Delhi High Court
Orissa Cement Ltd. vs Commissioner Of Income-Tax, Delhi on 5 November, 1992
Equivalent citations: 50(1993)DLT109, [1993]200ITR636(DELHI)
Author: B.N. Kirpal
Bench: B.N. Kirpal
JUDGMENT B.N. Kirpal, J.
(1) In respect of the Assessment Year 1972-73 two questions of law have been referred at the instance of the assessed and three questions at the instance of the Revenue. The questions of law referred at the Instance of the assessed are as follows:-
"1. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that interest paid under Section 220(2) of the Income-tax Act, 1961 is not allowable expenditure under Sections 28 and 37 of the Income-tax Act, 1961 ?
2.Whether the Tribunal is right in law in holding sur-tax levied under the Companies (Profits) Sur Tax Act, 1964 for the assessment year 1972-73 is not deductible in computing the total income of the assessed ? "
The questions of law referred at the instance of the Department are as follows:-
1. Whether on the facts and in the circumstances of the case, the tribunal was justified in law in directing the Income-tax Officer to work out and allow the assessed relief under Section 80J of the Income-tax Act, 1961 in respect of Mahuda Unit of the assessed ?
2.Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in directing the Income-tax Officer to compute the capital employed under Rule 1'9A of the Income- tax Rules, 1962 read with Section 80J of the Income-tax Act, 1961 in the manner laid down in the case of Century Enka Ltd. v. Income-tax Officer (107 Itr 909) and thereby permitting the inclusion of the borrowed money for the purpose of capital employed in the. industrial undertaking of Mahuda Unit ?
3.Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in directing the Appellate Assistant Commissioner to decide on merit the assessed's objections against the computing of interest under Section 21.4? "
(2) We will firstly deal with the reference which has been made at the instance of assessed.
(3) During the year in question the assessed has paid interest of Rs. 91,477 under Section 220(2) of the Income-tax Act, 1961. The Income-tax Officer disallowed the assessed's claim for deduction of this amount on the ground that the payment of interest for delayed payment of tax did not represent any business expenditure. This disallowance was confirmed, in appeal, by the Appellate Assistant Commissioner and, on a second appeal, by the Income tax Tribunal. Question No. " which has been referred at the instance of the assessed relates to this claim. In the case of Commissioner of Income Tax . v. Modi Spinning and Weaving Mills Ltd. [ITR 161/81 (1) decided on 23rd October, 1992]; this Court has had an occasion to consider such a question. It came to the conclusion that payment of interest on account of delayed payment of tax partakes the character of the tax itself and is not allowable as deduction by virtue of the provisions of Section 40(a)(ii) of the Act. Two earlier decisions of this Court taking the same view are Commissioner of Income- tax v. Dalma Dadri Cement Ltd.) 125 Itr 510 and Bharat Commerce Industries Ltd. v. Commissioner of Income Tax ., 153 Itr 275.
(4) In view of the aforesaid decisions the first question is answered in the affirmative and in favor of the Department.
(5) The second question relates to the payment made by the assessed of sur-tax which was levied under the Companies (Profits) Sur-tax Act, 1964 in respect of the Assessment Year 1972-73. The claim of the assessed was that this was allowable as a deduction under Section 37 of the Income-tax Act. The Income-tax Officer did not accept this contention and his view was upheld by the Appellate Assistant Commissioner as well as the Income-tax Tribunal.
(6) It has been contended before us by Shri Bishamber Lal that the expenditure was incurred for the benefit of the business of the assessed. The contention was that if the Sur-tax had not been paid the assessed would have been subjected to penalties etc. and it had no option but to make the said payment. The payment which was made had to be regarded as being incidental to the carrying on of the assessed's business. He further submitted that the provisions of Section 40(a)(ii) of the said Act are not applicable because Sur-tax is not a tax on the profits and gains as computed under the Income-tax Act.
