Gujarat High Court
Shree Digvijay Woollen Mills Ltd. vs Commissioner Of Income-Tax on 3 February, 1993
Equivalent citations: [1993]204ITR398(GUJ)
JUDGMENT G.T. Nanavati, J.
1. At the instance of the assessee, the Income-tax Appellate Tribunal, Ahmedabad, has referred the following two questions for the opinion of this court, under section 256(1) of the Income-tax Act, 1961 :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in confirming the disallowance of expenditure of Rs. 10,051 incurred for boring a tube well as capital expenditure ?
2. Whether, on the facts and in the circumstances of the case, the Income-tax was further justified in law in holding that the Income-tax Officer was justified in law in charging interest of Rs. 41,410 under section 216 of the Income-tax Act, 1961 ?"
2. During the accounting year relevant to the assessment year 1973-74, the assessee incurred an expenditure of Rs. 10,051 for the purposes of boring a tube well. The assessee claimed deduction of that amount on the ground that it was revenue expenditure. The Income-tax Officer disallowed that claim on the ground that boring of tube well was not the business of the assessee and that the expenditure was incurred for the purposes of creation of an asset and, therefore, it was capital expenditure in nature. While passing the assessment order, the Income-tax Officer also passed an order in the following terms : "......... Charge interest under section 216." This order was passed by the Income-tax Officer as he found that the assessee had underestimated the advance tax payable by it and thereby reduced the amount payable in the first two instalments. The amount of interest was worked out at Rs. 41,410.
3. The assessee challenged the assessment order and also the order passed under section 216 by filing a composite appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner agreed with the finding of the Income-tax Officer that the expenditure of Rs. 10,051 was not revenue in nature and that merely because a capital asset had not come into existence, the nature of the expenditure did not charge. As regards the order passed under section 216 levying interest, it was contended that the difference between the estimates filed by the assessee arose because of the retrospective amendment of section 40A(7) of the Act with respect to payment of gratuity. The Act was amended by the Finance Act of 1975 but was made effective from April 1, 1973. In view of the retrospective effect given to that section, the Appellate Assistant Commissioner held that there was no change in the legal position so far as filing of the estimates of advance tax was concerned, and that the same provision continued even at the time of filing of the revised estimate in March, 1973. He, therefore, held that interest was correctly charged by the Income-tax Officer. Therefore, the appeal filed by the assessee on the two points was rejected, though it was partly allowed on some other point.
4. The assessee then preferred a second appeal to the Tribunal. The finding with respect to the expenditure of Rs. 10,051 was confirmed by the Tribunal by holding that it was rightly disallowed by the Income-tax Officer and by the Appellate Assistant Commissioner. As regards charging of interest under section 216, the Tribunal held that the Income-tax Officer was justified in charging interest. Though the Tribunal agreed with the contention raised on behalf of the assessee that the Income-tax Officer had given no reasons for charging interest under section 216, it held that the assessee had full opportunity to raise that contention before he Appellate Assistant Commissioner and yet it was not contended before him that the order of the Income-tax Officer should be set aside and the matter be sent back to him for that reason and, therefore, no legitimate grievance could be made in that behalf. The appeal filed by the assessee was, therefore, dismissed. The assessee then moved the Tribunal for referring the aforesaid two questions to this court.
5. It was contended by the learned advocate appearing for the assessee that, because of scarcity of water during the relevant period, the assessee was required to purchase water from outside and, for that reason, it was required to incur expenditure. Instead of obtaining water in this manner, it decided to bore a tube-well and spent Rs. 10,051 for that purpose. The water thus obtained was brackish and, for that reason not suitable, and, therefore, the tube-well was required to be caped and it became useless for all practical purposes. Thus, even after the expenditure of Rs. 10,051 no capital asset came into existence. He submitted that, for these two reasons, viz., (i) that the amount was spent for the purpose of obtaining water which was required for the business of the company, and (ii) because no asset came into existence, the expenditure should have been regarded as revenue expenditure and should have been allowed by the Income-tax Officer. In support of his contentions, the learned advocate for the assessee relied upon the following observation made by the Bombay High Court in CIT v. Associated Cement Companies Ltd. [1974] 96 ITR 650 (headnote) :
"When an expenditure is made not only once and for all but with a view to bringing into existence an asset or advantage for the enduring benefit of a trade such an expenditure is properly attributable not to revenue but to capital. But a payment made to remove the possibility of a recurring disadvantage cannot be considered as payment made to secure an enduring advantage."
