Income Tax Appellate Tribunal - Mumbai
Maharashtra State Financial Corpn. vs Dy. Cit on 8 September, 2006
ORDER
Sunil Kumar Yadav, J.M.
1. Except ITA No. 1140/Bom./1992, all appeals are preferred by the assessee against the respective orders of the Commissioner (Appeals) for different assessment years on common grounds. Since, all these were heard together, these are disposed of by this consolidated order.
2. During the course of hearing, the assessee has filed the brief note of its submissions along with the consolidated chart prepared in respect of grounds raised in these appeals with a request that instead of dealing the grounds in all appeals independently, these appeals can be disposed of by adjudicating the common issues raised in these appeals. We, however, also of the view that these appeals can be disposed of by the single consolidated order by adjudicating the grounds issue-wise.
3. The first ground raised in Appeal No. 2060/Bom/1992 is with regard to the disallowance of Director's Remuneration under Section 40C of the Income Tax Act and this ground is raised only in I.T.A. No. 2060/Bom/1992 and in this regard, the learned Counsel for the assessee has invited our attention that the Managing Director of the assessee-company is not in fact an employee of the assessee-company, but he is an employee of the State Government who comes on deputation in the assessee-company as a Managing Director as such, the provisions of Section 40C would not apply. Whatever perquisites the Managing Director gets, it is, on account of terms of employment of the assessee-company, as such, the benefits given to the Managing Director do not fall within the meaning of the perquisites.
4. The learned Departmental Representative on the other hand has submitted that though the assessee is a Public Sector Undertaking under the State Government, but, it has its own bye-laws. No doubt, the Managing Director comes from the State Government, but, whatever benefit he enjoys after joining the assessee, it was on account of holding a post as Managing Director in the assessee-company and not as a State Government employee. The learned Departmental Representative further submitted that an officer in the State Government does not enjoy those facilities which are being enjoyed as and when he joins as Managing Director with the assessee-company, as such, it is not proper to hold that whatever facilities are being enjoyed by the Managing Director of the assessee-company, it was on account of official position in the State Government.
5. Having heard the rival submissions and from careful perusal of the record, we find that undisputedly, the assessee's Managing Director is appointed amongst the Senior Officers in the State Government. Till such officer remained in the State Government, he is eligible for certain facilities, but, once he joined the assessee-company as a Managing Director, he enjoyed much more facilities and that is only on account of holding a post of Managing Director of the assessee-company and not as an employee of the State Government. Had this contention of the assessee is accepted that whatever facilities are enjoyed by the Managing Director, it was on account of the State Government employee, those facilities should have been available with that officers even before joining as Managing Director or after relinquishing a charge as Managing Director and joins the State Government again. During the course of hearing, a specific querry was put to the learned Counsel for the assessee to state that what is the eligibility criteria for appointing an officer of the State Government as a Managing Director of the assessee. But, the learned Counsel for the assessee could not furnish information as to which rank of officers are eligible to become the Managing Director of the assessce. He was also failed to furnish the information as to what facilities are available with an officer when he works with the State Government before joining Managing Director of the assessee. It is also an admitted fact that the Managing Director draws the salary from the assessee and not from the State Government Meaning thereby, though the Managing Director of the assessee-company is a State Government employee, but he works with the assessee on deputation on terms of employment of the assessee-company. Once the assessee is assessed under the Income Tax Act, the relevant provisions of the Act is applicable and the Managing Director cannot be exonerated from the relevant provisions of the Act which are applicable to the Managing Director and Directors of the assessee- company. Keeping in view of the facts and circumstances of the case, we are of the considered opinion that the revenue authorities are rightly invoked the provisions of Section 40(C) of the Income Tax Act. Since the Commissioner (Appeals) has adjudicated the issue in right perspective, we find no infirmity therein. Accordingly, we confirm the order of the Commissioner (Appeals) in this regard.
6. The next issue raised in ITA Nos. 2060/13/92, 7782/B/94, 987/Bom/94, 7783/Bom/94 and 270/Bom/95 relate to an addition on account of fees pollected for payment to "deposit insurance and credit guarantee corporation". Though the facts are similar in all appeals, we take up the facts of appeal No. 2060/Bom/92 in which during the course of assessment proceedings, the assessing officer noticed from the details of other credit balance that it includes an amount of Rs. 34,27,924 being DICGC guarantee fees deposit. On enquiry from the assessee, the nature and source of the credit balances were explained by the assessee as under
(i) Re : DICGC guarantee fee deposit Rs. 34,27,924 included in 'other credit balances': The corporation is recovering DICGC fee from borrowers in advance for one year at the time of disbursement or subsequently of loan and fee recovered in advance is kept under this head of account. Whenever the payment is made to DICGC (Deposit Insurance & Credit Guarantee Corporation) the payment is debited to this account.
