Calcutta H.C : Essential proportionate expenses incurred at corporate office for eligible unit should be considered for computing deduction under section 80-IA

High Court Of Calcutta

Tide Water Oil Co. ( India) Ltd. VS. CIT

Assessment Year : 2000-01

Section : 80-IA

Kalyan Jyoti Sengupta And Kanchan Chakraborty, Jj.

IT Appeal Nos. 795 -797 Of 2008 & 129 Of 2010

November 3, 2011

JUDGMENT

K. J. Sengupta, J. -All the above appeals were admitted for decision of this court on the following identical points as points involved therein are identical.

“(i) Whether the learned Tribunal misdirected itself in law and it adopted a wholly erroneous approach in interpreting the provisions of section 80-IA(5) of the Income-tax Act, 1961, to hold that the corporate expenses in the sum of Rs. 1,75,73,406 incurred by the assessee-company at its registered and head office at Calcutta, during the financial year relevant to the assessment year 2000-01 were essential expenses and had direct nexus with the running of its Silvasa unit and were, therefore, deductible in computing the profits and gains derived from the eligible business for the purpose of sub-section (1) of section 80-IA of the said Act and whether the findings of the learned Tribunal to this effect were wholly unreasonable, based on irrelevant consideration, contrary to the facts and evidence on record and/or otherwise perverse ?

(ii) Whether on a correct interpretation of section 80-IA of the Income-tax Act, 1961, the assessee-company was rightfully entitled to enjoy deduction in the sum of Rs. 9,02,62,300 in respect of profit and gains derived from the eligible business of the Silvasa unit and in respect of the assessment year 2000-01 ?”

2. The short facts of the case is as follows :

The appellant assessee-company is engaged in business of manufacturing and selling lubricants for vehicles under the brand names of Veedol and Mitsubishi Oil. The base oil for carrying out the aforesaid manufacturing operations is mostly imported from abroad more particularly, from Singapore, UK, USA and other European countries. The assessee-company, at all material times had five manufacturing units situated at Ramkristopur, Howrah (W. B.), Deonar in Maharashtra, Faridabad in U. P., Royapuram in Chennai and Silvasa in the backward area of the Union Territory of Dadra and Nagar Haveli. For manufacturing Mitsubishi oil, the assessee-company has entered into a collaboration agreement with Mitsubishi company of Japan. The manufactured oil is sold by the assessee-company through distributors and agents appointed and functioning throughout the country. This appeal is against the judgment and order dated August 29, 2008, and relate to the financial years ending on March 31, 1998, March 31, 1999, March 31, 2000, and March 31, 2003, corresponding to the assessment years 1998-99, 1999-2000, 2000-01.

3. This appeal concerns with the manufacturing unit at Silvasa. The original assessment for the assessment year 1998-99 was completed on 30th March of 2001, at a total income of Rs. 3,91,62,300. The Commissioner of Income-tax in exercise of its power under section 263 of the Income-tax Act, 1961 (hereinafter referred to as “the said Act”) by its order dated November 20, 2002, set aside the assessment and directed the Assessing Officer to re-examine the issues and make a fresh assessment. The assessee thereafter preferred an appeal against the said order of the Commissioner of Income-tax dated November 20, 2002, before the Income-tax Appellate Tribunal, however, the said appeal was dismissed by order dated August 12, 2003, with direction as follows :

