Ajit K. Sengupta J.
1. In this reference under Section 256(1) of the Income-tax Act, 1961, the following questions of law have been referred to this court for the assessment year 1971-72 :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that Rs. 1,79,569 should be excluded for the purpose of computing the disallowance under Section 40(a)(v) ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the income earned by the assessee from transporting the crude belonging to Oil & Natural Gas Commission along with its own crude was attributable to the business of production of mineral oil within the meaning of item 3 of the list of articles and things specified in the Sixth Schedule to the Income-tax Act, 1961, read with Section 80B(7) and Section 80-I of the said Act ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee was entitled to relief under Section 80-I of the Income-tax Act, 1961, on the income earned by the assessee from transportation of crude belonging to Oil and Natural Gas Commission ?'
2. The facts are that the original assessment of the company for the assessment year 1971-72 was made on March 21, 1974. In the course of the original assessment proceedings, the company had offered for addition in terms of Section 40(a)(v) of the Income-tax Act, 1961, a sum of Rs. 12,60,723 and the said sum was accordingly added by the Income-tax Officer while computing the assessee's income for the aforesaid assessment year. The computation of the aforesaid sum of Rs. 12,60,723 was given by the assessee in annexure II of the revised return filed by it in the following manner :
(Rs.)(Rs.)'Fields and pipelines :Total expenditure in bungalow repairs, maintenance including water, electricity and petrol13,60,736Less : 1/12th for non-users during leave period of one month79,54912,81,187Depreciation
10,59,573Less : 1/12th for non-users during leave period of one month88,298
9,71,275
Total22,52,462Less : Expenditure allowable as per statement prepared and accepted by department11,33,537
11,18,925Add : For Calcutta, Delhi and Shillong offices1,41,798
12,60,723
3. During the aforesaid previous year, the company had also transported the crude oil of the Oil and Natural Gas Commission (hereinafter referred to as 'ONGC') and received payment from them for the said purpose. The company is extracting mineral oil and selling it and is thus entitled to the relief prescribed in Section 80-I of the Income-tax Act, 1961, with reference to its business of extracting mineral oil, etc., in terms of item 3 of the Sixth Schedule to the Income-tax Act, 1961. The assessee-company included in income derived by it from transporting the crude oil of ONGC through its pipelines also in its computation of income from the aforementioned business of extracting mineral oil, etc., and relief in terms of Section 80-I with regard to it also. The Income-tax Officer, in the original assessment order passed by him, accepted the assessee's aforementioned claim.
4. The Commissioner of Income-tax felt that the aforementioned order of the Income-tax Officer was erroneous and prejudicial to the interests of the Revenue and, therefore, he initiated proceedings under Section 263(1)of the Income-tax Act, 1961, in respect of the aforementioned assessment order of the Income-tax Officer for the assessment year 1971-72. In his opinion, the assessee should not have excluded the sum of Rs. 1,67,847 from the disallowable sum under Section 40(a)(v) on the ground that every year during the leave period of one month taken by the company's employees, the houses occupied by them remained vacant. He also felt that the relief under Section 80-I was not allowable to the assessee in respect of the income derived by it from transporting the crude oil of ONGC. He, therefore, after hearing the assessee with regard to the above points, set aside the order of the Income-tax Officer with the following directions :
'The Income-tax Officer is directed to give the assessee an opportunity of being heard, determine the correct facts, give a finding as to the computation of the amount under Section 40(a)(v) and as to the relief allowable under Section 80-I of the Income-tax Act, 1961, and complete the assessment accordingly.'