(ii) Suspense (others) Rs. 3,43,97,410:
Apart from other balances, suspense (others) includes major amounts of guarantee fee payable to DICGC. The loans granted by the corporation to small scale industries are covered under guarantee scheme of "Deposit Insurance and Credit Guarantee Corporation (DICGC)". For this guarantee the corporation has to pay guarantee fee to DICGC. As per the decision taken by the Corporation, the corporation bears the guarantee fees in respect of loans up to Rs. 50,000 and fee in respect of loans above Rs. 50,000 is recovered from the parties by debiting either the deposit account or by debiting loanees account. The rate of guarantee fee is 50 paise 96 p.a. for loans up to Rs. 25,000 and 75 paise 96 on loans above Rs. 25,000. The fee is payable half-yearly. It has been observed that the DICGC is very slow in settling the guarantee claims for this corporation. Since the amount involved in the guarantee claims, which were yet not settled by DICGC, was quite substantial and guarantee fee payable every year to DICGC was also quite high, the Corporation decided to put a pressure on DICGC not to pay guarantee fee till DICGC settles our pending claims; if not all the claims at least bigger claims. The Corporation, therefore, has not been paying the guarantee fee payable to DICGC since January 1986. Since the guarantee fee is a liability to DICGC by the Corporation, the Corporation has been continuing its system of either recovering or debiting loanees account. Such amounts has been credited to suspense account pending the payment of guarantee fee by the Corporation to DICGC.
6.1 The claim of the assessee in this regard was examined by the assessing officer in the light of his submissions, but was not convinced with it. He, accordingly, held that during the assessment year, assessee has collected and credited to suspense account a sum of Rs. 79,54,510 on account of such fees collected, but not paid to DICGC i.e., Rs. 3,43,97,410 balance as on 31-3-1988 less Rs. 2,64,42,900 i.e., opening balance as on 1-4-1987. The assessing officer accordingly held that this amount of Rs. 7,94,510 constitute the income of the assessee for the present assessment year and he added back the same. On a similar pattern, he has also collected a sum of Rs. 5,34,063 which was also not paid to the corporation during the year. This amount was also added by the assessing officer as an income to the assessee. The relevant observation in this regard of the assessing officer are extracted hereunder:
The assessee is a financial corporation mainly engaged in providing financial assistance to small scale industrial units and other industrial units manufacturing a wide range of products. The main source of income is interest earned on loans and advances, given by the assessee. The assessee follows 'cash system' of accounting.
The loans granted by the corporation are covered under credit guarantee scheme of Deposit Insurance and Credit Guarantee Corporation. For this guarantee the Corporation has to pay guarantee fee to DICGC. As per the practice followed by the assessee, guarantee fee in respect of the loans up to Rs. 50,000 is borne by the assessee and is charged as its profit and loss account as revenue expenditure. The guarantee fee in respect of loans above Rs. 50,000 is recovered from the parties, and is paid to DICGC halfyearly. It is a contract between the assessee-company and DICGC regarding the payment of guarantee fee by the former and risk cover by the latter. Thus the liability is between the assessee and DICGC.
From the above facts, it is crystal clear that for carrying out its business activities efficiently and also for safeguarding its interest the assessee has to incur an expenditure by way of guarantee fee to be paid to DICGC. As per the practice followed, the expenditure to the extent as borne by the corporation i.e., fee payable in respect of the loans up to Rs. 50,000 is charged to its revenue accounts, and fee in respect of loans above Rs. 50,000 which is recovered from the concerned loanees is directly paid to the DICGC, hence have no effect on the income earned by the assessee-company, as the receipt on one hand is offset by the payment on the other hand.
However, during previous year relevant for the present assessment year it has been noticed that the assessce-company has decided not to pay the guarantee fee to DICGC till their earlier pending claims are settled by the DICGC. The corporation stopped paying the fees collected from its loanees since January 1986. Such amounts have been credited to a suspense account pending payment of guarantee fee to DICGC. The method of accounting these receipts by crediting to suspense (other account) and claiming that it is not the income of the assessee is prima facie erroneous and totally incorrect.