In the instant case, we have noticed that the Commissioner of Income-tax (Appeals) after discussion had come to the conclusion that the assessment made was erroneous and prejudicial to the interests of the Revenue. In view of the same we do not find any infirmity of the order of the Commissioner of Income-tax. Pursuant to the said order, the Assessing Officer made a fresh assessment at a total income of Rs. 4,50,32,240, while doing so the Assessing Officer made an addition of Rs. 1,75,73,406 on account of proportionate corporate expenses out of the profit of the Silvasa unit, and thus reduced deduction under section 80-IA of the Act to the extent as against the deduction of Rs. 9,02,62,048 allowed under section 80-IA as per the original order dated 30th March, 2001. The assessee appellant thereafter preferred an appeal before the learned Commissioner of Income-tax (Appeal) who by order dated April 9, 2007, modified the said order of assessment with a direction upon the Assessing Officer to restrict the amount of corporate expenses to be deducted from the income of the Silvasa unit to Rs. 3,40,34,620 as against the entire amount of Rs.1,75,73,406 shown by the assessee as the head office expenses eligible to the Silvasa unit on the basis of the sale of the unit. Aggrieved by the said order dated April 9, 2007, of the Commissioner of Income-tax (Appeals) preferred an appeal before the learned Tribunal on various grounds. The learned Tribunal passed the impugned order.

4. Mr. N. K. Poddar, learned senior advocate appearing for the assessee in support of the appeal, contends that the assessee-company maintains separate books of account relating to the transaction effected at various branch offices under the relevant provisions of the Companies Act, 1956. The unit at Silvasa situated in the Union Territory of Dadra and Nagar Haveli of the appellant-company, has got the manufacturing activities and their expenses are also incurred by the assessee separately and such accounts are also audited separately. At the end of each financial year the audited accounts of each of the manufacturing units are brought to Calcutta for consolidation at the head office of the appellant company; and during such consolidation the receipts and expenses of the head office are also consolidated with receipt and expenses of the respective manufacturing units. Such accounts are first consolidated region-wise that is northern region, eastern region, western region, and southern region and thereafter consolidated with the accounts of the corporate head office at Calcutta. The overall consolidated accounts of each of the relevant financial years are audited by the statutory auditors under the provisions of the Companies Act. This consolidated accounts of the assessee-company as a whole are circulated and presented to the shareholders of the company in the annual general meetings held under section 166 of the Companies Act and once approved by them then printed audited account is filed with the Registrar of Companies as well as other statutory authorities including the Income-tax Department.

5. He submits that while filing the income-tax returns of each of the said four years, the assessee-company has filed separate sheets computing its total income based upon its consolidated printed audited financial accounts for each of the relevant financial years, along with the tax audit report prepared under section 44AB as well as sub-section (7) of section 80-IA of the said Act. The income-tax returns were also accompanied with its separate computation of total income in respect of the Silvasa unit falling under the western region, based on its audited accounts in respect of which the deduction under section 80-IA of the Income-tax Act, 1961, was claimed by the assessee-company for the first time in relation to the assessment year 1998-99 which is the first year of its operation. Similar computations of the total income of assessee-company as a whole including in respect of the Silvasa unit were also filed for each of the subsequent years and these are part of the records of the tax authorities including this hon’ble court. The registered office and head office at Calcutta only looks after the corporate functions of the assessee-company in accordance with the provisions of the Companies Act, 1956. The board of directors’ of the assessee-company sits at Calcutta, which is the registered office as well as the head Office of the assessee-company. All corporate functions including share transfer, etc., are executed and carried out at Calcutta. The directors’ board meetings and general meetings of the shareholder of the assessee-company are all held in Calcutta. The corporate expenses incurred in Calcutta and recorded in the head office books of the assessee-company maintained in the usual course of business in Calcutta has no direct nexus nor connection whatsoever with the manufacturing or selling operation of any of the manufacturing centres/units, including, inter alia, the Silvasa unit with reference to which alone the deduction under section 80-IA of the said Act has been claimed by the assessee-company.

