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Commissioner Of Income-Tax, Gujarat-I v. Shree Dig Vijay Cement Co. Ltd.

Gujarat High Court

Aug 3, 1981

Judgment

Subsequent
References

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Factual and Procedural Background

This matter arises from a reference made by the Revenue under section 256(1) of the Income Tax Act, 1961. Three separate and distinct questions were referred to the court; each question involves different facts and is dealt with separately in the opinion.

The factual background, as presented in the opinion, is as follows (organized by the issues to which they relate):

Question No. 1 (4th kiln at Sikka): The assessee-company was granted a licence to substantially expand its establishment at Sikka for the manufacture of Portland cement, including the setting up of a fourth kiln. The fourth kiln was installed in addition to three existing kilns. The assessee invested about Rs. 1.08 crore in installation of the fourth kiln; total investment in plant and machinery at Sikka amounted to about Rs. 2 crore. Installation of the fourth kiln increased production capacity of cement by 2 lakh tonnes. The assessee claimed tax relief under sections 84 (for assessment years 1964-65 to 1967-68) and 80J (for assessment years 1968-69 to 1970-71) of the Income-tax Act, asserting that the expansion was substantial, involved fresh capital investment, additional employment, and a separate and distinct identity for the expanded unit.
Question No. 2 (Contributions to CACO): After cement decontrol (effective 1 January 1966), the Cement Allocation and Co-ordinating Organization (CACO) was formed to ensure smooth implementation of the decontrol scheme, including fixation of price, allocation and distribution. CACO operated trust accounts and equalised prices, freight and other differentials on a pro rata basis. The assessee paid contributions of Rs. 1,85,983.32 and Rs. 17,536 in the assessment years 1968-69 and 1969-70 respectively, and claimed those amounts as allowable business expenditure under section 37 of the Income-tax Act.
Question No. 3 (Provision retained by CACO for liability to STC): For the assessment year 1969-70, the assessee's share from CACO worked out to Rs. 2,61,986.44 but after adjustments the assessee credited only Rs. 8,410. One adjustment was Rs. 2,15,418.17 retained by CACO as a provision for "liability to S.T.C. towards likely deficit in cement agency account of S.T.C." The assessee claimed that this amount represented an ascertained liability and was deductible; Revenue contended it was a contingent liability and not deductible.

Legal Issues Presented

Whether, on the facts and in the circumstances of this case, the Tribunal was right in law in holding that the assessee was entitled to relief under section 84/80J of the Income-tax Act in respect of the 4th kiln at Sikka for the assessment years 1964-65 and 1970-71?
Whether the amounts paid by the assessee to the Cement Allocation and Co-ordinating Organization (CACO) in the assessment years 1968-69 and 1969-70 are allowable as business expenditure under section 37 of the Income-tax Act?
Whether, for the assessment year 1969-70, the sum of Rs. 2,15,418 (deducted as a provision for liability payable to the State Trading Corporation by CACO) was a contingent liability in the hands of the assessee (and therefore not deductible), or whether it was an ascertained liability/allowable as business expenditure?

Arguments of the Parties

Appellant (Revenue)

In Question No. 3, the Revenue contended that the Rs. 2,15,418 retained by CACO represented a contingent liability and therefore was not an admissible deduction in the computation of the assessee's income for assessment year 1969-70.
Implicitly in Question No. 1 (by reference), Revenue challenged the Tribunal's allowance of relief under sections 84/80J (the reference raises the question at the instance of the Revenue), though specific Revenue arguments on the factual sufficiency for relief are not detailed in the opinion.

Respondent (Assessee-company)

For Question No. 1, the assessee-company contended that all requirements of sections 84/80J were satisfied by the installation of the fourth kiln (fresh investment, increased production and profit attributable to new outlay, employment of additional labour, and separate and distinct identity of the expanded unit) and therefore it was entitled to the relief claimed for the stated assessment years.
For Question No. 2, the assessee relied on the fact that CACO was formed at the behest of the Government, membership was obligatory for the assessee, and contributions to CACO were therefore incurred in the course of business as commercial expenditure and should be deductible under section 37.
For Question No. 3, the assessee contended that the Rs. 2,15,418 was an ascertained liability (and thus deductible) rather than a contingent liability.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Textile Machinery Corporation Ltd. v. CIT [1977] 107 ITR 195 (SC)	The tests for entitlement under the statutory provision analogous to ss.84/80J (derived from s.15C of the Indian IT Act, 1922): (1) investment of fresh capital; (2) manufacture/production yielding additional profit attributable to the new outlay of capital; (3) employment of requisite labour; and (4) separate and distinct identity for the new unit.	The court applied these tests to the facts relating to the fourth kiln at Sikka and concluded that the conditions were satisfied; this precedent directly covered the question and supported allowing relief under ss.84/80J.
CIT v. Indian Aluminum Co. Ltd. [1977] 108 ITR 367 (SC)	Referenced as a Supreme Court decision covering the legal proposition relevant to entitlement under provisions similar to s.84/80J (supporting the interpretation and application of the tests for substantial expansion and related relief).	The court treated this precedent as directly covering the issue and as supporting the Tribunal's allowance of relief to the assessee for the installation of the fourth kiln.

