Income Tax Appellate Tribunal - Delhi
Alang Auto And General Engineering Co. ... vs Deputy Commissioner Of Income Tax on 27 October, 2004
Equivalent citations: (2005)97TTJ(DELHI)778
ORDER
N.V. Vasudevan, J.M.
1. ITA 2876/Del/1998 is an appeal by the assessee and ITA 3118/Del/1998 is an appeal by the Revenue and both the appeals are directed against the order of CIT(A)-II, Meerut, relating to asst. yr. 1994-95.
ITA 5365/Del/1998 and ITA 4011/Del/1999 are appeals by the Revenue against the order, dt. 27th Aug., 1998 and 28th July, 1999, respectively, both of CIT(A)-II, Meerut, relating to asst. yrs. 1995-96 and 1996-97.
2. Since same issues are involved in all these appeals they were heard together and a common order is passed for the sake of convenience.
3. First we shall take up ITA 2876/Del/1998, the appeal by the assessee for the asst. yr. 1994-95. The only ground of appeal challenges the addition of Rs. 50,000 sustained by the CIT(A). The third ground of appeal in ITA 3118/Del/1998 is preferred by the Revenue which is aggrieved by the action of the CIT(A) in scaling down the addition of Rs. 2,00,000 made by the AO to a sum of Rs. 50,000. Both these grounds of appeal arise on the same set of facts. The facts giving rise to the aforesaid grounds of appeal are as follows. The assessee is a company which is engaged in the business of purchase of ships and dismantling them. The assessee purchases old ships, dismantles them or breaks them and sells the scrap generated out of dismantling. During the previous year, the assessee had purchased three ships. At the time of purchase of these old ships there would be fuel and lubricant oil left over in the ship. The customs authorities inspect the quantity of fuel so present apart from taking inventory of the various goods attached to the ship, before the ship enters the customs frontier. On such inspection the following was the quantity of fuel that was present :
I ship II ship III ship Total L.D.O. 60 Mt. 25 Mt. 40 Mt. 125 Mt. Furnace Oil 325.2 Mt. 32 Mt. 132.5 Mt. 489.5 Mt. Lubricant Oil 20,000 Ltrs. 1,200 Ltrs. 2600 Ltrs. 23,800 Ltrs.
4. On verification of the books of accounts of the assessee, the AO observed that the assessee had shown sale of 212 mt. of furnace oil only and no stock of closing stock whatsoever was shown. The assessee was asked to explain as to how the remaining quantity of oil was utilised. The assessee explained that till such time the ship is anchored in the port the entire system has to be kept operational and oil and lubricants are consumed in the process. It was further explained that lot of dust gathers at the bottom and the fuel at the bottom becomes unusable at the time of ship breaking. The AO held that the explanation given by the assessee was very vague and cannot be accepted for want of proof to substantiate the explanation. The AO held that a sum of Rs. 2,00,000 was to be added as income of the assessee from unaccounted sale of LDO, furnace oil and lubricant oil.
5. On appeal by the assessee, the assessee reiterated his submissions as were made before the AO. The CIT(A) restricted the addition made by the AO observing as follows :
"I have considered the submissions of the learned counsel. I partly agree with these submissions. No hard and fast rules can be laid down for the same and it is to be viewed on a practical point of view. The AO has made the addition on estimated basis, which is considered excessive and is reduced to Rs. 50,000."
6. Aggrieved by the order of CIT(A), the assessee and the Revenue are in appeal before us. The submissions as were made before the Revenue authorities were reiterated. We do not find any justification to interfere with the order of the CIT(A). As rightly held by the CIT(A), the issue deserves to be looked at from a practical point of view. The quantum of oil present in these ships and the quantity of sale of only 212 Mt. of furnace oil disclosed in the books of accounts of the assessee gave room for doubt about how the remaining quantity of oil was utilised. The assessee's reply in this regard was general. In the circumstances, some addition was called for. In our view, the CIT(A) has taken a very practical view of the issue and has sustained addition to the extent of Rs. 50,000. In our view, the order of CIT(A) is just and proper. The appeal of the assessee is therefore dismissed. The third ground of appeal in ITA No. 3118/Del/1998 is also dismissed.
