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Commissioner Of Income-Tax v. Everest Cold Storage.
Summary of Opinion: Reference under Section 256(1) of the Income-tax Act, 1961
Factual and Procedural Background
The reference arises from an order under Section 263 of the Income-tax Act, 1961, made by the Commissioner of Income-tax (CIT) in respect of assessments of a partnership firm engaged in running a cold storage and an ice factory. During assessment proceedings the firm claimed:
- Investment allowance under Section 32A in respect of plant and machinery installed in the cold storage plant (allowed by the Income-tax Officer (ITO));
- Deduction under Section 80J in respect of the cold storage (claimed);
- Relief under Section 80F (allowed by the ITO).
Because there were insufficient profits in the years under consideration, the ITO recorded that the Section 80J relief would be carried forward to be set off against future profits. The Commissioner examined the records, concluded that the ITO's assessment order contained errors prejudicial to the Revenue (on the investment allowance and Section 80J points), and issued a show-cause notice before passing an order under Section 263 (dated 6 September 1983) directing re-inspection by the ITO. The assessee challenged the CIT's order before the Tribunal. The Tribunal reversed the CIT and held that the ITO was right in granting the reliefs. The Revenue then sought a reference to this Court under Section 256(1); the Tribunal framed the question asking whether the CIT was correct in invoking his jurisdiction under Section 263.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Commissioner of Income-tax was correct in law in invoking his jurisdiction under Section 263 of the Income-tax Act, 1961?
Arguments of the Parties
Revenue's Arguments
- The Commissioner (Revenue) contended that the ITO erred in allowing investment allowance under Section 32A for the cold storage and in allowing relief under Section 80J, thereby causing prejudice to the Revenue; hence Section 263 jurisdiction was properly invoked.
- Learned counsel for the Revenue relied on the Kerala High Court decision in CIT v. Travancore Rayons Ltd. [1987] 164 ITR 134 and submitted that where it is not possible to ascertain facts from joint accounts, the benefit under Section 80J may be denied; the case supports the proposition that lack of separate accounts may preclude allowance of the deduction.
Assessee's Arguments
- The assessee submitted before the Commissioner that the Income-tax Officer had committed no error and that there was no prejudice to the Revenue in the original assessment order.
- Assessee's counsel (Shri Nema) relied on the Supreme Court decision in Textile Machinery Corporation Ltd. v. CIT [1977] 107 ITR 195 to argue that difficulties in practical ascertainment should not affect the proper construction of the provision (analogous provision Section 15C of the 1922 Act), and pointed to instances where separate books and separate undertakings permitted allowance of exemption.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Mittal Ice and Cold Storage v. CIT [1986] 159 ITR 18 | Operation of a cold storage does not result in creation of a new and distinct marketable commodity; cold storage does not amount to manufacture for purpose of investment allowance under Section 32A. | The Court relied on this decision to hold that the Tribunal's reliance on the Factories Act definition was erroneous and that a cold storage is not entitled to investment allowance under Section 32A; this supports the CIT's exercise of jurisdiction under Section 263. |
| CIT v. Travancore Rayons Ltd. [1987] 164 ITR 134 (Kerala HC) | Where separate accounts are not maintained and facts cannot be ascertained from joint accounts, benefit under the relevant deduction provision (analogous to Section 80J) may be denied because allocation becomes necessary and profits of the new establishment cannot be ascertained. | The Revenue relied on this decision to support the proposition that the benefit of Section 80J may be denied if ascertainment from joint accounts is impossible. The Court considered it in deciding whether the ITO should be directed to investigate account segregation. |
| Textile Machinery Corporation Ltd. v. CIT [1977] 107 ITR 195 (SC) | Where separate books and separate undertakings exist, ascertainment of exempted profit is possible; practical difficulties in calculation of profit should not drive the construction of the exemption provision, but if separate accounts exist the exemption can be applied. | Assessee relied on this decision. The Court used its principle (and the parity between Section 15C of the 1922 Act and Section 80J) to support a positive approach: if segregation of profit is possible from joint accounts then the benefit of Section 80J should be given. |