5. In accordance with the aforementioned directions of the Commissioner, the Income-tax Officer made another assessment on the assessee dated February 28, 1978, in terms of Sub-section (3) of Section 143 read with Section 144B of the said Act. The company's plea that all the employees to whom Section 40(a)(v) was applicable went on leave at least for a period of one month and the bungalows were not occupied during the leave period either by the employees or their dependants and that, therefore, 1/11th of the disallowance under Section 40(a)(v) deserved to be reduced was not accepted by the Income-tax Officer. He pointed out in his order that 'the company does not say that the employees leave and vacate the bungalows with all their belongings.' It is stated by the company that 'during the concerned employee's leave period, the company was free to use the respective bungalows for whatever purpose it liked and that if the company so desired/the bungalows could be allotted to other members of the staff after storing the employee's personal effects left by him in a part of the bungalow. But the company has not given and is unable to give any details of such user. So the position is that the bungalows were kept and maintained for the use of the employees. It may be mentioned in this connection that there is no rule of the company making it obligatory on the part of an employee to move out lock, stock and barrel during the leave period. Even assuming that, for a period of one month, the employees did not occupy the bungalows which were originally allotted to them as a part of the condition of service to whichthey were entitled, temporary absence will make no difference as to the nature of the asset and its use. The expenditure incurred by the company is for maintaining bungalows which are in fact used by the employees'. In view of the above analysis, the Income-tax Officer rejected the assessee's claim and added Rs. 1,79,569 to the amounts disallowable under Section 40(a)(v) of the Income-tax Act, 1961. With regard to the relief under Section 80-I claimed by the assessee, the Income-tax Officer noted that, during the year, the company transported 1,68,783.345 metric tonnes of ONGC crude on which it received Rs. 62,44,984 as charges at the rate of Rs. 37 per tonne. Income element in the same, as per calculation furnished by the company, was taken at Rs. 20,42,278. In addition to the aforesaid sum of Rs. 62,44,984, the company, during the year, also received Rs. 17,69,595 as additional amount agreed to be paid by ONGC in respect of transportation of their crude in the years 1968 and 1969. It was also treated as the assessee's income for this year. The income from transportation of the crude oil of ONGC was, thus, computed by the Income-tax Officer at Rs. 38,11,873. In respect of the aforesaid income, the Income-tax Officer expressed the opinion that the assessee was not entitled to the relief under Section 80-I of the Income-tax Act, 1961, as the said income was, according to him, not attributable to the assessee's business of extracting crude oil, etc.
6. The assessee appealed against the aforesaid assessment order to the Commissioner of Income-tax (Appeals) who dismissed the assessee's appeal, vide his order dated September 25, 1979.
7. The assessee thereupon appealed to the Tribunal. It was contended on behalf of the appellant-company that the chief executive of the company had issued in 1978 a circular stating that all the residential accommodation provided to the employees would continue to remain at the disposal of the company during the period of absence on leave of the employees. In view of the said circular, it was urged that the period of one month's leave should have been excluded by the Income-tax Officer while computing the disallowance in terms of Section 40(a)(v) of the Income-tax Act, 1961. It was also urged that expenses incurred on the repairs and maintenance of bungalows were completely excludible for working out the disallowable amount under Section 40(a)(v) as held by the Kerala High Court in the case of Travancore Tea Estates Co. Ltd. : [1980]122ITR557(Ker) and, therefore, there was no occasion to include the expenditure on repairing and maintenance of the bungalows, while computing the disallowance in terms of Section 40(a)(v) of the Income-tax Act, 1961. Onbehalf of the Department reliance was placed on the reasoning given by the Income-tax Officer and the Commissioner of Income-tax (Appeals) in their respective orders and it was specially stressed that the assessee had not been able to bring any material on record to support its claim regarding non-user of the bungalows during the leave period.
8. The Tribunal, after considering the facts on record and the rival submissions, held that the contention of the assessee was correct as, according to it, the expenses incurred on repairs and maintenance of such bungalows cannot be considered as a perquisite.
9. With regard to the relief to be granted to the assessee in terms of Section 80-I of the Income-tax Act, 1961, it was urged on behalf of the company that the company was engaged in the business of production, transportation and sale of crude oil. From 1968 onwards, the assessee-company was transporting through the same pipeline, along with its own crude oil, the crude oil belonging to ONGC which had its field of operation in upper Assam. The crude oil of the assessee and the ONGC flowed together as a mixed crude up to the refineries. At the refineries, the proportion of crude received was determined on the basis of the crude belonging to the two parties at the start and that the quality for the purpose of determining the price was fixed at the point of injection of the crude at Naharkatia and at Moran. It was, therefore, urged that the transportation of the crude of ONGC was mixed up with that of the crude of the assessee-company itself and it was not possible to treat the income received from transportation of the crude oil of ONGC separately from the assessee-company's own business and that the income derived by it from the transportation of the said oil was clearly attributable to the 'priority industry' and as such the relief under Section 80-I was allowable to the assessee-company in respect 'of the income derived by it from the said business including the income received on account of the transportation of the crude oil of ONGC. On behalf of the Department, reliance was placed on the orders of the Commissioner of Income-tax (Appeals) and of the Income-tax Officer. After considering the rival submissions and the facts of the case, the Tribunal held that the contention of the assessee was correct.
