Income Tax Appellate Tribunal - Indore
Prestige Foods Limited vs Deputy Commissioner Of Income Tax on 27 November, 1996
Equivalent citations: [1997]61ITD390(INDORE)
ORDER
S.K. Yadav, J.M.
1. This appeal is preferred by the assessee against the order of the CIT(A) pertaining to the asst. yr. 1992-93.
2. The assessee has filed some additional evidence alongwith an application on 20th August, 1996 with the request to admit these evidence as the same could not be filed before the authorities below. In respect of documents at serial No. 1, the learned counsel for the assessee submitted that this document is being filed only to make clarification about the observations of the CIT(A) and the AO that the Aum Consultancy had claimed air fare while its proprietor Jeenadewan claimed only railway first class fare. This document is very material to resolve this controversy about the circumstances under which the cash payment was made to Aum Consultancy. The documents placed at serial No. 2 is a copy of the assessment order of the appellant-company for the asst. yr. 1991-92 in which some of the similar issues were adjudicated by the AO in favour of the appellant and the documents placed at serial No. 3 is a copy of tax audit report for the financial year 1990-91 relevant to the asst. yr. 1991-92 and the same is very material for the adjudication of the issues involved in the appeal. The document placed at serial No. 4 is a copy of the assessment order for the asst. yr. 1993-94 in which some of the common issues were adjudicated by the AO. The document placed at serial No. 5 is a site plan of seed handling plant which is very material to place the correct position about the damages caused in the seed handling plant. The document at serial No. 6 is a copy of the Survey's report to make clarification about the damages caused in the seed handling plant as the assessee was not supplied with a copy of the survey report, submitted by the insurance company to the Revenue authorities. The documents placed at serial Nos. 7 to 11 are copies of insurance claims receivable, capital work-in-progress and the statement showing the sales, turnover of the assessee-company which are very material for proper adjudication of the issues involved. These documents could not be placed before the authorities due to non-availability of some of the documents at the relevant point of time. The learned counsel for the assessee has relied on the following judgments :
(i) CIT vs. Kum. Satya Setia (1983) 143 ITR 486 (MP) and
(ii) CIT vs. Saligram Prem Nath (1989) 179 ITR 239 (P&H).
3. In oppugnation, the learned Departmental Representative submitted that all these documents were well within the knowledge of the assessee and these documents could have been filed before the authorities below.
4. We have heard the rival submissions of the parties and have carefully gone through the documents filed by the assessee. Though some of the documents could have been filed by the assessee before the authorities below but these documents cannot be ignored solely on the ground that these were not filed before the authorities below. We have carefully examined the judgments in the case of CIT vs. Kum. Satya Setia & CIT vs. Saligram Prem Nath (supra) in which it was held that the Tribunal is a final fact-finding body under the scheme of the IT Act. Powers, therefore, have to be exercised by it for deciding the question of fact and while exercising its power if the Tribunal is of the opinion that the additional evidence is material in the interest of justice for deciding particular issue, its discretion cannot be interfered with unless it has been exercised on non-existing or imaginary grounds. Their Lordships have further held that under r. 29 of the Appellate Tribunal Rules, 1963 which are pari materia with O. 41 r. 27 of the CPC, 1908, it was within the discretion of the appellate authority to allow the production of additional evidence if the said authority required any document to enable it to pass orders or for any substantial cause. The documents filed by the assessee appear to be material for proper clarification of the issues involved in the appeal. Accordingly, we admit the additional evidence filed by the assessee and the same be taken on record.
5. The assessee has assailed the order of the CIT(A) on various grounds mentioned in Ground No. 1 and the Ground No. 2 is simply an elaboration of various sub-grounds raised in Ground No. 1. As such, Ground No. 2 is argumentative in nature and does not require separate adjudication. Hence, we propose to adjudicate various grounds of Ground No. 1 individually.
6. Ground No. 1(a) relates to the cash payments exceeding Rs. 10,000 made to various parties which were disallowed by the CIT(A) under s. 40A(3) of the IT Act. Briefly, the assessee-company derives income from manufacture of Soyabean oil in two divisions, one as Prestige Foods Ltd. and another (sic - as) Prestige Soya Industries. During the course of assessment the AO noticed that the assessee had paid amounts exceeding Rs. 10,000 in cash on a number of occasions and not being satisfied with the explanation of the assessee about the payments made under exceptional and unavoidable circumstances provided under r. 6DD(j) of the Act, the AO made an addition of Rs. 2,70,208 which was reduced to Rs. 90,253 by the CIT(A). Now, the disputes about the payments before us are as under :
(i) Rs. 12,074 paid to Aum Consultancy Services towards tour
expenses on 18th November, 1991.
(ii) Rs. 40,000 paid to M/s Pradeep Roadlines, Indore, as
advance against freight on 28th March, 1992.
(iii) Rs. 12,500 payment on 29th February, 1992 to Kachh Gujarat
Roadways.
(iv) Rs. 12,600 payment on 11th November, 1991 to Kachh Gujarat
Roadways.
(v) Rs. 13,079 payment made by Prestige Soya Industries to
M/s M. P. Sales Corporation, Dewas, on 18th
November, 1991.
7. In respect of payment of Rs. 12,074 to M/s Aum Consultancy Services, the learned counsel for the assessee submitted that M/s Aum Consultancy Services, Madras, had been the consultant to the expansion of the factory of the appellant. Its proprietor Jeenadewan had to travel to Indore, Nagpur and Madras in relation to giving consultancy to the assessee for installation of new machines in the solvent plant. M/s Aum Consultancy was reimbursed the tour expenses at Indore as it was not having any bank account. The learned counsel for the assessee submitted that Shri Jeenadewan had visited the assessee's factory for providing consultancy and stayed for 72 days i.e. from 31st August, 1991 to 10th November, 1991 for repairing the machinery in the factory of the assessee and submitted a bill of Rs. 27,074 of expenses incurred during his stay, to the assessee-company on 10th November, 1991. A sum of Rs. 15,000 advance given to Shri Jeenadewan was adjusted by him in the bill and the balance of Rs. 12,074 was paid in cash to Shri Jeenadewan on 18th November, 1991. The learned counsel has also drawn our attention to the order of the CIT(A) in which he has observed that Aum Consultancy needed a cash at Indore for the purchase of air ticket and the assessee could have got such air ticket from its regular travel agency instead of making the payment in cash to M/s Aum Consultancy. While in fact Shri Jeenadewan did not travel through air. As per the bill furnished by him he has claimed to and from first class railway fare from Madras to Dewas. There is no evidence on record to give any inference that Shri Jeenadewan had ever travelled through air. This cash payment was made to Aum Consultancy as they did not have any bank account at Indore or Dewas. Our attention was drawn to the bill dt. 10th November, 1991 and the brochure about payment of Rs. 15,000 which is placed at pp. 1 and 2 of the first compilation of the assessee.
8. In respect of cash payment of Rs. 40,000 to M/s Pradeep Roadways, Indore, as advance against freight on 28th March, 1992 the learned counsel for the assessee submitted that this cash payment was demanded by Pradeep Roadlines for making payments to truckwalas who carried the goods to the port and other places and to meet out diesel and other journey expenses. The learned counsel for the assessee submitted that the identical claims were allowed by the Revenue in the asst. yr. 1991-92. The certificate in respect of cash payment is filed by the assessee which is placed at p. 23 of the second compilation. Despite evidence regarding cash payment made to M/s Pradeep Roadlines, the AO and the CIT(A) have wrongly sustained the addition on this count.
