Tata Sponge Iron Limited Vs. Commissioner of Income Tax - Court Judgment

Excerpt:
direct taxation - deduction - section 37(4a) of the income tax act, 1961 - appellant was public limited company carrying on business of manufacture and sale of sponge iron - assessment was made - appellant approached to tribunal for deduction - dismissed - hence present appeal - whether tribunal is right in holding that expenses incurred towards repairs, depreciation and salary paid to staff looking after transit house indirectly is not allowable as deduction while computing income from business solely because of provision in section 37(4a) of act or not? - held, tribunal was correct in holding that expenses incurred towards repair, depreciation and salary paid to staff looking after transit house indirectly is not allowable as deduction while computing income from business solely because of provision in section 37(4a) of act direct taxation - relief - section 80hh of income tax act 1961 - whether tribunal is right in disallowing relief under section 80hh of act on whole of interest receipts of rs. 3,11,86,442 without setting off interest payments of rs. 2,35,38,917 or not? - held, tribunal erred in disallowing relief under section - 80hh of act in so far as interest received of rs. 1,63,04,937/- is concerned and tribunal also erred in disallowing set off of interest payment of rs. 2,35,38,917/- against interest income of rs. 1,48,81,505 - appeal allowed in part accordingly - labour & services pay scale:[tarun chatterjee & r.m. lodha,jj] fixation - orissa service code (1939), rule 74(b) promotion - government servant, by virtue of rule 74(b), gets higher pay than what he was getting immediately before his promotion - circular dated 19.3.1983 modifying earlier circular dated 18.6.1982 resulting in reduction of pay of employee on promotion held, it is not legal. statutory rules cannot be altered or amended by such executive orders or circulars or instructions nor can they replace statutory rules. - the assessee also claims that section 37(4) of the act over-rides the general provisions contained under section 27-32 of the act and accordingly claims that guest house expenses, wages and salary as well as depreciation of the guest house are to be allowed. he submitted that in the present case at hand, each of the four heads on which the present appellant earns interest ought to be cumulatively accepted as an act of prudent management on the part of the assessee to utilize its resources for the best interest of the company. the tribunal has failed to appreciate that it is not the case of the assessing officer that interest income is not assessable under the head 'profits and gains of business'.it is only while computing the relief that the revenue changes its stand. shri ratho submitted that no similar amendment or explanation was provided by the legislature into section 80hh when it carried out amendment to section 80hhc, which clearly indicates, that the legislature while on the one hand sought to limit the benefits available to the assessee under section 80hhc, on the other hand, by omission, the legislature, in fact, reiterated the wider benefits which intended to vest in the assessee claiming benefits under section 80hh. after considering all the aspects of the issue as well as several decisions of the supreme court, came to hold as follows: it is well settled law that the duty of the judicature is to act upon the true intention of the legislature. 12. shri ratho advanced an alternative argument without prejudice to their earlier contentions, that in the event of any of heads of income of interest would fail to pass the test of eligibility under section 80hh(1), in that event, he contended that the profit and loss account of the assessee shows that rs. shri mohapatra, placed strong reliance upon the judgment of the apex court in the case of pandian chemicals (supra) and submitted that the tribunal has correctly applied the ratio of this judgment to the facts and circumstances of the present case thereby not requiring any interference by this court in exercise of its appellate jurisdiction under section 260a of the income tax act, 1961. shri mohapatra submitted that section 80hh of .the act grants deduction only in respect of the profit and gains 'derived from' an industrial undertaking and stated that in the aforesaid judgment the apex court has clearly stated that the words 'derived from' in section 80hh of the income tax act, 1961 must be understood as something which has immediate nexus with the assessee's industrial undertaking. accordingly, the interest income claimed by the assessee under section 80hh of the act has correctly been rejected and/or turned down by the revenue as well as affirmed by the itat in the impugned order vide annexure-4. to sum up, mr. 14. shri mohapatra, relying upon the judgment in the case of pandian chemicals stated that no legislative intent could be inferred from the amendment of section 80hhc and the non-amendment to section 80hh, since it is well settled that the rules of interpretation would come to play only if there is any doubt with regard to the express language used. as well as a judgment of the constitution bench of the apex court in the case of mrs. 20. in