The assessee receives the fees during the course of its business activities. The fees, in respect of loans up to Rs. 50,000 which are borne by the assessee are treated by the assessee as revenue expenditure. Similarly, the amount collected from the loanees which are non-refundable are nothing but revenue/trading receipts. So far the fees are not paid to the DICGC, the assessee is having beneficial interest therein. Reliance is placed on the Hon'ble Supreme Court's decisions in the case of Chowranghee Sales Bureau (P) Ltd. (187 ITR 542 (SC)) and Sinclair Murray & Co. (P) Ltd. (97 ITR 615 (SC)). The accounts of the assessee are being maintained on 'cash' basis. Hence, accountancy principle require that these receipts be shown as revenue receipts in the year in which these are actually received. And since it is the assessee who is liable to DICGC for fees payable to them, it will be entitled to claim these payments as revenue expenditure in the year when there is actual payment.
During the previous year relevant to the present assessment year, the assessee has collected and credited to'suspense (Other)'account a sum of Rs. 79,54.510 on account of such fees collected but not paid to DICGC (Rs. 3,43,97,410 balance as on 31-3-1988 less ks. 2,64,42,900 opening balance as on 1-4-1987). Accordingly, it is held that said amount of Rs. 79,54,510 constitutes the income of the assessee for the present assessment year, and is added back.
10.5 Similarly the assessee has also collected Rs. 5,34,063 (Rs. 34,27,924 closing balance as on 31-3-1988 Rs. 8,93,861 the opening balance as on 1-4-1987) from borrowers in advance being DICGC guarantee fee, credited to "DICGC guarantee fee deposit account", but not paid to the said corporation during the year. As held above, this amount also constitutes the assessee's income for the present year, and accordingly is added back for identical reasons.
7. Aggrieved, the assessee preferred an appeal before the Commissioner (Appeals), but did not find favour with him. Before the Commissioner (Appeals), the assessee has raised a plea that though the assessee is following a cash system of accounting, but, every amount received by the assessee, does not constitute its income. The amounts collected by the assessee from its various loanees for payment of fees to the DICGC is an outstanding expenditure. Though the assessee is following the cash system of accounting, such receipts without any act on the part of the assessee would not form part of its total income. The Commissioner (Appeals) has followed the judgment of the Apex Court in the case of Chowranghee Sales Bureau (P) Ltd. v. CIT . Learned Counsel for the assessee, and held that as per the accountancy principles, the receipts have to be treated as revenue receipts for the year in which they are received and due credit will be allowed in the year of actual payment. The Commissioner (Appeals), further, directed the assessing officer to verify the figures as worked out by him are contrary to the details furnished by the assessee during the course of assessment proceedings. Subject to these directions, the additions made by the assessing officer, were confirmed.
8. Now the assessee has preferred an appeal before the Tribunal with the submissions that though the assessee has been following the cash system of accounting, whatever amount was received by it, it was on account of DICGC and the assessee has no control over it. It was shown in the books of account as an outstanding liability towards Deposit Insurance and Credit Guarantee Corporation (DICGC). The assessee is a mere trustee and has no right to use it. In support of his contention, he has relied upon the following judgments:
(i) CITv. Tollygunge Club Ltd.
(ii) CIT v. Biili Cotton Mills (P.) Ltd.
8.1 The learned Counsel for the assessee further contended that the judgment of Chowranghee Sales Bureau (P.) Ltd.s case (supra), is not applicable to the facts of the case as it has not received any statutory liability from its customers. The learned Counsel for the assessee further contended that whatever amount was received as guarantee fees it was credited to the DICGC deposit account and it was never formed to be the part of the income of the assessee, as such, it cannot be chargeable to tax. This guarantee fee was not a statutory liability. It was collected on account of resolutions passed by the assessee-company to pay to the DICGC in order to ensure its recovery of the outstanding dues from the loanees. Since, it was collected with a different motive or object and was never formed to be a part of the income/trading receipts of the assessee, it is not chargeable to tax.
9. The learned Departmental Representative on the other hand has submitted that undisputedly the assessee has collected the guarantee fees from the borrowers by debiting their accounts, but, it was never paid to the DICGC. Moreover, this amount was not kept under a separate account. It was kept on a common account though separate head was created in its books of account. Nothing is placed on record to establish that this collected funds was never used by the assessee and was kept intact for its payment to DICGC on a future date. The judgments on which the assessee has relied are rendered on different facts, as in those cases the'Dharmada'or surcharge for local charities was collected and was also applied for that purpose. But, in the instant case, the assessee has collected the guarantee fees, but, was used by it though a separate head was created in its books of account. The learned Departmental Representative has relied upon the judgment of the Apex Court in the case of Chowranghee Sales Bureau (P) Ltd. v. CIT and Synclaire Murray & Co. (P) Ltd. v. CIT in which it has been categorically held that the sales tax collected from its customers, but, not paid to the State Government nor refunded to the customers, is a part of trading receipt and chargeable to tax as a business income. This finding of the Apex Court are based on the facts that, the assessee has credited the sales tax receipt in a separate account, but, the amount realized on the sales tax were not put in a different account and was mixed up with its own funds and assessee treated the same as its on money. The learned Departmental Representative further contended that similar is the position in the instant case, as the assessee has collected this guarantee fees from its borrowers on account of Deposit Insurance Credit Guarantee Corporation (DICGC), but, was not paid to it and was kept in the mixed accounts of the assessee for its use. As such, the ratio laid down by the Apex Court in the aforesaid case are directly applicable to the present case.
