Auckland Jute Co. Ltd. Vs. Commissioner of Income-tax - Court Judgment

Shyamal Kumar Sen, J.

1. The assessee is a company and the assessment year involved is 1964-65 for which the previous year ended on March 31, 1964. During the year, the assessee carried on the business of manufacture and sale of jute fabrics.

2. Bird and Co., during the year, were the managing agents of the assessee-company as also two other jute mills by name the Kinnison Jute Mills Co. Ltd. and Northbrook Jute Mills Ltd. and also of another company known as Becker Gray and Co. (1963) Ltd. (hereinafter referred as 'Becker Gray'). Becker Gray acted as an export house for the export of wide hessian manufactured by the assessee-company and the other aforesaid two jute companies to the U. S. A. Becker Gray exported this wide hessian to the U. S. A. through Messrs. White Lamp and Finlay acting as agents.

3. For exporting the wide hessian, the assessee used steel cores for winding the said wide hessian into rolls.

4. In the assessment of the assessee for the year under consideration, i.e., 1964-65( the Income-tax Officer, on the basis of the seized correspondence, pertaining to the Bird group of companies, which came to be with him, has come to the conclusion that the following facts emerged therefrom :

'(i) The cores were not separately charged for by the mills when the rolls were 'sold' to Becker Gray. Nor did Becker Gray charge W.L.F. separately for the cores. In their declaration before the Customs, Becker Gray clearly stated that the cores were returnable. When W. L. F. sold the rolls to the consumers in U. S, A., they obtained a deposit of $10 to $13 from them for ensuring the return of the cores. If the cores were lost, the deposits were forfeited. The returned cores were shipped back to India and eventually found their way to the respective mills to be reused by them.

(ii) The average cost of a new core was about Rs. 100, whereas the cost of shipping back an old core would be about Rs. 20 only.

(iii) A core could be used over and over again after minor attention in some cases for straightening bent cores. The assessee's accounting procedure has been to debit as consumable stores the cost of new cores. Old cores are taken back on stock at cost of shipping them back and as such debited in the same manner when the core is reissued for packing.'

5. From the above facts, the Income-tax Officer came to the conclusion that the steel cores always remained the property of the assessee-company and that the case set up by the assessee that the cores constituted just packing materials and should be considered as sold along with the rolls was not correct. It was further clear, according to the Income-tax Officer, that the steel cores were to be given the same treatment as metal gascylinders in the case of concerns producing and selling gaseous products like oxygen, etc. The cores would have to be treated as capital assets and their cost debited to the account would have to be added back as capital expenditure. He, accordingly, in view of the assessee's account added Rs. 4,89,709, the total of Rs. 3,50,164 representing the value of the new cores issued during the year and Rs. 1,39,545 the value of old cores reissued.

6. In the assessment of the assessee, the Income-tax Officer also added Rs. 90,000 on account of amounts of deposits by customers in the U.S.A., which were forfeited by Messrs. White Lamb Finlay Inc. due to the nonreturn of steel cores. These deposits were taken against the steel cores and these were forfeited as the cores were not returned. The total amount thus forfeited came to one lakh dollars. The Income-tax Officer has taken the share of the assessee-company at Rs. 90,000 on estimate basis. For so holding, he has observed as under :

'In 1962, Pilkington recorded in his tour notes that the credit balance in the cores deposit account was around $1,00,000 and provided a useful form of interest-free financing. It is admitted that in 1963, a survey was made of the cores which had not been returned for long periods and the corresponding deposits were treated as forfeited and the amount so forfeited is claimed to have been adjusted against amounts due to W.L.F. in respect of the cost of returning cores. Details of the amounts actually forfeited and the assessee's share therein have not been furnished. Considering the fact that the balance in the core account was not less than $1,00,000 in 1962, I estimate the total amount forfeited in terms of rupees at Rs. 2.5 lakhs and the assessee-company's share therein at Rs. 90,000 taking into account its share in the total exports.'