9. In respect of the cash payment of Rs. 12,500 on 29th February, 1992 and Rs. 12,600 on 11th November, 1991 made to M/s Kachh Gujarat Roadways, the learned counsel for the assessee submitted that these payments in cash were made to the drivers of the truck who carried the goods of the assessee to different destinations at the instructions of the transporter M/s Kachh Gujarat Roadways, as this amount was required by the drivers to meet out journey expenses. The learned counsel has filed a certificate issued on 20th October, 1995 by Kachh Gujarat Roadways which is placed at p. 24 of the second compilation of the assessee.
10. In respect of cash payment of Rs. 13,079 made to M/s M. P. Sales Corporation, on 18th November, 1991 towards machinery repair expenses, the learned counsel for the assessee submitted that the assessee required the machinery parts urgently at its Dewas unit. The assessee had its head office at Indore and all the bills are to be processed at the head office. The assessee had no time to get the bill processed from its head office and to purchase machinery parts. The seller M/s M. P. Sales Corporation Ltd. refused to accept the cheque on the ground that he had not been receiving payments from the assessee-company in time. Since the machinery parts are required urgently at the insistence of the seller, the assessee had to make the payment in cash for purchasing the machinery parts. The vouchers to this effect are placed at pp. 25 to 27 of the second compilation. This payment was made by one of the units of the assessee, M/s Prestige Soya Industries. In respect of all the aforesaid payments made in cash, the learned counsel for the assessee submitted that all these payments were made in exceptional and unavoidable circumstances prescribed under r. 6DD(j) of the IT Rules and Circular No. 220 of the CBDT. The genuineness of the payments is not disputed by the Revenue. The assessee has discharged the onus lay upon him by producing the evidence about the cash payment. He relied on the following judgments :
(i) Girdharilal Goenka vs. CIT (1989) 179 ITR 122 (Cal) and
(ii) CIT vs. Satyam Ginning Pressing & Oil Mills (1996) 217 ITR 688 (MP).
11. In oppugnation, the learned Departmental Representative has submitted that the assessee did not file on record the sufficient evidence to prove that the actual payment in cash was made to the parties in exceptional and unavoidable circumstances prescribed in r. 6DD(j) and Circular No. 220 of the CBDT. In respect of the cash payment made to Aum Consultancy he submitted that the assessee could have made the payment through cheque to clear the bills of hotel in which Mr. Jeenadewan stayed on behalf of Mr. Jeenadewan instead of making cash payment. He relied on the observations of the CIT and the AO. In respect of Pradeep Roadlines, the learned Departmental Representative submitted that the assessee is found to have regular transactions with the Pradeep Roadlines and there is no reason why such an advance of Rs. 40,000 in cash was given to Pradeep Roadlines. There is no evidence to show that the same amount received by Pradeep Roadlines was disbursed among its drivers and workers. He drew our attention to the certificate issued by Roadlines in which it was stated that the Pradeep Roadlines received the payment of Rs. 20,000 each on two occasions on 18th March, 1992 for distributing it to truck drivers for diesel and journey expenses. This certificate did not bear any date. There is no evidence on record whether this amount was actually paid to Pradeep Roadlines and it was disbursed to the drivers.
12. In respect of cash payment of Rs. 12,500 on 29th February, 1992 and Rs. 12,600 on 11th November, 1991 the learned Departmental Representative submitted that there is no evidence on record to establish that these payments were made to Kachh Gujarat Roadlines. When the assessee is having a turnover in crores it must have regular transactions with the transporters and there is no evidence on record as to why this cash payment was made by the assessee. He drew our attention to some bills filed by the assessee on the instructions of the Bench in which cash payment of Rs. 2,500 was made to the drivers at the instance of the transporter, but there is no evidence whereby the aforesaid amount of Rs. 12,500 and Rs. 12,600 was made on the instructions of the transporters which is a case of the assessee. He has also drawn our attention towards the certificate dt. 21st October, 1995 filed by Kachh Gujarat Roadways which is placed at p. 24 of the second compilation in which the transporter has stated that he had received advance in cash of Rs. 12,500 on 29th February, 1992 and Rs. 12,600 on 16th November, 1992. The certificate is contradictory to the contention of the assessee as the assessee has submitted that the Rs. 12,600 were paid on 11th November, 1991 whereas the transporter has stated in the certificate that he has received the said amount on 11th November, 1992. These evidence are sufficient to rebut the contention that he had made the actual payment in cash to the so-called transporters.
13. In respect of cash payment of Rs. 13,079 by Prestige Soya Industries for M. P. Sales Corporation, the learned Departmental Representative submitted that this payment could have been made through cheque by the assessee. He relied on the observations made by the AO and the CIT(A). He relied on the following judgments :
(i) Nahgi Lal vs. CIT (1987) 167 ITR 139 (Raj);
(ii) Late Smt. Jyothi Chellaram vs. CIT (1988) 173 ITR 358 (AP) and
(iii) Hari Chand Virender Paul vs. CIT (1983) 140 ITR 148 (P&H).
14. We have heard the rival submissions of the parties and carefully perused the orders of the authorities below and the documents filed by the parties. It was held in various judgments that the object of s. 40A(3) is to check evasion of tax and not to deprive the assessee of the deduction which he is entitled to claim. Where the amount was paid in cash or received in cash, the AO has to find out whether the transaction is genuine or not. If he finds that the transaction is genuine, he should allow the deduction. The Circular No. 220 of the CBDT dt. 31st May, 1977 is illustrative and not exhaustive and the AO has to take into account the surrounding circumstances, consideration of business expediency and the facts of each particular case in exercising the discretion either in favour or against the assessee. This issue regarding admissibility of the cash payment came up for consideration before the Hon'ble High Court of Calcutta in Girdharilal Goenka (supra) in which their Lordships have discussed the possible circumstances under which the payment in cash can be made. Relevant observations in respect of possible circumstances are reproduced hereunder :
"The Board, therefore, issued a circular on 31st May, 1977, being Circular No. 220, 1977, [(1977) 108 ITR (St.) 8], clarifying the provisions of s. 40A(3) as well as r. 6DD(j). It has been provided as follows :
'All the circumstances in which the condition laid down in r. 6DD(j) would be applicable cannot be spelt out. However, some of them which would seem to meet the requirements of the said rule are :
(i) The purchaser is new to the seller; or
(ii) The transactions are made at a place where either the purchaser or the seller does not have a bank account; or
(iii) The transactions and payments are made on a bank holiday; or
(iv) The seller is refusing to accept the payment by way of crossed cheque/draft and the purchaser's interest would suffer due to non-availability of goods otherwise than from this particular seller; or
(v) The seller acting as a commission agent, is required to pay cash in turn to persons from whom he has purchased the goods; or
(vi) Specific discount is given by the seller for payment to be made by way of cash."' This issue was also considered by the Hon'ble Supreme Court in the case of Attar Singh Gurmukh Singh vs. ITO (1991) 191 ITR 667 (SC), in which their Lordships have held that s. 40A(3) of the IT Act, 1961 which provides that expenditure in excess of a specified limit would be allowed to be deducted only if made by a crossed cheque or crossed bank draft, is not arbitrary and does not amount to a restriction on the fundamental right to carry on business. If read together with r. 6DD of the IT Rules, 1962, it will be clear that the provisions are not intended to restrict business activities. There is no restriction on the assessee in his trading activities. Sec. 40A(3) only empowers the AO to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque or crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted upon to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of income from undisclosed sources. The terms of s. 