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TMI Blog1993 (8) TMI 126X X X X Extracts X X X X X X X X Extracts X X X X ..... e put forth the following contentions and urged that the amount of Rs. 14,83,931 is allowable as expenditure (a) Explaining the nature of the expenditure, it is stated by the assessee-company in its letter dated 16-3-1992 addressed to the Assessing Officer as follows: "During the previous year relevant to the assessment year, the assessee has made certain payments for acquisition of know-how relating to the manufacture of Ammonium Nitrate for use in its business. The relevant agreements were entered into on the following dates: (i) UNDE, GmbH, dated 2-12-1987. (ii) NORSK HYDRO, dated 2-12-1987. (iii) ADOLOF PLINK SOHONE, dated 27-1-1988. (iv) UHDE INDIA LIMITED, dated 2-12-1987. (v) BHALLA SPECTRUM INDUSTRIES LIMITED. A statement showing the amounts paid during the relevant previous year and the receipts in respect thereof are enclosed. At the time of filing of original return, two amounts paid were inadvertently omitted to be claimed as a deduction and the same were included in the revised statement enclosed. The total amount paid shown in the enclosed statement tallies with the amount of Rs. 51,35,725 shown in Schedule 6 to the Balance Sheet appearing at page 17 of the pub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness cannot be considered as the same business of the assessee. For acquiring the project report for the new business, certain expenditure was claimed as revenue expenditure and it was not allowed for assessment year 1988-89. The new line of business had not gone into commercial production in the accounting year in question, and therefore, the new line of business cannot be considered as the business of the assessee till the assessee goes into commercial production of Ammonium Nitrate and Nitric Acid. The new line of business, viz., manufacture of Nitric Acid, etc., is distinct and different from the existing business of manufacture of soft drinks and aerated water. Thus, with this reasoning, he disallowed the claim of the assessee under section 35AB. 18. Having been aggrieved by the disallowance made by the Assessing Officer, the assessee came up in appeal before the CIT (Appeals). The same arguments, which were advanced before the Assessing Officer were reiterated before him. He also held that deduction under section 35AB would be admissible only if the expenditure is laid out in connection with the business carried on during the previous year, and the expenditure under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see. It is enough if it is capable of being used for the purposes of business of the assessee. That means actual working of the manufacturing unit, using the technical know-how purchased was not essential. The lump sum paid for acquisition of know-how has to be allowed in instalments beginning from the assessment year in which the said know-how is purchased and in five other subsequent assessment years. (4) The importance is being given to the purchase and not very much for use of it in business. More often than not, the use of know-how developed in Laboratories and Universities will take considerable time to be adopted for industrial use and adoption. In some cases, in order to put them to use, new machinery and new set up or factory may be required, which involves time. It was the intention of the Legislature to allow the deduction if only one condition is fulfilled. That is, the know-how is acquired for business purposes, and it was never the intention of the Legislature that it should also be put to use in business in the first year of purchase itself, though deduction is to be granted in the year of purchase itself. In the considered opinion of this Tribunal, the intention o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ultimate control of the manufacturing units is done by a common registered office, if there is complete inter-connection, inter-lacing and inter-dependence and dovetailing of different business activities, then there are a number of decisions which held that the activity of running multiple units constitute one and single business only. Thus, the question in this case is whether the assessee who has been manufacturing soft drinks deriving profits in that venture, as a measure of diversification of its activities, started setting up of a factory for manufacture of Ammonium Nitrate and Nitric Acid, is entitled to the deduction under section 35AB. Though the said factory has not yet started manufacture or business by virtue of the fact that the same assessee has been running the other unit of manufacturing soft drinks, etc., can it be considered to be carrying on the same business, or not. 22. In this connection, attention of this Tribunal is invited to the following decisions: (1) Coromandal Fertilizers Ltd.'s case (2) Prithvi Insurance Co. Ltd.'s case (3) Produce Exchange Corpn. Ltd.'s case (4) India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC) (5) Setabganj Sugar Mills Ltd.'s c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowable deductions under section 37 and section 36(1)(vii), respectively. The factors or the basis of evidence which