TMI Blog2000 (11) TMI 286X X X X Extracts X X X X X X X X Extracts X X X X ..... ght of 2nd December, 1984, there was an unprecedented occurrence in the company's pesticide plant at Bhopal. Methyl Isocyanate, a very poisonous gas, escaped from tank No. 610 into the atmosphere causing death of many local residents and injuring many others. The company had to shut down the factory immediately and thereafter the Government of Madhya Pradesh has not given permission to start the factory at Bhopal. Several suits were filed in India and USA Courts against the assessee-company as well as the parent company. On 2-2-1985, an Ordinance was promulgated which was subsequently replaced by the Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985, in terms whereof the Central Government had the exclusive right to represent and act in place of several persons who had made or was entitled to make a claim arising out of the gas leak tragedy. The Central Government filed Suit No. 11.13 of 1986 before the District Judge, Bhopal against the appellant-company claiming compensation. The Union of India was also impleaded as co-plaintiff in cases already filed by individual claimnailts. All cases pending before him were stayed by Dist, Judge to enable Union of India to effectively ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ggested by this Court.' 4. As could be seen from the order, the compensation claim was settled by directing the Union Carbide Corporation, USA to pay a sum of U.S. Dollars 470 millions to the Union of India in full settlement of all claims arising out of Bhopal Gas disaster. However, on 15-2-1989, the Hon'ble Supreme Court passed another order in conformity with the settlement reached by the parties whereby the following order was passed "Having heard learned counsel for the parties, and having taken into account the written memorandum filed by them, we make the following order further to our order dated 14th February, 1989 which shall be read with and subject to this order: 1. Union Carbide India Ltd., which is already a party in numerous suits filed in the District Court at Bhopal, and which have been stayed by an order dated 31-12-1985 of the District Court, Bhopal, is joined as a necessary party in order to effectuate the terms and conditions of our order dated 14-2-1989 as supplemented by this order. 2. Pursuant to the order passed on 14-2-1989 the payment of the sum of US $ 470 Millions (Four hundred and seventy millions) directed by the Court to be paid on or before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amount transferred to his credit which is lying unutilized with the Indian Red Cross Society pursuant to the direction from the International Red Cross Society. 6. The terms of settlement filed by learned counsel for the parties today are taken on record and shall form part of our order and the record. This case will be posted for reporting compliance on the first Tuesday of April, 1989. "Terms of settlement consequential to the directions and orders passed by this Hon'ble Court: 1. The parties acknowledge that the order dated February 14, 1989 as supplemented by the order dated 15-2-1989 disposes of in its entirety all proceedings in Suit No. 1113 of 1986. This settlement shall finally dispose of all past, present and future claims, causes of action and civil and criminal proceedings (of any nature whatsoever wherever pending) by all Indian citizens and all public and private entities with respect to all past, present and future deaths, personal injuries, health effects, compensation, losses, damages and civil and criminal complaints of any nature whatsoever against UCC, Union Carbide India Limited, Union Carbide Eastern, and all of their subsidiaries and affiliates as w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r likely to be effected by the accident, the Hon'ble Supreme Court said to have made the following observations: "(c) For a period of 8 years facilities for medical surveillance of the population of the Bhopal exposed to MIC should be provided by periodical medical check-up. For this purpose a hospital with at least 500 beds strength, with the best of equipment and facilities should be established. The facilities shall be provided free of cost to the victims at least for a period of 8 years from now. The State Government shall provide suitable land free of cost. (e) On humanitarian consideration and in fulfilment of the offer made earlier, the UCC and UCIL should agree to bear the financial burden for the establishment and equipment of a hospital, and its operational expenses for a period of eight years." 8. In pursuance of the directions of the Hon'ble Supreme Court, assessee-company appears to have paid a sum of Rs.7.50 crores towards construction of hospital in Bhopal. 9. Since the accident took place on 2nd/3rd December, 1984 which date falls in the accounting year relevant to the assessment year 1985-86 and there were several claims against the company in the Distric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion paid by the assessee was occasioned by the criminal negligence of the assessee-company and, therefore, not an admissible deduction while computing the profit of the company. He also relied upon the decision of House of Lords in Strong Co. of Romsey Ltd. v. Woodi Field [1906] 5 TC 215 wherein Lord Chancellor observed that expenditure incurred by a trader in his capacity as an owner of the business cannot be treated as business expenditure and also gave an example of an injury caused to a man walking in the street by the fall of a window shutter of a grocery shop and observed that the loss arising thereby to the grocer ought not to be deducted. In the case before their Lordships, the facts were that a brewing company owned an inn and conducted business through its manager. A customer sleeping in the inn was injured by the fall of a chimney upon him and the company had to pay the cost and damage because the fall of the chimney was due to the negligence of the company's servants. Lord Chancellor observed that such payment is remotely connected with the trade. In other words, according to the Bench, expenditure is connected with something else quite as much as or even more than w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity since the company has also treated it as deposit in its accounts. 14. Aggrieved, it was contended before the CIT (Appeals) that the compensation amount was paid as per the order passed by the Hon'ble Supreme Court dated 15-2-1989 and the assessee having not disputed the liability any further, the liability accrued in the year under consideration and, at any rate, such debatable issues cannot be the subject matter of a 'prima facie adjustment' Linder section 143(1)(a) of the Act. More so, it cannot be rectified in a proceeding under section 154 of the Act. The CIT(Appeals) accepted the submissions of the assessee and held that since two views are possible, it cannot be the subject matter of rectification under section 154 of the Act and, therefore, deleted the addition of Rs.66,49,69,509. 15. Further aggrieved, revenue is in appeal before us. Supporting the decision of the learned CIT (Appeals), assessee filed cross objection contending, inter alia, that the liability, vis-a-vis the assessee-company, has been quantified and crystallised by the Supreme Court's order dated 14/15-2-1989; further litigation was not at the behest of the assessee-company and, at any rate, it co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal before the CIT (Appeals) as per the provisions of section 154(2)(b) of the Act. It was contended that the review was not sought by the assessee and the liability could only increase and not decrease and, therefore, so far as the claim made by the assessee is concerned, it was ascertained and finalised. However, the CIT (Appeals) was of the opinion that till the disposal of the review petition, liability has not come to a finality. 20. In the order passed under section 143(3) of the Act, for the assessment year 1990-91, Assessing Officer observed that the award or arbitration becomes final only in the year of decision of Court or on admission. He further observed that the dispute with regard to the payment of compensation has not become final as on 31-3-1990 because the liability fixed by the Supreme Court was challenged by certain individuals and organisations before the Supreme Court with a prayer to review the settlement order passed by the Apex Court and the said review petitions were not decided prior to 31-3-1990. He, therefore, disallowed the claim made by the assessee in this year. 21. In appeal, learned CIT (Appeals) framed the following issues for his decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It is a highly hazardous and lethal material by all means of contact and is poisonous. On thermal decomposition, MIC would produce hydrogen cyanide, nitrogen oxide, carbon monoxide and/or carbon dioxide; (b) The scientific team headed by Dr. Varadharajan has concluded that the factors which led to the toxic gas leakage causing its heavy toll existed in the unique properties of very high reactivity, volatility and inhalation toxicity of MIC. The needless storage of large quantities of the material in very large size containers for inordinately long periods as well as insufficient caution in design, in choice of materials of construction and in provision of measuring and alarm instruments, together with the inadequate controls on systems of storage and on quality of stored materials as well as lack of necessary facilities for quick effective disposal of material exhibiting instability, led to the accident; (c) Apart from these design defects, it has been found by the CB1 that following further lapses were committed: (i) Invariably storing MIC in the tanks which was much more than 50 per cent capacity of the tanks which had been prescribed. (ii) Not taking any adequate rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, the expenditure cannot be treated as business expenditure. 28. Aggrieved, assessee challenged the order of the Assessing Officer before the CIT (Appeals). Learned CIT (Appeals) preferred to follow the decision of the CIT (Appeals) for the assessment year 1990-91 wherein it was held that the expenditure is of capital nature and, therefore, not eligible for deduction. He, therefore, confirmed the disallowance of Rs.66.99 crores. For the same reasons, the expenditure on the setting up of the hospital was also disallowed. 29. Further aggrieved, assessee is in appeal against the orders of CIT (Appeals) for all the years under consideration whereas, against the order passed by the CIT (Appeals) deleting the addition made in section 143(1)(a)/ 154 proceeding for the assessment year 1989-90, the revenue is in appeal before us and the assessee-company filed cross objections supporting the order of the CIT (Appeals). 