10. Having heard the rival submissions and from a careful perusal of the record, we find that admittedly the assessee has been recovering the guarantee fees from its borrowers for its payment to Deposit Insurance Credit Guarantee Corporation (DICGC), but, was not paid to them. In the assessment year 1988-89, the assessee has collected and credited to suspense account a sum of Rs. 79,54,510 and since it was not paid to DICGC, the assessing officer treated it to be the income of the relevant assessment year. The explanation for not making payment to DICGC was stated, to create a pressure upon the DICGC to speed up the recoveries of outstanding dues from the borrowers. Since the DICGC was slow in recovery of the outstanding dues, the assessee has decided not to pay this guarantee fees collected from the borrowers. It is also not borne out from the record that this collected fund on account of guarantee fees was kept in a separate account and remained intact for its payment to DICGC or its refund to its borrowers on a future date. Though it was credited to this Deposit Insurance and Credit Guarantee Corporation deposit account, but, this fund was mixed up with the other trading receipts of the assessee. We have also carefully examined the judgments referred to by the assessee and the revenue and was find that the Apex Court in the case of Synclair Murray & Co. (P.) Ltd. (supra), has categorically held following the earlier judgment of the Apex Court in the case of Chowranghee Sales Bureau (P.) Ltd. (supra) that, it is the nature and quality of the receipt that would prove decisive. The fact that the assessee credited the sales tax received in a separate account, did not make any material difference. If a receipt is a proving receipt, the fact that it is not so shown in the account books of the assessee, would not proving the assessing authorities from treating it as a trading receipt. The assessee did not separately earmarked the amounts realized on sales tax or put in hand a different account. The assessee also did not deposit the amount with the Government as and when realized nor did the assessee refund it to the purchaser from whom the amounts had been received. The assessee mixed-up the amounts of sales tax with its own sums and treated the same as its on money. Therefore, sales tax collected was liable to be included in the total income of the assessee. Their Lordship further held in that case that when the assessee pays the sum or part thereof either to the State Government or to the purchaser, the assessee would be entitled to claim deduction of the sum so paid. Similar was the position in the case of Chowranghee Sales Bureau (P.) Ltd. (supra) in which their Lordships of the Apex Court have held that the sum realized as sales tax by the assessee- company in its character as an auctioneer form part of the trading or business receipt. The fact that the assessee credited the amount received as a sales tax under the head "sales tax collection account" did not make any material difference it was further observed by the Apex Court that it is the true nature and the quality of the receipt and not the head under which it has entered in the account books as would prove decisive.
11. We have also carefully examined the judgment of the Apex Court in the case of Tollygunge Club Ltd. (supra) and Bijli Cotton Mills (P) Ltd. (supra), in which their Lordships have held, that the receipts from the surcharge were not credited to the profit and loss account, but, they were directly credited to a separate account styled "charity account". The amounts realized by way of surcharge has been disbursed to local charities pursuant to the resolution passed by the general body meeting of the assessee and it was never reached to the assessee as its income. It was diverted to local charities before they reached to assessee, as such, it never partake the character of income of the assessee. In this case the surcharges were collected in addition to the admission fees for the purpose of local charity and as and when it was collected it was applied for the same purpose. This amount was never mixed up with the other trading receipts of the assessee and assessee never made its use for its business purposes. Similar was the position in the case of Bijli Cotton Mills (P.) Ltd. (supra). In that case, the assessee has received the Dharmada which were kept earmarked for charitable purpose and this amount was held by the assessee under an obligation to spend the same for charitable purposes only. While dealing with the issue, whether this receipt of Dharma is chargeable to tax as the income of the assessee ? Their Lordship of the Apex Court have observed that right from the beginning these amounts were received and held by the assessee under an obligation to spend the same for charitable purposes only, with the result that, these receipts cannot be regarded as forming part of income of the assessee. Their Lordships have further observed that Dharmada amounts paid by the customers cannot be regarded as part of price or surcharge on price of the goods purchased by the customers. The amount Dharmada is undoubtedly a payment which customer is required to pay in addition to the price of the goods, which was purchased from the assessee. Dharmada amount is therefore clearly not a part of the price, but a payment for a specific purpose i.e., charitable purpose. Their Lordship have further observed that this Dharmada payment cannot be said to have been made unvoluntarily by the customers and in any case the compulsory nature of the payments if there be any kind of impress, the receipts with the character of being trading receipts. Being a customary levy the constituents or customers' whether literate or illiterate would be knowing that the additional payments over and above price were meant for being spent by the assessee for charitable purpose. Further, the fact that assessee would be having some discretion as regards the manner in which and the time when it should spent the Dharmada amounts for charitable purposes, would not detract from the position the assessee had qua such amounts, namely, that it was under an obligation to utilize them exclusively for charitable purposes. It is true that the assessee did not keep this amounts in a separate bank account, but, admittedly a separate Dharmada account was maintained in the books in which every receipt was credited and payments were made there out on charity was debited and these amounts were never credited in the trading account nor were credited to the profit and loss statement. Hence, realization made by the assessee from its customers for Dharmada being validly earmarked for charity or charitable purposes could not be regarded as assessee's income chargeable to tax.
