Delhi High Court

Liberty Group Marketing Division vs Assistant Commissioner Of Income ... on 18 February, 1998

Equivalent citations: (1998) 61 TTJ Del 566

ORDER

Nathu Ram, A.M.

These are cross-appeals, preferred by the assessee for the assessment years 1986-87 and 1987-88 and by the revenue for the assessment year 1988-89, against the orders of the Commissioner (Appeals). As the facts and certain issues involved are common, these appeals have been heard together and are disposed of by this consolidated order.

2. We first take up assessees appeals for the assessment years 1986-87 and 1987-88. The only ground taken is against upholding the disallowance of claim made under section 80-I at Rs. 1,40,920 for assessment year 1986-87 and Rs. 97,494 for assessment year 1987-88. The assessee claimed deductions under section 80-I in the returns filed. The assessing officer noticed from the accounts for the assessment year 1986-87 that an amount of Rs. 12,60,476 was debited on account of production charges. On enquiries the assessing officer came to know that the entire stock was got manufactured from sister-concern for which such production charges were paid. When nothing was manufactured by the assessee, the basic condition of section 80-I remained to be fulfillled, according to the assessing officer. The assessing officer also noticed that raw material was purchased and the same was supplied to the sister-concern for manufacturing process. On these facts the assessing officer was of the view that the assessee could not be considered an industrial undertaking and accordingly deduction claimed under section 80-I for the assessment year 1986-87 was disallowed. For similar reasons the deduction claimed for the assessment year 1987-88 was also disallowed.

3. On appeal it was contended that the assessee was getting its products manufactured from sister-concerns, was not factually correct as observed by the assessing officer. The assessee in fact was getting the shoes manufactured by it, fabricated from cobblers employed by it on piece rate basis. A list of 21 cobblers was furnished to show that the assessee had employed more than twenty persons in the manufacturing process as the manufacturing process was not being carried out with the aid of power. I was also argued that for the purpose of claiming deduction under section 80-I it was not necessary that article or thing should be manufactured under its own roof and the employment of outside fabricators on piece rate basis was sufficient. It was also claimed that the assessee was registered as a small scale industrial unit with the Director of Industries. Reliance was also placed on the order of the Tribunal in the case of CIT v. Harjit Synthetic Fabrics (P) Ltd. 1986 Tax LR 498 (Bom) for the proposition that it was not necessary to employee the requisite number of workers throughout the year and only a substantial compliance with that provision was enough. Further reliance was placed on the decisions reported in Kanakadhara Industries v. ITO (1984) 7 ITD 142 (Mad-Trib), ITO v. Ahura Shipping & Engg. Co. (P). Ltd. (1984) 8 ITD 435 (Bom-Trib) and N. Synthetic (P) Ltd. v. ITO (1984) 18 TTJ (Ahd-Trib) 508 for the proposition that where a person manufactures something for other on job work basis, deduction under section 80-J could not be claimed by such person. The assessee sought to argue on the same analogy that the person for whom the manufacturing is done could claim such a deduction under section 80J or 80-I. It was also contended, placing reliance on the decision reported in Kapri International (P) Ltd. v. ITO: (1984) 8 ITD 820 (Del-Trib)(SB), that it was not necessary that labours and workers should be employed by the persons manufacturing goods and they should be working in his factory. The first appellate authority, however, did not agree with this line of arguments and he upheld the action of the assessing officer for the assessment year 1986-87 for the reasons recorded in his order in para 2.3 which is extracted hereunder :

2.3. I have carefully considered the arguments for the appellant and find no force in these. The deduction under section 80-I would not be admissible to the appellant for the following reasons :

(i) The appellant is admittedly not doing any manufacturing of its own and gets the shoes made from cobblers on job work basis. These cobblers do not work at the appellants premises and are not under the control and supervision of the appellant in the sense in which an employee should be under the control and supervision of the employee. As such, the relationship of employer and employee does not exist between the appellant and these cobblers and accordingly, the appellant cannot be said to be employing 20 or more persons in its manufacturing process. Under the labour welfare laws like EPF, CPF, ESI, etc. the appellant is taking the stand that these cobblers are not employees of the appellant and accordingly not entitled to the benefits of these labour welfare laws. However, for claiming the deduction under section 80-I, the appellant claims that these cobblers are its employees and accordingly, the deduction should be allowed to it. Under the law, an assessee cannot take contrary stands under different laws as held by the Allahabad High Court in the judgment reported in Shiv Prasad Ram Sahai v. CIT (1966) 61 ITR 124 (All). The appellant cannot, therefore, be permitted to take the plea in income-tax proceedings that these cobblers from whom the appellant was getting the shoes manufactured, are its employees when the appellant itself is not accepting this position under the various labour welfare laws mentioned above. Also, it is considered relevant here to reproduce the following extract from the order-sheet of the learned assessing officer dated 8-8-1989 which is duly signed for the appellant :