| CIT v. Indian Aluminium Co. Ltd. [1977] 108 ITR 367 (SC) | Followed the principle in Textile Machinery — i.e., where profit attributable to a new unit can be calculated, the exemption/benefit should be given. | The Court cited this as a supporting Supreme Court authority endorsing the Textile Machinery principle and used it to justify directing the ITO to attempt ascertainment and grant benefit if possible. |
| Garden Silk Weaving Factory v. CIT [1991] 189 ITR 512 | Unabsorbed depreciation can be carried forward to the next assessment year and to future years if it cannot be absorbed against the partners' profit; unabsorbed depreciation must be apportioned among partners and, if not absorbed, will revert to the firm. | The Court relied on this Supreme Court authority to accept the Commissioner's view that unabsorbed depreciation can be carried forward; used as precedent to decline further elaboration and to support the Commissioner's orders on carry-forward issues. |
| CIT v. Singh Transport Co. [1993] 200 ITR 574 | Reiterated the position regarding carry forward of unabsorbed depreciation. | Used by the Court as additional authority confirming the principle that unabsorbed depreciation may be carried forward and that the Commissioner's approach on this point was correct. |
| CIT v. Caps and Caps [1989] 179 ITR 235 | Addressed carry forward of relief under Section 80J (supporting carry-forward treatment of such relief). | The Court cited this decision to support its conclusion that carry forward of the relief under Section 80J is permissible and that the Commissioner's approach was correct on this aspect. |
Court's Reasoning and Analysis
The Court undertook a step-by-step analysis grounded in statutory interpretation and precedent:
-
Validity of the Commissioner's invocation of Section 263:
The Court observed that the CIT's order under Section 263 was not perverse and was based on a proper appreciation of facts and law; therefore the exercise of jurisdiction was appropriate.
-
Investment allowance under Section 32A — cold storage:
The Tribunal had permitted investment allowance treating a cold storage as a "factory" (relying on the Factories Act definition) and thus a manufacturing unit. The Court rejected this approach as erroneous because the Factories Act definition is in a different context and not determinative for the Income-tax Act. Relying on Mittal Ice and Cold Storage v. CIT, the Court held that cold storage operations do not produce a new marketable commodity or manufacture a marketable product; the articles preserved remain the same. Therefore cold storage is not a manufacturing unit for Section 32A and the Tribunal's finding was erroneous. This supported the CIT's view and justified remand under Section 263 to set aside the ITO's order for fresh investigation.
-
Investment allowance under Section 32A — ice manufacturing plant:
The Commissioner had taken the view that the ice plant was a manufacturing unit and thus eligible for investment allowance, but because cold storage and ice plant accounts were kept jointly it was not possible to ascertain the exact amount attributable to the ice plant. The Court accepted the CIT's approach of remitting the matter for the Assessing Officer to investigate and determine the segregable investment attributable to the ice plant.
-
Deduction under Section 80J:
The units (cold storage and ice plant) were registered as a composite unit and accounts were combined. The Court found there was no material to show they were intermingled so that one could not survive without the other; that factual question required investigation. The Tribunal had assumed interdependence without evidence. The Court endorsed the Commissioner’s decision to leave the matter open for the Assessing Officer to investigate whether the units are so interconnected or use common machinery, and whether segregation of accounts and allocation of profits is possible.
-
Approach to account segregation and practical difficulties:
The Court considered the Kerala High Court decision in Travancore Rayons (for the Revenue) and the Textile Machinery decision (for the assessee). It recognized that where segregation is impossible the benefit may be denied (Travancore Rayons), but emphasized the Textile Machinery principle that the statutory provision should be given a positive construction and practical difficulties alone should not defeat the allowance when segregation/ascertainment is possible. The Court therefore directed that the Assessing Officer should attempt to ascertain segregable profits from the joint accounts, and allow Section 80J relief if possible; if segregation is not possible the relief should be withdrawn for the assessment years in question. The Commissioner was further justified in directing spot inspections of machinery to assist the investigation.
