Income Tax Appellate Tribunal - Ahmedabad
Elscope Pvt. Ltd. vs Income Tax Officer. (Also Ito V. Elscope ... on 16 April, 1993
Equivalent citations: (1993)46TTJ(AHD)620
ORDER
R. L. SANGANI, J. M. :
These appeals were heard together with the consent of the parties and are being decided by this common order.ITA No. 743/Ahd/1983 :
2. The assessee in this appeal is Elscope Pvt. Ltd. The assessment year is 1978-79.
3. At the time of hearing of these appeals the assessee has filed a chart in respect of each of the grounds and arguments were presented on the basis of that chart.
4. The first ground relates to guest house expenses amounting to Rs. 5,368. It is admitted before us that the point in controversy was covered by the decision of the Tribunal dt. 19th Dec., 1985 in the case of Predecessor Company Sarabhai Chemicals Pvt. Ltd. in ITA No. 1261/Ahd/1982 and No. 961/Ahd/1982 relating to asst. yr. 1976-77 wherein the Tribunal had confirmed the decision of CIT(A) and had allowed guest house expenses to the extent of 1/3rd as attributable to employees and Reference Application in that case was rejected by the Tribunal by order dt. 25th Sept., 1986 in R. A. No. 157/Ahd/1986. This ground was not pressed and is rejected.
5. Ground No. 2 relates to expenses for increase in authorised capital. The amount involved is Rs. 70,000. It is admitted before us that the point in controversy was covered against the assessee by paras 7 and 8 of the aforesaid decision of the Tribunal in the case of Sarabhai Chemicals Pvt. Ltd. and Reference Application in that case had been rejected by order dt. 25th Sept., 1986 in R. A. No. 157/Ahd/1986. The assessee relies on decision of Madras High Court in the case of CIT vs. Kisanchand Chellaram (India) P. Ltd. (1981) 130 ITR 385 (Mad) and the decision of Karnataka High Court in the case of Hindustan Machine Tools Ltd. vs. CIT (1989) 175 ITR 220 (Kar). We find that there is difference of opinion amongst High Courts on this point. We respectfully follow earlier decision of Tribunal and reject this ground.
6. Ground No. 3 relates to Guarantee Commission. The amount involved is Rs. 3,16,668. It is admitted before us that the point in controversy was covered against the assessee by paras 23 to 27 of the aforesaid decision of the Tribunal in the case of Sarabhai Chemicals Pvt. Ltd. and that the Tribunal has granted Reference and the matter is pending before the High Court. The assessee wants to keep the issue alive. We respectfully follow said decision and reject the ground raised by the assessee.
7. Ground No. 4 relates to building repairs. The amount involved is Rs. 1,04,776.
7(i). The ITO has observed that the expenses have been claimed on renovation, additions and alterations to the toilet and the guest house pertaining to Sarabhai Common Services division. According to him, the amount consists of two items viz. Rs. 70,104 and Rs. 34,672. The ITO examined the details furnished by the assessee and found that the old structure was completely demolished and a new building was constructed from the foundation itself. According to the ITO the expenditure was capital in nature and it was an expenditure on the new constructed building. He accordingly disallowed the deduction as revenue expenditure.
7(ii). Before the CIT(A) it was submitted that an old toilet and some parts of the building were dismentled and that it was not correct to say that entire super-structure was rebuilt. In the statement of facts before the CIT(A) it was mentioned that during the year under consideration major renovation of the existing Rest House was made and that the existing toilets were demolished and replaced with new facilities. Dimension of roads were changed and that the amounts of Rs. 70,104 and Rs. 34,672 were spent towards renovation. It was submitted that the amount was spent for the purpose of modernising the facilities in the Rest House and that the existing structure was renovated. The CIT(A) examined the details of the work done and observed that on going through those details it was obvious that the expenditure was not on the work which could be described as repairs but expenditure was on work which was done by way of additions and alterations and as such the amounts fell into capital field.
7(iii). A copy of note on renovation is filed at page 32 of the paper book. Attention was also drawn to statement of facts before the CIT(A) at page 9 of the paper book.
7(iv). We have considered the rival submissions and facts on record and we see no justification in taking a view different from that taken by the CIT(A). Looking to the nature of work done, the expenditure in question would fall in the capital field. We accordingly reject this ground.
