Income Tax Appellate Tribunal - Madras
Ponds Exports Ltd. vs Income Tax Officer (Also Dy. Cit V. Ponds ... on 29 February, 1996
Equivalent citations: [1996]58ITD417(MAD)
ORDER
M.M. Cherian, A. M.
1. As common grounds are involved in these appeals filed in the case of M/s Ponds Exports Ltd. for the asst. yrs. 1983-84 and 1984-85, they are consolidated in a common order.
2. The assessee is a company in which the public are substantially interested and it derives income from the manufacture of cosmetics.
Asst. yr. 1983-84 :
3. During the previous year relevant to the asst. yr. 1983-84, the assessee company started a manufacturing unit at Kandla in respect of which it claimed under s. 10A of the IT Act, exemption on the profits. In the P&L a/c for the year ending 31st March, 1983 a sum of Rs. 5,51,718 was credited as interest on bank deposits. The assessee's claim for exemption on the interest income was not allowed by the Assessing Officer (AO) who brought to tax the amount as income under the head 'other sources'. In the first appeal, the CIT(A) held that interest on the bank deposits was assessable as income from business under s. 28(1) of the IT Act, in view of the fact that the interest was received on the deposits made with the money received on export of goods. In that view, the first appellate authority followed the decision of the Bombay Bench of the Tribunal in the case of ITO vs. Paramount Premises Pvt. Ltd. (1984) 21 TTJ (Bom) 572 : (1984) 9 ITD 263 (Bom). The Department is in appeal before us challenging the finding that the interest income is assessable as income from business.
4. On behalf of Revenue, Shri O. P. Sachan, the Departmental Representative submitted that the receipt of the interest had nothing to do with the assessee's business and that the direct source of the income was the deposit in the bank and so the same was assessable as income under the head 'other sources'. The learned Departmental Representative submitted that the CIT(A) was not justified in holding that the interest was assessable as business income merely because the surplus funds available with the assessee were deposited in the bank. According to the learned Departmental Representative what the AO had to see was the immediate source of the income and the immediate source being the bank deposit, the income was assessable under the head 'other sources' and not as business income. Referring to the decision of the Kerala High Court in the case of Collis Line Pvt. Ltd. vs. ITO (1982) 135 ITR 390 (Ker) it was contended that under similar circumstances the High Court had upheld the assessment of the interest income under the head 'other sources'. On behalf of the assessee, Shri Bhaskar, Advocate submitted that what the assessee deposited in the bank was the money received from Russian parties to whom goods were exported, and in that sense it was directly attributable to the export business. The learned counsel stated that the assessee had obtained from the importers money in advance against the exports and that such funds were kept in the bank account on which interest was received and so the same was rightly treated by the CIT(A) as income arising from business. It was submitted that the ratio of the decision of the Tribunal, in the case of Paramount Premises Pvt. Ltd. was rightly applied in this case to hold that the interest income was assessable as income from the business under s. 28(1) of the IT Act.
5. It can be seen that the deposits in the banks were made with the money received in the export business, and in that sense the interest income sprang from the business activity of the assessee. It did not arise out of any independent activity. The ratio of the decision of the Bombay Bench of the Tribunal in the case of Paramount Premises Pvt. Ltd. (supra) squarely applies to the facts of the case. In the case of Collis Line Pvt. Ltd. vs. ITO (supra) decided by the Kerala High Court, it was the surplus funds lying idle with the assessee, that was deposited in the bank. Having regard to the facts, we find that the CIT(A) was justified in holding that the interest on bank deposits was assessable under the head 'Business income'. The appeal filed by Revenue on this ground, thus, fails.
6. The Department has also raised another ground in respect of the asst. yr. 1983-84 to the effect that the CIT(A) erred in directing to allow the sum of Rs. 96,256 as loss in sea food business. The assessee's claim for allowing deduction of the amount as a business loss was not admitted by the AO on the view that the assessee had not done any business in sea food and that the assessee had purchased goods at the same price as the export price, and there was no need to incur any expenditure by way of commission on the purchases. The CIT(A) noticed that memorandum and articles of association authorised the carrying on of business in sea food and that during the relevant accounting period, the assessee had purchased sea food from various parties paying commission and sold the goods to parties outside India. It was also noticed that the loss actually represented the commission paid to various parties from whom purchases were made, as the sales were on the same price as the purchase price without adding further cost. The CIT(A) held that the assessee was entitled to adjust the loss in this business against other income of the year. Before us, the learned Departmental Representative submitted that the assessee had no processing unit and as per the accounts, the assessee had also not accrued any profit or loss when the goods were sold at the same price, and so there was no need for the assessee to pay commission and incur loss. It was contended that the CIT(A) was not justified in allowing the assessee's claim of business loss. On behalf of the assessee, the counsel explained that the assessee newly entered into the business of sea food export and that during next year large quantity of sea food was exported and during the current year, the assessee purchased goods from various parties paying commission on the purchase and making sales at the same price as the purchase. It was contended that merely because the assessee did not make any profit in sea food business, it would not be correct to hold that there was no business carried on by the assessee. The learned counsel relied on the decision of the Tribunal in the case of S. I. Property Development (P) Ltd. vs. IAC (1992) 40 ITD 494 (Mad). In that case when there was no profit in the export business it was held that the assessee was entitled to relief under s. 80HHC.
