Commissioner of Income-tax Vs. Vazir Sultan Tobacco Co. Ltd. - Court Judgment

Excerpt:
(i) direct taxation - weighted deduction - sections 28, 35c, 35c (1), 35c (2), 36, 36 (1), 40a (2) and 147 of income tax act, 1961 - whether bad debts and depreciation constitute expenditure or only notional outgoings - whether bad debts and depreciation qualified for weighted deduction under section 35c (1) (b) - value of assets gets diminished by their use in connection with services or facilities provided - consequently while arriving at taxable income for business reduced value to be treated as expenditure - bad debts arisen in connection with provision of facilities to customers - held, bad debts and depreciation constitute expenditure and weighted deduction to be given. (ii) shortfall - whether shortfall towards contribution to pension fund is allowable in full for assessment year in which shortfall came to notice of assessee - for calculating contribution of company towards pension fund both basic salary and allowances to be taken into consideration - contribution made on definite basis - contribution is not payment as contemplated by section 36 (1) (6) - held, assessee entitled to claim deduction for payment to pension fund. head note: income tax business deduction under s. 36(1)(iv)--staff pension fund contribution--arrears of previous years paid during the relevant assessment year being short contribution of earlier years was allowable in full held: in this case as has been rightly pointed out by the tribunal, the payment has been made because of a mistaken short payment in the earlier years. it was certainly a contribution on a definite basis, viz., in terms of the staff pension scheme on a percentage of salary and allowances. it wasnot a payment as contemplated by the second part of cl. (iv) of s. 36(1). the assessee was, therefore, entitled to claim a deduction for this payment. income tax act 1961 s.36(1)(iv) - - 1 and 2 for the assessment year 1973-74. the following three questions relate to the assessment year 1973-74; (1) whether, on the facts and in the circumstances of the case, the bad debts and depreciation constitute 'expenditure' or only notional out goings ? (2) whether, on the facts and in the circumstances of the case, bad debts and depreciation are qualified for weighed deduction under section 35c(1)(b) of the income-tax act ? (3) whether, on the facts and in the circumstances of the case, the shortfall of rs. 1 and 2 :the income-tax officer had allowed the deduction claimed by the assessee under section 35c(1)(b) towards bad debts and depreciation for both the financial year. , above the actual expenses on the ground that bad debts and depreciation were only notional losses and not cash expenditure and, therefore, not entitled to the benefit under section 35c of weighted deduction. 1,416 towards bad debts and rs. 9,905 towards bad debts and rs. on further appeal, the tribunal held that the bad debts and depreciation are expenditure within the meaning of the said section and entitled to weighted deduction. of the expenditure under the said section for (a) depreciation for its tractors and vehicles, and (b) bad debts. the bad debts are also claimed to have arisen because of the pesticides and seeds provided on credit to the farmers by the company. 2. the controversy is whether the depreciation and bad debts are an expenditure within the meaning of the section. whether the bad debts written off constitute an expenditure, there does not appear to be any direct case, sub-section (2) of this section provides that a deduction allowed under this section shall preclude its being claimed as a deduction under any other provision of the act. in this case, the bad debt has arisen in connection with the providing of goods contemplated by clause (b) of sub-section (1) on credit. we are not concerned in this case with grant of monetary loans or any bad debts as a result of the same.upendralal waghray, j.1. this references under section 256(1) of the income-tax act, 1961, is made at the instance of the revenue and is for the two assessment years, viz., 1973-74 and 1974-75. the assessee is a public limited company and its accounting year is october 1 to september 30, of the succeeding calendar year. in all, five questions have been referred for the opinion of this court, three for the assessment year 1974-74 and two for the assessment year 1974-75. the two questions for the assessment year 1974-75 are identical to questions nos. 1 and 2 for the assessment year 1973-74. the following three questions relate to the assessment year 1973-74; '(1) whether, on the facts and in the circumstances of the case, the bad debts and depreciation constitute 'expenditure' or only notional out goings (2) whether, on the facts and in the circumstances of the case, bad debts and depreciation are qualified for weighed deduction under section 35c(1)(b) of the income-tax act (3) whether, on the facts and in the circumstances of the case, the shortfall of rs. 1,75,434 towards contribution to pension fund is allowable in full for the assessment year 1973-74, that is, the year in which the shortfall came to the notice of the assessee ?' questions nos. 1 and 2 : the income-tax officer had allowed the deduction claimed by the assessee under section 35c(1)(b) towards bad debts and depreciation for both the financial year. however, he later reopened the assessments under section 147(a) of the act and, in the reassessment proceedings, withdrew the allowances to the extent of 20 per cent., above the actual expenses on the ground that bad debts and depreciation were only notional losses and not cash expenditure and, therefore, not entitled to the benefit under section 35c of weighted deduction. accordingly, for the assessment year 1973-74, rs. 1,416 towards bad debts and rs. 62,747 towards depreciation together aggregating to rs. 64,163 was disallowed. for the assessment year 1974-75, rs. 9,905 towards bad debts and rs. 1,16,116 towards depreciation aggregating to rs. 1,26,021 was disallowed. this was confirmed by the first appellate authority. on further appeal, the tribunal held that the bad debts and depreciation are expenditure within the meaning of the said section and entitled to weighted deduction. it is useful to extract section 35c of the income-tax act : '35c. agricultural development allowance-(1)(a) where any company or a co-operative society is engaged in the manufacture or processing of any article or thing which is made from, or uses in such manufacture or processing as raw material, any product of agriculture, animal husbandry, or dairy or poultry farming, and has incurred, after the february 29, 1968, whether directly or through an association or body which has been approved for the purposes of this section by the prescribed authority, any expenditure in the provision of any goods, services or facilities specified in clause (b) to a person (not being a person referred to in clause (b) of sub-section (2) of section 40a) who is a cultivator. grower or producer of such product in