Bombay High Court
Commissioner Of Income-Tax vs Pravin M. Mehta on 1 August, 2000
Equivalent citations: [2000]246ITR445(BOM)
Author: S.H. Kapadia
Bench: S.H. Kapadia, J.N. Patel
JUDGMENT S.H. Kapadia, J.
1. Two points arise for determination in this appeal. Firstly, whether the assessee was entitled to claim deduction under Section 80HHC on receipt of labour commission of Rs. 46,952. Secondly, whether the Department was right in taxing the export reserves withdrawn from the business and transferred to the partners' capital account.
2. On the first point, it may be mentioned that in view of our judgment in the case of CIT v. Kantilal Chhotalal [2000] 246 ITR 440 (Bom), decided on July 31, 2000, vide Income-tax Appeal No. 533 of 2000, we hold that labour commission/indenting commission was not includible in business profits in the formula :
Business profits X Export turnover
Total turnover
3. Accordingly, the issue is answered in favour of the Department and against the assessee.
4. On the second point, the facts arise as follows :
On October 4, 1990, the assessee filed its return of income for the assessment year 1990-91. The assessee was engaged in the business of export of diamonds. The assessee also had local sales. The assessee-firm had created a reserve during the assessment year 1987-88 of Rs. 65,000. Similarly, the assessee created a reserve in the assessment year 1988-89 of Rs. 1 lakh. However, during the assessment year 1990-91, the Assessing Officer found that the assessee had transferred the said export reserves of Rs. 1,65,000 to the partners' capital account. Vide letter dated January 22, 1993, the assessee claimed that it had utilised the export reserves for business purposes during the assessment year 1987-88 up to the assessment year 1990-91 and transferred the reserves to the partners' capital account only on March 31, 1990. It was further pointed out that the export during the assessment year 1987-88 up to 1991 were much more than the reserves. It was contended that under the Act, there was no provision for taxing the export reserves if they are withdrawn from business. The Assessing Officer did not accept the contention. The Assessing Officer came to the conclusion that under Section 80HHC as it stood at the relevant time, the assessee was required to debit the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account to be utilised for the purposes of the business of the assessee. According to the Assessing Officer on transfer of export reserves to the partners' capital account, the proviso to Section 80HHC stood violated. Accordingly, the above amount of Rs. 1.65 lakhs was taxed as income of the assessee for the assessment year 1990-91. Being aggrieved, the assessee went in appeal to the first appellate authority which came to the conclusion that under Section 80HHC, as it stood at the relevant time, the only requirement was that the funds shall be generally used for the purposes of business ; that the funds remained with the assessee during the assessment years 1987-88, 1988-89, 1989-90 ; that there was no mandate in Section 80HHC to retain the reserve account permanently. Hence, there was no violation of the proviso. Hence, the appeal was allowed. Being aggrieved the Department carried the matter in appeal to the Tribunal. The Tribunal found that with effect from April 1, 1989, the said Section had undergone a complete change. That even the requirement of creating the reserve came to be dispensed with from April 1, 1989. That up to April 1, 1989, the export reserves remained with the firm. That unlike Section 80HHD, there was no provision for bringing the said amount to tax. That at best, the allowance made in the earlier years became wrongful allowance but for that also there was no provision in the Act as in the case of other Sections like 32A(5)(b) read with Section 155(4A), Section 34(3) read with Section 155(5), Section 33A(3) read with Section 155(5A), etc. Accordingly, the appeal was dismissed.
5. Mr. Desai, learned senior counsel appearing on behalf of the Department, contended that prior to April 1, 1989, Sub-section (1) of Section 80HHC, inter alia, provided that an amount equal to the amount of deduction shall be debited to the profit and loss account and credited to a reserve account to be utilisted for the purposes of the business of the asses-see. He contended that although the amount was credited to a reserve account during the assessment years 1987-88 and 1988-89, on account of transfer to the partners' capital account during the assessment year 1990-91 it was clear that the deduction was not utilised for the purposes of the business of the assessee and, therefore, the Assessing Officer was right in taxing the amount of Rs. 1.65 lakhs as income of the assessee during the assessment year in question as it was in that year that the amount has been transferred to the partners' capital account.