12. In the light of guidelines laid down by the Apex Court through the ,aforesaid judgments, we examined the facts of the case in hand and we find that in the instant case though the assessee has collected guarantee fees for its payment to DICGC, but, it was not paid to them for various reasons. It is not a case where the assessee has not paid this guarantee fees to DICGC in one year, but, was paid in another year. It is a case where the assessee decided not to make payment to DICGC on account of their slow process of recovery of outstanding amounts. Though the assessee has credited this guarantee fees to DICGC guarantee fee deposit account, but, this amount was not kept in a separate account for its payment to DICGC or its refund to the borrowers on a future date. It was put in the mixed account of the assessee and the assessee has made a use of it. No doubt, it is not a statutory liability, but, it is the liability casted under a scheme launched by the State Government under the Deposit Insurance Credit Guarantee Corporation Act, 1961. Meaning thereby, the collection of guarantee fee from the borrowers has a statutory force. As per Clause (3) of Small Loans (Small Scale Industries) Guarantee Scheme, 1981 launched by the Deposit Insurance and Credit Guarantee Corporation, the corporation undertake, in relation to any credit facilities which may be provided to eligible borrower from time to time by an eligible credit institution, which has entered into the necessary agreement for this purpose with the corporation to provide a guarantee on account of the said credit facilities. The scheme also requires an agreement to be executed between the Corporation and the Credit Institution to enable it for guarantee in respect of the eligible credit facility. To avail this facility, the guarantee fees as per Clause (8) of the scheme shall be paid to the corporation by the credit institution availing itself of the guarantee provided under the scheme at such rate or rates as may, with the prior approval of the Reserve Bank of India, be notified by the corporation to the credit institution from time to time. In his instant case, the assessee being a credit institution has entered into an agreement with the corporation and was required to make the payment of guarantee fees on its collection from the borrowers. Since the scheme was launched by the Board of Deposit and Insurance Credit Guarantee Corporation in the exercise of power conferred by sub-Section (2) of Section 21A of the Deposit Insurance and Credit Guarantee Corporation Act, 1961, the recovery of guarantee fees and its payment to the corporation has a statutory force, though it is not a statutory liability in a strict sense as in the case of sales tax. In the instant case also, assessee, admittedly collected the guarantee fees, but, was not paid to the corporation continuously for years together and it were used by it for its business purposes. No material has been placed to establish that whatever amount was collected on account of this guarantee fees, it was kept in a separate account and was remained intact for its payment either to the corporation or its refund to the borrowers on a future date. Though this amount was collected for a specified purpose, but, it was not applied for the same purpose and was utilized for the purpose of the business of the assessee. The ratio laid down in the case of Tollygunj Club Ltd. (supra) and Bijlee Cotton Mills (P.) Ltd. (supra) cannot be applied to the case in hand, as in those cases the amount was collected on account of Dharmada or local charity and was immediately applied for the same purpose. The facts in this case are rather similar to the facts of the cases in the case of Chowinghee Sales Bureau (P.) Ltd. (supra) and Sinclain Murrary & Co. (P.) Ltd. (supra), in which the assessee has collected the sales tax from the customers, but, was not paid to the State Government or refunded to the customers and was utilized by the assessee for its business purposes. In those cases, their Lordships of the Apex Court have categorically held that since the assessee has used the money collected in the business on account of sales tax from its customers and was not paid to the State Government nor refunded to the customers, the amount so collected to be included in the total income of the assessee and is chargeable to tax as business income. In the same manner, the assessee has collected this guarantee fees from its borrowers, but, was not paid to the corporation though he was under an obligation to do so and has utilized the same for his own purpose, as such, the ratio laid down by the Apex Court in the case of Chowringhee Sales Bureau (P.) Ltd. (supra) and Sinclair Murray & Co. (P.) Ltd. (supra) are strictly applicable to the present facts of the case. We have also carefully examined the order of the Tribunal in the case of A.P. State Financial Corpn. v. Inspecting Assistant Commissioner (IT Appeal No. 2577 (Hyd.) of 1988) and the judgment of the A.P. High Court in the same case on a reference and we find that the A.P. High Court has set aside the order of the Tribunal and has restored the matter its file for re-adjudicating the issue in the light of the scheme and the modalities. Since this finding of the