6. Relying upon this observation, it was submitted that the expenditure of Rs. 10,051 was made by the assessee for the purpose of or with the object of removing the disadvantage of making payment for water every year. Thus, the expenditure was properly attributable to revenue. It was earlier made from time to time as revenue expenditure. Therefore, even if the test of purpose or object is applied, in this case, it should have been held that the expenditure made by the assessee was revenue expenditure. He further drew our attention to the fact that the view taken by the Bombay High Court has been affirmed by the Supreme Court in CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257. In our opinion, the contention raised on behalf of the assessee deserves to be rejected as it cannot be said that the expenditure was not made with a view to secure an enduring advantage. The said amount was spent for the purpose of bringing into existence a tube-well. Considering the facts of the case and the nature of the asset, the tube-well had to be regarded as a capital asset. The expenditure which the assessee had incurred was not by way of advance payment for provided water to the assessee for a pretty long time. The expenditure was incurred with a view to have a permanent solution to the difficulty from which the assessee was suffering in obtaining sufficient supply of water from others. What had happened in the case of Associated Cement Companies Ltd. [1974] 96 ITR 650, was that the assessee had incurred certain expenditure with a view to secure an advantage by way of absolving it. While affirming the decision of the Bombay High Court, the Supreme Court approved the test that the expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the purpose of the enduring benefit to the trade. If, on the other hand, what is go rid of by lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. As we have pointed out above, the expenditure incurred by the assessee cannot be said to be a lump sum payment in lieu of the annual business expenses. Moreover, in this case, as a result of the expenditure, a capital asset did come into existence though it became useless thereafter as the water which was obtained therefrom was not found suitable. Therefore, even if the test laid down in the case of Associated Cement Companies Ltd. is applied, it will have to be held that the expenditure incurred by the assessee for boring a tube-well was capital in nature and was, therefore, rightly disallowed.
7. We may also refer to the decision of this court in CIT v. Shri Digvijay Cement Co. Ltd. [1986] 159 ITR 253 to which our attention was invited by learned counsel appearing for the Revenue wherein this court has held that, in order to determine whether an expenditure is of the nature of revenue or capital, the aim and object of the expenditure should be considered. An expenditure would be capital in nature, if it is made with a view to bringing into existence an asset or advantage of enduring nature and it is not at all necessary that it should have had that result. Therefore, even though the tube-well became useless in the sense that water obtained therefrom was not found suitable, it cannot be said that the expenditure incurred in that behalf should not be regarded as capital in nature. This court has gone to the extent of holding that even if the expenditure does not result in the creation of an asset, it would not cease to be an expenditure of the nature of capital, if it was incurred for the purpose of bringing into existence an asset of enduring nature. Therefore, the authorities below were right in holding that the expenditure of Rs. 10,051 was incurred for the creation of an asset of capital nature, and that it was not revenue expenditure, being a lump sum amount spent for obtaining water for a period of years.
8. As regards chargeability of interest under section 216, it was contended that, as the Income-tax Officer had not recorded the requisite finding and passed a speaking order, the condition precedent to the chargeability of interest was not satisfied and, therefore, the order passed under section 216 deserves to be set aside. It was submitted that the Tribunal did not properly appreciate the contention raised by the assessee in this behalf and erroneously held that the assessee had full opportunity of challenging the order before the Appellate Assistant Commissioner and, therefore, the order passed by the Income-tax Officer did not deserve to be set aside. In the alternative, it was submitted that the assessee had filed the estimate of advance tax on September 4, 1972, estimating the income below Rs. 12 lakhs. The assessee paid the first two instalments of advance tax on the said estimate. At the time of payment of the last instalment, the assessee filed a revised estimate of advance tax estimating the income at Rs. 38 lakhs and paid the balance amount of tax. It was submitted that the estimate was required to be revised in view of the passing of the Payment of Gratuity Act in 1972. That was a justifiable cause for revising the estimate and, for that reason, the Income-tax Officer should have exercised his discretion in favour of the assessee and should not have charged interest even though the other conditions precedent to the chargeability of interest were satisfied. It was submitted that, until the Income-tax Officer records a finding that the underestimation was deliberate or intentional, section 216 would not be attracted and as the Income-tax Officer in this case had not recorded such a finding, the order passed by him under section 216 should be regarded as void, or, in any case, invalid.
