Bombay High Court
Excel Industries Ltd. vs Dy. Cit on 28 August, 2002
Equivalent citations: (2004)86TTJ(MUMBAI)840
ORDER
B.L. Chmber, A.M. The assessee is a public limited company and is engaged in the manufacture and sale of chemicals and fertilizers. As many as 17 grounds have been raised in this appeal. The same are discussed and disposed of as under. Ground No. 1 reads as under :
"On the facts and in the circumstances of the case and law, the Commissioner (Appeals) erred in setting aside the ground relating to addition of Rs. 5,50,676 to the closing stock on account of modv ' at credit and in directing the Dy. CIT to make verification and take consequential action."
2. At the time of hearing, this ground was not pressed. The same is, accordingly dismissed.
3. Ground No. 2 reads as under
"On the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in upholding the disallowance of rural development expenses amounting to Rs. 2,15,000. In upholding the said disallowance, the Commissioner (Appeals) erred in not appreciating the fact that the said expenses were eligible for deduction under section 37(1) in spite of the withdrawal of section 35CC."
4. During the year under appeal, the assessee claimed a sum of Rs. 2,15,000 on account of expenses on rural development. It was submitted before the assessing officer that the assessee is committed to the welfare of the farmers and it had spent the amount towards helping the farmers of Kutch through a number of activities to develop and improve agriculture. It was further submitted that the expense is covered by the object of the company for carrying on business and the expense is approved by the shareholders of the company by special resolution passed on 28-3-1978. The assessing officer, however, rejected the assessee's claim with the following observations reproduced in para 4 of the Commissioner (Appeals)'s order :
"3(ii) Sec. 36CC specifically allowed the said expenses which are otherwise not an admissible deduction and with the withdrawal of the section, assessee is not justified in claiming the deduction. Acceptance of assessee's argument that the expense is approved by the shareholders would lead to the absurd conclusion by virtue of which even non-business expenses would acquire the tinge of legality. Hence, the contention of the assessee, is rejected."
5. On appeal, the Commissioner (Appeals) confirmed the action of the assessing officer, observing as under
"In my view, the Dy. CIT has rightly rejected the appellant's claim because the benefit of this deduction has been duly withdrawn from assessment year 1989-90 which refers to expenditure on any programme of rural development. Further, the Board's Circular relied upon by the appellant is with respect to withdrawal of tax concession under section 35C being the expenditure incurred by the sugar factory on cane development programmes. This circular does not cover section 35CC. This also shows the clear intention of interpretation given by the Board to particular section only. In view of the above facts, the claim has been rightly rejected."
6. Shri Kirit R. Kamdar, the learned counsel for the assessee, drew our attention to the details of the expenses incurred for rural development (placed at p. 36 of the paper book). Thereafter, he drew our attention to note on rural development expenses (placed at pp. 37 & 38 of the paper book). In this note, it has been submitted that the Kutch District of Gujarat State covers about 1/4th of the total geographical area of entire Gujarat. The main profession of the people of Kutch is agriculture in spite of many odds to be faced by it under present agro-climatic conditions. More than 80 per cent of agriculture is rain fed. However, the rainfall is very scarce and erratic. The occurrence of frequent faminesis a very common feature. The soils are infertile and the irrigation water is not only inadequate but is not so suitable for irrigation because of salinity infestation. It has further been submitted that the company has made serious efforts towards helpinq, the -farmers of Kutch through a number of activities to develop and improve agriculture. These include the programmes on water harvesting, research on different aspects of agriculture to develop new technology applicable under Kutch conditions, transmitting the scientific know-how and the technology already available to the framers and water and land management activities.
7. it hda'MAhe'r 1:b6eni subrilfti6d that the applimitioris-6f these:,166hniques have already started giving fruitful results. It is hoped that the efforts being put by the company in this direction will create a very good impact on the overall improvement of agriculture in Kutch. This will enhance the flow of various agricultural inputs more and more in this field. The farmers have already started realizing the importance of pesticides and other agricultural chemicals. It is visualized that the programmes initiated by the company will give a big boost to the use of these chemicals with more and more technology being made available to the cultivations.
8. It was further submitted that in order to run the above activities efficiently, the company incurs lot of expenditure in terms of creating infrastructure facilities, use of man power, agricultural land and other monetary and material inputs and accordingly, the flow of funds is a must to meet the recurring costs of salary, their travelling expenses, purchase of agricultural inputs and other relevant items. The learned counsel for the assessee placed reliance on the Circular No. 578 dated 12-9-1990, issued by the CBDT. He submitted that the expenditure claimed on this account was allowed in the past by the department.
