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Commissioner Of Income-Tax v. Sundaram Industries Ltd.

Madras High Court

Apr 8, 1985

Judgment

Subsequent
References

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Factual and Procedural Background

The Revenue asked the Income-tax Appellate Tribunal to refer four questions to this court for its opinion. The reference concerns (i) whether certain sums spent on provision of coffee, cool drinks and sometimes meals to customers are entertainment expenditure; (ii) whether section 52(2) of the Income-tax Act could be invoked to adopt fair market value instead of sale price in computing capital gains on sale of specified shares; (iii) whether for relief under section 80J the building under construction and assets awaiting installation should be treated as forming part of capital employed for Kochadai Rubber Factory; and (iv) whether the assessee is entitled to relief under section 80J for Vizag and Bangalore Units at 6% on the capital employed without prorating for the actual period of working. The Tribunal referred those questions for this court's opinion.

The court answered the four referred questions and recorded that there would be no order as to costs.

Separately, in T.C.P No. 299 of 1982, the Revenue sought a direction to the Tribunal to refer a question about which balance-sheet reflected the true fair market value of shares sold. The court held that, having already determined in the tax case (T.C No. 1180 of 1980) that section 52(2) could not be applied because the Revenue had not established that the sale price exceeded the sale deed price, the question was academic and did not arise; the reference application was dismissed.

Legal Issues Presented

Whether the sum of Rs. 13,582 spent on provision of coffee, cool drinks and sometimes meals to customers can be viewed as 'entertainment expenditure' and whether the disallowance in this regard was called for.
Whether, in computing capital gains arising out of sale of shares in (i) M/s. Indian Motor Parts and Accessories Ltd. and (ii) M/s. Sundaram Private Limited, the provisions of section 52(2) could be invoked to adopt fair market value in place of the sale price, where the Income-tax Officer had not established that the sale price received was more than the one disclosed in the sale deed.
Whether, having regard to the provisions of rule 19A of the Income-tax Rules, 1962, for the purpose of allowing relief under section 80J in respect of the Kochadai Rubber Factory, the building under construction and the assets awaiting installation therein should be treated as forming part of the capital employed and relief under section 80J should be allowed accordingly.
Whether the assessee is entitled to relief under section 80J in respect of the Vizag and Bangalore Units at 6% on the capital employed without it being limited on a proportionate basis to the actual period of working by the said units.

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Commissioner Of Income-Tax, Tamil Nadu-I v. Karuppuswamy Nadar & Sons., [1979] 120 ITR 140	Whether expenditure on provision of refreshments/meals to customers is to be treated as 'entertainment expenditure'.	The court followed this decision (which is against the Revenue) and, applying it to the facts, held that the disallowance was not called for; question (i) answered in the affirmative and against the Revenue.
K.P Varghese v. ITC, [1981] 131 ITR 597	Application of section 52(2): that section cannot be invoked where Revenue has not established that sale price actually received exceeded the sale deed price.	Following this Supreme Court decision, the court held that section 52(2) did not apply on the Tribunal's finding that Revenue had not established a higher sale price; question (ii) answered in the affirmative and against the Revenue.
Jayaram Mills Ltd. v. CEPT, [1959] 35 ITR 651	Whether capital invested in purchase of machinery which is not yet put to use forms part of capital for relief under section 80J.	Part of a series of authorities followed for the proposition that such capital must be taken as forming part of capital employed; applied to answer question (iii) in the assessee's favour.
Commissioner Of Income-Tax v. Indian Oxygen Ltd., [1978] 113 ITR 109	Support for inclusion of machinery purchased (even if unused) in capital employed for section 80J relief.	Relied upon as part of the consistent view of various High Courts; contributed to answering question (iii) in the affirmative and against the Revenue.
Ravi Machine Tools (P.) Ltd. v. CIT, [1978] 114 ITR 459	Support for taking unused purchased machinery as part of capital employed for section 80J relief.	Relied upon as part of the uniform view followed to decide question (iii) for the assessee.
CIT v. Cibatul Ltd., [1978] 115 ITR 879	Support for including purchase cost of machinery awaiting installation as capital employed under section 80J.	Used with other authorities to conclude in favour of the assessee on question (iii).
CIT v. Alcock Ashdown & Co. Ltd., [1979] 119 ITR 164	Consistent authority on treatment of capital invested in machinery for relief under section 80J.	Followed as part of the consistent case law to allow section 80J relief including machinery awaiting use.
CIT v. Mohan Meakin breweries Ltd., [1980] 122 ITR 203	Further High Court authority supporting inclusion of unused machinery in capital for section 80J.	Included among the consistent High Court decisions relied on to answer question (iii) in favour of the assessee.
CIT v. Madras Wire Products, [1980] 123 ITR 722	A later decision of this court supporting the same proposition regarding capital employed.	Followed as part of the uniform view to decide question (iii) against the Revenue.
CIT v. Simpson and Company, [1980] 121 ITR 283	Whether relief under section 80J for units should be allowed at 6% on capital employed without pro-rating for actual period of working.	The court followed this decision (which is against the Revenue) and applied it to answer question (iv) in the affirmative and against the Revenue.
T.C No. 1180 of 1980	Decision by this court that section 52(2) could not be applied where Revenue had not established that the sale price actually received was more than the one disclosed in the sale deed.	The court relied on this holding in dismissing the separate reference application (T.C.P No. 299 of 1982) as the question of computing capital gains on market value was rendered academic.

