High Court Of Kerala
CIT vs. Parry Agro Industries Ltd.
Sections 28(i), 32, 43(6), 43B, 45, 73, 80HHC, 80-I, Rule 8
Asst. Years 1990-91, 1991-92
K.S. Radhakrishnan & V. Ramkumar, JJ.
IT Appeal Nos. 102, 109 & 134 of 1999
5th July, 2006
Counsel Appeared
P.K.R. Menon & George K. George, for the Appellant : Antony Dominic, for the Respondent
JUDGMENT
K.S. Radhakrishnan, J. :
This appeal is preferred by the CIT under s. 260A of the IT Act. Following are the substantial questions of law formulated by the CIT for our consideration in IT Appeal No. 109 of 1999 : “1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the loss incurred on sale of units of Unit Trust of India was not speculation business and is not the finding wrong and against law ? 2(a) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and had material to hold that it would not be correct to say that the machinery had not been put to use in the year ending 31st March, 1991 ? 2(b) Whether, on the facts and in the circumstances of the case, are there material and evidence for the Tribunal to find—‘There is evidence to show that it was received in the estate on 31st Jan., 1991’; ‘it was on trial run for some time when the defect was noticed’; ‘After making the repair the machinery was brought back to the estate when the invoice was issued’ and are not the findings wrong and unsupported by evidence ? 2(c) Whether, on the facts and in the circumstances of the case, the assessee is entitled to depreciation on fluid bed tea drier for the asst. yr. 1991-92 in the light of the finding of the AO that the assessee had not put to use the assets during the previous year ending on 31st March, 1991 ?
3. Whether, on the facts and in the circumstances of the case, the assessee is entitled to claim deduction under s. 80HHC and under s. 80-I before applying r. 8 of the IT Rules for allocation in regard to income from tea ?
4. Whether, on the facts and in the circumstances of the case and read with r. 8 of the IT Rules which brings only 40 per cent of the income under the Central income-tax, the assessee is entitled to claim deduction under ss. 80HHC and 80-I on 60 per cent of the agricultural income as well ?” Assessee is a public limited company deriving income mainly from the manufacture of tea from its own estates, seven in the State of Tamil Nadu and one in the State of Assam. Assessee filed its return of income declaring a total income of Rs. 2,87,11,180 for the asst. yr. 1991-92. In the return of income, the assessee claimed short-term capital loss of Rs. 1,45,08,630 which is set off against business income. The loss was incurred on the purchase of units of UTI and REC bonds. AO treated the loss as speculation loss, which is to be set off against speculation profit only. Appeal was preferred against the order of the AO before CIT(A). CIT(A) held that the loss on sale of units of UTI, etc. is only a capital loss, which should be allowed to be set off against the business income of the relevant assessment year. Revenue, aggrieved by the said order, took up the matter in appeal before Tribunal. Tribunal however, following the decision of this Court in CIT vs. Appollo Tyres Ltd. (1998) 149 CTR (Ker) 538 : (1999) 237 ITR 706 (Ker) upheld the decision of the CIT(A) holding that the loss is only a capital loss and not a speculation loss. Revenue’s stand that the purchase and sale of units of UTI tantamounts to speculation and the loss incurred therefrom is a speculation loss was not accepted. AO disallowed depreciation on fluid bed tea drier on the ground that this item has not been put into use by the assessee during the assessment year, since the same has been purchased as per invoice No. 2387, dt. 15th May, 1991 only, i.e., after the previous year. Assessee maintains the stand that machinery was delivered to them on 31st Jan.,1991 and the same was installed on the same date and trial run was going on. But according to the assessee, the machinery developed some defects and the same was set right and delivered back to the assessee on 15th May, 1991 only on which date the invoice for the sale was also issued. The CIT(A) noticed that the receipt of machinery was entered in the assessee’s books of account in the form of goods received note on 31st Jan., 1991. Under such circumstance CIT(A) and later the Tribunal allowed the claim of the assessee. Revenue has taken up the stand that there is no evidence on the part of the assessee to show that the machinery was brought to the premises on 31st Jan., 1991. Further, it was pointed out that no invoice or a separate delivery note from the seller was obtained. Without any corroborative evidence, Revenue took the stand that it is not possible to substantiate the assessee’s entry in its books on 31st Jan., 1991 towards goods received note raised by the assessee itself. Further, it was also pointed out that without a sale invoice it is not possible to consider the assessee as the owner of the machinery. Therefore, it was pointed out that the date of purchase of the machinery can be taken only as 15th May, 1991 and, therefore, the assessee was not entitled for depreciation during the asst. yr. 1991-92.
