Income Tax Appellate Tribunal - Delhi
Rollatainers Limited vs Deputy Commissioner Of Income Tax on 7 September, 1999
ORDER
M. K. Chaturvedi, J.M.
1. This appeal by the assessee is directed against the order of the CIT(A)-III, New Delhi, and relates to the asst. yr. 1990-91.
2. The following three grounds taken in this appeal are reproduced here as under :
"1.1 That the CIT(A) erred on facts and in law in confirming the action of the AO in treating Rs. 49,741 as prior period expenses.
1.2 That the CIT(A) erred on facts and in law in observing, inter alia, that the liability in respect the aforesaid expenditure crystallised during the asst. yr. 1989-90, "because all actions relating to accrual of liability had been undertaken or done during that previous year.
2. That the CIT(A) erred on facts and in law in confirming the expenditure on rent, repairs and depreciation amounting to Rs. 2,32,434 under s. 37(4).
3. That the CIT(A) erred on fact and in law in not holding that other income amounting to Rs. 8,32,191 was part of profits and gains derived from the industrial undertaking for purposes of deduction under s. 80-I.
3.2 That the CIT(A) erred on facts and in law in observing inter alia, that the source referable to the aforesaid receipts was not the business of the undertaking."
3. In regard to the first ground, we have heard the rival submissions. The AO disallowed Rs. 2,19,745 as prior period expenses. Before the CIT(A) the assessee objected to these disallowances of the following amounts only :
Rs.
(a) Job work expenses 17,550 (b) White-washing expenses 22,150 (c) Repairs 10,041 (d) Excise duty 3,150
4. The amount of excise duty was allowed by the CIT(A), hence there is no dispute on this count. In regard to the job work, white washing expenses and repairs, the learned counsel produced before us the relevant bills. It was stated that the bills were received consequent upon the closing of the preceding assessment year. As such, the liability was crystallised in the relevant year of assessment, because it came to the knowledge of the assessee first time during the relevant year only and it was settled accordingly. The CIT(A) held that such liability was allowable as because all the actions relating to accrual of liability had been undertaken or done during the previous year only. The learned counsel also placed reliance on the decision of Gujarat High Court rendered in the case of CIT vs. Saurashtra Cement Ltd. (1995) 213 ITR 523 (Guj). In this case it was held that the liability for an expenditure has to be allowed in the year in which liability crystallised/became known for the first time even though the same may relate to the earlier year.
5. No contrary decision was brought before us.
6. Having regard to the facts and respectfully following the precedent, we decide this issue in favour of the assessee and against the Revenue.
7. In regard to ground No. 2 we tested the prescription of s. 34 on the touchstone of Hyden's Rule. We find that expenditure on maintenance of guest house was allowable till 28th February, 1987, as a deduction in computing the profits and gains of the business. It was subject to the limits as prescribed in r. 6C as existed at that time. It was felt by the legislature that business houses were incurring lavish expenditure on maintenance of guest house and claiming the same as deduction. In order to put a check on such lavish expenditure, s. 37(4) was inserted. The rule of construction which is relevant to the present enquiry is expressed in the maxim : "Generalia Specialibus non Derogant" [General things will not derogate from special things].
8. Expenditure incurred on the maintenance of guest house were found to be not allowable in the case of CIT vs. Occean Carriers (P) Ltd. (1995) 211 ITR 357 (Bom), Raj B. Moti Lal vs. CIT (1995) 212 ITR 175 (Bom), and United Catelists vs. CIT (1998) 229 ITR 233 (Ker).
9. Having regard to the recent trend of the judgments in the context of allowability of claim under s. 37(4) we are not inclined to accept the contention raised on behalf of the assessee. Accordingly, we decide this issue in favour of the Revenue and against the assessee.
10. Coming now to the last ground, we find that the assessee claimed deduction under s. 80-I of the IT Act, 1961 aggregating to Rs. 28,22,525. The AO restricted the deduction to Rs. 25,41,948 after reducing a sum of Rs. 2,80,577 being 25 per cent of Rs. 11,22,207 being the other income included in the P&L a/c. The details of other income were submitted as under :
Rs. Rs.