10. Before us, the same contentions as urged before the Tribunal have been reiterated.
11. The first controversy, as we have already indicated, is whether the Tribunal was right in holding that the sum of Rs. 1,79,569 should be excluded for the purpose of computing the disallowance made underSection 40(a)(v) of the Act. The Tribunal held that the expenses incurred on repair and maintenance of such bungalow cannot be considered as a perquisite.
12. Section 40(a)(v) was inserted by the Finance Act of 1968, with effect from April 1, 1969. The object clause introducing Section 40(a)(v) lays down as follows (see [1968] 67 ITR 87) :
'In the case of companies, the deductible amount of expenditure incurred by them in providing perquisites, benefits or amenities (subject to certain exceptions) to their higher paid employees is at present limited to 20 per cent. of the basic salary of each employee. It is proposed to extend this provision to non-corporate employers also and to bring within the purview of the limit any expenditure or allowance admissible to the employer in respect of any assets provided by him to the employee free of charge or on a concessional basis. Thus, where an employer has provided residential accommodation or household equipment such as frigidaires, air conditioners, etc., owned by him, to his employees free of charge, any expenditure incurred by the employer on the maintenance of these assets or any depreciation allowance admissible to him in respect thereof will also be brought within the purview of the limit over the deductible amount of expenditure in providing perquisites, benefits or amenities to employees.'
13. Construing the above provision, it was pointed out by the Kerala High Court in CIT v. Travancore Tea Estates Co. Ltd. : [1980]122ITR557(Ker) , that the second type of expenses provided for in the section which are intended to be brought within the ceiling limit, are expenses in respect of any asset of the assessee used by such employee. The use of the expression 'such employee' in the latter part of Section 40(a)(v) refers to the types of employees who have been referred to in the earlier part. The employees referred to in the earlier part of the section are those employees who have been the beneficiaries of the expenditure or they should have derived an amenity or perquisite from the expenditure. Neither of these is satisfied with respect to the expenses on the maintenance of the building.
14. The matter came up before the Full Bench of the Kerala High Court which is in CIT v. Forbes, Ewart and Figgis (P.) Ltd. [1983] 138 ITR 1. The Full Bench differed from the view of the Division Bench of the Kerala High Court in Travancore Tea Estates Co. Ltd. : [1980]122ITR557(Ker) . The Full Bench pointed out that no doubt the use of the term 'such' is inappropriate in the strictly grammatical sense. But courts are not always to be guided by the strict grammatical sense of an expression. Inother words, the Full Bench did not consider that the interpretation given by the earlier Division Bench is not correct on the basis of the expression 'such employee'. But the Full Bench took the view that though, in a very strictly grammatical sense, 'such' may be taken as relating to that which follows what precedes and, therefore, there may be a nexus with the earlier part, it is evident that, so construed, the latter part which relates to 'expenditure' as well as 'allowance' cannot be read intelligibly with regard to allowance. That, according to the Full Bench, was sufficient to alert one to the need to have a close look at the provision and to notice the legislative intent in enacting the provision.
15. We are unable to agree with the aforesaid reasoning of the Full Bench. The reasoning of the Division Bench of the Kerala High Court in Travancore Tea Estates Co. Ltd. : [1980]122ITR557(Ker) equally applies in the case of an allowance as much as in the case of an expenditure. Moreover, the Legislature has deleted the expression 'such' while introducing Section 40A(5) of the Act, which came into effect from April 1, 1972. The latter part of Section 40(a)(v) cannot apply to the repair and maintenance of such bungalow when the rent-free accommodation or the accommodation at a concessional rate is treated as a perquisite by the earlier part. Moreover, when a company is maintaining the bungalow in good livable condition, the company incurs the expenditure in question for repairs of its own property. Unless there is evidence that the repair increased the value of the bungalow and the flats, such expenditure cannot be coming within the ambit of the latter part of Section 40(a)(v) of the Act. It cannot be the intention of the Legislature to bring within the sweep of the latter part of Section 40(a)(v) expenditure or allowance in respect of an asset belonging to the assessee and used by such employees when the rent-free accommodation or the accommodation at a concessional rate is itself treated as a perquisite.
