, the learned CIT(A) partially accepted the plea of the assessee but rejected the assessee's contention that irrespective of the profits from any unit the benefit under Section 32AB should be given against those units in which there was no claim under Section 80-1.
22. Both the assessee and the revenue have come up in cross appeal on this point of relief under Section 80-1. While the main thrust of the assessee's grievance is that the reallocation of expenses is bad for purposes of arriving at the quantum of deduction under Section 80-1, the revenue in ground No. 2 has challenged the direction of the learned CIT(A) to allow the assessee's claim under Section 32AB first adjusted against those profit where no claim under Section 80-1 was made to the extent of 20% of those profits and the balance to be adjusted against the profits where claim under Section 80-1 was made.
23. The learned counsel for the assessee submitted that the assessee was manufacturing different types of steel, that in the beginning steel was made in the electric arc furnace and later on in the induction furnace which involved a different process. It was submitted that complete books of account were maintained in respect of each unit and that in the earlier years also deduction claimed under Section 80-1 had been allowed without disturbing the books of the assessee. It was vehemently argued that the Assessing Officer had recorded a finding of fact at page 6 of the assessment order that the purchases of raw material and consumable stores of all the units were made in SMS-I (the head office) and from that unit those raw materials and consumable stores etc. were transferred to various units and their cost was debited to the respective units. It was also submitted that another finding of fact was recorded by the Assessing Officer to the effect that the sale or transfer of steel ingots from other units to SMS-I was the same at which it could have been sold in the market directly by each unit with the exception of excise which in any case was not to be taken into account. For this purpose, reliance was placed on the rules issued by the excise authorities, a copy of which has been placed on record. It was submitted that after having recorded the above findings of fact, the Assessing Officer reached a perverse conclusion that the transfer price of ingots of other units to unit No. I was "blatantly excessive". Reliance in this regard was placed on the Supreme Court decision in CIT v. Daulat Ram Rawatmull [1973] 87 ITR 349. It was vehemently argued that the conclusion by which provisions of Section 80-1(8) have been invoked was perverse because the Assessing Officer did not say that the profits of the other units in which relief under Section 80-1 had been claimed were inflated. According to the learned counsel for the assessee the only fault found by the Assessing Officer was that the transfer price was excessive which was not based on any evidence. It was submitted that Section 80-1(8) had no application in the instant case because goods had been transferred at the "maximum realisable price". It was also submitted that the learned CIT(A) had accepted the assessee's plea that the provisions of Section 80-1(8) were not applicable and the revenue had accepted that finding insofar as it had not challenged the same in the cross appeal. It was also explained that the proviso to Section 80-1(8) could not be read in isolation and could be pressed into service only if the main provision, namely, Section 80-1(8) was applicable. According to the learned counsel ties would arise only if Section 80-1(8) was otherwise applicable.
24. It was also submitted that the learned CIT(A) had also wrongly held that the provisions of Section 80-1(6) were applicable in this case. In this regard, it was submitted that Section 80-1(6) was not also applicable because it was enacted to meet a different situation. It was elaborated that for determining the quantum of deduction under Section 80-1(1) for the immediately succeeding year to initial year or any subsequent assessment year, the profits and gains of the industrial undertaking had to be computed as if such profits were the only source of income of the assessee during the previous year relevant to the initial assessment year and every subsequent assessment year. It was submitted that this provision was enacted because the profits and gains of each industrial undertaking had to be computed and brought forward loss and unabsorbed depreciation etc. had to be adjusted against the profits and gains of that unit, or undertaking. It was vehemently argued that this section also did not give power or authority to the revenue authorities to disturb the allocation made by the assessee in the normal course of business as per books of account.
25. In the alternative, it was submitted that even if some adjustments had to be made in the allocation of expenses which were otherwise not permitted by law, even then the assessee had debited expenses in various units which compared favourably with such expenses in the earlier years which had been accepted by the revenue and hence the expenses claimed were reasonable. Pointing to page 26 and onwards of the assessee's compilation, it was submitted that the percentage of manufacturing expenses with reference to sale value of production of three induction furnace units, namely SMS-III, SMS-IV and SMS-V shall be that manufacturing expenses for accounting year 1985-86 in respect of SMS-III had been claimed at 19.95%, for accounting year 1986-87 at 16.94% and for the year under consideration comprising 21 months at 16.52%. It was, therefore, submitted that the manufacturing expenses claimed in the year under consideration in respect of SMS-III compared with the expenses of the immediately preceding accounting year. It was explained that though such expenses were not there in the earlier years in respect of SMS-IV and SMS-V because these units were set up in 1988, the manufacturing expenses claimed at 17.46% and 14.40% respectively were quite reasonable. Similarly it was explained that in SMS-I, manufacturing expenses with regard to the sale value of production of two units of electric arc furnaces, the percentage in the accounting year 1984-85 was 41.39%, for accounting year 1985-86 at 41.54%, for accounting year 1986-87 at 46.31% and for the year under consideration at 46.02%. It was pointed out that in all the earlier years, the manufacturing expenses had been accepted and the trading and profit and loss account had not been re-casted and that the percentage of expenses at 46.02% in the year under consideration compared favourably with the earlier years. Similarly, as regards SMS-II, it was explained as per details placed at page 28 of the assessee's compilation that such manufacturing expenses on the basis of value of production worked out to 25.72% for accounting year 1984-85, 30.31% for accounting year 1985-86, 29.69% for accounting year 1986-87 and 28.30% for accounting year 1988-89. It was submitted that the expenses in the year under consideration on the basis of value of production were comparable to the earlier years which had been accepted by revenue. Pointing to page 29 of the assessee's compilation, it was submitted that the manufacturing expenses claimed by the assessee for SMS-II at sale value of production would work out to Rs. 596.19 laces whereas manufacturing expenses actually claimed were of the order of Rs. 737.65 laces which compared favourably and hence there was no design on the part of the assessee to inflate the profits of the units in which claim under Section 80-1 was preferred.