7. The first ground of appeal in all the three appeals by the Revenue is against the action of the CIT(A) in holding that the activity of ship breaking is an industrial undertaking and such activity amounted to manufacture or production of an article and hence deduction under Sections 80HH and 80-I of the Act was to be allowed to the assessee on the profits derived from such activity. There are two decisions of the Hon'ble High Courts taking contrary views on this issue. The first decision is that of the Hon'ble Bombay High Court in the case of Ship Scrap Traders and Ors. v. CIT and Ors. wherein it has been held as follows :
"The ship-breakers take delivery of the ships at high seas against payment and subsequently ships are beached by the ship-breakers. The ship purchase contract, entered into between the ship-breaker and the seller stipulates that the ship has to be seaworthy, afloat and beaching assistance be given by the seller for about seven days even after taking physical delivery of the ship by the breaker. In other words, what is purchased is a ship which is capable of plying and not merely a scrap. In the course of breaking activity, the ship loses its identity and results into production of the various items. In a cargo ship, the yield of ferrous metals is more. In a passenger ship, the yield of non-ferrous and non-metallic scrap is also substantial. These items are used as raw material by other industries and such items have got different market identity. The ship-breaking activity calls for expertise in the technique to be adopted right from the time of beaching and pulling the ship to the shore. Specialised process is to be employed in the recovery of its output.
The concept of industrial undertaking need not necessarily be confined to manufacture and production of articles and even in the absence of either of them there could be an industrial undertaking. The assessee's are, therefore, well within the expression of industrial undertaking. Whether a particular activity is a manufacturing activity is dependent upon several factors and no straight-jacket formula or principle can be applied. The manufacture implies a change but every change is not manufacture. The material from which thing or article is produced or manufactured may necessarily lose its identity or may become transformed into the basic or essential properties. The manufacture implies a change but every change is not manufacture, yet every change of an article is the result of treatment, labour and manipulation. Naturally, manufacture is the end result of one or more processes through which the original commodities are made to pass. The moment there is transformation into a new commodity commercially known as a distinct and separate commodity having its own character, use and name, whether be it the result of one process or several processes manufacture takes place. Etymologically, the word manufacture properly construed would doubtless cover the transformation. The word manufacture used as a verb is generally understood to mean as 'bringing into existence a new substance' and does not mean merely 'to produce some change in a substance', however, minor in consequence the change may be. When the word manufacture is appearing in the company of word 'production' which has a wider connotation than the word 'manufacture', the word 'production' or 'produce' when used in juxtaposition with the word manufacture takes in bringing into existence new goods by a process which may or may not amount to manufacture. The associated words are indicative of the mind of legislature. Where a word is doubtful or ambiguous in nature the meaning has to be ascertained by considering the company in which it is found and the meaning of the word associated with it. The words manufacture and production have received extensive judicial attention both under the Act as well as the Central Excise Act and the various sales-tax laws. The word 'production' has a wider connotation than the word 'manufacture'. In Webster's New International Dictionary, the word 'produce' is defined as 'something which is brought forth or yielded either naturally or as a result of effort and work'. In Shorter Oxford English Dictionary, the following meaning is given 'to bring forward, bring forth or out to bring into being or existence'. When the word manufacture is appearing in the company of the word production, which has wider connotation than the word manufacture, then in that event, the word 'manufacture' will have to be interpreted in wider sense and will have to be understood at par with the meaning assigned to the word 'production' and if such approach as contemplated by legislature is adopted then in that event it is not difficult to reach to the conclusion that assessees are the industrial undertakings, engaged in manufacture and production of articles and things. Considering the peculiar nature of the ship-breaking activity it gives rise to manufacture and production of altogether new commercial articles or things which are commercially identifiable in the commercial world other than the ship and, therefore, the assessees should be held entitled to claim deductions under Sections 80HHA and 80-I. CST v. Indian Metal Traders (1978) 41 STC 169 (Bom) and Ashish Steels (P) Ltd. v. Mukhopadhyay (1989) STC 293 (Bom) followed; CST v. Delhi Ironand Steel (P) Ltd. (1995) 98 STC 202 (Bom) distinguished; CIT v. N.C. Budharaja and Co. and Anr. Etc. applied."
8. A contrary view has however been expressed by the Hon'ble Gujarat High Court in the case of CIT v. Vijay Ship Breaking Corporation and Ors. , wherein after considering and, dissenting from the decision of the Hon'ble Bombay High Court, it was held as follows :
Activity of ship-breaking did amount to manufacture or production of things or articles for the purpose of deductions under Sections 80HHA and 80-I. Ship-breaking activity is not an activity of manufacture or production of any article or thing for the purposes of availing of the benefit of deductions under Sections 80HH and 80-I of the IT Act, 1961. The Tribunal was, therefore, wrong in holding that ship-breaking activity gives rise to manufacture and production of altogether new articles or things and in allowing deductions under Sections 80HH and 80-I of the Act to the assessees.