(7) The aforesaid question has come up for consideration before different High Courts in a number of cases. Except for the two decisions of the Gauhati High Court, every other High Court has come to the conclusion that the Sur-tax computed is not an allowable deduction under Section 37 of the Act and. some of the other High Courts have held that the tax so paid also comes within the ambit of Section 40(a)(ii).
(8) The contention of Shri Bishamber Lal, learned counsel for the assessed is that except for the Gauhati High Court, the A either decisions do north lay down the correct law. Strong reliance is placed by him on a decision of the Supreme Court in the case of Jaipuria Samla Amalgamated Collieries Ltd. v. Commissioner of Income-tax, 82 Itr 580(4). In that case Casks were helved on owners of mines on the average of annual net profits of last three years. A question arose whether the amounts so paid were allowable as a deduction. The Supreme Court, in that case, had an occasion to construe the provisions of Section 10(4) of the Income-tax Act, 1h922, which was in pan malaria to Section 49(a)(ii) of the 1961 Acthaiu' it came to the conclusion that the words "profits and gains of any business, profession or vocation" of concurring in Section 10(4) can have reference only to profits afghan gains as determine-I under Section 10 of the 1922 Act. The Cess was leviable under the Respective statutes on the annual net profit and not on the profits and gains as computed under the Income-tax Act and, therefore, the provisions of Section 10(4) were held to be not (9) The decision in Jaipuria Samla's case (supra) can Oc to little assistance to the learned counsel for the .issesse's, and is clearly distinguishable. Firstly what the assessed ww required to pay turn carrying on the business of raising coal from coal Mews and selling it, was road and public works cess as well as education cess. The payment of these cesses was compulsory but the calculation thereof was relatable to the annual net profit of the assessed. The Supreme Court did not have occasion to consider the question as to whether the said amount was allowable as a deduction under Section 10(2)(xv) as it was assumed that the same would be regarded as a business expenditure, because this question was not raised, in the pre- sent case, as we shall see, (he expenditure in question, ^s not allowable as a deduction under Section 37. Secondly, whereas the Cesses in Jaipuria Samla's case were not relatable to Act. Income-tax the under computed as prophets to relatable clearly is 1964 Act, Sur-tax (Profits) Companies of provisions payable which 1922, prov.?sions profit (10) Section 4 of the 1964 Act is a charging section which provides that in respect of every assessment year commencing from 1st April, 1964 Sur-tax will be levied on Chargeable profits of the previous year as exceed the statutory deductio'i which was specified. Chargeable profit? are defined in Section 2(5) of the 1964 Act to mean the total income of an assessed computed under the Income-tax Act, 1961 for any previous year or years, as the case may be and adjusted in accordance with the pretensions of the First Schedule. The First Schedule, inter alia, profited for adjustment to be made to the total income computed in the year under the Income-tax Act while computing the chargeable profirts. The adjustment which is provided is for the exclusion of certain types of incomes, profits and gains and other sums from the total income which is computed under the said Act. Some odf the items which are to be excluded are capital gains, compensation or payment referred to in Section 28(ii) of the Income-tax Act, profits and gains of any business aof life insurance, income referred to in Section 41(2) of the Income-tax Act, income chargeable under the head "interest on securities" of certain kinds, 50 per cent of she deduction allowable under Section 80G cf the Act, income from dividends, income of royalties received from Government or local authorities or any other Indian concern, certain types of income of assdas banking company and amount of any deduction from income-tax chargeable on the total income in connection with the export sof any goods etc. (11) It is clear from the reading of Section 4 along with Section 2(5) and the First Schedule of the 1964 Act that the Sur-tax is sought to be computed primarily on the profits and gains from business of an assessed. The tax is in respect of the assessment year and the chargeable profits ars the total income computed under the Income-tax Act, 1961 bur. adjusted in accordance with the provisions of the First sehedule. There can be a number of cases where the types of incomes and gains referred to in the First Schedule to the said Act may not have accrued or arisen to an assessed and it may still be liable to pay Sur-tax because of its total income computed under the Income-tax Act, 1961 which is regarded as chargeable profits. We have no manner of doubt that the tax which is imposed by the charging Section under the 1964 Act is on the total income computed under the Income-tax Act, 1961, subject to such adjustments as may be necessary under the First Schedule to the Act. This was not the position in Jaipuria Samla's case (supra). There the annual net profits were not to be computed under the provisions of the Income-tax Act but the computation was to take place under the respective Cess Ac's.