8. Ground No. 5 relates to addition on account of purchases amounting to Rs. 4,72,232.
8(i). The CIT(A) has set aside the finding of the ITO on this point with direction to record fresh finding. It was submitted before us that fresh assessment has already been made wherein the ITO added a small sum of Rs. 17,962 for which the assessee had preferred an appeal before the CIT(A) who had deleted the said addition of Rs. 17,962 by order dt. 5th May, 1986. In view of these subsequent events, the assessee did not want to press this ground. This ground is accordingly rejected.
9. Ground No. 6 relates to Commutation charges of Rs. 32,50,557. In fact this is a main ground on which elaborate arguments have been made. We shall deal with this ground after deciding the other grounds.
10. Ground No. 7 relates to gratuity liability of Rs. 2,95,207. It was admitted before us that the point in controversy was covered against the assessee by the decision of the Supreme Court in the case of Sajjan Mills Ltd. vs. CIT (1985) 156 ITR 585 (SC). The assessee therefore did not want to press this ground. This ground is accordingly rejected.
11. Ground No. 8 relates to closing stock. The amount involved is Rs. 19,37,411.
11(i). The CIT(A) has set aside the finding of the ITO on this point with direction to the ITO to record fresh finding. It is submitted before us that fresh assessment was made by the ITO and the ITO has deleted the entire addition on this count and hence no further adjudication was necessary. The assessee therefore did not press this ground. This ground is accordingly rejected.
12. Ground No. 9 relates to deduction under S. 80MM of the Act. The amount involved is Rs. 11,34,243.
12(i). It was admitted that identical ground had been decided against the assessee in the above mentioned case of Sarabhai Chemicals Pvt. Ltd. It was also submitted that Special Leave Petition Nos. 7325, 7344 & 7349 of 1982 had been filed in the Supreme Court but they were dismissed by order dt. 26th April, 1983. Consequently, the assessee did not want to press this ground. This ground is, therefore, rejected.
13. Ground No. 10(a) relates to extra shift allowance on electrical machinery of Sarabhai Machinery Division. The amount involved is Rs. 10,263.
13(i). The CIT(A) observed that the details given by the assessee indicated that machinery in question consisted of switch boards and electrical tube expender control unit.
13(ii). We have considered the rival submissions and facts on record. It had been specifically mentioned in depreciation table as follows :
"The extra shift allowance shall not be allowed in respect of any item of machinery or plant which has been specifically excepted by inscription of the letters "NESA" (meaning No Extra Shift Allowance) against it in sub-item (ii) above and also in respect of the following items of machinery and plant to which the general rate of depreciation of 10 per cent applies :
(1) Electrical machinery switchgear and instruments, transformers and other stationery plant and wirings and fittings of electric light and fan installations;. (2) to (10).
Considering the relevant items, we are of the opinion that the ITO had rightly disallowed extra shift allowance. We, accordingly, confirm the disallowance.
14. Ground No. 10(b) raises dispute whether the rate of depreciation should be 10% or 15%. The amount involved is Rs. 70,163.
14(i) It is admitted before us that this point was been decided against the assessee by Tribunal in the assessees own case for asst. yr. 1977-78 by order dt. 1st May, 1987 in ITA No. 1044/Ahd/1984 and Reference Application filed by the assessee has been rejected by Tribunal by order dt. 9th Nov., 1987 in R. A. No. 697/Ahd/1987 and hence this ground was not pressed. This ground is accordingly rejected.
15. Ground No. 11(a) relates to investment allowance on R & D Assets and the amount involved is Rs. 21,770. This ground was not pressed and hence is rejected.
16. Ground No. 11(b) relates to Investment Allowance in respect of Elscope Division and the amount involved is Rs. 1,12,125. It was submitted that in fresh assessment the ITO has granted investment allowance in respect of Elscope Division Consequently this ground was not pressed. It is accordingly rejected.
17. Ground No. 11(c) and (d) are in respect of investment allowance pertaining to Sarabhai Common Services Division and Sarabhai Chemicals Division. The amounts involved are Rs. 17,905 and Rs. 43,393. These grounds were not pressed because of the fact that they were going to be finally decided in ITA No. 2236/Ahd/86. They are accordingly rejected.