"1. (a) Interest from employees 6,153.25
(b) Interest from HSEB (on
security deposit). 35,870.00
(c) Interest on fixed deposit 2,253.00
(d) Interest received from
bank 13,086.00
(State Bank of Mysore)
(e) Interest on NSC 4,019.00
(f) Interest received from
customers
(on late payment) 85,834.75
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1,27,216.00
2. Profit on sale of raw
materials and stores. 1,02,558.00
3. Misc. receipts :
(i) Sales of Scrap (Coal
ash, iron) 2,90,116,64
(ii) Insurance claim 5,59,730.00
-------------
8,49,847.00
4. Liabilities no longer
required written back 46,842.00
5. Profit/loss on sales of
fixed assets (Typewriters) 4,156.00
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TOTAL 11,22,307.00"
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11. In regard to the interest from employees it was submitted that this sum was advanced in the normal running of business. In regard to interest from HSEB and interest received from customers on late payment it was submitted that the issue stands squarely covered in favour of the assessee by the decision of the Madras High Court rendered in the case of CIT vs. Rane Madras Ltd. (1999) 102 Taxman 284 (Mad). In regard to the interest on fixed deposit, interest received from bank and interest on NSCs, it was fairly conceded by Shri Vohra that the issue stands covered against the assessee by the decision of the Madras High Court rendered in the case of Rane (Madras) Ltd. (supra). However, it was prayed that the exclusion should be made only in respect of net interest income. We, therefore, direct the AO that where the interest paid exceeds the interest earned and there is no interest income assessed, no exclusion is called for. Similar view was taken by the Tribunal in the case of Dy. CIT vs. Vindhya Telelinks Ltd. (1997) 58 TTJ (Jab) 450 : (1997) 63 ITD 127 (Jab). No contrary decision was brought before us. We, therefore, respectfully following the decision of the Madras High Court direct the AO to allow the claim in respect of interest from employees interest from HSEB and interest received from customers.
12. Interest on fixed deposit, interest received from bank and interest on NSCs are not to be considered for computing the claim made under s. 80-I.
13. The deduction under s. 80-I is available to an assessee whose gross income includes any profits and gains derived from an industrial undertaking which fulfils all the conditions laid down in the section. The assessee complied with the conditions laid down in the section. But in respect of the aforesaid items, Revenue opined that profits are not derived from the industrial undertaking. As such, the claim of the assessee was not accepted. However, in relation to the sales of scrap, the CIT(A) allowed the claim. As such, the assessee is not in appeal on this count. In the case of Ashok Leyland Ltd. vs. CIT (1997) 224 ITR 122 (SC), the assessee was manufacturer of trucks in collaboration with foreign company. There was phased programme for manufacture of spare parts. Because the purchasers experience difficulty in procuring spare parts the assessee imported spare parts to meet the demand. The question before the apex Court was whether the profit from the sale of imported spare parts can be attributed to the priority industry. The Hon'ble Supreme Court has held that the activity of sale of imported parts was intimately connected with the priority industry set up and run by the assessee. The assessee was, therefore, entitled to relief under s. 80E and 80-I of the Act.
14. In the case of CIT vs. Sterling Foods (1999) 237 ITR 579 (SC), the assessee derived profits from the sale of import entitlement. Apex Court has held that these are not profits derived from industrial undertaking. The word "derive" is usually followed from the word "from" and it means : "get, to trace from a source; arise from, originate, show to origin or formation of". The source of import entitlements could not be said to be the industrial undertaking of the assessee. Source of import entitlements could only be said to be the export promotion scheme of the Central government whereunder the export entitlements became available. There must be for the application of the words "derive from", a direct nexus between the profits and gains and the industrial undertaking.
15. In the case of Sterling Foods (supra), apex Court found that direct nexus was not direct, but only incidental. The industrial undertaking exported processed sea foods. By reason of such export, the export promotion scheme applied. Thereunder the assessee was entitled to the import entitlement which it could sell. The sale consideration therefrom could not be held to constitute a profit and gain derived from the assessee's industrial undertaking. The receipts from the sale of import entitlements could not be included in the income of assessee for the purpose of computing the relief under s. 80HH of the IT Act, 1961.
16. The expression "attributable to" is of wider import than the expression "derive from". The former expression covers receipts from sources other than the actual conduct of the business of the priority industry. Therefore, in the present case, we got to see that whether there exist a direct nexus between the profits and gains of the industrial undertaking. The raw materials were said to have been purchased incidental to the business of the industrial undertaking. The profit on sale of such raw material is insignificant comparing to the overall turnover of the assessee-company. The profit derived is incidental to the activity of the industrial undertaking. It has got a direct nexus with the profits of the industrial undertaking. Similarly, insurance claim was received for goods damaged in transit. Expenditure in relation to the same were claimed in the preceding years. When the assessee got the insurance claim, the receipt was offered for taxation. It was considered to be the income of the assessee. This fact was demonstrated with reference to the accounts and the assessment order. The profit is, therefore, relatable to the goods manufactured by the company. Therefore, it bears direct nexus with the industrial undertaking. Similarly, the amount offered for taxation on account of cessation of trading liability and profits on sale of fixed assets are intimately connected with the working of the industrial undertaking. As such, it can be said that there exist a direct nexus between the profits and the industrial undertaking. Accordingly, in our opinion, the assessee is entitled to s. 80-I deduction in relation to all the items where direct nexus between profits and industrial undertaking was found to exist. Accordingly, we allow the claim of the assessee pro tanto.
17. In the result, the appeal of the assessee stands partly allowed.