-
Carry forward of unabsorbed depreciation and Section 80J relief:
The Court accepted binding Supreme Court authority (Garden Silk Weaving Factory v. CIT and Singh Transport Co.) that unabsorbed depreciation can be carried forward to next and future assessment years and revert to the firm if it cannot be absorbed by partners. For carry forward of Section 80J relief it relied on the Court's earlier view in CIT v. Caps and Caps. On both aspects the Court held the Commissioner’s view correct.
Holding and Implications
Holding: The Court answered the reference in favour of the Revenue and against the assessee: the view taken by the Commissioner of Income-tax was correct. The Commissioner properly invoked his jurisdiction under Section 263 and his directions to remit matters for fresh investigation were justified.
Direct consequences for the parties
- The Tribunal's allowance of investment allowance for the cold storage was held to be erroneous; cold storage is not a manufacturing unit for Section 32A and is not entitled to investment allowance on that basis.
- The question of investment allowance for the ice manufacturing plant is remitted to the Assessing Officer to determine the segregable investment attributable to the ice plant (the Commissioner had found the ice plant to be a manufacturing unit eligible for Section 32A, but exact allocation must be ascertained).
- The question of deduction under Section 80J is left open for the Assessing Officer to investigate whether accounts can be segregated and whether the units are interdependent; if segregation is possible, the deduction may be granted subject to conditions, but if not possible the relief may be withdrawn for the assessment years concerned.
- Unabsorbed depreciation and carry forward of Section 80J relief: the Court confirmed that unabsorbed depreciation may be carried forward (subject to apportionment among partners) and that carry forward of Section 80J relief is consistent with prior decisions.
Broader implications
The opinion applies and reiterates existing legal principles rather than announcing new precedent. It underscores that:
- Statutory definitions in other statutes (e.g., Factories Act) cannot be transplanted mechanically to determine eligibility under the Income-tax Act;
- Where factual ascertainment (segregation of accounts) is possible, tax benefits intended by statute (such as Section 80J) should be given a positive construction and allowed after investigation;
- Where ascertainment is not practicable from joint accounts, relief may be denied; the Assessing Officer must investigate and, where necessary, conduct spot inspections to determine the true position.
Result: Reference answered in favour of the Revenue; the Commissioner's order under Section 263 upheld and remand to Assessing Officer for further investigation directed.
1. This is a reference under Section 256(1) of the Income-tax Act, 1961, at the instance of the Revenue and the following question of law has been referred by the Tribunal for answer of this court :
" Whether, on the facts and in the circumstances of the case, the Commissioner of Income-tax was correct in law in invoking his jurisdiction under Section 263 of the Income-tax Act, 1961 ?"
2. The brief facts giving rise to this reference are as follows: The assessee is a partnership-firm deriving income from business of running a cold storage and ice factory. In the course of assessment proceedings, it claimed an investment allowance under Section 32A of the Act on the plant and machineries installed in the cold storage plant. This was allowed by the Income-tax Officer. The assessee also claimed relief under Section 80J of the Act in respect of the cold storage. The Income-tax Officer also allowed relief under Section 80f of the Act. Since there was not enough profit during the years under consideration for allowing the relief under section 80j, the income-tax Officer recorded a finding that the relief under Section 80J admissible to the assessee during the years under consideration shall be carried forward to be set-off against the profits of the future years. Subsequently, the Commissioner of Income-tax scrutinised the records and came to the conclusion that the Income-tax Officer had erred in his decision to the prejudice of the Revenue on both the points. Therefore, the Commissioner of Income-tax exercised the jurisdiction under Section 263 of the Act and issued a show-cause notice to the assessee. The assessee appeared before the Commissioner and submitted that the Income-tax Officer had committed no error and there was no prejudice to the Revenue in the original assessment order. However, the Commissioner of Income-tax disagreeing with the contention raised by the assessee, passed an order under Section 263 of the Act on September 6, 1983, and directed a re-inspection in the matter by the Income-tax Officer. Aggrieved by this order, the assessee approached the Tribunal and the Tribunal reversed the finding of the Commissioner of Income-tax and held that the Income-tax Officer was right in granting reliefs to the assessee. Hence, the Revenue approached the Tribunal for making a reference to this court and as such the Tribunal has referred the aforesaid question for answer of this court.
