Income Tax Appellate Tribunal - Mumbai
Ewac Alloys Ltd. vs Deputy Commissioner Of Income-Tax on 12 March, 1992
Equivalent citations: [1992]42ITD218(MUM)
ORDER
G.K. Israni, Judicial Member
1. This appeal by the assevssee challenges the order of the learned CIT(A) dated 14-12-1990 in relation to the assessment year 1987-88.
2. The grounds raised in the appeal, our discussion thereof and the findings thereon are as under.
3. Ground No. 1 :
1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) has erred in confirming the addition of Rs. 196.63 lacs made by the learned Deputy Commissioner of Income-tax in respect of sales made by your appellants to M/s. Larsen & Toubro Limited. He ought not to have done so.
The assessee-company is a manufacturer of electrical products. Sixty per cent of its shares are held by M/s. Larsen & Toubro Limited (L&Tfor short) and the balance 40 per cent by Eutectic Corporation, U.S.A. The assessee, after obtaining the approval of the Government of India under Section 294AA of the Companies Act, had appointed L & T as its sole selling agent in the year 1970. This arrangement was renewed every fifth year after obtaining similar approval of the Government of India. The Income-tax Department, with a view to understand the transaction relating to the sole selling agency between the assessee and the L & T, conducted a survey. During the survey the list mentioning the prices at which EWAC sold the goods to the L & T and the list of prices at which the L & T sold the goods to the customers were obtained. The gate-passes of excise duty and invoices for excise duty were also collected. As a result of this survey, the department came to the conclusion that enormous margin of profit had been given to the sole selling agency, i.e., L & T. The assessing officer was of the opinion that since 1979 L & T had 60 per cent holding in the assessee-company, it was in a commanding position to dictate the terms to suit its convenience. Though the Board of Directors had equal representation by L & T and the non-resident share-holders, i.e., Eutectic Corporation, U.S.A., still the shareholding was the most important factor in controlling and managing the affairs of the assessee-company. The Government of India's approval to the sole selling agency agreement between the assessee and the L & T was obtained by informing the Company Law Board only of the facts beneficial to the assessee-company. The assessee-company had thus diverted its profits to the L & T, which was a 'zero taxed' company. According to the assessing officer, the following features were present in the agency agreement between the assessee and the L & T, viz. :
(i) There was enormous margin of profits to L & T.
(ii) L & T manipulated and compelled Eutectlc Corpn. to reduce its shareholding.
(iii) Company Law Board was only informed of the facts beneficial to the assessee-company.
(iv) The correct relationship between the assessee-company and L & T was not communicated to the Government in the application.
(v) Appointment of stockists and the discount payable to them was not bona fide and should not be considered while considering the margin.
(vi) Manipulating arrangements in regard to the excise duty.
(vii) Attribution of motives to the manner of dealing.
(viii) Comparison of selling arrangement between L & T and Audco India Ltd. with that of the assessee-company.
(ix) Motive of tax saving and diversion of profits to L & T as L & T are paying lesser tax.
(x) Margins were not clearly indicated.
(xi) The parties to the agreement would have revised the agreement and this not having done the assessee had not acted in a commercial manner.
(xii) Projections were known to the parties well in advance for all future years to come as also the cost of production and the market conditions in which higher price would be acceptable to the customers.
(xiii) The margin would be very high for L & T because the increase in sales In terms of metric tonnes from 444 in 1980 to 531 in 1987 had not the same rate of growth as the increase in price.
(xiv) The average rise in the sale price from 1982 to 1987 was smaller than the increase in price from 1978 to 1982.
(xv) Eutectic Corpn., U.S.A. had been compensated for the purchase of know-how and that the acquisition of know-how had not benefited the assessee-company.
(xvi) There was tax planning and diversion of profits by relying on the decisions of the Calcutta Discount Co. Ltd., Jlyajeerao Cotton Mills Ltd. & McDowell & Co. Ltd.
Basing on the above observations, the assessing officer made the disallowance as under :
(Rs. in lakhs) Sales as per statement 1,645.32 Add: Discount as discussed above 180.03 1,825.35 Less: Cost of goods for resale 1,172.38 652.97 (Rs. in lakhs) Estimated profits @ 25% on Rs. 1,825.35 lakhs 456.34 196.63 Add: Profit on goods for self-consumption on estimate 15.00 211.63 Thus the assessing officer made a total addition of Rs. 211.63 lakhs on the ground that the assessee had made diversion of its profits to L & T for noncommercial consideration.
4. On the matter being taken up in the first appeal, the learned CIT(A) has deleted the addition of Rs. 15 lakhs representing the estimated profit on goods for self-consumption, i.e., the goods purchased by L & T from EWAC Alloys Ltd. and consumed for its (L &Ts) own purposes. The learned CIT(A) thus confirmed the addition to the extent of Rs. 196.63 lakhs.
5. A reading of the impugned order of the learned CIT(A) shows that on behalf of the assessee, the following submissions were made before him:--
(a) L & T had all along been and continues to be a professionally managed public quoted company and its management does not have any proprietary interest in it. Hence there was no scope for attributing manipulative motives or malafldes to L & T management.
(b) The basis of the sole selling arrangement between the assessee and L &T had been in operation from 1970 and the Income-tax Department had never questioned the commercial nature or the bona fides of the arrangement.
(c) It was not open to the assessing officer to substitute the margin of L & T approved by the Government under Section 294AA of the Companies Act by a margin, which he considered to be reasonable.
(d) Under the arrangement between the assessee and L &T, which was in operation since 1-10-1980, L & T bought goods from the assessee-company at prices fixed by the assessee-company and the L & T had to sell goods at the list price to be settled with the concurrence of the assessee-company. This difference between the price at which L & T bought the goods from the assessee-company and the L & Ts selling price was called 'margin' of L & T. As per the Government approval, this margin was not to exceed Rs. 32.4 per cent of the L &Ts sale price inclusive of excise duty, that is to say, 48 per cent of L & Ts purchase price from the assessee-company. The actual margin during the year in question worked out to be 29 per cent of the L & Ts selling price inclusive of excise duty against the permissible maximum margin of 32.4 per cent.
