Calcutta High Court
Commissioner Of Income-Tax vs Dunlop India Ltd. on 8 January, 1990
Equivalent citations: [1992]197ITR34(CAL)
Author: Suhas Chandra Sen
Bench: Suhas Chandra Sen
JUDGMENT Suhas Chandra Sen, J.
1. The case was originally heard and decided on March 21, 1989. Later on, it was decided to rehear the case because certain relevant facts and law and in particular the latest Supreme Court judgments were not cited in the course of hearing of the case. The judgment and order passed on March 21, 1989, are recalled. The case has been heard de novo.
2. The following four questions of law have been referred to this court by the Tribunal under Section 256 of the Income-tax Act, 1961 :
"1. Whether, on the facts and in the circumstances of the case and in view of the provisions of Section 35B(1) of the Income-tax Act, 1961, the assessee was entitled to weighted deduction in terms of Section 35B on the emoluments paid by it in each of the accounting periods relevant to the assessment years 1972-73 and 1973-74 to its employees in its export promotion department ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the relief in terms of Section 80J of the Income-tax Act, 1961, for each of the accounting periods relevant to the assessment years 1972-73 and 1973-74 should be computed in accordance with the decisions of the Calcutta High Court in the cases of Century Enka Ltd. and C. R. No. 6564(W) of 1974 dated April 29, 1976 (Century Enka Ltd. v. ITO )?
3. Whether, on the facts and in the circumstances of the case, the sum of Rs. 2,97,72,039 representing actuarial valuation of the liability on account of gratuity payable by the assessee to its employees was an allowable deduction in computing the profits and gains of the assessee's business for the accounting period relevant to the assessment year 1972-73 ?
4. Whether, on the facts and in the circumstances of the case, the deduction under Section 80-I of the Income-tax Act, 1961, was allowable in the assessment of the assessee for the accounting period relevant to the assessment year 1972-73 in respect of its income of Rs. 1,80,601 from interest on securities and insurance commission?"
2. The assessment years involved in this reference are the assessment years 1972-73 and 1973-74, for which the corresponding period of accounting are the financial years ending on December 31, 1971, and December 31, 1972.
3. The Income-tax Officer had disallowed the assessee's claim for weighted deduction under Section 35B on two grounds. The staff engaged by the assessee in the export division performed a variety of functions not all of which were of the prescribed nature, viz., active exploration of export potential. It would be impossible to segregate the expenditure that was relatable only to export development from the routine functions. Secondly, it was pointed out that salaries paid to the export personnel being incurred in India were specifically excluded by Section 35B(1)(b)(iii) from expenditure eligible for relief. The Income-tax Officer allowed the expenditure incurred actually for export promotion as deduction. The Appellate Assistant Commissioner, on appeal, held : " Another point which is also common to both the assessment years relates to the refusal of the Income-tax Officer to grant weighted deduction under Section 35B in respect of the expenditure on emoluments of personnel exclusively employed for the promotion of export. It is stated that there was a separate export promotion department and the expenses claimed duly fulfilled the conditions prescribed in Section 35B(1)(b). I have gone through the details furnished and I find that the appellant was maintaining an exclusive independent export promotion department. The nature of the expenses also shows that they qualified for the weighted deduction under Section 35B(1). I, therefore, allow deductions of Rs. 1,14,215 and Rs. 1,33,279 on this account for the assessment years 1972-73 and 1973-74, respectively ".
4. The Tribunal has really not applied its mind to the problem. The Tribunal is the last fact-finding authority. It is also the last appellate court under the Income-tax Act, 1961. The jurisdiction of the Tribunal in the appeal is quite different from the jurisdiction of the High Court on a reference. The question of the assessee's entitlement to get weighted deduction under Section 35B of the Income-tax Act, 1961, was specifically raised before the Tribunal. It was specifically argued by the Departmental representative that, in order to succeed in its claim under Section 35B of the Act, the assessee had to satisfy the Income-tax Officer about the purpose of the expenditure. Reference was made to the language of Clause (b) of Sub-section (1) of Section 35B of the Act.
