Madras High Court
M/S. Carborundum Universal ... vs The Assistant Commissioner Of ... on 13 December, 2021
TCA No. 1049 & 1050 of 2008
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 13.12.2021
CORAM
THE HON'BLE MR. JUSTICE R. MAHADEVAN
and
THE HON'BLE MR. JUSTICE MOHAMMED SHAFFIQ
Tax Case Appeal Nos. 1049 & 1050 of 2008
---
M/s. Carborundum Universal Limited
“Parry House”
43, Moore Street .. Appellant in both
Chennai – 600 001 the appeals
Versus
The Assistant Commissioner of Income Tax
Company Circle I (3) .. Respondent in both
Chennai the appeals
Tax Case Appeals filed under Section 260A of the Income Tax Act,
1961 against the orders dated 28.12.2007 passed by the Income Tax Appellate
Tribunal, “A” Bench, Chennai in I.T.A.Nos.1102/(Mds)/2006 and
1103/(Mds)/2006 respectively.
For Appellant : Mr. R. Venkatanarayanan
in both the appeals
For Respondent : Mr.T.Ravikumar
Senior Standing Counsel
in both the appeals
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TCA No. 1049 & 1050 of 2008
COMMON JUDGMENT
(Judgment of the Court was delivered by R. MAHADEVAN, J.)
These tax case appeals have been filed by the appellant / assessee,
calling in question the correctness of the common order dated 28.12.2007
passed by the Income Tax Appellate Tribunal, 'A' Bench, Chennai, in
I.T.A.Nos. 1102/Mds/2006 and 1103/Mds/2006 relating to the assessment
years 2000-01 and 2002-03 respectively.
2.According to the appellant / assessee, they are engaged in the business
of manufacturing and sale of abrasives, industrial ceramics and electro
minerals. For the assessment years in question, they filed return of income,
which were processed under Section 143(1)(a) of the Income-tax Act, 1961
(hereinafter referred to as “the Act”). The Assessing Officer issued notice
under Section 148 for the purpose of scrutiny assessment and the assessment
was completed under Section 143(3) read with Section 147 of the Act.
While so, the Assessing Officer restricted the relief under Section 80HHC and
Section 80 I and disallowed depreciation claimed on the merged entity and on
Technical know-how fee paid and added the notional profit arising on
valuation of closing inventory on account of mandatory adoption of Accounting
Standard (AS 2) issued by ICAI. Further, the Assessing Officer included the
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TCA No. 1049 & 1050 of 2008
sale of scrap in the total turnover and excluded 90% of gross interest income
while computing deduction under 80HHC.
3.Challenging the orders of assessment, the assessee filed appeals before
the Commissioner of Income-tax (Appeals)-III, Chennai, who partly allowed
the appeals, by common order dated 28.02.2006. Aggrieved over the same,
both the assessee and the Revenue went on further appeals before the Income
Tax Appellate Tribunal. By order dated 28.12.2007, the Tribunal partly
allowed the appeals filed by the assessee as well as the Revenue. Therefore, the
present tax case appeals by the assessee alone.
4.By order dated 30.07.2008, TCA No.1049 of 2008 was admitted on
the following substantial questions of law :-
“1. Whether on the facts and in the circumstances of the
case, the Tribunal was right in holding that scrap should
be included in the total turnover while computing
deduction under Section 80HHC?
2. Whether on the facts and circumstances of the case, the
Tribunal was right in confirming the disallowance of
depreciation claimed under Section 32 on the technical
know how fee paid and holding that only relief under
Section 35AB is to be allowed on such payment?
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TCA No. 1049 & 1050 of 2008
3. Whether on the facts and in the circumstances of the
case, the Tribunal was right in confirming the
disallowance of depreciation claimed under section 32 on
the assets acquired through amalgamation?
4. Whether on the facts and in the circumstances of the
case, the Tribunal was right in confirming the additional of
notional profit arising on account of the inventory
valuation due to mandatory application of AS-2?”
5.By another order dated 30.07.2008, TCA No.1050 of 2008 was
admitted by this court on the substantial question of law Nos.1 to 3 as were
raised in TCA No.1049 of 2008, as stated above.
6.Heard both sides and perused the materials placed before this court.
7.1 As regards the first question of law, whether the sale of scrap
should be included in the total turnover for the purpose of deduction under
Section 80HHC of the Act, the same is covered by the decision of the Hon'ble
Supreme Court in the case of Commissioner of Income Tax vs. Punjab
Stainless Steel Industries [(2015) 229 Taxman 0423 (SC)], wherein it was
held that “the proceeds generated from the sale of scrap would not be included
in the ‘total turnover’, for computation of deduction under Section 80HHC”.
The relevant paragraphs of the said decision are usefully extracted below:
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TCA No. 1049 & 1050 of 2008
“22. So far as the scrap is concerned, the sale proceeds from the
scrap may either be shown separately in the Profit and Loss
Account or may be deducted from the amount spent by the
manufacturing unit on the raw material, which is steel in the case
of the respondent-assessee, as the respondent-assessee is using
stainless steel as raw material, from which utensils are
manufactured. The raw material, which is not capable of being
used for manufacturing utensils will have to be either sold as
scrap or might have to be re-cycled in the form of sheets of
stainless steel, if the manufacturing unit is also having its re-
rolling plant. If it is not having such a plant, the manufacturer
would dispose of the scrap of steel to someone who would re-
cycle the said scrap into steel so that the said steel can be re-used.
23. When such scrap is sold, in our opinion, the sale proceeds of
the scrap cannot be included in the term ‘turnover’ for the reason
that the respondent-unit is engaged primarily in the
manufacturing and selling of steel utensils and not scrap of steel.