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the AO the circumstances under which the payment in the manner prescribed in s. 40A(3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule. It will be clear from the provisions of s. 40A(3) and r. 6DD that they are intended to regulate business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions. Their Lordship further held that in interpreting a taxing statute, the Court cannot be oblivious of the proliferation of black money which is under circulation in our country. Any restraint intended to curb the chances and opportunities to use or create black money, should not be regarded as curtailing the freedom of trade or business. Similar views were also taken in the case of CIT vs. Avtar Singh & Sons (1992) 194 ITR 80 (P&H). From all these above judgments and the judgments quoted by the assessee as well as by the Revenue it has become clear that a ban was imposed by the legislature on payment in cash exceeding the prescribed limit by inserting the provisions of s. 40A(3) to put a check on circulation of the income from undisclosed sources or black money. But this ban was lifted by r. 6DD r/w Circular No. 220 of the CBDT dt. 31st May, 1977, whereby the payment made in cash under the exceptional and unavoidable circumstances prescribed in the rules is allowable to be deducted as expenditure. Each and every transaction is to be considered on its facts and circumstances. In respect of the first payment of Rs. 12,074 paid to Aum Consultancy it is apparent from record that Om Consultancy is a consultant of the assessee-company for installation of the new unit of the assessee who had to visit the assessee factory for consultancy and repairing of machines. The proprietor of Aum Consultancy, Mr. P. K. Jeenadewan had visited the assessee factory in August., 1991 and had to stay there for repairing work of the machines for 72 days i.e. from 31st August, 1991 to 10th November, 1991. He raised a bill to the assessee-company of Rs. 27,074 in which he adjusted Rs. 15,000 received from the assessee-company in advance and demanded the balance money of Rs. 12,074 in cash and, accordingly, the cash payment was made to Aum Consultancy. It is an admitted fact that the proprietor of Aum Consultancy is outsider and has no bank account at Indore or Dewas. He had to clear hotel bills and other miscellaneous expenses. The contention of the Revenue cannot be accepted that the hotel bills and other bills can be cleared by the assessee-company by making the payments through cheques. In bills which is placed at p. 2 of the compilation of the assessee we find that the hotel bill was of Rs. 6,400. The other expenses include to and fro first class railway fare from Madras to Dewas and other miscellaneous expenses. All these expenses cannot be meted out by the assessee by making payments through cheque. A brochure signed by Shri P. K. Jeenadewan is also at page (sic) of the assessee's compilation. After careful perusal of the order of the CIT(A) as well as the AO we find that both the authorities have observed that Shri P. K. Jeenadewan require cash for purchase of air ticket whereas there is no evidence on record on the basis of which this inference can be drawn. In fact, Shri P. K. Jeenadewan did not come by air. He travelled through rail and claimed to and fro first class railway fare from the assessee. The evidence placed by the assessee is sufficient to establish the fact that the payment made in cash to Shri P. K. Jeenadewan was made under exceptional and unavoidable circumstances contemplated under r. 6DD of the IT Rules and Circular No. 220 the CBDT. Accordingly, we set aside the orders of the CIT(A) on this ground and allow relief to the appellant.
14.1 In respect of payment of Rs. 20,000 each made on two occasions on 28th March, 1992 to M/s. Pradeep Roadlines, Indore, we do not find documents on record to establish the fact that there was any unavoidable circumstances under which the assessee was constrained to make the payment in cash. The assessee has simply filed one certificate obtained from Pradeep Roadlines which is placed at p. 23 of the second compilation of the assessee. This certificate does not bear any date on which it was issued. Except this certificate, no other evidence was placed by the assessee as to why this payment of Rs. 40,000 was made in cash on 18th March, 1992 in the last month of the accounting year. Moreover, there is no evidence on record to establish the fact that the said payment was made under exceptional and unavoidable circumstances given under r. 6DD of the IT Rules and CBDT Circular No. 220. The assessee having a turnover of crores, must have regular business transaction with Pradeep Roadlines. If such a heavy amount is to be paid to Pradeep Roadlines, it could have been paid through a cheque and if it is required by the transporter for its disbursement to its drivers for diesel and journey expenses, some evidence should have been placed on record. This document is not sufficient to prove the assessee's case within the four corners of the exceptions provided under r. 6DD of the IT Rules. Accordingly, we agree with the view of the CIT(A) that the payment is hit by s. 40A(3) of the Act and we confirm the order of the CIT(A) on this count.
15. In respect of next payment of Rs. 12,500 paid on 29th February, 1992 and Rs. 12,600 paid on 11th November, 1991 to M/s. Kachh Gujarat Roadlines against freight, the assessee has filed a certificate dt. 20th October, 1995 much after from Kachh Gujarat Roadways. This certificate shows that the cash payment of Rs. 12,500 and Rs. 12,600 was received in cash on 29th February, 1992 and 11th November, 1992, respectively, from the assessee for making the payment in advance to truck drivers for journey expenses. The assessee's main case is that he had to make the payment in cash to the truck drivers who carried the goods of the assessee to different destinations at the instance of Kachh Gujarat Roadways. On this submission, the assessee was asked by the Bench to furnish some evidence about the instructions or slips by which the assessee was asked to make the payment in cash. In response to this, the assessee has filed certificate challans dt. 29th February, 1992 from Kachh Gujarat Roadways which are placed in file. From these challans it is abundantly clear that the assessee was asked only to make the payment in cash of Rs. 2,500 in all the four challans and the consolidated debit entry of Rs. 10,000 was made in the cash voucher of the same date. We do not find any document on record whereby the assessee was asked to make the payment in cash of a sum of Rs. 12,500 or Rs. 12,600. It is pertinent to mention here that in the certificate the transporter has stated that he has received a cash of Rs. 12,600 on 11th November, 1992 in the next previous year whereas the assessee's case is that he has made the payment in cash of Rs. 12,600 on 11th November, 1991. The facts of the assessee are contradictory by his own documents. In making the payment in cash exceeding the prescribed limit, the primary onus is upon the assessee to prove the genuineness of the transaction and the identity of the persons to whom it is made and to establish the unavoidable exceptional circumstances under which the payment was made for proving his case within the four corners of r. 6DD. In respect of these payments, we do not find that the assessee has discharged the primary onus which lay upon him. In the absence of the relevant evidence, the contention of the assessee cannot be accepted. Hence, we uphold the order of the CIT(A) on this count.
16. In respect of the next payment in cash of Rs. 13,079 made to M/s. M. P. Sales Corporation, Dewas, on 18th January, 1991, the assessee has filed bill and the vouchers whereby the payment of Rs. 13,079 was made to M/s. M. P. Sales Corporation, Dewas, by Prestige Soya Industries. In the vouchers it is clearly mentioned by the recipient of cash that he refused to accept the cheque on the ground that the earlier bills were not cleared in time. The contention of the assessee that in the regular course of business all the payments are to be made through head office Indore, but at that time when the machinery parts are required in Dewas, unit of the assessee, it had to be purchased from the local market to put the machine in running condition, appears to be plausible. From the documents filed by the assessee and the explanation furnished by him, we are of the view that the payment of Rs. 13,079 was made by the assessee under exceptional and unavoidable circumstances and as such this payment should be allowed as expenditure. Accordingly, we delete the addition of Rs. 13,079 and direct the AO to allow the claim of the appellant.
17. Ground No. 1(b) relates to the disallowance of Rs. 5,21,496 sustained by the CIT(A) out of past year adjustment on the ground that the evidence of the disputed payments were not produced. The assessee had been maintaining the books of accounts on mercantile basis, but has claimed certain expenses and liabilities incurred in the earlier years on the ground that the contractual liabilities and the statutory liabilities were finalised in the relevant accounting year. During the course of assessment the AO sought explanation from the assessee about his claim of such expenses while he was maintaining accounts on mercantile basis. The assessee was also asked to furnish details of expenses incurred in earlier years. Being not satisfied with the explanation of the assessee, the AO has disallowed a sum of Rs. 7,31,233 against which the assessee approached the CIT(A) and got relief of Rs. 2,09,701. The disallowance of Rs. 5,21,496 was sustained by the CIT(A) on account of advertisement expenses, brokerage, clearing and forwarding charges, commission, conveyance allowance, electricity expenses, freight and cartage, hire charges, hammali and labour, house rent allowance, interest, machinery repairs and maintenance, office repair and maintenance, other expenses on export, pre-paid expenses, stationary and printing, telephone and trunk call, travelling expenses, vehicle repairs maintenance, wages at factory, water charges, workers' welfare expenses, tankers accident claim and Bombay office expenses in which the past year income was adjusted. Aggrieved by the order of the CIT(A), the assessee is before us.
