1. The above referred appeals have been filed by the assessee arising out of a consolidated order dated 11/12/96 of CIT (A) XXXVII, Mumbai.
For the sake of convenience both the appeals are hereby decided by this common order.
2. Ground No. 1 is in respect of confirmation of disallowance of legal and professional fees of Rs. 1,35,000/-.
3. The A.O. has mentioned that an amount of Rs. 1,35,000/- was paid to M/s. Anand Pvt. Ltd. for arranging Bridge Loan from ANZ Grindlays Bank New Delhi and for disposing the convertible debentures of M/s. Gabriel India Ltd. The AO has observed that this concern M/s. Anand Pvt. Ltd. being assessee's sistern concern, therefore, asked to file the confirmation letter in respect of work done for which the assessee has made the said payment. The A.O. has recorded that the assessee has expressed its inability to produce the confirmation from ANZ Grindlays Bank. In the absence of any evidence the claim of legal and professional expenses were disallowed.
4. In first appeal Id. CIT(A) has again reiterated the same facts as mentioned by A.O. and mentioned that the appellant has against filed to produce any documentary evidence in support of claim of expenses. The addition was confirmed.
5. On behalf of the assessee Id. A.R. Shri H.P. Manajani submitted that the assessee is an investment company holding shares of various companies. M/s. Gabriel India Ltd. offered partly convertible debenture, however, the company had insufficient funds to avail this attractive offer, therefore, sought help for arrangement of finance so that the debentures could be purchased. Through good officers of Anand Pvt. Ltd. the Bridge Loan of Rs. 10.00 lakhs was arranged. Subsequently for buying back of of said debentures the goods offices of Anand Pvt.
Ltd. were utilized. Since the assessee had not direct dealing with ANZ Grindlay Bank, therefore, for arrangement of Bridge Loan and for buying back of non convertible portion of debentures the contacts of Anand Pvt. Ltd. were exploited. For this services Anand Pvt. Ltd. raised a debit note, photo copy filed, and the assessee has claimed the expenses which was wrongly disallowed.
6. On behalf of the revenue Id. D.R. Shri Prawin Kumar has strongly supported the orders of A.O. and Ld. CIT(A) and argued the neither before the revenue authorities nor at this stage any proof of service rendered was filed. It is an admitted fact as borne out from the orders that no independent evidence was produced. The self declaration of statement should not be relied upon because the onus was not discharged and the payment was made to its sister concern.
7. We have carefully heard the rival submissions and also thoroughly perused the impugned orders and have found that the assessee was unable to produce any satisfactory independent evidence as required by the revenue authorities. The assessee has failed to discharge its onus to establish the genuineness of claim of legal or professional expenses.
During the course of assessment proceedings it was asked to place on record a confirmation letter from ANZ Grindlys Bank to ascertain the fact the Bridge Loan was provided through the services of M/s. Anand Pvt. Ltd. however, no such evidence was produced. Only on the basis of self serving statement and debit note the assessee has tried to claim the said legal expenses which according to us were rightly rejected in the absence of any satisfactory or cogent material. This ground of the assessee is rejected.
8. Ground No. 2 is in respect of claim of deduction u/s. 80HH on sale of Scrap.
9. The assessee company has claimed deduction u/s. 80HH @ 20% of Rs. 4,07,138/- amounting to Rs. 81,428/-. On perusal the A.O has found that an amount of Rs. 38,130/- was included in the profits which was in respect of sale of scrap. According to A.O the deduction u/s. 80HH could be available only on the profits and gains derived from industrial undertaking and not from income incidental to the activity of industrial undertaking, therefore, for the purpose of determining the deduction u/s 80HH the income shown from sale of scrap to be excluded. Accordingly the profit from industrial undertaking as claimed was reduced by the amount of sale of scrap and on the balance amount deduction u/s 80HH at Rs. 73,802/- was computed.
10. In first appeal Id. CIT(A) was of the opinion that the generation of scrap was only incidental to the manufacturing activity which could not be considered as income "derived from industrial undertaking".
Accordingly to Id. CIT(A) generation of scrap was independent to manufacturing activity, therefore, not entitled for claim of deduction u/s. 80HH and the action of the A.O was confirmed.
11. Before us Id. AR has submitted the facts of the case as mentioned in above paras and in support of the claim cited a decision of Hon'ble Madras High Court in the case of Fenner (India) Ltd. 241 ITR 803.
12. On behalf of the Revenue Id. DR has supported the orders of the authorities below and argued that the sale of scrap cannot be said to be income derived from manufacturing activity as held by Id. CIT(A), therefore, the claim deserves to be dismissed.
13. We have carefully considered the submissions of both the parties in the light of the orders of the authorities below as well as the case law cited. In view of the facts referred above we have carefully considered the precedent of Hon'ble Madras High Court in the case of Fenner (India) Ltd. (supra) wherein it is expressed that, "the scrap materials had direct link of nexus with the industrial undertaking, therefore, profit from the sale of the scrap materials was eligible for deduction u/s 80HH." Since this citation is directly on the issue before us, therefore, respectfully following the same we hereby reverse the finding of Id. CIT (A) and allow this ground.