Court's Reasoning and Analysis

The court addressed each referred question separately, applying the facts to the relevant legal principles or accounting analysis as follows.

Question No. 1 (Relief under s.84/80J for the fourth kiln)

The court accepted the factual premise that the assessee was licensed to install a fourth kiln at Sikka and had invested about Rs. 1.08 crore in that installation, bringing total plant and machinery investment at Sikka to about Rs. 2 crore.
It was accepted on the record that the installation increased cement production capacity by two lakh tonnes and that various machineries independent of existing machinery were installed along with the fourth kiln.
The court observed that the legal tests for entitlement to relief under the relevant provisions (as formulated by the Supreme Court in Textile Machinery Corporation Ltd.) require proof of (a) fresh capital investment, (b) manufacture/production yielding additional profit attributable to the new outlay, (c) employment of requisite labour, and (d) a separate and distinct identity for the expanded unit.
Applying those tests to the present facts, the court found that fresh capital was invested, additional labour was employed, the expanded unit had a separate and distinct identity, and there was a substantial increase in production attributable to the new installation.
Consequently, the court held that the Tribunal was right in law to uphold the assessee's claim for relief under s.84/80J for the relevant assessment years.

Question No. 2 (Contributions to CACO — deductibility under s.37)

The court set out the background: cement was decontrolled from 1 January 1966; CACO was established to implement the decontrol scheme and its rules and schemes (including price fixation and allocation) were binding on members.
The assessee had paid contributions to CACO which were used to equalise price, freight and other differentials through trust accounts operated by CACO.
The Tribunal had reversed the Income-tax Officer and allowed the expenditure as incurred in the course of business and constituting commercial expenditure, noting that CACO was established at the behest of the Government and membership was obligatory.
The court agreed with the Tribunal's reasoning: because the assessee was obliged to be a member of CACO and contributions were required to carry out its objects, the payments were business expenditure incurred for the purpose of the assessee's trade or business.
Accordingly, the court upheld the Tribunal's allowance of the claimed deductions under section 37.

Question No. 3 (Rs. 2,15,418 retained by CACO for liability to STC)

The court examined the assessee's annual report and accounts for the calendar year 1968 (relevant to assessment year 1969-70) and quoted the explanatory note which stated that Rs. 2,15,418 was retained by CACO "for meeting the contingent liability to the State Trading Corporation of India for the calendar year 1966, as per the statements of accounts received from CACO."
From that note the court drew two conclusions: (i) the liability to the State Trading Corporation related to calendar year 1966, and (ii) the liability was expressly characterised as a contingent liability.
The court reasoned that, even on the method of accounting followed by the assessee, if the liability were ascertained it would be a matter relevant to the calendar year 1966 (and thus the assessment year 1967-68), not the assessment year 1969-70.
Because the note showed the liability was contingent and not ascertained, and no amount payable to the State Trading Corporation had been determined, the court held that the amount retained by CACO could not be treated as an ascertained liability deductible in the computation for assessment year 1969-70.
The court concluded that the Tribunal erred in allowing deduction for Rs. 2,15,418 in assessment year 1969-70.

Holding and Implications

Final Dispositions:

Question No. 1: Answered in the affirmative and against the Revenue — the Tribunal was right to hold that the assessee was entitled to relief under sections 84/80J in respect of the fourth kiln at Sikka for the years in question.
Question No. 2: Answered in the affirmative and against the Revenue — the contributions paid to CACO in the specified assessment years were held to be allowable business expenditure under section 37.
Question No. 3: Answered in the negative and against the assessee — the sum of Rs. 2,15,418 retained by CACO as provision for liability to the State Trading Corporation was a contingent liability and not deductible in assessment year 1969-70; the Tribunal was wrong in allowing the claim.