18. The learned counsel for the assessee submitted that the above liabilities arose in the earlier year but the liabilities were finalised in the previous year relevant to the assessment year. All these liabilities are contractual liabilities and can only become due at the time of its finalisation. The assessee was maintaining the books of accounts on mercantile basis, but due to non-finalisation of this contractual liability, the same could not be claimed in the previous year. The learned counsel for the assessee has raised all the arguments which were raised before the CIT(A) in support of the contention that the expenditure incurred in earlier year is allowable, in the current year. Our attention was drawn to the assessment order in the case of the assessee for the asst. yr. 1993-94 which is placed at pp. 53 to 59 in which identical claims of the previous year's expenses were allowed by the AO. The learned counsel for the assessee submitted that normally the expenses are accounted for on accrual basis from year to year but many a times due to disputes and differences the amount actually having accrued or payable remains undecided and in future when the accounts are settled, these items of expenses are accounted for. In case of brokerage, the assessee normally holds the broker responsible for any deficiency in the quality contracted if the first supplier does not approve of deduction. In such cases, disputes of commercial nature arise which are settled during next year when the new season starts. In such type of cases, the assessee tried to settle the old dispute and then start with the new business. Likewise, other claims of the assessee were not settled during the past year. So, they could not have been claimed in that previous year. Since all these claims are settled in the previous year, they are being claimed by the assessee. The learned counsel for the assessee relied on the following judgments :
(i) Swadeshi Cotton Mills Co. Ltd. vs. CIT (1980) 125 ITR 33 (All);
(ii) Malayalam Plantations (India) Ltd. vs. CIT (1990) 184 ITR 505 (Ker);
(iii) Saurashtra Cement & Chemical Industries Ltd. vs. CIT (1995) 213 ITR 523 (Guj);
(iv) CIT vs. Nathmal Tolaram (1973) 88 ITR 234 (Gau) and
(v) Karam Chand Thapar & Bros. (P) Ltd. vs. CIT (1969) 74 ITR 26 (SC).
19. In oppugnation, the learned Departmental Representative submitted that the assessee has been maintaining accounts on mercantile basis. Whatever expenses were incurred by the assessee, it should have been claimed in the same assessment year in which they became due. If the assessee wants to raise the claims in the subsequent assessment year on the basis of its finalisation, the assessee had to place evidence on record in respect of the finalisation of the contractual liabilities, but during the course of assessment the assessee did not place any relevant documents or record to evidence that these contractual liabilities have been finally settled during the current accounting year. The learned Departmental Representative has drawn our attention to the letter dt. 24th August, 1994, which is placed at pp. 8 to 11 of the Revenue's second compilation in which they have specifically asked the assessee to produce complete details of the items of income and expenditure to prove, that the expenditure become payable during the current year and also the income accrued during the present year. In spite of specific request, the assessee did not furnish complete details of the expenditure claimed by him. He has further drawn our attention to its order sheet dt. 23rd March, 1995 in which he has specifically mentioned that the assessee was asked to justify the claim of expenditure amounting to Rs. 7,00,138. Despite repeated demand of the AO, the assessee failed to furnish complete details of the expenditure incurred in the accounting year. It was also argued that even before the CIT(A) the assessee could not place documents in support of his claim about the expenditure. In the absence of evidence about the genuineness of the expenditure, the CIT(A) was justified in sustaining the disallowance of Rs. 5,21,496.
20. We have heard the submissions of the parties and have carefully examined the orders of the authorities below and the documents filed on record. We have examined the details of expenses claimed by the assessee and find that some of the expenses like conveyance allowance, electricity expenses, house rent allowance, machinery repair and maintenance, stationary printing, telephone and trunk call, travelling expenses, vehicle repair and maintenance, water charges, Bombay office expenses cannot be called to have arisen out of the contractual liabilities, which are settled in the next previous year. Some of the expenses like brokerage, clearing and forwarding charges, machinery repair and maintenance, hammali and labour, hire charges and freight and cartage may be called to have arisen out of the contractual liabilities settled after sometime. Whenever the liabilities had been settled, it is to be proved and claimed by the assessee in the relevant accounting period. Without the evidence it is very difficult for the Revenue to allow the claim of the assessee. During the course of arguments, the learned counsel for the assessee has argued at one point of time that the CIT(A) did not allow the assessee to produce the documents in support of the claim regarding the expenses made by the assessee, as the same could not be produced before the AO due to missing of the file in which all bills and vouchers pertaining to the expenses claimed by the assessee in this accounting year, and sustained the addition. With the intention to ascertain the genuineness of the claim, the assessee was directed by the Bench to produce details of expenses and the evidence whereby the contractual liabilities have been finalised during the current accounting year, but the assessee could not produce any evidence in support of his contention with respect to the claim raised by the assessee on the ground of finalisation of the contractual liability. We have examined the letters written by the AO and its order sheet in which the assessee was asked to produce the relevant evidence in support of the claim of expenses but the assessee could not produce the same. In these circumstances, it appears to us that the assessee was repeatedly asked and various opportunities were given to him to produce the relevant evidence to prove the expenditure pertaining to the earlier year incurred in the relevant accounting year but the assessee was badly failed to produce any evidence in support of the contentions. We have examined the judgments cited by the assessee. The ratio of all the judgments is that though the assessee adopts the mercantile system of accountancy, liabilities based on some contractual obligations arise only when it is ascertained. Unless the liability has become an ascertained sum of money, it no doubt exists but the proceedings have yet to be taken to determine the exact amount. The vague liability to make a payment cannot be entered in the accounts. We agree with the contention of the assessee that merely because the expenditure relates to an earlier year, it does not become the liability payable in the earlier year unless it was determined and crystalised in the year in question on the basis of maintaining accounts on mercantile basis. But for claiming the deduction for the payment, the onus is upon the assessee to prove that the contractual liabilities have been finalised, settled and cleared in the accounting year in which it is claimed. Mere furnishing the statement that these liabilities are cleared by the assessee will not suffice. In the instant case, we do not dispute the claim of the assessee that he cannot raise the claim on the basis of finalisation of the contractual liability, but for making a claim he is required to prove that these liabilities have finally accrued and paid in the accounting year in which it was claimed. In the instant case the assessee did not place any material on record to prove that the so-called contractual liabilities have accrued on its finalisation in the previous year relevant to the asst. yr. 1992-93. In the absence of material evidence the assessee is not entitled for the claim. In view of the foregoing discussion, we are of the view that the CIT(A) was justified in sustaining the disallowance of Rs. 5,21,496 and we uphold the order of the CIT(A) on this count.