so far as the alternative plea is concerned, we are in complete agreement with the contention of the appellant that the mere reflection of transactions in two separate or distinct accounts in the books of the company do not by itself qualify for distinctly different treatment and since both, i.i. mahanty, j.1. m/s. tata sponge iron limited, the appellant, is a public limited company carrying on the business of manufacture and sale of sponge iron and incorporated under the companies act, 1956. the appellant has preferred this appeal under section 260a of the income tax act, 1961 (hereinafter referred to as 'the act') seeking to challenge the order dated 13.10.2003 passed by the income tax appellate tribunal in ita no. 83/ctk/2000 pertaining to the assessment year 1996-97.2. this court vide the order dated 3.5.2006 was pleased to admit the appeal on the following two questions of law:1) whether on the facts and in the circumstance of the case, the learned income tax appellate tribunal is right in holding that the expenses incurred towards repairs, depreciation and salary paid to staff looking after the transit house indirectly is not allowable as deduction while computing the income from business solely because of the provision in section 37(4a) of the income tax act, 1961.ii) whether on the facts and in the circumstances of the case, the learned income tax appellate tribunal is right in disallowing the relief under section 80hh of the act on the whole of interest receipts of rs. 3,11,86,442 without setting off the interest payments of rs. 2,35,38,917.3. in so far as the first question of law is concerned, it is seen from the order of the income tax appellate tribunal that the same relates to the claim for deduction of expenditure made by the assessee towards salary and wages of guest house staff and depreciation of guest house and the claim for the same to be admissible under section 28-32 of i.t. act. the assessee claims that the restriction provided for in the residuary section 37 of the act should not be applied to such expenses. the assessee also claims that section 37(4) of the act over-rides the general provisions contained under section 27-32 of the act and accordingly claims that guest house expenses, wages and salary as well as depreciation of the guest house are to be allowed.4. the tribunal has noted in the impugned order that in view of the judgment in the case of united catalysts india ltd. v. cit : [1998]229itr233(ker) , the guest house expenses are not allowable and therefore the tribunal affirmed addition of such expenditure into the income assessable of the assessee.shri s.n. ratho, learned counsel for the appellant submitted that this question is no longer res integra and has been settled against the assessee and in favour of the revenue by the hon'ble supreme court in the case of britannia industries ltd. v. cit and anr. : [2005]278itr546(sc) and in view of such determination, question no. 1 need not be answered. shri akhil mohapatra, learned counsel for the revenue also affirms the same and accordingly, question no. 1 is decided against the assessee and in favour of the revenue in the light of the judgment of the apex court referred to above.5. in so far as the second question of law noted hereinabove is concerned, the same relates to a claim of deduction under section 80hh of the act. shri ratho, learned counsel for the appellant submitted that the assessee earned interest from various sources noted herein below:interest from rupees1. deposit with bank 54,88,403/-2. inter corporate deposits 93,93,102/-3. customers 99,42,335/-4. bill discounting 63,62,602/--------------3,11,86,442/--------------shri ratho submitted that against the aforesaid earning of interest, it had also incurred expenses amounting to rs. 2,35,38,917 -as interest paid on borrowed funds. therefore, he submits that in effect the earning from interest is rs. 76,47,525/- (rs. 3,11,86,442 - rs. 2,35,38,917). in this respect, shri ratho submitted that the interest earning ought to qualify for relief under section 80hh of the act, since such earning arose out of borrowed funds of the assessee, which was not immediately required for earning some interest and accordingly, he submitted that such interest earned under item nos. 1, 2 and 4 ought to be classified as such.in so far as interest earned from delayed payment by customers is concerned i.e. item no. 3, shri ratho submitted that the same was earning by the assessee from customers who chose to delay in making payment for purchases, and since the assessee in this case was carrying on an ongoing business of 'manufacture' during the previous year, the present case was a case where the assessee had earned income after its business had actually commenced. therefore, shri ratho, reiterated that the assessee had no other business except the business of manufacture and sale of sponge iron and even though the revenue had granted the appellant similar claims under section 80hh for the earlier years, rejecting the same for the assessment year 1996-97 is wholly erroneous in law.6. shri ratho, further submitted that the assessing officer (ao) did not allow the assessee relief under section 80hh on the ground that the interest income of the assessee did not form