5. The Tribunal held :
"We have given consideration to the above arguments. As already stated, the assessee is maintaining an exclusive independent export promotion department for dealing with its exports. The Appellate Assistant Commissioner had gone through the details furnished and had been satisfied about the nature of the expenses qualified for weighted deduction under Section 35B(1) of the Act. The said finding has not been challenged by the Department. Rather, the ground, accepted those findings, as correct, because it proceeds with the opening words : 'That, on the facts and in the circumstances of the case.' Nor has the departmental representative been able to satisfy us that the said finding of the Appellate Assistant Commissioner is not correct. Furthermore, as rightly argued by Dr. Pal, the assessee cannot be denied the benefit under Section 35B(1) of the Act simply because the emoluments were paid by the assessee to its employees in India, as that view of the Income-tax Officer does not appear to be correct in view of the decision of the Bombay High Court in CIT v. Eldee Wire Ropes Ltd. [1978] 114 ITR 485. We, therefore, after due deliberation, uphold the order of the Appellate Assistant Commissioner."
6. The Tribunal really sidetracked the issue raised by the Departmental representative. The point of allowability of the assessee's claim under Section 35B was specifically taken in the grounds of appeal before the Tribunal. The point was argued by the Departmental representative. The Tribunal had to come to a finding about the correctness of the Appellate Assistant Commissioner's decision both on facts and in law. In reference jurisdiction, the High Court may decline to answer a question of fact unless the facts have been specifically challenged by a specific question raised. That is because of the limited jurisdiction of the High Court sitting in reference. In the absence of challenge, the finding of fact must be taken to be correct. If a question is raised on the basis of the facts and the circumstances of the case, the High Court cannot go behind the facts found by the Tribunal because the Tribunal is the final fact-finding authority.
7. But the Tribunal sitting in appeal cannot treat the finding of fact made by the Appellate Assistant Commissioner as final. If the question of allowability of weighted deduction under Section 35B has been raised before the Tribunal, the Tribunal has to examine the question both on facts and in law. Merely because the ground of appeal starts with the phrase "whether, on the facts and in the circumstances of the case", the Tribunal cannot decline to investigate the facts and come to a conclusion as to the correctness of the Appellate Assistant Commissioner's finding.
8. Moreover, even assuming that the ground of appeal was of limited nature, the question still remains as to whether, on the basis of the finding made by the Appellate Assistant Commissioner, the claim of the assessee could be allowed under Section 35B. The Appellate Assistant Commissioner has merely stated that the assessee maintained an export department and the nature of the expenses showed that they qualified for the weighted deduction under Section 35B(1). The nature and purpose of the expenses were not analysed. The specific sub-clause under which the expenses were allowable was not mentioned or examined. It is true that some expenses incurred in India qualified for weighted deduction under Section 35B. But all expenses incurred in India do not qualify for such deduction. Therefore, the nature of the expenditure has to be examined and a decision has to be taken as to under which sub-clause of Section 35B(1)(b) the expenditures are allowable. The Appellate Assistant Commissioner has merely said : "I have gone through the details. I find that the appellant was maintaining an exclusive export promotion department and, therefore, the expenditure is allowable". The Appellate Assistant Commissioner must come to a definite finding about the exact nature of the expenditure and the exact sub-clause under which such expenditure is allowable.
9. Even assuming that the facts found by the Appellate Assistant Commissioner were binding on the Tribunal, the Tribunal could not have held that the expenditure was allowable or that the Appellate Assistant Commissioner was right in allowing the expenditure without examining the nature and details of the expenditure. Whether the expenditure is allowable or not under Section 35B will depend upon whether the expenditure was incurred wholly and exclusively on the specific activities mentioned in sub-clauses (i) to (viii) of Section 35B(1)(b). If the assessee is claiming a relief, the onus lies upon the assessee to establish facts which will entitle it to obtain that relief. It was for the assessee to establish that the expenditure was of a nature that specifically fulfilled the conditions and was for the particular purposes mentioned in the various sub-clauses under Section 35B(1)(b).