6. Mrs. Visanji, learned counsel appearing on behalf of the assessee, however, contended that by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, it was provided that an amount equal to the amount of the deduction claimed under the above Section 80HHC(1) was required to be debited to the profit and loss account and credited to a reserve account which was to be utilised for the purposes of the business of the assessee. She contended that this provision existed from April 1, 1987, up to April 1, 1989. Thereafter, the section was deleted. She contended that under the said section there was no provision to retain the reserve account of the firm permanently. She contended that the requirement of creating the reserve was dispensed with from April 1, 1989. She accordingly contended that on transfer to the partner's capital account during the assessment year 1990-91 there was no breach of Section 80HHC. In the alternative, she contended that in the same Chapter we have the provision of Section 80HHD which, inter alia, provided in Sub-section (4) that the amount credited to the reserve account shall be. utilised by the assessee before expiry of the stipulated period by constructing new hotels, purchase of new cars, etc. Similarly, under Sub-section (5) of Section 80HHD consequences of the breach have also been laid down inasmuch as where any amount credited to the reserve account stood utilised for any purpose other than those mentioned in Sub-section (4) or if the amount has not been utilised in the manner indicated in Sub-section (4) then the amount credited to the reserve account shall be deemed to be the profits and shall be charged to tax accordingly. She also invited our attention to various other sections of the Act where a similar provision dealing with consequence has been laid down. She further contended that unlike Section 80HHD in Section 80HHC(1), as it stood at the relevant time, there was no provision for utilising" the reserve for a particular purpose(s) nor was there any provision for consequences of breach. She further contended that, in any event, the requirement of creating the reserve has been dispensed with after April 1, 1989, In the circumstances, she contended that there was no provision in Section 80HHC to treat the allowance made in the earlier years as wrongful allowance. Hence, she contended that the Assessing" Officer erred in taxing the amount as income of the assessee. She further contended that there is no finding of fact recorded by the Assessing Officer that the amount has not been used for business purposes. She further contended that the assessee is a firm. If it would have been a company it was entitled to distribute the undistributed profits as dividend in which case there would not be any violation of the provisions of the Act. She invited our attention to the circular of the Central Board of Direct Taxes dated August 14, 1986, in which it has been laid down that distribution of dividends out of statutory reserve constituted utilisation of the reserve for business purposes. Mr. Desai in rejoinder contended that the transfer of Rs. 1.65 lakhs to the partners' capital account clearly showed non-utilisation of statutory reserve for business purposes. He contended that there was no need for the Legislature to make the provisions for utilisation of the statutory reserves for specific purposes because the Section itself states that the statutory reserve shall be used for business purposes and when the amount is transferred to the partners' capital account, it is clear that the amount has not been used for business purposes.
7. We do not find any merit in this appeal. Section 80HHC, as it stood at th'e relevant time, did not mandate a statutory reserve to be maintained permanently. The entire section was deleted from April 1, 1989. From that date the requirement of creating the reserve stood dispensed with. In the absence of any provision, the amount was transferred to the partner's capital account during the assessment year 1990-91, In the case of the assessee, the funds were not withdrawn during the assessment years 1987-88, 1988-89 and 1989-90. They were withdrawn after the section came to be deleted. If an accounting entry like transfer to the partners' capital account was required to be treated as income then the Legislature was required to say so. For example, in the case of Section 80HHD(5), the consequences of non-utilisation of the statutory reserve are clearly laid down when it states that where any amount credited to the reserve account has been utilised for any purpose other than those referred to in Sub-section (4) or the statutory reserve is not utilised in the manner specified in Sub-section (4) then the amount so utilised in the former case or the amount not so utilised in the latter case shall be deemed to be profits. Hence, the Legislature, by a legal fiction, has provided that an accounting entry shall be treated as income/ profits if *here is a breach of the provisions of Sub-section (4). No such consequence is spelt out in the case of Section 80HHC particularly when the entire section stood deleted from April 1, 1989. There is nothing' to indicate that the Legislature intended for an assessee to maintain a statutory reserve permanently. If the argument of the Department is accepted, it would lead to an assessee being required to maintain the reserve permanently. There is no such provision in the erstwhile section. Moreover, in the case of companies, the Central Board has clearly laid down in the above circular that distribution of dividends out of statutory reserve constituted utilisation for the business of the assessee. In this case we are concerned with a firm. Transfer to the capital account of the partners would be similar to distribution of the dividends. In the circumstances, there is no merit in the appeal.
8. Accordingly, the appeal is partly allowed with no order as to costs.