AO also computed the deduction under ss. 80HHC and 80-I on the income worked out from the tea business after apportioning the same, after applying r. 8. However, on appeal, following the decision of the Madras High Court in the case of Commr. of Agrl. IT vs. Periakaramalai Tea & Produce Co. Ltd. (1972) 84 ITR 643 (Mad) the CIT(A) directed the AO to work out the deduction before applying r. 8. Revenue aggrieved by the said order filed appeal before the Tribunal. Tribunal applying the ratio laid down by the Madras High Court in the abovementioned decision held that the deduction has to be worked out before applying r. 8, i.e., on 100 per cent of income computed in respect of the whole tea income. Revenue maintained the stand that the above decision of the Tribunal is not correct. It was pointed out that as per s. 80HHC, deduction has to be computed on the basis of the income from such business. It was pointed out that s. 2(24) defines income, which includes profits and gains. The income derived under the IT Act must be the income included in the total income on which income-tax is charged. Further it was pointed out that in respect of the income, the computation under ss. 28 to 43C is applied only to ascertain the income liable under the IT Act and under the Agrl. IT Act and to ascertain such proportion r. 8 is applied and 40 per cent of the income is considered as income under s. 2(24) of the IT Act, which is considered for purpose of s. 2(24) of the Act. Further, it was also submitted that only such 40 per cent of income is included in the gross total income and total income of the assessee. Reference was also made to Board’s Circular No. 600, dt. 23rd May, 1991.
Counsel appearing for the assessee on the other hand contended that there is no infirmity in the reasoning of the Tribunal and wanted dismissal of this appeal. Counsel submitted sale of bonds of public sector undertakings cannot be considered as shares and the finding that the assessee buys and sells shares periodically is without any basis. Further it was also pointed out that the bonds were sold only after due registration in the name of the assessee without any element of speculation. Appollo Tyres Ltd.’s case (supra) was a case where investment of the assessee in units of the UTI was in the course of business of manufacture and sale of tyres. While affirming the decision of this Court on this point the apex Court in Apollo Tyres Ltd. vs. CIT (2002) 174 CTR (SC) 521 : (2002) 255 ITR 273 (SC) held that the business of the assessee in buying and selling was an eligible business as contemplated under s. 32AB of the Act. The Tribunal had found as a fact on material on record that the investment by the assessee in units of the UTI was in the course of business, and the manufacture and sale of tyres and the business of purchase and sales of units of UTI were common in nature and both the businesses were intertwined and interlaced and, therefore, the sale of units was an “eligible business” within the meaning of s. 32AB(2) of the IT Act. The question as to whether the purchase and sale of UTI bonds was in the course of business or not has to be decided by the taxing authority as a question of fact. The question as to whether the purchase of UTI bonds, REC bonds were in the course of business or not was not considered by the assessing authority in the instant case and hence we feel that an opportunity be given to the parties to raise their respective claims on the question as to whether the loss on the sale of units of UTI is only a capital loss, which should be allowed to be set off against the business income of the relevant assessment year. In our view the matter requires further probe at the hands of the assessing authority. Therefore, the first question is sent back to the assessing authority for fresh consideration.
With regard to question No. 2(a), (b) and (c) are concerned, we feel that evidence is necessary to determine as to whether the assessee had brought the machinery in its business premises on 31st Jan., 1991 without an invoice or a separate delivery note from the seller. Assessee’s case is that machinery was installed on 31st Jan., 1991 and while trial run was going on it developed certain defects and consequently it was sent to the seller for rectifying the defects and the same was subsequently brought on 15th May, 1991 on which date the invoice for the sale was issued. Relevant documents were not made available before the authorities to support the contention. However, without expressing any opinion on the merits of the case we feel that it would be appropriate that the AO be directed to examine the claim of the assessee afresh and record a finding regarding ownership. We are now concerned with question Nos. 3 and 4. These questions are interlinked. The question is whether the assessee is entitled to claim deduction under s. 80HHC and under s. 80-I on the income worked out from the tea business after apportioning the same, after applying r. 8. On appeal, CIT(A) following the decision of the Madras High Court in Periakaramalai Tea & Produce Co. Ltd.’s case (supra) directed the AO to work out the deduction before applying r. 8. Revenue took up the stand that the decision of the Tribunal on the above issue is not correct. Point is already covered in favour of the assessee by the decision of this Court in CIT vs. C.W.S. (India) Ltd. (2000) 158 CTR (Ker) 529 : (2000) 246 ITR 278 (Ker) to which one of us, K.S. Radhakrishnan, J., is a party. After referring to the decision of the Madras High Court in Periakaramalai Tea & Produce Co. Ltd.’s case (supra) held that s. 80HHC refers to computation of the total income of an assessee. Rule 8 creates a legal fiction, 40 per cent deemed to be income liable to tax under r. 8 is chargeable income.