6. He contends further that the corporate, administrative and overhead expenses incurred at the head office were never allocated to any of the manufacturing units and/or respective regions, in the books of account maintained by the assessee-company in the usual course of its business either at the manufacturing units/centres and/or at the head office. However, such corporate, administrative and overhead expenses incurred and recorded in the head office books of account maintained in the usual course of business in Calcutta were bifurcated only in the statements prepared for management information purposes and for internal control, in proportion to sales. Similar allocations were done for the subsequent years under appeal. Nowhere in the books of account and/or in the audited statements drawn in the form of profit and loss account and balance-sheet, the head office corporate, administrative and overhead expenses recorded in the head office books maintained in the usual course of business in Calcutta have been bifurcated and/or allocated to any of the manufacturing units. According to him, bifurcation made by the assessee-company for management information purposes cannot be used against the assessee-company for tax purposes. He contends with reference to the Supreme Court decision in the case of CIT v. C. Parakh & Co. (India) Ltd. [1956] 29 ITR 661 that just because the bifurcation of the accounts made for management information purpose the assessee cannot be estopped from claiming the benefit of deduction by reason of the fact it erroneously allocated part of it towards profits earned in a particular branch or centre.

7. According to him, legally the corporate head office expenses cannot be lawfully bifurcated and deducted from the profits of the respective manufacturing units and such proposition of law as propounded by him has been laid down by the Supreme Court in the case of CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 and in Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 450/109 Taxman 145 (SC).

8. Learned Tribunal has committed patent error in interpreting the expression “profits and gains” derived from any business of an industrial undertaking in sub-section (1) of section 80-IA/80-IB of the said Act in this case.

9. He also relied on the decisions of the Supreme Court in case of Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278/129 Taxman 539 (SC) and also in the case of CIT v. Sterling Foods [1999] 237 ITR 579/104 Taxman 204 that the words derived from denotes direct nexus between the profits and gains and the industrial undertaking.

10. According to him, in the facts and circumstances of this case, the expenses in the head office and corporate office has got no direct nexus between the profits and gains at the Silvasa unit.

11. He further contends that the words “derived from” used in the various sections of the Income-tax Act, 1961, like sections 80HH, 80-IA, 80-IB should be given restrictive meanings as the Legislature uses the narrower expression derived from as against the wider expression attributable to. In a recent decision of the Supreme Court in case of Liberty India v. CIT [2009] 317 ITR 218/183 Taxman 349 (SC) it is held that mere commercial connection between the profit earned and the industrial undertaking is not sufficient. The expression derived from has been explained in the said judgment to the effect that the words “derived from” are narrower in connotation as compared to the words attributed to. In other words, by using the expression “derived from” Parliament intended to cover sources not beyond the first degree. Under the scheme of the said Act, the tax is levied on the income, profits and gains and not on gross receipt. Under section 2(24) of the Act, the word “income” includes profits and gains which combines receipts and expenses. According to him, only those receipts can be considered for the purpose of allowing deduction under section 80-IA/80-IB of the said Act which have a direct nexus of a first degree source with eligible industrial undertaking ; by the very simple principles, the expenses derived from such receipts should also have a direct nexus of a first degree source, connection to receipts of the industrial undertaking in question. By the same principles, the expenses to be deducted from such receipts, should have a direct nexus of a first degree source connection to the receipts of industrial undertaking. In support of his submission he has relied on the following decisions of the Supreme Court :

(1) Rajapalayam Mills Ltd. v. CIT [1978] 115 ITR 777 (SC) ; and

(2) CIT v. Patiala Flour Mills Co. Ltd. [1978] 115 ITR 640 (SC).

12. He also contends that the circular issued by the Central Board of Direct Taxes No. 281, dated September 22, 1980, reported in [1981] 131 ITR (St.) 4 explaining the provisions of the Finance (No. 2) Act, 1980. In the said circular it is, inter alia, provided that in computing the quantum of tax holiday profits in all cases, taxable income derived from the new industrial units, etc., will be determined as if such units were an independent unit owned by an assessee who does not have any other source of income.

13. He has also referred to a Division Bench judgment of this court in the case of CIT v. Andaman Timber Industries Ltd. [2000] 242 ITR 204/109 Taxman 135 (Cal). The recent judgment of the Supreme Court in the case of Liberty India (supra) the expression of the meaning of the words “derived from” as mentioned in sections 80-IA and 80-IB has been explained.