9. Shri Arun Dewan, the learned departmental Representative, relied upon the orders of the authorities below. He submitted that the expenditure was allowed in the past because there was on the statute book a specific section, i.e., section 35CC which has since been withdrawn from the statute book and for the assessment year 1989-90, i.e., under appeal, such an expenditure cannot be allowed.
10. We have considered the rival submissions and perused the facts on record. No doubt, section 35CC has been withdrawn from the statute book, but yet, after perusing the details of expenditure incurred and aftW going through the nature of activities carried on by the assessee- company, we are of the opinion that the amount should be allowed as deduction under section 37(1) of the Act, because the assessee- company is engaged in the manufacture of chemicals and fertilizers which are used by the agriculturists and the expenditure under consideration was incurred to encourage the farmers; it has live nexus with the business purpose of the assessee and accordingly, incidental to the carrying on of business. In our opinion, CBDT Circular No. 578, dated 12-9-1990, supports the case of the assessee. In para. 3 of the said circular, it has been provided as under .-
"3. Sec. 37(1) of the Income Tax Act, 1961, however, provides that any expenditure, not being in the nature of capital expenditure or personal expenses of the taxpayers, laid ' out or expended wholly and exclusively for the purpose of his business, is to be allowed as deduction in computing the income chargeable under the head 11 profits and gains of business or profession". Hence, any expenditure incurred by a sugar factory on cane development programmes would be eligible for deduction in computing the taxable profits if, having regard to the facts and circumstances of the case, the assessing officer is satisfied that the conditions laid down in s. 37(1) of the Act are fulfilled. The withdrawal of the tax concession under section 35C would not affect this position."
11. The Commissioner (Appeals) has not relied upon the above circular, stating that this circular is applicable in the case of sugar factory only. This interpretation by the Commissioner (Appeals) is not a correct interpretation because the circular lays down the basic principle for allowing deduction under section 37(1) and the criteria is that the expenditure should be laid out or expended wholly, or exclusively for the purpose of business.
12. In the case before us, as, stated above, the expenditure incurred has direct nexus with the carrying on of business and accordingly, the same is to be allowed as business expenditure. We direct the assessing officer to allow the same. This ground accordingly succeeds.
13. Ground No. 3 reads as under
"On the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in upholding the disallowance of a sum of Rs. 74,760 being rent paid for guesthouse. The Commissioner (Appeals) failed to appreciate that the provisions of section 37(4) apply only to items of expenditure which are covered under section 37(1) or section 37(3) and as the rent paid for the guest-house was eligible for deduction under section 30, the provisions of section 37(4) are not applicable."
14. It has been submitted that such an expenditure has been allowed by the Tribunal in the earlier assessment years and reliance has been placed on the orders of the Tribunal, in the case of the assessee itself in ITA No. 2478/B/92 for the assessment year 1988-89, ITA No. 5630/Bom/1991 for the assessment year 1987-88, ITA No. 3540/Bom/1994 for the assessment year 1990-91 and ITA No. 9138/Bom/1991 for the assessment year 1986-87.
15. We have heard both the parties. In the case of Dy. CIT v. The Andhra Valley P.S. Co. Ltd. in ITA No. 4144/Bom/93 dated 29-5-2002, to which both of us were parties, for the detailed reasons given in the aforecited order, we have reversed the order of the Commissioner (Appeals) and restored that of the assessing officer on this ground. Since the facts obtaining in the case under consideration are identical to those of the concluded one cited supra, we find no reason to take a different view. This ground is accordingly dismissed.
16. Ground No. 4 reads as under :
"On the facts and circumstances of the case and in law, the Commissioner (Appeals) erred in upholding the disallowance of a sum of Rs. 5,50,104 out of the expenditure on presentation articles under the provisions of r. 6B of the IT Rules, 1962."
17. After hearing both the parties, we hold that the issue stands covered in favour of the assessee by the decision of the Tribunal in the assessee's own case relating to the assessment years 1986-87 to 1988-89 and 1990-91 (copies of orders of Tribunal placed at pp. 3,8,14 and 19 of the paper book) and by the decision of the Bombay High Court in the case of CIT v. Allana Sons Pvt. Ltd. (1993) 114 CTR (Bom) 448: (1995) 216 ITR 690 (Bom) this ground is accordingly allowed.