The direct consequences for the parties are:

The assessee's claim for relief under ss.84/80J in relation to the fourth kiln (as found on the facts and on the authority of the cited Supreme Court decisions) is upheld.
The assessee's payments to CACO for the relevant years are allowed as business expenditure.
The deduction of Rs. 2,15,418 in assessment year 1969-70 is disallowed because the amount represented a contingent liability and related to an earlier accounting period.

No order as to costs was made. The court's conclusions flowed from application of existing Supreme Court authority and accounting records; the opinion does not purport to lay down a new legal precedent beyond applying established tests and accounting principles to the facts of this reference.

Show all summary ...

1. In this reference made at the instance of the REvenue three questions have been referred to us for our opinion under s. 256(1) of the I. T. Act, 1961 (hereinafter referred to as "the ACt"), Each question involves different and distinct set of facts and, therefore, it would be convenient to deal with each question separately.

Question No. 1 which is referred to us, read as under :

"Whether, on the facts and in the circumstances of this case, the Tribunal was right in law in holding that the assessee wa entitled to relief under section 84/80J of the ACt in respect of the 4th kiln at Sikka for the assessment years 1964-65 and 1970-71?"

2. The facts which are relevant to this question are as follows. The assessee-company was granted a licence for substantial expansion of its establishment at Kikka for manufacture of Portland cement. It was granted licence to set up a 4th Kiln for such expansion. The assessee-company already has three kilns and the fourth kiln was step up for manufacture of Portland cement. The assessee-company invested about Rs. 1.08 cross in the installation of the 4th kiln at Sikka. It may be mentioned that the total investment in plant and machinery at Sikka came to about Rs. 2 cores. As a result of the installation of the 4th Kiln, production capital of cement was increased by 2lakhs tones. The expansion, according to the assessee, was substantial involving investment of large capital and employment of additional labor force. The assessee company claimed relief under s. 84/80J of the Act in respect of the fourth kiln at Sikka for the assessment years 1964-65 to 1970-71. Section 84 which is deleted with effect from April 1, 1968, by the ? Finance (No. 2) Act of 1967 was almost in identical terms with s. 80J, which are required to be stifled for claiming relief under both these provision are almost same. The assessee-company claimed relief under s. 84 of the ACt for the assessment years 1964-65 to 1967-68 and under s. 80J for the assessment years 1968-69 to 1970-71. Provisions of ss. 84 and 80J are similar to the provision contained in s. 15C of the Indian I. T. ACt, 1922. It was contended on behalf of the assessee-company that all the requirements of s. 84/80J were satisfied and, therefore, it was entitled to claim relief under the said provision in respect of its fourth Kiln at Sikka. In our opinion, ther question refereed to use is directly covered by the decisions of the Supreme Court in Textile Machinery Corporation Ltd. v. CIt [1977] 107 ITR 195 and CIT v. Indian Aluminum Co. Ltd. [1977] 108 ITR 367. In the instant case before us, there was substantial expansion when the assessee-company installed a fourth kiln. Production capital of cement was increased by two lakhs tones. There was therefore, substantial increase in the production of the assessee-company as a result of the installation of a fourth kiln. The evidence on record discloses that various machineries independent of the existing machineries were installed along with installation of the fourth kiln. As held by the Supreme Court in the case of Textile Machinery Corporation Ltd. [1977] 107 ITR 195 (SC), which wa case o s. 15C of the Indian I. T. ACt, 1922, in order to be entitled to benefit under s. 84/80J, following facts have to be established by an assessee : (1) investment of fresh capital, (2) manufacture or production of articles yielding additional profit attributable to the new out lay of capital, (3) employment of requisite labor, and (4) separate and distinct identity is given. All the tests laid instant case. In other words, conditions for decision a satisfied in the instant cases,. In other word, s conditions of claiming relief under s. 84/80J are satisfied in this case. There is vestment of fresh capital and additional labor force is employed by the assessee-company as a result of the installation of the fourth kiln. The expanded unit has a separate and distinct indignity, and there is substantial increase in the production in the assessee-company. It was stated before us that the profits attributable to the new unit have been worked out by the ITO. In our opinion, thereof, the Tribunal was right in upholding the claim of the assays-company. Questions No. 1 is, therefore, answered in the affirmative and against the Revenue.

3. Question No. 2 referred to us is with regard to the amounts paid to Cement Allocation and Co-ordinating Organization (hereinafter referred to as "CACO"), in the assessment years 1968-69 and 1970-71. the assessee Rs. 17,536 in the assessment year 1969-70. In claimed deduction of these amounts as allowable business expenditure under s. 37 of the ACt.

