Income Tax Appellate Tribunal - Cochin
Kesaria Tea Co. Ltd. vs Income Tax Officer (Also Income Tax ... on 21 September, 1992
Equivalent citations: (1993)46TTJ(COCH)43
ORDER
P. K. AMMINI, J.M. :
The former four appeals are by the assessee while the latter two appeals are by the Revenue. The assessment years involved are 1980-81, 1982-82 and 1982-83. The financial year is the previous year of the assessee. Since common issues are involved, these appeals are disposed of by a common order for the sake of convenience.
2. The first ground which is common in ITA Nos. 456 and 457 (Coch)/87 is against the reopening of the original assessment under S. 147(b) of the IT Act. The original assessments for the asst. yrs. 1980-81 and 1981-82 were completed on 28th Feb., 1983 and on 20th March, 1984 respectively wherein purchase tax liability amounting to Rs. 6,61,413 and Rs. 5,01,826 for the above two assessment years respectively were allowed. Subsequently, the audit party pointed out that the allowance of provision for purchase tax liability was wrong. Treating this objection as a fresh information for involving S. 147(b) of the IT Act, the ITO reopened the assessments for the above two years. Notices were also issued to the assessee. The assessee opposed the reopening of the original assessments and contended that the reopening was not valid since there was no fresh information before the ITO so as to attract the provisions of S. 147(b) of the IT Act. Rejecting this contention, the ITO reopened the assessments and withdrew the grant of provision for purchase tax liability. On appeal, the CIT(A) upheld the orders passed by the ITO under S. 147(b). Hence, these further appeals by the assessee.
3. The question that arises before us is whether the original assessments were validly reopened under S. 147(b) of the IT Act. Admittedly, the original assessments were reopened only on the basis of the audit objection. The assessee contended that there was no fresh information in this case and the objection of the audit party will not constitute an information to reopen the assessments under S. 147(b) of the IT Act. The learned representative for the assessee also placed reliance on the decision of the Supreme Court in the case of Indian and Eastern Newspaper Society vs. CIT (1979) 119 ITR 996 (SC), wherein the Supreme Court held that the opinion of the audit party on a point of law could not be regarded as information enabling the ITO to initiate reassessment proceedings under S. 147(b). The Revenue also made available to us copy of the audit objection where it is pointed out that in the sales-tax returns the assessee claimed total exemption for tax on exports. The Sale-tax Department also did not raise any demand for the purchase tax on export for which the assessee has made provisions in the accounts. Actually, the assessee has got no legal liability for the payment of purchase tax on produce exported especially in view of the finding of the ITO that the assessee has effected the purchases against specific export orders (vide Para 6 of the draft assessment order for 1980-81 under S. 144B). Further, the Kerala High Court in Dy. Commr. of ST (Laws) vs. Neroth Oil Mills Ltd. reported in 49 STC 249 held that peeling, deveining, cleaning, etc., done by the assessee in that case are only processing the goods to make it fit for export market and that process does not bring into existence any new product different from the goods purchased and, hence, the exporter is eligible for exemption from purchase tax under S. 5(3) of the CST Act. Hence, when the assessments for the asst. yrs. 1980-81 and 1981-82 were taken up it was quite clear that the assessee had no legal liability for the purchase tax for which provision has been made in the P&L Account. We notice that in the case the assessments were passed after the pronouncement of the judgment by the Honble Kerala High Court in the case the of Neroth Oil Mills (supra). Further, in the draft assessment order for the year 1980-81 the Assessing Officer had discussed the liability for purchase tax. He has also proposed to disallow the same. But, in the order under S. 144B(4) of the IT Act, the IAC directed the Assessing Officer to allow the claim. Accordingly, the original assessments were completed allowing the provisions made for purchase tax liability. Hence, we hold that there was no new information in the possession of the Assessing Officer warranting him to initiate proceedings under S. 147(b) of the IT Act.