Tribunal, which was in favour of the assessee, was set aside by the A.P. High Court, it would not hold the field and does not render any assistance to the assessee. In the instant case, copy of the scheme is filed before us and from its careful perusal, we find that the assessee was under an obligation to collect the guarantee fees from its borrower and also to make the payment of the same to the corporation. If he does not make the payment to the corporation and utilized it for its own purpose, it would partake the character of business receipts of the assessee in the light of the judgment of the Apex Court in the case of Chowranghee Sales Bureau (P.) Ltd. (supra) and Sinclar & Murray & Co. (P.) Ltd. (supra) and is chargeable to tax. Following the view taken by the Apex Court in the case of Sinclair & Murray & Co. (P.) Ltd. (supra) we are also of the view that whenever the assessee makes the payment of the guarantee fees collected from the borrowers to the corporation i.e., DICGC or refunds to the borrower, the assessee would be entitled to claim deduction of the sum so paid. We, order accordingly.
13. to 15. (These paras are not reproduced here as they involved minor issues.)
16. The next issue in ITA No. 987/Mum./1994 relate to the deduction of subsidy from cost of maintenance for depreciation.
17. The facts borne out from the record are that during the year assessee received computer subsidy from IDBI. The assessing officer reduced this amount from the cost of the computer purchased and accordingly depreciation allowable to the assessee has been reduced by an amount of Rs. 1,66,650. According to the assessee, subsidiary was given by the IDBI to the assessee with a view to encourage computerization and not for meeting cost of the parts incurred by it. It was therefore argued that subsidy received was the capital receipt unconnected to the cost incurred for purchase of computers and therefore, the assessing officer was not justified to deduct the amount of subsidy from the cost of computer. The assessee has also placed a reliance upon the Bombay High Court judgment in CIT v. Elys Plastics (P) Ltd. (1995) 188 ITR 11 (Bom). The Commissioner (Appeals) re-examined the issue, but, was not convinced with the assessee's contention and he observed that the expenditure incurred on computers was an integral part of the purpose for which subsidy had been given. He, accordingly, hold that assessing officer has rightly reduced the said sum of Rs. 5 lakhs from the cost of computer.
18. Now the assessee has preferred an appeal before the Tribunal with the submissions that the said subsidy was given by IDBI with a view to encourage computerization not for meeting cost of the parts, incurred by the assessee and hence it should not be reduced from the cost of the computer. In support of his contention, he has relied upon the following judgments:
CIT v. P.J. Chemicals Ltd. (1994) 210 ITR 8301 (SC) and CIT v. Elys Plastics (P.) Ltd.
19. The learned DR on the other hand has submitted that this subsidy was given to meet the expenditure to be incurred on the part of the computer. Since the subsidy was not granted to encourage computerization, it cannot be called to be a capital subsidy. In support of his contention, he has relied upon the judgment of the Apex Court in the case of Sahney Steels &Press Works Ltd. v. CIT in which it has been held that once subsidiary is granted by the Government to enable the assessee to run the business more profitably and for not setting up of the industry, it is his operation subsidy and hence a revenue receipt.
20. We have carefully examined the orders of the lower authorities in the light of rival submissions and the relevant judgments referred by the parties and we find that in the case of Sahney Steels & Press Works Ltd. (supra), their Lordship of the Apex Court have laid down the guidelines or the criteria to work out whether subsidy granted to the assessee is a capital receipt or a revenue receipt. It has been held specifically that what is material to determine the nature of subsidy is the purpose of which it has granted and not the source of grant. If the purpose is to help the assessee to set up its business or a complete project, the monies must be treated as to have been received for capital purpose, but, if the monies are given to the assessee for assisting him in carrying out the business operation and the monies given only after the commencement of production, such subsidies must be treated as assistance for the purpose of trade and revenue in nature. In the instant case, undisputedly, the subsidy was granted to the assessee, but, the relevant factor on the basis its nature can be determined are not placed before us during the course of hearing. In the absence of relevant material, it is not possible for us to determine the nature of subsidy. We, therefore, of the view that it requires a re-adjudication by the assessing officer in the light of the guidelines laid by the Apex Court in the case of Sahney Steels & Press Works Ltd. (supra). Accordingly, we, set aside the order of the Commissioner (Appeals) in this regard and restore the issue to the file of the assessing officer with a direction to re-adjudicate in the light of the aforesaid judgment of the Apex Court.
