Usha Rectifier Corpn. (I.) (P.) ... vs Inspecting Assitant ...
1989 Latest Caselaw 234 Del

ORDER

Per Chander - This appeal by the assessed is directed against the order of the CIT (A) New Delhi dated 22-1-1986 relating to asst. year 1979-80. This appeal was filed and was marked by the Registry as time barred by 8 days. However, the assessed has explained the delay and the delay has been condoned.

2. In the grounds recorded in the memo of appeal, various issues have been raised. However, at the time of hearing, the learned counsel for the assessed, Shri C. S. Agarwal, Advocate crystallised the issues for our determination with the result that in ground No. A, the issue that survives is regarding the eligible deduction under section 80J of the Income- tax Act, 1961 for the year under appeal to be determined on the facts and circumstances of the case. The grounds mentioned after this have not been pressed except for the ground relating to disallowance of Rs. 23,304 out of total expenditure of Rs. 41,606 spent by the assessed for the purpose of its business. We have heard the parties on these grounds.

3. Before we take up these grounds for consideration along with the submissions that have been made before us, we bring into focus the factual backdrop from which they emerge. The assessed, during the previous year, continued the business of manufacture of selenium along with other business activities, such as manufacture of thruster and diodes. The registered office of the company is at "Jeevan Tara", 5 - Parliament Street, New Delhi. It had set up an independent silicon manufacturing unit at Faridabad. The return of income for the year under appeal was filed originally on 29-6-1979 declaring loss of Rs. 7,31,900. This return was, however, revised twice subsequently on 26-9-1981 and 6-7-1982 respectively declaring loss of Rs. 4,28,194 and Rs. 4,33,487. During the course of assessment proceedings, the IAC (A) came to consider the claim for deduction under section 80J with regard to silicon unit at Faridabad. The assessed had made a claim of deduction of Rs. 2,55,217 under this section, The IAC (A) found that the assessed had computed the deduction of Rs. 2,55,217 by taking the capital employed in this unit from the balance sheet of the previous year. According to the IAC (A), "it is quite possible that part of the internal funds to this unit came from the borrowed funds of the main branch. There is no evidence to show that the internal funds came to silicon unit consisted only of share capital or reserves from the main unit." He, therefore, held that a rational basis of working out the deduction under section 80J would be, "to apportion the capital employed of the unit in the same ratio as the capital and the reserve of the main unit bears to the total of share capital, reserves and borrowings." After making these observations IAC (A) worked out the capital employed in the industrial undertaking on the basis of which deduction under section 80J was to be worked out as under :-

Rs.

Rs.

1. Capital employed in the silicon unit as shown by the assessed

42,53,617

2. Capital plus reserves of main branch

56,82,556

3. Total capital of the main branch in-clouding the borrowed Criminal Appeal No.ital

1,46,75,259

4. The net capital employed excluding the proportionate borrowed capital from main branch is therefore- 42,53,617 X 56,82,556

1,46,75,259

16,47,086

5. Deduction under section 80J at 6 per cent is therefore

98,825

4. Thus, instead of deduction of Rs. 2,55,217 as computed by the assessed and claimed before him, the IAC (A) worked out the admissible deduction under section 80J at Rs. 98,825.

5. Under the head Sales Promotion Expenses, the assessed had shown total expenditure of Rs. 46,606 the assessing officer added back Rs. 41606 after allowing allowing deduction of Rs. 5,000 in terms of section 37(2A) of the Act. There were some other decisions and conclusions arrived at by the assessing officer in completing the assessment on 8-3-1985 but we are not concerned with them in these proceedings. This assessment was challenged in appeal. 6. The ld. CIT (A) did not find any merit in the submissions raised on behalf of the assessed before him that the assessing officer erred in reducing the claim for deduction under section 80J from Rs. 2,55,217 to Rs. 98,825 only. On this ground, the appeal of the assessed was dismissed. With regard to the addition of Rs. 41,606, he found that some of the expenses under the head been incurred on the employees of the appellant company. These expenses were incurred on the occasions of meetings of different committees. He also found that some of the expenses as was evident from the details thereof filed before him were of entertainment nature on the customers of the assessed. He was, therefore, of the view that it would be reasonable and fair to treat 50 per cent of the expenses as relating to the expenses incurred on the employees. He, however, held that such expenses will not amount to entertainment expenditure. Thus, out of the total of Rs. 46,606 it was held by him that expenses to the extent of Rs. 23,304 were of the nature of entertainment expenditure. under section 37(2A) deduction to the extent of Rs. 5,000 was admissible to the assessed. Therefore, from Rs. 23,304 Rs. 5,000 were allowed and the balance of Rs. 18,304 was held as justified addition as against the addition of Rs. 41,606 made by the IAC (Asst.). This is the second issue raised in appeal that has to be determined by us.