26. As regards claim under Section 32AB, it was submitted that this could not be reduced from the profits because there was no claim under Section 32AB in respect of units in which relief under Section 80-1 had been claimed. It was, therefore, submitted that though the learned CIT(A) had given a partial relief in this regard, there was no justification for reducing any amount from the profits for computing the relief under Section 80-1.
27. It was finally submitted that the assessee's claim under Section 80-1 may be allowed without making any adjustment on account of allocation of expenses.
28. The learned D.R. submitted that Section 80-1(8) was definitely applicable in this case and even if the revenue had not specifically challenged the finding of the learned CIT(A), the issue needed adjudication by the Appellate Tribunal. It was submitted that when it was not possible to arrive at correct profits and gains or such computation presented exceptional difficulties, then Section 80-1(8) had to be applied and a reasonable basis found to adjust the market price. It was submitted that the method of adjustment adopted by the Assessing Officer was correct because it was based on the tonnage of production whereas the assessee had made the adjustment on the basis of sale value of production which gave a lop-sided or distorted picture because in those furnaces which were induction furnaces, the raw-material was imported and hence the price of raw-material was more and as such the sale price realised was also more. Secondly, it was submitted that manufacturing expenses or financial expenses were debited only to the head office and not taken to other units. It was also pointed out that in respect of some of the expenses like insurance expenses, the assessee had itself agreed to their allocation in a particular manner before the learned CIT(A) and that there could not be any grievance on the part of the assessee regarding that part of the impugned order. It was vehemently argued that there was no record of each unit and so the provisions of Section 80-1(8) were applicable. It was also pointed out that the market price arrived at by the assessee was on month's average price and not a representative price. The learned D.R. further challenged the direction of the learned CIT(A) regarding the assessee's claim under Section 32AB for arriving at the deduction under Section 80-1.
29. We have carefully considered the rival submissions as also the facts on record. The first question to be decided is whether the provisions of Section 80-1(8) are applicable in this case or not. That section provides that where any goods held for the purposes of the business of the industrial undertaking are transferred to any other business carried on by the assessee or where any goods held for the purposes of any other business carried on by the assessee are transferred to the business of the industrial undertaking and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the business of the industrial undertaking does not correspond to the market value of such goods as on the date of the transfer, then for the purposes of deduction under Section 80-1, the profits and gains of the industrial undertaking shall be computed as if the transfer, in either case, had been made at the market value of such goods as on that date. In the Explanation to Section 80-1(8) "market value" has been defined to mean, in relation to any goods, the price that such goods would ordinarily fetch on sale in the open market. The proviso to Section 80-1(8) stipulates that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the industrial undertaking presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit.
30. From the scheme of Section 80-1(8), it is clear that this section can be invoked only if the goods from the industrial undertaking to any other units of the assessee and vice versa are not transferred at the market price. The proviso comes into play only if Section 80-1(8) first comes into play. If it is found as a fact that the goods have been transferred from various units to the industrial undertaking and vice versa at less than the market price, then and then alone the provisions of Section 80-1(8) are attracted. In that event, the Assessing Officer has to compute the profits and gains of the industrial undertaking as if the transfer had been made at the market value of such goods. It is only when the provisions of Section 80-1(8) are attracted and the Assessing Officer is confronted with exceptional difficulties in computing the profits and gains of the industrial undertaking that the law permits him to compute such profits and gains on such reasonable basis as he may deem fit. Where the main provisions contained in Section 80-1(8) are not applicable, the proviso has no application at all.
31. In the present case, the Assessing Officer has clearly mentioned in body of the assessment order that the cost of the raw material and consumable stores purchased by SMS-I was transferred and debited to profits and loss account of various units. As regards the sale value, the Assessing Officer has clearly mentioned that the units had realised maximum realisable price from the head office. Both these findings are findings of fact. Against this background, it cannot now be said that the goods were transferred from various units to the industrial undertaking and vice versa at less than the market price. In fact, the onus is on the revenue to record a finding and to prove that the transfer of goods is at less than the market price. Instead of recording that finding, the Assessing Officer gives a certificate that the goods in the instant case had been transferred at the "maximum realisable price". In that view of the matter, it is clear that the provisions of Section 80-1(8) are not applicable in the instant case and hence the proviso to Section 80-1(8) can also not be invoked. It is significant to note that the learned CIT(A) has also held though impliedly that the provisions of Section 80-1(8) are not applicable to the facts of the instant case. That finding has also not been challenged by the revenue. We, therefore, hold that the entire exercise of re-allocation of various expenses on the facts and in the circumstances of the case was unwarranted.