(e) The average margin had to be calculated during the year and not the margin with reference to the sale of any specific product.
(f) The margin had to be calculated with reference to the net sales of L & T after excluding trade discount of 12.5 per cent to the stockists. This was obvious from equating the two percentages, i.e., 32.4 per cent of L & Ts sales and 48 per cent of L & Ts purchase price from the assessee-company. (There could be no argument that the trade discount must come out of L & Ts margin.
(g) The object of Section 294(AA) of the Companies Act is to ensure that the sole selling agents are only appointed, where it is necessary to do so and the expenditure incurred should not be unnecessary. The Government accords approval to appointment of sole selling agents only after considering all relevant information and as the approval is indicative of the commercial necessity it cannot be questioned by the Income-tax Authorities.
(h) Similar arrangements had been approved earlier and in all there have been five approvals under Section 294(AA) of the Companies Act.
(i) The purchase of know-how by the assessee-company from Eutectic cannot be considered as diversion of profits from the assessee-company to Eutectic so as to compensate the foreign share-holder for the alleged diversion of profits to L & T.
(j) L & Ts profit was Rs. 91,30,000. which was arrived at by debiting the expenditure incurred in the selling operations. Therefore, the margin was not excessive. In fact, the margin percentage on net sales owned by L & Ts Eutectic Division had not exceeded the margin in earlier years.
(k) If the assessing officer's margin is substituted for the contractual margin, L & T will make a loss of Rs. 1.20 crores.
(l) The appointment of stockists is commercially justified as will be evident from the details given in the application under Section 294(AA) and the Government has approved such appointment and the discount payable to them. This commerciality cannot be questioned by the assessing officer.
(m) The excise duty aspect has no relevance to the arrangement.
(n) L & Ts purchase of the goods for captive consumption is also made at the same price as the goods for resale. L & Ts consumption constitutes only a small percentage of the total purchases of the assessee-company's goods.
(o) It will be commercially imprudent not to allow marketing company to make larger profit from larger sales. If the profit is restricted by reducing the margin on increased sales, the marketing company will not have any incentive to promote and enlarge the sales.
(p) Comparison of the sale value with the quantity by weight of the products has no relevance to the margin.
(q) Discount is not a selling expense. It is merely an allowance made by the wholesale dealers to retailers on the catalogue or invoice price.
(r) Reference to margin of 117.55 per cent made by the assessing officer is misleading. The margin varies from product to product and the average margin worked out to be about 29 per cent of L &Ts selling price (inclusive of excise duty) against the permissible maximum margin of 32.4 per cent (Inclusive of excise duty) approved by the Government.
(s) The net margin of profit worked out to be in the range of 5 per cent taking into consideration the expenses of L &Ts EWAC division. Thus the margin of the sole selling agent has been reasonable and it has been so considered by the Government under Section 294(AA).
(t) The trading discount payable to the stockists cannot be included in the margin of L & T.
6. The learned CIT(A), after considering the issue as discussed in the assessment order and the contentions made on behalf of the assessee in the written and oral submissions, held that the trade discount (given by L & T to its stockists) was to be a part of the margin allowed to the L & T to cover its sole marketing responsibility. He further held that on the face of it, the stockists' discount was very heavy since L & T was supposed to do the job of securing orders through its large volume of engineers and selling centres all over India. Only collection and inventory-holding appeared to be the stockists' responsibility, but in the fast moving items of a market-leader like EWAC, whose manufacturing cost was only 33 per cent of sale price, inventory-holding did not appear to be a big burden and collection was also easier for L &T and engineers, who were in more direct touch with customers than stockists. As regards the computation of the profit of L & T, the learned CIT(A) has observed that the assessee-company, in actual working, could not debit notional interest in such computation. Secondly, warehousing at 12 per cent of average inventory claimed on notional basis came to Rs. 400 per M.T. of the highly value added Eutectic stores. This notional (not actual) cost was too high. Thirdly, allocation of group expenses was not on actual but notional basis. This was not verifiable. Thus the net margin of L & T could not be as low as 5.6 per cent when the gross margin was as heavy as 77 per cent or more on purchase cost (leaving excise inclusion component in purchase cost before working out 48 per cent or 32.4 per cent). The learned CIT(A) has further observed that the approval of the Company Law Board was not binding on the Income-tax Department. Even if the Company Law Board's approval held to be correct, yet the assessee-company has gone beyond the permissible limits to the extent of trade discount of 12.5 per cent as discussed above. Thus, 12.5 per cent-was a payment beyond approval and excessive as discussed above and not justified on commercial principles and specially under Section 40A(2)(b) since L & T was a substantial share-holder and connected party. In fact, both under Section 40(c) and Section 40A(2)(b) the case of disallowance was fully justified. The learned CIT(A) has repelled the argument that in the past for several years' assessments have not been disturbed by saying that as res judicata does not apply to income-tax proceedings, the assessment for each year is to be considered independently. In this context, he has held that the Supreme Court decisions in the cases of CIT v. B.M. Kharwar [1969] 72 ITR 603 (SC), McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 and Associated Rubber (sic) applied in the assessee's case. In the result, the learned CIT(A) sustained the addition of Rs. 2.11 crores made by the assessing officer except to the extent of the addition of Rs. 15 lakhs made in connection with the self-consumption.
