9911796707
TMI Blog1990 (11) TMI 199X X X X Extracts X X X X X X X X Extracts X X X X ..... hen as deductions in computing its income for these two assessment years: . 1985-86 1986-87 Society commission Rs. 11,44,636 Rs. 10,18,406 Cane development subsidy Rs. 2,07,387 Rs. 3,56,341 These sums were claimed as deductions under s. 37(1) of the IT Act. They were duly allowed as deductions by IAC of IT (Asst), Range I, Muzaffarnagar. Besiges the assessee entered into an agreement with M/s. Jagat Jeet Industries Ltd. on22nd July, 1981for the manufacture of Indian made Foreign Liquor under the technical supervision, trade-mark and brand name of Jagat Jeet and the secret formula in the form of premix development was to be supplied by M/s. Jagat Jeet Industries Ltd. The assessee entered into an agreement with M/s. Jagat Jeet Industries Ltd. Providing for the terms and conditions for the manufacture of this kind of liquor. Under this agreement the assessee is to receive only royalty at a fixed rate while the other income from the manufacture was to go to M/s. Jagat Jeet Industries Ltd. The assessee disclosed the royalty received from these operations in the asst. yrs. 1986-87 as its income. 3. The CIT examined the records of this assessee for these two years and came to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under s. 37 was in pith and substance a claim made under s. 35C and was allowed under s. 35C by the IAC overlooking the fact that such expenditure was not allowable after29th Feb., 1984. He held that the IAC failed to appreciate the correct nature of the expenditure and should have held that this expenditure fell within the four corners of s. 35C. He gave several reasons in support of his order mainly discussing the case law on the subject as to whether for a situation of this nature provisions of s. 35C would apply or the provisions of s. 37 would apply. He was of the opinion that s. 37 being a residuary section and since it specifically mentioned that expenditure of the nature described in ss. 30 to 36 were not considered for the purpose of allowance under s. 37, the expenditure in this case being of the nature described in s. 35C of the IT Act, the description made s. 37 inapplicable to the allowance of that expenditure. He also discussed his order, the evolution of s. 35C as to why it was introduced by way of giving weighted deduction and how weighted deduction was withdrawn and how even the allowance of this expenditure was withdrawn with effect from 29th Feb., 1984. He was o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 37(1). Such an enquiry not having been made, the claim was not admissible at all under that section. 6. As regards the royalty received in the asst. yr. 1985-86, the assessee's case was that the agreement was a genuine agreement, that the assessee company had utilised its excise licence and excess land but short of capital, technical know-how and the marketing skills and the trade name. It was M/s Jagat Jeet Industries Ltd. who approached the assessee company to utilise its excess licensed capacity by agreeing to build a manufacturing unit at its factory by providing the entire technical know-how while allowing its trade name to be used and also by helping it in marketing the product. Since the assessee did not contribute any capital, it stood to gain by allowing its surplus land to be used for the manufacture of Indian made foreign liquor and in the process gained the advantage of the knowledge of manufacturingIndiamade foreign liquor and earn profits in future. It, therefore, agreed for the receipt of the royalty only. Pursuant to this arrangement, it became necessary for the assessee to allow its excise licence to be used by M/s Jagat Jeet Industries Ltd. and in order that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interests of the Revenue to suffer by accepting the royalty only and not the income. According to the CIT the IAC should have seen in the entire management of the manufacture of Indian made foreign liquor was in the hands of the assessee company as well as the control over the finance and, therefore, the profits belonged to it. According to him the failure of the IAC to look into this aspect also caused prejudice to the interests of the Revenue. For these reasons he declined to accept the reasons advanced by the assessee in support of the assessments and set aside assessments and directed the IAC to make fresh assessments according to law. It was to this direction that objection was taken to by the assessee in these appeals. 8. We have carefully heard the arguments addressed to us on behalf of the assessee company by Shri O.P. Vaish and on behalf of the Department by Shri Sandeep Tondon and perused the records, which included paper book. The commission on cane purchased was paid to the growers under the U.P. Sugarcane (Reg. of Supply and Purchase) Act, 1953. Sec 18 of the said Act provided: "18. Commission on purchase of cane. (1) There shall be paid by the occupier of a factory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arise at all. Sec. 35C only applies to the expenditure incurred on development of agriculture, the kind of expenditure to be allowed under s. 35C was mentioned in s. 35C(b) and it does not include purchase price of cane. The view of the CIT in this regard thus appears to us to be totally incorrect and misconceived. Further under the statute and the policies of the State Government the Cane development Society formed for the purposes by the Government are obliged to take such steps as to develop the growth of cane in the area. The amount was spent partly by the Society from its own resources and partly by the subsidies granted by the State Government and partly paid by the factory to the Society. The expenditure was incurred directly in this case by the assessee company by paying it to the growers either in cash or in kind to develop a better variety of cane in the area and to increase its yield. This expenditure also does not come in any of the provisions of s. 35C. The amount paid by way of cane development subsidy was debited to cane purchase account as it formed part of the purchase price of the cane. The expenditure referred to in s. 35C for the purposes of allowance of weighte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the