18. Ground No. 12 relates to foreign tour expenses of Dr. K. Ramanathan and the amount involved is Rs. 7,903.
18(i). The ITO has disallowed this claim on the ground that this was capital expenditure. The CIT(A) went through the correspondence made with RBI for obtaining foreign exchange and found that the tour was undertaken by Dr. K. Ramanathan mainly for purchase of machinery. It was submitted before the CIT(A) that the tour was undertaken for business purpose and no benefit of enduring nature had resulted to the assessee company. The CIT(A) held that the main purpose of the tour was the purchase of machinery and hence the amount represented additional expenditure incurred for purchase of machinery and the ITO was justified in disallowing it as capital expenditure. He accordingly confirmed the disallowance.
18(ii). The learned counsel for the assessee has drawn our attention to pages 28 and 76 to 79 of the paper book. It was submitted that total expenditure of Rs. 39,96,303 and that 20% thereof was debited to the assessee-company. The fact that the tour was undertaken for purchase of machinery is not disputed. The expenditure would obviously fall in the capital field and hence was rightly disallowed. We accordingly reject this ground.
19. Ground No. 13 relates do deduction under S. 80J and the amount involved is Rs. 1,58,873. This ground was not pressed in view of the decision of Supreme Court in the case of Lohia Machine Ltd. vs. Union of India (1985) 152 ITR 308 (SC). It is accordingly rejected.
20. The last ground relates to interest under S. 215 of the Act. This ground shall be dealt with after the decision on ground No. 6.
21. As already stated, ground No. 6 pertains to commutation charges and the amount involved is Rs. 32,50,557. The facts are that the assessee had acquired four divisions during the year as going concerns alongwith their assets and liabilities which included amounts payable to four investment companies in five annual equal instalments in respect of purchases of the industrial units acquired by Sarabhai Chemicals Pvt. Ltd. from Karamchand Premchand Pvt. Ltd. (KPPL). The amount due to those investment companies was, by mutual agreement, commuted at a discounting rate of 12% and the difference of Rs. 32,50,557 was credited to the capital reserve of the assessee-company. As a result of commutation the amounts payable to those four investment companies in five equal instalments became payable on demand with interest. In reply to show cause notice the assessee explained vide letter (page 379 of the paper book) that the amount was not of the character of income or deemed income and that it had nothing to do with the trading activities of the assessee. It was submitted that the amount represented capital receipt and was not liable to tax. The ITO rejected the submissions of the assessee and observed that the assessee had acquired going concerns and had transferred the same within a period of four months w.e.f. 1st July, 1977 and the profit arising on the reduction of liabilities was thus trading profit which was liable to tax as business income of the assessee. He, therefore, assessed the amount of Rs. 32,50,557 as assessees income. In the alternative, he held that the said amount was liable to tax as capital gains arising to the assessee on short-term basis.
22. The details of commutation charges were as under :
"Name of the Investment Company Liability as on 30/6/1977 Commutation charges at the discounting rated of 12 % Amount payable in lump sum on demand Rs.
Rs Rs Kailash Inv. Pvt. Ltd.
64,42,365.00 12,01,782.47 50,40,582.53 Dhaulgiri Inv. Pvt. Ltd.
12,15,000.00 2,33,924.17 9,81,075.83 Malbar Invest. Pvt. Ltd.
31,21,875.00 6,01,055.11 25,20,819.89 Nilgiri Invest. Pvt. Ltd.
62,92,365.00 12,13,815.69 50,78,549.31 168,71,605.00 32,50,597.44 136,21,027.56"
The CIT(A) held that the amount in question was not chargeable to tax under S. 41(1) as it did not represent a remission of a trading liability within the meaning of S. 41(1) of the Act, particularly when no allowance or deduction had been made in the assessment of the assessee for any of the earlier years in respect of any loss, expenditure or the said liability and hence the prerequisites for invoking S. 41(1) were absent. He further held that the amount was not liable to tax as short-term capital gain because the conditions under S. 45 were not satisfied inasmuch as the said liability was not capital asset and further there was no transfer of any capital asset at the time of commutation. The CIT(A), however, held that the transaction of purchase of industrial undertakings by the assessee and sale thereof within period of four months amounted to adventure in the nature of trade and hence the amount of Rs. 32,50,557 represented revenue income under S. 28 of the Act. He upheld the addition on this ground.