part of the business carried on by the assessee, whereas in appeal, the cit(a) upheld the disallowance, although he treated interest income of the assessee as business income. further, the tribunal also disallowed the claim of the assessee by placing misplaced reliance on the judgment of the apex court in the case of pandian chemicals ltd. v. commissioner of income tax : [2003]262itr278(sc) .shri ratho, submitted that the apex court while dealing with the case of pandian chemicals was concerned with interest earned on deposit with the electricity board and submitted that the said case would have no applicability to the present case, inasmuch as, the appellant in the present case, had not earned any interest from similar deposits with any electricity board. he reiterated that the interest earned on the deposit in pandian chemical's case was taken not be a deposit made for the purpose of its business. he submitted that in the present case at hand, each of the four heads on which the present appellant earns interest ought to be cumulatively accepted as an act of prudent management on the part of the assessee to utilize its resources for the best interest of the company. it is further submitted that interest from deposits in bank (item no. 1) was the interest earned by the assessee from bank deposit of funds not immediately required by the appellant-company and therefore, was an act of prudent financial management on the part of the assessee. interest earned from delayed payment by the customers (item no. 3) was the interest paid by the customers who delayed payment for sale proceeds. it is further submitted that the assessee did not do any additional voluntary act, unlike pandian chemical's case (supra), making deposits and that sale of manufactured articles and collection of payment thereof is an inseparable part of the industrial activity of the present assessee. in this respect, shri ratho placed reliance on the judgment of the madras high court in the case of cit v. madras motors ltd. he submitted that the aforesaid decision has already been followed by a later on decision of the madras high court in the case of cit v. indo matsushita carbon co. ltd. : [2006]286itr201(mad) .7. learned counsel for the appellant also placed reliance on a judgment in the case of nirma industries ltd. v. deputy cit : [2006]283itr402(guj) , relevant portion of which is quoted herein below:the purchaser pays a higher sale price if it delays payment of the sale proceeds....the distinction by the revenue is artificial in nature and is neither in consonance with law nor commercial practice.the tribunal has failed to appreciate that it is not the case of the assessing officer that interest income is not assessable under the head 'profits and gains of business'. it is only while computing the relief that the revenue changes its stand.... therefore, on this limited count alone, the order of the tribunal suffers from a basic fallacy resulting in an error in law and on facts.8. shri ratho thereafter dealt with the three other heads under which interest has been earned by the assessee i.e. interest from bank deposits, interest on inter corporate deposits and interest from bill discounting. it is submitted that the aforesaid three items of interest were earned by the assessee on account of prudent investment of idle funds voluntarily. as a consequence of such interest earning, the cost of production was reduced and consequently enhanced the profits of the assessee due to efficient and prudent financial management of the assessee's manufacture business. it is further submitted that by denying the claim of deduction by the assessee, the assessee has in effect been penalized for conducting its business in a manner that subserved the mandatory direction of the law. in this respect, the appellant has placed reliance on a judgment of the apex court in the case of cit v. canara workshop (p) ltd. : [1986]161itr320(sc) wherein the apex court took note of the underlying object of the enactment of section 80e of the act in the following manner:it is obvious from the object of the terms in which it provides relief that the intention of the parliament.... it is clear that the benefit was directed to setting up and also the efficient working of the priority industries.9. he has further placed reliance on the judgment of the apex court in the case of cit v. j.h. gotla (1995) 156 itr 323 wherein the apex court laid down the principles of interpretation of statutes in the following manner:where the plain literal interpretation produces a manifestly unjust result which could have never been intended by the legislature, the court might modify the language used by the legislature so as to achieve the intention of the legislature and produce a rational construction.10. a further contention advanced by mr. ratho, was to the effect that the legislative intent behind the enactment of section 80hh (introduced with effect from 1.4.1974) can also be inferred from a conscious omission to amend section 80hh when the legislature amended section 80hhc by finance (no. 2) act, 1992 by introducing the explanation (baa) in section 80hhc. by inserting explanation (baa) , the bulk of the relief on items enumerated therein (namely, interest, commission