7. Having regard to the facts of the case, we find no reason to interfere with the order of the CIT(A). The memorandum and articles of association authorised the business in sea food and the assessee had also dealt in sea foods during the year and exported the goods after paying commission. As rightly pointed out by the learned counsel for the assessee, the assessee had entered into these transactions with an eye on the export market, and there was in fact large export sales in the subsequent year. In these circumstances, the Departmental appeal, on this ground, is dismissed.
8. For the asst. yr. 1983-84, the assessee is also in appeal in regard to the claim of exemption under s. 10A of the IT Act. Before the AO, the assessee claimed that the sum of Rs. 5,51,718 received as interest on bank deposits was entitled to exemption under s. 10A of the IT Act on the view that it was income arising from the industrial undertaking in a free trade zone. The assessee's claim was that Kandla area was a free trade zone and so the entire profit from the business including the bank interest would qualify for the exemption. This was not allowed by the AO. In the first appeal, the CIT(A) held that the necessary condition for deduction under s. 10A was that the income should be derived from an industrial undertaking in a free trade zone, and that the interest on bank deposits would not qualify as profits and gains derived from the industrial undertaking. Relying on the decision of the Calcutta High Court in the case of Aluminium Co. Ltd. vs. CIT (1980) 122 ITR 660 (Cal), the CIT(A) held that the interest on the bank deposits would not be entitled to the exemption under s. 10A of the IT Act. Before us, Shri Bhaskar, the assessee's representative submitted that the CIT(A) was not justified in upholding the denial of exemption under s. 10A on the interest income earned in the Kandla unit when he himself had held that it formed part of the business income. The learned counsel contended that in view of the decision in the case of Paramount Premises Pvt. Ltd. (supra) interest on bank deposits was not only assessable as business income but it should also be considered as income derived from the industrial undertaking, in the free trade zone entitled to all benefits available to business income. The Departmental Representative strongly supported the decision of the CIT(A) and contended that in view of the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. vs. CIT (1978) 113 ITR 84 (SC) interest on the bank deposit would not qualify as income derived from an industrial undertaking. He also referred to the decisions of the Kerala High Court reported in (1982) 135 ITR 278 (Ker) (infra) and CIT vs. Cochin Refineries Ltd. (1983) 142 ITR 441 (Ker).
9. Sec. 10A of the IT Act provides that any profits and gains derived by an assessee from an industrial undertaking in free trade zones is not to be included in the total income of the assessee, subject to the fulfilment of certain conditions. The essential condition to be satisfied is that the income should be profits and gains 'derived from' an industrial undertaking. The expression 'derived from' cannot have a wide import so as to include any income which can in some manner be attributable to the business. The derivation of income must be directly connected with the business in the sense that the income is generated by the business. The distinction between the expressions 'derived from' and 'attributable to' has been noticed by the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. (supra) while dealing with the relief under s. 80E of the IT Act. The following observation of the Supreme Court in this context is relevant : "It would be pertinent to observe that the legislature had deliberately used the expression "attributable to" and not the expression "derived from". It cannot be disputed that the expression "attributable to" is certainly wider in import than the expression "derived from". Had the expression 'derived from' been used, it could have with some force been contended that a balancing charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity". In the case of CIT vs. Cochin Refineries (1982) 135 ITR 278 (Ker) the Kerala High Court held that interest accrued on the surplus amounts deposited in banks could not be considered as income derived from the industrial undertaking, to qualify for relief under s. 80J of the IT Act. Reference may also be made to the decision in (1983) 142 ITR 441 (supra), wherein also it was held that relief under s. 80J was available only on income derived from the industrial undertaking and not on interest on bank deposits. There is also the decision of the Calcutta High Court reported in (1980) 122 ITR 660 (Cal) (supra), to which the CIT(A) has referred; in support of the view that 'derived from' has a restrictive meaning compared to 'attributable to'. In the above circumstances, we hold that the assessee is not entitled to the exemption under s. 10A in respect of the interest income on the bank deposits.