were duly taken into consideration in coming to the conclusion that several businesses which were noted above, constituted a single business are the following as per the head note of the decision at pages 66 and 67: "Held, that the board of directors of the assessee, which was a private company, was in overall control of all the five business activities which were owned and carried on by the assessee. There was a common fund from which the necessary capital and working funds were supplied to the various business activities. The ultimate gain or loss of the business was also worked out by a consolidated profit and loss account and balance sheet. The source of finance for running the various businesses was thus one and the same and there was consolidation of accounts for the purpose of ascertaining the ultimate working result of the business carried on by the assessee. Merely because there was a separate staff, which was not inter-transferable, the unity of control was not affected since, at the apex, there was common management and administration with an overall con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age in Srikakulam District, whereas the unit manufacturing the soft drinks and aerated water was situated in Vizag. However, according to the decision quoted above, it is not a matter of any consequence and that factor does not run counter to inter-lacing inter-dependence, unity of control, management, etc. So also, the maintenance of different accounts or maintenance of different staff for two separate units cannot also have any significant consequence. 25. In Coromandal Fertilizers Ltd.'s case the facts which came up for consideration before the Tribunal are that the assessee initially incorporated in 1961 for manufacture and sale of fertilisers. In 1979, its objects clause was amended and the assessee was authorised to start a cement plant. The assessee raised capital from the financial institutions, several works of the plant were started in 1981 and the first batch of machinery arrived in January 1982. For assessment year 1982-83, assessee claimed deduction in respect of amounts spent towards interest and commitment charges payable to financial institutions, even though the amounts were not debited to the Profit & Loss Account. The question is whether the assessee is entitled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stan Machine Tools Ltd. (No. 1) [1989] 175 ITR 212 (Kar.) the High Court held that the Tribunal was correct in holding that the expenditure incurred by the assessee in connection with its new divisions was deductible as business expenditure. 27. Having regard to the facts and circumstances of the case, and also having regard to the innumerable decisions, we are of the opinion that the business of manufacture of soft drinks and aerated water, as well as the business of manufacture of Ammonium Nitrate and Nitric Acid should be considered as one and the same business carried on by the assessee. 28. It is further contended that the provisions of section 35AB were intended to give special deduction as special incentive to persons who are already in business. This provision was introduced under Finance Act, 1985. Memorandum explaining the provisions of the Finance Bill, 1985, and the relevant provision, namely section 35AB and it reads as follows: "44. It is proposed to insert a new section 35AB in the Income-tax Act to provide that any lump sum consideration paid by a taxpayer for acquiring any know-how for use for the purposes of his business will be allowed as deduction by spreadin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the cases arising before the lower authorities, is apt to be noted at this juncture. The said caution is administered in a recent decision of Supreme Court in CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297: "It is not proper to regard a word, a clause or a sentence occurring in a judgment of the Supreme Court divorced from its context as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment." It is further stated as follows: "It is neither desirable nor permissible to pick a word or a sentence from the judgment of the Supreme Court divorced from the context of the question under consideration and treat it to be the complete law declared by the Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before the court. A decision of the Supreme Court takes its colour from the questions involved in the case in which it is rendered and while applying the decision to a later case, courts must carefully try to ascertain the true principles laid down by the decision." We are of the opinion that this caution administered by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 as deduction. We reverse the orders of the lower authorities in this regard and direct the Assessing Officer to grant deduction of Rs. 14,55,556. 31. to 37. [These paras are not reproduced here as they involve minor issues.] 