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Commissioner Of Income Tax v. Tata Chemicals Ltd. .
Factual and Procedural Background
The respondent is a public limited company engaged in manufacturing chemicals, salt, and detergents, with a manufacturing unit at Mithapur, Gujarat. It set up a subsidiary company, Tata Fertilizers, which was amalgamated with the respondent by an order of this Court dated 7th September 1989. Subsequently, the respondent established a fertilizer plant at Babrala, Uttar Pradesh. For the assessment year 1992-1993, the respondent claimed certain deductions under sections 36(1)(iii) and 37(4) of the Income Tax Act, 1961, which the Assessing Officer disallowed by an order dated 24th March 1995.
The respondent appealed the disallowance; the Commissioner of Income Tax (Appeals) dismissed the appeal on 27th March 1996. The respondent then appealed to the Income Tax Appellate Tribunal (ITAT), which allowed the appeal by its order dated 14th January 1999. The revenue filed the present appeal under section 260-A of the Income Tax Act, 1961, challenging the ITAT's order.
Legal Issues Presented
- Whether interest already capitalised in the books can be claimed as revenue expenditure for taxation purposes.
- Whether three units located at different places without functional integrity, common accounts, or organic unity can be treated as one unit for the purpose of claiming deductions under section 36(1)(iii).
- Whether interest attributable to borrowings for investments in Tax Free Bonds is allowable under section 36(1)(iii) of the Income Tax Act, considering such borrowings are not for the purpose of business.
- Whether expenses incurred towards maintenance of a guest house can be allowed as a deduction under section 37(4) of the Act.
Arguments of the Parties
Appellant's Arguments
- Interest that has already been capitalised in the books should not be allowed as revenue expenditure for tax purposes.
- The three units (including the fertilizer unit at Babrala) are distinct entities without functional integration, common accounts, or organic unity; hence, the Tribunal erred in treating them as one unit for deduction claims.
- Interest on borrowings for investments in Tax Free Bonds is not allowable under section 36(1)(iii) because such borrowings are not for business purposes.
- Expenses incurred for maintenance of the guest house should not be allowed as deductions under section 37(4) of the Act.
Respondent's Arguments
- The amalgamation of the subsidiary with the respondent company and the common management, administration, and accounting indicate a unity of control and functional integration of the units, justifying the allowance of deductions under section 36(1)(iii).
- The investment in Tax Free Bonds was made in the course of business as a prudent parking of funds, supported by Apex Court precedents permitting such deductions even for non-banking companies.
- The Tribunal followed precedent in allowing depreciation on guest house expenses and the contention against disallowance of salaries and food expenses was not pressed; thus, the disallowance was partly modified.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Setabgag Sugar Mills Co. v. C.I.T, 41 I.T.R 272 | Tests for determining unity of business units for tax purposes. | Used to establish criteria such as unity of control, inter-dependence, and common management in deciding whether separate units can be treated as one business. |
| Prithvi Insurance Co., 63 I.T.R 632 (S.C.) | Legal principles on business unity and tax deductions. | Supported the Tribunal's approach to test functional integration and unity of control. |
| Produce Exchange Corporations v. C.I.T, 77 I.T.R 739 | Criteria for assessing business unity and allowable deductions. | Reinforced the tests applied by the Tribunal regarding interlacing and interdependence. |
| Standard Refinery v. C.I.T, 79 I.T.R 589 | Principles regarding business units and tax treatment of interest. | Contributed to the legal framework for assessing unity of business operations. |
| Hooghly Trust v. C.I.T, 73 I.T.R 685 | Tests for determining commonality in business operations. | Supported the Tribunal's findings on common administration and management. |
| B.R Limited v. V.P Gupta, C.I.T, 113 I.T.R 647 | Legal principles on business unity and tax deductions. | Referenced by the Tribunal in formulating the tests for unity of control. |
| Indian Bank's case, 56 I.T.R 77 | Allowability of expenditure related to business investments. | Relied upon by the Tribunal to justify deduction for investment in Tax Free Bonds as a business activity. |
| Rajasthan State Warehousing Corporation v. Commissioner of Income Tax, 242 I.T.R 450 | Extension of principles allowing deductions for investments in non-core business activities. | Confirmed applicability of Indian Bank's case to non-banking companies, supporting the Tribunal's decision. |
| Tribunal order in 61 I.T.D 129 (Bom.) | Allowability of depreciation on guest house expenses under section 37(4). | Followed by the Tribunal to partly allow the deduction for guest house depreciation. |
Court's Reasoning and Analysis
The Court first addressed whether it could consider the question of interest already capitalised in the books (question (a)). It found that this issue was not raised before the Tribunal and under section 260-A(6)(a), the High Court can only decide questions that were raised but not determined by the Tribunal. Since the issue was not raised below, the Court declined to consider it.