10. Therefore, the answer to question No. 1 must be in the negative and in favour of the Revenue. The case will have to be remanded to the Tribunal and the Tribunal will examine the question of allowability of these items of expenditure afresh. The assessee must be able to satisfy the Tribunal that the expenditure was of the nature mentioned in Sub-clauses (i) to (viii) of Sub-section (1)(b) of Section 35B.
11. Question No. 2 is already concluded by the judgment of the Supreme Court in the case of Lohia Machines Ltd. v. Union of India and, following the principles laid down in that case, the question has to be answered in the negative and in favour of the Revenue.
12. Question No. 3 is also concluded by the judgment of this court in the case of CIT v. Eastern Spinning Mills Ltd. [1980] 126 ITR 686 and, following the principles of law laid down in that case, the question has to be answered in the affirmative and in favour of the assessee.
13. Question No. 4 relates to the deduction claimed under Section 80-I in respect of interest on securities and insurance commission. The case of the assesses is that interest on securities and insurance commission received by the assessee come within the phrase "profits and gains attributable to any priority industry". The Tribunal's findings of fact on these questions are as under :
"The last ground of appeal by the Revenue pertains to the appeal for the accounting period relevant to the assessment year 1972-73. The Income-tax Officer, in .the assessment order, has held that the deduction under Section 80-I of the Act was not available in respect of the income from interest on securities and insurance commission totalling Rs. 1,88,601 as the said income from the said sources does not constitute income arising from the manufacture and sale of priority goods.
On appeal, the Appellate Assistant Commissioner of Income-tax, following the order of this Bench of the Tribunal, decided on November 30, 1976, in the case of the assessee for the accounting period relevant to the assessment years 1968-69 and 1969-70, has directed the Income-tax Officer to recompute the relief admissible under Section 80-I of the Act in the light of the said decision of the Tribunal.
In the appeal before us, the arguments on the point at issue by the parties have proceeded on the same lines as were canvassed before the Tribunal on the earlier occasions. For the reasons stated in our earlier order with which we agree, we uphold the order of the Appellate Assistant Commissioner on this point also."
14. For the assessment years 1968-69 and 1969-70, the question of allowability of the reliefs under Section 80-I was gone into at length by the Tribunal. The orders passed by the Tribunal for the assessment years 1968 69 and 1969-70 have been annexed to the statement of the case.
15. On the point of insurance commission, the Department's case was that the commission was earned by the assessee as an agent of the insurance company and not as the owner of a priority industry.
16. The Tribunal held :
"The position in regard to the other two sums of commission receipts and interest receipts is quite different. The facts as stated by the appellant in relation to these commission receipts clearly show that the appellant did not carry on any business activity in insurance agency as contended by the Revenue. Admittedly, the appellant had serviced the insurance policies relating to its business asset only, viz., its factory buildings, plant and machinery, raw materials, stock-in-trade, etc. To facilitate this work, it has its own insurance department for which it has also taken a licence from the Controller of Insurance. It is not the case of the Department that the appellant carries on any business activity as an insurance agent by canvassing business from outsiders and earned commission thereon. On the other hand, the facts of the case conclusively established that the entire commission receipts were from the assessee's own payments of insurance premium and that they were in the nature of rebate allowed to the assessee from the insurance premium paid by it on its own policies. Further, the Department is not entitled to take only the gross receipts of commission ignoring the expenses incurred by the assessee on its insurance department which are, admittedly, debited under the head 'Selling and administrative expenses, manufacturing expenses and salaries and wages account' as contended by the appellant. We are unable to agree with the Revenue that it was not open to the appellant to take up this plea merely because this aspect was not placed by it before the lower authorities. In fact, the appellant was contending throughout that these commission receipts were part of its business receipts and should not be excluded for the purpose of allowing deduction under Section 80-I of the Act. We are, therefore, satisfied that these commission receipts are part of the business activity of the priority industry carried on by the appellant."
17. This order of the Tribunal was passed in a rectification proceeding. The Tribunal ultimately held in those cases that substantial questions of law were involved on these two points and that the errors, if any, committed were not rectifiable errors under Section 154. If the Income-tax Officer had allowed the claim of the assessee inadvertently and erroneously, even then, such errors could not be corrected under the provisions of Section 154 of the Income-tax Act, 1961.