7. Before us, the ld. counsel for the assessed submitted that the authorities below have not appreciated the first issue at all on the peculiar facts and circumstances of this case. It was contended that there is no presumption that money that was advanced by the assessed to the silicon unit came out of the borrowed funds. Such a presumption has, therefore, been erroneously raised and used against the assessed by the authorities below and it is not at all justified in law. It was further contended that there was no nexus between borrowings by the assessed from outside parties and advancing the amounts from the capital and reserves of the assessed to the silicon unit. It was submitted that if such a link could be established the assessed would have no case. However, it was emphasised that not only a presumption has been raised in the case of the assessed and used against it there is no nexus established and, therefore, the manner and method in which the capital employed in the industrial undertaking was determined by the assessing officer and upheld by the CIT (A) is unjustified.

For this reliance was placed on the following judgments :-

1. Bishamber Dayal Badri Prasad v. IAC [1986] 18 ITD 279 (Delhi) (TM);

2. Indian Explosives Ltd. v. CIT [1984] 147 ITR 392 (Cal.) PP 404.

Reliance was also placed upon the judgment of the Honorable Supreme Court in the case of Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 to support the assesseds contentions. It was emphasised by the ld. counsel for the assessed that the assessed had sufficient funds with it in the form of paid up capital and reserve and surpluses to advance to the silicon unit in the interest of the business. It did so. The assessed knew how to carry on the business and how the best interest of the assessed could be served. This could not be looked into and it was not for the revenue to tell the assessed as to how the business should be carried on. Since, the deduction under section 80J was reduced merely by raising presumptions and on conjectures and surmises, the orders of the authorities below be set aside with the directions that deduction as claimed by the assessed be allowed.

8. With regard to the disallowance out of Sales Promotion Expenses. the ld. counsel submitted that in view of the details filed, the allowance should be more than what was allowed by the ld. CIT (A).

9. Replying to these submissions, the ld. DR contended that it is admitted that the business of the assessed consisted of more than one unit and each unit should be considered as an independent entity. Viewed in this context, it was contended that the transfer of fund from head office to silicon unit is in itself a borrowing and, therefore, hit by the provisions of rule 19A read with section 80J and the manner and method in which the authorities below proceeded to determine the admissible deduction under section 80J was, therefore, fully justified. The ld. DR invited our attention in particular to the judgment of the Honorable Supreme Court in the case of Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308 and a judgment of the Rajasthan High Court in the case of CIT v. Lodha Enterprises [1988] 170. It was pointed out that this judgment clearly lays down that special deduction under section 80J of the Income-tax Act, 1961, in respect of the newly established industrial undertaking is not allowable in respect of the borrowed capital.

10. Replying to the submission of the assessed that the case of the assessed is covered by the ratio of the judgment of the Tribunal in the case of Bishamer Dayal Badri Prasad (supra), the ld DR submitted that that case was not relevant because that was not on an issue involving deduction under section 80J. It was also contended that if the aggregate value of the assets and the borrowings is taken, the borrowings are in excess of the assets and, therefore, the proportionate capital worked out by the assessing officer is fully justified.

11. The ld. DR submitted that CIT (A) has been more than fair in allowing deduction out of sales promotion expenses, and no further interference at the instance of the assessed is called for in his order. Reliance was place on a judgment in the case of Amritsar Transport Co. (P.) Ltd. v. CIT [1988] 174 ITR 377 (Punj. & Har.).

12. We have given careful consideration to the rival submissions. We find that there is no dispute that Silicon Unit as one of the Divisions under which the business of the assessed is carried on. There is equipment division and selenium division. The Silicon Division was established in the accounting period 1975-76 relevant to the assessment year 1977-78 because the previous year of the assessed ends on 30th June. for the asst. years 1977-78 and 1978-79 no claim for deduction under section 80J was made due to looses though it appears that the assessed could have asked for determination of the deficiency to be carried forward in terms of sub-section (3) of section 80J of the Act. The claim for the assessment year under appeal is, therefore, being considered for the first time. In making this claim, the assessed has taken the value of the fixed assets at Rs. 24,93,388 and sundry debtors taken at Rs. 4,49,224 has been added to current assets Rs. 22,17,388 to arrive at the total of Rs. 52,39,094. From this figure liabilities amounting to Rs. 9,85,477 consisting of current liabilities at Rs. 1,31,840 and I. C. I. C. I. loan of Rs. 8,53,637 have been deduced. Capital employed has thus been arrived at Rs. 42,53,617. So far as computation of this figure is concerned, there is no dispute. However, the dispute is that the assessing authority has raised a presumption that in view of the loans taken by the assessed-company. It should be naturally taken that the entire capital employed in the silicon unit, which is an independent unit of the industrial undertaking did not come out of the paid up capital and reserves and surpluses, but should be related to the overall that have been raised by it in running the entire business including various units. It is on account of this presumption that the IAC (A) proceeded to determine the proportionate capital after taking into account the capital and reserves of the main branch and has also considered total capital of the main branch including the borrowed capital. Thereafter, the capital employed in the silicon unit as worked out by the assessed and capital and reserves of the main branch have been multiplied and divided by the capital of the main branch including the borrowed capital. Buy this process, the deduction 80J at 60 percent of the capital employed has been arrived at amounting to Rs. 98,825 because the capital employed has been taken at Rs. 16,47,086 as against Rs. 42,53,617. In nut shell, the issue is whether this method adopted by the assessing officer is justified on the facts and circumstances of the case or under the provisions of law.