9. There is no decision of the Hon'ble jurisdictional High Court on this issue. We are left with the option of following either of the two decisions referred to above. It is a cardinal principle of beneficial interpretation in fiscal enactment that where interpretation of a fiscal enactment is open to doubt, the construction beneficial or favourable to the assessee should be adopted. In the circumstances, we are inclined to follow the decision of the Hon'ble Bombay High Court in the case of Ship Scrap Traders (supra). Consequently, the order of the CIT(A) is upheld and the 1st ground of appeal in all the three appeals by the Revenue are dismissed.
10. We shall now consider the remaining grounds of appeal in the respective appeals of the Revenue.
IT A No. 3118/Del/1998; asst. yr. 1994-95 : The only surviving ground of appeal in this appeal is ground No. 2 which reads as follows :
"Ground No. 2(1)--The learned CIT(A) has erred on facts and in law in deleting the disallowance of interest of Rs. 23,02,796 without adequately appreciating the facts of the case, inter alia that (i) the impugned amount was interest payable by the assessee-company within 180 days @ 6 per cent over and above the purchase price. Hence the nature of impugned amount is that of the interest. The interest was payable outside India on which tax had not been paid or deducted under Chapter XVII-B of the Act. So the amount was not deductible in computing the income chargeable under the head 'Profits and gains of business' under Section 40(a)(i) of the IT Act, 1961.
2(ii). Section 40(a)(i) of the Act prohibits deduction of 'any interest' which is payable outside India on which tax had not been paid or deducted. So long as it is in the nature of interest, the tax at source has to be paid or deducted, failing which the amount is not deductible. Hence learned CIT(A) has erred in deleting disallowance relying upon the ratio of case reported in the case of CIT v. Visakhapatnam Port Trust ."
11. The facts giving raise to the aforesaid ground of appeal are as follows : The assessee purchases ships from abroad. On going through the purchase invoices, the AO noticed that a sum of Rs. 23,02,796 was paid on account of interest to the seller of the ships. The further admitted facts are that the assessee did not deduct tax at source in respect of this payment made to the foreign seller. Under the provisions of Section 40(a)(i) the expense on account of interest cannot be claimed as a deduction if tax had not been deducted at source while making payment to the foreign seller. The relevant provisions of Section 40(a)(i) read as under:
"Section 40--Amounts not deductible.-- Notwithstanding anything to the contrary in Sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession',--
(a) in the case of any assessee--
(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable outside India, on which tax has not been paid or deducted under Chapter XVII-B :
Provided that where in respect of any such sum, tax has been paid or deducted under Chapter XVII-B in any subsequent year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid or deducted."
12. When confronted by the AO as to why the deduction claimed should not be disallowed, the plea of the assessee before the AO was :
(a) that the amount in question was purchase price and not interest and therefore provisions of Section 40(a)(i) are not attracted. The AO however held that the invoice clearly bifurcates purchase price and interest separately and therefore the plea of the assessee in this regard was not acceptable.
(b) that under Section 10(15)(iv)(c) interest paid by an industrial undertaking in India on any moneys borrowed or debt incurred by it in a foreign country in respect of purchase outside India of raw material or capital plant and machinery to the extent to which such interest calculated at the rate approved by the Central Government in this behalf having regard to the terms of the loan or debt and its repayment, is not chargeable to tax. Since the interest income is not chargeable to tax the provisions of Section 40(a)(i) are not attracted.
The AO however rejected this argument also holding that in the first place the assessee was not an industrial undertaking and secondly, the AO held that the assessee has not taken any such approval as is required under Section 10(15)(iv)(c) of the Act. There were some other plea taken by the assessee which were rejected by the AO and they are not necessary for adjudication of the present issue in this appeal.
13. Aggrieved by the order of the AO, the assessee preferred appeal before CIT(A) who deleted the addition made by the AO by concluding that the payment in question was not interest but part of the purchase price. The reasons in this regard are found in paras 3.3 to 3.6 of CIT(A)'s order. Aggrieved by the order of the CIT(A), the Revenue is in appeal before us. We have heard and considered the rival submissions. We have already held that the assessee is an industrial undertaking while dealing with the claim for deduction under Sections 80-I and 80HH of the Act.