18. Ground No. 5 reads as under
"On the facts and in the circumstances of the case and in law,,the CIT(Appeals) erred in upholding the disallowance of the entire sum of Rs. 6,62,449 as entertainment expenditure on employees which was specifically excluded from the purview of disallowance under Explanation to section 37(2A) The CIT(Appeals) further erred in observing that since the said expenditure had not been incurred in office, factory or other place of work the same are includible for the purposes of disallowance under section 37(2A) in spite of the facts that business meetings and discussions outside the office or factory are also covered under the term 'other place of work',"
19. Here, the prayer of the assessee is 1/3rd of the expenditure estimated to have been incurred on employees and accordingly does not fall within the purview of section 37(2A) of the Act. Reliance has been placed on the following. orders of the Tribunal, in the assessee's own case and the judgments of the High Courts :
(i) ITA No. 2478/Bom/92-Asst. yr. 1988-89
(ii) ITA No. 5630/Mum/91-Asst, yr. 1987-88
(iii) ITA No. 9130/Bom/91-Asst. yr. 1986-87
(iv) CIT v. Mysore Minerals Ltd. (1986) 57 CTR (Kar) 135 : (1986) 162 ITR 562 (Kar) (v) CIT v. Ajanikumar & Co. (P) Ltd. (1997) 227 ITR 7B6 (Raj)
(vi) CIT v. Andhra Sugars Ltd. (1997) 142 CTR (AP) 453: (1997) 225 ITR 118 (AP) 20. Following the above decisions/judgments, we direct the assessing officer to allow 1/3rd of the expenditure as having being incurred on employees. This ground accordingly succeeds in part pro tanto.
21. Ground No. 6 reads as under:
"On the fats and in the circumstances of the case and in law, the Commissioner (Appeals) erred in upholding the disallowance of project expenses written off amounting to Rs. 33,19,600. In upholding the aforesaid disallowance, the Commissioner (Appeals) erred in not appreciating the fact that the write off of the said project expenses was eligible as a business loss under section 29, since the concerned projects were a part of the existing business and the appellant had not obtained any advantage in the capital field and the decision to abandon the said project was taken during the relevant previous year on the grounds of commercial unviability.
22. The assessee had incurred a sum of Rs. 33,19,600 on two projects viz., ceramic project and high aluminium refractor ce ment project. The details of these expenses are as follows :
(1)Expenses on ceramic project 8,92,008 (2) Expenses on high aluminium refractor cement 84,718 (3) Expenses on ceramic tiles 6,36,745 (4) Expenses on HARC 12,14,129 (5) Incentives of HARC 4,92,000 33,19,600
23. The above expenses were capitalized in the books of accounts in the earlier years and shown as capital work-in-progress. During the year under appeal, these projects were abandoned and the project expenses were written off in the books of accounts as the projects were found to be commercially unviable. It was submitted before the assessing officer that since the concerned projects were part of existing business, the amounts allowed should be allowed as business expenses. Reliance was placed on the Hon'ble Supreme Court judgments in the case of Empire Jute Co. Ltd, v. CIT (1980) 17 CTR (SC) 113: (1980) 124 IM 1 (SC) and Alembic Chemicals Works v. CIT (1989) 77 CTR (SC) 1 : (1989) 177 ITR 377 (SC). The assessing officer rejected the claim of the assessee, holding that the assessee is a manufacturer of fertilizers related chemicals and the two projects were new projects and the same were altogether different from the existing business. He accordingly, disallowed the claim of the assessee. On appeal, the Commissioner (Appeals) confirmed the action of the assessing officer, observing as under :
"I have considered the various facts and circumstances of the case. However, for the reasons given by the Dy. CIT in his order (paras 10(vi) to 10(viii)). I hold that the claim of the appellant has been rightly rejected."
24. Shri Kirit R. Kamdar, the learned counsel for the assessee drew our attention to the note submitted during the assessment proceedings, giving justification to write off the project expenses, along with a copy of board's minutes, approving the write off of the project expenses (pp. 77 to 84 of the paper book). He submitted that the concerned projects were undertaken in the course of existing business and were not a different or new business. Accordingly, the projects abandoned during the relevant previous year amounts to a business loss allowable under section 29 of the Act. He placed reliance on the following decisions
(a) CIT vs, Graphite India Ltd. (1997) 137 CTR (Cal) 123
(b) CIT v. India Carbon Ltd. (1997) 137 CTR (Gau) 517: (1996) 221 ITR 264 (Gau)
(c) CIT v. Woodcraft Products Ltd. (1993) 111 CTR (Cal) 149 : (1993) 69 Taxman 415 (Cal)
25. Shri Arun Dewan, the learned departmental Representative, strongly supported the orders of the authorities below. He reiterated that the two projects were altogether new ones and had nothing to do with the business of the assessee and accordingly, it was a capital loss and not a revenue loss.