14. He further contends that it is not every business receipt could qualify for deduction as required in the said two sections. Any incidental profits or receipts would not qualify for deduction even when these are arising from carrying on the business. There should be direct nexus between the receipt and the eligible business undertaking. A mere commercial connection between profits earned and the industrial undertaking is not sufficient.

15. He explains that the principle which has been laid down by different courts in interpreting the words “profits and gains” derived from any business or any industrial undertaking would equally apply to both receipts as well as the expenses. In other words, only those receipts can be considered for the purpose of allowing deduction under sections 80-IA and 80-IB of the said Act which have a direct nexus for the first degree source with the eligible industrial undertaking. Following the same principle the expenses is to be deducted from such receipts, that would also have a direct nexus of the first degree source in connection with the receipts of the industrial undertaking in question. Similarly, incidental commercial connection with the business at the industrial undertaking would not make the relevant expenditure deductible in computing the profits derived from the eligible industrial undertaking for the purpose of allowing deduction under section 80-IA/80-IB of the said Act. Every business expenditure, although deductible in computing the business income under sections 28, 29 read with section 47 of the Income-tax Act cannot be deducted in computing the profits derived from the eligible industrial undertaking for the purpose of sections 80-IA/80-IB of the said Act. In support of his aforesaid contention he refers to the Supreme Court decision reported in Rajapalayam Mills Ltd. (supra) and Patiala Flour Mills Co. Ltd. (supra), a mere commercial connection between the income and the industrial undertaking would not be sufficient. What is to be computed for the purpose of allowing deduction under sections 80-IA/80-IB is the profits and gains derived from any business of the industrial undertaking. Such income/profits and gains can be computed only by deducting from receipts and income, which have a direct nexus (connection of the first degree source) with the industrial undertaking, the expenses, which too have direct nexus with such receipts/income of the industrial undertaking. Since all business income/receipts cannot form part of profits derived from the industrial undertaking all business expenses cannot be deducted in computing any profits. The expenses incurred and recorded at the Calcutta head office are corporate administrative expenses and overhead expenses as it is very clear from the details set out in the petition. The registered and head office at Calcutta only looks after corporate functions of the assessee-company in accordance with the provisions of the Companies Act, 1956. The board of directors of the assessee-company sits at Calcutta which is a registered office as well as the head office of the assessee-company. All corporate functions including share transfers, etc., are executed and carried out at Calcutta. The directors’ board meetings and general meetings of the shareholders of the assessee-company are all held at Calcutta. Corporate expenses incurred at Calcutta and recorded in the head office books of the assessee-company maintained in regular course of business at Calcutta have no direct nexus or connection whatsoever with the manufacturing or the selling operations of any of the manufacturing centres including, inter alia, the Silvasa unit with reference to which alone the deduction under section 80-IA of the said Act has been claimed by the assessee-company. Undoubtedly, the head office expenses are incidental to the business operations carried out by the assessee-company but these expenses from the very nature thereof do not have a direct nexus whatsoever with the running of any of the five manufacturing units including, inter alia, the unit at Silvasa.

16. He submits that the findings recorded by the learned Tribunal in its impugned order dated August 29, 2008, followed by a subsequent impugned order dated April 8, 2010, are wholly unreasonable based on irrelevant consideration, contrary to the facts and evidence on record and/ or other purpose. The learned Tribunal failed to appreciate that advertisement, selling and marketing expenses of the manufacturing units were directly and fully debited and recorded in the respective manufacturing units as was the case of the Silvasa unit as well, whose advertisement expenses in the aggregate sum of Rs. 1,10,59,241 and selling and marketing expenses in the aggregate sum of Rs. 61,53,630 in respect of the assessment year 1998-99 were independently and separately recorded directly in the books of account of the Silvasa unit, as evident from page 151 of the paper book, volume-I in respect of the said year. Similarly, advertisement expenses in the aggregate sum of Rs. 1,52,70,208 and selling and marketing expenses in the aggregate sum of Rs. 43,69,645 both of the Silvasa unit in respect of the assessment year 1999-2000 were independently and separately recorded directly in the books of account of the Silvasa unit. The advertisement, selling and marketing expenses of the Silvasa unit were debited directly in the books of that unit for the assessment year 2000-2001.