Court's Reasoning and Analysis

The court addressed each referred question by identifying and applying binding or persuasive authorities and the factual findings of the Tribunal:

Question (i): The court found the issue covered by Commissioner Of Income-Tax, Tamil Nadu-I v. Karuppuswamy Nadar & Sons. That decision, applicable on the facts, indicated that the sums in question could not be treated as entertainment expenditure; the court therefore held the disallowance was not called for.
Question (ii): The Tribunal had found that the Revenue did not establish that the sale price received exceeded the sale deed price. Applying the Supreme Court's decision in K.P Varghese v. ITC, the court concluded that section 52(2) was inapplicable under those findings and answered the question against the Revenue.
Question (iii): The court reviewed a series of decisions of this court and several High Courts which uniformly held that capital invested in the purchase of machinery forms part of the capital employed for relief under section 80J, even if the machinery has not been put to use in the relevant year. Following this uniform view, the court held that building under construction and assets awaiting installation should be treated as capital employed and allowed the relief accordingly.
Question (iv): The court found the question covered by this court's decision in CIT v. Simpson and Company and applied that decision to hold that the assessee was entitled to relief under section 80J at 6% on capital employed without pro-rating to the actual period of working; the question was answered against the Revenue.
T.C.P No. 299 of 1982 (separate reference): Because this court had already held in T.C No. 1180 of 1980 that section 52(2) could not be applied where the Revenue had not proved a higher sale price, the question posed in the reference (how market value should be determined) was academic and did not arise from the Tribunal's order; the application was dismissed.

Holding and Implications

Holding: The court answered the four questions referred by the Tribunal in the affirmative and against the Revenue. The court also dismissed T.C.P No. 299 of 1982 as academic because section 52(2) was held inapplicable on the Tribunal's factual finding and the court's earlier decision (T.C No. 1180 of 1980).

Implications:

Direct effect: The disallowance relating to refreshments was rejected; section 52(2) was not applied to compute capital gains on the specified share sales; capital employed for section 80J relief includes building under construction and machinery awaiting installation; and relief under section 80J for the Vizag and Bangalore Units was allowed at 6% on capital employed without pro-rating. There will be no order as to costs.
Broader precedent: The court followed existing decisions of this court and several High Courts and did not purport to set a new legal principle beyond applying and following those authorities.

Show all summary ...

Ramanujam, J.:— At the instance of the Revenue, the following four questions have been referred to this court, for its opinion by the Income-tax Appellate Tribunal:

“(i) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sum of Rs. 13,582 spent on the provision of coffee, cool clrinks and sometimes meals also to customers cannot be viewed as an ‘entertainment expenditure’ and, therefore, the disallowance made in this regard was not called for?