(1) Registered claim under section 80-I it is admitted that no manufacturing is done in the assessees own premises and no arrangement of such manufacturing of assessees own. The manufacturing is got done from outside. It is further admitted that this would be an excisable item if goods are manufactured in assessees own premises; and to avoid the excise duty the assessee gets it manufactured from other outside parties (asked to file list of these parties). Contends that raw material is supplied to these manufacturers by the assessee (like leather foam, lining, adhesives, buckles, thread, etc.)

(2). It would, therefore, be seen that the appellant is even trying to take a plea under the Income Tax Act which is contrary to the plea taken by it under the excise laws. Under the Central Excise Act, the appellant is pleading that it is not manufacturing the shoes whereas under the Income Tax Act it has raised the plea that it is a manufacturer of shoes and should accordingly be allowed the deduction under section 80-I, as held by the Allahabad High Court in the judgment mentioned above, the appellant cannot be allowed to take one stand under one enactment and a contrary stand under an other enactment for deriving maximum benefit under both the enactments.

(ii) The appellant has also produced no evidence to show that it had made substantial compliance with the condition that it should have employed more than 20 persons in its manufacturing process as the manufacturing process was carried on without the aid of power. No doubt, a list of 21 persons has been furnished who are claimed to have done some job work for the appellant during the year. The appellant has not shown that all these persons were engaged simultaneously and not one after the other or how long and how often each of the persons was engaged. The appellant is accordingly held to have failed to show that the condition of employing 20 or more persons was satisfied in its case. The onus of proving that all the conditions of section 80-I were satisfied, was upon the appellant which it has failed to discharge.

(iii) I also find force in the argument advanced by the learned assessing officer during the course of appeal proceedings that if the appellants argument was to be accepted, then not only the fabricators but also all other persons who get the fabrication done from him on job work basis, would become entitled to the deduction under section 80-I which could never be the intention of the law. In a case where a person installs a machinery and does mainly job work for others whose number may be in thousands, then in my view it is only the owner of the machinery who would be eligible to the deduction under section 80-I and not the several thousand persons who get the job work done from him. Deductions like 80-I are allowed for setting up of new industrial undertakings. In my view, only the person who installs the machine, can be said to be a manufacturer who has set up a new industrial undertaking and the person who gets job work done from him cannot be said to have set up any new industrial undertaking. A new industrial undertaking which manufactures an article or thing, as popularly understood, would mean an undertaking with some manufacturing facilities of its own and cannot mean an undertaking which gets its entire manufacturing done from outside and its only job is to pack the goods and despatch them to the customers."

For the above reasons, the appellant is considered to be not eligible for the deduction under section 80-I. The appellants reliance on three Tribunal orders for the proposition that for deduction under section 80-I, the assessee should be manufacturing its own articles, is not considered to be of any help to the appellant as nowhere in these decisions, it is mentioned that an assessee getting articles manufactures, from others would be eligible for the deduction. In the Tribunal order in Kapri International (P) Ltd. v. ITO (supra) relied upon for the appellant, it is mentioned that it is not necessary for eligibility to deduction under section 80J that all stages of manufacture should be done by the manufacturer himself and there was no bar if some of the stages of manufacture was got done from outside. This order of the Tribunal also does not help the appellant as the appellant has not shown that even one stage of the manufacturing process was carried out by the appellant itself. The appellant has relied on the Bombay Bench Tribunal order reported in CIT v. Harjit Synthetic Fabrics 1986 Tax LR 498 (Bom-Trib) for the proposition that the condition regarding employment of 19/20 persons was only required to be substantially complied with this provision as mentioned above. The appellant is accordingly held to be not entitled to the deduction under section 80-I.

3.1 As regards the assessment year 1987-88, the Commissioner of Income Tax(Appeal) following his order for the assessment year 1986-87 upheld the disallowance of claim made under section 80-I.