23. The submissions on behalf of the assessee before us were that the aforesaid amount of Rs. 1,68,71,605 was payable to the respective companies in five annual equal instalments as per the original agreement and that what all that had happened was that the terms and conditions of the original agreement were modified with mutual agreement with the result that the amounts became payable on demand and as such this was a case of reduction of capital liability and not earning of any profits from the transactions. Reliance was placed on the following decisions :
1. Sutlej Cotton Mills Ltd. vs. CIT (1979) 116 ITR 1 (SC),
2. CIT vs. Harikishan Jethalal Patel (1987) 168 ITR 472 (Guj),
3. D. S. Virani & Ors. vs. CIT (1973) 90 ITR 255 (Guj),
4. Bengal & Assam Investors Ltd. vs. CIT (1966) 59 ITR 547 (SC).
24. The submission on behalf of the Department, on the other hand, is that acquisition of industrial undertakings and disposal thereof within period of four months amounted to transaction in the nature of trade and commutation amount represented Revenue profit. In the alternative, it was submitted that the said amount represented short-term capital gains. Reliance was placed on certain decisions of the Tribunal and also on the following decisions :
1. CIT vs. Mogul Line Ltd. (1962) 46 ITR 590 (Bom),
2. B. Guha & Co. vs. CIT (1958) 34 ITR 873 (Punj),
3. Bhagwan Dass Jain vs. Union of India & Ors. (1981) 128 ITR 315 (SC),
4. CIT vs. Smt. Shanti Meattle (1973) 90 ITR 385 (All),
5. Delhi Stock Exchange Association Ltd. vs. CIT (1961) 42 ITR 495 (SC).
25. We have considered the rival submissions and facts on record. We find that the difference between the total amount payable in five annual equal instalments and the total amount payable on demand represented reduction in the capital liability. The reduced amount represented present value of the original liabilities which were payable in future and in instalments, at the discounting rate of 12%. Such commutation charges did not have characteristic of income. The said sum of Rs. 1,68,71,605 representing unpaid purchase consideration payable for the undertakings and the business acquired by the assessee, was never claimed as an allowance or deduction in the assessment of the assessee for any year and hence commutation charges representing reduction in such liability could not be treated as deemed income. The business of the assessee was not that of acquiring trading concerns or industrial units as stock in trade and selling the same. If the business of the assessee had been that of acquiring industrial units as stock in trade and then selling the same, the assessee would not have carried on the manufacturing activity during the intervening period. The fact that the assessee carried on manufacturing activity and thus run the industrial units in the intervening period indicated that the undertakings had been acquired for carrying on business and hence undertakings in question represented capital assets of the assessee and not trading assets. The transaction could not also be regarded as adventure in the nature of trade. No industrial unit had been acquired from any outside party. The industrial unit had been acquired and then disposed of under the scheme of re-organisation of units of Sarabhai Group. Mere fact that clause in memorandum and articles of association empowered the assessee to acquire industrial undertakings would not mean that it was the business of assessee to acquire the same.
26. The CIT(A) has admitted that the liability in question was capital liability in the hands of Sarabhai Chemicals Pvt. Ltd. since it arose as part of the consideration for the purchase of industrial undertakings. However, according to him, these liabilities could not become capital liabilities in the hands of the assessee who was successor and that the nature of those liabilities in the hands of the assessee would be required to be determined in the context of the circumstances and the nature of business of the assessee. We find that even when the circumstances and nature of business of the assessee were examined, it would be found that the business of the assessee was not that of acquiring business concerns as stock in trade and selling the same and hence the said liability which was admittedly capital liability in the hands of Sarabhai Chemicals Pvt. Ltd. would not become liability in the hands of the assessee.
27. The CIT(A) has also observed that the assessee was wholly owned subsidiary of the vendor Sarabhai Chemicals P. Ltd. and the assessee had transferred the undertakings to Ambalal Sarabhai Enterprises P. Ltd. which was another subsidiary of Sarabhai Chemicals P. Ltd. and that prior to said transfer, land and building had not been legally transferred in favour of assessee but were only subject matter of agreement of purchase dt. 28th Feb., 1977. We find that this circumstance is of no relevance. This is because the properties which are held under agreement of purchase could be legally transferred. In such cases what would be transferred would be the right of the seller to obtain conveyance from the original vendor. Consequently, nothing turns on these facts.