4. The further question to be decided is whether the audit party is empowered to give view on law. In our considered view, the objection raised by the audit party would not constitute an information for which we place reliance on the decision of the Supreme Court in the case of Indian and Easter Newspaper Society vs. CIT (supra), wherein the Honble Supreme Court has held as follows :
"In every case, a declaration or exposition to be law must be a creation by a formal source, either legislature or judicial authority. A statement by a person or body not competent to create or define the law cannot be regarded as law. The suggested interpretation of enacted legislation and the elaboration of legal principles in text books and journals do not enjoy the status of law. They are merely opinions and, at best, evidence in regard to the state of law and in themselves possess no binding effect as law. The forensic submission of professional lawyers and the seminal activities of legal academics enjoy no higher status."
Further, it was held that the opinion of the audit party on a point of law could not be regarded as information enabling the ITO to initiate reassessment proceedings under S. 147(b).
5. The audit party has pronounced its opinion on a question of law based on incorrect appreciation of facts when it stated that "actually the assessee has got no legal liability for the payment of purchase tax on produce exported especially in view of the finding of the ITO that the assessee has effected the purchase against specific export orders (vide Para 6 of the draft assessment order for 1980-81 under S. 144B) ". From para 6 of the draft order, a copy of which is furnished before us, the ITO has nowhere stated that the assessee has effected the purchases against specific orders. In Para 6 he was only referring to the legal claim made by the assessee before Sales-tax authorities that purchases were effected against specific orders and inferred therefrom that the assessee has fair chances of success in getting exemption from tax. This inference was not upheld by the IAC and the assessments were completed allowing the liability. Therefore, the reassessment proceedings now initiated amounted to change of opinion on the same set of facts. Hence, the reassessment is not valid.
6. The next ground which is common in these two appeals (ITA Nos. 456 & 457 (Coch) 87) is that the CIT(A) ought to have held that the provision made for purchase tax is an allowable item in computing he income of the assessee. In this regard the assessee has contented that the sales-tax assessments in respect of these assessment years are still pending. Hence, the liability to pay purchase tax is not finally decided. Therefore, the assessee was under a bona fide impression that he is liable to pay purchase tax. We agree with the contention of the assessee and hold that as long as the sales-tax assessments are pending, the provision made for purchase tax liability is an allowable deduction. Thus, we decide the issue in favour of the assessee on merits as well.
7. The next ground which is common in ITA Nos. 456, 457, 458 & 459 (Coch)/87 is in respect of the status of the assessee. According to the assessee, the assessee should have been assessed in the status of an industrial company. Admittedly the assessee is engaged in tea business. The assessee is doing buying, blending, packing and selling it. Hence, it is to be held that the assessee is engaged in the manufacture of goods and it has to be treated as an industrial undertaking. In this regard, the learned representative for the assessee drew our attention to the decisions G. A. Renderian Ltd. vs. CIT (1984) 145 ITR 387 (Cal), 1 STC 157 and 47 STC 124. We have gone through all these decisions. In the case of G. A. Renderian Ltd. vs. CIT (supra), the assessee, who carried on the business of purchasing tea of different qualities, blending the same by mixing one type with another and selling it, claimed that it was an industrial company, within the meaning of S. 2(7)(c) of the Finance Act, 1978, entitled to concessional rate of tax. The Tribunal disallowed the claim on the ground that there is no processing of tea as the end product was the same and the process was manual. On a reference the Honble Calcutta High Court that the Tribunal was in error and the assessee was an industrial company in terms of S. 2(7)(c) of the Finance Act, 1978. The Honble High Court followed the ratio laid down in the case of Chowgule & Co. Pvt. Ltd. & Anr. vs. Union of India & Ors. 47 STC 124 (SC). The above decisions are applicable to the facts of this case and we hold that the assessee is an industrial company and is entitled to concessional rate of tax. We also find that in the assessees own case, the CIT(A) vide his order dated 18th Oct., 1989, for the assessment year 1980-81 had held that the assessee is entitled to be treated as an industrial company for the purpose of levy of tax. Therefore, this issue is decided in favour of the assessee.