26. We have considered the rival submissions and perused the facts on record. It is noted that the company is manufacturing phosphorous andin the process of manufacturing this, slag is produced as co-product at the time of furnace tapping in the ratio of 1:8. In order to add substantial value to this co-product i.e., phosphorous slag, the company has developed a technology for the manufacturing of high aluminium refractory cement (HAQ which was the extension of the technology used for the development of ceramic tiles project. Thus, both the projects were conceived to utilize the bi-product i,e., phosphorous slag and accordingly, it cannot be said that the two projects were altogether new projects. In fact, the two projects were based on extension of existing business, but the projects were later on abandoned and the loss incurred, in the circumstances is a revenue loss in view of the judgments relied upon by the learned counsel for the assessee referred to (supra). Accordingly, we see no justification on the part of the lower authorities to disallow the amount of Rs. 33,19,600. This ground accordingly succeeds.
27. Ground No. 7 reads as under :
"On the facts and in the circumstance of the case and in law, the Commissioner (Appeals) erred in not giving any directions or finding in respect of the ground relating to disallowance of expenditure aggregating to Rs. 16,02,599 pertaining to assessment year 1989-90 debited in assessment year 1990-91."
28. At the time of hearing, this ground was not pressed. The same is accordingly dismissed.
29. Ground No. 8 reads as under
"On the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in upholding the disallowance of the claim for investment allowance in respect of data processing equipment. In upholding the said disallowance, the Commissioner (Appeals) erred in the following aspects ;
(i) In upholding the said disallowance on the ground that a similar claim was rejected in the appellate order for the earlier year in spite of the fact that the said issue did not arise in the appellate order for the assessment year 1988-89.
(ii) In not, appreciating the fact that the appellant had fulfilled all the conditions laid down under section 32A in respect of the said data processing equipments and accordingly the claim for investment allowance ought to have been allowed."
30. This issue stands covered in favour of the assessee -and against the revenue by the orders of the tribunal, in the case of the same assessee in ITA Nos. 5630/Mum/91 for the assessment year 1987-88 and 9138/Bom/91 for the asst. yr, 1986-87. Accordingly, this ground is allowed.
31. Ground No. 9 reads as under :
"On the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in upholding the action of the Dy. CIT in including excise duty and sales-tax as part of the 'total turnover' for the purpose of computing deduction under section 80HHC of the Act. The Commissioner (Appeals) further erred in upholding the action of the Dy. CIT in including 'other income' as part of the 'total income' for the purpose of computing the deduction under section 80HHC in spite of the fact that the 'total turnover' ought to have been considered only in respect of goods sold and cannot included 'other income'.
32. As regards excise duty and sales-tax, the same are covered in favour of the assessee and against the revenue by the decision of the Bombay High Court in the case of CIT v. Sudarshan Chemicals Inds. Ltd. (2000) 163 CTR (Bom) 596 .. (2000) 245 ITR 769 (Bom). As regards the other income, the matter is restored to the file of the assessing officer with a direction to re-adjudicate in the light of the ratio laid down in Sudarshan Chemicals Inds. Ltd. (supra).
33. Ground No. 10 reads as under :
"On the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in setting aside the issue regarding apportionment of expenditure towards dividend income for the purpose of granting deduction under section 80M. "
34. At the time of hearing, this ground was not present. The same is accordingly dismissed.
36. Ground No. 11 reads as under
"On the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in upholding the action of the Dy. CIT in excluding items of 'other income' from the profits of the concerned undertakings for the purpose of computing deduction under section 80HH."
36. This issue is covered in favour of the assessee by the orders of the Tribunal, Mumbai Bench, in assessee's own case in ITA No. 2478/Bom/92 for the assessment year 1988-89, ITA No. 6630/Mum/91 for the assessment year 1987-88, and ITA No. 9130/Bom/91 for the assessment year, 1986-87. Accordingly, this ground succeeds.
37. Ground No. 12 reads as under :
"On the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in upholding the action of the Dy. CIT in deducting the losses of flowcel unit at Roha and oxalic acid unit at Bhavnagar from the profits of the other units while computing the deduction under section 80HH. The Commissioner (Appeals) erred in the following respects while upholding the said action of the Dy. CIT :
(i) In relying upon the appellate order for the assessment year 1985-86 in spite of the fact that the said issue did not arise in the assessment year 1985-86.