7. In the initial round of arguments, we were addressed by the learned counsel for the assessee, Shri N.A. Palkhivala. The subsequent rounds of arguments were made by Shri J.D. Mistri. the contentions raised before the two revenue authorities were reiterated before us. The impugned order was assailed on the basis of a number of propositions, which we propose to discuss in the following paragraphs :
The first contention of the learned counsel was that there was no provision in law nor was it permissible for the department to tax notional/alleged income, which admittedly has not been earned by an assessee, on the ground that the assessee could have, although in fact it has not, earned such income. Reference in this connection was made to the decisions of the Supreme Court in the cases of CIT v. A. Roman & Co. [1968] 67 ITR 11 and CIT v. Calcutta Discount Co. Ltd. [1973] 91 ITR 8. Particular reference in this connection was made to the following observations of the Supreme Court in its judgment reported at 67 ITR 17, viz;
But the law does not oblige a trader to make the maximum profit that he can out of his trading transactions. Income which accrues to a trader is taxable in his hands: income which he could have, but has not earned, is not made taxable as income accrued to him. By adopting a device, if it is made to appear that income which belonged to the assessee had been earned by some other person, that income may be brought to tax in the hands of the assessee, and if the income has escaped tax in a previous assessment a case for commencing a proceeding for reassessment under Section 147(b) may be made out. Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. A taxpayer may resort to a device to divert the income before it accrues or arises to him. Effectiveness of the device depends not upon considerations of morality, but on the operation of the Income-tax Act. Legislative injunction in taxing statutes may not, except on peril of penalty, be violated, but it may lawfully be circumvented.
In this connection, the learned counsel further claimed that there was no reason to believe that the sole selling arrangement between the assessee-company and the L & T was otherwise than bonajide so as to invoke the application of the principles of law enunciated in the Supreme Court decisions in the cases of B.M. Kharwar (supra), McDowell & Co. Ltd. (supra) and Associated Rubber.
We have considered the facts and circumstances of the case and agree with the learned counsel that the assessee could not have validly been taxed on a notional income, which admittedly has not been earned by it, on the ground that it could have earned such income. From a cumulative consideration of the facts and circumstances, the discussion whereof follows, we conclude that there is no reason to believe that the transaction between the assessee-company and the L & T is otherwise than bonafide one. In such circumstances, we do not feel inclined to accept the contention of the revenue that the value of the so called advantage, which arose to the L & T out of the agency arrangement between it and the assessee-cornany, was liable to be treated as the income of the assessee and taxed as such. On this aspect of the matter, the learned Departmental Representative has relied upon the decision of the Supreme Court in the case of B.M. Kharwar (supra) and urged that the taxing authority is entitled to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a device the legal relation it is open to the taxing authority to unravel the device and to determine the true character of the relationship. To this, the reply of the learned counsel was that on the facts of the present case, it cannot validly be concluded that any device has been adopted by the two contracting parties to divert the profits of the assessee-company to the L & T. The terms and conditions of the sole selling agency arrangement between the two parties cannot be held to be otherwise than as bona fide. Moreover, a taxing authority is not entitled to re-write the price at which the assessee-company ought to have sold its products to the sole selling agent. The provisions of neither Section 40(c) nor Section 40A(2) nor of any other provisions of the IT Act enable the taxing authority to re-write the price of a seller and to proceed in the manner in which it had been done in the present case. As has already been stated, we find considerable force in these arguments of the learned counsel. This relationship between the manufacturer and the sole selling agent came into being as back as in the year 1970 after obtaining the approval of the Government of India in accordance with the provisions of Section 294(AA) of the Companies Act. The main object of enacting Section 294 AA and other relevant provisions of the Companies Act is to ensure that the terms and conditions of relationship between a principal and sole selling agent are not unreasonable and do not work to the disadvantage of the principal-company. Not only the agency arrangement between the two parties have operated over a period of about two decades, but it has been renewed every fifth year after obtaining similar approval of the Government of India. We, therefore, find it difficult to endorse the view of the two revenue authorities that the price charged by the assessee-company from the L & T was unreasonably low and, therefore, the difference arising out of the lower price was liable to be treated as the notional income of the assessee-company and be taxed as such.
The learned counsel then discussed the question of the applicability of Section 40A(2). According to the learned counsel, the provisions of that section can be invoked only in cases where deductions in respect of expenses or payments are sought, under that section. In the case in hand, no payment of deduction is sought by the assessee and, therefore, the provisions of Section 40A(2) could not validly be invoked. So far as the discount to stockists is concerned, such expenditure is not the expenditure incurred by the seller, i.e., the assessee-company and, therefore, the provisions of Section 40A(2) cannot be applied even to the question of discount. Support on this point was sought from the decisions reported in CIT v. A.K. Subbaraya Chetty & Sons [1980] 123 ITR 592 (Mad.) and CIT v. Udhoji Slvikrishnadas [1983] 139 ITR 827 (MP). From a study of these two decisions, we find that the ratio of those decisions helps the present assessee not only on the question of applicability of Section 40A(2) but also on the broad question of adding the notional income equal to the difference between the actual price and the selling price as has been alleged in the present case. As regards Section 40(c) no argument was advanced by the learned Departmental Representative, in support of the view that the provisions of that section applied in any way to the facts of the present case. We also find that provisions of that section, in their terms, are not at all attracted in the present case. We further find that no other provision of the IT Act comes to the rescue of the department to enable it to rewrite the selling price of goods and make an addition of the nature as the present one, on that basis.
The next point raised by the learned counsel related to the question of rejection of the method of accounting of the assessee. It was contended by the learned counsel that without rejecting the method of accounting of the assessee the Department could not have claimed that the assessee had earned greater profits than what was actually earned. Without the rejection of the books of account no addition on account of higher or greater profits could have validly been made in the income of the assessee. Support on this point was sought from the following decisions :
(i) Panda Bros. v. CIT [1954] 26 ITR 159 (Punj.)
(ii) R.B. Bansilal Abirchand Spg. & Wvg. Mills v. CIT [1970] 75 ITR 260 (Bom.)