28. The CIT(A) has also observed that floating of the subsidiary company and the transfer of industrial undertakings from the holding company to a subsidiary company and from the subsidiary to further subsidiary, has been practised by the assessee as a scheme of tax planning. It is not clear from the order of the CIT(A) as to what savings in tax has been made by the assessee. If the CIT(A) was of the opinion that transactions were of colourable nature or were not real transaction and were sham and bogus, then the finding to that effect should have been recorded and all consequences that followed from said finding should have been given effect to. However, it is not the finding of the CIT(A) that the transactions in question were colourable in nature and were sham and bogus. The transactions have been treated by the CIT(A) as real transactions. Consequently, legal consequences of transactions should be given effect to. The documents on record clearly indicate that the transactions in question have taken place in the course of re-organisation of business of what is known as "Sarabhai Enterprises." The intention was to transfer the undertakings to Public Limited Companies through subsidiaries. Nothing objectionable has been found by the CIT(A) in this process.
29. The assessee has filed documents including copy of prospectus to show that the transactions had taken place in the course of re-organisation of the undertakings of Sarabhai Group. It is not necessary to refer to all those documents. Suffice it to say that materials on record do not at all indicate that reduction in liability by way of commutation resulted in any profit under S. 28 of the Act and as such the said amount could not have been added to the income of the assessee. We accordingly delete the same.
30. Before parting we may mention that it is not necessary to refer to large number of decisions which have been cited by the parties because on the facts of the present case there could not be any dispute on the principle of law that would be applicable.
31. We may also mention that the plea of the learned Departmental Representative that the amount represented short-term capital gains, is unsustainable in view of the fact that there was no capital asset and there was no transfer as far as transaction of commutation of liability was concerned.
32. The last ground relates to interest under S. 215 of the Act. The assessee has given working which indicates that if the assessees plea regarding commutation charges (Rs. 32,50,557) and building repairs (Rs. 1,04,776) are accepted, no interest under S. 215 would be payable because advance tax paid would be more than 75% of the tax payable. However, we have not upheld the plea of the assessee regarding building repairs. The assessee has relied on decision of Gujarat High Court in the case of CIT vs. Bharat Machinery & Hardware Mart (1982) 136 ITR 875 (Guj) and certain Tribunal decisions. We find that those decisions are not applicable to the facts of the present case. The interest under S. 215 would be consequential. We accordingly direct the ITO to recompute the interest after giving effect to the order of the Tribunal.
ITA No. 856/Ahd/198333. This appeal by the assessee relates to asst. yr. 1979-80. The only ground in this appeal pertains to commutation charges of Rs. 24,59,188 which has been treated as income by the ITO. The CIT(A) has confirmed the order of the ITO. The facts are stated in the orders of the ITO as well as in the order of CIT(A) and need not be stated again in the present appeal. It is admitted before us that the point in controversy was identical to that in the appeal for asst. yr. 1978-79 and that the decision on that point in said appeal would govern the decision in the present appeal. For reasons given while dealing with the appeal for asst. yr. 1978-79 we hod that commutation charges did not represent income of the assessee. We accordingly delete the addition of said amount.
ITA No. 756/Ahd/1983 :34. In this Departmental appeal the following two grounds have been raised :
"(1) The learned CIT(A) has erred in law and on facts in holding that contribution made to Sarabhai Research Centre is an admissible deduction under S. 35(1)(i) and alternatively under S. 37 of the IT Act.
(2) The learned CIT(A) has erred in law and on facts in holding that the contribution to Provident Fund made by the assessee in respect of employees of STDS Pvt. Ltd. was admissible under S. 37 of the IT Act."
35. After hearing the parties we find that ground No. 1 was covered in favour of assessee by the decision of Tribunal in the case of Sarabhai Chemicals P. Ltd. for asst. yr. 1976-77 referred to above and Departments reference application has been rejected by the Tribunal by order dt. 12th Aug., 1986 in R. A. Nos. 230 & 231/Ahd. It was submitted before us that reference to the High Court was also rejected by order dt. 7th Sept., 1987 in ITA No. 172 of 1987. We accordingly reject the said ground.
36. As regards second ground we find that the point in controversy was covered in favour of assessee by the decision of Gujarat High Court in the case reported in 128 ITR 712 (sic). We respectfully follow said decision and reject the ground raised by the Department.
37. The appeal ITA No. 743/Ahd/1983 is partly allowed. The appeal ITA No. 856/Ahd/1983 is allowed. The Departmental appeal is dismissed.