16. This question came up for consideration before a Division Bench of this court in CIT v. Davidson of India Pvt. Ltd. : [1984]148ITR544(Cal) . In that case, the Division Bench held that the assessee had incurred the expenditure on repairs in order to discharge the obligation of maintaining the flats in good livable condition and there was no evidence to show that the repairs increased the value of the flats. Therefore, the expenditure on repairs to the flats did not confer any benefit, amenity or perquisite to the employees within the meaning of Section 40(c)(iii).
17. The view taken by the Calcutta High Court in Davidson of India Pvt. Ltd. : [1984]148ITR544(Cal) was followed by the Andhra Pradesh HighCourt in CIT v. Vazir Sultan Tobacco Co. Ltd. [1988] 169 ITR 324. There the Andhra Pradesh High Court held that, in the absence of a contract to the contrary, it was the obligation of the lessee to keep and maintain the leased premises in good condition. In respect of the leased buildings, the assessee-company was the lessee. It was not the case of the Revenue that any unusual or extraordinary amounts were spent on the house. The amount spent on repairs of buildings allotted to its employees could not be disallowed.
18. It is no doubt true that the decisions of this court as well as of the Andhra Pradesh High Court as referred to above were with regard to the applicability of Section 40(c)(iii) of the Act. The Andhra Pradesh High Court, in a latter decision in CIT v. Vazir Sultan Tobacco Co. Ltd. : [1988]173ITR290(AP) applied its earlier decision in CIT v. Vazir Sultan Tobacco Co. Ltd. [1988] 169 ITR 324. In the latter decision, the assessee owned certain buildings which it allotted for the occupation of its directors and other senior executives. It did not collect any rent from them. The Income-tax Officer held that notional income from these properties should be determined and assessed as income from house property but the Tribunal held that it was assessable as income from business. The assessee claimed that the buildings should be treated as business assets for purposes of Section 40A(5) of the Income-tax Act, 1961. It also claimed the cost of repairs to buildings owned by the assessee and those taken on lease by it and allotted to its employees. The Andhra Pradesh High Court held that the buildings had to be treated as business assets for purposes of Section 40A(5) and the cost of repairs to the buildings owned by the assessee or taken on lease by it and allotted to its employees was not a perquisite for purposes of Section 40A(5).
19. In our view, the principles governing construction of the Section 40(c)(iii) of the Act will equally apply to the construction of Section 40(a)(v).
20. For the foregoing reasons, we answer the first question in this reference in the affirmative and in favour of the assessee.
21. We now turn to the second question. As indicated earlier, the assessee-company is engaged in the business of production, transportation and sale of crude oil. The oil fields of the assessee-company are in Nahar-katia and Moran areas in Assam. A pipeline has been constructed by the assessee-company running from Naharkatia to Gauhati and therefrom to Barauni in Bihar. The pipeline has been used for transporting the crude oil produced by the assessee-company and it is sold to the Indian Oil Corporation at its refineries at Gauhati and Barauni. These pipelines havebeen in operation from 1962. From 1968 onwards, the assessee-company is transporting through the same pipeline along with its own crude oil, the crude oil belonging to ONGC with its field of operation in upper Assam. The crude oils are received at Moran pump station and are measured by the representatives of the assessee-company and ONGC. The crude oil of the assessee-company and ONGC flows together as a mixed crude up to the refineries. At the refineries again, the proportion of crude received is determined on the basis of the crude belonging to the two parties at the start.
22. It is contended that in order to earn profit from the production of crude it has to sell and without sale profit cannot be earned and determined. For the purposes of sale, transportation of crude is necessary and it is with this view that the pipeline from Naharkatia to Barauni has been constructed by the assessee-company. The income element out of the transportation receipt of the assessee's own crude is taken into consideration which it sells to Indian Oil Corporation in determining the profit attributable to the priority industry by the Income-tax Officer himself.
23. Therefore, income from the transportation of crude of ONGC must be taken to be profits attributable to the priority industry, viz., production of mineral oil.
24. It is contended that, if the test laid down by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. C1T : [1978]113ITR84(SC) is applied to the facts of this case, in that event, income by way of transporting the crude of ONGC has to be held to be attributable to the assessee's priority industry.
25. It is the case of the assessee that but for the business of production and transportation of its own crude, the assessee would not have undertaken to transport the crude belonging to the ONGC. Hence, the income of the assessee from the transportation of crude of ONGC must be included for working out the relief under Section 80-I of the Income-tax Act.