21. The next issue in ITA No. 987/Bom./1994 relate to disallowance of maintenance charges included in the cost for the purpose of Section 32AB.
22. The facts borne out from the record are that the assessee purchased computers at Rs. 15,53,292 and paid sales tax at Rs. 64,153, Octroi Rs. 53,982, maintenance charges Rs. 1,73,640, electrical fittings Rs. 81,425 and other expenses amounting to Rs. 38,145. The assessee claimed the entire expenditure as part of cost of the computers. The assessing officer did not agree with regard to the maintenance charges and he accordingly disallowed the deduction under Section 32AB on maintenance charges included by the assessee in the cost of computers. The assessee preferred an appeal before the Commissioner (Appeals) with the submissions that maintenance charges were one of the ingredients of the purchase price because it is a well known fact that the manufacturers, with a view to reduce their tax burden, spilt their sales price under various heads. The Commissioner (Appeals) was not satisfied with the explanation of the assessee and he accordingly confirmed the order of the assessing officer.
23. Now the assessee preferred an appeal before the Tribunal and raised a similar argument. But, no evidence in this regard has been placed before us in support of his contention that maintenance charges are the part of the cost of the computers, whenever computers are purchased the assessee is required to spend some amount towards annual maintenance on computers, which can only be claimed to be the revenue expenses. We, however, carefully examined the order of the lower authorities, but, we do not find any infirmity therein. Accordingly, we confirm the disallowance.
24. The next issue with regard to disallowance of payments made to Udyog Mitra, MCED and Mitcon are raised in ITA Nos. 7783/Mum./94, 270/Mum./95, 6088/Mum./96 and 1936/Mum./99 and the facts borne out from the record are that assessee has made certain payments to Udyog Mitra, MCED and Mitcon as per the guidelines of the State Government and Central Government and debited it to the P&L account. This claim was disallowed by the assessing officer on the ground that it was not incurred for the business purpose of the assessee. The assessee preferred an appeal before the Commissioner (Appeals), but, did not find favour with him.
25. Now the assessee is in appeal before the Tribunal with the submissions that with a view to avoid duplication of efforts, labour and consequential wastage of time, money and in order to achieve more effective output of the various lending institutions, set up for encouraging entrepreneurship and industrialization in the various region, certain specialized bodies had been set up by the Government of Maharashtra to assist the financial institutions set up to carry out their objectives. The expenses incurred by these bodies are in turn borne by the financial institutions by way of contribution. MCED is an institution permitted by the Government of Maharashtra to give training/information to new entrepreneur about starting industries in the State of Maharashtra and the infrastructure facilities available to them for starting the industries. The governing body of the institutions in which the Managing Director of the assessee corporation is a Member, decides about the activities of the institutions. The expenditure of the said institutions are shared by various State Level Corporations i.e., Maharashtra Tourism Development Corporation (MTDC), the assessee MSFC, State Industrial and Investment Corporation of Maharashtra Limited (SICOM), Maharashtra Small Scale Industries Development Corporation Limited (MSIDCL). A photo copy of the letter dated 4th November, 1986 received from the Secretary (Industries), Government of Maharashtra in this regard is also placed on record. Similar is the position of the Udyog Mitra which was established in November, 1979 with an object to achieve proper coordination and issuance of requisite sanction or clearances speedily for the new industries coming up in the State of Maharashtra. Its management is consisted of representatives of various State level corporations with a view to address the problems faced by entrepreneurs in setting up their projects. The expenditure incurred on office, staff, advertisement and publicity, books and ventures, etc., are to be borne by the State Industrial and Investment Corporation of Maharashtra and then equally by the State level corporations represented by Udyog Mitra. The assessee corporation therefore, has been contributing towards the expenses of Udyog Mitra every year. Similar is the position with regard to the Mitcon which is a joint venture company floated by ICICI, IDBI, ICFI, MHFC and other various commercial Banks to render industrial and technical consultancy in various backward regions of the State. Since such organizations are initially bound to make a loss in its gestation period, it was decided at the time of its incorporation that its losses for the initial year would be borne by the various promoters. The assessee being one of them in their share holding ratio, has contributed to the said losses. The learned Counsel for the assessee further contended that the above payments are made pursuant to the directions of the State Government and are not in the nature of donations, but, are incurred wholly and exclusively for the purpose of business of the assessee. In support of his contention, assessee has relied upon the following judgments:
(1) Sri Venkata Satyanarayana Rice Mill Contractors Co. v. CIT .