4. The learned counsel for the assessee made a submission that the assessee was getting the shoes manufactured from the cobblers on piece rate basis. The material was supplied to them and they were paid job charges. The number of such workers involved in both the years were more than twenty. The learned counsel also claimed that such a number need not be throughout the year and in support he placed reliance on the decision in the case of Harjit Synthetic Fabrics (P) Ltd. (supra). He also placed reliance on the ratio of decisions reported in (1984) 7 ITD 142 (Mad-Trib) (supra) (1984) 8 ITD 435 (Bom-Trib) (supra) and (1984) 18 TTJ 508 (Ahd-Trib) (supra) made a submission that in the present situation that the assessee is entitled to deduction under section 80-I. He also submitted that part of the manufacturing operations were carried out by the assessee itself such as designing, sampling, etc. and partly the manufacturing was got done from the cobblers. He submitted that in the latter assessment years on identical ground the Commissioner of Income Tax(Appeal) has allowed claim under section 80-I in the assessment year 1989-90, 1990-91 and 1992-93 and the department has not challenged the decision of the Commissioner of Income Tax(Appeals) for those years before the Tribunal. The learned counsel, therefore, pleaded that the department having accepted the claim in latter years on identical facts, there is no reason for denying the benefit in the current assessment year 1986-87 and 1987-88. In support he has also cited decisions in the cases of Indocean Engg. Systems (P) Ltd. v. Dy. CIT (1997) 60 ITD 649 (Pune-Trib) and CIT v. Penwalt India Ltd. (1992) 196 ITR 813 (Bom).

5. The learned Departmental Representative on the other hand, narrating the facts of the case, submitted that assessee in fact was not an industrial undertaking nor it was manufacturing any article or thing. The assessee also did not have any facility of its own for manufacturing the shoes. It is also an admitted fact that the assessee got the shoes manufactured from cobblers on piece rate basis on supply of material to them. He also submitted that the assessee has not admitted its liability in respect of EPF, CPF, ESI, etc. in respect of the cobblers manufacturing shoes on piece rate basis and further under the excise laws also the assessee has claimed that it is not manufacturing shoes whereas the claim made before the department is contrary to that taken under the excise laws and other labour laws. The learned Departmental Representative further placed reliance on the decisions in CWT v. Venkatachalam Pillai (1995) 215 ITR 406 (Mad) and CWT v. V.O. Ramalingam (1995) 216 ITR 566 (Mad), to contend that the assessee having not carried out any manufacturing activity, was not an industrial undertaking. He further placing reliance on Mahendra Kumar Agarwal v. ITO (1986) 19 ITD 474 (Del-Trib) and Talwar & Khullar (P) Ltd. v. IAC (1982) 1 ITD 1025 (Del-Trib) contended that on identical facts deduction under sub section 80-I, 80J and 80HH was denied in those cases. The learned Departmental Representative therefore, pleaded that on the facts and direct decisions of the Tribunal on the issue available the Commissioner of Income Tax(Appeal) has rightly upheld the order of the assessing officer and the same required no interference. As regards the latter assessment years, where deduction under section 80-I has been allowed by the Commissioner of Income Tax(Appeal), he made a submission that as per facts shown, part of the manufacturing process was carried out by the assessee and partly the manufacturing process was got done from outside whereas in the current assessment years no manufacturing operation was carried out by the assessee and the shoes were totally manufactured by the cobblers on piece rate basis. The facts of the present case, therefore, being distinguishable, no assistance could be taken from the orders of the Commissioner (Appeals) for latter assessment years.