14. Ground No. 1 as per ground of appeal has raised two issue, first is in respect of reopening of assessment u/s 147. Ld. AR has contested that due to change of opinion the assessment was reopened u/s 147 r.w.s. 148 which is not permissible. In support of this contention he has relied upon the decision of CIT (A) Vs. Kelvintor of India Ltd. 256 ITR 1 (Del) and IPCA Laboratories Ltd. 251 ITR 416 (Bom). On the other hand, Id. DR. has argued that there was not question of any change of opinion because as per the original assessment order passed u/s 143(3) there was not discussion on the issue of charge of tax, therefore, A.O has not formed any opinion at all in the original assessment order. Ld.
D.R. has also mentioned that charging of correct rate of tax was a mistake of law which was rightly cured by invoking the provisions of section 147.
15. After considering the facts and circumstances of the case we are of the opinion that the A.O has rightly invoked the provisions of section 147 r.w.s. 148. In the original assessment order apparently there is not reference in respect of charge of tax to be applied whether @ 45% or 50%,thus escaped the attention of the A.O. Having regard to the nature of issue involved, the case law cited by Id. Ar has altogether different set of facts, therefore, not applicable on facts of the instance case. for the purpose of section 147 where an assessment has been made but the income has been assessed at a lower rate the the same shall be deemed to be a case where income chargeable to tax has escaped the assessment as mentioned in Explanation-2 of proviso to section 147.
In view of the specific provision and the issue involved we are of the opinion that the case was rightly reopened by invoking section 147 r.w.s. 148, hence this ground is dismissed.
16. The next issue is in respect of applicability of Income Tax rate on the appellate company. The claim of the appellant is that the Income Tax rate at 45% plus surcharge should have been applied against which the A.O has applied income tax rate at 50% plus surcharge thereon. The ground also refers that the appellant company is neither a trading company nor an investment company, therefore, not liable to income tax at higher rate but falls under the category of lower rate of tax.
17. As per the order passed u/s 143(3) r.w.s. 148 dated 21/11/94 the A.O has observed that the rate of tax was wrongly charged by treating as a manufacturing company instead of charging the rate leviable on an investment and trading company. Originally the AO has levied the tax @ 45% plus surcharge however, on scrutiny of the income from various sources it was found that the income from manufacturing activity did not constitute more than 50%. The A.O has recorded that the gross total income of Rs. 8,58,759/- comprised of the following.
In the assessment order it was observed that the dividend income constitute only 48.9% and the income from trading activity from 2.16% which exceeded more than 50% and the income from manufacturing activity constituted only 48.93%. The relevant percentage of income was tabulated by Id. CIT (A) as follows.
According to A.O the percentage of income from trading and investment activities if considered together from more than 51% of the income and the percentage of income from manufacturing activity from only 48393% of total income, therefore, the rate of taxation to be levied should be at 50% as applicable to investment and trading company. In short, as per A.O. since the income from trading and investment activities if clubbed together, constituted 51% of total income,. therefore, it was held that the company was liable to tax @50% plus surcharge thereon. On the other hand, the contention of the appellant was that as per the relevant provisions of Finance Act, for determining composition of total income, the income under various heads required to be determined independently and not by clubbing of income of two head of income. It was contended that the assessee is neither an investment company and nor a trading company and the composition of gross total income established that the major activity was under the head "manufacturing", therefore, subject to tax at the lower rate i.e. 45%. It was also argued that the company has regularly been assessed as manufacturing industrial company and the slight shortfall in the manufacturing activity may not result into trading it as not industrial company.
18. In first appeal Id. CIT(A) has mentioned that admittedly for the year under consideration the income of the assessee from manufacturing activity was not more than 50% therefore, the company could not be said to be a manufacturing company. In a case where the assessee is a trading company or an investment company the rate of tax applicable should be 50% which was rightly applied as the company did not fall in the category of manufacturing company. Levy of tax @ 50% was up held.19. On behalf of the assessee Id. A.R. Shri H.P. Mananajani has vehemently opposed the charge of tax at 50% on the assessee. The first limb of argument of Id. A.R. was that the assessee has always been treated as manufacturing concern. In support he has drawn our attention on the original order for the same assessment year i.e. A.Y. 1991-92 dated 8/3/93 wherein as per the body of assessment order the A.O was mentioned that the assessee's business was of manufacturing of Central Tubes used in automobile industries. Ld. A.R has also mentioned that while passing the order u/s. 143(3) r.w.s. 148, the order in appeal, the nature of business in the assessment order was mentioned by A.O as manufacturing of Center Tubes and investment in shares. He has thus submitted that revenue authorities have actually admitted this fact that the assessee was in fact a manufacturing company during the year under consideration. There was a slight shortfall in the income from manufacturing activity due to which it was absolutely wrong on the part of the revenue authorities to change the character of the company from manufacturing to investment or trading company. His next argument was in respect of rate of income tax applicable in the case of company as per finance (No.2) Act, photocopy filed. ld. A.R. has argued that where the company is not a company in which the public are not substantially interested then the tax is to be charged either @ 50% or @45%. For charging to Tax two columns are referred in finance Act, first column (i) consists of trading company of investment company. The second column (ii) consists "any other case". He has stressed that the legislature has not used the word" and" not but used the word "or" in column (i), therefore, the A.O should not have added the income from trading activity and income from investment together but should have considered both the income separately as well as independently while comparing the percent age of income with the income from manufacturing activity. In support of his claim that the assessee was in fact a manufacturing company he has referred the definition of "investment company" and the definition of "trading company" as defined in the Act.
