Dinesh Mills Ltd. v. Deputy Commissioner of Income-tax

R.M. MEHTA, A.M. - This appeal is directed against the order passed by the Commissioner (Appeals) for which purpose as many as 12 grounds have been urged. These grounds, however, raise for our consideration two issues and first of these pertains to the relief allowable to the appellant under section 80HH of the Act.

2. Before we proceed further it may be mentioned that the question of 80HH relief had already been adjudicated upon by the Commissioner (Appeals) in his order dated 15th March 1985 but being dissatisfied with the said decision the assessee had preferred an appeal to the Tribunal and vide order dated 28th April 1987 the matter was restored back to the Commissioner (Appeals) to reexamine the issue in the light of the CBTD Circular No. 380 dated 10th April 1984 and the decision of the Bombay High Court in the case of Indian Oil Corporation v. Rajagopalan (S), ITO (1973) 92 ITR 241 (Bom.) which had been accepted by the Board by means of the aforesaid circular. In the second round the Commissioner (Appeals) following the decision of her predecessor held that out of the net profit of Rs. 10.49 lacs of the Combing Unit, a sum of Rs. 8.75 lacs was to be reduced that being the proportionate interest due on the funds borrowed by the Head Office and diverted to the Combing Unit. In this way the net profit was worked out at Rs. 1.74 lakhs and 20 per cent thereof, viz., Rs. 34,800 was allowed as a deduction under section 80HH. This was against the relief of Rs. 71,200 worked out by the Commissioner (Appeals) in his order dated 15th March 1985.

3. The learned counsel for the appellant at the outset stated that no such adjustment out of the net profit of Rs. 10.49 lacs was justified either in law or on facts since the Board's Circular was absolutely clear on the subject. This circular, according to him, although pertaining to section 80J held good even for purposes of considering the relief allowable under section 80HH. According to him, the borrowings of the Combing Unit only were required to be taken into account and not those of the "assessee". By means of this argument he sought to draw a distinction between an "Industrial Undertaking" and an "assessee". Further arguments which were advanced by him were as follows :

(i) That one cannot be one's own lender and interest cannot be paid to self.

(ii) That the bank over draft account in the books of the Head Office was a mixed one in which were included the sales realisations of the assessee as well and it could not be said with any certainty that there was a nexus between the funds borrowed from the bank and those diverted to the Combing Unit since the assessee's own funds were sufficient to take care of the amount advanced to that Unit. The learned counsel made an impassioned plea for the acceptance of the assessee's claim to allow relief under section 80HH on the net profit of Rs. 10.49 lacs of the Combing Unit and in the alternative it was argued that the assessee could not be worse off in the second round before the Commissioner (Appeals) since the relief of Rs. 71,200 granted vide order dated 15th March 1985 had been reduced to Rs. 34,800 by the successor Commissioner (Appeals) and it was not the Department which was in appeal before the Tribunal at the first stage but the assessee. In support of his various arguments the learned counsel placed reliance on the following decisions :

(1) Kamani Engg. Corpn. Ltd. v. Commissioner (1991) 191 ITR 107 (Bom.);

(2) Indian Oil Corporation v. ITO (1973) 92 ITR 241 (Bom.)

(3) Commissioner v. Kamani Engg. Corpn. (1986) 161 ITR 473 (Bom.);

(4) Commissioner v. Karnataka Cement Pipe Factory (1985) 151 ITR 247 (Kar.);

(5) Malwa Mills Karamchari Parasper Sahakari Sanstha Ltd. v. Commissioner (1983) 140 ITR 379 (MP);

(6) Alkali & Chemical Corporation of India Ltd. v. Commissioner (1986) 161 ITR 820 (Cal.);

(7) Indian Explosive Ltd. v. Commissioner (1984) 147 ITR 392 (Cal.);

(8) Gujarat Agro Industries Corporation Ltd. v. ITO (1985) 14 ITD 320 (Ahd.);

(9) Manipal Power Press v. ITO (1986) 18 ITD 14 (Bang);