9. In order to support his contention, the learned advocate for the assessee drew our attention to some decisions of different High Courts. He first invited our attention to the decision of the Bombay High Court in Spaco Carburettors (India) Ltd. v. M. A. Ajinkya, CIT [1990] 186 ITR 360, wherein it is held that the question whether interest is or is not to be charged under section 216 arises only after the assessment is completed. The mere fact that the order under section 216 is found on the same sheet of paper on which the order of assessment is passed will not make the two orders one. For taking this view, the Bombay High Court also relied upon section 246 under which the assessment order and the order charging interest under section 216 are separately appealable. This decision has no direct bearing on the question which arises for our consideration, but it was relied upon only with a view to show that the order under section 216 is an independent order. What was further submitted on this premise was that, for that reason, it should be a complete order in the sense that it must record a necessary finding and should contain reasons in support of the finding.
10. In Addl. CIT v. Vazir Sultan Tobacco Co. Ltd. [1980] 122 ITR 251 (AP), while interpreting section 216, what has been held is that section 216 requires that the Income-tax Officer must find at the time of regular section that the assessee has, under sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) of section 212, underestimated the advance tax payable in either of the first two instalments. The finding contemplated by section 216 is a condition precedent to the charging of interest under sub-section (1) of section 216. In that case, the Andhra Pradesh High Court has also taken the view that, if advance tax happens to be underestimated by reason of the fact that the current income has been underestimated as compared to the actual income ascertained at the end of the year, the provisions of section 216 are not attracted. We are not concerned in this reference with the later aspect, but we may only point out that the Calcutta High Court has dissented from this view. In that case also, no speaking order was passed under section 216. While passing the assessment order, the Income-tax Officer had further stated as under : "Add interest under section 216-Rs. 49,671." The Andhra Pradesh High Court held that, as the Income-tax Officer had precedent to charge condition precedent to the passing of the order under section 216 was not satisfied.
11. The Allahabad High Court in CIT v. Elgin Mills Co. Ltd. [1980] 123 ITR 712, after examining the sections dealing with advance payment of tax, observed that they mark a departure from the basic scheme of the Act that the subject of charge is the income of the previous year and not the income of the assessment year. It was further observed that the principle incorporated in these sections is "pay as you earn". In that case, it was urged on behalf of the Revenue that if, on making a regular assessment, the Income-tax Officer finds that the advance tax paid by the assessee fell short of the tax determined by him, then section 216 would be attracted and interest would be charged for the period during which the payment was deficient and this would be on the difference of the amount paid in such instalment and the amount which could have been paid. It was further contended that this section does not require the existence of the element of the mens rea. In this context, the Allahabad High Court held that, if, at the time when the estimate is filed, there is proper basis and justification shown for it, then it cannot be said that it is an underestimate. It further held that the question whether the assessee had some justification for the estimate filed or that it was an underestimate is to be examined with reference to the time when it was filed, as the assessee, while making the estimate, is not required to project himself in future. The Allahabad High Court also held that charging interest under section 216 is not automatic. It is discretionary and, for the exercise of discretion, the Income-tax Officer is required to examine the matter from the viewpoint as to whether the estimate filed by the assessee was in fact an underestimate.