He has concluded that the nature of business activity of the company did not fall either under the category of investment company or under the category of trading company. He has concluded that looking at the composition of the gross total income, the income from manufacturing activity constituted the largest percent of income, therefore, originally the rate of tax at 45% was correctly applied.
20. On behalf of the Revenue Id. D.R, Shri Prawin Kumar has argued that as per the Finance Act, first of all the categories as per column (i) has to be ruled out and then only the assessee falls in the category (ii). The percentage of income from investment and trading if clubbed together comes to 51.06% and the income percentage from manufacturing activity was only 48.93%, therefore, the A.O has rightly charged 50% of tax.
21. We have carefully considered the submissions of both the sides in the light of the orders of the authorities below as well as the provisions of Finance Act. Finance (No.2) Act provides : (1) where the company is a company in which 40% of the total income the public are substantially interested (2) where the company is not a company in which the public are substantially interested (i) in the case of trading company or an investment company 50% of the total income In view of above, in the case of a company in which public are not substantially interested, then in case of a trading or investment company 50% rate of tax is to be applied and in any other case the rate of tax is to be applied at 45%. The Finance (No.2) Act also defines "Investment Company" as follows.
"Investment Company" mean a company whose gross total income (as defined in section 80B of the Income Tax Act) consists of mainly of income which is chargeable under the head "income from house property", "Capital gains" and "Income from other sources" or of income by way of interest on security." "trading company" means a company whose business consists mainly in dealing in goods merchandise manufactured, produced or processed by a person other than that company and whose income attributable to such business included in its gross total income (As defined in section 80B of the Income Tax ACt) is not less than fifty one percent of the amount of such gross total income." As far as the above two definitions are concerned the facts of the case reveals that the assessee company do not fall under any of the two categories. This observation is mainly based on the nature of business recorded by A.O in the assessment order and mentioned that the assessee is a manufacturing company. Moreover, we have also taken into account, the definition of "Investment company" according to which the income mainly consisted of "house property", capital gain" and" income from other sources".In the instant case the income from investment activity is to the extent of Rs. 14,19,942/- which comprised 48.90% of the total income. For the purpose of determining whether the company fall in the category of "trading company", such business activity included in the gross total income be not less than 51% of the total income. the trading activity of the appellant is only Rs. 18,596/- which constituted 2.16%. Therefore, independently the income of each category do not exceeded 50% if taken into account separately The main reason for charging of higher rate of tax by the revenue authorities was only on the reason of clubbing the income of "trading activity"and "investment activity".If we carefully examine the relevant provisions of Finance Act, then it can be observed that there is not provision or any indication to determine the composition of total income by adopting the collective method i.e. by clubbing the income of trading activity along with investment activity. Though, both the categories are under column (i) but the legislature has separated the two type of companies i.e. trading company and investment company by the word" or" instead of using the word" and". The conjunction "or" is always used to link alternative. The dictionary meaning of the word "or" is otherwise and either. On the contrary, the conjunction "and" is used to connect words of the same part of speech or sentence. The word "and" connects two identical comparatives so as to emphasis progressive charge. It it also used to connect two numbers to indicate that they are being added together. For the correct interpretation of this conjunctions we have consulted Oxford dictionary.
On the analysis of the meaning assigned to these two conjunctions based on the common usage there is not two opinion that the word "and" is used for the purpose of connecting two numbers so that the numbers can be added together. The legislature must have taken into account the difference of the two conjunctions on the basis of their common usage as commonly acceptable, therefore, used a selective terminology. Thus for the purpose of determining the total income of a company the income arising from trading activity or income arising from investment company has to be taken into account independently as well as separately while comparing the income that a company falls in residual category as mentioned in column (ii). In our opinion the intention of the legislature is not to club and to add together the income of trading company and the income of investment company for determination of rate of tax. In our opinion the intention of the legislature was that where the company is either a trading company or an investment company then the tax @ 50% is to be charged. For that purpose a separate category as Column I(2)(i) of paragraph-E is made and for any other company being not a trading company or a investment company a separate category in column(ii) is made for which rate of tax prescribed at 45%. Since in the instant case admittedly the assessee was held as manufacturing company and in addition to this for the year under consideration the percentage of income from manufacturing activity was calculated 48.93%, higher percentage than the other two activities of compared independently with each of them, the rate of tax has to be levied at 45% plus surcharge thereon. In view of the reasons recorded above, we hereby hold that for the year under consideration the business of the appellant company mainly consisted of manufacturing income being the highest in percentage, therefore, the A.O has wrongly charged the rate of tax at 50%. resultantly the order of Id. CIT(A) in this regard is hereby reversed and this ground of the assessee is allowed.