4. The learned Departmental Representative on the other hand strongly supported the order passed by the Commissioner (Appeals). According to him, the funds raised by the Head Office and diverted to the Combing Unit had to be deducted for purposes of calculating the relief under section 80HH. It was further contended that in case the proposition canvassed on behalf of the assessee was accepted then absurd results would follow since every assessee would divert borrowings meant for a new unit through the Head Office. He also referred to the observations recorded by the predecessor Commissioner (Appeals) in para 6.6 of his order whereby the assessee's representative had himself admitted that the amounts from the over draft bank account in the Head Office had been diverted to the Combing Unit. This aspect of the matter, according to him, had not been challenged by the assessee. Then again a reference was made to the fact that the quantum of relief had been worked out in the order dated 15th March 1985 by the Commissioner (Appeals) on the basis of the figure furnished by the assessee itself and all that the successor Commissioner (Appeals) had done was to arrive at a different figure on finding that there was a "mistake" in the said calculation. He thereafter made an impassioned plea for the confirmation of the order passed by the Commissioner (Appeals) submitting further that the decisions relied upon by the learned counsel for the assessee including the one of the Bombay High Court in the case of Indian Oil Corporation (supra) were distinguishable and that the Circular of the Board was not applicable.

5. We have examined the rival submissions and have also perused the material on record to which our attention was invited by the parties. The decisions cited at the bar have also been duly considered by us. At the outset we may mention that whatever relief the Commissioner (Appeals) had allowed to the assessee in his order dated 15th March 1985 had been computed on the basis of he facts and figures furnished by the assessee itself. There can be no quarrel with the law laid down on the subject by the numerous decisions cited at the bar but we have before us case in which the assessee itself admitted that the funds borrowed from the bank in the books of the Head Office had been diverted to the Combing Unit. Then again, it was the assessee itself who furnished to the Commissioner (Appeals) the relevant facts and figures wherein the endeavour was to point out that a part of the funds diverted to the Combing Unit came out of the assessee's own funds and not from the funds borrowed from the bank. Even the percentage viz., 35.42 which had been applied to work out the proportionate amount had been calculated by the assessee and given to the Commissioner (Appeals) and which he accepted. The aforesaid facts become absolutely clear from a reading of para 6.6 of the order of the Commissioner (Appeals) dated 15th March 1985 as follows :

"The position in regard to the interest is different. Shri Kishnadwala has very strenuously argued that interest has been paid by the Head Office on those loans raised which are not specifically for the Combing Unit. He originally argued that unless the Department establishes that some loans are taken specifically for the Combing Unit, no part of interest can be attributed to the Combing Unit out of the claim made in the Head office. On the first day of hearing, I raised a query as to whether moneys passed on from the Head Office to the Combing Unit were from the Over-draft Bank a/c. It was admitted before me that they were really from the O.D. Bank A/c. On this basis, I indicated to Shri Kishnadwala that prima facie, the nexus between the loans taken and moneys given to the Combing Unit stood established. Obviously, if Rs. 10 lacs are paid from the OD bank A/c to the Combing Unit, the Head Office bears interest attributable to the said sum of Rs. 10 lacs and there is direct nexus between that borrowing by the Head Office and the financing of the Combing Unit. Faced with this situation, Shri Kishnadwala argued that practically in all Industrial establishments there are over draft bank accounts, but all the receipts and payments are transacted through them. He argued that in the O.D. Bank A/c sale proceeds were also credited and, hence, it was not proper to hold that the moneys passed on by the Head Office to the Combing Unit came solely from borrowing from the bank. In my opinion, on these facts and in these circumstances, apportionment of the interest debited in the Head Office on a reasonable basis would be certainly warranted. This is so because prima facie, the nexus between the interest bearing borrowings and the financing of the Combing Unit exists. For meeting Shri Kishnadwala's argument that sale proceeds are also credited in the O.D. Bank a/c; all that one can say is that the apportionment should be done on a reasonable basis. With this end in view and on my request, Shri Kishnadwala has furnished facts and figures to show cash accruals and total increase in investments and assets. One set of those papers is being forwarded to the ITO alongwith this order. As per those charts, investment in the Combing Project by the Parent Unit as on 1st January 1980 is Rs. 59.65 lacs and the ratio of generated cash used for expansion to total expansion or increase in assets comes to 35.42 per cent. Hence, utilisation of own generated funds of the parent unit for the Combing Unit would be 35.42 per cent of Rs. 59.65 lacs, i.e., Rs. 21.13 lacs. On the basis of these figures, the balance of Rs. 38.52 lacs (Rs. 59.65 - 21.13 lacs) would be out of borrowed funds and interest thereon at the rate of 18 per cent would be Rs. 6.93 lacs. This is the only sum deductible from the figure of net profit from that Unit computed by the appellant at Rs. 10.49 lacs in the revised claim. This gives a figures of net profit at Rs. 3.56 lacs, and, hence, relief under section 80HH would be 20 per cent thereof, i.e., Rs. 71,200."