(12) Except for the two decisions of the Gauhati High Court, the opinion of all the other High Courts in India has been that Sur-tax so payable is not allowable as a deduction either because it is not a business expenditure and /or because it is a tax on profits and, therefore, is not allowable as a deduction by virtue of the provisions of Section 40(a)(ii). The decisions of the various High Courts taking this view are Molins of India Ltd v. Commissioner of Income Tax ., 144 Itr 317 (Calcutta) ; C.I.T. v. International Instruments (P) Ltd., 144 Itr 936 (Kar)(6) ; A. V. Thomas & Co. Ltd. v. Commissioner of Income Tax . 159 Itr 431 (F. B. Ker) (7); Sundaram Industries Ltd. v. Commissioner of Income Tax ., 159 Itr 646 (Madras) (8) ; Vazir Sultan Tobacco Co. v. Commissioner of Income Tax . 169 Itr 35 (A.P.)(9) ; Associated Stone Industries v. Commissioner of Income Tax ., 170 Itr 65? (Raj.) (10) ; S. L. M. Maneklal Industries Ltd. v. Commissioner of Income Tax ., 1.72 Itr 176 (Gu).)(ll) ; Simon Carves India Ltd. v. Commissioner of Income Tax ., 173 Itr 660 (Cal)(12) ; T. T. Pvt. Ltd. v. Commissioner of Income Tax ., 177 Itr 536 (Kar.)(13) ; Highway Cycle Industries v. Commissioner of Income Tax ., 178 Itr 601 (PAH) (14) ; Commissioner of Income Tax . v. Maltex Malsters Ltd., 179 Itr 41 (PAH) (15) ; H. M. M. Ltd. v. Commissioner of Income Tax ., 181 Itr 473 (PAH) (18) and Mysore Lamp Works Ltd. v. Commissioner of Income Tax ., 185 Itr 96 (Kar) (16).
(13) The ratio of the decisions in the aforesaid cases is that Sur-tax is not paid for the conduct of the business and it is not incidental to the carrying on of the business, the Sur-tax is paid if the assessed has earned income. The payment of Sur-tax is nothing more than an apportionment of the profits after they have arisen. This payment is not a charge on the profits of the company but is an allocation or an apportionment which is made thereafter. The fact that this payment is not relatable to the carrying on of the business of the assessed is evident from the fact that if the assessed suffers a loss or does not have any chargeable profits then no Sur-tax is payable but the assessed can carry on its business activity. The payment is to be made only in the event of chargeable profits being there and not otherwise. It is clear, therefore, that "The provisions of Section 37 of the Income-tax Act cannot be invoked by the assessed while claiming a deduction."
(14) A different view. from all the other High Courts has. however, been expressed by the Gauhati High Court in the case of Makum Tea Co. (India) Ltd. v. Commissioner of Income Tax .. 178 Itr 453(17). In that case the question arose was whether the payment of Sur-tax could be disallowed under Section 40(a)(ii) of the Act. The Court was not, in that case, called upon to examine the Question whether Sur-tax was an allowable deduction under Section 37 of the Act. The Gauhati High Court referred to the decision of the Supreme Court in Jaipuria Samla.s case (supra) and observed as follows:- "The ratio of Jaipuria's case is squarely applicable to the facts of the present case inasmuch as the amount of tax whose deduction is barred by Section 40(a)(ii) "if the Act is the one levied on profits and gains of any business or profession, whereas the sur-tax under the Sur-tax Act is leviable on the total income of the assessed as that income is taken to be "chargeable profits". It may be pointed out that Section 4 of the Sur-tax Act which is the charging section has made it clear that sur-tax shall be charged in respect of the chargeable profits of the previous year or previous years".