21. Ground No. 1(c) relates to repair expenses of Rs. 16,47,766 incurred on seed handling plant which was treated by the Revenue as capital expenditure while the assessee claimed it to be revenue expenditure. Briefly stated the assessee possessed one seed handling plant which is more of a godown to store seeds purchased in the season but used in production afterwards. The seed handling plant was set up in the second unit of the assessee i.e. Prestige Soya Industries during the asst. yr. 1988-89 and was in operation for almost 15 months till it was severely damaged due to dust explosion on Saturday, the 26th May, 1991. In this accident the plant was badly damaged, and the loss was surveyed by Mehta & Padamsey, Bombay, and Thapar Shrinivasan and Kapoor of Delhi. This plant was insured with the New India Assurance Company Ltd. with whom insurance claim of Rs. 25,73,929 was made but has not been finalised so far. This plant was repaired by the assessee and the expenses of Rs. 16,47,766 have been charged in the P&L a/c during the year. During the assessment the AO was not satisfied with the explanation of the assessee about the repair expenses and came to the conclusion, after examining the various aspects of the damages caused to the plant, that the plant was totally destroyed and it has been reconstructed during the year and treated the expenses as capital expenditure and declined to allow the claim of the assessee under s. 30, or 31 or 37 of the IT Act. Dissatisfied, the assessee carried the matter before the CIT(A) but did not find favour from him.
22. The learned counsel for the assessee submitted that though the seed handling plant was extensively damaged due to dust explosion, but it was repaired by the assessee to restore the same in original and working condition. The expenses incurred in repairing should be treated as revenue expenditure because no additional benefit or asset has been created and the allegation of the AO that it was completely or totally damaged or destructed is not correct. The claim with the insurance company has not been finalised and even the report filed before the CIT(A) was not shown to the assessee. In the absence of the survey report of the company, the assessee has filed its survey report which is placed at pp. 65 and 66 of the first compilation of the assessee. The assessee has also filed the site plan of the seed handling plant which is at p. 64 of its first compilation, whereby the actual damage caused to the seed handling plant can be ascertained. Certain photographs showing damage to the seed handling plant were also filed by the assessee. He further submitted that the total original expenditure incurred on seed handling plant was approximately more than Rs. 80 lacs during the year 1990-91. During the course of repair the design of the seed handling plant was changed for its better use and the total expenditure incurred on its reconstruction and repair of about Rs. 52 lacs out of which Rs. 16,47,766 has been charged on revenue account in the books of account present assessment year and Rs. 9,26,163 in the books of the next assessment year and the balance amount of Rs. 26,57,698 has been capitalised by the assessee itself in the next assessment year. The total claim made on account of revenue expenditure in two years was to the extent of Rs. 25,73,929. Though the claim of the assessee made with the insurance company has not been finalised, but the assessee has shown it as receivable in its books of accounts. While the cost of construction of the seed handling plant was more than Rs. 80 lacs, it cannot be reconstructed in Rs. 52 lacs. It is abundantly clear from the survey report, site plan and the photographs that the seed handling plant was not totally destroyed but was damaged in the dust explosion. The damages caused in the plant were repaired by the assessee and the expenses incurred in its repairing amounting to Rs. 16,47,766 should be allowed as revenue expenditure. The learned counsel for the assessee relied on the following judgments :
(i) Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34 (SC);
(ii) CIT vs. Madras Spinners Ltd. Taxation 95(3) 117;
(iii) CIT vs. Makhan Sarmah Savapandit (1989) 180 ITR 35 (Gau);
(iv) CIT vs. Shree Hari Industries (1987) 161 ITR 249 (Raj);
(v) CIT vs. Mohd. Ishaque, Mohd. Gulam (1994) 210 ITR 817 (MP) and
(vi) CIT vs. Dasaprakash (1978) 114 ITR 210 (Mad).
23. In oppugnation, the learned Departmental Representative submitted that in dust explosion the original structure was completely destroyed and has become totally useless and thereafter the assessee has redesigned as new plant and constructed new one after spending Rs. 52 lacs and by using the debris of the old plant. So, the new plant has come up with different design and the expenses incurred thereon can only be called capital expenditure. The survey report from the New India Assurance Company was received by the CIT(A) which was claimed by the Assurance Co. to be kept as confidential because the claim of the assessee with the insurance company has not been settled. The learned Departmental Representative has drawn our attention to survey reports containing various photographs of the damages in the seed handling plant. From the survey report and the photographs shown in the survey reports, the complete destruction of the structure has been approved. The assessee has claimed the same amount from the insurance company, which has been claimed by it as revenue expenditure in two years. He submitted that the time taken by the assessee in reconstruction of the structure was of two years which clearly shows that this time was consumed for reconstruction of the structures and not for repair of the plant. He drew our attention to the note in the audit report and submitted that the assessee himself has initially treated it as reconstruction of seed handling plant. Besides this, the learned Departmental Representative strongly relied on the observations of the AO and the CIT(A). He relied on the following judgments :
(i) L. H. Sugar Factories & Oil Mills Ltd., In re (1952) 21 ITR 325 (All);
(ii) Humayun Properties Ltd. vs. CIT (1962) 44 ITR 73 (Cal);
(iii) Southern Agencies Ltd. vs. CIT (1962) 45 ITR 602 (Mad);
(iv) Ratlam Bone Mills vs. CIT (1984) 147 ITR 148 (MP) and
(v) Hyam vs. IRC 14 ITC 479.
24. We have heard the submissions of the rival parties and have gone through the orders of the authorities below and the documents placed by the parties. From a careful perusal of the survey report obtained by the insurance company, the survey report filed by the assessee, auditor note at Sl. No. 4 of Sch. 9 and the photograph filed by the assessee and shown in the survey report prepared by Mehta & Padamsey (P) Ltd. and Thapar, Shrinivasan and Kapoor (P) Ltd., we are of the view that the substantial damage was caused in seed handling plant of the assessee during the course of dust explosion in the asst. yr. 1992-93. The survey report was received by the AO during the pendency of the appeal before the CIT(A) with the request that the same be treated as confidential since the insurance claim of the assessee has not been finalised. The AO filed the survey report before the CIT(A) and the report was examined by the CIT(A) but it was not discussed by the CIT(A) due to its being confidential in nature. We have carefully examined the report and find that the opinion of various surveyors was obtained in the survey report regarding damage caused to the seed handling plant. If all the evidence available on record and the surveyors' reports are put together, the nature of damage caused to the seed handling plant becomes clear. It is not disputed that the substantial damage was caused to the seed handling plant but the controversy is that whether the damage caused to the seed handling plant is repairable or it requires reconstruction after demolition of the damaged portion of the seed handling plant. It is abundantly clear from the photographs and other reports that the roof and some of the walls were collapsed in dust explosion. In our view the repair means to remove the damages without demolishing or disturbing the design of the structure. Once the structure is demolished and erected in its original shape it will not amount to repair. It will be called reconstruction of the structure. At one point of time in a report the auditors of the assessee made a note in schedule at serial No. 6 that a part of the seed handling plant of the Prestige Soya Division of the company was damaged during the year. Since the insurance claim has not been settled, the company has not made any provision. However, expenses to the tune of Rs. 16,47,766 incurred during the year on its reconstruction have been charged to the P&L a/c. In the very first year the assessee treated it as reconstruction of the plant. This fact was not disputed by the assessee that during the course of reconstruction the design and capacity of the plant was changed by the assessee. It is clear from the photographs that the structure of the plant was damaged in such a manner that it cannot be repaired without demolishing the damaged portion. Once the damaged portion is demolished and erected, it will not amount to repair. It will amount to construction. The total cost incurred in the reconstruction was Rs. 52 lacs as claimed by the assessee out of which the assessee has claimed that Rs. 25,73,929 was spent towards the repair of this plant and the remaining balance amount of Rs. 26,57,698 was incurred in reconstruction of the plant which was capitalised by the assessee itself in the next year. The assessee did not file any criteria or calculation on which he has bifurcated the total expenses incurred in reconstruction of the plant into repair expenses and reconstruction expenses for claiming it in the heads of revenue expenditure and capital expenditure. No evidence is furnished before us as to how the assessee has made changes in the design while making the repair of this plant or during reconstruction of the same. The onus is on the assessee to prove that the structure was not damaged in toto and the repair was done in respect of certain portion and some accidented portion was reconstructed, but this exercise was not done by the assessee either before the AO or the CIT(A). He has claimed in general that he has spent Rs. 16,47,766 in the asst. yr. 1992-93 and Rs. 9,26,163 in the asst. yr. 1993-94 for repairing the said handling plant and the remaining amount of Rs. 26,57,698 for reconstruction of the plant. In the absence of any evidence in support of this contention, the same cannot be relied upon. The assessee's contention that while total cost of the plant is about Rs. 80 lacs, the reconstruction cannot be done in Rs. 52 lacs is not acceptable to us in the light of the submissions of the Revenue that the reconstruction of the plant was done after making use of debris of the old structure. The contention of the Revenue that for reconstruction, complete wall did not require to be demolished, but after demolishing the damaged portion it can be further erected by making use of the bricks and iron found in the debris of the old structure, appears to be plausible. In reconstruction, the whole structure does not require to be demolished. A portion of the walls or upto the plinth area of the wall can be demolished and thereafter it can be further raised but this type of activity do not come within the four corners of the repair which will certainly amount to reconstruction of the structure. The expenses incurred in the reconstruction will be treated as capital expenditure. In the peculiar facts and circumstances of the case, there is overwhelming evidence on record which shows that the plant of the assessee was substantially damaged in dust explosion which cannot be repaired without demolishing major portion of it. Since it has been reconstructed with the changed design, the expenses incurred on it can only be treated as expenditure incurred in reconstruction of the plant. We have carefully examined the judgment quoted by the assessee as well as by the Revenue and find that the ratio of all the judgments is that the expenses incurred in repair will be treated as revenue expenditure. Since we are of the view that the repair is not done in the seed handling plant, all the judgments referred to by the assessee will not render any assistance to him. In the light of the foregoing discussions, we are of the view that the CIT(A) is justified in rejecting the claim of the assessee. We also agree with the observations of the CIT(A) that when the amount spent was only on account of work in progress, there is no justification on the part of the assessee to allow depreciation on such amount. Accordingly, we uphold the order of the CIT(A).