30. Learned Senior Counsel, appearing on behalf of the assessee-company, submitted that the claim made by the assessee was disallowed by the tax authorities and the findings in each year were inconsistent with that of the findings in other orders. Adverting our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-company and, therefore, he sought to consider the issue on the limited ground i.e., whether the expenditure is capital or revenue in nature. Adverting our attention to the appellate order for the assessment year 1985-86, learned counsel submitted that the CIT (Appeals) treated the expenditure as not incidental to the business, by placing reliance on the observations of Lord Chancellor in the case of Strong Co. of Romsey Ltd. page 215 whereas, the said observations were not accepted by the House of Lords in the later decisions and even the Hon'ble Supreme Court of India has not accepted the principle laid down by the Lord Loreburn, L.C., in the aforecited case. To explain the position succinctly, learned counsel has taken us through the decision of the Hon'ble Supreme Court in the case of Indian Aluiminium Co. Ltd. v. CIT [1972] 84 ITR 735. The Apex Court held that when a person has a dual capacity, of a trader-cum-owner, as long as the expenditure is in his capacity of trader, it has to be allowed as deduction. Learned counsel, therefore, submitted that the decision in the case of Strong Co. on which the tax authorities have placed heavy reliance, is no longer good law as hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not included in the settlement. 32. Regarding the issue that the assessee did not pay the damages and hence the claim is not allowable, learned counsel submitted that the American Company merely stood as guarantor to facilitate the assessee to obtain the loan and the loan was, in fact, repaid by the assessee-company in the subsequent years, as could be seen from the Annual Reports of the company for the years 1988-89 and 1989-90. 33. Learned counsel further submitted that the obligation to pay the amount arose on account of the settlement reached during the accounting year relevant to the assessment year 1989-90 and the payment was merely in discharge of such obligation, to compensate the loss of lives, etc., but it does not enhance any prestige of the assessee so as to consider the expenditure as capital in nature. The case law relied upon by the Commissioner in this regard was distinguished on facts. Learned counsel also cited the following decisions to contend that damages cannot be presumed to be punitive without sufficient material in support thereof: (a) Ramchandar Shivnarayan v. CIT [1978] 111 ITR 263 (SC). (b) Prakash Cotton Mills (P.) Ltd. v. CIT[1993] 201 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by USA company and, therefore, cannot be treated as expenditure by the assessee-company wholly and exclusively connected to its business. Explaining the reasons for using the words 'not as fine, penalty or punitive damage passed in the order issued by the Supreme Court, learned departmental counsel submitted that the dominant reason was to ensure that the individual victims of Bhopal gas tragedy should receive the compensation and but for the specific expression 'not as fine, penalty or punitive damage', there is likelihood of the compensation not reaching the individual, inasmuch as, amount paid by way of fines and penalties, under law, goes to the Crown. He, therefore, submitted that the background of settlement shows that the compensation is connected to the criminal negligence of the assessee-company though stated to be not in the nature of fine, penalty, etc. Learned counsel further submitted that immediately after the accident, the Unit was closed and hence there was no business in the Unit during the period when the compensation amount was payable and, therefore, the expenditure incurred by the assessee is not allowable as deduction against the income of the assessee from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng on of the business and, therefore, incidental to the trade. He further emphasized that the enormity of the damages caused to the public at large by this accident has no significance in so far as the liability of the expenditure is concerned, inasmuch as, the allowability of an expenditure is dependent on the principle as to whether accident occurred in the normal course of business. In other words, it has to be seen as to whether such risk is inherent in the normal course. Placing reliance on the decision of the Hon'ble Supreme Court in the case Ramchandar Shivnarayan, learned counsel submitted that direct and proximate link is not necessary in order to allow an expenditure so long as the accident and the consequent damages are connected to the business, The decision of the Hon'ble Bombay High Court in the case of K.B.H.M.D.H. Bhiwandiwalla Co. has no application to the case on hand, inasmuch as, the case relied upon by the learned departmental representative related to litigation expenses and the facts were entirely distinguishable. 37. Meeting the issue raised by the learned counsel as regards the fact that the unit was closed and the business was discontinued, it was sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed by the Hon'ble Supreme Court, there is no single test of universal application in order to appreciate whether the expenditure was expended wholly and exclusively for the purpose of business. It is, therefore, necessary to go into the peculiar facts of the instant case so as to appreciate whether the expenditure incurred by the assessee was for the purpose of business. On a careful consideration of the facts and circumstances of the case, we are of the opinion that the expenditure was not incur-red for the purpose of business and, therefore, not allowable as deduction under section 37(1) of the Act for the following reasons: 41. In the assessment order for the assessment year 1992-93, the Assessing Officer mentioned that as per the CBI (a) the storage of the poisonous gas was much more than 5096 capacity-of the tank which has been prescribed; (b) adequate remedial action to prevent back flow of solution from VGS into RVVH and PVH lines was not taken; and (c) that the temperature of MIC tanks at the preferred temperature of Zero Degree Celsius was not maintained but at ambient temperatures which were much higher, apart from not taking immediate remedial action when tank No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rade. It must be made for the purposes of earning the profits." The application of these principles has led to The position which may be taken as well settled now, that payments of penalties for infraction of law fall outside the scope of permissible deductions. The penalty in any such case is imposed as a punishment on the offender as a responsible person owing obedience to the law. Its nature severs it from the expenses of trade. It is not incurred by him in his character of trader." Page 158 of the report "As we said, these cases were all virtually decided on the application of the tests laid down in Strong v. Woodi Field. It is not enough if the loss sustained or expenditure incurred is in some sense connected with the trade, for it may be only remotely connected with the trade, or it may be connected with something else quite as much or even more than with the trade. Only such losses can be deducted as are connected in the sense that they are really incidental to the trade itself. It is not enough that the disbursement is made in the course of, or arises out of, or is connected with, the trade or is made out of the profits of the trade. It must be made for the purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e had to pay the India Coffee Board was inextricably mixed up with its normal line of business. The breach of its contractual obligation to the Board was not in the normal course of business, and the liability the assessee had to discharge for such a breach was not incidental to the trade itself that it carried on." At pages 159 and 160 of the Report "From what we have said above it should be clear that it was not a case of a payment of damages for a mere breach of contract with nothing more. It was not of course a case of penalty paid under the terms of a statute for contravention of any specific statutory provision. In the circumstances of this case, the liquidated damages claimed and paid was, however, more akin to a penalty then the damages suffered for breach of contract in the course of normal trading activities, whether or not that breach of a contract was also dishonest ... In our opinion it is the principle laid down in Von Glehn's case that should be extended and applied to negative the claim of the assessee in this case." 42. The remarks of Lord Davey in the case of Strong Co. of Romsey Ltd. were relied upon by the Court of Appeal in the case of IRC v. Alexander ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of their Lordships was that merely because an expenditure is remotely connected with the trade or merely because the disbursement was made in the course, or arises out of, or is connected with the trade, or is made out of profits of the trade, it is not an allowable deduction under section 37(1) of the Act in the absence of proving that the expenditure was incurred for the purpose of earning the profits which, in turn, means that the expenditure should have been incurred in the normal course of conducting its business i.e., in conformity with the obligations imposed upon the assessee and should not be opposed to public policy or against the interest of national economy or against the interests of innocent citizens of the country. 45. In the case before us, circumstances show that the disaster was due to the negligent maintenance of the factory as could be inferred from the report of Dr. Varadrajan regarding the design defect and the report of the CBI regarding further lapses. Such maintenance can certainly be said to be in breach of strict regulations and, therefore, opposed to public policy having effected thousands of innocent citizens. Such an expenditure, in our opinion, doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt to the effect that the compensation is not for criminal negligence on the part of the company. To quote in this context, the observations of Justice Holmes of U.S. Supreme Court - "A 'word' is not a crystal, transparent and unchanged; it is the skin of a living thought and may vary greatly in colour and content according to the circumstances and the time in which it is used." 47(a) For the sake of argument, if it is considered that the expenditure is incurred in the normal course of business, the subsidiary question that arises for our consideration is whether an expenditure relatable to a closed down unit is allowable as deduction against the profit of the assessee-company? In our opinion, the answer to the above question would be in the negative. Assessee-company carried on several distinct and independent businesses. Bhopal plant is one such unit which manufactures pesticides. Admittedly, the Bhopal Unit was ordered to be closed down soon after the disaster. The annual report of the year ended 25th of December, 1984 indicates that the M.P. Govt. made it clear that the plant will not be allowed to resume operations and has not renewed the licence of the factory which expi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter judgment has been delivered on the validity of the Bhopal Act by the full Bench presided over by the Hon'ble Mr. Justice Sabyasachi Mukherjee, and the pending writ petitions will also be listed along with the review petitions. Thus, it will be seen that despite the Supreme Court Orders dated February 14 and 15, 1989, directing an overall settlement of the Bhopal Litigation, matters are still pending. In these circumstances, the Company has been advised by its Legal Counsel that the liability to pay compensation in terms of the settlement as recorded in the Orders of the Supreme Court has not become a determinate or ascertained one and cannot be treated as having accrued till all the issues connected with the Settlement Orders have been finally disposed of. Accordingly, based on legal advice, the Company has decided that the said amount of US $45 million [equivalent to Rs.68.99 crores] paid into the Supreme Court of India be not charged to the Profit and Loss Account for the accounting period ended March 31, 1989, but be held in suspense and treated as a deposit to be carried forward and necessary adjustment in this regard be made after this matter is finally decided by the Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l wear and tear accepted. The Seller and the Purchaser have agreed that the Seller shall undertake a Pre-transfer Maintenance shut-down of the said Chemicals and Plastics Unit about end-March 1984 and the Purchaser shall contribute a sum of Rs.38.50 lakhs (Rupees Thirty-eight lakhs and fifty thousand only) towards expenses to be incurred by the Seller for the Pre-transfer Maintenance Shut down and the start-up expenses for the said Unit. This payment shall be made by the Purchaser to the Seller on the Transfer date. The Purchaser shall be entitled to depute observers, (technical or financial) to the Chemicals and Plastics Unit after the date hereof and the Seller shall furnish all information and documents to them as may be necessary for implementing this Agreement." 