13. It is apparent that the assessing officer did not find any direct transfer of borrowed funds by the company to the silicon unit. This is so because no mention of it has either been made by him or by the ld. CIT (A). Even at the time of hearing before us no such transfer could be shown to exist. On the other hand, there is enhancement assertion by she assessed that no borrowed capital, whatsoever, was transferred to silicon unit and as such, there is no link at all between the borrowings and the capital employed in the silicon unit of the assessed. The claim of the revenue is that it should be presumed that even if there is no specific transfer of borrowed capital, the borrowings helped the assessed and the proportionate borrowings should be taken as computed by the assessing officer. We, however, do not find any justification for this view on the facts of this case.

14. It is apparent that so far as computation of the capital employed at Rs. 42,53,617 is concerned, the assessing officer has not found any fault with it. This is so because even while working out the deduction on proportionate basis this capital employed working has been taken into consideration by him. The capital employed has to be worked out taking into consideration the facts and figures available as on the first day of the previous year relevant to the assessment year under appeal. The assessed has done so. Now, it is one thing to point an accuring finger at something apparently not done in accordance with law but it is quite different to say that a presumption in law should be raised to find out whether there is any defect in the working or computation done by the assessed. This is exactly what has been done in this case. Deduction in respect of the profits and gains from newly established industrial undertaking has to be worked out in accordance with the provisions of section 80J read with the rule 19A of the Income -tax Rules and insofar as the Rule 19A of the Income-tax Rules, 1962 provides for the exclusion of borrowed moneys and debts, in the computation of the capital employed by an industrial undertaking for the purpose of tax exemption is concerned, it could not said to be outside the rule making authority a held by the Supreme Court in the case of Lohia Machines Ltd. (supra) on which reliance have been placed by the revenue. However, the issue really is whether there was any borrowed capital and debts or any long-term borrowings by the assessed company that traveled directly to the silicon unit so as to entitle the assessing authority to include the same in computing the capital employed. There is no evidence whatsoever, at any stage of the proceedings brought out to indicate that there could be even any doubt that such borrowing were intended or were taken for the purpose of employment in the silicon unit of the industrial undertaking. Therefore, the type of assumption raised by the assessing officer on the basis of which the capital employed was reduced cannot be justified at all. The very basis on which the claim of the assessed was rejected in fact did not exist, as the denial of rightful claim was on mere conjectures and surmises without any enquiry to establish factual employment of borrowed capital in the silicon unit.

15. We also find that the assessed accepted the proposition that in case borrowed capital by the company is brought into the working capital of the silicon unit, the assessed will be not entitled to include it in the capital employed. On the other hand, the assessed had asserted that the capital employed in the silicon unit came out of paid up capital and reserves and surpluses of the company. It is not defined by the revenue that paid up capital and reserves and surplus were in excess of the capital employed in the silicon unit. We also find that silicon unit is maintaining separate books of account. which have been audited by authorised chartered accountants. There books have also been accepted by the revenue. The assessed, therefore, could correctly work out capital employed by taking the figures recorded in these books. Therefore, we find substance in the submissions made on behalf of the assessed by its learned counsel that there was no link, howsoever, even remotely to show that borrowings travelled to the industrial undertaking in which the claim of deduction under section 80J has been made. On such facts, we do not find any justification to support the orders of the authorities below. Since, the computation of the capital employed at Rs. 42,53,617 is not otherwise in dispute, we direct that deduction under section 80J at 6 per cent of this amount be allowed which comes to Rs. 2,55,270 as claimed by the assessed. We, therefore, allow this ground in toto.

16. Now, coming to the other issue in appeal, we do not find any justification for interference in the order of the ld. CIT) on behest of the assessed because we find that the ld. CIT (A) has been very reasonable and fair in allocating the expenditure which was considered by him as not entertainment expenditure and that which was considered as expenditure covered by section 37(2A). The details of the expenses have been considered by us and we are of the opinion that the allocation made by the ld. CIT (A) does not require any intereference. This ground of the appeal of the assessed is rejected.

17. Appeal partly allowed.