25. In the Ground No. 1(d) the assessee has assailed the order of the CIT(A) on the ground that the CIT(A) has erred in holding that various expenses viz., telephone expenses, conveyance and vehicle expenses, travelling expenses and legal professional expenses are to be split in the ratio of turnover of both the plants viz. Food Division and Soya Division. During the course of assessment, the AO has noticed that the assessee had debited the major expenses towards the directors' remuneration, books, periodicals, Diwali expenses, professional charges, vehicle expenses, telephone and trunk call expenses, directors' travelling expenses, in Prestige Food Industries. Nominal expenses were debited in the account of Prestige Soya Industries. The assessee was asked to make the explanation of this disproportionate allocation of miscellaneous expenses. Being not satisfied with the explanation of the assessee, the AO bifurcated the expenditure and divided it in the ratio of the turnover of both the units of the assessee. Dissatisfied, the assessee appealed to the CIT(A) but did not find favour from him and the CIT(A) has reallocated the expenditure.
26. The learned counsel for the assessee submitted that the CIT(A) has not properly bifurcated the expenses incurred on telephone and trunk call, conveyance and vehicle expenses, travelling expenses, legal and professional expenses fee in both the units. He submitted that the Prestige Soya Industries is a manufacturing unit of the assessee and its maximum sale was made to Prestige Foods, the other unit of the assessee. In the sale from one unit to another, no expenses are required to be incurred. The maximum sale was made from the Prestige Foods to outsiders. The assessee has furnished a statement which is at p. 77 of the first compilation of the assessee whereby the assessee has calculated the ratio in which the expenditure incurred in both the units should be bifurcated. As per his statement, the total sale of the Prestige Industries during the financial year 1991-92 was at Rs. 61,90,88,427 out of which sale made to Prestige Soya Industries was at Rs. 32,45,32,245 and the sale to other than Prestige Food Units were at Rs. 29,45,56,182. The total sales of both the units in the financial year were at Rs. 1,09,79,15,023 out of which sales of Rs. 29,45,56,182 were made by Soya Industries to outsiders and sale of Rs. 80,33,58,841 were made by Prestige Food Units to outsiders. So, the expenditure should be bifurcated in the ratio of the sale made by both the units to the outsiders. According to the appellant, the calculation of ratio comes to 26.83 per cent for Soya Industries and 73.17 per cent for Prestige Food Units. The said criteria was not adopted either by the AO or the CIT(A). They have adopted the ratio to turnover of both the units.
27. In oppugnation, the learned Departmental Representative submitted that the criteria shown by the assessee is not a workable criteria which can be adopted in the multiple units of the assessee. The general criteria is to bifurcate the common expenditure amongst the units of the assessee in their turnover ratio. The learned Departmental Representative has put an example that in case the Prestige Soya Industries made the entire sales of its products to Prestige Food Industries, then there would be no sale to the outsiders. It means that as per the assessee's version, there should not be any expenditure to be borne by the Prestige Soya Industries, which is not possible. The management is common in both the units and whatever services were rendered by them, these were for both the units. No specific details or accounts were furnished before the AO or the CIT(A) to establish the fact that the particular expenditure was incurred for a particular unit.
28. We have heard the submissions of the rival parties and examined the orders of the authorities below. The disputed expenses pertain to the expenditure incurred on telephone, trunk call, conveyance and vehicle travelling expenses, legal and professional fees. There is no detail available on record to show that particular expenses were incurred for a particular unit. The contention of the Revenue cannot be overlooked that whatever expenses were incurred in these heads, these were incurred for both the units. The example given by the learned Departmental Representative that in case the Prestige Soya Industries does not make any sale other than to Prestige Foods, no expenses can be claimed against Soya Industries as per the contention of the assessee appears to be plausible and we are of the view that this model of apportionment of expenditure in both the units furnished by the assessee (sic-at) p. 77 of the first compilation of the assessee does not appear to be reasonable. Whatever expenses are incurred for multiple units, the total expenses should be bifurcated as per their turnover ratio in the absence of any specific evidence for specific expenditure for a particular unit. A similar formula was adopted by the AO and followed by the CIT(A). The CIT(A) has adjudicated this issue in detail and we do not find any error in its order pertaining to the issue. Accordingly, we uphold the order of the CIT(A) and reject the claim of the assessee.
29. Ground No. 1(e) relates to allowability of deduction under s. 80HHG of the IT Act. The grievance of the appellant is that the CIT(A) has upheld the order of the AO in which the AO has allowed deduction after setting off the loss in trading export activity against the profit in export manufacturing activities.
30. During the course of assessment the assessee had filed the working of calculation of deduction to be claimed under s. 80HHC of the Act. In its working, the assessee has shown that it has incurred loss on export on trading goods of Rs. 61,09,744 and profit from the manufacturing unit against which deduction under s. 80HHC has been computed at Rs. 1,78,97,490. The assessee has also claimed deduction on account of export incentive at Rs. 98,36,373. The total claim of deduction under s. 80HHC made by the assessee was at Rs. 2,77,33,833. The working of deduction was not accepted by the AO on the ground the loss suffered in export trading activities should be set off against the profit earned from the manufacturing activities of the assessee. Dissatisfied with the observations of the AO, the assessee carried the matter before the CIT(A) but did not find favour from him. After interpretation the relevant provisions of law, the CIT(A) came to the conclusion that the loss of one activity is also to be considered with the profit of the other activities and is not to be ignored and s. 80HHC is available only on the net result of the two activities and not that only profit of one activity is to be considered and losses of the other activities are to be ignored.