51. This pre-transfer expenditure was not debited to the Profit Loss A/c. but debited to Suspense A/c. in the assessee's books. However, it was claimed as deduction in the return as normal maintenance expenditure of the plant mainly on the ground that the sale did not ultimately materialise and the normal maintenance expenditure was, even otherwise, to be incurred by the assessee. However, in the opinion of the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us that the expenditure is not towards improvement of the plant and machinery. Ld. counsel further submitted that the actual expenditure incurred by the assessee was much more but over and above Rs.38.50 lakh was allowed as revenue expenditure by the Assessing Officer. It is also the submission of the Id. counsel that after the shut-down, the sale having not materialised, the assessee-company had taken full advantage of the shut-down maintenance by its subsequent operation of the plant which continued in their ownership. It was also brought to our notice that only in the accounting year, relevant to the assessment year 1990-91, the unit could be sold to Oswal Agro and, therefore, the assessee enjoyed the benefit of annual maintenance carried out in March, 1984 in the subsequent period when the factory was operated by the assessee-company. It was, therefore, submitted that the expenditure is allowable as deduction against the profits of the assessee-company. 54. On the other hand, Id. departmental representative submitted that as per the agreement (clause 5), assessee-company is a trustee on behalf of the purchaser and, therefore, the expenditure incurred by the company cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,294 (iv) Advertisements for sale of scrap, tender, etc. 50,537 ----------- 2,12,233." ----------- Reg: Running maintenance of motor cars and payment to hotel -------------------------------------------------------------------------- 57. Ld. counsel for the assessee submitted that except the payment of salaries and bonus, all other expenditure, such as, depreciation, insurance, taxes and repairs on motor-cars, is not disallowable under section 37(3A) of the Act as the said expenditure is allowable under sections 30 to 32 of the Act. In other words, the claim of the assessee is that section 37(3A) is attracted only in respect of such expenditure which is otherwise allowable under section 37(1) of the Act and in this regard he relied upon the decision of the Hon'ble Calcutta High Court in the case of CIT v. Tungabhadra Industries Ltd. [1994] 207 ITR 553. He also relied upon the decision in the case of CIT v. Orient Papers Industries Ltd. [1995] 214 ITR 473 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wise allowable under section 35 of the Act. Such being the case, section 37(3A) is not attracted for the reason that the expenditure does not fall under the residuary clause i.e., section 37(1) of the Act. By respectfully following the judgment of the Hon'ble Calcutta High Court, we allow the claim of the assessee-company. Re: Advertisement, publicity and sales promotion expenses 61. The claim of the assessee's counsel is that (a) the expenditure on dealers' convention do not fall to be considered as expenditure on advertisement, publicity and sales promotion within the meaning of section 37(3A)/(3B) of the Act; and (b) cost of free samples do not fall for consideration under section 37(3B) and advertisement for sale of scrap, etc. is not an advertisement in connection with products of the assessee-company and, therefore, it is not advertisement within the meaning of section 37(3B). 62. On the other hand, Id. counsel, appearing on behalf of the revenue, supported the order of the first appellate authority by reiterating the submissions made before us while arguing the case for the assessment year 1984-85 in ITA No. 2686 (Cal.) of 1989. Incidentally, it may be noted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee is rejected. 66. Ground No. 5 (as per abbreviated grounds of appeal) reads as under: "The CIT (Appeals) erred in confirming the addition in respect of excise duty written back of Rs.35,13,542 under section 41(1) of the Act." 67. The facts in brief are that the assessee-company manufactured zinc calots at its Madras factory. These calots are made out of rough rolled zinc. Assessee paid excise duty on rough rolled zinc for the period 1972 to 1979. However, at a later stage, the assessee-company claimed that excise duty is not leviable at that stage. In the meantime, the Appellate Collector, Calcutta, under similar facts and circumstances held that rough rolled zinc is not exigible to excise duty. Therefore, the Single Judge of the Madras High Court directed the Excise authorities of Madras to act in accordance with the view taken by the Appellate Collector, Calcutta. The Excise department has appealed against these directions before the Division Bench of the Madras High Court which is still pending. In the meantime, the assessee-company filed a writ petition for direction to refund the excise duty which is also pending. In the accounts for the previous year rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the previous year relevant to the assessment year 1985-86. 72. We have carefully considered the rival submissions and perused the record. This issue was considered by us elaborately in the orders passed in ITA Nos. 968 (Cal.) of 1986 and 2686 (Cal.) of 1989, both dated 12-11-1998. For the elaborate reasons given by us in the said orders, we hold that there is no cessation of liability within the meaning of section 41 (1) of the Act in the year under consideration. 73. It may be relevant here to list out the relevant dates to highlight this position. On 16-9-1973, the Asst. Collector of Central Excise held that rough rolled zinc was chargeable to central excise duty which order was upheld by the Appellate Collector on 4-3-1974. On 5-9-1975, Government of India rejected the assessee's revision application. In 1976, assessee filed a writ petition before the Madras High Court challenging the aforesaid order. The writ petition was disposed by an order dated 16-4-1979 wherein it was stated that the decision rendered by the Appellate authority, Calcutta should be applied to this case also. Till that decision is rendered, the department is directed not to enforce the levy against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the finality reached only on the date when the revisional proceedings were dropped and not on the date when the amount was refunded to the assessee. This case supports the stand of the assessee-company rather than the contention of the revenue. It may be noted here that the decision of the Hon'ble Gujarat High Court was applied by the Kerala High Court recently in the case of Travancore Chemicals Mfg. Co. Ltd. v. CIT[1998] 101 Taxman 639 wherein Their Lordships observed that the word 'obtained' in section 41(1) cannot be given a meaning 'capable of being obtained' and thus held that merely because the Apex Court decided the matter whereby the assessee was entitled to refund is not sufficient to tax tile amount likely to be refunded. Only in the year of actual refund, the amount is taxable under section 41 (1) of the Act. 76. Govind Sugar Mills Ltd.'s case: In this case, the question is with regard to the deduction of liability Linder section 37 and not with regard to cessation of liability under see Lion 41(1) of the Act. We further find that the Hon'ble Court decided the reference application on the peculiar facts of that case and Their Lordships made it clear that tile de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... examined and it can also be inferred from the surrounding circumstances as to whether there has been any cessation or remission of liability of the assessee. A perusal of the judgment shows that the decision of the Hon'ble High Court was mainly based on the facts existed therein. 81. Jiajee Rao Cotton Mills Ltd.'s case: In this case, application of section 41(1) of the Act with regard to the unpaid wages and bonus of earlier years written back to P. L. A/c. in the subsequent year was under challenge. Assessee's counsel conceded before the Hon'ble Court that it is covered by decision in the General Industries Society Ltd.'s case. As there is no discussion in the instant case, it is difficult to apply the ratio of the said decision to the case before us. 82. Ravindra C Gajiwala's case: In this case, some of the creditors allowed remission of trading liability which was brought to tax under section 41(1) of the Act. The contention of the assessee that remission was given in the same year in which the liability was incurred and so the provisions of section 41(1) would have no application, was accepted by the Tribunal. The Hon'ble High Court held that the amount can be considere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f CITv. Indian Products Ltd. [1994] 207 ITR 647 was followed wherein it was held that aggregate export turnover of goods and merchandise should be taken into consideration. Ld. Senior counsel, appearing on behalf of the assessee-company conceded that the assessee's case is covered by the aforesaid decision. We, therefore, uphold the order of the CIT (Appeals). 89. Ground No. 9 (as per abbreviated grounds of appeal) reads as under: "The CIT (Appeals) erred in confirming the action of the DCIT in adding back Rs.1,97,559 being loss arising out of exchange fluctuation." At the time of hearing, Id. counsel, appearing on behalf of the assessee-company did not press this ground. We, therefore, uphold the order of the CIT (Appeals). 