6. We have considered the facts and rival submissions. We have also gone through the orders of the lower authorities and various decisions cited by both the parties. We find that in the assessment year 1986-87 the assessee has shown the sale of finished goods of Rs. 1,22,41,759 in the manufacturing and trading account and apart from the purchase of raw material of Rs. 83,30,495 the assessee has claimed production charges paid to cobblers at Rs. 12,60,476. There are no expenses other than these on manufacturing of shoes debited in its accounts. Similarly, in the assessment year 1987-88 the assessee has shown in the manufacturing and trading account, sale of finished goods at Rs. 2,00,17,277 and there against, apart from the purchases of raw material of Rs. 1,15,68,133 the assessee has debited production charges paid to cobblers on piece rate basis at Rs. 20,33,147. In this year also the assessee has not shown any other expenses incurred on manufacturing of shoes of its own. This clearly shows that the assessee neither had any manufacturing facilities available nor carried out any manufacturing process of its own. The shoes were got manufactured wholly from the cobblers on piece rate basis. They were not in fact employees of the assessee. We also find from the paper-book that there were 21 cobblers engaged in the manufacturing of shoes on job work basis in the assessment year 1986-87 and 24 in the assessment year 1987-88. It so appears, the assessee was doing the packing of the shoes after the same were received readymade from the cobblers for further sale, as is seen from the fact that the assessee was doing the packing of the shoes after the same were received readymade from the cobblers for further sale, as is seen from the fact that the assessee has claimed in the trading and manufacturing account, packing material expenses of Rs. 5,07,041 in the assessment year 1986-87 and of Rs. 9,56,140 in the assessment year 1987-88. The employees which the assessee engaged were working as packers, salesmen, typists, assistants, driver, etc. and they did not come under the category of workers engaged in the manufacturing of shoes. Section 80-I for proper appreciation is reproduced hereunder :

80-I(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel or the business of repairs to ocean-going vessels or other powered craft to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof."

6.1 It would be seen from the bare reading of the section that deduction is available under the section on income derived from an industrial undertaking. The question that arises is whether the assessee is an industrial undertaking. In the case of CWT v. Venkatachalam Pillai (supra) the assessee was purchasing gold and getting it manufactured as ornaments from gold miths for sale. The Honble Madras High Court held that the assessee was not an industrial undertaking. Further, in the case of CWT v. V.O. Ramalingam (supra) the Honble Madras High Court considered the meaning of expression "industrial undertaking" and held the view according to its definition the term "industrial undertaking" for the purpose of business activity means an undertaking engaged in the business of manufacture or processing of goods. The expression "engaged in manufacturing" postulates the assessees direct involvement in manufacture.

In the present case admittedly the assessee was not directly involved in the manufacturing of shoes, but getting the shoes manufactured from outsiders on piece rate basis. Though the aforesaid cited decisions are under the Wealth Tax Act, but the ratio thereof would apply to the facts in the present context as well.

6.2 One of the conditions prescribed in sub-section (2) of section 80-I for validity of the claim is that the industrial undertaking manufactures or produces any article or thing. As the facts shows the assessee was not directly involved in manufacturing of any article or thing i.e. shoes. In the case of Talwar & Khullar (P) Ltd. v. IAC (supra), the assessee got brass wares processed through artisans in cottage industries on payment of wages by supplying raw materials and semi-finished material to them. The assessees claim being treated as an industrial undertaking for the purpose of allowing deduction under sub-section 80HH and 80-I was disallowed by the lower authorities on the ground that the assessee neither owned any building, plant machinery nor was itself manufacturing any goods. The Tribunal upheld the action of the lower authorities. In the case of Mahender Kumar Agarwal v. ITO (supra), the assessee purchased yarn from market and gave it to weavers for weaving clothes. Cloth was then dyed and calendered. The assessee did not employ any workers for getting the manufacturing work done from industrialist who carried it out in its own factory. The Tribunal held that deduction under section 80-I was not allowable. We also note that the assessee-firm has not employed any worker of its own in shoes manufacturing and accordingly the condition prescribed in clause (iv) of sub-section (2) of section 80-I is not satisfied.

6.3 As regards the latter assessment years 1989-90 to 1992-93, we find that in those assessment year the assessee had carried out certain manufacturing activities with its own machinery installed in those years and accordingly it fulfillled the necessary condition as required under section 80-I. The assessing officer has admitted that the assessee-firm installed substantial machinery during those year including those imported valued at Rs. 13,85,620. The assessee carried out manufacturing activities like folding, crumping, pneumatic fusing, ironing, fungible innerlining, commenting and stamping, etc. with the help of its own machinery and the workers employed thereon. The assessing officer in this view of the matter allowed deduction under section 80-I in proportion to the profits attributable to its activities. However, the Commissioner (Appeals) allowed full claim under section 80-I and the same is supported by decisions in the cases of Penwalt India Ltd. (supra) and Indocean Engg. Systems (P) Ltd. (supra). Since in the years under consideration the assessee-firm carried out no manufacturing activity nor any workers were employed in manufacturing activity, the assessee could not be entitled to the claim under section 80-I in the current assessment years on the strength of the appellate orders for the later assessment year 1989-90 to 1992-93.