7. The assessee filed an appeal before the Appellate Assistant Commissioner. The assessee contended that the cost of steel cores amounting to Rs. 3,50,164 as well as the cost of bringing back the used steel cores amounting to Rs. 2,39,545 should be treated as revenue expenditure. The Appellate Assistant Commissioner upheld the addition of Rs. 3,50,164 being the cost of the steel cores subject to the allowance of appropriate depreciation. He, however, agreed with the assessee that the expenditure in bringing back the used cores amounting to Rs. 1,39,545 should be allowed as revenue expenditure.

8. As regards the assessee's share in the amount forfeited, amounting to Rs. 90,000 for non-return of steel cores by customers, the Appellate Assistant Commissioner upheld the Income-tax Officer's action in adding the said sum in the total income of the assessee.

9. The assessee filed a further appeal before the Tribunal. On going through all the relevant facts, the Tribunal found that the position in the present case was similar to the case of Kinnison Jute Mills Co. Ltd. decided by the Tribunal, vide its order in I. T. A. No. 628/(Cal) of 1972-73 dated September 5, 1978.

10. Accordingly, the Tribunal held that the tax authorities were justified in treating the assessee as the real owner of the steel cores and the expenditure for purchasing the new steel cores in the year under consideration as capital expenditure.

11. On the issue of the addition of the sum of Rs. 90,000 in respect of forfeited money for non-return of the steel cores, the Tribunal held that, since the steel cores had been held as capital assets of the assessee, the amount forfeited for the non-return of the same should be treated as capital and not revenue in nature.

12. On a reference application made by the assessee under Section 256(2) of the Income-tax Act, 1961, being Matter No. 2095 of 1980, the following questions were directed to be referred :

'(1) Whether the finding of the Tribunal that the assessee-company was the real owner of the steel cores was based upon any material and/or evidence and was vitiated by failure to consider the relevant materials on record and by considering irrelevant and inadmissible materials and is otherwise unreasonable and perverse

(2) Whether the Tribunal was legally justified in law in holding that the expenditure for purchasing new steel cores was a capital expenditure and not a revenue expenditure allowable as a deduction in computing the business income of the assessee ?'

13. The aforesaid questions arose out of the assessee's reference numbered 605/(Cal) of 1979, relating to the order dated February 3, 1979, of the Tribunal in I. T. A. No. 1376/(Cal) of 1972-73, for the assessment year 1964-65.

14. On the Revenue's reference being numbered 614/(Cal) of 1979, arising out of the same order dated February 3, 1979, of the Tribunal in I. T. A. No. 1376/(Cal) of 1972-73 for the same assessment year 1964-65, this court, by order dated May 13, 1982, in Matter No. 1316 of 1980, directed the Tribunal to refer the following question under Section 256(2) of the Income-tax Act, 1961 :

'Whether, on the facts and in the circumstances of the case, the Tribunal misdirected itself in law in holding that the sum of Rs. 90,000added on account of deposits by customers in the U.S.A., which were forfeited by White Lamb Finlay Inc., due to the non-return of the steel cores, will be capital and not revenue in nature ?'

15. It has been contended on behalf of the assessee that the asgessee was manufacturing wide hessian cloth which was exported to the U. S. A, and Becker Gray and Co. (1930) Ltd. acted as an exporter of this special type of wide hessian cloth. The purchase of new steel cores was accounted for in the consumable stores account and the assessee claimed it to be consumable stores and hence revenue expenditure deductible in computing the total income of the assessee. Wide carpet backing cloth was rolled on steel cores which were sold to Becker Gray and Co. for export and the steel cores were not charged separately to Becker Gray and Co. by the assessee. The exporter, Becker Gray and Co., stated before the Customs Authority that the steel cores were returnable. This declaration by the exporter has nothing to do with and not given by the assessee but by some other company which is a separate entity (sic). Becker Gray and Co., while exporting carpet backing cloth to White Lamb Finlay, U. S. A., did not charge separately for the cores but W. L. F. kept the deposit for the cores from its customers for ensuring the return of the cores and sometimes, the cores were returned to the exporter and the exporter distributed the cores to different mills by charging the shipment and other incidental charges and the assessee-company debited the same while using the old steel cores in the consumable stores account. The old steel cores were again repurchased from Becker Gray and Co. Thus the ownership of the steel cores remains with the exporter and not with the assessee-company. At the hearing before the Tribunal, the assessee produced some specimen contracts. In some of the contracts, there is no mention whether the carpet backing cloth is to be bounded on steel/paper cores. As the cost of the new steel core has been debited in the consumable stores account, the Tribunal, it has been alleged, has wrongly observed that there cannot be any presumption whether the iron/paper cores on which the said cloth was bound had not been sold with the cloth. The paper core and/or steel had been sold along with the carpet backing cloth after being bound and the assessee had not charged separately for the said cores and when the carpet backing cloth was sold to the exporter, whether it is mentioned or not, the ownership of the core passes to the exporter. It has been submitted that the finding of the Tribunal that the assessee was the real owner of the steel cores is completely erroneous.