18. The reasoning given in the earlier part of this order for allowing the claim of the assessee under Section 80-I has, however, been followed by the Tribunal in the instant case. No separate reason has been given by the Tribunal.
19. On the point of insurance commission, two facts were emphasised by the Tribunal. The appellant did not carry on any insurance business other than servicing its own factory building, plant and machinery, raw materials, stock-in-trade, etc. The company has its own insurance department for which a licence has been taken from the Controller of Insurance. The second important fact noted by the Tribunal is that the entire commission receipts were from the assessee's own payment of insurance premium and that they were in the nature of rebate allowed to the assessee from the insurance premium paid by it on its own policies.
20. The first question that arises is this : did the assessee receive any payment by way of commission ? The answer must be in the affirmative. The assessee had two roles to play. As a client of the insurance company, it paid premium for the insurance cover provided to it by the insurance company. It also acted as an agent of the insurance company by virtue of a licence obtained by it specifically for this purpose. As an insurance agent, it was entitled to get commission for the business procured by it. It was agreed between the insurance company and the assessee that, instead of direct payment of the agency commission separately, a rebate would be granted on the amount of the premium payable by the assessee. If the agent was an outsider, the assessee-company would have paid the full amount of the insurance premium and the insurance company in its turn would have separately paid the usual commission to the insurance agent.
21. In this case, the assessee and the insurance company came to an agreement that the commission would be paid by granting a rebate on the premium payable. That is a mutually agreed mode of payment of the insurance commission. Merely because the amount of commission is adjusted or set off by way of rebate against the premium payable by the assessee, it does not mean that there has not been any accrual of income to the assessee. In the case of Coren v. Keighley [1972] 48 TC 370 (Ch. D.), it was held that, where two cross demands for money were set off against each other, each set-off constituted payment in cash.
22. Therefore, in our view, the insurance company, in effect, paid commission to the assessee by way of granting rebate on the insurance premium. The amount of commission which was given by way of rebate was income in the hands of the assessee and was taxable as such.
23. The next aspect of the question is that, even if it be held that the rebate granted by the insurance company is to be treated as income, can it be described as part of "profits and gains attributable to any priority industry" under Section 80-I ? Commission is usually paid by the insurance company to its agent for procuring business. The agent acts as a middleman between the insured and the insurance company. The payment of commission may be calculated on the basis of a percentage of the total amount of premium paid by the insured. But the commission that an insurance agent receives is nothing but a consideration payable for procuring business and servicing the insurance policies. The accrual of income takes place not on account of any activity of the priority industry but because of the service rendered by the insurance agent to the insurance company. However widely the phrase "profits and gains attributable to any priority industry" is construed, the commission received for the services rendered by an insurance agent to an insurance company cannot come within the ambit of that phrase merely because the insurance cover is in respect of the plant and machinery and stock-in-trade of the priority industry.
24. The fact that the assessee-company has been treated as a priority industry and had itself acted as an insurance agent will not make any difference to the principle. When the assessee was acting as an insurance agent, it was carrying on an activity which was quite distinct and separate from the business of the priority industry. In fact, the Tribunal has pointed out that in order to carry on business as an insurance agent, it was necessary to obtain a licence. The assessee had actually taken out a licence from the Controller of Insurance for this purpose. On the strength of this licence, the assessee acted as an insurance agent. The insurance agency business of the assessee may have been confined to the priority industry only. But that will not alter the position in any way. The agency business of the assessee was quite a distinct and separate business and did not form part of the priority industry. The income from the agency business cannot be treated as part of "profits and gains attributable to any priority industry".
25. I am unable to uphold the contention that the commission was paid out of income attributable to a priority industry. A rebate was granted on the amount of premium and, therefore, the rebate, even if it can be treated as income, must be treated as income attributable to a priority industry.
26. There are two reasons why the assessee's contention cannot be accepted. In the eye of law, it is the insurance company which has paid the commission to the assessee. The mode of payment may be by book adjustment. But such adjustment in the eye of law must be regarded as cash payment. The payment was made by the insurance company out of its own monies. The payment cannot be treated as having been made out of the income of any priority industry or out of profits and gains attributable to any priority industry.