3. We have gone through the record and heard learned counsel for the parties. In fact, it appears to us that the order of the Commissioner of Income-tax passed under Section 263 of the Act is not perverse, but it is based on proper appreciation of the facts and the law.
4. Now, coming to the question whether the assessee is entitled to investment allowance on the cold storage or not, the reasoning given by the Tribunal for permitting the investment allowance on the cold storage with reference to the definition given in the Factories Act is that since cold storage is a "factory" and is, therefore, a manufacturing unit, the assessee is entitled to the benefit of investment allowance. This reason on the face of it appears to be erroneous. The definition of "factory" given in the Factories Act is given in a different context and the same cannot be used for the purpose of finding out whether the unit is a manufacturing unit under the Income-tax Act. This was totally an erroneous approach on the part of the Tribunal and this court in Mittal Ice and Cold Storage v. CIT [1986] 159 ITR 18 has negatived this contention and observed as follows (headnote) :
" The operation of a cold storage plant does not result in bringing into existence any new and distinct marketable commodity. The articles or goods preserved in a cold storage plant remain the same as they were prior to such preservation. There is no manufacture or production of 'cool air' because no marketable product is brought into existence by the operation of a cold storage plant.
Therefore, an assessee who operates a cold storage plant is not entitled to claim investment allowance under Section 32A in respect of machinery of the cold storage plant."
5. Therefore, the finding given by the Tribunal is erroneous on the face of it and the view taken by the Commissioner of Income-tax is well-founded and he rightly exercised the jurisdiction under Section 263 of the Act for setting aside the order of assessment made by the Income-tax Officer and remanding the matter to the Income-tax Officer for fresh investigation.
6. Coming to the next question regarding investment allowance on the ice manufacturing plant, since a combined account of the cold storage as well as the ice plant was maintained, it was not possible to ascertain the exact amount for giving the benefit of investment allowance on the ice manufacturing plant under Section 32A of the Act, but at the same time the Commissioner has held that ice plant is a manufacturing unit and is entitled to be given investment allowance under Section 32A of the Act. Therefore, he has remitted the matter for investigation by the assessing authority and rightly so.
7. It is true that when both the accounts are combined it is difficult to ascertain how much of the investment has been made on the ice plant so as to show the investment under Section 32A of the Act distinctly. However, the Commissioner has already taken a view that ice plant is entitled to the benefit under Section 32A of the Act being a manufacturing unit, therefore, he has left it open to the Assessing Officer to investigate into this specific aspect and allow the claim of the assessee keeping in view the above finding. This view of the Commissioner is also justified.
8. Now, coming to the question regarding deduction under Section 80J of the Act, both the units, i.e., cold storage and the ice plant are combined units and there is a composite unit as registered under the Industries Act. But there is no such material on record to show that they are inter-mingled with each other and one cannot survive without the other. It is not always necessary that a storage plant should have ice manufacturing plant also. It may be possible, and some times it may not be possible, but that can be found out only on investigation of the entire plant. Therefore, this matter has also been left open by the Commissioner of income-tax to investigate whether both are so interconnected with one another and in fact one machinery is used for cold storage and manufacturing of ice. The Tribunal has assumed it so, but there is no such evidence available on record. It is also pointed out that the assessee increased the capacity of cold storage by 1,400 M. T. which commenced production from March 9, 1980, whereas the ice factory commenced production from January 15, 1979. It is, therefore, not possible to ascertain the income from the cold storage because of the joint account kept by the assessee, and in that view, the Commissioner observed that the cold storage as a whole and the ice factory as separate unit will be entitled to deduction under Section 80J if the conditions prescribed in that section are fulfilled. Therefore, we leave this matter still open for investigation by the Assessing Officer.