The Court, therefore, concluded that before applying the 40 per cent rule, income should be first computed in accordance with the provisions of the Act, i.e., after allowing deductions including those encompassed by Chapter VI-A. This Court held that a legal fiction is to be limited to the purposes for which it was created and should not be extended beyond the language of the section by which it is created. This Court pointed out that r. 8 deals with two types of income, i.e., agricultural income and non-agricultural income at the ratio of 60 : 40 of the total income. After computing the total income, the same has to be bifurcated in the above manner. Therefore, the total income would necessarily mean the net income and not gross income. This Court held that before the charging section is given effect to, taxable income must accrue and while computing the total income, all expenditure and other deductions and allowances must be taken into account. This Court held that special deduction under s. 80HHC must be granted before applying r. 8 which deems 40 per cent of income from manufacture and sale of tea to be income liable to tax. In the light of the above decision we answer the question in favour of the assessee. IT Appeal No. 134 of 1999
11. We are in this case concerned with the asst. yr. 1990-91. Questions raised in this appeal are identical to the question Nos. 3 and 4 raised in IT Appeal No. 109 of 1999 which we have already answered in favour of the assessee in view of the decision of this Court in C.W.S. (India) Ltd.’s case (supra). Therefore, the appeal would stand dismissed. IT Appeal No. 102 of 1999
12. In view of our finding on question No. 1 in IT Appeal No. 109 of 1999 the first question raised herein is directed to be considered by the assessing authority afresh. Question Nos. 2 and 3 are as follows :
“2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the profit derived from export is to be computed for the purpose of the relief under s. 80HHC in accordance with cl. (a) of sub-s. (3) on Assam tea without taking into account the turnover of tea from other estates, provided the business there is exclusively of export of tea ?
3. Whether, on the facts and in the circumstances of the case and on an interpretation of s. 80HHC of the IT Act, should not the Tribunal have taken the total turnover of the entire business including the Assam Tea Estate since as regards the tea business is concerned, the business as a whole in respect of all tea estates has to be taken together and is not the direction to the assessing authority accordingly wrong and unwarranted ?”
We find in the facts and circumstances of the case the Tribunal is right in holding that the profit derived from export is to be computed for the purpose of the relief under s. 80HHC in accordance with cl. (a) of sub-s. (3) on Assam tea without taking into account the turnover of tea from other estates. Questions 2 and 3 are already covered by the judgment of this Court in IT Appeal No. 103 of 1999 and IT Appeal No. 115 of 1999 in favour of the Revenue in which the assessee itself was the party. We, therefore, follow those decisions and answer these two questions in favour of the Revenue. We may now extract question Nos. 4(a) and (b). “
4(a) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that for arriving at the WDV of the assets in the tea business, depreciation to the extent of 40 per cent only was to be adjusted as the depreciation actually allowed ?
4(b) Whether, the Tribunal is factually right in upholding the contention that ‘depreciation actually allowed was only 40 per cent’ and is not the finding wrong legally and factually ?”
In view of the decision of this Court in C.W.S. (India) Ltd.’s case (supra), these questions have to be answered in favour of the Revenue. This Court in C.W.S. (India) Ltd.‘s case (supra) held that after computing the total income, the same has to be bifurcated in the ratio of 60 : 40 and the total income would necessarily mean the net income and not gross income. The income from tea estate is computed applying ss. 28 to 43C, and when computing the income, depreciation of 100 per cent is allowed under s. 32 though for the purpose of charging of income under IT Act, r. 8 is applied and the income so computed is apportioned. The depreciation actually allowed against the assessee was not 40 per cent, but 100 per cent which is to be considered for the purpose of WDV. These questions are, therefore, answered in the negative in favour of the Revenue.
15. We may now extract question No. 5.
“5. Whether, on the facts and in the circumstances of the case the Tribunal is right in law in holding that the assessee is entitled to deduct the contribution to provident fund in the year of actual payment ?”
The above question is also covered in favour of the Revenue in view of the decision in CIT vs. South India Corpn. Ltd. (1999) 157 CTR (Ker) 422 : (2000) 242 ITR 114 (Ker). We, therefore, answer this question in favour of the Revenue. All these appeals are disposed of as above.
[Citation : 293 ITR 99]