90. Vide Ground No.10, assessee-company contends that the CIT(A) erred in confirming the DCIT's action for levy of interest under section 139(8) of the Act. Interest under section 139(8) was charged from 1-7-1985 to 30-11-1985 @ 15% on Rs.2,03,76,722. It was contended before the first appellate authority that the return of income could not be prepared till the annual accounts and tax audit report were ready and since the assessee has a reasonable ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... othing could be inferred. Since the assessee challenges the very levy itself, in the light of the decision of the Hon'ble Supreme Court in the case of Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961, appeal is maintainable on this issue. By respectfully following the decision of the Hon'ble Calcutta High Court in the case of New Swadeshi Mills of Ahmedabad Ltd. and in the interests of justice, we set aside this issue to the file of the Assessing Officer who is directed to pass a speaking order. Re: I.T.A. No. 1341 (Cal) of 1993: 94. Ground No.1 (as per abridged grounds of appeal) reads as under: "The Commissioner of Income-tax (Appeals) hereinafter referred to as the CIT(A) erred in upholding the DCIT's stand of disallowing the following items as entertainment expenses under section 37(2A) of the Act: --------------------------------------------------------- ----------------- Rs. -------------------------------------------------------------------------- (a) Pertaining to scientific research 3,935 (b) On shareholders meeting 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. The Court held that on distribution of packets no price was charged and hence there cannot be any tax on notional receipt. It is well settled now that any expenditure on coffee and beverages, except on employees, is hit by section 37(2A) of the Act. To our mind, shareholders are not employees of a company. In this regard we follow the decision of the Karnataka High Court. Since the case of the assessee-company is that part of the expenditure is also incurred on employees of the assessee-company at the Annual General Meeting, we estimate such expenditure at Rs.10,000 and the balance addition of Rs.20,115 is hereby sustained. 98. As regards payment of subscription to the clubs, Id. counsel for the assessee relied upon the decision of the Hon'ble Bombay High Court in the case of Otis Elevator Co. (India) Ltd. v. CIT [1992] 195 ITR 682. On the other hand, Id. departmental counsel relied upon the order of the first appellate authority. 99. We have carefully considered the rival submissions. Section 37(2A) is applicable only when the expenditure incurred by the assessee-company is in the nature of entertainment expenditure. The case of the assessee-company is that the subsc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow the decision of the Delhi High Court in the case Expo Machinery Ltd. It appears that part of the claim also pertains to the expenditure incurred on the staff members while they were on picnic. Such expenditure, ill our opinion, is allowable as deduction in the light of the decision of the Bombay Bench of the Tribunal in the case Ponds India Ltd. v. Dy. CIT [1997] 59 TTJ 560. 102. Ground No. 2 (as per abridged version of grounds of appeal) reads as under: "The CIT (Appeals) erred in confirming the disallowance of the following travelling expenses under section 37(3) of the Act read with Rule 6D of the Income-tax Rules: -------------------------------------------------------------------------- Rs. -------------------------------------------------------------------------- (a) Pertaining to scientific research 15,721 (b) Ad hoc disallowance for expenses other 10,00,000." than expenses on hotel bills -------------------------------------------------------------------------- 103. As regards expenditure pertaining to scientific research, for the reasons stated in para 59 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th July, 1984." 109. The facts in brief are that the assessee-company contributed a sum of Rs.52,780 towards UCIL Senior Manager's Children Welfare Fund. Assessing Officer disallowed the expenditure under section 40A(9) of the Act. Before the CIT(A) it was contended that the contribution is not meant to Managers but their children relied upon the decision in the case of CIT v. M.N. Nadkarni [1986] 161 ITR 544 (Bom.) which was no[ accepted by the CIT(A). For the reasons given by him in his order for the assessment year 1987-88, the disallowance was confirmed. 110. Aggrieved, assessee is in appeal before us. The case of the assessee-company is that section 40A(9) of the Act applies only when the fund is for the welfare of the employees themselves. Ld. counsel relied upon the order of the Bombay Bench of the Tribunal in ITA No. 6323 (Bom.) of 1985 dated 29-5-1991 and the following two reported decisions: (a) Rassi Cement Ltd. v. ITO [1993] 45 ITD 233 (Hyd.) (b) India Pistons Repco Ltd. v. IAC [1988] 26 ITD 413 (Mad.). 111. On the other hand, Id. departmental counsel submitted (hat the contribution was not made by virtue of any obligation under any law; the language of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Memorandum of agreement was made under section 18(1) of the Industrial Disputes Act and, therefore, the amount payable to the Fund was treated as liability under that law and thus held that the payment falls within the exception provided in section 40A(9) of the Act. In fact, the decision of the Tribunal in the case of Sree Saraswathi Mills Ltd. [IT Appeal No. 1367 (Mad.) of 1985, dated 4-11-1987] was distinguished by the Tribunal on the ground that in the said case there was no settlement but it was only a voluntary creation of a fund by the employees, implying thereby that if there is no settlement and if the amount is not payable under any law, then the same is hit by section 40A(9) of the Act. 114. In the case of Rassi Cement Ltd, the Hyderabad Bench of the Tribunal passed its judgment basing on the agreement entered into between the assessee-company and the trustees constituting Rassi Cement Employees Welfare Fund Scheme. In ITA No. 6232 (Bom.) of 1985, the Tribunal decided the issue in favour of the assessee in a cryptic order by not assigning any reason as to how such payments are outside the purview of section 40A(9) of the Act. 115. Reverting to the facts of the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss on forward cover for raw materials/sales to the turn of Rs. 3,40,299 which was disallowed by the Assessing Officer on the ground that under section 43A of the I.T. Act, such loss is not allowable. 119. Aggrieved, it was contended before the CIT(A) that it is a revenue loss allowable on accrual basis as per the method of accounting consistently followed by the assessee. However, the CIT(A) observed that loss on forward cover can be considered only on actual remittance and thus rejected the claim of the assessee-company. 120. Further aggrieved, assessee is in appeal before us. While reiterating the submissions made before the first appellate authority, Id. counsel further submitted that actual remittance had, in fact, taken place in this year only. On the other hand, Id. counsel, appearing on behalf of the revenue, contended that fluctuation loss on forward cover is not allowable on accrual basis. In reply to the submissions made by the counsel of the assessee, it was submitted that if the actual remittances took place in this year, there is no objection for allowing the claim of the assessee in the year under consideration. 121. We have considered the rival submissions. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clear that the Assessing Officer would bring to tax only that part of the expenditure which was incurred after the agreement for sale but not reimbursed or any expenditure which is in connection with the transfer of the Chembur plant. 125. Ld. counsel, appearing on behalf of the assessee-company, objected to the observations of the CIT(A) whereas, the departmental counsel relied upon the order of the CIT(A). 126. We have carefully considered the rival submissions. The case of the assessee is that the expenditure incurred to keep the machinery in good condition upto the transfer- of the unit is wholly and exclusively for the purpose of business and, therefore, allowable as revenue expenditure. We find force in the submission of the assessee. To the extent the expenditure is reimbursed by the purchaser, it is not allowable as revenue expenditure. If the expenditure results in upgradation of the machinery which, in turn, enhance the value of the plant or machinery, in our opinion, such expenditure would partake the character of capital expenditure. All other expenditure, to keep the plant and machinery in good condition, is to be treated as revenue expenditure. Subject to this o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing mercantile system of accounting, the expenditure relatable to the prior years cannot be allowed as deduction in the year under consideration. in the absence of facts before us to indicate as to in which year the liability accrued, it is not possible for us to give suitable direction to the Assessing Officer to allow the expenditure in the relevant year of accrual of liability. We, therefore, uphold the order of the first appellate authority. 132. Vide ground No. 8, assessee-company contends that the CIT(A) erred in holding that the layout charges on storm water drain of Rs.7,677 is capital in nature. Ld. counsel submitted that the layout charges are for replacement of the storm water drain and, therefore, the expenditure is deductible. However, we find that the CIT(A) held the issue against the assessee for lack of evidence to prove that the charges arc in connection with replacement of storm water drain. In other words, the case of the revenue is that the expenditure was incurred on laying new water drain and, therefore, capital in nature. Even before us, no material was furnished to show that a storm water drain already existed and the expenditure is for replacement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear under another head. Therefore, the Tribunal held that by debiting the Profit and Loss A/c., assessee had written off the debts in its books of account. The Hon'ble High Court upheld the order of the Tribunal and in this regard observed as under: "In the present case, the sundry debtors account has been credited with the aforesaid sum. By reducing the sundry debtors account in respect of the aforesaid amount the assessee has clearly demonstrated its intention not to great (sic) the said bad debt as an asset and provided for the said amount by crediting the amount with the account 'Provision for Doubtful Debt' and debiting the Profit and Loss Account under the heading 'Provision for Doubtful Debts'.... IL has been claimed on behalf of the assessee that it has written off the amount in his books of account. This manner of accounting is in consonance with well established accounting practice." 138. An identical issue was also considered by us while disposing of the appeal in ITA No. 2759 (Cal.) of 1989 dated 15-10-1998 and vide para 8 of our order, we decided the issue with the following observations: "in our opinion, in the light of the decision of the Hon'ble Calcutta Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Aggrieved, assessee is in appeal before us. Ld. counsel for the assessee submitted that the issue is squarely covered by the decision of' the Supreme Court in the case of CIT v. P.J Chemicals Ltd. [1994] 210 ITR 830. He further submitted that in the subsequent years, CIT(A) allowed the claim of the assessee. On the other hand, Id. departmental counsel submitted that the nature of the subsidy has to be examined before applying the decision of the Hon'ble Supreme Court. 143. Having considered the rival submissions and in the interests of justice, we direct the assessee-company to furnish a copy of the aforesaid scheme before the Assessing Officer for his examination and the Assessing Officer is directed to reconsider the issue in accordance with law and in line with the decision of the Hon'ble Supreme Court 144. Ground No. 11 (as per abridged version of grounds of appeal) reads as under: "The CIT (Appeals) erred in confirming the DCIT's action of not considering the following as-profit of business/profession eligible for deduction under section 32AB of the Income-tax Act -------------------------------------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eved by the action of the tax authorities, assessee is in appeal before us. Ld. counsel, appearing on behalf of the assessee-company submitted that the issue is squarely covered by the decision of the Cochin Bench of the Tribunal in the following cases: (a) Apollo Tyres Ltd. v. Dy. CIT[1992] 43 ITD 464 (Cochin) at pp. 490, 495 and 496; (b) Indian Transformners Ltd. v. Dy. CIT [1995] 52 TTJ (Coch.) 654. 