17. He further contends that the nature of advertisement, selling and marketing expenses recorded in the head office books in each of the said years had no direct nexus or connection whatsoever or relationship of the first degree source with any of the manufacturing units.

18. Mr. Dipak Som, learned senior advocate appearing for the Revenue, supports the judgment and findings of the learned Tribunal. He contends that the meaning of the words “derived from” is something different from what the learned counsel for the appellant-assessee explains. He refers to the Blacks Law Dictionary, sixth edition for the meaning “derive” and contends that it will appear therefrom the meaning of the said word is to receive from a specified source or origin. He refers to a decision of the High Court in the case of Mst. Sarju Bai v. CIT [1947] 15 ITR 137 (All) at page 145, and contends that the meaning of the word “derived” should not be given a restricted meaning.

19. He submits that the learned Tribunal has correctly concluded the corporate/head office expenses at Calcutta has to be taken into consideration for the Silvasa unit, and on the facts and circumstances of this case it is not permissible under the law to ignore the corporate office expenses and in support of his contention he has referred to a decision of the Supreme Court in case of Consolidated Coffee Ltd. v. State of Karnataka [2001] 248 ITR 432.

20. He contends that no substantial point of law is formulated in other two appeals hence those two appeals should not be heard, as formulation of substantial question of law is a pre-condition for admission and hearing of the appeal as it has been held in a decision reported in M. Janardhana Rao v. Jt. CIT [2005] 273 ITR 50/142 Taxman 722 (SC).

21. We have considered the submissions of the learned counsel for both the parties. It appears to us from the argument of Mr. Poddar appearing for the appellant-assessee that this court should accept the interpretation of section 80-IA of the said Act the expenses incurred at the Silvasa unit should be taken into account for Silvasa alone not that of the Corporate and head office expenses. In this context, we have read the judgment of the learned Tribunal carefully and also that of the courts. We are of the view that in this matter there is no scope for fresh interpretation of section 80-IA for its applicability to the aforesaid relevant assessment years by reason of the fact that the learned Tribunal “D” Bench, Calcutta, in I. T. A. No. 1408 (Kol) of 2003 for the assessment years 1999-2000 (at page 226 of the paper book, volume III) and in I. T. A. No. 2753/Kol/2003 (at page 229 of the paper book, volume II) 2000-01 delivered judgments holding on March 29, 2004 and September 10, 2004, respectively on this issue, that the corporate expenditure essentially incurred for the Silvasa unit has to be taken into account for the purpose of allowing the benefit under the aforesaid section. Both the judgments aforesaid were rendered on identical points. These judgments have even accepted by the assessee. We, therefore, quote the relevant portion of the said earlier judgment and order of the learned Tribunal :

“We have considered the rival contentions and carefully perused the orders of the authorities below, and deliberated on the case law referred to by both the lower authorities as well as cited at the Bar by the learned authorised representative and the Departmental representative. As per the provisions of section 80-IA, deduction is to be allowed on the profit of an undertaking referred to in sub-section (iv) of section 80-IA. Thus, the intention of the Legislature is to give deduction in respect of the profits and gains from the industrial undertaking or enterprise engaged in infrastructure development, etc. For arriving at the correct profit of the industrial undertaking, the expenditure related to such undertaking is to be properly accounted for. Only by making entry under the head ‘corporate expenses’, the assessee is not allowed to increase the profit of the industrial undertaking, just by debiting the same in the head office account, the expenses which are actually attributable to the industrial undertaking on the profit of which deduction is eligible under section 80-IA. We had carefully gone through the details of corporate expenditure which has been narrated by the learned Commissioner of Income-tax (Appeals) in his order at page 4 and found that no reasoning has been given by the learned Commissioner of Income-tax (Appeals) for treating this expenditure as not related to the Silvasa unit. No justification has also been given by the learned Commissioner of Income-tax (Appeals) for treating these expenses as corporate expenses and not related to the manufacturing activity of the assessee’s unit. After going through the nature of the expenses like salary, wages and bonus of Rs. 56,93,453, it is very difficult to presume that such a heavy salary, wages and bonus will be paid just to maintain a corporate office . . .