(iii) Motipur Sugar Factory (P.) Ltd. v. CIT [1974] 95 ITR 401 (Pat.).
We have considered this aspect of the matter and find that the separate and further discussion thereof does not appear to be necessary. The assessing officer has not rejected the books of account of the assessee and made the addition on the basis of such rejection. What the assessing officer has actually done is that he has virtually re-written the price at which, according to the assessing officer, the assessee ought to have sold its products to the sole selling agent. It is on that basis and not on the basis of rejection of books that an addition has been made to the total income of the assessee. That aspect of the issue has already been considered by us in the preceding paragraphs and a conclusion favourable to the assessee has been recorded. Further discussion of the same aspect is, therefore, not necessary.
The next question taken up for consideration by the learned counsel for the assessee was the motive imputed by the department for the alleged diversion of profits by the assessee-company to the L & T. On this point, it was submitted by the learned counsel that the assessee was forced to become a subsidiary of the sole selling agent by virtue of the provisions of the Foreign Exchange Regulations Act, 1973 and it resisted to become a subsidiary as far as it was legally possible for it to do so. After being forced to become a subsidiary, it altered its Articles so as to ensure that the sole selling agent could have the highest advantage of 50 per cent seats on the Board of Directors. A foreign company, namely Eutectic Corporation of U.S.A., which held 50 per cent of the seats on the Board of Directors could have absolutely no reason to be a party to the diversion of the assessee's profits to the L & T. There is no material on the record to support the conclusion drawn by the two revenue authorities to the effect that the technical know-how purchased by the assessee-company from Eutectic Corporation of U.S.A. was not useful or productive and that purchase was made only with a view to compensate the said foreign company for the loss arising out of the alleged diversion of the profits to the L &T. Here again, we find that the argument of the learned counsel is not without force. The learned Departmental Representative has not been able to point out the basis on which the revenue authorities have based their conclusion that the know-how purchased by the assessee-company from Eutectic Corporation of U.S.A. was not useful or productive. In the absence of any basis for such conclusion, it was not correct for the department to contend that the transactions of sole selling agency and purchase of know-how from the foreign company were so devised as to wipe out the loss arising out of the diversion of fund to the L & T by the purchase of unwanted technical know-how from the foreign company.
The learned counsel then discussed the reasonableness of the price charged by the assessee for the sale of its products to the L & T, its sole selling agent. It was stated by the learned counsel that the prices charged could not be held to be low. Whole of the sole selling agency relationship over the years has been receiving approval of the Government under Section 294-AA. This relationship had come into being in the two decades back. The agency agreement was renewed every fifth year under the approval of the Government of India. Under every such renewal the margin of profit of the sole selling agent was revised downwards by the Government of India The margins of 32.4 per cent and 48 per cent were determined by the Government of India under the provisions of law relating to Companies. There was no valid reason for the department to hold that the sole selling agency agreement approved by the Government of India or the rates determined thereunder were not reasonable or that they were to the disadvantage of the shareholders of the assessee-company. According to the learned counsel, the presumption of reasonableness attaches to the rates which have been approved by the Government of India under the statutory provisions. Support on this point was sought from the decisions in Anand Dyes Industhes (P.) Ltd. v. ITO [1986] 17 ITD 1041 (Ahd.) and CIT v. Karam Chand Thapar & Bros. (P.) Ltd. [1978] 115 ITR 688 (Cal.). To this argument, the reply of the learned Departmental Representative was to the effect that merely because an agreement has been approved by the Government of India, it does not preclude an authority under the Income-tax Act to independently adjudge the reasonableness of relationship. The approval of the Government of India has been accorded only under the provisions of the Companies Act, whereas an assessing authority under the Income-tax Act is required and entitled to act independently and consider and determine the issues in the light of the provisions embodied in the Income-tax Act. Reference in this connection was made by the learned Departmental Representative to the judgment of the Calcutta High Court in the case of Bilaspur Spg. Mills & Industhes Ltd. v. CIT [1982] 135 ITR 496.
We have considered the rival submissions and find that there was no justification or warrant in the present case for taking the view that the terms and conditions of the agreement approved by the Government of India were unreasonable or that they were to the disadvantage of the assessee-company. It is of course true that the taxing authorities may independently consider the real relationship between a principal and its sole selling agent. But it is also equally true and clear that the Company Law Board takes into consideration not only the public interest but also the business needs while considering the allowability of payment of commission/discount/profit margin to the sole selling agents and also the services rendered by them and then approves the rates of commission/ discount/profit margins. In the case before us, there is no allegation by the department that no services were, in fact, rendered by L & T or that those services were not commensurate with the requirements or otherwise unsatisfactory. The objection of the department has centered only around the question relating to the fixation of the margin of profit. Here again, the department had not proceeded correctly. Instead of computing the gross/ net profit of margin of the sole selling agent on the total sales, the assessing officer has proceeded selectively. He has taken out a few items of the assessee's products and after considering the list prices, came to the conclusion that the rate of gross profit earned by L & T on those items was very high and not within the margin of profit allowed under the approval accorded by the Government of India. The learned counsel for the assessee has filed in the paper-book the method of computation of the margin. According to the learned counsel, it is the margin computed under this method which had been approved by the Government of India. On behalf of the department, no serious attempt has been made to show that the margin approved by the Government of India could have been computed under a method different from the one claimed by the assessee. As has already been pointed out by us, no much significance can be attached to the conclusion of the assessing officer to the effect that the margin actually earned by L & T was much higher than what was determined under the Government approval. Since the assessing officer has taken into consideration the margin earned on certain items on selective basis, the conclusion drawn by him on such basis cannot be pressed into service for holding that the list prices on which the goods were sold by the assessee-company to the L & T were unreasonably low. Even for argument sake it be presumed - though not accepted - that the prices charged by the assessee-company were low, yet there was no disproportion between the actual prices and the alleged reasonable prices so as to warrant a conclusion that the motive behind the assessee's action was to divert its profits to L & T. At the most, such alleged action of the assessee could be termed as imprudent, but it cannot validly be held to be otherwise than bonajlde and the department cannot be allowed to substitute its own Judgment for the judgment of the assessee. Case law support on this point is available in the decisions of the Supreme Court in the case of CIT v. Edward Keventer (P.) Ltd. [19781 115 ITR 149 and in the case of CIT v. Dhanrajgirji Raja Narasingirji [1973] 91 ITR 544. The facts of the case clearly show that the addition of as much a sum as Rs. 1,86,000 as additional/notional profits of the assessee-company is clearly misconceived. The net profits of L & T out of this sole selling agency were to the tune of about Rs. 92 lakhs. Should the impugned addition of Rs. 196 lakhs be upheld it would result in loss of Rs. 104 lakhs to L & T. L &T is a company which is managed by presumably intelligent persons. It would be unnatural and improbable human conduct on the part of those presumably intelligent persons to accept such sole selling agency relationship that would cause such colossal loss to the company every year and then allow such relationship to exist and operate over a period of about two decades. It has further been pointed out in the material before us that L & Ts net profit out of the sole selling agency transaction has been of the order of 5 per cent. Such level of profit cannot by any stretch of imagination, be regard as excessive or unreasonably high so as to entitle the assessing authority under the Income-tax law to interfere.