16. It has been submitted on behalf of the assessee that the life of the steel core is negligible and the expected life of such steel core ends afterbeing used once or twice. It has been contended that the Tribunal failed to consider the relevant and important fact that the life of the steel core does not extend beyond one to two voyages and as such the said cores cannot be regarded as an asset or advantage of an enduring nature. According to Dr. Pal, the learned advocate for the assessee, the Tribunal has mentioned that the old steel cores are required to be straightened which is not required in the case of a gas cylinders as they are made of heavy steel but the steel cores are made of tin and as such the comparison with cylinders used in hessian product is not at all correct.

17. Learned counsel for the assessee further pointed out that the documentary and oral evidence before the Tribunal conclusively proved that so far as the assessee was concerned, the steel cores were sold by it to Becker Gray with the wide hessian bound on it and that the property in those steel cores passed from the assessee to Becker Gray. The Tribunal, however, observed as follows :

'The contracts between the assessee and Becker Gray made it clear that the subject-matter of the sales also included the steel cores, but we regret to state that learned counsel for the assessee was not able to point out the so called documentary or oral evidence in regard to the steel cores or the contracts between the assessee and Becker Gray in that behalf. The fact, as has been brought out in the aforesaid order referred to in the paragraph in the matter of the export of wide hessian to the U.S.A., is that Becker Gray has only acted as an export house and that they were interested in having their profit at 3/4ths percentage. In substance, the transactions were between the assessee mills and the other two mills and the ultimate purchasers through the agency of Becker Gray and White Lamb Finlay and the said three jute mills including the assessee were the real persons interested who were affected by the fluctuation in the prices of the wide hessian exported to America. They were to get the surplus or meet the deficiency, if any, due to the said fluctuation in the prices of the wide hessian. In the absence of the assessee to refer and show to us the so called documentary and oral evidence and/or the contracts between it and Becker Gray and in view of the facts to which we have referred just hereinbefore, the irresistible conclusion is that there is no evidence or material on record to prove that the steel cores were sold by the assessee and that the property in the steel cores passed from the assessee to Becker Gray and/or that the subject-matter of the sales consisted of both the wide hessian and the steel and the steel cores for the prices specified in the contracts in this behalf.'

18. The Tribunal, considering the evidence produced before the tax authorities, came to the finding that the ownership in the steel cores remained with the assessee mill. The relevant facts were considered by the Tribunal. In this connection, we may take note of the relevant portion of the judgment of the Tribunal :

'The relevant facts in this behalf are that the steel cores, as stated by the Income-tax Officer on the strength of the seized correspondence, and not shown by the assessee to be incorrect, were not separately charged for by the assessee when the wide hessian rolls were 'sold' to Becker Gray. Nor did Becker Gray charge W. L. F. separately for the cores. In their declaration before the customs, Becker Gray clearly stated that the cores were returnable. When W. L. F. sold the rolls to the consumers in the U.S.A., they obtained a deposit of $10 to $13 from them for ensuring the return of the cores. If the cores were lost, the deposits were forfeited. The returned cores were shipped back to India and eventually found their way to the respective mills including the assessee to be reused by them. Though the average cost of a new core was about Rs. 100, the cost of shipping back an old core was about Rs. 20. When the old cores came back, they were taken back on stock at cost of shipping them back. Further, these cores being steel cores, were capable of being used again and again in some cases just paying minor attention, say, for straightening bent cores, etc. It is not correct to say that a steel core is like a wooden or paper core. Steel cores were brought into use so as to avoid wastage. Cores, being of steel, have the inherent quality in themselves of being used again and again. The very fact that they were received back from the U.S.A. established its quality of being used again and again. They cannot be taken as consumable stores ending with their use once. It is not correct to say that, when these cores were received back by the assessee-company, they had been resold by Becker Gray to it. Further, the fact that there was an adjustment between Becker Gray and W. L. F. as brought out in the grounds of appeal for the accounting period relevant to the assessment year 1964-65, does not, in any way, displace the above conclusion. As rightly pointed out by the tax authorities, the steel cores can be taken as analogous to the cylinders used as containers for supply of gas, etc. The cores were certainly not stores which could be considered to be consumable as claimed. As already stated, these cores could be used almost indefinitely unless very badly damaged. We, therefore, on the facts and the circumstances of the case, and the material on record and our above discussion, hold that the tax authorities were justified in treating the assessee mill as the real owner of the cores and the expenditure for purchasing new cores inthe years under consideration as capital expenditure. We, therefore, uphold the finding of the tax authorities in this behalf.'