In view of the above and in the interest of justice, the matter is restored back to the file of the Assessing Officer to examine in detail the nature of expenditure. If the Assessing Officer finds that these expenditure were essentially incurred for running the Silvasa nit, then the same is liable to be reduced from the profit of Silvasa unit for computing the deduction under section 80-IA. On the other hand, if he finds that the expenditure are nothing to do with the running of the Silvasa unit and purely of the corporate nature, such expenditure is not required to be reduced for computing deduction under section 80-IA. The Assessing Officer is directed accordingly.”

22. In the record we do not find any challenge was to the aforesaid decisions interpreting the applicability of section 80-IA rather the same was accepted by both the parties as the Assessing Officer assessed afresh.

23. Under these circumstances, the contention on the legal aspect of Mr.Poddar does not require any consideration as rightly recorded by the learned Tribunal. It is true that there is no question of estoppel as against the provision of law but when an appropriate authority having jurisdiction has interpreted the provision of law in its own way, and such interpretation is accepted by the parties concerned, this court under section 260A of Act cannot upset the aforesaid accepted binding decision of the learned Tribunal on identically mixed question of fact and law.

24. On reading we notice the learned Tribunal really wanted proportionately essential expenses incurred at the corporate office for the Silvasa unit alone should be taken into consideration for working out the figure of the profit of the Silvasa unit which is not being assessed separately as independent assessee. It is one of the units of the appellant who is the assessee.

25. We are not commenting as to whether for the purpose of section 80-IA only the Silvasa unit is to be treated and other unit is to be excluded.

26. However, while reading the impugned judgment we think that the learned Tribunal has encouraged guesswork made by the Assessing Officer. We are of the view accepting the argument of Mr. Poddar such decision is perverse and it is legally impermissible to accept it. We have read the judgment and order of the Assessing Officer and also the Commissioner of Income-tax (Appeals), carefully we find that the earlier direction of the learned Tribunal has not been followed with the appropriate application of mind. Actually, it appears the direction was that the Assessing Officer must examine the accounts either of corporate/head office accounting or of the Silvasa unit to ascertain essential expenditure incurred at the corporate office for running the Silvasa unit.

27. It seems to us that no endeavour has been made to do so. The learned Tribunal has gone wrong lending misplaced support to the concept of “best judgment”, because of non-availability of the materials or relying upon the accounting of the assessee. We think that this is not the way to find essential expenditure actually incurred for the Silvasa unit alone. We, accordingly, set aside the judgment and order of the learned Tribunal and allowed the appeal partly. In view of the above discussion and reasoning we do not think the decisions cited by Mr. Poddar are of any help to this case. We, therefore, direct the Assessing Officer to implement the earlier two decisions of the Tribunal mentioned above calling for the audited accounts both the Silvasa unit as well as the audited accounts of the corporate office and to find out the expenses incurred essentially for the Silvasa unit the amount of such expenses if found shall be deducted from the profit earned at the Silvasa unit, if there is none in real sense obviously, no other expenditure at the corporate level which is remotely or indirectly related should be taken into consideration. This shall be done for the assessment year 1998-99 also. Fresh exercise shall be completed within a period of three months from the date of communication of this judgment.

Kanchan Chakraborty J. – I agree.

[Citation : 353 ITR 300]

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