The next question discussed at the Bar related to the alleged motive of the assessee to pass on its profits to L &T, which is a zero-tax company. On this aspect of the matter, it was stated by the learned counsel that L & T has become a zero-tax company only recently whereas the sole selling agency agreement between the two companies has been in existence and operation since the year 1970. The two companies could not have known as back as in the year 1970 that L &T would become a zero-tax company in the 80s. In the initial years of their relationship, the L & T used to get a higher margin in the matter of purchase and sale prices. This margin has been gradually cut over the years by the Company Law Board while approving the sole selling agency arrangement every fifth year. Thus such motive could not have possibly been present in creating this relationship. We have given our careful thought to this aspect of the matter and find no reason to disagree with the learned counsel. The relationship between the two companies had originated in the year 1970 and has been continuing since then. No material has been brought on the record by the department to show that prior to the 80s or at the very outset or in the initial years of their relationship, the assessee-company had any such motive. This could be shown only by producing tax records of the two companies for the years of seventies to show that the assessee-company attracted higher rates of tax (including wealth-tax) as compared to L & T and an advantage in tax matters was sought to be gained by the alleged diversion of profits to L & T. This argument of the department is thus not well founded and cannot be upheld.
We would now take up the question of application of doctrine of res judicata in the present case. The learned CIT(A) has rejected this plea of the assessee on the ground that the doctrine of res judicata does not apply in tax matters and that the tax authorities are not precluded from reviewing the position from year to year. Although we cannot have a quarrel with the principle that the doctrine of res judicata as such or in its terms does not apply to tax proceedings, yet the earlier decisions in tax matters cannot be lightly disturbed. Unless there are strong and compelling reasons for reviewing an earlier decision or order, a different view in the subsequent taxproceedings cannot legitimately be taken. There has to be finality to the adjudicatory orders in certain areas even in tax matters. In the present case, the department has been accepting the relationship created between the two companies and approved by the Government of India. The margins initially approved were admittedly higher than those allowed in the later years. Thus the change, if any, in the relationship has been to the disadvantage of L &T. There was thus no compelling reason or good ground for reviewing the earlier years' orders of the tax authorities with regard to the allowability of the margin. In the earlier year also the same practice was followed while computing the income and profits of the assessee-company. No case has been made out by the department to justify a deviation from the earlier practice.
Looking to the above facts and circumstances and our discussion thereon, we hold that there was absolutely no basis for the assessing officer for proceeding in the manner in which he has done. The addition made by the assessing officer and upheld by the learned CIT(A), therefore, cannot be sustained. We thus allow this ground of the appeal and delete the addition of Rs. 196.63 lakhs.
8. Ground No. 2.
2. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that your appellants are entitled to depreciation allowance at 5% on the building for documentation and training centre instead of at 10% as is applicable to factory building. He ought not to have done so.
The assessee had claimed depreciation for the training centre at a higher rate as for a factory building. The claim for depreciation at a higher rate has been turned down by the two revenue authorities on the ground that the training centre, although located within the factory campus, was not part of factory building and, therefore, would notbe entitled to depreciation at a higher rate. There is no similarity in wear and tear either between production centre, factory building and training centre. The learned counsel for the assessee reiterated the arguments madebefore the learned CIT(A) and also submitted that since the training centre is situated within the factory premises it would be entitled to higher rate of depreciation. In support of this contention, he relied upon the decisions reported in :--
(i) CIT v. Engine Valves Ltd. [1980] 126 ITR 347 (Mad.)
(ii) CIT v. Engine Valves Ltd. S.L.P. (Civil) No. 6061 of 1981 147 ITR (St.) 4
(iii) CIT v. Motor Industhes Co. Ltd. [1986] 158 ITR 734 (Kar.)
(iv) CIT v. Elpro International Ltd. [1989] 177 ITR 20 (Bom.)
(ii) Hukamchand Mills Ltd. v. CiT [1978] 114 ITR 870 (Bom.)
(vi) CIT v. Borosil Glass Works Ltd. [1986] 161 ITR 286 (Bom.)
(vii) CIT v. Standard MotorProducts of India Ltd. [1983] 142 ITR 877 (Mad.).