As rightly pointed out by the Departmental Representative the aforesaid findings recorded by the Commissioner (Appeals) have not been challenged on behalf of the assessee. In the final analysis we uphold the decision taken by the Commissioner (Appeals) to reduce from the net profit of the Combing Unit the proportionate amount of interest vis-a-vis the borrowed funds diverted by the Head Office to the said Unit. We are, however, of the view that the Commissioner (Appeals) was not justified in reducing the relief to a figure of Rs. 34,800 as against Rs. 71,200 allowed by her predecessor. The question whether the borrowings on the first day of the year are to be taken or on the last day of the year, is a debatable one ad it cannot be called a simple calculation mistake apparent from the record. The Commissioner (Appeals) in her order has calculated the interest at the rate of 18 per cent on the sum of Rs. 72.03 lacs that being the figure of investment in the Combing Unit on the last day of the year viz., 31st December 1980. It cannot be said that the entire amount had been borrowed on the first day of the year and the same balance remained with the assessee till the last day of the year. The amount would have come in different denominations from day to day and in case the interest is calculated on that basis or on an average basis for purposes of convenience, then the figure attributable as interest would be much less than the sum of Rs. 8.75 lacs taken by the first appellate authority. Then again, it was not the Department which went up in appeal to the Tribunal against the order passed by the Commissioner (Appeals) on 15th March 1985 but it was the assessee who did so. In other words this is a case where the assessee has become worse off by taking up the matter before the Tribunal. In this view of the matter we modify the order of the Commissioner (Appeals) and restore the original relief of Rs. 71,200 granted by the predecessor Commissioner (Appeals) in his order dated 15th March 1985. This decision of ours disposes off the relevant grounds in the appeal pertaining to relief under section 80HH in respect of the Combing Unit since the claim under the said section in respect of the Spinning and Weaving project was not pressed (Ground No. 6) and which is accordingly being rejected.

6. The remaining grounds in the appeal pertain to the computation of relief under section 80J. The facts pertaining to this are more or less identical to those discussed by us while deciding the appeal pertaining to relief under section 80HH since the dispute between the parties here also was whether anything was to be deducted in respect of liabilities pertaining to the Head Office while computing the capital employed for purposes of working out the relief under section 80J. The matter was restored to the file of the Commissioner (Appeals) by the Tribunal on identical reasons, viz., to consider the Circular of the Board and the decision of the Bombay High Court (supra). The claim before us in respect of the Combing Unit as also the Spinning and Weaving Project.

7. Both the parties agreed and stated before us that the arguments advanced by them in respect of the ground pertaining to section 80HH relief would be applicable in deciding the present ground as well. In view of the decision that we have taken to uphold the order of the Commissioner (Appeals) to deduct from the net profit of the Combing Unit the proportionate amount of interest on the funds borrowed and diverted to the said Unit, it would be necessary to deduct from the figure of "capital employed" the amounts which have actually been so diverted and in respect of which the relevant figures have been furnished by the assessee itself to the Department. As already mentioned by us while deciding the ground pertaining to section 80-HH such a deduction may otherwise not be necessary in view of the legal position on the subject as also the Board's circular but this is a case where the assessee itself admits that the funds have been so diverted and in view of such a clear admission, there is no option but to carry out the necessary deduction while computing the figure of "capital employed". This would mean that the deduction which is being made is not only in conformity with the various decisions cited before us in the course of the hearing but also in accordance with the Circular of the Board since what is required to be deducted is the liability/liabilities "in respect of that Industrial Undertaking only". It is specifically this which has been done by the Commissioner (Appeals) and which we hereby confirm. of course of any relief is due to the assessee as a result of the decision taken by us in the ground pertaining to section 80HH then the Assessing Officer may recompute the deduction allowable to the assessee under section 80J as well.

8. The appeal is partly allowed.