Commissioner of Income-tax Vs. Andhra Pradesh State Financial Corporation - Court Judgment

Excerpt:
direct taxation - deduction - sections 2 (45), 28, 36 (1) and 40a (5) of income tax act, 1961 - whether percentage of deduction of total income under section 36 (1) to be applied before calculating deduction or after allowing deduction under other provisions - circular in force at time of assessment provided that deduction of 40% to be allowed after net income arrived after allowing deductions under other provisions - court relying upon precedent held that simple deduction at 40% of total income to taken into consideration under section 36 (1). head note: income tax business disallowance under s. 40a(5)--cash allowance to employees--house rent allowance, conveyance allowance and ex gratia payments income tax act 1961 s.40a(5) business deduction under s. 36(1)(viii)--computation--financial corporation--special reserve created held: the definition of 'total income' in s. 2(45) will have to be read in the context of the language used in the present section. instead of adopting a circuitous method, a simple deductions calculated at 40 per cent of the total incoem arrived at that stage is to be taken into consideration for applying this section. any notional addition to the income for calculation of a statutory deduction is not justified. -cit v. bihar state financial corporation (1989) 142 itr 518 (pat) and cit v. bihar state financial corporation (1986) 159 itr 275 (pat) followed. income tax act 1961 s.36(1)(viii) - motor vehicles act (59 of 1988)section 149 (2): [v. gopala gowda & jawad rahim, jj] insurers entitlement to defend the action joint appeal by insured and insurer - held, the language employed in enacting sub-section (2) of section 149 appears to be plain and simple and there is no ambiguity in it. it shows that when an insurer is impleaded and has been given notice of the case, it is entitled to defend the action only on grounds enumerated in sub-section (2) of section 149 of the act, and no other grounds are available to it. the insurer is not allowed to contest the claim of the injured or heirs of the deceased on other grounds, which are available to the insured. if insurer is permitted to contest the claim on other grounds it would mean adding more grounds of contest to the insurer and will be negation of the intention of the legislature and annihilate mandate of the provisions of sections 170 and 149 of the act. the insured can pursue appeal only after giving up the insurer as the appellant and not otherwise. in the instant case, the insurer has not withdrawn from party array but has remained prosecuting the appeal with the insured on the grounds which are available only to the insured. therefore, the joint appeal as filed by the insured and the insurer is not maintainable. section 166: [v. gopala gowda & jawad rahim, jj] claim for compensation accident due to mechanical defect in the vehicle held, it is not in dispute that the claimant suffered injuries in an accident, which occurred during the course of his employment, albeit due to his negligence but law does not render him remediless. statutory right is conferred on him, accruing by virtue of his employment under insured to claim compensation under workmens compensation act. the insurer is statutorily duty bound to discharge the liability of the owner of the vehicle, to pay such compensation to the employee, as mandated under the provisions of section 149 of the act. the right of an injured employee or his dependents as the case may be to be compensated, when injury is suffered or death occurs during his employment, is recognised not only under workmens compensation act, but also under benevolent provisions under section 166 and 167 of the m.v. act. the right of driver to seek compensation is not restricted only to the workmens compensation act, it has been enlarged to enable such person to seek just compensation (sections 166 and 168), conferring upon him the right of election engrafted under section 167 of the act to choose either of the two forum. the only defence which the insurer could take is limit of its liability as enumerated under section 147 of the act, leading to contest, inter alia, only between insured and insurer and does not impact claimants right to recover the compensation determined by the tribunal which crystallizes into enforceable right against both. in the instant case, the claimant/driver has exercised right of election under section 167 of the act to seek compensation under section 166 of the act resulting in award passed by the tribunal. therefore, the insured and the insurer have no escape but to discharge the said award as directed. undisputedly, in this case as deduced for proved facts, the vehicle in question was not properly maintained by the owner and despite faulty brake system, the claimant had undertaken the hazardous journey to his peril at the behest of and at the instruction of the owner. the owner is therefore, tortfeasor. section 168: [v. gopala gowda & jawad rahim, jj] insurers limit of liability - held, it is well settled that the liability of the insurance company for payment of compensation can be statutory or contractual. is for the insurance company to show that the insurance policy was a statutory policy and not a contractual policy to restrict its liability. that issue was neither raised before the tribunal nor is raised in this appeal requiring decision. thus, if at all the insurer has any valid ground to restrict its liability, it can proceed against the insured but firstly it has to discharge the award as required under section 149 (1) of the act. where the owner/insured has failed to maintain the vehicle as per prescribed safety standards and has caused the claimant to drive the vehicle with mechanical defects, the owner would be the tortfeasor and the claimant can maintain a petition seeking compensation under the provisions of the act, instead of seeking compensation under the workmens compensation act. on facts, held, the material evidence on record, particularly, with regard to the income of the claimant, his age, medical evidence and the evidence relating to pecuniary loss has not been considered by the tribunal in the correct perspective, which has resulted in passing of the impugned award, disproportionate to the pecuniary loss and the loss of future income of the victim. the settled principles governing determination of compensation has been given a go-bye. compensation of rs.4,15,150/- awarded by the tribunal was enhanced to rs.8,20,000/-. - 1 about the effect of the instructions, we would like to examine the controversy raised in question no. this circular was in force during the accounting year as well as the assessment year in this case till it was withdrawn by the board by a circular dated august 13, 1979. however, when the matter was reopened by the income-tax officer, the earlier circular was withdrawn.upendralal waghray, j. 1. at the instance of the revenue, the following four questions have been referred for the opinion of this court. they are : '1. whether, on