12. The Kerala High Court in Travancore Tea Estate Co. Ltd. v. CIT [1985] 153 ITR 444, was also called upon to examine the question of charging interest under section 216. It considered the scope of section 216 and has observed as under (at page 450) :
"This section must be seen in two parts. The first part concerns the finding of the Income-tax Officer, at the time of the regular assessment, in regard to the matters dealt with under clauses (a) and (b). It is such a finding that is the condition precedent to the exercise of his power to make a direction in terms of the remaining part of the section. As soon as the officer finds that the assessee has under sub-section (1) or (2) or (3) or (3A) of section 212 underestimated the advance tax payable by him, and thereby reduced the amount payable in either of the first two instalments, or has under section 213 wrongly deferred the payment of advance tax on a part of his income, the remaining part of the section is attracted, whereby the officer is empowered to levy simple interest in terms of those provisions. What the section says is that where the officer has come to a finding as to the matter mentioned under either clause (a) or clause (b), 'he may direct that the assessee shall pay simple interest at.......' The word 'may' indicates that the officer has a discretion in making a direction. In the absence of a direction, no interest will accrue, even when there is a finding under the first part. There is no automatic accrual of interest under section 216. First the finding and then the direction, and only then the interest accrues."
13. In that case, what was urged on behalf of the Revenue was that the interest levied under section 216 being compensatory in character, the section must be read as mandatory and not as directory. The Kerala High Court rejected that contention and held that the section is not mandatory and levy of interest is not automatic.
14. In CIT v. Nagri Mills Ltd. [1987] 166 ITR 292, this court was called upon to decide under section 256(2) of the Act whether the Tribunal was justified in not referring the question proposed by the Revenue to this court. The question which was raised by the Revenue was : "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal has been right in law in holding that interest under section 216 of the Income-tax Act, 1961, was not chargeable ?" That was a case where no specific finding was recorded by the Income-tax Officer and, therefore, it was contended by the Revenue that it was not necessary for he Income-tax Officer to record such a specific finding and the fact that he had charged interest under section 216 was sufficient to indicate that he had found that the assessee had underestimated the amount of advance tax payable by it. According to the Revenue, it was implicit when the Income-tax Officer decided to charge interest that the assessee had underestimated the advance tax payable it. In this context, this court examined section 216 and held that on a plain reading of section 216, it is clear that interest could not have been levied under that section unless the Income-tax Officer had found that the assessee had underestimated the advance tax payable by him. The finding that there was underestimate of the advance tax payable by the assessee was a pre-condition for levy of interest and unless such a finding was recorded, no interest could have been levied. Emphasising the use of the word "may", this court further observed that it clearly shows that the Income-tax Officer has a discretion to levy or not to levy interest. The discretion has, no doubt, to be exercised judicially and not arbitrarily. The question of exercising such a discretion would arise only when the Income-tax Officer finds that the assessee had underestimated the advance tax payable by him. It is needles to say that the finding which the Income-tax Officer is required to record has to be backed for reasons. It is further held that the estimate can be said to be an "underestimate" if it is deliberate or intentional. There has to be lack of bona fides on the part of the assessee. The finding of underestimation, therefore, cannot be made without appreciation of the facts which are pleaded or which are on record. It is on appreciation of the facts on record that the Income-tax Officer is required to reach the conclusion that, when the assessee filed estimate of advance tax, he had underestimated it. It is, therefore, necessary for the Income-tax Officer to record a finding that the assessee had underestimated the advance tax payable by it and unless he records such a finding, the question of levy of interest would not arise. This decision emphasis the necessity of recording a finding before the Income-tax Officer, in his discretion, can pass an order for payment of interest by the assessee. It also emphasizes the necessity of recording reasons in support of such finding.
15. In Pasupati Das and Sons Pvt. Ltd. v. CIT [1988] 170 ITR 110 (Cal), it was contended on behalf of the assessee that as there was no finding that the assessee had underestimated the advance tax payable by it and thereby reduced the amount payable in the second instalment, and as recording of such a finding was necessary before any interest could be charged, the assessee was not liable to be charged with interest. In support of that contention, the learned advocate for the assessee had relied upon the cases of Vazir Sultan Tobacco Co. Ltd. [1980] 122 ITR 251 (AP); Elgin Mills Co. Ltd. [1980] 123 ITR 712 (All); Travancore Tea Estates Co. Ltd. [1985] 153 ITR 444 (Ker) and one judgment of the Calcutta High Court in CIT v. Hindustan Sanitary Ware and Industries Ltd. [1989] 180 ITR 21. Though it is not stated in so many words, it appears from the judgment that the Calcutta High Court was also of the view that recording of such a finding was pre-condition to the levy of interest. As no specific finding was recorded in that behalf, the Calcutta High Court was inclined to remand the matter to the Tribunal but it did not do so as it found that the amount of interest was insignificant and, therefore, it was not proper to prolong the proceedings further. One more thing which is required to be noted is that the Calcutta High Court disagreed with the view taken by the Andhra Pradesh High Court that where there is underestimate of advance tax on account of underestimation of current income, section 216 is not attracted. (See Vazir Sultan Tobacco Co.'s case [1980] 122 ITR 251 (AP)).