The claim was contested by the learned Departmental Representative, who submitted that the training centre could not be subjected to the same amount of wear and tear. By its very nature, the training centre building could not form part of factory building. We have given our careful thought to this aspect of the matter and find that this claim of the assessee cannot be allowed. The rulings relied upon by the learned counsel do not offer any material assistance to the assessee. The first three rulings pertained to the canteens situated in the factory premises. It was held therein that canteen is located in the factory premises for the welfare of the workers and is subjected to almost the same amount of wear and tear. The decisions in Elpro International Ltd.'s case (supra) and Hukamchand Mills Ltd.'s case (supra) pertained to the roads in the factory premises. These two decisions only purported to lay down that the roads in the factory premises are 'buildings'. They do not lay down a principle that roads are entitled to higher depreciation. As regards the decision in Borosil Glass Works Ltd.'s case (supra) that pertained to fencing and road in factory premises and, therefore, they are held to be part of factory building. In the decision in Standard Motor Products of India Ltd.'s case (supra) the question pertained to the buildings housing engineering offices wherein designs for factory use were prepared. It was in that context that it was held that they constitute part of factory building. In the case before us, the question pertains to a training centre. It would be difficult to accept the proposition that the training centre is part of the factory building. This ground of the appeal shall, therefore, stand rejected.
9. Ground No. 3.
3. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming the action of the learned Deputy Commissioner of Income-tax holding that the interest of Rs. 87,627 paid to Gujarat Industrial Development Corporation is not admissible as revenue deduction.
The assessing officer has dealt with this issue in paragraph 11 of his order, which reads as under:
The assessee has paid Rs. 87,627 by way of interest to GIDC on account of different payment credit given on allotment of plot of land. As discussed in earlier years, the same is treated as capital expenditure on new project and not allowed as deduction.
The learned CIT(A) has disposed of this ground before him in the following manner, viz:
Interest payable to Gujarat Indl. De v. Corpn. Appellant loses this point following orders of the CIT(A) for earlier assessment years.
The learned counsel challenged this part of the impugned order and in this connection referred to the decision of the Bombay High Court in the case of Addl. CITJ v. Aniline Dyestuffs & Pharmaceuticals (P.) Ltd. [1982] 138 ITR 843 and the orders dated May 1990 and 31-1-1990 of the Bombay Bench of the Tribunal passed in ITA Nos. 2389 and 2390 (Bom.)/1984 and R.A. No. 2265 (Bom.) of 1988 respectively in the case of ITO v. Balkrishna Pen (P.) Ltd. We have gone through these decisions of the Bombay High Court and the Tribunal and find that no basis has been laid out before us for their being pressed into service for the purposes of the present issue before us. Neither in the assessment order nor in the impugned order of the learned CIT(A) the full facts pertaining to the assessee's case for the year under consideration have been stated. In the absence of the facts, it would not be possible for us to decide as to whether the facts in the aforesaid cases before the Bombay High Court and the Tribunal were identical and. therefore, the ratio of those decisions would apply to the present case. Suffice it to say that the two revenue authorities have stated in their orders in the present case that the land was purchased for a new project. No material has been paid before us to show that the factual position is otherwise and that the land was not purchased for a new project or that the new project was part and parcel of the present undertaking of the assessee. In the absence of the full factual picture before us, we would not feel inclined to disturb this finding of the learned CIT(A) more particularly so when he has relied on the decisions of the Commissioner (Appeals) for earlier years and it has not been shown to us that those earlier decisions in the first appeal have been reversed by the Tribunal. This ground of the appeal would, therefore, stand rejected.
10. Ground No. 4.
4. On the facts and in the circumstances of the case and in law the learned CIT(A) has erred in holding that the repairs to gear type rolling shutter amounting to Rs. 9,000 is of capital nature and not a revenue nature. He ought not to have done so.
This ground has been dealt with by the learned CIT(A) in paragraph 13 of his impugned order. The learned counsel for the assessee challenged this part of the CIT(A)'s order with the aid of the decisions in the cases of New Shorrock Spg. & Mfg. Co. Ltd. v. CIT [1956] 30 ITR 338 (Bom.), Gulamhussein Ebrahim Matcheswalla v. CIT [1974] 97 ITR 24 (Bom.) and Addl. CIT v. IndiaUnited Mills Ltd. [1983] 141 ITR 399 (Bom.). We have considered the facts and circumstances of the case and find that the disallowance of the expenditure of Rs. 9,000 on replacement of motor in gear type rolling shutter was not in order and, therefore, cannot be sustained. This is a part and parcel of the current repairs and even replacement of the motor would not bring in any enduring benefit of longer life of asset or better service to the assessee. Looking to the ratio of the above decisions, we hold that the assessee is entitled to the deduction of this expenditure as of revenue nature.
11. Ground No. 5On the facts and in the circumstances of the case and in law the learned CIT(A) has erred in holding that the expenditure of Rs. 38,000 incurred on the installation of logo of L & T and EWAC Institute for the purpose of identification is of capital nature and not a revenue expenditure. He ought not to have done so.
The issue raised in this ground finds its discussion in paragraph 14 of the impugned order. During the course of his challenge to this part of the impugned order, the learned counsel referred to the following decisions, viz. :
(i) Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC).
(ii) CIT v. Associated Cement Cos. Ltd. [1988] 172 ITR 257 (SC),
(iii) Addl. CIT v. Awind Mills Ltd. [1977] 109 ITR 212 (Guj.) and
(iv) R.G.S. Industhes v. CIT [1990] 183 ITR 31 (Gauhati).
We have studied these rulings with a great care and are of the view that the assessee is entitled to succeed on this issue. It has been observed by the Supreme Court in the case of Empire Jute Co. Ltd. (supra) that there may be cases where the expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only whether the advantage is in the capital field that the expenditure would be dlsallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. In the case before us, the old logo of the company had been replaced by a new one. The old logo by itself was not a marketable asset. The new asset also by its very nature would not be a marketable asset. The replacement of the logo is made with a view to project the image of a trading/ manufacturing house in a better manner. The expenditure incurred thereon does not lead to the creation of any asset or addition of any asset to the assessee. The disallowance, therefore, cannot be upheld. This ground of the appeal thus succeeds.