Regarding the question of whether the distinct units (Mithapur and Babrala plants) should be treated as one business for deduction purposes (questions (b) and (h)), the Court examined findings of fact by the Assessing Officer and Commissioner of Income Tax (Appeals) that treated the units as separate. The Tribunal, however, applied tests from various Apex Court judgments focusing on unity of control, interlacing, inter-dependence, and common management. The Tribunal found functional integrity, common administration, and common fund management between the units, justifying treating them as one business for claiming deductions under section 36(1)(iii). The Court agreed with the Tribunal's approach and held that the question raised was one of fact, not law, and did not warrant interference.
On the issue of interest on borrowings for investments in Tax Free Bonds (question (f)), the Tribunal found on evidence that such investments were made in the course of business as prudent fund management. The Court noted the reliance on the Apex Court decision in Indian Bank's case and its approval in Rajasthan State Warehousing Corporation's case, which extended the principle to non-banking businesses. The Court held this was a factual determination by the Tribunal and did not raise a substantial question of law.
Concerning expenses for maintenance of the guest house (question (j)), the Tribunal allowed depreciation following a prior Tribunal judgment and noted that the contention against disallowance of salaries and food expenses was not pressed. Since the issue was not dealt with by the Tribunal, the Court declined to consider it.
In conclusion, the Court found no merit in the appeal and dismissed it without costs.
Holding and Implications
The appeal is dismissed.
The Court upheld the Income Tax Appellate Tribunal's findings that the fertilizer unit at Babrala and the other units constituted a single business entity for tax deduction purposes under section 36(1)(iii). It also affirmed the allowance of interest on borrowings for investments in Tax Free Bonds as a business expenditure based on factual findings. The Court declined to entertain issues not raised before the Tribunal. This decision directly affects the parties by confirming the respondent’s entitlement to the disputed deductions but does not establish any new legal precedent beyond affirming existing principles and the proper application of factual tests by the Tribunal.
Per H.L Gokhale, J.:— Heard Mr. Desai for the appellant. Mr. Vyas appears for the respondents.
2. This appeal at the instance of revenue under section 260-A of the Income Tax Act, 1961, seeks to challenge the judgment and order passed by the Income Tax Appeal Tribunal dated 14th January, 1999.
FACTS-IN-BRIEF
3. The facts leading to this appeal and grounds raised therein are as follows: The respondent is a public limited company engaged in the manufacture of chemicals, salt and detergents in its factories. One of such manufacturing unit is at Mithapur in Guajarat. Subsequently it set up is a subsidiary company known as “Tata Fertilizers”, but this subsidiary company amalgamated with the respondent under the order of this Court passed on a company application on 7th September, 1989. The respondent thereafter set up a fertilizer plant at Babrala in State of U.P Certain deductions were claimed by the respondent for the assessment year 1992-1993. The Assessing Officer disallowed some of the deductions claimed, particularly those under sections 36(1)(iii) and 37(4) of the Act.
4. Being aggrieved by the order of the Assessing Officer passed on 24th March, 1995, an appeal was preferred by the respondent. The same came to be dismissed by the Commissioner of Income Tax (Appeals) by his order dated 27th March, 1996.