etc.) was withdrawn. shri ratho submitted that no similar amendment or explanation was provided by the legislature into section 80hh when it carried out amendment to section 80hhc, which clearly indicates, that the legislature while on the one hand sought to limit the benefits available to the assessee under section 80hhc, on the other hand, by omission, the legislature, in fact, reiterated the wider benefits which intended to vest in the assessee claiming benefits under section 80hh. shri ratho, in essence submitted that section 80hh and the legislative intent behind it must be given a wider amplitude and that the present assessee who claims relief under section 80hh should be entertained and considered favourably.in this respect, shri ratho placed reliance on a judgment of this court in the case of tata sponge iron ltd. v. state of orissa ojc no. 2213 of 2001, disposed of on 9.8.2006 (unreported till date) wherein this court while considering whether a time limit can be read into the industrial policy resolution, when it did not explicitly contain any time limit. after considering all the aspects of the issue as well as several decisions of the supreme court, came to hold as follows:it is well settled law that the duty of the judicature is to act upon the true intention of the legislature. in other words, if a provision is open to more than one interpretation, the court has to choose that interpretation which represents the true intention of the legislature.in support of the above submission, shri ratho placed reliance on the case of p.r. pravakar v. cit (2006) 248 itr 548 to the following effect:it is also trite law that an exemption is to be granted unless it is expressly taken away.11. the summary of the aforesaid contentions advanced on behalf of the appellant are noted herein below:(1) section 80hh has been indicated as an 'incentive provision'.(2) there is no doubt that the provision of section 80hh is applicable to the instant case and the only dispute relates to quantum of income eligible for such relief.(3) interest income indicated in paragraph - 5 above constitutes only 4 to 5 per cent of the total income of the assessee and such interest income could not have been earned without the funds borrowed from the assessee for its manufacture business.(4) the assessee is a manufacturer and seller of 'sponge iron'.(5) despite the items of interest have already been assessed for earlier years as income from business.(6) exemption under section 80hh continues and that too without any amendment similar to the amendment made to section 80hhc.12. shri ratho advanced an alternative argument without prejudice to their earlier contentions, that in the event of any of heads of income of interest would fail to pass the test of eligibility under section 80hh(1), in that event, he contended that the profit and loss account of the assessee shows that rs. 2,35,38,017/- has already been paid as interest on borrowed funds of the assessee whereas a sum of rs. 2./1 2,44, 107/- has been earned from the three items under consideration. he further submitted that the said income earned and interest paid on borrowed capital, have been shown separately only to conform to the requirements of schedule vi-part-ii, section 3(v) and section 3(xi)(b) of the companies act, 1956 which mandates that 'expenditure for interest' to be shown at expenditure side and the 'interest income' to be shown on the income side of the profit and loss account. shri ratho submitted that two heads of income i.e. interest paid and interest earned have been shown separately otherwise the same would have been shown under the same heading of expenditure and would have been set off and the expenditure would have been set off against the income and the net balance would have been shown either in income or expenditure heading. he submitted that in the present case if the first contention fails, then since the assessee has paid interest on borrowed funds of rs. 2,35,38,017/- and has earned interest of rs. 2,/12,44, 107/-, after setting off the interest expenditure from the interest income, the only net amount of interest, if any, may be denied exemption and not the total interest income earned. in this respect, mr. ratho placed reliance on a decision of the apex court in the case of keshavji ravji and co. v. cit effect: : [1990]183itr1(sc) to the following effect:if instead of the transaction being reflected in two separate or distinct accounts in the books of the partnership, they were in one account partake of the same character.drawing an analogy from the aforesaid judgment, shri ratho submitted that both, the interest earned and interest paid partake the same character, since they are only referable from the said borrowed funds utilized for the purpose of efficient conduct of the business of the assessee. at the conclusion, learned counsel for the appellant submitted that the learned itat has misconceived the case of pandian chemical (supra). without taking note of the fact that the facts eminent in the case of the present appellant is basically different and such distinction was ignored by the itat and the following factual distinctions have been ignored by the itat:(i) none of the four items of interest earned in the present case relates to deposits with electricity board.