4. Cement wa decontrolled with effect from January 1, 1966, at the behest of the Government. The cement Allocation and Co-ordinating Organization" to ensure smooth implementation of cement decontrol scheme for equitable distribution for consumer throughout the country. CACO framed scheme for fixation of price and allocation and distribution of cement, which were binding on its members. CACO operated various trust accounts and the amounts received from its member were utilised for equalizing process, fright and other differentials on pro rate basis. The assessee-company paid Rs. 1,85,983.32 and Rs. 17,536 in the assessment years 1968-69 and 1969-70, respectively to CACO by way of its contribution. The Tribunal reversing the decision of the AC held that the expenditure incurred by the assessee-company wa allowable expenditure. It wa held that the expenditure was incurred in the course, of the business and it was incurred out of commercial expency. The Tribunal observed that CACO was established at the behest of the Government and the assessee as a businessman was obliged to become a member of CACO. As a member of CACO, it was obligatory on it to pay contribution to CACO. Therefore, the aforesaid expenditure wa incurred in the course of business, In our opinion, no exception can be taken to the view taken by the Tribunal. As observed by the TRibunal, the assessee-company was obliged to become member of CACO which was formed at the behest of the Government. It was required to make contribution to CACO to carry out its object. Such contribution were therefore, made on account of business expendiency and for the purpose of the business of the assessee-company. We have, therefore, no hesitation in upholding the view taken by the Tribunal. Question No. 2 shall therefore, have to be answered in the affirmative and against the REvenue.

5. Third question which is refereed to us at th instance of REvenue is as follows :

"Whether, on the face and in the circumstances o this case, the Tribunal was right in law in holding that for the assessment year 1969-70, the sum of Rs. 2,15,418, which was deducted as provision for liability payable to the S. T. C. by 'CACO', could not be said to be a contingent liability in the hand of the assessee as the same was ascertained and adjusted in he accounts of the assessee with the CACOP and is therefore not liable to be assessee in the hands of the assessee and/or was allowable as business expenditure?"

6. In the assessment year 1960-70, the assessee's share from CACO worked out to Rs. 2,61,986.44. The assessee-company however, credited a sum of Rs. 8,410 in its accounts after making adjustments of certain amounts., One of the amounts which was adjusted against the aforesaid share of Rs. 2,61,986.44, was Rs., 2,15,418.17 for provision for "liability to S. T. C. towards likely deficit in cement agency account of S. T. C. " It was contended on behalf of the assessee-company that the liability of the assessee-company to pay the aforesaid amount was ascertained and, therefore, it was entitled to deduct the said amount from its business income. Revenue contention, on the other hand, was that the liability was a contingent liability and consequently not admissible deduction. The Tribunal allowed the assessee-company claim observing that the amount wa already debited to the assessee-company amount. According to the Tribunal the liability of the assessee-company was an ascertained liability. the view taken by the Tribunal is challenged by the REvenue before us.

7. Now, if we turn of the annual report and account of the assessee-company for the calendar year 1968, relevant to the assessment year 1969-70, we find the flowing note so far as it is relevant to the aforesaid dispute at Sr. No. 12 on page 18 of the report :

" : Sales include Rs. 8,410 being the net amount of surplus receivable from CACO for the Calendar year 1967, after the set-off of the amount of Rs. 1,38,158 in respect of Shau Jain group of companies and Rs. 2,15,418 retained by the CACO for meeting the contingent liability to the STate TRading Corporation of India for the calendar year 1966, as per the statements of accounts received from CACO."

8. The above note makes it clear : (i) that the liability to the State Trading Corporation of India was for the calendar year 1966; and (ii) such liability was a contingent liability. In the face of this note, we are unable to understand as to how the liability of Rs. 2,15,418 could be held to be an ascertained liability. The liability if any is of the calendar year 1966, which is the year of account relevant of the assessment year 1967-68. Therefore, having regard to the method of accounting followed by the assessee-company even if the said liability was ascertained liability claim in respect thereof could be made only in the assessment year 1967-68. We, however, find that the liability is not ascertained but only contingent. No amount payable to the State Trading Corporation of India was determined,. In other words the liability if any, of he assessee-company was not ascertained. merely because CACO retained the aforesaid amount of Rs. 2,15,418 for contingent liability as stated above, the assessee-company is not entitled to deduct that amount in the computation of its income from the assessment year 1969-70. The Tribunal in our opinion, was, therefore wrong in allowing the aforesaid claim of the assessee for the assessment year 1969-70. In the result, we answer question No. 3 set out above in the negative and against the assessee.

9. Reference answered accordingly with no order as to costs.