38. The last of the issues that remains for consideration is the deduction claimed under S. 80HHC. The amount of deduction claimed is Rs. 5,17,695. The assessee also claimed a sum of Rs. 2,24,679 towards service charges paid to V.B.C. Exports Ltd. as deduction. However, both the claims were denied by the Income-tax Officer. The brief facts with regard to the claim of the assessee under S. 80HHC may be stated as follows: (a) V.B.C. Exports Ltd. is a sister concern of the assessee and it is engaged in the processing as well as export of shrimps. The assessee claimed to have exported 47.1 metric tons of Shrimps worth Rs. 54.88 lakhs to several countries including Japan. The assessee entered into an agreement with V.B.C. Exports on 4-3-1989. Copy of the agreement is provided at page 1 of 2nd paper-book filed by the assessee. We shall discuss the clauses of the agreement later. For the present, it is enough to note that the claim of the assessee was that V.B.C. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the allotment of Exporter Code No. HV 000085 dated 8-3-1989 was assigned to the assessee at page 25 of the paper-book the provisional certificate as exporter was given to the assessee by the Marine Products Export Development Authority (MPEDA), dated 7-11-1991 was provided. The said authority certified Invoice No., its date, the quantity exported and the FOB value of the said consignments. Therefore, it is extracted: "To whomsoever it may concern--- M/s. V.B.C. Industries Ltd., A-4 Unit, Industrial Estate Visakhapatnam-530007 is a Registered Exporter with the Authority. The Registration Number assigned to them is 2022/MPEDA/REGN/VSRO/V-2/89, dated 5-7-1989. Prior to the issual of permanent Registration as an Exporter with the Authority, the party has exported 39,940 Kgs. of Frozen Shrimp worth Rs. 56.17 lakhs on the basis of ad hoc permits issued by the authority, the details of which is given below: 1. Invoice dated 10-3-1989 9120 Kgs. Rs. 20,88,121.48 2. Invoice dated 10-3-1989 8480 Kgs.&n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Branch, Visakhapatnam is provided. It is dated 30-3-1989 and it is stated that 323 cartons of fresh frozen shrimps were shipped on 25-3-1989 in MV Indian Courier to M/s. Mitsubishi Corporation, Tokyo, Japan. They have enclosed all documents duly signed and the SBI was requested to negotiate the documents and credit the sale proceeds to VBC Industries Limited, Packing Credit Account No. CC/2/166, for and on behalf of VBC Industries Ltd. At page 39, a copy of the Bank credit advice was provided. At page 41, a certificate of Exports issued by the State Bank of India was provided. At page 43, copy of the Debit Note sent by VBC Exports Limited to the assessee-company claiming service charges and compensation calculated at 4% FOB value of exports of marine products was given. This would show that they have been claiming charges and compensation at 4% on Rs. 14,90,054.97 which comes to Rs. 59,602.20 from the assessee-company. The Debit Note is dated 30-3-1989. At page 45 is the statement of exports made by the assessee-company during the years 1988-89 and 1989-90 as also 1990-91. This would show that whichever exports were made by the assessee-company for the financial years 1988-89 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he hands of the sister concern was calculated at Rs. 54,76,920 as against Rs. 54.88 lakhs shown as the cost of material exported. Thus, the sister concern was found out to have earned profit of Rs. 2,93,689 (Rs. 57,70,609 - Cost of material Exported (-) Rs. 54,76,920 - Cost of production). Before the Assessing Officer, the resolution passed at the Extra Ordinary General Body Meeting of the assessee-company, on 4-3-1989 was submitted in which in the objects under Clause III sub-clause 58 in the memorandum of Association of the assessee-company, export of fish and prawns were added as objects of the assessee-company. The Assessing Officer stated that in the accounting year relevant to assessment year 1989-90, the sister concern of the assessee incurred huge losses amounting to Rs. 1,21,91,355 was accepted by the Revenue under section 143(1)(a) vide his order dated 21-3-1990. According to the Assessing Officer, since it has incurred losses during the year, there is no scope for the sister concern of the assessee to claim deduction under section 80HHC. Therefore, a colourable device of tax avoidance was evolved by the assessee with the help of its sister concern. The reasons for coming ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d goods from the sister concern. The Assessing Officer concluded that by this mere agreement, the assessee raised a facade of export sales. He held that the export agreement dated 4-3-1989 is a sham one, intended only to reduce the business profit by paying the excess of Rs. 2,93,689 towards purchase and Rs. 2,24,679 towards service charges and compensation to the sister concern with the ulterior motive of staking claim for deduction under section 80HHC and in a bid to reduce its total income by Rs. 5,17,695. He held that the principle laid down by the Supreme Court in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 is to be applied to the facts of this case. Ultimately, while refusing deduction under section 80HHC the ITO also added the total sum of Rs. 5,17,695 (Rs. 2,93,689 + Rs. 2,24,679) to the total income computed. 