8. The next issue which is common to ITA Nos. 458 and 459 (Coch)/87 is in respect of disallowance of commission paid to foreign agents. For the asst. yr. 1981-82 the assessee claimed weighted deduction on commission payments of Rs. 3,88,910 to the foreign agents. The ITO rejected the claim on the ground that the parties who received commission could not be treated as maintenance of an agency or a branch office outside India. The CIT(A) allowed weighted deduction in respect of a sum of Rs. 3,71,116 and disallowed the claim for Rs. 17,794. The assessees claim for weighted deduction for the asst. yr. 1982-83 was rejected by the ITO as well as by the CIT(A). Before us, the assessee has filed details of the commission paid to foreign agents and also the agency and also the agency agreements. We have gone through the same. We find that this issue came up for consideration before the Honble Kerala High Court in the case in the case of Srivilas Cashew Co. vs. CIT (1991) 99 CTR (Ker) 36, wherein it is held as follows :
"It was argued on behalf of the Revenue that the word agency takes its colour from the words branch and office (these words, in the context, can only mean the branch office of the assessee manned by his servants) used in the section and, therefore, it should be given the same meaning and, if that be so, the relationship between the assessee and the so-called agent shall be that of master and servant. Here the persons who are doing the agency work are doing agency business for others also. They, therefore, cannot be said to be servants of the assessee and, hence, the commission paid to them cannot be said to be an expenditure incurred wholly, and exclusively for maintaining an agency outside. This argument is not impressive. The word agency used in the section has acquired a clear and definite meaning both under law and in trade. The same meaning shall be attributed to the word in the section and not the meaning suggested by counsel for the Revenue. It is all the more so because the Legislature has deliberately used the disjunctive expression or denoting that the meaning of the words branch, office or agency cannot be same. The commission paid by the assessee to the agents is the expense incurred by the assessee to maintain an agency outside India for the promotion of the sale of assessees goods outside India. The assessee is, therefore entitled to claim deduction in respect of the payment under S. 35B(i)(b)(iv) of the IT Act, 1961."
The Honble High Court came to the conclusion that For being entitled to weighted deduction, the foreign agency need not work as a servant exclusively for the assessee. Respectfully following the above decision of the jurisdictional High Court, we hold that the assessee is entitled to get deduction in respect of commission paid to foreign agents. This ground is decided in favour of the assessee.
9. The next ground which is common to appeal Nos. 458 and 459(Coch)/87 is against the disallowance made under S. 40A(5) of the IT Act, for the asst. yrs. 1981-82 and 1982-83. While completing the assessments for the above two years, the ITO disallowed a sum of Rs. 26,636 and Rs. 18,141 in the asst. yrs. 1981-82 and 1982-83 respectively by involving the provisions of S. 40A(5) of the IT Act out of the remuneration of the wholetime directors. On appeal, the CIT(A) directed the ITO to recalculate the disallowance following the decision of the Tribunal dt. 30th Nov., 1981 based on the decision of the Kerala High Court in the case of Forbes, Dwart & Figgis (P) Ltd.
10. We have heard the parties to the dispute. The assessees contention that the payment of remuneration to whole time director is governed by the provisions of S. 40(c) cannot be accepted in view of the decision of the jurisdictional High Court in the assessees own case Kesaria Tea Co. Ltd. vs. CIT reported in (1991) 189 ITR 374 (Ker) wherein the High Court held as follows :
"In the case of remuneration paid to a director, an employee of the company which consists of salary and perquisites only, the expenditure to be allowed is only with reference to S. 40A(5)(a) and (c) of the IT Act, 1961, and not with reference to S. 40(c)."
We also see no reason to interfere with the direction of the CIT(A) to the ITO that the disallowance should be made in accordance with the decision of the Tribunal dt. 30 Nov., 1981. The issue is, therefore, decided against the assessee.
11. The next common issue in the appeals for the asst. yrs. 1981-82 and 1982-83 (ITA Nos. 458 & 459 (Coch)/87) is against the inclusion of the cash assistance received by the assessee in the income of the assessee. While completing the assessments for the above two years, the ITO disallowed the assessees claim for exemption in respect of cash assistance amounting to Rs. 54,840 for the asst. yr. 1981-82 and Rs. 4,77,163 for the asst. yr. 1982-83 and brought the same to tax. On appeal, it was confirmed. Hence, these further appeals by the assessee.