(ii) interest on delayed payment received from the customers directly relate to the business of the assessee.(iii) other three heads of interest earned are due to the various acts on the part of the assessee to invest its surplus funds as a prudent financial manager to protect the companies financial interests.13. shri akhil mohapatra, learned standing counsel for the revenue supported the decision and the conclusion arrived at by the it at in its judgment dated 13.10.2003 vide annexure-4 to the present appeal. shri mohapatra, placed strong reliance upon the judgment of the apex court in the case of pandian chemicals (supra) and submitted that the tribunal has correctly applied the ratio of this judgment to the facts and circumstances of the present case thereby not requiring any interference by this court in exercise of its appellate jurisdiction under section 260a of the income tax act, 1961. shri mohapatra submitted that section 80hh of . the act grants deduction only in respect of the profit and gains 'derived from' an industrial undertaking and stated that in the aforesaid judgment the apex court has clearly stated that the words 'derived from' in section 80hh of the income tax act, 1961 must be understood as something which has immediate nexus with the assessee's industrial undertaking. he further submitted that interest earned by the assessee under all the. four heads of interest earning in the present case is a step removed from the business of industrial undertaking, its manufacture and sale of sponge iron. he accordingly submitted that deriving an income of interest on deposits made with banks and/or customers cannot be said to flow directly from the industrial undertaking of the assessee i.e. manufacture and sale of sponge iron. accordingly, the interest income claimed by the assessee under section 80hh of the act has correctly been rejected and/or turned down by the revenue as well as affirmed by the itat in the impugned order vide annexure-4.to sum up, mr. mohapatra submitted that none of the four heads of interest income indicated by the appellant can be claimed for relief under section 80hh since such income does not bear any 'direct or immediate nexus' with the appellant's industrial undertaking and as such, the income is from an activity of the appellant which is a step removed from the business of the industrial undertaking and that the earning of interest in the present case cannot be said to be flow directly from the industrial undertaking of the assessee.14. shri mohapatra, relying upon the judgment in the case of pandian chemicals stated that no legislative intent could be inferred from the amendment of section 80hhc and the non-amendment to section 80hh, since it is well settled that the rules of interpretation would come to play only if there is any doubt with regard to the express language used. where the words are unequivocal, there is no scope for importing the rule of liberal interpretation, as submitted by the appellant. he, accordingly, submitted that the judgment of the apex court in the case of pandian chemical fully substantiates and supports the conclusion arrived by the itat and for such reason, the said judgment of the tribunal merits no interference and the answer to question no. 2, as framed by this court in the present appeal should be answered in negative against the assessee and in favour of the revenue.15. the essential stand of the revenue before us was that the issues raised in the present appeal are covered by the judgment of the apex court in the case of pandian chemicals ltd. (supra). the question that was referred to the high court under section 256(1) of the i.t. act in pandian chemicals case (supra) is quoted herein below:whether on the facts and in the circumstances of the case, the appellate tribunal was right in holding that the interest on deposits with tamil nadu electricity board should be treated as income derived, by the industrial undertaking for the purpose of section 80hh ?on a plain reading of the facts of the present appeal, it is clear that interest earned by the present assessee is not due to any deposit made with the electricity board. despite this distinction of facts, it has to be determined as to whether interest earned by the present assessee from 'banks and inter corporate deposits' (item nos. 1 and 2) and the interest earned by the assessee on account of delayed payment by the customers, (item nos. 3 and 4) can be equated with interest on deposits with electricity board.16. in the case of pandian chemicals, the apex court was dealing with section 80hh(1) which is quoted herein below:where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof.hon'ble supreme court considered section 80hh of the act which grants deduction in respect of the profits and gains 'derived from' an industrial undertaking. the apex court also took note of the fact that the words 'derived from' had a narrower connotation than the expression 'attributable to'. in this respect, a reference was made to a judgment in the case of cambay electric supply industrial co. ltd. v. cit : [1978]113itr84(sc) , relevant portion is quoted herein below:in this connection, it may be pointed