147. On the other hand, the departmental counsel submitted that the assessee is entitled to relief under section 32AB of the Act on the business income as understood under the Income-tax Act and as a separate head is provided for taxing dividend income and interest income, such income does not form part of profits and gains of business or profession and thus supported the orders of the taxing authorities. 148. We have carefully considered the rival submissions. In the case of Indian Transformers Ltd. the Appellate Tribunal observed at page 658 as under: "As far as sub-clause (ii) is concerned, a question arises whether the Profits of eligible business means, profits chargeable under the head 'Profits and gains of eligible business' or 'The profits and gains of eligible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reads as under: "For that the Assessing Officer should be directed to allow the expenses relating to this assessment year which according to the department's contention are not allowable in the subsequent year as claimed by the Appellant." 153. This ground is very vague and does not specify the exact grievance and the amount in dispute, etc. Even if we presume that this additional ground is connected to Ground No. 7, as already indicated in our order in the earlier paragraph, it is not possible for us to direct the Assessing Officer, in the absence of any specific evidence to show that the claim pertains to a particular assessment year. No specific argument was advanced by the counsel in this regard. As the ground is vague and lacks any supporting material, we rejected identical additional ground raised in the order passed by us in ITA No. 1245 (Cal.) of 1994 dated 1510-1998. We, therefore, reject the additional ground raised in tile present appeal. Re.: I.T.A. No. 1818 (Cal) of 1996: 154. This appeal pertains to the assessment year 1990-91. Facts pertaining to Ground No.1 are as under. Expenditure of Rs.36,039 incurred by the assessee on shareholders' meeting was disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in ITA No. 1341 (Cal.) of 1993. In the light of the detailed discussion and reasons given by us in paragraph is 108 to 115, we uphold [lie order of the CIT(A) on this issue. 160. Ground No. 4 pertains to the deduction claimed in respect of the amount paid as compensation to the victims of the Bhopal gas disaster. This issue was considered by us in this order vide paragraphs 2 to 48. For the reasons stated hereinabove, we reject this ground. 161. The assessee raised an additional ground which reads as under: "For that the Assessing Officer should be directed to allow the expenses relating to this assessment year which according to the department's contention are not allowable in the subsequent year as claimed by the Appellant." 162. This ground is vague as in the earlier years. For the reasons stated by us while disposing of a similar ground for the assessment year 1989-90, we reject the additional ground raised by the assessee. Re.: I.T.A. No. 2183 (Cal) of 1993.: 163. This appeal filed by the assessee-company is directed against the order of the CIT(A)-XI, Calcutta. Primia facie adjustments made in the intimation under section 143(1)(a) and the additional tax lev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 37(4) of the Act. We, therefore, hold that prima facie adjustments made by the Assessing Officer, vis-a-vis the claim of depreciation is in order. However, with regard to the other expenditure, considering the divergent views on this issue, we arc of the opinion that the Assessing Officer is in error in disallowing the claim in the proceedings under section 143(1)(a) of the Act. (c) Payment to clubs of Rs.1,27,863 - The case of the assessee is that the above-referred amount is spent on subscription only and, therefore, does not fall within the expression 'entertainment expenditure'. In the order passed by the CIT(A) against the regular assessment order, the disallowance made by the Assessing Officer was set aside by following the decision of the Appellate Tribunal in the case of Siemens India Ltd. (sic). It goes to show that the question of disallowance is not free from debate or dispute and in the light of the decision of the Hon'ble Calcutta High Court in the case of Modern Fibotex India Ltd. we set aside the disallowance. (d) Disallowance under section 40A(9) of the Act of Rs.1,50,000 Contributions towards UCIL Senior Manager's Children Welfare Fund and UCIL S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. The issue, therefore, becomes academic and, at any rate, the decision if the CIT(A) in the proceedings under section 143(3) is proof enough to show that the decision on this issue is debatable and, therefore, falls outside the scope of prima facie adjustment under section 143(1)(a) of the Act. (f) Net compensation towards Bhopal gas tragedy - Net compensation towards Bhopal gas tragedy disallowed by the Assessing Officer on the ground that liability to pay compensation has not been finalised before the end of the accounting year in view of the fact that the review petitions were pending before-the Supreme Court. (f) (i) We have considered this issue elaborately in the earlier paragraphs. The issue as to whether the liability is deductible as business expenditure and if so, in which year, is highly debatable. We, therefore, hold that the issue is outside the scope of 'prima facie adjustment'. Re.: ITA No. 1340 (Cal) of 1997: 164. This appeal pertains to the assessment year 1992-93. Ground No. 1 pertains to the disallowance made by the Assessing Officer under section 37(2A) of the Act. Facts in brief are that the assessee treated expenditure of Rs.6,08,927 (being 50% of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany towards Senior Managers' Children Welfare Fund and Senior Staff Executive Childrens' Fund. We have considered an identical issue elsewhere in this order. For the reasons stated by us in paragraphs 112 to 115 of our order, we are unable to appreciate the submissions of Id. counsel of the assessee and we, therefore, uphold the order of the CIT(A). 169. Vide Ground No. 3, assessee-company contends that the compensation amount of Rs.66,49,69,504 paid to the victims of the Bhopal gas disaster and a further amount of Rs.7,50,00,000 payable for establishment of an hospital are deductible as revenue expenditure. The case of the assessee is that the payment for establishment of hospital is also a part of the settlement and partakes the character of compensation. The Id. counsel for the assessee further submitted that payment of such huge amount cannot be termed as voluntary contribution. In short, it is the submission of ld. counsel that there is no charity involved in making the payment as it was paid consequent to the direction of the Hon'ble Supreme Court and the payment having been made in the interests of business, the same is allowable as deduction. On the other hand, Id. dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he reasons stated therein, we reject the contention of the assessee-company. 175. Vide Ground No. 2, assessee-company contends that the disallowance made by the Assessing Officer under section 37(2A) of the Act is not in accordance with law. The following expenditure was treated as entertainment expenditure under section 37(2A) of the Act: -------------------------------------------------------------------------- (a) Tea, snacks, etc. supplied to business associates. Rs. 3,00,000 (b) Expenditure on food, beverages, etc. Rs. 2,61,064 at guest-house, residences and restaurants and during staff picnics (c) Refreshment and beverages to shareholders Rs. 17,695 during AGM (a) Expenditure on shareholders visits to the plant Rs. 14,070 of the company. -------------------------------------------------------------------------- 176. We have considered identical issues elsewhere in our order. For the reasons stated therein, we hold that the expenditure incurred on the business associates and on the shareholders on their visit to factory and AGM is hit by section 37(2A) of the Act. However, the expenditure incurred on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the next year the CIT(A) allowed a similar claim. 183. Similar claim was considered by us elsewhere in our order. In the interests of justice, we uphold the order of the CIT(A) with a further direction to the Assessing Officer to consider the claim of the assessee-company in the light of the decision of the Hon'ble Supreme Court. 184. Ground No. 6 pertains to the claim of allowance under section 32AB of the Act. At the time of hearing, Id. senior counsel, appearing on behalf of the assessee, submitted that the CIT(A) remanded the matter to the file of the Assessing Officer to examine the claim of the assessee keeping in view various arguments advanced at the first appellate stage. Since the matter is remanded for reconsideration, Id. counsel did not raise any serious objection to the procedure adopted by the CIT(A). We, therefore, uphold the order of the CIT(A) on this issue. 185. Vide Ground No. 7, assessee contends that the expenditure on safety up-gradation and rehabilitation be treated as current repairs and allowed as revenue expenditure. The CIT(A) remanded the matter to the file of the Assessing Officer with the following direction: "I have considered the sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter, should keep in mind the observations of the CIT(A) but, at the same time, should not be influenced by the same. Subject to this, we uphold the order of the CIT(A) on this issue. 189. Vide Ground No. 8, assessee-company contends that the interest income is liable to be taxed on cash basis which is the method consistently followed by the assessee and accepted by the department in the past. CIT(A) directed the Assessing Officer to examine the contention of the assessee and pass a speaking order on this matters Ld. counsel, appearing on behalf of the assessee-company, submitted that in the order of assessment passed for the assessment year 1985-86, the Assessing Officer accepted the method followed by the assessee and, therefore, seeks similar relief for the assessment year under consideration. On the other hand, ld. departmental counsel submitted that the matter is restored to the file of the Assessing Officer and, therefore, the assessee cannot have any grievance. 190. We have considered the rival submissions. The order of the CIT(A) restoring the matter to the file of the Assessing Officer for re-examination is fair and does not call for any interference. We may add that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt." 196. Ld. counsel submitted that the value of opening stock cannot be different from the value of closing stock of earlier year and for this purpose he requested the Bench for a direction to the Assessing Officer. 