(15) With respect we are unable to agree with the aforesaid observations of the Gauhati High Court. The Judges have not analysed the provisions of the Companies (Profits) Sur-tax Act, 1964 in any detail and have apparently overlooked the definition of the expression "chargeable profits" occurring in Section 2(5) of Sur-tax Act, 1964 which clearly stales that the chargeable profits mean the total income computed under the provisions of the Income-tax Act, 1961 subject to adjustments being made under the First Schedule. No doubt the charging section states that tax is to be levied on chargeable profits but then chargeable profits are no different than the total income computed under the provisions of Section 28 and 37 of the Income-tax Act but subject to adjustments under the First Schedule. The question as to whether the payment could be claimed as a deduction under Section 37 came up for consideration before the Gauhati High Court in the case of Doom Dooma Tea Co. Ltd. v. Commissioner of Income Tax ., 180 lTR 126(19). After "referring to various cases it was observed that Sur-tax was different from Income-tax in all attributes and perspectives and "Sur-tax was paid by the assessed in the install case under the compulsion of the statute for running: the business of tea, and. therefore, ban to be allowed to be deducted under Section 37 of the Income-tax Act."
(16) We do not find either in the Income-tax Act or in the Sur-tax Act any provision which can persuade us to come to the conclusion that the payment of Sur-tax was an compulsion for running the business. It is not as if without payment of Sur-tax the business could not be conducted. As we have already indicated hereinabove if the business runs at a loss or its total income does not exceed the statutory deduction referred to in Section 4 the assessed can still continue to carry on its business. In ether words the carrying on of the business by the assessed is not dependent upon or subject to the condition of payment of Sur-tax under the said Act.
(17) For the aforesaid reasons it must be held that the payment of Sur-tax is not allowable as a deduction under Section 37 of the Act.
(18) Mr. Bishamber Lal, however, contended that the Supreme Court has observed in the case of Commissioner of Income Tax . v. Delhi Safe Deposit Company Ltd., 133 Itr 756 that the true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessed as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than that of a trader. The expenditure incurred on the preservation of a profit-earning asset o^ a business is always a deductible expenditure. The said test, as laid down by the Supreme " Court, has no applicability in the present case. As we have already observed the money spent by the assessed in paying sur-tax was not for the purpose of carrying on any trade or business. The assessed was obliged to part with money by way of tax which was imposed on the profits which it had earned as a result of the carrying on of the business. The payment was not made for the preservation of any asset. It was. in fact, application of a part of its income towards payment of Sur-tax.
(19) For the aforesaid reasons question No. 2 referred at the instance of the assessed is answered in the affirmative and in favor of the Department.
(20) Now coming to the reference made at the instance of the Department, as far as question No. I is concerned the facts as found by the Tribunal are that the assessed had established a cement plant at Mahuda (Bihar). It claimed deduction under Section 80J in respect of the profits and gains of the aforesaid newly established industrial undertaking. Relying upon an earlier order the Income-tax Officer did not allow the claim. This was upheld by the Appellate Assistant Commissioner. The Tribunal, however, reversed the finding and allowed the claim of the assessed. The deduction under Section Soj was not allowed on the ground that the assessed had purchased some second hand machinery from Heavy Engineering Corporation, Ranchi for setting up a new unit and the condition laid down under Section 5oj(4)(ii) was not satisfied. The Tribunal found as a fact that in the year in question new assets worth Rs. 4,65,160.00 had been purchased by the assessed as against old assets worth Rs. 74,580. "The percentage of new and old assets was 86 per cent : 14 per cent. .Following the decision of the Gujarat High Court in the case of Commissioner of Income-tax v. Satellite Engineering Ltd., 113 Itr 208 (21) the Tribunal came to the conclusion that the assessed was entitled to deduction.