Asst. yr. 1984-85 :
10. For this year, the assessee is in appeal on two items (1) under s. 10A on the interest income and (2) assessability of income from Kandla unit.
11. As regards the first ground in regard to the exemption under s. 10A, it has been earlier held in respect of the asst. yr. 1983-84 that the interest on bank deposits does not qualify as income derived from an industrial undertaking in free trade zone, and so the assessee is not entitled to the exemption under s. 10A. For this assessment year also, we hold that the assessee is not entitled to the deduction under s. 10A on the interest income.
12. In the next ground, the assessee contends that the income arising from the Kandla unit should not be assessed in its hands. The claim is that the income should not be taxed in the hands of the assessee-company but the income should be taxed in the hands of the holding company, viz., Ponds (India) Ltd., as the entire business had been taken over by that company under an agreement entered into between the assessee and the holding company on 10th Dec., 1983. For the reasons discussed in the assessment order, the AO did not accept this claim and assessed the income in the hands of the assessee. The appeal before the CIT(A) on this ground was not successful.
13. In the present appeal, the assessee pleads for excluding the income from its assessment and requests for the assessment being made on the holding company, i.e., M/s Ponds (India) Ltd. The assessee's representative, Shri Bhaskar submitted that the assessee-company closed its accounts every year on 1st January and that for the asst. yr. 1984-85, the previous year ended on 1st Jan., 1984. According to the counsel as on 1st Jan., 1984, the business did not belong to this assessee, as prior to that date itself the entire business had been transferred to the holding company. It was pointed out that the entire business was transferred to M/s Ponds (India) Ltd. under the agreement dt. 10th Dec., 1983. As per the agreement the business as a going concern would be transferred and assigned to the holding company with effect from the opening of the business on the 2nd Jan., 1983. Shri Bhaskar submitted that it was settled law that the income did not arise from day to day and that only at the time of closing of the accounts, the income would be ascertainable and so as on 1st Jan., 1984 at the time of closing accounts for this assessee there was no income from business to be assessed in its hands. It was contended that the CIT(A) was not correct in upholding the assessment without appreciating the fact that the business had been transferred even before the closing of the accounts. The Departmental Representative on the other hand submitted that the agreement showed that the business was transferred to the holding company from a prior date and that such a retrospective transfer was not permissible in law. It was contended that in view of the fact that the agreement was made effective retrospectively, it was not a valid agreement and so the entire income was rightly brought to tax in the hands of the assessee. It was pointed out that the prospective effect of the agreement had been accepted as could be seen from the assessment of the income of the subsequent year in the hands of the holding company. The learned Departmental Representative strongly supported the order of the first appellate authority and made an earnest plea for dismissing the assessee's appeal on this ground.
14. The assessee-company had an industrial undertaking in the free trade zone at Kandla for the manufacture of cosmetics and a unit at Kodaikanal for manufacturing thermometers. The assessee's claim is for assessing the income from these two units in the hands of M/s Ponds (India) Ltd., the holding company. Under the agreement dt. 10th Dec., 1983 the assessee agreed to transfer and assign to the holding company, the undertakings and business of the Kandla and Kodaikanal units as a going concern with effect from the opening of the business on the 2nd Jan., 1983. All the total assets, stock in trade, etc., were transferred to the holding company, for consideration to be paid partly in cash and partly in instalments to be agreed upon from time to time, but not later than 31st Dec., 1983. In the assessee's P&L a/c for the period ending on 1st Jan., 1984 (which is the previous year for the asst. yr. 1984-85) no income from business was shown; only miscellaneous expense of Rs. 24,750 was debited to arrive at a net loss of an equal amount. In the return of income filed for the asst. yr. 1984-85 the assessee showed this loss and claimed that the profit from the Kandla and Kodaikanal units had been included in the accounts of the holding company. The holding company, M/s Ponds (India) Ltd., in its report for the year ended 30th June, 1984, included the income from these units. In the Directors Report of the holding company, the relevant portion reads as under :
"The undertakings at Kandla and Kodaikanal were taken over at book value as going concerns effecting close of business on 1st Jan., 1983."
In the Directors Report of the assessee-company, it was stated thus :
"As resolved by the Members at the Extraordinary General Meeting of the company held on 10th Dec., 1983, the Board of Directors have transferred and assigned to Ponds India Ltd., the cosmetics and toiletries manufacturing unit at Kandla Free Trade Zone and the Thermometers manufacturing unit at Kodaikanal at their net book value as on 2nd Jan., 1983. Consequently, there has been no operating income during the year under review."