(2) CIT v. Madras Refineries Ltd.
(3) Mysore Kirloskar Ltd. v. CIT .
25.1 The learned Counsel for the assessee further contended that the assessee has incurred these expenses to promote the industrial growth of the State of Maharashtra. As such, it was the expenditure, incurred for the purpose of business of the assessee.
26. The learned DR on the other hand has placed heavy reliance upon the order of the Commissioner (Appeals).
27. Having given a thoughtful consideration to the rival submissions and from a careful perusal of the record, we find that undisputedly the assessee is a public sector of the State Government and was set up to provide the financial assistance to various industrial units. The MCED, Udyog Mitra, Mitcon were also promoted by the State Government to give training/information to new entrepreneurs in order to set up their industries within the State. When these institutions are promoted by the State Government for public welfare or to provide assistance to the new entrepreneurs and for a financial growth of the State, some expenditure are bound to incur and as per the decision taken by the State Government these expenses are to be borne by the State Government public sectors. Being one of them, the assessee has also required to share the burden of the expenditure incurred by these institutions. Meaning thereby, whatever expenditure are incurred by the assessee-corporation i.e., assessee, it was incurred for the public welfare and for the betterment of the State. In the case of Madras Refineries Ltd. (supra), their Lordships of the Apex Court have held that the concept of business is not a static. It has evolved either a period of time of include within its fold the concrete expression of care and concern for the society at large and the people of the locality in which the business is located in particular. Being known as a good corporate citizen brings goodwill of the local community, as also with the regularity agencies and the society at large, thereby, creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill. Money is spent for bringing drinking water as also for establishing or improving the school meant for the residents of the locality in which the business is situated, cannot be regarded as being wholly outside the ambit of the business concern of the assessee, especially, where the undertaking owned by the assessee. Therefore, the entire amount of expenditure is to be allowed as a business expenditure.
28. In the case of Sri Venkata Satyanarayana Rice Mills Contractors Co. (supra), their Lordships of the Apex Court, have held that what is to be seen is not whether it was compulsory for the assessee to make the payment or not. But, the correct test is that of commercial expediency. As long as the payment which is made for the purpose of the business, and the payment made is not by way of penalty for infraction of any law the same would be allowable as deductions. Contribution which was made by the assessee could under no circumstances be regarded as illegal payments or payment which were opposed to a public policy if it is contributed to a public welfare fund which is directly connected or related with the carrying on the assessees business or which results into the benefit of the assessee business has to be regarded as an allowable deduction under Section 37(1) of the Act. Such a donation, whether voluntary or at the instance of authorities concerned, when made to a Chief Ministers Draught Relief Fund or a District Welfare Fund established by the District Collector or any other fund for the benefit of the public and with a view to secure benefit to the assessees business, cannot be regarded as payment opposed to a public policy. There is no law which prohibits to make all such donations. The mere fact that making of a donation for a charitable or a public cause or in public interest results in the Government giving patronage or benefit can be no ground to deny the assessee, a deduction of that amount under Section 37(1) when such payment had been made for the purpose of assessees business.
29. If we examine the facts of the case in the light of the ratio laid down by the Apex court and the Madras High Court in the aforesaid cases, we find that assessee is a State Government Public Sector and the other institutions were promoted by the State Government for the public welfare and the growth of the State with a clear understanding that the expenses incurred by these institutions are to be borne by other Public Sectors of the State. It is also an admitted fact that the assessees representative is the part of the management of these institutions. Since the object of the institutions is a public welfare and the growth of the State and the assessee has made some contributions therein, that contributions cannot be called to be as against the public policies and not for the business purposes. Following the ratio laid down in the aforesaid case, we are of the view that the contributions made by the assessee in these institutions is an allowable deduction under Section 37(1) of the Income Tax Act. We, therefore, direct the assessing officer to allow the claim of the assessee. Accordingly, the additions made in this regard are hereby deleted.
30. The last issue relates to disallowance of credit guarantee fees re-paid during the year. This issue was adjudicated by us while dealing with the addition on account of fees paid to deposit insurance credit guarantee corporation and we have given a specific direction that whenever guarantee fees are paid either to DICGC or refunded to the borrowers, a credit of the same should be given in the respective years. We, therefore, do not find any justification to give a further direction in this regard. Accordingly, this issue is disposed of.
31. In the result, appeals of the assessee are partly allowed for statistical purposes.
32. In the result, revenues appeal is partly allowed for statistical purposes.