32. Now we come to the question as to. whether the learned CIT(A) was justified in saying that the provisions of Section 80-1(6) were applicable in this case and hence the expenses could be re-allocated amongst the various units on that basis. Section 80-1(6) stipulates that notwithstanding anything contained in any other provisions of the Income-tax Act, the profits and gains of an industrial undertaking for the purposes of determining the quantum of deduction under Section 80-1(1) would be deemed to be the only source of income of the assessee. This sub-section was enacted to meet a particular situation. This sub-section enacts a provision of over-riding nature and lays down a special mode for computation of profits and gains eligible for deduction under Section 80-1. For the purpose of determining the quantum of "tax holiday" profits under Section 80-1, the taxable income of the eligible industrial undertaking, etc. is to be ascertained as if such industrial undertaking were an independent unit owned by the assessee concerned and the assessee had no other source of income. The purpose of this sub-section was that the unabsorbed loss, unabsorbed depreciation etc. relating to the eligible industrial undertaking etc. should be taken into account in determining the quantum of deduction under Section 80-1 even though these may actually have been set off against the profits of the assessee from other sources. The celebrated authors, Chaturvedi and Pithisaria in Fourth Edition of their "Income-tax Law" have also expressed a similar view with regard to the interpretation of Section 80-1(6) at p. 2594.
33. If the scope of Section 80-1(6) is what has been explained above, then this sub-section does not also give a handle to the revenue authorities to re-allocate the expenses in various units. In our considered view, the entire exercise embarked upon by the Assessing Officer and the learned CIT(A) regarding re-allocation of expenses was not called for and the aforesaid sections, namely, Section 80-1(8) and Section 80-1(6) do not clothe the revenue authorities to re-allocate the expenses particularly when the assessee has been maintaining regular books of account and production record in respect of each unit and the assessee's claim under Section 80-1 has been accepted in the past. We, therefore, hold that there was no justification for re-allocating various expenses as done by the revenue authorities to compute deduction under Section 80-1 of the Act.
34. We, however, find from the order of the learned CIT(A) that the assessee had agreed to certain expenses being allocated like insurance expenses etc. Since this was a specific concession by the assessee, we cannot accept the plea of the assessee that even in respect of those expenses, there should be no re-allocation. In the face of the acceptance by the assessee, the re-allocation as suggested by the learned CIT(A) in respect of only those expenses where the assessee's agreement has been secured would remain unaffected and the Assessing Officer would be justified in making the allocation and re-casting the profit and loss account of various units in respect of only those items.
35. As regards the question of reducing relief under Section 32AB from the profits for the purposes of computing deduction under Section 80-1, the learned Counsel for the assessee submitted that though the learned CIT(A) had given partial relief, this was not enough. It was contended that the Assessing Officer had allowed deduction under Section 80-1 after reducing the assessee's claim under Section 32AB from the profits of two units, namely SMS-II and the Oxygen Plant as per Annexure 'B' to the assessment order. It was submitted that Section 32AB was an independent section and while Section 80-1 was applicable to an industrial undertaking, Section 32AB was applicable to an assessee and not to an undertaking and both these sections operated in different fields. Pointing to the provisions of Section 32AB(7), it was submitted that where the asset acquired in accordance with the provisions of Section 32AB(1) (b) was sold or otherwise transferred in any previous year by the assessee to any person at any time " before the expiry of 8 years from the end of the previous year in which it was acquired, such part of the cost of the asset as was relatable to the deduction allowed under Sub-section (1) shall be deemed to be the profits and gains of business or profession of the previous year in which the asset is sold or otherwise transferred and shall accordingly be chargeable to income-tax as the income of that previous year. It was vehemently argued that the machinery purchased had been identified as to belong to rolling mill, cast iron foundry unit and SMS-V, in respect of which no deduction under Section 80-1 had been claimed. It was also submitted that while Section 32AB allowed deduction from the total income of the assessee, relief under Section 80-1 had to be allowed on the basis of profits and gains.
36. As regards the claim under Section 32AB, the learned D.R. submitted that even the partial relief allowed by the lamed CIT (A) was not correct as was pointed out in ground No. 2 of the cross appeal.
37. We have condisered the rival submissions and we find considerable merit in the arguments by the learned Counsel for the assessee. Since the claim under Section 32AB has been made in respect of cast iron foundry, SMS-V and rolling mill on which no deduction under Section 80-1 has been claimed, the question of reducing the assessee's claim under Section 32AB for purposes of computing relief under Section 80-1 does not arise. While the assessee's submission on the point is accepted, the revenue's ground being No. 2 is rejected.
38 to 40. [These paras are not reproduced here as they involved minor issues.]