out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned solicitor-general, it has used the expression 'derived, from', as, for instance, in section 80j. in our view, since the expression of wider import, namely, 'attributable to', has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity.hon'ble supreme court also took note of the judgment of the privy council in the case of cit v. raja bahadur kamakhaya narayan singh (1948) 16 itr 325 to the following effect:the word 'derived' is not a term of art. its use in the definition indeed demands an enquiry into the genealogy of the product. but the enquiry should stop as soon as the effective source is discovered. in the geological tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. and rent is not land within the meaning of the definition.as well as a judgment of the constitution bench of the apex court in the case of mrs. bacha p. guzdar v. cit : [1955]27itr1(sc) , wherein the apex court approved and reiterated the views of the privy council as quoted herein above. it is, therefore, now settled that the words 'derived from' contained in section 80hh of the act must be understood as something which has a direct or immediate nexus with the appellant's industrial under taking.17. before proceeding any further in the matter, it is important for us to consider the nature of the present appellant's industrial undertaking. it is the admitted case of both the parties that the assessee is in the business of manufacture and sale of sponge iron. we are of the view that only those incomes which have 'direct or immediate nexus' with the manufacture and sale of sponge iron alone, would qualify to be covered under section 80hh and not any other income. in this respect, it has to be accepted that the industrial undertaking of the assessee was not limited to manufacture of sponge irons, but it has also extended thereof to the sale of manufactured items. therefore, we are of the view that any interest earned by the assessee which has direct or immediate nexus with either manufacture or sale of its product has to be accepted to be an income which qualified as an income under section 80hh. as contended by the learned counsel for the appellant, we are of the view that interest earned by the assessee from its customers for delayed payment and for bill discounting, such interest income does bear a direct and immediate nexus with the industrial undertaking of the assessee and therefore, interest earned from the customers, for delayed payment and bill discounting, are held to be income 'derived' from the petitioners industrial undertaking and therefore, entitled for relief under section 80hh.18. applying the provisions and the ratio of the judgment in the case of pandian chemical ltd. (supra), we are of the view that interest earned by the assessee from the deposits made in bank and inter corporate deposits, though attributable to the business of the assessee, is a step removed from the assessee's industrial undertaking and therefore, cannot be held to have been 'derived from' the industrial undertaking in order to qualify for relief under section 80hh. we are, therefore, of the view that the interest earned by the assessee from the deposits with banks or inter corporate deposits (item nos. 1 and 2) do not qualify for relief under section 80hh.19. in so far as the plea raised by the appellant regarding interpretation of statute is concerned vis-a-vis inference to be drawn from the amendment to section 80hhc and non-amendment of section 80hh, we are in agreement with the learned counsel for the revenue, since section 80hh itself, is clear and unambiguous, no necessity exists for the court to infer or derive any legislative intent. in view of the fact that this very conclusion has been reached by the apex court in pandian chemical's case (supra), we are constrained to reject this contention raised by the appellant.20. in so far as the alternative plea is concerned, we are in complete agreement with the contention of the appellant that the mere reflection of transactions in two separate or distinct accounts in the books of the company do not by itself qualify for distinctly different treatment and since both, i.e., the interest earned and interest paid partake the same character, set off as claimed is permissible under law. in this respect, reliance is placed on the judgment of the apex court in the case of keshavji ravji and co. v. cit : [1990]183itr1(sc) .21. in view of the discussions made herein above, we answer the question framed herein in the following manner:i) the itat was correct in holding that the expenses incurred towards repair, depreciation and salary paid to the staff looking after the transit house indirectly is not allowable as deduction while computing the income from business solely because of the provision in section 37(4a) of the income tax act, 1961.ii) the itat erred in disallowing relief under section - 80hh of the act in so far as interest received of rs. 1,63,04,937/- is concerned and the tribunal also erred in disallowing set off of interest payment of rs. 2,35,38,917/- against interest income of rs. 1,48,81,505/-.22. the appeal is partly allowed in terms of the answers to the questions of law framed hereinabove.b.p. das, j.23. i agree