197. We have carefully perused the record. The additional ground annexed to the abridged ground reads as under: "Without prejudice to Ground of' appeal No. 1 to the Income-tax Appellate Tribunal preferred by your appellants for the assessment year 1986-87, your appellants submit that the addition of Rs.2,45,73,456 representing custom duty paid (hiring the prior previous years i.e., 1983, 1984 and 1985, relating to opening stock for the previous year, be deleted since such custom duty was not allowed on payment basis under section 43B of the Act in the preceding assessment year 1986-87 per order of the DCIT under section 143(3) r.w.s. 263 of the Act dated 25th February, 1993. The DCIT be directed to delete the double addition of Rs.2,45,73,456, once in assessment year 1986-87 and again in assessment year 1987-88. Your appellants crave leave to add to after or amend any of the aforesaid grounds of appeal as they may be advised from time to time." 198. A carefu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the duty to accompany the customers and business associates. It is the case of the assessee that on such visits, the places where the employees visited the customers and business associates become their places of work within the meaning of Explanation 2 to section 37(2A) of the Act. However, the Assessing Officer disallowed the claim of the assessee. He further disallowed a sum of Rs.1,77,139 referable to the expenditure incurred on shareholders meetings (Rs.27,139); payments to employees recreation club (Rs.1,30,321); and payment to clubs (Rs.19,663). CIT(A), however allowed the claims of the assessee with regard to the payment to employees recreation club and payment to clubs. The other addition was confirmed for the reasons given in the previous years by the appellate authorities. Further aggrieved, assessee is in appeal before us. 201. We have carefully considered the rival submissions and perused the record. Identical issue was considered by us while disposing of the appeal for the assessment year 1992-93 [Ground No. 1 in ITA No. 1340 (Cal.) of 1993]. For the reasons given therein, the Assessing Officer is directed to re-examine the aforesaid disallowance of Rs.4,71,351 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dditional tax of Rs.12,825 levied was also confirmed. As regards the charging of interest under section 234C, CIT(A) observed that interest is mandatory under the Scheme and, therefore, no appeal lies against the same. 207. Further aggrieved, assessee is in appeal before us. Ld. counsel submits that in the light of the decisions of the Hon'ble Bombay High Court, in Chase Bright Steel Ltd. and Century Spg. Mfg. Co. Ltd., the question as to whether the claim of deprection is hit by section 37(4) is a debatable issue and, therefore, falls outside the purview of section 143(1)(a) of the Act. He also placed reliance on the decision of the Hon'ble Calcutta High Court in Modern Fibotex India Ltd.'s case. As regards the interest charged under section 234C of the Act, Id. counsel submitted that the very jurisdiction of tile Assessing Officer to levy interest is challenged in the instant case and, therefore, the assessee has a right of appeal and further submitted that whether interest can be charged in the form of a prima facie adjustment is a moot question. Ld. counsel also Submitted that against the regular assessment order passed under section 143(3) of the Act, assessee preferred a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sputes had not been finalized in the assessment years concerned and it was capital in nature. 213. Certain basic undisputed facts are as follows - Since 1969 the assessee has been engaged in the business of manufacturing pesticides at its factory at Bhopal. The pesticides are used for support and preservation of agriculture. For manufacture of such pesticides, MIC (Methyl Isocyanate) has to be used. The same was duly obtained by requisite licence under different legislations for its manufacturing business. Union Carbide Corporation (UCC), U.S.A., is a leading firm having the technology and skill for manufacturing of such pesticides. UCC held majority of the shares in the assessee. Agreements were entered into with UCC with the approval of the Central Government and in terms of such agreements, UCC was to design the plant required for manufacture of the pesticides and to supply technology for its manufacture. UCC was also to train at its plant in U.S.A. the technical staff of the assessee for operation of such plant. In the Paper Book filed by the assessee, an agreement entered into with the UCC concerning the manufacture or fabrication and installation of the capital plant, mach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmine whether a particular loss is in the course of, or incidental to, the carrying on of business, it is necessary to determine the nature of the business involved and in that context the issue has to be decided after appropriate appreciation of the relevant factors. What is necessary for the assesee to show is that it was conducting its business in a proper and reasonable manner with proper technical personnel. If in spite thereof, some accident do take place due to human error or lapse, the loss suffered on account of such accident has to be treated as one in the course of carrying on of the business and/or incidental thereto. The accident took place in the working of the plant and storage of the raw material for manufacture of pesticides. It cannot be described to be one in the capacity as owner of the property. It was in the course of and in relation to the manufacturing activities themselves. 213.1 The litigation relating to the claim for compensation was initially only against UCC, USA. Thereafter, because of the subsequent developments, ultimately the matter was settled in the Supreme Court of India. The accident took place in the previous year relevant to the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compensation and such expenditure would be arising in the course of, and/or incidental to, the business. 214. The next issue which arises as stated in (b), is whether the expenditure is of capital nature or not. In my view, it is difficult to appreciate how the payment of the said compensation can be treated as capital expenditure. In fact, my learned Brother has also not expressed different view on this aspect and, therefore, we both have agreed that the expenditure is not capital in nature. 215. With regard to the issue regarding the year in which the deduction is allowable, as raised in (c), I am of the opinion that the deduction should be allowed only in the assessment year 1989-90. The Supreme Court passed an order on 15th February, 1989 relevant to the assessment year 1989-90 and in this year the amount was also paid. The deduction claimed is for damages and although the cause of action giving rise to such damages might have occurred in the year of accident, still whether the assessee was liable to pay any sum on account of such accident, and if so, to what extent, was only decided by the said order of the Supreme Court finally settling the disputes. Therefore, the cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. Therefore, in my view, the assessee's claim is allowable. 217. With regard to the issue raised in (c), I agree with my learned Brother. 218. Regarding the deductibility of' the amount of Rs.7.5 crores the assessee's claim has to be accepted. The learned Judicial Member made the disallowance on the basis of the reasons recorded for rejecting the claim of the assessee for deduction of Rs.68.99 crores. 1 would not agree that this payment of Rs.7.5 crores was in any way totally voluntary payment. My learned Brother has also stated that the liability arose because of the unprecedented disaster. In my view, the same is allowable. 219. With rest of the order passed by my learned Brother, I agree. REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 Because of the difference between the Members, we forward the case to the Hon'ble President. Following 3 questions are referred for the opinion of the Third Member: 1. Whether, on the facts and in the circumstances of the case, the compensation amount of Rs.68,99,19,509 paid by the assessee-company and Rs.7.5 crores spent by it is allowable as expenditure incidental to the carrying on of the business? 2. Whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssues of law and facts and in particular the enormity of human suffering occasioned by the Bhopal Gas disaster and the pressing urgency to provide immediate and substantial relief to the victims of the disaster, both the executives and judiciary as well as Legislature were anxious to settle the issue as expeditiously as possible. Originally an ordinance to process the claim arising out of the disaster was promulgated on 2-2-1985. It was subsequently replaced by the Legislature by an Act named Bhopal Gas Leak Disaster (Processing of' Claims) Act, 1985 with the following objects: "An Act to confer certain powers on the Central Government to secure that claims arising out of, or connected with, the Bhopal gas leak disaster are dealt with speedily, effectively, equitably and to the best advantage of the claimants and for matters incidental thereto." This Act has given power to the Central Government to settle the issues not for its own benefit but only with a view to settle the claim in the best advantage of the claimants. The Central Government has been given the exclusive right to represent and act in place of every person who has made, or is entitled to make, a claim for all pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... produced by its reaction and the medical steps to be taken immediately. It was further stated apart from the design defects the UCC did not take any adequate remedial action to prevent back flow of solution from VGS into RVVH and PVN lines and that there were various other acts of criminal negligence alleged. Probably in these circumstances, Union Carbide took major portion of the liability upon Itself and out of 470 million U.S. Dollar, the liability passed on to the assessee was only 45 million U.S. Dollar. But as stated in paragraph 3 of the order of the Supreme Court in Charan Lal Sahu v. UNion of India AIR 1990 SC 1480, the exact reasons and circumstances for such leakage have not been ascertained or clearly established. 3. Consequent upon filing of suits for compensation of the individuals claimants and by the Central Government under the Ordinance promulgated on 2-2-1985 which was subsequently replaced by the Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985, the Supreme Court thought it pre-eminently fit to settle the issue once for all and passed an order on 14-2-1989 directing the assessee's parent company, the Union Carbide Corporation, USA to pay a sum of US ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Union of India and the State of Madhya Pradesh shall take all steps which may in future become neccssary in order to implement and give effect to this order including but not limited to ensuring that any suits, claims or civil or criminal complaints which may be filed in future against any Corporation, company or person referred to in this settlement are defended by them and disposed of in terms of this order. (b) Any such suits, claims or civil or criminal proceedings filed or to be filed before any court or authority are hereby enjoined and shall not be proceeded with before such court or authority except for dismissal or quashing in terms of this order. 