the facts and in the circumstances of the case, the income-tax appellate tribunal is justified in holding that the later instructions of the board, i.e., 1275 in f. no. 204/72/75-iia. ii dated 13-8-1970, are not to be applied even though the assessment was made after the receipt of such instructions 2. whether, on the facts and in the circumstances of the case, the income-tax appellate tribunal is justified in holding that the percentage of deduction under section 36(1)(viii) of the income-tax act, 1961, should be applied before the deduction and not after the deduction 3. whether, on the facts and in the circumstances of the case, the income-tax appellate tribunal is justified in holding that for the purpose of disallowance of perquisites under section 40a(5) of the income-tax act, 1961, cash allowances should not be included 4. whether, on the facts and in the circumstances of the case, the income-tax appellate tribunal is justified in holding that house rent allowance, conveyance allowance and ex gratia payments in excess of 20% of the salary and dearness allowance are not disallowable by application of the provisions of section 40a(5) of the income-tax act ?' 2. the andhra pradesh state financial corporation, hyderabad, is the assessee and the relevant assessment year is 1976-77. the first two question are inter-related. before taking up question no. 1 about the effect of the instructions, we would like to examine the controversy raised in question no. 2 regarding the interpretation to be placed on the provisions of section 36(1)(viii) of the income-tax act. the tribunal has taken the view that for the purpose of allowing a deduction under section 36(1)(viii), the total income of the assessee has to be computed before giving any deduction under the said section. but, according to the revenue, for the purpose of grant of deduction, total income is to be calculated after giving effect to all deductions including the one under this section. it is useful to extract the said provision, viz., section 36(1)(viii) : '36. (1) the deductions provided for in following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28, - ...... (viii) in respect of any special reserve created by a financial corporation which is engaged in providing long-term finance for industrial or agricultural development in india, an amount not exceeding - (a) in the case of a financial corporation or a joint financial corporation established under the state financial corporations act, 1951(63 of 1951), or an institution deemed under section 46 of that act to be financial corporation established by the state government for the state within the meaning of that act, forty per cent., (b) in the case of any other financial corporation. - (i) where the paid-up share capital of the corporation does not exceed three crores, twenty-five per cent., (ii) where the paid-up share capital of the corporation exceeds three crores of rupees, ten per cent., of the total income (computed before making any deduction under chapter vi-a) carried to such reserve account : provided that the corporation is, for the time being, approved by the central government for the purposes of this clause : provided further that where the aggregate of the amounts carried to such reserve account from time to time exceeds the paid-up share capital (excluding the amounts capitalised from reserves) of the corporation, no allowance under this clause shall be made in respect of such excess.' 3. the controversy can be illustrated by giving an example : assuming the total income before applying this provision to be rs. 1,000, according to the assessee, for calculating the deduction under this section (and if this sum of rs. 1,000 is put in a reserve fund), 40 per cent. should be calculated on rs. 1,000 and a deduction of rs. 400 is to be given. according to the revenue, the deduction at 40 per cent. should be calculated on the figure of total income arrived at after this deduction also is applied for which a notional calculation is to be done by adding 40 per cent., to the total income and then calculating the deduction to be allowed at 40 per cent. of rs. 1,400. the income-tax officer has adopted the method urged by the revenue, but the first appellate authority and the tribunal have not accepted it and reliance was placed on the instructions of the board, which were in vogue during the relevant accounting and assessment year. the applicability of the said instructions is the subject-matter of question no. 1. we have considered it appropriate to examine this question without reference to any of the circulars of the board. 4. learned counsel for the revenue has placed reliance on the definition of 'total income' in section 2(45) of the act and contented that for the purpose of giving any deduction, the income as computed in accordance with the act alone will have to be taken into account, that is, after giving effect to the deduction mentioned in this section and he supported the calculation adopted by the income-tax officer. he has not been able to cite any authority in support of this contention. according to learned counsel for the assessee, the definition in section 2(45) will have to be read in the context of the language used in the present section. instead of adopting a circuitous method, a simple deduction calculated at 40 per cent. of the total income arrived at that stage is to be taken into consideration for applying this section. any notional addition to the income for calculation of a statutory deduction is not justified. he has relied upon two decisions of the patna high court in cit v. bihar state financial corporation : [1983]142itr518(patna) and cit v. bihar state financial corporation been : [1986]159itr275(patna) . in the earlier decision, the aforesaid provision has been considered at length and a similar contention of the revenue has been negatived. in our view also, this is a correct approach. our answer to question no. 2 is in the affirmative and in favour of the assessee. question no. 1 : the central board of direct taxes have issued a circular f. no. 204/35/73-ita-ii dated november 12, 1973, where it was clarified that 40 per cent. deduction under this section was to be applied on the income arrived at after giving deductions under other provisions. this circular was in force during the accounting year as well as the assessment year in this case till it was withdrawn by the board by a circular dated august 13, 1979. however, when the matter was reopened by the income-tax officer, the earlier circular was withdrawn. the tribunal has taken the view that the circular of the board which was in force at the relevant period ought to be followed. however, this question has become academic, in view of our answer to the second question. 5. it is not disputed that questions nos. 3 and 4 are covered by a decision of this court in cit v. warner hindustan ltd. : [1984]145itr24(ap) and following the said decision, they have to be answered in the affirmative and in favour of the assessee. 6. the reference is answered accordingly. we make no order as to costs.