5. Being aggrieved therefrom, an appeal was preferred to the Income Tax Appellate Tribunal which has come to be allowed.
6. Being aggrieved by that order dated 14th January, 1999 this appeal is filed by the appellant.
Questions raised:—
7. Mr. Desai, learned Counsel appearing for the appellant, pressed questions of law framed at Sr. Nos. (a), (b), (f) and (j) of the Appeal Memo. These questions read as follows:—
(a) Whether the interest which is already capitalised in the books can be claimed as revenue expenditure for the purposes of taxation.
(b) When the three units situated in different places and there is no functional integrity, common accounts, organic unity and further there is an ample evidence borne out by the record that the units were distinct and having its own entity, whether the Tribunal is justified in coming to the conclusion that the units are one and others are the extension/expansion of the other only on certain things which are not fundamental, basis to the issue.
(f) Whether the interest attributable to the borrowings for investments in Tax Free bonds is allowable under section 36(1)(iii) of the I.T Act as the said borrowings are not for the purpose of business.
(j) Whether the expenses incurred by the respondent towards maintenance of guest house can be allowed as deduction under section 37(4) of the Act.
8. The rest of the questions though raised but were not pressed into service. Hence our order is confined to the questions raised. Appeal on other questions stands dismissed as not pressed.
CONSIDERATION
Question (a):—
9. As far as question (a) is concerned, it is not in dispute that this question was not raised before the Tribunal. Mr. Desai submitted before us that under section 260-A(6)(a) it is permissible for the High Court to determine any issue which is not determined by the Appellate Tribunal. The careful reading of section will show that High Court can decide only that question which was raised but not determined by the Tribunal. Therefore it was necessary that the question sought to be raised ought to have been raised before the Tribunal and then if it had not determined it, one can say that it has not been determined by Tribunal and therefore the High Court should look into it. In the present case, we do not find that this issue had been raised before the Tribunal. It is also not the case of revenue that the issue or question was raised but not decided by the Tribunal. In the circumstances, we do not propose to dwell on this question.
Question (b) & (h):—
10. As far as question (b) read with question (h) is concerned, Mr. Desai took us through the order passed by the Assessing Officer as well as by the C.I.T (Appeals), Mumbai and pointed out that both these authorities have come to the conclusion that this fertilizer unit will have to be treated as a separate unit and therefore the benefit under section 36(1)(iii) cannot be extended to the respondent as far as any amount of interest paid in respect of capital borrowed for the business of the fertilizer unit is concerned. Now, when one sees the order of the Assessing Officer, he has given emphasis on the solitary fact that the two plants; one at Mithapur, and other at Babrala are situated at two far off places and that the operation of both these plants is neither inter-dependent for technology nor for inputs. He has observed that closure of plant at Mithapur would not in any manner adversely affect the operation of the fertilizer plan at Babrala.
11. This order of Assessing Officer has been mechanically confirmed by the C.E.T (A), Mumbai. As against this, the Appellate Tribunal has culled out the propositions of law based on various judgments of the Apex Court as well as of various High Court in para 28 of its order. It has summarised propositions and determined the tests on the question of unity of business. They are as follows:—
i) The nature of the two lines of business is not relevant.
ii) The fact that one business can be conveniently closed down without affecting the other business is a strong indication that both the businesses are distinct and separate. But no decisive inference can be drawn from the fact.
iii) The decisive test is the unity of control which is indicated by interlacing, inter-dependence and inter-connection between the businesses and the dovetailing of one into the other, such inter-lacing, inter-dependence or inter-connection can be shown to exist by reason of a common management, common administration, common fund and a common place of business.”
12. The above propositions are culled out from the following judgments of the Apex Court:
(1) (Setabgag Sugar Mills Co. v. C.I.T)1, 41. I.T.R 272.
(2) (Prithvi Insurance Co.)2, 63 I.T.R 632 (S.C).
(3) (Produce Exchange Corporations v. C.I.T)3, 77 I.T.R 739.
(4) (Standard Refinery v. C.I.T)4, 79 I.T.R 589.
(5) (Hooghly Trust v. C.I.T)5, 73 I.T.R 685.
(6) (B.R Limited v. V.P Gupta, Cit)6, 113 I.T.R 647.