(21) This Court had also ?n occasion to consider the meaning of the expression "reconstruction of business", occurring in the analogous provisions under the Income-tax Act, 1922 namely Section 15(0(2) (i) in the case of Commissioner of Income-tax v. Ganga Sugar Corporation, 92 Itr 173(22). In that case the assessed company had set up a new plant for manufacturing sugar after it had scrapped the old plant. Nevertheless some of the old material was used in the erection of the new plant but the said percentage was only I per cent. It was observed by this Court that the use of scrap and material of the old plant of the value of a small fraction of the expenditure involved in the setting up of a new unit did not attract the concluding words of clause (i) of Section 15(C)(2). It also held that in order to hold that an industrial undertaking had been formed by the transfer to a new business of building, machinery or plant previously used in any other business the Court should take into account the value of the transferred building, machinery or plant vis-a-vis the total cost involved in the setting up of the new industrial undertaking. If in the context of the total cost involved in the setting up of the new industrial undertaking the value of transferred building, machinery or plant constitutes only a small fraction, the new industrial undertaking would not be held to have been formed by the transfer to a new business of building, machinery of plant previously used in any business. It is only if the value of the transferred building, machinery or plant is substantial, when compared to the total cost involved in the setting up of the new industrial undertaking could the said undertaking be regarded as being hit by the concluding words of clause (i) of Sub-Section (2) of Section 15C. The said reasoning of this Court in Ganga Sugar Corporation's case is clearly applicable in the instant case.
(22) It has been contended by Shri Gupta that the value of the old machinery which was used in the instant case was not a small traction. He further submits that explanation (ii) lo Section 80J(4) was inserted w.e.f. 1st April, 1976 and it no doubt provided the use in the new industrial undertaking of old plant and machinery to the extent of 20 per cent of the total value of the machinery. The learned counsel contends that this explanation was not applicable to the assessment year in question viz., 1972-73.
(23) In our opinion even without the help of this explanation but by virtue of. the ratio of the decision of this Court in Ganga Sugar Corporation's case (supra) the assessed is entitled to succeed. Out of a total expense which was incurred during the year, old assets of only Rs. 74,580 were used and these assets also were not those which belonged to the assessed. This was second hand machinery which was purchased from outside and as far as the assessed is concerned It was going to use the said machinery for the first time; in a sense the said machinery was new to the assessed. The Tribunal was, therefore, right in concluding that the assessed was entitled to the relief as prayed.
(24) The said question is, therefore, answered inthe affirmative and in favor of the asssessee.
(25) Question No. 2 referred at the instance of the Department has to be decided in its favor in view of the decision of the Supreme Court in the case of Lohia Machine Tools, 152 Itr 308. The said question is, therefore, answered in the negative and in favor of the. Department.
(26) As regards question No. 3, the same is concluded against the Department by virtue of the Judgment of this Court in Commissioner of Income Tax . v. Mahabir parshad & Sons, 125 Itr 165. The assessed had not been allowed the correct amount of interest under Section 214 of lae Act. The Appellate Assistant Commissioner did not entertain the assessors appeal on this point, as, according to him, no appeal was provided. The Income- tax Tribunal, however, followed the aforesaid judgment of this Court in Mahabir Parshad's case and held that the question of interest under Section 214 could be challenged in an appeal filed against the assessed. Since the Appellate Assistant Commissioner had not dealt with this matter on merits, the point was referred back to him with a direction to decide it on merits and according to law. We find that the direction given by the Tribunal, in the instant case, is in confirmity with the observations of this Court in Mahabir Parshad's case (supra) and, therefore, the question of law is answered in the affirmative and in favor of the assessed.
(27) The net result is that both the questions referred at the instance of the assessed are decided in favor of the Department. As regards the three questions referred at the instance of the Department, question Nos. 1 and 3 are decided in favor of the assessed and Question No. Tis decided in favor of the Department. There will be no order as to costs.