14. As is evident from the provisions of Section 40(a)(i) of the Act, the interest payable or paid by the assessee should be chargeable to tax. If the interest paid by the assessee to the foreign seller is not chargeable to tax then the question of deducting tax at the time of making payment or paying the tax so deducted to the account of the Central Government does not arise for consideration at all. Provisions of Section 10(15)(iv)(c) have been amended with retrospective effect from 1st April, 1962 by the Taxation (Amendment) Ordinance, 2003. Explanation 2 has been introduced with retrospective effect from 1st April, 1962. The amended provisions read as follows :
"Section 10--Incomes not included in total income.--In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included--
(15) (iv) interest payable--
(c) by an industrial undertaking in India on any moneys borrowed or debt incurred by it before the 1st day of June, 2001 in a foreign country in respect of the purchase outside India of raw materials or components or capital plant and machinery, to the extent to which such interest does not exceed the amount of interest calculated at the rate approved by the Central Government in this behalf, having regard to the terms of the loan or debt and its repayment.
Explanation 2.--For the removal of doubts, it is hereby declared that the usance interest payable outside India by an undertaking engaged in the business of ship-breaking in respect of purchase of a ship from outside India shall be deemed to be the interest payable on a debt incurred in a foreign country in respect of the purchase outside India."
15. One aspect which is made clear by the amended provisions of Expln. 2 is that the interest payable by an assessee engaged in the business of ship-breaking in respect of purchase of a ship from outside India is also to be considered as payment of interest by an industrial undertaking in India on any money borrowed or debt incurred in a foreign country for purchase outside India of raw materials or capital equipment. Such interest payment to the extent it is approved :by the Central Government is not chargeable to tax. The only aspect to be now seen is as to whether the payment of interest can now be considered as approved by the Central Government in the present case. The finding of the AO on this aspect is that there was no approval from Central Government obtained by the assessee and therefore the provisions of Section 10(15)(iv)(c) are not applicable at all. The CIT(A) decided this issue on a totally different angle altogether and did not consider this aspect. Before us at p. 12 of the assessee's paper book a letter of approval dt. 3rd Nov., 2003 is placed. This approval appears to be in relation to the payment of interest to the three foreign sellers of the three ships purchased by the assessee during the previous year. If the payment of interest by the assessee is within this limit then such interest is not chargeable income in the hands of the foreign seller and therefore provisions of Section 40(a)(i) of the Act will not apply. In the certification of the paper book it has been certified that the documents filed in the paper book were filed before the lower authorities. This is obviously not correct as the letter dt. 3rd Nov., 2003 could not have been filed before the Revenue authorities since the CIT(A) himself decided the appeal on 30th March, 1998. In the given circumstances, we deem it proper to set aside this issue for fresh consideration by the AO in the light of the approval dt. 3rd Nov., 2003 or any other approval that the assessee might produce in respect of the interest payment in dispute in these appeals. The AO shall consider the issue afresh in the light of the amended provisions of the Act. The basis on which the CIT(A) considered the sum in question as part of the purchase price is however not found acceptable. The reliance placed on the decision of the Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. v. CIT is again not proper as it is a case in which the question for determination of capitalisation of expenditure prior to commencement of business while allowing claim for depreciation. The analogy cannot be extended to the facts of the present case. We are, however, remanding the issue to AO for fresh consideration for the reasons given above. The ground of appeal is treated as allowed for statistical purposes.
16. The surviving grounds are ground No. 2 in ITA No. 5365/Del/1998 and ITA No. 4011/Del/1999. These grounds read as follows :
5365/Del/l998--Ground No. 2 "The learned CIT(A) has erred in reducing the addition on account of unaccounted sale of LDO, Furnace oil and lubricant oil from Rs. 50,000 to Rs. 20,000 without adequately appreciating the facts of the case, inter alia, that assessee was unable to account for the stock found as per the inspection report of customs authority that was neither sold by the assessee nor shown in the closing stock."
4011/Del/l999--Ground No. 2 "The learned CIT(A) has erred in law and on facts in deleting the addition of Rs. 50,000 made by the AO on account of disallowance of expenditure on consumables and other expenses ignoring the fact that the expenditure claimed during the year was higher than the last year though the sales was much lower than the last year."
17. The facts and circumstances under which the addition was made by the AO and the same was deleted by the CIT(A) are identical as in asst. yr. 1994-95. For the reasons given while dealing with the relevant ground of appeal in asst. yr. 1994-95, these grounds are dismissed.
18. In the result, ITA No. 2876/Del/1998 is dismissed. ITA No. 3118/Del/1998 is treated as partly allowed for statistical purposes ITA Nos. 5365/Del/1998 and 4011/Del/l999 are dismissed.