26. In our view, the contention of the assessee has substance. Section 80-I uses the expression 'profits attributable to priority industry'. The expression 'attributable to' is certainly wider in import than the expression 'derived from'. Whenever the Legislature wanted to give a restricted meaning in the matter suggested, it had used the expression 'derived from' as, for instance, in Section 80-J of the Act. Since the expression of wider import, namely, 'attributable to', has been used, the Legislatureintended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity. Applying the above test, the income-tax authority itself has included the income from transportation of crude of the assessee to the Indian Oil Corporation as profits attributable to the priority industry and has included the said income for the purposes of Section 80-I of the Act. The crude of ONGC is transported by the assessee through the same pipeline which it had constructed for supplying its own crude. The Tribunal found that, but for the business of production and transportation of its own crude, the assessee would not have undertaken to transport the crude belonging to ONGC. In view of the above finding, it will be clear that the transportation of the crude of ONGC was undertaken by the assessee as part of its business of transportation of its own crude through its own pipeline. The transportation of its own crude and of the crude of ONGC is integrally connected with the business of the assessee. The income, therefore, of the assessee from transportation of crude of ONGC through its own pipeline should be attributable to the profits of the priority industry in view of the test laid down by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. : [1978]113ITR84(SC) .
27. Our attention has also been drawn to several other decisions. In CIT v. West Coast Paper Mills Ltd. : [1988]169ITR288(Bom) , the assessee was engaged in the production of pulp and paper from bamboo which was a priority industry for the purposes of Section 80-I. The assessee entered into a collaboration agreement with another company for supplying to the latter company technical know-how and assistance for installing, commissioning and successfully running a pulp and paper plant. The income arising from the supply of technical know-how for the installation, commissioning and running of pulp and paper plant was held to be income attributable to the priority industry, viz., production of pulp and paper. The Bombay High Court relied upon the judgment of the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. : [1978]113ITR84(SC) and also the judgment of the Karnataka High Court in Mysore Electrical Industries Ltd. v. CIT : [1978]114ITR865(KAR) .
28. Our attention has also been drawn to the decision of this court in CIT v. Flender Macneill Gears Ltd. : [1984]150ITR83(Cal) . A Division Bench of this court held that interest received from the distributor for delay in payment of bills was to be treated as income attributable to the priority industry.
29. In CIT v. Buckau Wolf New India Engineering Works Ltd. : [1984]150ITR180(Bom) , the assessee, a priority industry which carried on thebusiness of manufacture and sale of machinery used in the sugar industry, claimed deduction under Section 80-I of the Income-tax Act, 1961, in respect of the profits attributable to its priority industry from machining charges for repairs to machinery and from interest on the unpaid sale proceeds of machinery manufactured by it. The Income-tax Officer disallowed the claim of the assessee. The Tribunal allowed the assessee's claim. On a reference, the High Court held that Section 80-I uses the words 'attributable to', which had been deliberately used by the Legislature. The words are of wider import than the expression 'derived from' and the Legislature intended to cover receipts from sources other than the actual conduct of the business. Section 80-I envisaged relief being granted in all cases where there was some direct nexus between the income and the priority industry. Since the manufacture of machinery by the assessee was a priority industry, the carrying out of repairs to machinery manufactured and sold by the assessee was an activity which had a direct nexus to the priority industry and the income derived therefrom must be held to be attributable to the priority industry. The income derived from interest paid by the buyers of machinery manufactured by the assessee on deferred payment also had a direct nexus to the assessee's priority industry and was attributable to it. The facility of after sales repairs and of deferred payment were inducements offered to the intending purchasers and were intimately linked to the assessee's priority industry. Therefore, the assessee was entitled to deduction under Section 80-I in respect of such income.
30. Our attention has also been drawn to a decision of a Division Bench of this court in CIT v. Davidson of India (Pvt.) Ltd. : [1986]161ITR407(Cal) . There, the Division Bench of this court held that the profits arising from sale of import entitlements obtained from export of manufactured products of the assessee which carried on the business of manufacture of tea garden machinery, a priority industry, are attributable to the business of manufacture and export of products in a priority industry and hence allowed the relief under Section 80-I in respect of profits arising from the sale of import entitlements.
31. In our view, having regard to the facts of this case and the principles laid down in the decisions referred to above, the second question must be answered in the affirmative and in favour of the assessee.
32. There will be no order as to, costs.
Bhagabati Prasad Banerjee J.
33. I agree.