13. The learned Counsel appearing for the parties took us through the test of the various judgments referred to herein above and we are in complete agreement with the Tribunal that the above determined tests would be the correct approach to the questions with which we are concerned. The Tribunal while reaching to the conclusion has considered various factors such as administration of various units, flow of funds, unity of management, unity of the accounting set up as well as control coupled with various such relevant factors. The Tribunal also found the administration and management of funds of two units is common. The Tribunal has also recorded findings of fact that there was a functional integrity between the two units. It is in these circumstances that the deduction under the particular section was held allowable.
14. The Tribunal has come to the conclusion that the decisive test is the unity of control which is indicated by inter-lacing, inter-dependence and inter-connection between the businesses and dovetailing of one into the other. In the present case, it is quite clear that the amalgamation of the subsidiary was allowed by the High Court. Thereafter it is for the management of the company to manage its affairs and the benefit which would be available for the borrowings done for a unit would certainly be claimable by the company as such. section 36(1)(iii) which permits the amount of interest paid in respect of capital borrowed for the purposes of the business will have to include the borrowing for a unit of the company which is what the fertilizer unit at Babrala is Considering the fact that finding is based on appreciation of evidence brought on record, we do not find that this question can be said to be question of law warranting adjudication by this Court. In view of what is observed hereinabove, the questions of law raised in at (b) and (h) do not arise for our consideration.
Question (f):—
15. We now turn to the question of law set out as (f), which raises a question as to whether the interest attributable to the borrowings for investments in Tax Free Bonds is allowable under section 36(1)(iii) of the Act. As far as this deduction is concerned, the Tribunal has in para 66 of the order recorded a positive finding based on evidence that the investment in the Tax Free Bonds has been in the course of business. The Tribunal has observed that in the natural course of business, sometimes assessee may have to park its funds in investments as a matter of prudence, relying upon the judgment of the Apex Court in (Indian Bank's)7, case reported in 56 I.T.R 77. Mr. Desai submitted that the Indian Bank's case was concerning with an expenditure claimed by the banking company. The assess not being a banking company, the judgment of the Apex Court could not have been relied upon to consider the case of chemical unit. In answer to this, Mr. Vyas, learned Counsel for the assessee respondent, has drawn our attention to a subsequent judgment of the Apex Court in the case of (Rajasthan State Warehousing Corporation v. Commissioner of Income Tax), reported in 242 I.T.R 450, wherein the above referred proposition in the case of Indian Banks has been approved. In the case of Warehousing Corporation, whose business was of warehousing the foodgrains and not of investment, such deduction on the same footing was permitted by the Apex Court. In these circumstances, the resolution of this question was based on facts since Tribunal has recorded finding of fact that the investment in question was a business investment. We do not find that this ground raises any substantial question of law favour consideration. This question sought to be raised therefore needs no consideration.
Question (j):—
16. The last question (j) sought to be canvassed before us is whether the expenses incurred by the respondents towards maintenance of guest house can be allowed as deduction under section 37(4) of the Act. Now as far as this ground is concerned, para 71 of the order of the Tribunal is quite clear. The Tribunal has observed in this para as under:—
“Ground No. 5 is directed against the disallowance of depreciation, salaries and food expenses in respect of the guest houses at Bombay. As regards depreciation, respectfully following the order of the Third Member in the case reported in (61 I.T.D 129 (Bom.))9, we hold that the depreciation cannot be disallowed under section 37(4) of the Act. The contention against the disallowance of the salaries and food expenses under section 37(4) is not pressed. Accordingly the Assessing Officer is directed to modify the disallowance. The ground is partly allowed.”
17. Thus this para makes it clear that the Tribunal was following the judgment of the Tribunal in 61 I.T.D 129 and the contention against the disallowance had not been pressed. Since the contention of disallowance was not pressed, the same has not been dealt with by the Tribunal. Hence question sought to be raised does not arise from the judgment of the Tribunal. For reasons stated above, we do not find any merit in this appeal. The appeal is thus dismissed in limine with no order as to costs.
18. Appeal dismissed.
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