12. Ground No. 6 :
6. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that the expenditure of Rs. 23,990 incurred on laying, installation and commissioning of compressed air pipeline is of capital nature and not a revenue expenditure. He ought not to have done so.
This issue has been discussed by the learned CIT(A) in paragraph 13 of his impugned order. The learned CIT(A) has held that since independent new parts are involved. It could not be called a routine repair, even if a replacement is involved. Here again, looking to the ratio of the decisions referred to in our discussion of the ground No. 4, we hold that the assessee is entitled to have this expenditure treated as of revenue nature. This ground of the appeal thus succeeds.
13. Ground No. 7:
7. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that the expenditure of Rs. 6,500 incurred for increasing the authorised capital is capital expenditure and not a revenue expenditure. He ought not to have done so.
This issue finds its discussion in paragraph 12 of the impugned order. Fees were paid to the Controller of Capital Issues for increase in authorised capital. The learned CIT(A) has upheld the disallowance on the basis of the Bombay High Court decision in the case of Bombay Burmah Trading Corpn.Ltd. v. CIT[1984) 145 ITR 793. It was stated by the learned counsel before us that the fees were paid not in connection with any public issue but in connection with the issue of bonus shares. Therefore and in consonance with the ratio of the Bombay High Court decision reported in Bombay Burmah Trading Corpn. Ltd.'s case (supra) on which the learned CIT(A) has placed reliance, the assessee will be entitled to have the expenditure treated as of revenue nature. From a study of the aforesaid decision of the Bombay High Court we find that that Court has taken a view that the expenses incurred or fees paid in connection with the issue of bonus shares are to be treated as revenue expenditure. We, therefore, direct that the assessing officer would verify and in case he finds that the expenditure had been incurred in connection with the issue of bonus shares then allow the deduction of this expenditure on revenue account. Otherwise, the expenditure shall be treated as of capital nature. Subject to this direction, this ground of the appeal shall stand allowed.
14. Ground No. 8:
8. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that the society charges on flat given to employees come within the purview of the provisions of Section 40A(5) of the Income-tax Act, 1961 as perquisite. He ought not to have done so.
This issue finds its discussion in paragraph 10 of the impugned order. The learned CIT(A) has held that the society charges on ownership flats given to the Chief Executive are liable to be taken into consideration for the purpose of disallowances under Section 40A(5). He has further held that the ownership flat is much more a personal property and benefit than company owned, leased, rented flat. For this purpose he has placed reliance upon the decision of the Tribunal in the case of Kodak Ltd. v. IAC [1986] 18 ITD 213 (Bom.)(SB). After a reading of that decision of the Tribunal, we hold that no fault can be found with this part of the order of the learned CIT(A). This ground of the appeal would thus stand rejected.
15. Ground Nos. 9 and 10:
9. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that your appellants are not entitled to the deduction of the entire amount of Rs. 1,08,65,976 payable to the foreign collaborators for technical know-how fees. He ought not to have done so.
10. Without prejudice to the ground of appeal No. 9, supra the learned CIT(A) should have directed the assessing officer to allow the deduction of Rs. 18.10,996 under Section 35AB of the Income-tax Act. 1961 being l/6th of the total know-how payable amounting to Rs. 1,08,65,976.
The assessing officer has dealt with the issue involved in these grounds in paragraph 15 of his order, the relevant portion whereof reads as under:
Agreement with Eutectic Corporation, U.S.A. are arrived at on 19-5-1980 for supply of know-how for consideration of Rs. 2,50,000 and on 4-3-1986 for Rs. 6,00,000. The money was payable in three equal instalments as. under:--
a. 1/3 on filing the agreement to RBI on its being taken by Govt. on record.
b. Date of delivery of documents.
c. On commencement of commercial production or 4 years from the date as per para (a) whichever is earlier.
Thus the amount become due for payment only after occurrence of the events. Prior to the occurrences of these events, it neither accrues to the collaboration nor is paid.
** ** ** ** ** **
Due to the express provision of Section 35AB, the argument of the assessee is untenable. The expenditure is for obtaining the technical know-how as defined in the section. Therefore the provisions of Section 35AB are applicable. The section also contemplates the allowability of the amount paid during the year under consideration. Therefore, the claim is to be restricted to the amount paid. Presuming that the 'paid' includes 'payable' as defined in Section 43, the amount also becomes payable on occurrence of certain events. Therefore, nothing is payable unless the condition (a) is fulfilled. The assessee had not given the dates of payments of know-how and hence it is presumed that no payment is made before 30-9-1986 and that even event (a) has not occurred. Therefore, no deduction is allowed. Had the assessee stated that prior to 30-9-1986, condition (a) was fulfilled, it would have been entitled for deduction of 1/6th of 1/3 and that of total consideration only.
The learned CIT(A) has discussed this issue in the following manner, viz. :
4. Technical know-how fees Rs. 1,08,65,976 (1987-88):
I agree, for reasons given by assessing officer that such payments for technical know-how are specifically covered under Section 35AB and not revenue allowance under Section 37(1), a residual provision is permitted. Assessing Officer will allow after verifying the dates of payments and satisfaction of conditions when the amounts are 'payable' (included in 'paid') as per provisions of Section 35AB of the Act.
We have considered the submissions made on behalf of the assessee before the two revenue authorities and also before us and are of the view that the question of treating the expenditure on know-how as of capital nature or of revenue nature need not detain us. Irrespective of whether an expenditure is capital or revenue, it will receive the same treatment under Section 35AB. The scheme of that section is to give special treatment to the expenditure on know-how. In this view of the matter and looking to the scheme of Section 35AB, we find that the directions issued by the learned CIT(A) on this issue are eminently correct and reasonable and cannot be interfered with. These grounds of the appeal thus fail.