Therefore, the proceeds of such scrap would not be included in
‘sales’ in the Profit and Loss Account of the respondent-assessee.
....
28. The intention behind enactment of Section 80HHC of the Act
was to encourage export so as to earn more foreign exchange. For
the said purpose the Government wanted to encourage
businessmen, traders and manufacturers to increase the export so
as to bring more foreign exchange in our country. If the purpose is
to bring more foreign exchange and to encourage export, we are of
the view that the legislature would surely like to give more benefit
to persons who are making an effort to help our nation in the
process of bringing more foreign exchange. If a trader or a
manufacturer is trying his best to increase his exports, even at the
cost of his business in a local market, we are sure that the
Government would like to encourage such a person. In our
opinion, once the Government decides to give some benefit to
someone who is helping the nation in bringing foreign exchange,
the Revenue should also make all possible efforts to encourage
such traders or manufacturers by giving such business units more
benefits as contemplated under the provisions of law.
29. For the aforesaid reasons, we are of the view that the view
expressed by the High Court is in conformity with the normal
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TCA No. 1049 & 1050 of 2008
accounting practice followed by the traders, including the
respondent-assessee and it was justified in coming to a conclusion
that the proceeds generated from the sale of scrap would not be
included in the ‘total turnover’.
7.2 Following the aforesaid decision, we are inclined to interfere with
the finding of the Tribunal and this issue is answered against the Revenue and
in favour of the assessee.
8.With regard to second question of law relating to the expenditure
incurred by the assessee for the purpose of getting technical know-how on
manufacture and process of goods, they are entitled to depreciation or
deduction under Section 35AB, the same is covered by the decision of this
court in Carborundum Universal Ltd vs. The Joint Commissioner of Income
Tax [(2012) TIOL 790 HC Mad IT], wherein it was held that “the assessee is
entitled to deduction under section 35AB and not entitled to depreciation under
section 32”. In view of the same, we answer this issue against the
appellant/assessee and in favour of the revenue/respondent.
9.1 Regarding the third question of law, in the decision reported in the
case of Commissioner of Income Tax vs. Silical Metallurgic Ltd [324 CTR
29(Madras)], this Court concluded that “the amalgamation of one company
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TCA No. 1049 & 1050 of 2008
with the other company cannot be regarded as a splitting up or reconstruction
or by a transfer of a new business of the plant and machinery of the old
business. Thus, the amalgamation cannot be regarded as a splitting up of the
company for the purpose of negativing the claim of deduction under Section
80HH and 80-I, which has been statutorily conferred on the company, if such
companies fulfil the conditions stipulated therein. Similar view was expressed
by this court in another decision reported in the case of EID Parry (India)
Limited v. Deputy Commissioner of Income Tax [256 CTR 104 (Madras)], in
which, it was held that “the accumulated loss and unabsorbed depreciation of
the amalgamating company is deemed to be the loss or the allowance of
depreciation to the amalgamated company for the previous year in which the
amalgamation is effected”. The relevant paragraph of the said decision is
reproduced below:
“23.As far as the present case is concerned, it is no
doubt true that Explanation 2 is not similarly worded as
Explanation 2A, which was considered by the Bombay
High Court. The provisions contained in Explanation 2,
applicable to the present case, in fact, brings out the
intention better and is crisp in its language, as is evident
from a reading of explanation 2. As per explanation 2, the
actual cost of the block of assets at the hands of the
amalgamated company is “the written down value of the
block assets” as in the case of transferor company or the
amalgamating company for the immediately preceding
previous year as reduced by the amount of depreciation
actually allowed in relation to the said immediately
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TCA No. 1049 & 1050 of 2008
immediately preceding previous year” with reference to
the written down value at the hands of transferor company
in understanding what should be the cost of the block of
assets at the hands of amalgamated company.”
9.2 In view of the above decision, we are inclined to answer this issue
in favour of the assessee and against the Revenue and is accordingly,
answered.
10. As regards the fourth substantial question of law in TCA No.1049 of
2008, in the decision in the case of Commissioner of Income Tax vs. George
Oakes reported in [75 CCH 357 (Mad)], this Court was of the view that “the
assessee having valued its inventory as per AS-2 prescribed by the ICAI, such
a change was bonafide and was mandatory by the ICAI and the discrepancy in
profitability arising in the year of change, cannot be forced to be taxed”.
Similar view was upheld by the Hon'ble supreme court in the decision reported
in the case of VKJ Builders and Contractors (P) Ltd v. Commissioner of
Income Tax in [318 ITR 204 (SC)], wherein it was held that “the closing stock
of earlier year has to be treated as opening stock of current year and therefore
where the opening stock of current year shows a lower value than the value of
closing stock of earlier year as finally determined by the Assessing Officer, the
same is amenable to rectification under Section 154 of the Act”. In view of the
said decisions, this issue is answered in favour of the assessee.
11.In the result, both the tax case appeals filed by the assessee are partly
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TCA No. 1049 & 1050 of 2008
allowed to the extent as indicated above. No costs.
[R.M.D,J.] [M.S.Q,
J.]
13.12.2021
Internet : Yes
Index : Yes / No
dhk/rsh
To
1. The Income Tax Appellate Tribunal,
Madras “A” Bench.
2. The Assistant Commissioner of Income Tax
Company Circle I (3)
Chennai
https://www.mhc.tn.gov.in/judis
TCA No. 1049 & 1050 of 2008
R. MAHADEVAN, J
and
MOHAMMED SHAFFIQ, J
dhk/rsh
TCA Nos. 1049 & 1050/2008
13.12.2021
https://www.mhc.tn.gov.in/judis