19. It was argued before the Tribunal that, in the case of Kinnison Jute Mills Co. Ltd., according to the contracts specimen of which were produced, the steel cores were sold outright along with the wide hessian to the foreign buyers. The expenditure in question was, therefore, revenue in nature. Considering the specimen contract for the sale of the item mentioned in the said contract and on perusal of the contract, it was found by the Tribunal that, in the first contract, the item sold is hessian cloth--40' width. It was further observed by the Tribunal : 'In the body of the contract, it is nowhere stated that this cloth was to be bound on the steel cores and that the steel cores were sold along with the hessian cloth. The next specimen contract pertained to Brattic cloth-84' width. The goods sold are different from hessian cloth. As such these specimen contracts are of no assistance in the present case. Furthermore, the said contracts are silent on the point whether the cloth sold was to be bound on paper rolls or steel cores. Another thing noted is that the said contracts do not state that the said cloth was sold along with the paper or iron cores. The next two specimen contracts pertained to linoleum hessian cloth of 52'/65' width. The goods sold are also different from the goods involved in the present appeal. Lino hessian cloth is different from hessian cloth of jute carpet backing cloth. Further, in one of these specimen contracts it is not stated as to whether the linoleum hessian cloth was to be bound on paper or iron cores. Nor does it state that the steel cores were sold along with the lino hessian cloth. The fact last mentioned assumes importance because in the order specimen contracts lino hessian cloth has been sold with steel cores 88'. As such, these specimens were of no help to the assessee in the present case. Coming to the remaining three specimen contracts, we find that one pertains to jute carpet backing cloth of 29' width. This contract, like the other which pertains to hessian cloth 43' wide, is silent as to whether the cloth sold was to be bound on paper or iron cores and as to whether the packing was sold along with the cloth. In the absence of any mention in that behalf, it is presumed that the iron paper cores on which the said cloth was bound up had not been sold with the cloth. Coming to the last specimen contract, we find that it pertains to hessian cloth-48' width to be rolled on paper cores. As such, this specimen contract is also of no help. To say, in other words, the specimen contracts produced before us do not render any help or assistance to the assessee in the present case as to make it distinguishable from that of the Kinnison Jute Mills Co. Ltd. (supra). The position in the present case appearsto be similar to that in the case of Kinnison Jute Mills Co. Ltd. We have perused our said earlier order in the case of Kinnison Jute Mills Co. Ltd. For the reasons stated in the said order, with which we agree, we hold that in the case of the present assessee also the tax authorities were justified in treating the assessee mill as the real owner of the steel cores and the expenditure for purchasing the new steel cores in the year under consideration as capital expenditure.'

20. In our opinion, the finding of the Tribunal does not call for interference by this court. The decision of the Tribunal that the assessee-company was the real owner of the steel cores was based on facts and evidence and it cannot be said that the Tribunal committed any error. The finding of the Tribunal to the effect that the expenditure incurred for purchasing steel cores was a capital expenditure, is also justified.

21. Under such circumstances, question No. 1 is answered in the negative and in favour of the Revenue and question No. 2 is answered in the affirmative and also in favour of the Revenue.

Ajit K. Sengupta, J.

22. I agree.