16. Ground Nos. 11 and 12 :
11. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that for the purposes of computing the profits of the new industrial undertaking for allowing deduction under Section 80-1 of the Income-tax Act, 1961 the following items are to be deducted :--
(a) Portion of interest paid by your appellant on its other borrowings;
(b) Part of the claim of capital expenditure on scientific research;
(c) Part of the deduction under Section 32AB of the IT Act, 1961.
He ought not to have done so.
12. Without prejudice to the aforesaid contention at ground No. 11(a) the learned CIT(A) should have held that only the proportion of net interest (interest paid less interest received) is required to be deducted in computing the profits of the new industrial undertaking for the purposes of allowance of deduction under Section 80-1 of the Income-tax Act, 1961.
The issue Involved in these grounds has been dealt with by the assessing officer in paragraph 5 of his assessment order, which reads as under:
5. The assessee has claimed deduction under Section 80-1 of Pis. 5,23,000, at 25% of Rs. 20,90,148. The assessee has submitted the working of the profit earned by its project of automised metal powder alloys. On going through the details it is noticed that no portion of interest paid by the company has been attributed to the new project while arriving at profit of this unit. The details are submitted.
As in last year, the interest and R & D expenses attributable to the unit are Rs. 2,32,064 and Rs. 6,45,000 respectively.
The proportionate deduction under Section 32AB is further reduced in accordance with Section 80-1(6). The computation is as under :--
Net income as per assessee Rs.20,90,148
Less: Interest : Rs. 2,32,064 + 6,45,000 Rs. 8,77,064
Rs.12,13,084
Under Section 32AB Rs. 2,42,617
Profit Rs. 9,70,467
Deduction under Section 80-1 = Rs. 2,67,617.
The learned CIT(A) has discussed this issue in the following manner, viz. :
"8. Deduction under Section 80-1:
Deduction from profits of new automised powder alloy unit, on borrowings and expenditure on R & D. Appellant loses regarding interest point following CIT(A)'s order and reasonings for A.Y. 1984-85. The funds of units are mixed up and the borrowings are utilised for new unit also. Appellant's plea fails.
Regarding appellant's plea for allocating pro rata only net interest paid (after adjusting interest received) is also not justified since interest paid is a separate credit item and is not to be mixed up with interest paid which as an expenditure is tobe apportioned over new and old units. Interest paid and interest received are both to be separately allocated on specific nexus basis, if possible or on pro rata basis. This is what is already done by the assessing officer.
Regarding R& D expenses, appellant admits, it is of general nature (and pertains to several units) and hence, in my view it is to be allocated pro rata over old and new units. Appellant gefs relief in these terms.
We see no reason as to why the directions of the learned CIT(A) on this issue should not be endorsed except that we would direct that the assessing officer will verify as to whether any interest has been received by the assessee. If so, the interest received shall be deducted from the interest paid and only the balance, i.e., the net interest paid shall be deducted in computing the profits of the new industrial undertaking for the computation of allowance of deduction under Section 80-1. These two grounds shall stand decided accordingly.
17. Ground No. 13:
13. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in directing the assessing officer to allow the deduction under Section 32AB of the Inccme-tax Act on verification as per the provisions and figures of depreciation under Section 32(1) and 35 deductions from book profits after add back of book depreciation. He ought to have directed the assessing officer to reduce the depreciation under Section 32(1) only from book profits after add back of depreciation as provided at Section 32AB of the Income-tax Act, 1961.
This issue has been discussed by the assessing officer and the learned CIT(A) in paragraphs 4 and 7 of their respective orders, which read as under :
Assessing officer's order.
4. The assessee has claimed investment deposit scheme under Section 32AB of Rs. 50.85,305 for which auditor's certificate is also submitted. The assessee has been showing the capital expenditure on R & D activities in the block of assets of claiming the deprn. in the P & L account. Under the provisions of Section 32AB the deprn. as per the Books is to be added. Therefore, the depreciation on R & D assets has been added to the income. However, deduction under Section 35 has not been reduced to arrive at the profit from the eligible business. Therefore, the deduction is recomputed after reducing the capital expenditure allowed to the assessee under Section 32AB.
Rs.
2,36,96,981
36,67,722 Rs.
-----------
2,73,64,703 2,73,64,703
-----------
Deprn. 19,33,263
R&D 82,57,805
-----------
1,01,91,068 1.01,91,068
----------- -------------
1,71,73,635
-------------
Deduction Rs. 34,34,727.
------------
CIT (A)'s order:
7. Disallowance under Section 32AB -1987-88 :
Deduction on capital expenditure on R& D for purpose of 32AB allowance. The appellant submits that under Section 32AB, first the depreciation claimed in books (Appellant has debited depreciation on R & D assets) is to be added back and then depreciation under Section 32(1) is to be reduced from profits before allowing 32AB but not deduction under Section 35 which is not a depreciation and hence, not deductible as per appellant, before 32AB deduction.
Assessing officer will allow on verification as per the provisions and figures of depreciation under Section 32(1) and 35 deductions from book profits after add back of book depreciation.
Appellant also argues that profits of. other units are sufficient to absorb claim under Section 32-AB and it should not be deducted from profits of the new unit. In my view, there is no warrant to justify such distinction. Proportionate deduction of 32-AB from profits of new unit is perfectly justified. There is no sequence given in the Act for first absorbing 32-AB claim against profits of old units and then deduct from new unit profits. In absence of such priority/sequence, proportionate deduction is perfectly rational.
We find that the direct ons already issued by the learned CIT(A) are appropriate and do not all for any interference on our part. Subject to these directions, we end rse this part of the order of the learned CIT(A) and reject this ground of the appeal.
18. In the result, this appeal partly succeeds and shall stand allowed as above.