6.4 Looking to the facts and the ratio of the decisions cited we are of the considered opinion that the assessee during the assessment years under consideration was neither an industrial undertaking nor it was directly involved in manufacturing of shoes with its own workers and accordingly we see no infirmity or flaw in the orders of the Commissioner (Appeals) for both the years and the same are upheld.

7. Coming to the revenues appeal for the assessment year 1988-89 the only issue involved is whether the expenses incurred of Rs. 1,79,883 and Rs. 1,86,406 on neon-signboards, etc., debited to publicity and advertisement account, were of capital nature.

7.1 The assessing officer noticed in the account of Saharanpur branch that there was a debit of Rs. 1,89,821 on account of publicity and advertisement. This included a sum of Rs. 3,415 paid to Amar Shoes considered separately, leaving a balance of Rs. 1,86,406. According to the assessing officer this was the cost of neon-sign and glow-sign boards deployed at various places or given to showrooms. The assessing officer treated these expenses of capital nature and disallowed the same. He, however, allowed depreciation thereon.

7.2 The assessing officer also noticed that advertisement expenses also included cost of production of T.V. film Rs. 98,000 and cost of neon and glow signboards amounting to Rs. 75,833 and insurance expenses of Rs. 60,000. The assessing officer treated such expenses as of capital nature, by placing reliance on the decision of the Honble Bombay High Court in the case of CIT v. Patel International Film Ltd. (1976) 102 ITR 219 (Bom). The total amount involved of Rs. 1,79,833 was thus disallowed. However, depreciation thereon was allowed.

7.3 On appeal, it was contended that the expenses involved on publicity and advertisement were on revenue account and reliance was placed on the decision in the case of Mohan Meakins Breweries Ltd. v. CIT(1979) 118 ITR 191 (HP), and also contended that as per that decision, advertisement expenses could never be of capital nature. As regards the expenditure on neon-sign and glow-signboards, reliance was placed on the order of the Commissioner (Appeals) in the case of Atlas Cycle Industries Ltd. for the assessment year 1982-83 and 1983-84 wherein it was held that expenses incurred ought to be treated as for the purpose of business and following the decision of the Tribunal in its own case for assessment year 1978-79 expenses claimed were allowed as revenue expenses. It was also contended that the department has accepted the findings so given by the Commissioner (Appeals) in the case of Atlas Cycle Industries. It was also contended, referring to the judgment of the Honble Himachal Pradesh High Court, cited,that even if there are other contrary judgments of other High Courts, the view favourable to the assessee should prevail as has been held by the Honble Supreme Court in large number of cases. The first appellate authority having regard to such pleadings allowed the expenses claimed as revenue expenditure with the following observations :

4.3. I have carefully considered the arguments for the appellant and find force in these. In the Himachal Pradesh High Court judgment relied upon for the appellant, it has indeed been held that the expenditure on advertisement and publicity cannot be treated as capital expenditure. The appellants reliance on the order of the learned Commissioner of Income Tax (Appeals), Chandigarh in the case of the Atlas Cycle Industries Ltd. (supra) is also valid and the revenue apparently accepted the findings of the learned Commissioner of Income Tax(Appeals), Chandigarh in that case to the effect that expenditure on glow-signs was of a revenue nature. It is also true that the Supreme Court of India has repeatedly held that where two opinions are possible on an issue, the view in favour of the assessee should prevail. The expenditure in question was clearly in the nature of advertisement and publicity. Thus, even if the Bombay High Court view is against the appellant, the issue will have to be decided in favour of the appellant in view of the Himachal Pradesh High Court judgment particularly since there is no judgment on this issue of the jurisdictional High Court i.e. Punjab and Haryana High Court or the Supreme Court of India. considering these facts, the learned assessing officer is held to have not been justified in treating the expenditure in question to be of a capital nature. The expenditure in question is held to be allowable as revenue expenditure. The learned assessing officer is directed to allow the same. He shall, however, withdraw the depreciation, if any, allowed on this expenditure."

8. We have the learned representative of the revenue as well as the assessee and also considered the facts and have gone through the decisions cited. Having regard to all the facts and the ratio of decisions relied upon, we see no infirmity in the order of the first appellate authority and the same is upheld.

9. In the result, assessees appeals for the assessment year 1986-87 and 1987-88 are dismissed and the revenues appeal for the assessment year 1988-89 also stands dismissed.