31. The learned counsel for the assessee submitted that the CIT(A) failed to interpret the relevant provisions of law in spirit as it was enacted. It was argued that the provisions of sub-cl. (c) to s. 80HHC(3) of the Act speaks of only the profit on trading goods and not losses and further argued that in case there is a profit on trading goods, the same has to be clubbed with the profit on own manufactured goods but in case there is a loss on trading of goods, then the same has to be ignored and not to be considered with the profit from the other unit. He submitted that the sub-s. (1) of s. 80HHC is a machinery section and it is sub-s. (3) which gives out the formula of working of profit from each of the activities of the assessee. He emphasized the word "profit" and submitted that this section relates to profit of the assessee from any of the activities and in case the assessee suffers a loss from any activity, that loss has to be ignored. He submitted that both these sub-cls. (i) and (ii) of sub-cl. (c) to s. 80HHC(3) are independent and the profit is to be calculated separately from both the activities and thereafter it should be clubbed. If the assessee suffers a loss from any of the units, the loss should be ignored while ascertaining the profit out of the export business. The learned counsel for the assessee has drawn our attention to Chapter 8 of Tax Reference, 1994 Vol. 31 pp. 411 to 416 which are placed at pp. Nos. 103 to 104 of the second compilation of the assessee. He argued that sub-cl. (c) of the provisions of s. 80HHC(3) should be interpreted liberally in favour of the assessee. The learned counsel for the assessee has drawn our attention to the Commentary of s. 80HHC at p. 3945 of the 9th Edn. of Sampath Iyengar's Law of Income-tax. He relied on the following judgments :
(i) CIT vs. Jaora Oil Mill (1981) 129 ITR 423 (MP);
(ii) CIT vs. Vegetable Products Ltd. (1973) 88 ITR 192 (SC);
(iii) Maharajadhiraj Sir Kameshwar Singh vs. CIT (1957) 32 ITR 587 (SC);
(iv) Goodyear India vs. State of Haryana & Anr. (1991) 188 ITR 402 (SC) and
(v) CIT vs. Gwalior Rayon Silk Mfg. Co. Ltd. (1992) 196 ITR 149 (SC);
It was further argued by him that whenever there is ambiguity or confusion in the interpretation of a particular provision of law, it should be interpreted in favour of the assessee in view of various pronouncements of Hon'ble High Courts and the Supreme Court. While interpreting the provisions of law, intention of the legislature should be adjudged by the Courts. The learned counsel for the assessee strongly relied on the observation of the Cochin Bench of the Tribunal in A. M. Moosa vs. Asstt. CIT (1992) 44 TTJ 193 (Cochin), in which the Tribunal has observed that it is the bounden duty to liberally construe the provisions of sub-s. (3) or proviso therein of s. 80HHC as the section was enacted to give a fillip to the exporters who earn precious foreign exchange in addition and submitted that the loss suffered by the assessee in its export trading activities should be ignored while computing the net profit from both the activities for the purpose of deduction under s. 80HHC.
32. In oppugnation, the learned Departmental Representative submitted that the legislature has inserted three clauses in sub-s. (3) of s. 80HHC of the Act. Sub-s. (a) gives a formula for computing the profit in case the assessee deals with the export of goods or merchandise manufactured or processed by him. Clause (b) gives a formula for computing the profit in case the assessee deals in export of trading goods and cl. (c) gives a formula for computing the profit when the assessee deals in export of goods or merchandise manufactured or processed by it and of trading goods. In cl. (c) though the formula for calculating the profit from both the activities are separate, but the net profit is to be calculated by clubbing the profits from both the activity of the assessee irrespective of the nature of the profits. The profit may be a positive or negative from either of the activities, the net profit is to be computed for the purpose of allowability of deduction under s. 80HHC(3). He emphasised the word "and" which is used as a conjecture between both the sub-cls. (i) and (ii) of sub-cl. (c) of s. 80HHC(3) and submitted that the main intention of the legislature for inserting this section is to find out the net profit from both the activities of the assessee. For ascertaining the net profit both the profits though it may be positive or negative are to be clubbed, for the purpose of allowability of the deduction under s. 80HHC(3). He also put an emphasis on the word 'profit' used in sub-cl. (c) of sub-s. (3) and stated that the word 'profit' means the net profit arising out of both the units of the assessee. After ascertaining the net profit, a deduction is to be given as per sub-s. (1) of s. 80HHC.
33. The learned Departmental Representative submitted that while interpreting the provisions of law, it has to be read as a whole. In order to construe the provisions of a statute, it would be just and proper to see what was the position before the amendment and to find out what was the mischief sought to be remedied and to discover the two (sic) rationale for such remedy. He submitted that it is a well settled principle of interpretation that the statutory provisions should be construed according to the plain reading (sic of the) meaning of its language. When the language of a particular provision is clear and according to the plain natural meaning thereof, the assessee is not entitled to any rebate, relief or allowances, it is not for the Court to strain and stretch the language of the statutory provisions to enable the assessee to get such relief. The learned Departmental Representative submitted that in sub-cl. (c) the word 'profit' was used only at one time in the main clause and was not used in its sub-cls. (i) and (ii). It means the net profit should be calculated from entire mixed activities of the assessee. Sub-cls. (1) and (ii) does not say about the profit but it simply says about the working formula for computing the profit from the manufacturing and trading activities of the assessee. As such, since the word 'profit' is not used in sub-cls. (i) and (ii) of cl. (c), it is net correct to say that only profit from export trading goods should be taken into account and the loss should be ignored. It was also argued that the loss from the export business can be ignored for the purpose of computation of allowances under s. 80HHC but the loss incurred from one unit should be set off from the profit of the other export unit of the assessee. He drew our attention to the relevant provisions of law which were in existence prior to the amendment in the section w.e.f. 1st April, 1992 in which deduction was allowed on the basis of percentage. This legislation was brought by the legislature to stop the misuse of the relevant provisions by inserting these two clauses. The learned Departmental Representative relied on the following judgments :
(i) State of Bihar & Anr. vs. CIT (1993) 202 ITR 535 (Pat);
(ii) M. H. Daryani vs. CIT (1993) 202 ITR 731 (Bom);
(iii) CIT vs. Harprasad & Co. (P) Ltd. (1975) 99 ITR 118 (SC);
(iv) Gopal Engg. Works & Ors. (1995) 211 ITR 303 (Mad);
(v) CIT vs. H. H. Maharani Sethu Parvathi Bayi (1993) 199 ITR 524 (Ker);
(vi) Distributors (Baroda) (P) Ltd. vs. Union of India (1985) 155 ITR 349 (SC) and
(vii) CIT vs. Karamchand Premchand Ltd. (1960) 40 ITR 106 (SC).
34. We have heard the rival submissions of the parties and carefully examined the documents filed by them and the orders of the authorities below. The controversy in a narrow compass is as to how deduction under s. 80HHC(3) is to be allowed in case the assessee is engaged in trading and manufacturing activities. The issue in dispute revolves around the proper interpretation of cl. (c) of s. 80HHC(3). Before dealing with the issue in detail we feel it proper to reproduce s. 80HHC which is as under :
"80HHC(1) - Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of the profits derived by the assessee from the export of such goods or merchandise :
Provided that if the assessee, being a holder of an Export House Certificate or a Trading House Certificate (hereafter in this section referred to as an Export House or a Trading House, as the case may be) issues a certificate referred to in cl. (b) of sub-s. (4A) that in respect of the amount of the export turnover specified therein, the deduction under this sub-section is to be allowed to a supporting manufacturer, then the amount of deduction in the case of the assessee shall be reduced by such amount which bears to the total profits derived by the assessee from the export of trading goods, the same proportion as the amount of export turnover specified in the said certificate bears to the total export turnover of the assessee in respect of such trading goods.