(ii) In not appreciating the fact that deduction under section 80HH is admissible in respect of each undertaking and accordingly there was no question of deducting the losses of flowcel unit at Roha and oxalic acid unit at Bhavnagar against the profits of the other units."
38. This issue stands covered in favour of the assessee and against the revenue by the decision of the Tribunal, in the case of the same assessee in ITA No. 2478/Bom/92 for the assessment year 1988-89, ITA No. 5630/Mum/91 for Ae assessment year 1987-88 and ITA No. 9130/Bom/91 for the assessment year 1986-87. Accordingly, this ground succeeds.
39. Ground No. 12 reads as under
"On the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in rejecting the submission of the appellant that the deduction under section 80HH ought to be allowed on the profits of the concerned industrial undertaking before deducting investment allowance and higher depreciation eligible under the IT Act.
40. This issue was decided in favour of the revenue by the decision of the Tribunal, in the assessee's own case in ITA No. 2478/Bom/92 for the assessment year 1988-89 (paras 14-19 refers). -Following the above decision of the Mumbai Bench of the Tribunal, we decide this issue in favour of the revenue and against the assessee. Consequently, this ground fails.
41. Ground No. 14 reads as under :
"On the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in upholding the action of the Dy. CIT in rejecting the claim for deduction under section 80-1 in respect of endo unit VI at Bhavnagar on the ground that the said unit did not qualify for deduction under section 801"
42. Though the facts reveal that new unit was established which becomes eligible for deduction as decided by the Mumbai Bench of the Tribunal in the assessee's case for the assessment years 1987-88 and 1990-91 in ITA Nos. 5630/Mum/1991 and No. 3540/Bom/1994, in view of the loss in the current year, no deduction can be allowed. This ground of appeal, therefore, is dismissed on technical ground.
43. Ground No. 15 reads as under
"On the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in upholding the action of the Dy. CIT in excluding items of 'other income' from the profits of the concerned undertakings for the purpose of computing deduction under section 80-1."
44. The assessee has filed details of 'other income' which is placed at p. 86 of the paper book. The Tribunal, Mumbai Bench, has consistently taken a favourable decision in the case of the assessee for the assessment years 1986-87 to 199091. Copies of the relevant orders of the Tribunal are available at pp. 17 and 18 of the paper book. Respectfully following the aforesaid orders of the Tribunal, we decide this issue in favour of the assessee. Accordingly, this ground of appeal succeeds.
45. Ground No. 16 reads as under
"On the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in rejecting the submission of the appellant that the deduction under section 80-1 ought to be allowed on the profits of the concerned industrial undertakings before deducting investment allowance and higher depreciation eligible under the Income Tax Act."
46. This issue has been concluded against the assessee by the order of the Tribunal, Mumbai Bench, in the assessee's own case in ITA No. 2478/Bom/1992 for the assessment year 1988-89. Accordingly, we dismiss this ground.
47. Ground No. 17 reads as under
"On the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in not giving any finding in respect of the appellant's claim for grant of interest under section 244A on the refund of Rs. 3,39,504 determined on regular assessment. The appellant prays that the Dy. CIT be directed to grant interest under S. 244A on the said refund from 'I -4-1989, upto the date of granting the refund. "
48. At the time of hearing, this ground was not pressed. Accordingly, the same is dismissed.
49. The assessee vide letter dated 7-2-2002, has taken an addition ground which reads as under
"The appellant prays that deduction ought to be granted in respect of expenditure pertaining to assessment year 1988-89 debited in the previous year relevant to assessment year 1989-90 amounting to Rs. 39,21,334 as per the directions issued by the Tribunal in the order dated 9-11-2001 for the assessment year 1988-89.
50. The issue was already. considered by the Mumbai 'A' Bench of the Tribunal, in the assessee's own case for the assessment year 1988-89 vide para 21 of its order dated 9-11-2001 in ITA No. 2478/Bom/92. Consequential to the direction contained in the aforecited order of the Tribunal, the assessing officer is directed to allow the claim of the assessee, if the expenditure is otherwise allowable, following the ratio laid down by the jurisdictional High Court in the case of CIT v. Nagri Mi ls Co. Ltd. (1958) 33 ITR 681 (Bom).
51. In the result, the appeal filed by the assessee is allowed in part.