42. The learned Commissioner of Income-tax (Appeals) had in fact confirmed the order of the Assessing Officer. The reasons given by him at para 12 of his order are the following: (1) The agreement does not bring into existence a buyer/seller relationship between the assessee and the sister concern. (2) It does not specify the cost of the goods transacted. (3) As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... already extracted in the orders of the learned Commissioner of Income-tax (Appeals) and therefore, we do not want to burden the record further, extracting them once again. 45. The learned Commissioner (Appeals) held in his impugned orders that: (1) The agreement does not bring in to existence a buyer/seller relationship between the assessee and VBCE. (2) The agreement does not specify the cost of the goods transacted. (3) As per articles 3 & 5 of the agreement the entire cost of exports is home by VBCE and the entire export proceeds is also to be appropriated by VBCE. (4) The whole aim of the agreement appears to be to get recognition as an Export House and to get the benefit of deduction under section 80HHC of the Income-tax Act. (5) The assessee did not take any risk in buying and selling. Its name only was used and for the benefit of getting recognised as an export house and for getting benefits under section 80HHC, it had agreed to pay service charges to the VBCE at 4% FOB. According to the learned Commissioner of Income-tax (Appeals), the whole commercial risk of exporting marine products was on VBCE and at the same time it was divested of a legal benefit of deduction wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; (ii) IRMAC (Industrial Raw Materials Assistance Centre) facilities for import of raw materials and components (Non-canalised items only) for supply to Actual users off-the-shelf, as per the provisions contained in para 121 of this Policy; (iii) Import of one PBX/PABX (including electronically operated) in a year for use in its office(s); (iv) Import of office machines as provided in para 118 of this policy; and (v) issue of Advance licences and Import-Export Pass Books against legal undertaking in lieu of bank guarantee and exports against such licences issued to other manufacturer-exporters. Now to get eligibility to get recognised as export house, is given at para 212 of the Policy, an extract of which was given at page 53 of the second paper-book which is as follows : "212(1). The eligibility for the grant of Export house/Trading House certificate shall be determined on the basis of the Net Foreign Exchange Earnings (NFE earnings) from the exports actually made in the preceding three licensing years termed as the 'Base Period'. The earnings from (i) the exports of products specified in Appendix- 12, (ii) re-exports as defined in para-174(1) of this policy, (iii) 'Deemed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement at all though there may be chances for VBC to get some profits, we are unable to agree with the lower authorities. When the profits under section 80HHC is to the tune of Rs. 5,17,000 as against the payment of Rs. 2,24,679 towards service charges payable to VBCE anybody can clearly see whether it is advantageous to the assessee or not. Thus, we hold that entering into an agreement, the assessee in fact, stood to gain rather than lose anything. Another criticism is that the assessee did not undertake any business risk and the whole risk is to be borne by the VBCE, its sister concern. This, in our opinion is also not well founded. Clause 12 of the agreement contemplates that the assessee should purchase marine products in the course of the export on board the ship outside the custom frontiers of India at C&F prices obtained by the assessee against export orders. Thus, sale would be complete and title of the goods exported shall pass to the assessee. By the time the goods are exported, the owner of the goods exported would be the assessee only and not VBCE. After the custom frontiers of India were crossed and after the sale of the marine products takes place on C&F prices, ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ason that if at all it is a clandestine arrangement made only to evade tax, then VBCE would have shown anxiety to show all the exports it had made or majority of the exports which it had made during the relevant accounting year in the name of its sister concern only. In the financial year 1988-89, VBC Exports had directly made exports whose C'F value was Rs. 8,04,08,614. In the total exports, only a paltry amount of Rs. 57,70,607 represents value of exports made by VBC on behalf of others which is described as (route through exports). The value of the exports through VBCE as well as route through exports were given at page 49 of the second paper-book. Thus the theory that the agreement dated 4-3-1989 must have been designed only to see that the claim of 80HHC should be made successfully by the assessee in respect of VBCE does not appear to be true or correct. This circumstance adds to the genuineness of the agreement, rather than its being considered as sham. Another criticism levelled against the agreement was that because VBCE was incurring losses in the year of account there was no scope for it to claim deduction under section 80HHC and therefore, the agreement is a device in