statute book w.e.f.1st April, 1989. It remained on the statute book between31st March, 1984till it was deleted on1st April, 1989only as a section without any operations as a redundant section without any teeth to bite. But if the expenditure incurred by the assessee though falls within the range of the expenditure described in s.35C and becomes disallowable under that section, since that section became inoperative from 1st March, 1984, nonetheless the expenditure so incurred if it was incurred, wholly and exclusively for the purposes of the business, it was not to be disallowed at all as not relating to the business as the residuary s. 37 would still apply notwithstanding the fact that reference was made in that section to the exclusion of the expenditure of the nature referred to in s.30 to 36. When reference was made in s. 37 to the expenditure incurred of the nature described in ss. 30 to 36 and though it includes s. 35C but yet the expenditure must be such that it should be allowed under any one of those sections. If no expenditure of the nature described in ss.30 to 36 is to be allowed under any of those sections, then that expenditure would be allowable under s.37 on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d incur for the purposes of business and after having referred to most probable expenditure that a businessman would incur, left it to the Assessing Officer to allow the expenditure in computing the income under the head 'business' by laying guidelines. That is how s. 37, which is known as residuary section is brought into being. The guidelines are that it should not be a capital expenditure and should be laid out or expended wholly and exclusively for the purpose of the business. We may refer here by way of example that in none of these sections salaries paid for running the business is to be allowed as an expenditure because neither of these ss. 30 to 36 refer to salaries although provision was made for the allowance of bonus, commission paid to employees and allowance of salaries paid to blind and yet the salaries paid were being allowed only under s. 37. Therefore, if any expenditure is not to be allowed under ss. 30 to 36 either for the reason that they are not allowable under those sections or for the reason that though that section exists in the statute book and yet made inoperative, that section is as good as a dead letter and, therefore, the expenditure would become inadmi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the Revenue. 10. Now we go to the other item of M/s Jagat Jeet Industries Ltd. The assessee company has two distilleries, one at Shamli, District Muzaffarnagar and the other at Pilkhani, District Saharanpur. Both the distilleries were having plants to produce spirit. In Pilkhani Distillery the assessee was manufacturing Indian made Foreign Liquor but with little success. Since the assessee was not able to compete in the market with other established brand names, it entered into a sort of collaboration agreement with M/s Jagat Jeet Industries Ltd. the broad features of which were that at its Shamili Distillery Unit, the assessee company would provide some spare piece of land to M/s Jagat Jeet Industries Ltd. M/s Jagat Jeet Industries Ltd. would invest all the capital required for building the infrastructure for storage of spirit, blending of brands, bottling house and storage of finished products. The assessee was not to incur any capital expenditure whatsoever. The supervision of the manufacturing process would be done by M/s Jagat Jeet Industries Ltd. so that the assessee company is freed from any obligation of manufacturing the products. M/s Jagat Jeet Industries Ltd. would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o by the assessee to divert its profits to M/s Jagat Jeet Industries Ltd. by taking only the royalty. 11. We are unable to appreciate the view taken by the CIT in this behalf. None of the points shown by him indicates that the business belonged to the assessee, that M/s Jagat Jeet Industries Ltd. was only its benami only when the profits could be taxed in the hands of the assessee when on the other hand M/s Jagat Jeet Industries Ltd. had invested a huge amount of capital, agreed to undertake to do everything without any obligation on the assessee. Under the arrangements the assessee had given only a piece of land and facility of using the excise licence. All the expenditure, both revenue and capital was provided by M/s Jagat Jeet Industries Ltd. I had also to provide the know-how, undertake the risk and uncertainty in selling its product. It cannot be said that under this arrangement, the profit belonged to the assessee and the royalty to M/s Jagat Jeet Industries Ltd. for profit to belong to the assessee, M/s Jagat Jeet Industries Ltd. should be the benami or nominee of the assessee. Further, the capital provided by M/s Jagat Jeet Industries Ltd. should be by way of loan or retur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the manufacture or sale. 12. The learned Departmental Representative submitted that even though there was enough material on record, the IAC should have applied his mind to arrive at the conclusion that the expenditure incurred on commission and subsidy was allowable under s. 37 and the royalty retained by the assessee earned from M/s Jagat Jeet Industries Ltd. as a proper arrangement. We fail to appreciate this argument for the reason that there was nothing to indicate that the IAC had not applied his mind. On the contrary a reading of the assessment order and the details filed before him do show that he applied his mind but it was the CIT, who had come to a different opinion. 13. The learned Departmental Representative had argued that when the legislative intention was that s. 37 would not apply to expenditure of the nature described in ss. 30 to 36 any administrative instruction given by the Board should not be permitted to override the legislative intention. The circular of the Board was neither law nor direction nor instruction but only an expression of its view. We are unable to subscribe to this view because as we have endeavoured to show that the object of s. 37 was not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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