india, the company or co-operative society shall, subject to the provisions of this section, be allowed a deduction of sum equal to one-fifth times the amount of such expenditure incurred during the previous year. (b) the goods, services or facilities referred to in clause (a) are the following :- (i) fertilizers, seeds, pesticides, concentrates for cattle and poultry feed, tools or implements, for use by such cultivator, grower or producer; (ii) dissemination of information on, or demonstration of, modern techniques or methods of agriculture, animal husbandry, or dairy or poultry farming, or advice on such techniques or methods; (iii) such other goods. services or facilities as may be prescribed. explanation. - in computing the expenditure with reference to which deduction under this section is to be allowed, the amount, if any, received by the company or co-operative society in consideration of, or as compensation for, such goods, services or facilities shall be deducted. (2) where a deduction under this section is claimed and allowed for any assessment year in respect of any expenditurs of the nature specified in sub-section (1), deduction shall not be allowed in respect of such expenditure under any other provision of this act for the same or any other assessment year.' this section gives a weighted deduction (i.e., one and one-fifth times of the actual expenditure incurred) for providing to an agriculturist, the goods, services or facilities specified in it or as prescribed in rule 6a. it is not disputed that the assessee in connection with its business of manufacturing cigarettes, purchases tobacco from various cultivators and growers and in that connection, provides goods, services and facilities to the agriculturist as contemplated by the said section. the assessee claimed weighted deduction i.e., 120 per cent. of the expenditure under the said section for (a) depreciation for its tractors and vehicles, and (b) bad debts. this was initially allowed but after reopening and reassessment, the deduction under these two heads was confirmed to only 100 per cent., as a business expenditure and in weighted allowance or 20 per cent., disallowed on the ground that section 35c contemplated only actual expenditure and these two items are not actual expenditure, depreciation is claimed in respect of tractors and vehicles used in connection with the services and facilities provided to agriculturists as contemplated by section 35c. the bad debts are also claimed to have arisen because of the pesticides and seeds provided on credit to the farmers by the company. sub-section (1) of section 35c speaks of 'any expenditure' in the provision of goods or services or facilities completed by the section. 2. the controversy is whether the depreciation and bad debts are an expenditure within the meaning of the section. 3. the value of the assets, viz., tractors and vehicles, gets diminished by their use in connection with the services or facilities provided and, consequently, such a reduction in its value will have to be treated as an expenditure while arriving at the taxable income for business of an assessee. the use of the vehicles is directly and intimately connected with the services and facilities provided. 4. the calcutta high court had a occasion to consider this controversy in cit v. indian jute association : [1982]134itr68(cal) and in indian leaf tobacco development co. ltd. v. cit : [1982]137itr827(cal) , and has held that depreciation on the machinery or implements used for providing services and facilities constitutes expenditure for the purpose of section 35c. whether the bad debts written off constitute an expenditure, there does not appear to be any direct case, sub-section (2) of this section provides that a deduction allowed under this section shall preclude its being claimed as a deduction under any other provision of the act. this indicates that expenditure and deduction in this section are, in essence, the same. in this case, the bad debt has arisen in connection with the providing of goods contemplated by clause (b) of sub-section (1) on credit. this is also directly and intimately connected with the object of the section and has to be allowed as an expenditure and deduction under this section. we are not concerned in this case with grant of monetary loans or any bad debts as a result of the same. in view of this, the answer to question no. 1 is in the affirmative and in favour of the assessee. our answer to question no. 2 is also in the affirmative and in favour of the assessee. question no. 3 : during the previous year relevant to the assessment year 1973-74, it was pointed out to the assessee by the authorities of the staff pension fund that, for the earlier years, while computing the contribution of the company to pension fund, only basic was salary was taken into consideration while, in fact the contribution was to be on the basis of salary plus allowances. in view of this mistake, a sum of rs. 1,75,434 was ascertained as the amount so payable towards arrears for the previous years and was also paid, the assessee claimed deduction of this payment under section 36(1)(vi) of the income-tax act. the income-tax officer, in the reassessment proceedings, has disallowed the deduction on the ground that there was no definite basis on which this payment has been made. this was confirmed by the first appellate authority. the tribunal, on appeal, held that the aforesaid payment was on a definite basis falling within the limits prescribed under rule 86 (sic) and notification no. 100 dated october 21, 1965 and, therefore, the assessee was entitled to the deduction of the aforesaid sum. the relevant portion of section 36 of the income-tax act reads as follows : '36. other deductions :- (1) the deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 - ... (iv) any sum paid by the assessee as an employer by way of contribution towards a recognised provident fund or an approved superannuation fund, subject to such limits as may be prescribed for the purpose of recognizing the provident fund or approving superannuation fund, as the case may be; and subject to such conditions as the board may think fit to specify in cases where the contributions are not in the nature of annual contributions of fixed amounts or annual contributions fixed on some defined basis by reference to the income chargeable under the head 'salaries' or to the contributions or to the number of members of the fund....' 5. in this case, as has been rightly pointed out by the tribunal, the payment has been made because of a mistaken short-payment in the earlier years. it is, certainly, a contribution on a definite basis, viz., in terms of the staff pension scheme on a percentage of salary and allowances. it is not a payment as contemplated by the second part of clause (iv) of section 36(1) of the act, the assessee is, therefore, entitled to claim a deduction for this payment. our answer to question no. 3 is in the affirmative and against the revenue. the reference is answered accordingly. no costs.