9. Learned counsel for the Revenue has invited our attention to a decision of the Kerala High Court in CIT v. Travancore Rayons Ltd. [1987] 164 ITR 134 and submitted that where it is not possible to ascertain the facts from the joint accounts, then the benefit of Section 80J may be denied to such units. It is observed in that case that no separate accounts are maintained and it becomes necessary to make an allocation of all the liabilities, apart from the liability directly related to the new unit. It is also observed that it is not possible to find out from the accounts, the profits the assessee has derived from the new establishment. In other words, the assessee itself has treated the new plant as forming part of the existing business. In this connection, Shri Nema, learned counsel for the assessee, invited our attention to the decision of the Supreme Court in Textile Machinery Corporation Ltd. v. CIT [1977] 107 ITR 195. In that case also, their Lordships while disposing of the petition observed as under (page 207) :
" We may observe that we are not required to consider in these appeals how profit will be actually calculated in order to determine the quantum of exemption of six per cent. of the profits on the capital employed. If difficulties are insurmountable and, therefore, profit cannot be ascertained, that will be a different question in the course of practical application of the section. That kind of a possible difficulty should not weigh in the true construction of Section 15C. In the present case the assessee claimed profit and there was no difficulty about ascertainment of the exempted profit as separate books of account were kept and the undertakings were at separate places."
10. section 15c of the 1922 act is pari materia with Section 80J of the 1961 Act. This decision has been followed by their Lordships in CIT v. Indian Aluminium Co. Ltd. [1977] 108 ITR 367 (SC). Thus, wherever it is possible to calculate the profit attributable to the new unit from the joint account, the benefit of Section 80J should be given to the assessee. In fact, Section 80J is meant for encouraging the entrepreneurs for establishment of new industrial undertaking and the said provision is mainly for the benefit of new entrepreneurs and it should be construed positively and, therefore, if it is possible to grant the benefit, the Tribunals and the courts should adopt a positive approach. It is, therefore, open for the Income-tax Officer to ascertain whether segregation of accounts is possible and if it is possible the benefit of Section 80J of the Act should be given to the assessee subject to fulfilment of other conditions prescribed in that section. The Commissioner, therefore, Observed that this exercise should be done by the Income-tax Officer and it is further observed that in case such segregation of accounts is not possible for allowing the relief, the relief allowed under Section 80J of the Act should be withdrawn for the assessment years 1980-81 and 1981-82. He also directed the Income-tax Officer to make spot inspections of the machineries used in the new unit before deciding the issue one way or the other. This approach of the Commissioner also appears to be well justified and there is no reason why the Tribunal should reverse this finding.
11. Lastly, regarding carry forward of the unabsorbed depreciation and carry forward of the relief under Section 80J to be set-off against the profits of future years, their Lordships of the Supreme Court in Garden Silk Weaving Factory v. CIT [1991] 189 ITR 512 held that unabsorbed depreciation can be carried forward to the next assessment year and to future years if it is not possible to absorb the same against the partners' profit. Thus, it is clear that the unabsorbed depreciation has to be apportioned among the partners and if it cannot be absorbed, then it will revert to the firm. Therefore, since this view has already been taken by the Supreme Court, we do not propose to refer to any further decision on this aspect. This view has been reiterated by their Lordships in CIT v. Singh Transport Co. [1993] 200 ITR 574. Similar is the position regarding carry forward of the relief under Section 80J as held by this court in CIT v. Caps and Caps [1989] 179 ITR 235. Therefore, on both these aspects, the view taken by the Commissioner is correct.
12. In the result, the view taken by the Commissioner is right. Hence, we answer this reference in favour of the Revenue and against the assessee.
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