Madras H.C : Whether the assessee is entitled to claim deduction in the liability for payment of sales-tax on the ground that the amount collected for payment of sales-tax had not been paid over to the Government by reason of a dispute raised by the assessee regarding the taxability of the transaction

High Court Of Madras

CIT vs. Indian Express (Madurai) (P) Ltd.

Sections 32(1), 32A, 36(1)(iii), 37(1), 38(2), 43B

Asst. Year 1980-81

R. Jayasimha Babu & Mrs. A. Subbulakshmy, JJ.

Tax Case No. 1404 of 1986

3rd September, 2001

Counsel Appeared

Mrs. Chitra Venkataraman, for the Revenue : R. Kumar for T.N. Seetharaman, for the Assessee

JUDGMENT

R. JAYASIMHA BABU, J. :

The assessment year is 1980-81. The questions requiring our consideration are as to whether the assessee is entitled to claim deduction in the liability for payment of sales-tax on the ground that the amount collected for payment of sales-tax had not been paid over to the Government by reason of a dispute raised by the assessee regarding the taxability of the transaction; and as to whether the depreciation, extra shift allowance, interest on loan taken, and investment allowance in relation to the tele typesetter owned by the assessee, but installed in the premises of its associate concern at Bombay, should be restricted only to a proportion thereof, by reason of the product of that machine being used by the assessee as also by its associate company.

2. As regards the first question, that has to be answered in favour of the asses- see, having regard to the decision of the Supreme Court in the case of Jonnalla Narashimharao & Co. vs. CIT (1993) 112 CTR (SC) 126 : (1993) 200 ITR 588 (SC) : TC 13R.338. The law laid down therein, which concerns the asst. yr. 1968-69 would apply to the case on hand as well, the assessment year with which we are concerned being 1980-81, which is prior to the introduction of s. 43B(a), which permits deductions of taxes, duties, cess or fees only in the year of payment. That clause was introduced w.e.f. 1st April, 1989. In the case of Jonnalla Narashimharao & Co. (supra), the apex Court held thus : “It is not disputed that the assessee maintained his accounts on the mercantile basis. Sec. 43B was not there during the relevant assessment year ; it came into force much later. In these circumstances, it cannot be disputed in view of the decision of this Court in Kedarnath Jute Manufacturing Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC) : TC 16R.668 that it is a deductible expenditure.”

3. The assessee here also maintains its accounts on a mercantile basis. The dispute that it had with the sales-tax Department was with regard to the taxability on the sale of paper which were required to be sold as waste paper. That dispute was ultimately decided against the assessee by the Supreme Court in the case of Indian Express (P) Ltd. vs. State of Tamil Nadu (1987) 67 STC 474 (SC). The liability for payment of tax, therefore, clearly existed and though the decision of the apex Court was rendered several years after the end of the assessment year, the liability for payment of tax had. arisen in the previous year relevant to the asst. yr. 1980-81 and it is a liability which the assessee is entitled to deduct while computing its income for the year. For the earlier assessment year of 1979-80, a similar decision has already been rendered by this Court in the case of Indian Express (Madurai) (P) Ltd. vs. CIT (2000) 244 ITR 341 (Mad).

4. Learned counsel appearing for the Revenue, however, sought to contend that the liability for tax can be taken note of only in the year of payment and not earlier, notwithstanding the fact that s. 43B was introduced in the statute book long after the end of the asst. yr. 1980-81. Learned counsel sought to derive support from certain observations of the Supreme Court in the case of K.C.P. Ltd. vs. CIT (2000) 162 CTR (SC) 320 : (2000) 245 ITR 421 (SC). It was observed by the Court therein that an amount which formed part of a trading receipt in the asst. yr. 1972-73 would be taxable in that year, notwithstanding the transfer of that amount to the sugar equalisation fund in the year 1997. That fund, according to counsel, was created in the year 1996, long after the assessment year in question before the Court, and there was no liability on the assessee at the time of collection of the amount. In the same judgment, the Court has made the observations which indicate that where receipt of the amount is associated with the liability and that liability was ascertainable and quantified, that liability is to be taken note of while computing the income for the relevant year.

5. Learned counsel also referred to the decision of this Court in the case of CIT vs. Southern Explosives Co. (2000) 242 ITR 107 (Mad). It was held therein that amounts collected by an assessee towards payment of sales-tax but not paid over to the Government, formed part of the assessee’s income.

6. The question as to whether the assessee could claim deduction to the extent of the liability for payment of tax for that year was neither raised nor argued and consequently that aspect of the matter was not required to be considered by the Court in that decision. Having regard to the clear pronouncement of the Supreme Court in the case of Jonnalla Narashimharao (supra), it must be held that the assessee is entitled to claim deduction for the liability towards sales-tax on the sale of waste paper and that the Tribunal was right in allowing that deduction.

7. As regards the other question it is necessary to first’ set out s. 38(2) of the Act. “38. Building, etc., partly used for business, etc., or not exclusively so used.—…. (2) Where any building, machinery, plant or furniture is not exclusively used for the purposes of the business or profession, the deductions under sub-cl. (ii) of cl. (a) and cl. (c) of s. 30, cls. (i) and (ii) of s. 31 and cl. (ii) of sub-s. (1) of s. 32 shall be restricted to a fair proportionate part thereof which the AO may determine, having regard to the user of such building, machinery, plant or furniture for the purposes of the business or profession.” Secs. 30, 31 and 32 uniformly use the expression “used for the purposes of the business or profession”. By sub-s. (2) of s. 38, in order to claim full benefit of those provisions such user is required to be exclusive for the purpose of the business or profession. The emphasis here is on the user for business or profession and it excludes user for purposes other than the business or profession. To the extent of such user for non-business or non-professional purposes, the benefit allowed under ss. 30, 31 and 32 is required to be reduced proportionately.