16. In Hindustan Sanitary Ware and Industries Ltd.'s case [1989] 180 ITR 21, the Calcutta High Court had to consider a point similar to the one which arises for our consideration in this reference. In that case, there was deficiency in payment of the first instalment and the second instalment of advance tax. The Income-tax Officer, therefore, charged interest under section 216 being discretionary, unless there is a finding regarding default by the assessee, the Income-tax Officer cannot charge interest. As against that, it was contended on behalf of the Revenue that, as charging of interest is not penal in character, no formal order was necessary. It was also contended that it is not necessary that a finding has to be recorded regarding default of the assessee before interest can be charged. It was also contended that levy of interest under section 216 is mandatory and not discretionary. The Calcutta High Court held that charging of interest under section 216 is not and cannot be automatic. It is discretionary. It will depend upon the facts and circumstances of each case. The Income-tax Officer has to apply his mind and find out whether first or second instalment of advance tax. The Income-tax Officer will have to find out whether an appropriate estimate was made on the materials available on the day when such estimate was filed. If he finds that the estimate was not genuine or bona fide, on the prevailing facts and circumstances, he may draw an inference that there was an underestimate. The question whether there was any justification for the estimate or whether it was in fact an underestimate has to be examined by the Income-tax Officer objectively with reference to the time and the materials available when the estimate was filed by the assessee. The Calcutta High Court further observed that the mind of the Income-tax Officer cannot be ascertained unless he has come to a finding that there is underestimate of advance tax payable by the assessee. Unless he records any finding at the time of regular assessment, the assessee does not get the opportunity to assail the order, if he is aggrieved. At least there must be some material to hold that the assessee has underestimated the advance tax. In that case also, the Income-tax Officer had not given any reason while levying interest under section 216. The Calcutta High Court, therefore, held that such a non-speaking order was invalid and was rightly quashed by the Tribunal. It is also observed by the Calcutta High Court that, in such a case, the question is no merely of giving reasons but the question is more fundamental as to whether the conditions precedent for exercise of power under section 216 were satisfied or not. In such a case, the Tribunal should not give a further opportunity to the Assessing Officer to make good the lacuna. The Tribunal could have decided the question whether, on the materials on record, there was any underestimate by the assessee within the meaning of section 216. The action of the Tribunal in the remanding the matter to the Assessing Officer was held to be not justified.
17. Having carefully gone through the section as it stood then and the decisions cited before us, we are of the view that levy of interest under section 216 is not mandatory but is directory. We agree with the reasons given in this behalf in the decisions which were cited before us. We would only like to add that underestimated or difference may arise as a result of an honest mistake because of unforeseen circumstances or for some other justifiable reasons. It could not have been the intention of the Legislature to levy interest in such cases also as that would have made the provision unreasonable and harsh. The Legislature has, therefore, though it fit to confer discretion on the Income-tax Officer not to direct the assessee to pay interest even though he finds that the assessee had underestimated the advance tax payable by him and thus the amount payable on account of the first two instalments was thereby reduced or that the assessee had, under section 213, wrongly deferred payment of advance tax on a part of his income. The words "reduced" and "wrongly deferred" soggiest a deliberate or intentional act on the part of the assessee. Though the underestimation contemplated by clause (a) will, in all cases, result in reduction of the amount payable as advance tax, the underestimation itself may not always be, or in all cases, with a view to reduce the amount payable as advance tax. As stated earlier, the underestimation may be because of a bona fide mistake, a doubtful position of law or circumstances beyond the control of the assessee. So also, when the payment of advance tax is wrongly deferred, that may be as a result of a bona fide mistake, or doubtful position of law or circumstances beyond the control of the assessee. If the Legislature wanted interest levied under section 216 as compensatory in character, then it would have used different phraseology and would not have conferred a discretion on the Income-tax Officer. If payment of interest under this Act was intended to be compensatory, then on mere underestimation of the advance tax payable and less payment of advance tax and mere deferment of the payment of automatic. The intention of the Legislature in enacting section 216 clearly appears to be to make that assessee pay interest who deliberately or intentionally paid less advance tax.