4. Upon full payment in accordance with the court's directions: (a) The undertaking given by Union Carbide Corporation pursuant to the order dated 30th November, 1986 in the District Court, Bhopal shall stand discharged, and all orders passed in suit No. 1113 of 1986 and/or in revision therefrom shall also stand discharged. (b) Any action for contempt initiated against counsel or parties relating to this case and arising out of proceedings in the courts below shall be treated as dropped." Though assessee was alrea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... volatility and inhalation toxicity of MIC and the finding of investigations conducted by CBI that certain lapses which were alleged to have been committed, the Judicial Member observed that the disaster was due to the negligent maintenance of the factory which could certainly be said to be in breach of strict regulations and therefore, opposed 'to public policy having affected thousands of innocent citizens. Such an expenditure, in his opinion, did not fall in the category of expenditure incurred for the purposes of business or trade inasmuch as exposing citizens of the city to poisonous gases which affected them severely and consequent payment of damages is not a normal incident of business carried on by any assessee and, therefore, such expenditure is not deductible against the profits earned by the assessee. For the same reasons he held that the expenditure incurred by the assessee of Rs.7.5 crore was not an allowable deduction; that it was not a voluntary payment and that the liability to pay arose because of the unprecedented disaster. The Judicial Member further observed that there was no conclusive finding of the Supreme Court to the effect that the compensation was not for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufacture of carbonate pesticides by the reaction of MIC with hydroxyl compounds and that UCC regularly employed research staff and maintained extensive research laboratories and other facilities for research and it had trained and experienced person available to impart training and inspections in USA; that prior approval of the Government had been obtained for its execution; that a detailed list of the personnel who were deputed for start of the plant of MIC unit and about the personnel who were trained at the factory of UCC at USA with their technical qualifications and regarding management set up and personnel who were responsible for different sections of the plant at Bhopal was also submitted together with their previous employment, posts held. He therefore concluded that the assessee had taken all reasonable and proper steps that were feasible for the purpose of securing the best possible plant and the best technical know-how for its installation and operation; that the assessee was conducting its business in a proper and reasonable manner with proper technical personnel and if in spite thereof, some accident do take place due to human error or lapse, the loss suffered on ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tself for assessment year 1985-86 stated that the assessee was a company deriving income from various activities or ventures like, manufacturers and sale of batteries, chemicals, pesticides, flash light cases, plastics and commercial harvesting of shrimps, lobsters etc. that the assessee was having its registered office at Calcutta and factories and branches located at Calcutta, Bombay and various other stations and therefore the question of disallowing the claim for deduction on the ground that related to the close business, in his opinion, cannot arise; that the tax authorities being fully conscious of the aforesaid factual aspects never rejected the claim on any such ground. He therefore held it is a case of same business and therefore the assessee's claim was allowable. 10. I have heard the learned counsel of the assessee Shri R.N. Bajoria and the learned Standing Counsel Sri M.P. Agarwal and considered their rival submissions. Let me take up the second question first as the arguments were advanced first on this point of difference, The learned counsel of the assessee submitted that this question was raised by the Bench for the first time and decided in absence of full facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the disallowance on the assumption of fact that the Bhopal business was distinct and separate without going into the facts and dealing with the theory of the same business cannot be supported in law. Even in view of the Supreme Court decision in the case of L.M. Chhabda sons, the question whether different ventures carried on by the assessee are parts of the same business must depend on the facts and circumstances of the case. In a later decision of Supreme Court in Waterfall Estates Ltd. v. CIT [1996] 219 ITR 563, it was observed: 'We do not think it necessary to deal with the facts of each of the decisions for the aforesaid reason and also because the said question is essentially a question of fact. No single test can be devised as universal and conclusive. The question has to be decided on a consideration of all the relevant facts and circumstances. Some facts may tend one way and some other the other way. An overall view has to be taken and a conclusion arrived at." 12. There seems to be no doubt about the proposition as canvassed by the learned Standing Counsel that the liability of' an expenditure can be allowed only of a business carried on by the assessee during the y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. v. CIT [1970] 77 ITR 739 (SC); (iv) Import business closed in 1953-54 and export business started in 1954-55 in B.R. Ltd. v. VP. Gupta, CIT [1978] 113 ITR 647 (SC); (v) Diverse commodities like sugar, vanaspati, soap, etc. and special alloy ware and blades in CIT v. Modi Industries Ltd. (No. 3) [1993] 200 ITR 341 (Delhi); (vi) Fertilizer and Cement in the case of IAC v. Coromandal Fertilizers Ltd. [1989] 29 ITD 455 (Hyd.); (vii) Agro Chemical/soda ash and fertiliser business under process of construction in the case of Tata Chemicals Ltd. v. Dy. CIT [2000] 72 ITD 1 (Mum.); (viii) Diverse business in textile, fibre on different places and cement/ sponge iron at other places hi Grasim Industries Ltd. v. Dy. CIT [1999] 64 TTJ (Mum.) 357, etc. From all these decisions, the following principles are emerging: (i) The nature of two lines of business is not relevant; (ii) The fact that one business can be conveniently closed down without affecting the other business is a strong indication that both the businesses are distinct and separate, but no decisive inference can be drawn from that; (iii) The decisive test is the unity or control which is indicated by in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstruments, together with the inadequate controls on systems of storage and on quality of stored materials as well as lack of necessary facilities for quick effective disposal of material exhibiting instability, led to the accident. Similarly, the CBI pointed out certain lapses of the assessee, viz.-- (i) Invariably storing MIC in the tanks, which were, much more than 5096 capacity of the tanks, which had been prescribed; (ii) Not taking any adequate remedial action to prevent back flow of solution from VGS into RVVH and PVH lines; (iii) Not maintaining the temperature of the MIC tanks at the preferred temperature of zero degrees Celsius but at ambient temperatures, which were much higher, (iv) Not taking any immediate remedial action when tank No. E 610 did not maintain pressure from 22nd October, 84 onwards; (v) When the gas escaped in such large quantities, not setting out an immediate alarm to warn the public and publicise the medical treatment that had to be given immediately. 16. By these two reports, it is claimed by the Revenue that there was negligence of the assessee in maintaining the factory; that it was a liability not for the purpose of the trade or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge, expertise and experience with respect to the facilities for the manufacture of carbonate pesticides by the reaction of MIC with hydroxyl compounds. It regularly employed research staff and maintained extensive research laboratories and other facilities for research and it had trained and experienced personnel available to impart training and instruction in U.S.A. A list of personnel who were deputed for start of the plant of MIC Unit and the personnel who were trained at the facility of' U.S. holding company with their technical qualifications, etc. along with the details of the management, set-up and the personnel who were responsible for the different sections of Plant at Bhopal with their technical qualifications, experience and particulars of previous employments, posts held from time to time are on record. In these circumstances, as observed by the then Vice President, the assessee had taken all reasonable and proper steps that were feasible for the purpose of securing the best possible plant and the best technical know-how for its installation and operation thereof. No such allegation has been made at any stage of the proceedings that the assessee had not employed compete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount of the profits or gains from such operations that are to be assessed may be computed. Such cost includes not only all the ordinary operations costs but also all moneys paid in discharge of the liabilities normally incurred in the operations. When the nature of the operations is such that the risk of negligence on the part of the taxpayer's servants in the course of their duties or employment is really incidental to such operations, as was the fact in the present case, with its consequential liability to pay damages and costs, then the amount of such damages and costs is properly included as one of the items of the total cost of such operations. It may, therefore, properly be described as a disbursement or expense that is wholly, exclusively and necessarily laid out as part of the process of earning the income from such operations." 18. In Anamalai Timber Trust Ltd.'s case , the Kerala High Court was dealing with the compensation paid by the assessee for the injury caused by the elephant employed by it in carrying the logs. It was held allowable by observing that there is no difference in principle between the liability being contractual or delictual even though the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above passage that no degree of ingenuity can frame a formula so precise and comprehensive as to solve at sight all the cases that may arise. 19. Let us examine it from this angle first. The assessee was the owner of the storage tanks. At the same time, the factory as well as the storage tanks were used for the purpose of the business and in such circumstances, it may at best could be said that it was a liability both as owner as well as a trader and in view of the trend of the decision of the Supreme Court in the case of Indian Aluminium Co. Ltd. while dealing with the allowability of the wealth-tax in the case of a trading company, the majority view was that when a person has a dual capacity, of a trader-cum-owner, and he pays tax in respect of property which is used for the purpose of trade, the payment must be taken to be in the capacity of a trader according to ordinary commercial principles. Their Lordships referring to the earlier decision in the case of Travancore Titanium v. CIT [1966] 60 ITR 277 (SC) qualified the test of that case 'to be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business, i.e., between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business but as penalty for an act of infraction of public policy underlying the concerned Statute. In the present case, it was compensation for loss incurred by negligence and not for any infraction of law or public policy. 