The Supreme Court in the case of CIT vs. Chandulal Keshavlal & Co. (1960) 38 ITR 601 (SC) : TC 16R.507, held that if the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party. The Court also held that if the expenditure is incurred for fostering the business of another only, or was made by way of distribution of profits, or was wholly gratuitous, or for some improper or oblique purpose outside the course of business, then the expense is not deductible. The Court further held that another test is whether the transaction is properly entered into as a part of the assessee’s legitimate commercial undertaking in order to facilitate the carrying on of its business ; and it is immaterial that a third party also benefits thereby. But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of the trade or business of the assessee.

The fact that a third party also derives a benefit by reason of the expenditure incurred by the assessee on its business, therefore, does not solely by reason of such benefit derived by a third party, render the expenditure incurred by the assessee, not exclusive for the purpose of its business or profession. So long as, from the point of view of the assessee, the expenditure incurred was an expenditure which in terms of commercial expediency was an expenditure which was required to be incurred for its business, such expenditure must be regarded as having been incurred exclusively for the purpose of the assessee’s business even though incidentally a third party may also happen to be benefited by reason of such expenditure.

The tele typesetter purchased by the assessee for a sum of Rs. 26.39 lakhs during the accounting year relating to the asst. yr. 1980-81 is a machine which is admittedly used for the purpose of the assessee’s business, although it was located in the premises of the assessee’s sister concern at Bombay. The purchase was financed out of the monies borrowed by the assessee from its bankers. In the note given by the assessee with regard to this tele typesetting composing machine, it is stated that it is a perforator and is a unit of the apparatus used to prepare perforated tape which, when fed through a tele typewriter operating unit, operates as a slug line casting machine/photo typesetter. The perforated tape is then fed into a photo typesetter from which matter is taken for paste up. The assessee has stated that the machine installed at Bombay was used to prepare tapes for typesetting for the Sunday Magazine published by the assessee as also by its associate concern at Bombay. Though the assessee claimed that the associate concern at Bombay provided the power to run it as also the space and thus there was a quid pro quo for the tapes to be obtained from the tele typesetter being also made available to the associate concern, the Tribunal has held that there was no proof of such quid pro quo. It is not disputed by the Revenue that this tele typesetter is used by the assessee for the purpose of its business. Though it is used for preparing perforated tapes for typesetting the Sunday Magazine, that Sunday Magazine is also published by the assessee. The fact that the tape obtained from the use of this machine is also used by the associate company for the purpose of publishing the Sunday Magazine does not on that score alone, render the user of this machine by the assessee non-exclusive for the purpose of s. 38(2). The machine continues to be used exclusively for the business of the assessee and not for any non-business or non-professional purpose of the assessee. The machine is used for bringing out a magazine, which is distributed along with the newspaper published by the assessee on Sundays. The machine is admittedly owned by the assessee and the assessee is the only entity, which is entitled to claim the benefits provided under ss. 30 to 32.

In this background, it cannot be said that the user of the machine is not exclusive for the business or profession of the assessee. The machine, as already noticed, is used to obtain perforated tapes which is then used for typesetting for the Sunday Magazine. The mere fact that the assessee has allowed the tapes obtained from the machine also to be used by its associate company to bring out the same Sunday Magazine for the purpose of distributing the same with the newspaper published by the associate company will not render the assessee ineligible to claim the full extent of the benefit in relation to that machine as the investment and ownership of the machine is exclusively that of the assessee. Sec. 38(2) cannot be read in the way in which the Revenue suggests, as that would have the effect of depriving the person who has invested monies in machines which he has used for his business purpose and which he does not use for any non-business purpose, from claiming the deductions and benefits provided in the statute. The machine is used to obtain a tape which is essential for carrying on the business of the assessee, viz., the production of the Sunday Magazine. The use of the machine is, therefore, an exclusive use for the purpose of the business of the assessee. The making available to its sister concern of the tape obtained from the use of this machine is a subsequent event which may amount to a gratuitous act on the part of the assessee which would not render the user non-exclusive so far as the assessee is concerned for the purpose of its business.

The benefit of depreciation and investment allowance cannot, as proposed by the Revenue, be reduced by half, since having regard to the nature of the user of the machine, depreciation is inevitable and the replacement of the machine at a later point of time would be necessary. The investment having been made by the assessee, investment allowance is properly claimable by the assessee and by none else. The expenditure incurred by the assessee by way of interest on loans obtained for funding the purchase of that machine is an expenditure which the assessee is required to meet and which expenditure it is entitled to claim as a deduction.

As observed by the apex Court in the case of Chandulal Keshavlal & Co. (1960) 38 ITR 601 (SC) : TC 16R.507, the fact that a benefit is obtained by a third party by reason of an expenditure incurred by an assessee does not ipso facto result in the assessee not being regarded as having incurred expenditure solely and exclusively for its business. What is important is the intention of the assessee, and the user by the assessee of the machinery in relation to his business, if the investment is made by the assessee and ownership vests in the assessee, expense is incurred by the assessee, the machine is used for the business of the assessee, and the machine has not been used by the assessee for any non-business or non-professional use, the expenditure incurred on the machinery is commercially expedient from the point of view of the business of the assessee, and if the business of the assessee is benefited from the user of the machine, then the incidental sharing of the benefits obtained from the user of the machine with an associate would not render the user of the machine non-exclusive for the purpose of s. 38(2) of the Act. We, therefore, answer the second question also in favour of the assessee and against the Revenue.

The questions actually referred to us are four in number. But, as we have considered the questions two to four together our answers to all the questions referred to us are, in favour of the assessee and against the Revenue.

[Citation : 255 ITR 68]

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