12. We have heard the parties. The issue also stands decided by the decision of the jurisdictional High Court in the case of the same assessee reported in Kesaria Tea Co. Ltd. vs. CIT (1989) 180 ITR 134 (Ker) wherein it was held as follows :
"The entitlement to the cash assistance sprang from the business carried on by the assessee and the amount was received during the course of conduct of the business. The subsidy or cash assistance received by the assessee was by way of additional payment for the goods exported and it could not be considered to be a capital receipt. The subsidy was not given for a specific or special or specific purpose. Therefore, the Tribunal was justified in holding that the cash assistance received by the assessee was income liable to tax."
Respectfully following the above decision of the Honble Kerala High Court, this ground is decided against the assessee.
13. For the asst. yr. 1982-83 the assessee has taken a ground that there is no justification for sustaining an addition of Rs. 24,728 under the head pepper-vaida. During the course of assessment proceedings, the ITO noticed that a sum of Rs. 24,728 was debited as pepper vaida. The ITO was of the view that this was the net loss suffered by the assessee in pepper forward trade. Hence, he requested the assessee to file a note on the expenditure under pepper viada. It was also suggested to the assessee that the expenditure is in the nature of speculation loss and, therefore, calls for disallowance. The assessee did not file any reply. Hence, the ITO disallowed the claim treating the same as speculation loss. However, the ITO allowed this loss to be carried forward to be set off against any further income under speculation. The CIT(A) also found as a matter of fact, that this is clearly in the nature of speculation loss. On a careful consideration of the facts and circumstances of the case, we also agree with the view of the CIT(A). This ground taken by the assessee is dismissed.
14. The next issue which requires our consideration in the appeal for the year 1982-83 is in respect of addition made under S. 40A(8). The ITO disallowed a sum of Rs. 410 under the head 40A(8) which was confirmed by the CIT(A). We find that the interest paid is not on any deposits and, hence, no disallowance can be made under S. 40A(8). For this we place reliance on the decision of the Madhya Pradesh High Court in CIT vs. Kalani Asbestos (P) Ltd. (1989) 180 ITR 55 (MP). This ground is decided in favour of the assessee.
15. The next ground in the assessees appeal for the asst. yr. 1982-83 is that the CIT(A) erred in not giving a clear finding in respect of the amount allowable as contribution to the approved gratuity fund. While completing the assessment the ITO disallowed Rs. 14,794 stating that the same is in excess of the provisions. The CIT(A) has directed the ITO vide Para 9 of his order to obtain necessary details from the assessee and allow the gratuity as per rules. In view of this, in our considered view, the assessee cannot have any grievance. This ground is decided against the assessee.
16. Now, shall take up the Revenues appeals. The only ground taken in ITA No. 530 (Coch)/87 is against the allowance of deduction under S. 35B by the CIT(A). We have already dealt with this issue in para 8 of this order, while considering the assessees appeals. For the reasons stated therein, this ground is decided against the Revenue.
17. The only ground taken in ITA No. 531 (Coch)/87 for the asst. yr. 1982-83 is in respect of allowance of bonus paid in excess of 8.1/3% of the wages and salaries to the workers and staff of the assessee. The assessee paid bonus at the rate of 20% to its employees. The ITO restricted the payment of bonus to 8.1/3% and disallowed a sum of Rs. 23,905. The CIT(A) held that the payment was made as per contracts and as customary one. Therefore, the disallowance made by the ITO was deleted by the CIT(A). Against this finding of the CIT(A) the Revenue has filed the present appeal.
18. The assessee has filed details of payment of bonus for the asst. yr. 1982-83. The assessee has also filed copy of the agreement arrived at between the assessee and its employees on 23rd Jan., 1982 in connection with the payment of bonus. The assessees previous year ended on 31st March, 1982. We have gone through the details filed by the assessee. We find that this issue is decided in favour of the assessee by the Honble High Court of Kerala in the case of CIT vs. Jayashree Cashew Co., Quilon (O.P. No. 10393/87-6 dt. 17th Jan., 1989) wherein it is held that even bonus paid in excess of 20% can be allowed if it is made as per agreement and also as a customary one. In view of this, we see no reason to interfere with the order of the CIT(A) on this issue.
19. In the result, ITA Nos. 456 & 457 (Coch)/87 are allowed; ITA Nos. 458 & 459 (Coch)/87 are partly allowed; and ITA Nos. 530 & 531 (Coch)/87 are dismissed.