(1A) Where the assessee, being a supporting manufacturer, has during the previous year, sold goods or merchandise to any Export House or Trading House in respect of which the Export House or Trading House has issued a certificate under the proviso to sub-s. (1), there shall, in accordance with and subject to the provisions of this section, be allowed in computing the total income of the assessee, a deduction of the profits derived by the assessee from the sale of goods or merchandise to the Export House or Trading House in respect of which the certificate has been issued by the Export House or Trading House ..........
(3) For the purposes of sub-s. (1) :
(a) Where the export out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such export shall be the amount which bears to the profit of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee;
(b) where the export out of India is of trading goods, the profits derived from such export shall be the export turnover in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export;
(c) Where the export out of India is of goods or merchandise manufactured or processed by the assessee and of trading goods the profits derived from such export, shall :
(i) in respect of the goods or merchandise manufactured or processed by the assessee, be the amount which bears to the adjusted profits of the business, the same proportion as the adjusted export turnover in respect of such goods bears to the adjusted total turnover of the business carried on by the assessee; and
(ii) in respect of trading goods, be the export turnover in respect of such trading goods as reduced by the direct and indirect costs attributable to export of such trading goods :
Provided that the profits computed under cl. (a) or cl. (b) or cl. (c) of this sub-section shall be further increased by the amount which bears to ninety per cent of any sum referred to in cl. (iiia) (not being profits on sale of a licence acquired from any other person), and cls. (iiib), and (iiic) of s. 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee."
From a plain reading of this section it appears to us that this legislation was brought to give deduction in respect of profits derived from the export business.
Its sub-s. (1) says that where an assessee is engaged in the business of export out of India of any goods to which this section applies, he will be allowed a deduction of the profits derived by the assessee from the export of such business in computing his total income. Before allowing a deduction, profits of the assessee from the export business, are to be ascertained first. In sub-s. (3) a formulas of calculating the profit from following types of export business are laid down :
(i) In sub-cl. (a) when the assessee is engaged in the business of export of goods, merchandise, manufactured or processed by him;
(ii) in sub-cl. (b) when the assessee is engaged in the business of export of trading goods only;
(iii) When the assessee is engaged in the business of export of goods, merchandise, manufactured or processed by him and of trading goods.
Clause (c) says about the composite export business of the assessee, in which profit is to be computed from both the activities for purposes of allowable deduction under sub-s. (1) of section 80HHC. From plain reading of the operating portion of cl. (c) it appears to us that it means that the profits are to be computed from both the export activities of the assessee by applying a different formula for its calculation. Both the sub-cls. (i) and (ii) are connected with each other by a conjunction "and" which is generally used for connecting two clauses for arriving at net result therefrom. The fundamental principle of construction is that the words used in a statute must be understood in their ordinary grammatical sense. For ascertaining the net profit from both the activities of the assessee, the individual profit though it may be positive or negative from both the units should be clubbed. The word 'profit' has been defined in Law Lexicon, 2nd Vol. at p. 1113. The apex Court has held in the case of CIT vs. Karamchand Premchand Ltd. (supra) and CIT vs. Harprasad & Co. (P) Ltd. (supra), that from the charging provisions of the IT Act, it is discernible that the words "income" or "profits and gains" should be understood as including losses also so that in one sense, "profits and gains" represent "plus income" whereas losses represents "minus income". In other words, loss is negative profit. Both positive and negative profits are of a revenue character. Both must enter into computation, wherever it becomes material, in the same mode of the taxable income of the assessee. In the light of this definition of 'profit' explained by the Hon'ble Supreme Court, individual profit derived from both the activities of the assessee i.e. manufacturing and trading activities calculated in accordance with sub-cls. (i) and (ii) of cl. (c) of s. 80HHC(3) though it may be positive or negative, should be clubbed for arriving at the resultant profit as contemplated in sub-cl. (c). We have also carefully examined the various judgments cited by both the parties in respect of interpretation of the relevant provisions. The ratio of all these cases are that the relevant provisions of law should be literally interpreted. If that defeats manifest object and purpose of the statute, a reasonable construction is to be followed in such cases. The apex Court has recently held in the case of CWS (India) Ltd. vs. CIT (1994) 208 ITR 649 (SC) as under :
"Literal construction may be the general rule in construing taxing enactments, but that does not mean that it should be adopted even if it leads to a discriminatory or incongruous result. When a literal interpretation leads to an absurd or unintended result, the language of the statute can be modified to accord with the intention of Parliament and to avoid absurdity."
In respect of interpretation of taxing statute, the Hon'ble Bombay High Court has observed in the case of M. H. Daryani vs. CIT (supra) as under :
"The principle of beneficial interpretation or interpretation in favour of the assessee of a taxing statute has application only in a case where, on a proper interpretation, the Court is in doubt about the true scope and ambit of the provision or finds that two equally reasonable interpretations - one in favour of the assessee and the other in favour of the Revenue - are possible. It is only in such cases that the question of accepting one of the two reasonably possible interpretations would arise. The principle of beneficial interpretation has no application in a case where the words of a statute are plain, precise and unambiguous. In such a case the well settled principle of interpretation is that the statutory provision should be construed according to the plain natural meaning of its language. When the language of a particular provision is clear and according to the plain natural meaning thereof the assessee is not entitled to any rebate, relief or allowance, it is not for the Court to strain and stretch the language of the statutory provision to enable the assessee to get such relief. Such an approach will be against all accepted principles of interpretation."
35. The Hon'ble Supreme Court has observed in CIT vs. Gwalior Rayon Silk Mfg. Co. Ltd. (supra), that it is settled law that the expressions used in a taxing statute would ordinarily be understood in the sense in which it is harmonious with the object of the statute to effectuate the legislative intention and if the language is plain and unambiguous, one can only look fairly at the language used and interprete it to give effect to the legislative intention. Their Lordships have further observed that nevertheless, tax laws have to be interpreted reasonably and in consonance with justice adopting a purposive approach. The contextual meaning has to be ascertained and given effect to. We have examined the Chapter 8 of Tax Referencer and we are of the view that it is an exhaustive description of s. 80HHC, made by some author. The other judgment of Cochin Bench in the case of A. M. Moosa vs. Asstt. CIT (supra) does not render any assistance to the assessee as the facts of this case are distinguishable with the facts of the instant case. Each and every case has to be decided on its own facts. In this case, the Tribunal has interpreted the provision given in s. 80HHC(3) of the Act and on this point we do not have any different opinion. After careful perusal of s. 80HHC of the Act it appears to us that this section is self-explanatory and there is no ambiguity in s. 80HHC(3) of the IT Act. The language adopted in its sub-cl. (c) is very clear and by its plain reading, we are of the view that for ascertaining the net profit derived from the export business of goods or merchandise manufactured or processed by him and of trading goods, the individual profit from both the activities of the assessee is to be computed in accordance with the formula applicable to respective activities and clubbed with each other. After ascertaining the net profit from the export business of the assessee from both the activities, it shall be further increased as per the proviso given under that sub-section and thereafter a deduction shall be allowed as per sub-s. (1) of s. 80HHC. If this interpretation is applied in the instant case, we find that the assessee did not make proper calculations of profit from both the units and deduction was not properly claimed by him. The AO and the CIT(A) have properly applied provisions of s. 80HHC and we do not find any error in the order of the CIT(A). Accordingly, we confirm the order of the CIT(A) and reject this ground of the assessee.
36. In the result, the appeal is partly allowed.