23. Strong Co. of Romsey Ltd., case and latter decision relied upon that in Alexander Von Glehn Co. Ltd.'s case were referred to by the Supreme Court in Maddi Venkataraman Co. (P.) Ltd.'s case But all these cases were of defiance committed by the assessee in following the law and/or regulations, which were based on public policy. Volition in committing the offence was present in all these cases. In the case of Maddi Venkataraman Co. (P.) Ltd., the assessee contravened the provisions of the Foreign Exchange (Regulation) Act to cut down its losses or to make larger profits while carrying on the business. Supreme Court observed that it was only to be expected that proceedings would be taken against the assessee for violation of that Act. The expenditure incurred was for evading the provisions of the Act. It was a case of the penalty levied for such evasion that was held not be allowed as deduction. Moreover, it would be against public policy to allow t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Sales-tax Act, 1959 and the damages under the Employees State Insurance Act, 1948 for delayed payment of the contribution and the Court held that the payments were composite in nature. In so far as it related to the compensation for late payment, it was held to be an allowable deduction and the balance amount which was penal in nature was held not allowable as it was meant to penalise the defaulter employers as also a warning to employers in general not to commit a breach. The compensation payment by the assessee in the case under consideration was for a tortuous liability arising out of negligence of the employees of the assessee to compensate to the loss of' life and property, personal injury and for expenses for containing the disaster or mitigating or otherwise coping with the effects of the disaster or any other claim (including any claim by way of loss of business or employment) arising out of, or connected with the disaster. It is thus cannot be a penalty or fine or an impost akin. to penalty and being compensatory payment arising out of carrying on the business is an allowable deduction. 25. In Ahmedabad Cotton Mfg. Co. Ltd.'s case, the assessee could not produce or pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... representative of the claimants under the Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985. The Act was passed in recognition of the right of the sovereign to act as parens patriae to effectively safeguard the right of the victims who were in general poor, illiterate and helpless and is constitutionally valid. As observed by the Supreme Court in Charanlal Sahu's case there was no curtailment of any criminal liability of anyone. The Act also does not in any way circumscribe the liability of the Union of India or the State of Madhya Pradesh or the Chief Minister of that State in case they were liable as joint tort feasors with the UCC or UCIL. As stated in paragraph 144 of the Report, Justice Ranganathan for himself and for Justice A.M. Ahmadi observed-- "The Act talks only of the civil liability of, and the proceedings against the UCC or UCIL, or others for damages caused by the gas leak. It has nothing to say about the criminal liability of any of the parties involved. Clearly, therefore, the part of the settlement comprising a term requiring the withdrawal of the criminal prosecutions launched is outside the purview of the Act. The validity of the Act cannot, therefore, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his land in the ordinary manner of its use, though mischief should thereby be occasioned to his neighbour, he will not be liable in damages. But if he brings upon his land anything which would not naturally come upon it, and which is in itself dangerous, and may become mischievous if not kept under proper control, though in so doing he may act without personal wilfulness or negligence, he will be liable in damages for any mischief thereby occasioned. In this case 'A' was lessee of certain mines. 'B' was the owner of a mill standing on the land adjoining that under which the mines were worked. 'B' desired to construct a reservoir and employed competent persons, such as engineers and a contractor to construct it. 'A' had worked his mines upto a spot where there were certain old passages of disused mines; these passages were connected with vertical shafts which communicated with the land above and the earth of the surrounding land. No care had been taken by the engineer or the contractor to block up these shifts and shortly after water had been introduced into the reservoir it broke through some of the shafts, flowed through the old passage and flooded A's mine. In this background of' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of hazardous or inherently dangerous nature of the activity which it has undertaken. The enterprise must be held to be under an obligation to provide that the hazardous or inherently dangerous activity in which it is engaged must be conducted with the highest standards of safety and if any harm results on account of such activity, the enterprise must be absolutely liable to compensate for such harm and it should be no answer to the enterprise to say that it had taken all reasonable care and that the harm occurred without any negligence on its part. Since the persons harmed on account of the hazardous or inherently dangerous activity carried on by the enterprise would not be in a position to isolate the process of operation from the hazardous preparation of substance or any other related element that caused the harm the enterprise must be held strictly liable for causing such harm as a part of the social cost for carrying on the hazardous or inherently dangerous activity. If the enterprise is permitted to carry on an hazardous or inherently dangerous activity for its profit, the law must presume that such permission is conditional on the enterprise absorbing the cost of any acci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he damages if the action had proceeded, as another matter. Normally, in measuring civil liability, the law has attached more importance to the principle of compensation that than of punishment Penal redress, however, involves both compensation to the person injured and punishment as deterrence. These problems were highlighted by the House of Lords in England in Rookes v. Barnard 1964 AC 1129, which indicate the difference between aggravated and exemplary damages. Salmond on the Law of Torts, 15th Edition at p. 30 emphasises that the function of damages is compensation rather than punishment, but punishment cannot always be ignored. There are views which are against exemplary damages on the ground that these infringe in principle the object of law of torts, namely, compensation and not punishment and these tend to impose something equivalent to find the criminal law without the safeguards by the criminal law. In Rookes' case, the House of Lords in England recognised three classes of cases in which the award of exemplary damages was considered to be justifiable. Awards must not only it is said, compensate the parties but also deter the wrong doers and others from similar conduct in f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 14/15-2-1989. 32. In paragraph-3 of the order in the case of Charan Lal Sahu the Supreme Court noted that Methyl Isocyanate (MIC), a highly toxic gas, is an ingredient in the production of both Sevin and Temik (the pesticides). On the night of the tragedy, MIC leaked from the plant in substantial quantities and the exact reasons for and circumstances of such leakage have not yet been ascertained or clearly established. Thus on the date of the announcement of the judgment dated 22-11-1989 it was not established that the assessee had done any wrong wilfully or with any malice or mens rea or guilty mind, nor was it established that it was a case of criminal negligence attributable to the company. 33. In the case of M.C Mehta, the Supreme Court has discussed the procedure as to how a chemical and fertilizer manufacturing unit is to be installed. It discussed the procedure in paragraphs-20 to 28 of the order as below:- "20. In order to assess the functional role allocated to private corporation engaged in the manufacture of chemicals and fertilizers, we need to examine the Industrial policy of the Government and see the public interest importance given by the State to the act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Government was found necessary in national interest. Among the eighteen industries so mentioned as requiring such Central Control, heavy chemicals and fertilizers stood included. 25. In order to carry out the objective of the Policy Resolutions the Industries (Development and Regulation) Act of 1951 was enacted which, according to its objects and reasons, brought under central control the development and regulation of a member of important industries the activities of which affect the country as a whole and the development of which must be governed by economic factors of all India import. Section 2 of the Act declares that it is expedient in the public interest that the Union should take under its control the industries specified if) the First Schedule. Chemicals and Fertilisers find a place in the First Schedule as Items 19 and 18 respectively. 26. If an analysis of the declarations in the Policy Resolutions and the Act is undertaken we find that the activity of producing chemicals and fertilisers is deemed by the State to be an industry of vital public interest, whose public import necessitates that the activity should be ultimately carried out by the State itself, though ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed with the settlement order were decided, it cannot be said that the liability has accured prior to the decision on review petitions Chronological events of the facts as stated in the directors report are: "Subsequently, the Bench presided over by Hon'ble Mr. Justice Sabyasachi Mukherjee held several hearings on the question of the validity of the Bhopal Act and after hearing the Counsels for the petitioners and the Union of India and other parties, has reserved its judgment. By another order dated May 2, 1989, the Bench presided over the Hon'ble Chief Justice has ordered that the review petitions will be listed after judgment has been delivered on the validity of the Bhopal Act by the full Bench presided over by the Hon'ble Mr. Justice Sabyasachi Mukherjee and the pending writ petitions will also be listed along with the review petitions. Thus, it will be seen that despite the Supreme Court Orders dated February 14 and 15, 1989, directing an overall settlement of the Bhopal Litigation, matters are still pending." 36. Under these circumstances, in my opinion pendency of review/writ petition postpones the accrual of liability to the date of the final order thereon which was pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tta High Court in the case of Shalimar Chemical Works (P.) Ltd. v. CIT [1987] 167 ITR 13 wherein liability was held to arise when question of validity of the Statute was decided by the Court. Similarly, in the case of CIT v. TS. Srinivasa Iyer [1984] 146 ITR 526 (Mad.), the liability was held to be allowed when the Supreme Court finally decided the matter though it related to earlier year. 39. The case shall now be posted before the Divisional Bench for passing order in conformity with the majority opinion. ORDER Per Pramod Kumar, A.M.- On a difference of opinion between the members constituting this bench when these appeals originally came up for hearing, following questions were referred for the opinion of Third Member under section 255(4) of the Income Tax Act: "1. Whether, on the facts and in the circumstances of the case, compensation amount of Rs.68,99,19,509 paid by the assessee company and Rs.7.5 crores spent by it is allowable as expenditure incidental to the carrying on of the business? 2. Whether, on the facts and in the circumstances of the case, the said two sums can be disallowed while computing the income of the assessee for the reason that the exp ..... 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