18. Thus, in each case, if the Income-tax Officer finds an underestimation or deferment of payment of advance tax, he will have to hold an inquiry and find out whether the underestimation was done by the assessee with a view to reduce the amount of advance tax payable, or he had wrongly and deliberately deferred payment of advance tax. Only in those cases where the Income-tax Officer finds that the assessee had intentionally done either of these acts, recording of such a finding is a condition precedent to the exercise of the power to levy interest. If, as a result of the inquiry, he finds that there was some justification for the underestimation at the time when the said underestimation was made, then it would be just and proper on his part not to direct the assessee to pay interest. If, on the other hand, he finds that the underestimation of the advance tax or deferment of the payment of advance tax was intentional and wrong, then it would become his duty to direct the assessee to pay interest. Thus, making of an inquiry, recording the requisite finding and giving reasons in support thereof are necessary before the assessee can be directed to pay interest under section 216. As rightly pointed out by the Calcutta High Court, the function which the Income-tax Officer has to perform under section 216 is a quasi-judicial function. An order passed under section 216 is made appealable under section 246. Section 216 itself requires fulfilment of two conditions upon which the order for payment of interest can be passed. For all these reasons, recording of the requisite finding and giving reasons in support thereof are contemplated by section 216 and, in the absence of the requisite finding or reasons in support thereof, the order passed by the Income-tax Officer, ordinarily, will have to be regarded as invalid. It may, however, happen that the Income-tax Officer might have, while making the assessment, held an inquiry in this behalf by inquiring from the assessee the reasons for underestimation or deferment of payment of advance tax. In such case, it may not become necessary for him to hold a fresh inquiry under section 216 after passing the assessment order, and if the requisite findings and the reasons are recorded in the assessment order, then the order passed by the Income-tax Officer under section 216 may not be regarded as invalid.
19. So far as the facts of this case are concerned, it is not in dispute that the Income-tax Officer not only did no give any reason for levying interest under section 216 but had also not recorded the requisite finding contemplated by clause (a) of section 216. The assessee did make a grievance before the Appellate Assistant Commissioner in this behalf. The Appellate Assistant Commissioner held that the interest was correctly chargeable as there was no change in the legal position as regards the includibility of the provision for gratuity in the total income. The Appellate Assistant Commissioner assumed that possibly that was the only reason why the assessee had underestimated the first and second instalments of advance tax payable by it. The Tribunal, on the contention raised by the assessee in this behalf, held that the Income-tax officer was justified in directing the assessee to pay interest. The only observation made by the Tribunal as regards the grievance of the assessee that the Income-tax Officer had not recorded the requisite finding and had not given reasons is that the assessee had ample opportunity before the Appellate Assistant Commissioner and that the assessee had not contended before him that the order of the Income-tax Officer should be set aside on that ground. In our opinion, the Tribunal really misunderstood the grievances made by the assessee. The assessee had in substance contended before the Appellate Assistant Commissioner that the order under section 216 should be set aside as the requisite finding was not recorded by the Income-tax Officer and that he had not given reasons for the direction which he gave for payment of interest. The prayer for setting aside the order of the Income-tax Officer was very much implicit in the grievance made by the assessee before the Appellate Assistant Commissioner. We are, therefore, of the view that the Tribunal was not right in holding that the Income-tax Officer was justified in giving direction to the assessee to pay interest under section 216. The Tribunal ought to have set aside the order of the Income-tax Officer as confirmed by the Appellate Assistant Commissioner and ought to have remanded the matter to the Income-tax Officer for passing a fresh order as contemplated by section 216 of the Act.
20. For the reasons stated above, we answer question No. 1 in the affirmative, that is, against the assessee and in favour of the Revenue and question No. 2 in the negative, that is, in favour of the assessee and against the Revenue. No order as to costs.