15. In the course of the hearing before us it was clarified by the assessee's counsel that though the agreement was entered into on 10th Dec., 1983, it was executed only on 29th Dec., 1983, through a registered transfer deed. The transaction involves the transfer of immovable properties and so only by a registered document such transfer can be effected. [vide Supreme Court in Alapati Venkataramiah vs. CIT (1965) 57 ITR 185 (SC)]. The claim that the assessee transferred the Kandla and the Kodaikanal units with all movable and immovable assets to the holding company, w.e.f. 2nd Jan., 1983 cannot be, therefore, accepted. As a matter of fact, it was noticed by the AO and also by the CIT(A) that the business in the two units were carried on by this assessee only. In the assessment order the AO pointed out that on 15th Sept., 1983 assessee-company filed an estimate of advance tax, estimating a total income of Rs. 36,48,140 for the asst. yr. 1984-85. After adjusting the brought forward loss and claiming the deductions in Chapter VIA, the net income liable to tax was shown at Rs. 16,03,700, and advance tax was also paid on that basis. Evidently, at least till 15th Sept., 1983 the business was carried on by the assessee only. Later on 15th Dec., 1983 the assessee filed a nil estimate of advance tax in Form No. 29. As rightly observed by the CIT(A) the business carried on at the Kandla and the Kodaikanal units acquired the use of certain licences granted by various statutory authorities. These licenses also formed part of the items transferred to the holding company. But during the previous year, the licenses were used by the assessee only for the purpose of carrying on the business in these two units. We have already seen that the legal ownership was transferred to the holding company only on 29th Dec., 1983, with the execution of the transfer deed. It is, therefore, evident that apart from continuing to be the legal owner of the business till 29th Dec., 1983, the business was also carried on by the assessee only. Hence, the income was rightly assessed to tax in the hands of the assessee-company.
16. In this context reference may be made to the provisions of s. 170 of the IT Act relating to succession to business. It is provided in s. 170(1) that where a person carrying on any business or profession, has been succeeded therein by any other person, who continues to carry on that business or profession, then the predecessor shall be assessed in respect of the income of the previous year in which the succession took place upto the date of succession. The successor shall be assessed in respect of the income of the previous year after the date of succession. Succession involves change of ownership in the sense that the successor taking over the whole business or substantially the whole business of the predecessor and continuing the same notwithstanding the retention by the predecessor of some assets and liabilities. In CIT vs. K. H. Chambers (1965) 55 ITR 674 (SC) the Supreme Court has laid down as under :
"This is an authority for the position that if a business was taken over as a going concern the mere fact that some assets, which were not required by the successor for the carrying on of the business, were not transferred to him would not make it any the less a succession in law. It is not necessary to multiply decisions. Succession involves change of ownership; that is, the transferor goes out and the transferee comes in; it connotes that the whole business is transferred; it also implies that substantially the identity and the continuity of the business are preserved. If there is a transfer of a business, any arrangement between the transferor and the transferee in respect of some of the assets and liabilities not with a view to enable the transferor to run a part of the business transferred but to enable the transferee to run the business unhampered by the load of debts or for any other appropriate collateral purpose cannot detract from the totality of succession."
17. The assessee has transferred the entire Kandla and Kodaikanal units to the holding company on 29th Dec., 1983, and so the holding company becomes the successor to these businesses. In accordance with the provisions of s. 170(1) of the IT Act, the income of these two units till the date of succession is thus assessable in the hands of the assessee. For applying the provisions of s. 170(1) it is immaterial whether the profits of the business accrues from day to day only at the end of the accounting year. It is also not relevant whether the accounts were closed on 29th Dec., 1983, or not. There is no merit in the contention that the accounts were not closed on that day and so no assessment of income till that date could not be subjected to tax. In the assessment order the AO has shown the previous year as the period ending on 1st Jan., 1984. It is not clear from the records as to whether any income has been derived from the Kandla unit and the Kodaikanal unit between the period from 29th Dec., 1983, and 1st Jan., 1984, i.e., for the period of three days. If the assessee is able to show the actual income earned in these two units on these three days, that will be excluded from the computation. The AO will give the assessee an opportunity to produce evidence regarding any income that was earned in the Kandla and the Kodaikanal units after 29th Dec., 1983, and exclude the same from assessment in the hands of the assessee. Subject to the modification as above, we confirm the order of the CIT(A) on the issue of the assessability of the income from the Kandla and the Kodaikanal units in the hands of the assessee.
18. In the result, the assessee's appeal for the asst. yr. 1984-85 is dismissed.