27. Moreover, the amount of premium received by the insurance company must be treated as its own monies. If fees are paid by a priority industry to a lawyer or an accountant on account of professional services rendered, such fees in the hands of the recipient cannot be treated as income attributable to a priority industry. Similarly, if an insurance company receives payment from a priority industry, the money in the hands of the insurance company does not become income attributable to a priority industry. If any payment is made by the insurance company to an agent, the payment received by the agent cannot be treated as income of the priority industry even though the premiums were paid out of income attributable to a priority industry.
28. A similar question was examined by the Judicial Committee of the Privy Council in the case of Premier Construction Co. Ltd. v. CIT [1948] 16 ITR 380. In that case, the assessee-company was the managing agent of the principal company whose business was to manufacture sugar from cane grown on its own farms as well as cane bought from outside. There was no dispute that the income derived by the principal company from sugar manufactured from its own cane was agricultural income and as such was exempt from income-tax. The assessee-company as managing agent of the principal company was entitled to a commission at the rate of ten per cent. per annum on the annual net profits of the principal company after making all proper allowances and deductions from revenue for working expenses chargeable against profits but without making any deduction for depreciation or in respect of any amount carried to reserve or sinking fund or any payment on account of super-tax or any deduction for expenditure on capital account provided that such commission should not in any year amount to a less sum than rupees ten thousand. The assessee claimed that a portion of the income received by the assessee from the principal company was agricultural income and as such, exempt from assessment under the Income-tax Act, 1961. Sir John Beaumont repelled this contention in the following words (at page 384) :
". . . . where an assessee receives income, not itself of a character to fall within the definition of agricultural income contained in the Act, such income does not assume the character of agricultural income by reason of the source from which it, is derived, or the method by which it is calculated. But if the income received falls within the definition of agricultural income it earns exemption, in whatever character the assessee receives it. In the present case, the assessee received no agricultural income as defined by the Act ; it received remuneration under a contract for personal services calculated on the amount of profits earned by the employer, payable, not in specie out of any item of such profits, but out of any moneys of the employer available for the purpose. The remuneration therefore is not agricultural income and is not exempt from tax."
29. In the instant case, the commission income was received by the assessee under a contract for personal service. The commission was payable by the insurance company. The character in which the assessee received the money was that of an insurance agent. The mode of payment or the fact that the assessee had no other agency business is quite irrelevant for the determination of the question of accrual of income and the character of the income.
30. On the question of interest received from Government securities, the finding of fact made by the Tribunal is that these deposits were made with the excise department and the electricity boards in West Bengal and Tamil Nadu. The deposits that were made with the excise department was for obtaining manufacturing facilities under the Central Excise laws and the deposits that were made with the electricity boards were for the purpose of obtaining industrial power connection. It cannot be disputed that these deposits made were incidental to and for the purpose of carrying on the business of priority industry. The Tribunal has found that the deposits were made in the form of Government securities which were kept deposited with the excise department and the electricity boards. The case of the assessee is that it had to purchase these Government securities to furnish deposits only for the purpose of carrying on its business. The Tribunal has held that the interest earned on these Government securities will form part of the income of the priority industry. We have no hesitation in upholding this conclusion of the Tribunal. If the securities had to be furnished for the purpose of carrying on the business of the priority industry, then the interest receipts earned from these securities will have to be treated as part of the profits and gains attributable to a priority industry.
31. Therefore, the questions raised are answered in the following manner :
Question No. 1 is answered in the negative and in favour of the Revenue. The Tribunal will examine the question of allowability of the expenditure under Section 35B afresh as directed hereinabove.
Question No. 2 is answered in the negative and in favour of the Revenue.
Question No. 3 is answered in the affirmative and in favour of the assessee.
Question No. 4 is in two parts and is answered in the following manner :
The income from interest on securities received by the assessee qualifies for deduction under Section 80-I of the Income-tax Act, 1961. The amount received by the assessee as insurance commission does not qualify for deduction under Section 80-I of the Income-tax Act, 1961.
32. There will be no order as to costs.
Bhagabati Prasad Banerjee, J.
33. I agree.