(ii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that in computing the capital gains arising out of the sale of shares in (i) M/s. Indian Motor Parts and Accessories Ltd. and (ii) M/s. Sundaram Private Limited, the provisions of section 52(2) could not be invoked for adopting the fair market value in the place of the sale price, since the Income-tax Officer had not established that the sale price received was more than the one disclosed in the sale deed?

(iii) Whether, on the facts and in the circumstances of the case and having regard to the provisions of rule 19A of the Income-tax Rules, 1962, the Appellate Tribunal was correct in holding that for the purpose of allowing the relief under section 80J in respect of the Kochadai Rubber Factory, the building under construction and the assets awaiting installation therein should also be treated as forming part of the capital employed and the relief under section 80J should be allowed accordingly?

(iv) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee is entitled to relief under section 80J in respect of the Vizag and Bangalore Units at 6% on the capital employed without it being limited to a proportionate basis to the actual period of working by the said units?”

2. Coming to question No. (i), we find that the question stands covered by a decision of this court in Commissioner Of Income-Tax, Tamil Nadu-I v. Karuppuswamy Nadar & Sons., [1979] 120 ITR 140, which is against the Revenue. Following the said decision, which is applicable to the facts of this case, the question is answered in the affirmative and against the Revenue.

3. Coming to question No. (ii), we find that in view of the finding rendered by the Income-tax Appellate Tribunal that the Revenue has not established that the sale price received towards the sale of the shares was more than the one disclosed in the sale deed, section 52(2) cannot stand attracted to the facts of this case, in view of the decision of the Supreme Court in K.P Varghese v. ITC, [1981] 131 ITR 597. Following the said decision of the Supreme Court, this question is answered in the affirmative and against the Revenue.

4. Coming to the third question, we find that the said question stands concluded by a decision of this court in Jayaram Mills Ltd. v. CEPT, [1959] 35 ITR 651, a decision of the Calcutta High Court in Commissioner Of Income-Tax v. Indian Oxygen Ltd., [1978] 113 ITR 109, a decision of the Karnataka High Court in Ravi Machine Tools (P.) Ltd. v. CIT, [1978] 114 ITR 459, a decision of the Gujarat High Court in CIT v. Cibatul Ltd., [1978] 115 ITR 879, a decision of the Bombay High Court in CIT v. Alcock Ashdown & Co. Ltd., [1979] 119 ITR 164, a decision of the Himachal Pradesh High Court in CIT v. Mohan Meakin breweries Ltd., [1980] 122 ITR 203 and a later decision of this court in CIT v. Madras Wire Products, [1980] 123 ITR 722. The consistent and uniform opinion taken by the various High Courts in the decisions referred to above is that the capital invested in the purchase of machinery will have to be taken as forming part of the capital for the purpose of relief under section 80J, even though the machinery purchased has not been put to use in the relevant accounting year. Following the uniform view expressed in the above decisions, this question is also answered in the affirmative and against the Revenue.

5. Regarding the fourth question, we find that the said question is also covered by a decision of this court in CIT v. Simpson and Company, [1980] 121 ITR 283, which is against the Revenue.

6. It is not in dispute that the said decision is applicable to the facts of the present case. Therefore, following the said decision, we answer this question in the affirmative and against the Revenue.

7. The reference is answered accordingly. However, there will be no order as to costs.

T.C.P No. 299 of 1982:

The Revenue, in this reference application, seeks a direction to the Tribunal to refer the following question for the opinion of this court:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in not considering the grounds 5, 6, 9 and 10 raised in the grounds of appeal raising questions as to which one of the balance-sheets reflected the true fair market value of the shares sold by the assessee?”

8. This question proceeds on the basis that section 52(2) is applicable to the facts of the case and, therefore, the market value of the shares have to be determined. A reading of the question will indicate that the question posed is as to how the market value of the shares sold by the assessee has to be determined. In view of the fact that we have held in T.C No. 1180 of 1980 that section 52(2) cannot be applied to the facts of this case as the Revenue has not established that the sale price actually received was more than the one disclosed in the sale deed, there is no question of computation of the capital gains at all on the basis of the market value. In view of the adverse decision given by this court in the said tax case, this question is purely academic and it does not actually arise out of the order of the Tribunal. This reference application is, therefore, dismissed.