or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gard to the same may be supplied by parol evidence. In this connection, we came across at page 813 of Sarkar's Law of Evidence as follows: "Though parol evidence is inadmissible to contradict a written agreement, it may be offered to ascertain an independent collateral fact explanatory of the instrument. Indeed, it appears that the rule will not be infringed by adducing extrinsic evidence even to contradict a deed or other writing, provided the contradiction be confined to the details of formal matter, which may well be presumed not to have been stated with careful precision. For instance, parol evidence has on several occasions been admitted to contradict the recited date of a deed, order or other instrument. In Refell V. R. 35 IJP & M 121, the court of probate admitted parol evidence to prove that a will bearing date 27-2-1855, was in fact executed in 1865 and had consequently invoked another will that was made in 1855 (Tays 1150 Ros N P p 21). Thus the date of execution of a deed may be contradicted (Exp. Slater, 76 LT 529, Jayne v. Hughes, 10 EX 430 or if omitted, supplied (Labb v. Stanley, 5 QB 574; Phip 11th Ed., p. 809. Dates of documents are therefore regarded as formal pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Venkatesa Iyer, 4th Edition, Vol. I at pages 388 and 389. The learned author had dealt with the English Law and then came to discuss the Indian Law at both the pages as follows : "Greer L.J., also observed: 'The obligation to pay reasonable remuneration for the work done when there is no binding contract between the parties is imposed by a rule of law and not by an inference of fact from the acceptance of services or goods'. Similarly, where there is no concluded contract but services rendered are not intended to be gratuitous, a claim on the basis of quantum meruit may be sustained. In Way v. Latilla, where the arrangement was to share in the profits, the House of Lords upheld the right to quantum meruit and Lord Atkin said: 'While there is no concluded contract as to the remuneration it is plain there existed between the parties a contract of employment under which Mr. Way was engaged to do work for Mr. Latilla in circumstances which clearly Indicated that the work was not to be gratuitous. Mr. Way was therefore entitled to a reasonable remuneration on the implied contract to pay him quantum meruit.' "The law in India is similar. In Alopsi Parshad & Sons Ltd. v. Union of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is filed along with the paper-book. At page 7 giving an account of the activities of the assessee to the general body of the share-holders, the assessee had stated as follows: "During the period under review your company has taken up the business of exports of shrimp and exported shrimps to the tune of Rs. 57.70 lakhs." In Schedule 19 which is appended to the Profit & Loss Account, a sum of Rs. 57.70 lakhs was stated to have been incurred for purchase of finished goods (shrimps) and the quantum of shrimps purchased was stated to be 39,940 Kgs. Therefore, either the quantity of exports or the exports were really made can never be doubted in view of the bulky evidence on record which clearly proves that the assessee is a genuine exporter in that year, secured orders for export but the exports were got made through its sister concern VBCE after paying 4% FOB value. The document filed on behalf of the assessee is replete with evidences which establishes the factum of exports by the assessee. Therefore, when the payment of consideration is correct, we fail to understand how such an agreement can be termed as sham and collusive brought out only for the purpose of avoidance of tax. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble where there is no profit from the export business was also untenable because the reference in section 80AB is only to the gross total income and not to the profit from the export business alone. This is self-evident from a reading of section 80AB and it has been so held by the Delhi Bench of the Tribunal in the case of Expo Machinery Ltd. v. IAC [1989] 31 ITD 41. Thus accordingly, the expenses incurred for the export business as well as the deduction claimed under section 80HHC had to be allowed to the assessee company in computing the total income." It is argued that the facts of that case are very near to the facts of the present case before us. As can be seen from the extract given above, the disallowance of deduction under section 80HHC was on the ground that the exports were made through the sister concern and it was only an arrangement to avoid tax payment. Having regard to the bulky evidence on record there also, the Tribunal held that the entire documentation establish that the export business was done by the assessee and the sister concern acted as an agent of the assessee. Another contention taken was that deduction under section 80HHC cannot be allowed when there ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for deduction under section 80HHC was rejected by the Income-tax Officer, on the ground that exports were undertaken through export house which was not entitled for deduction. After going through the evidence put on record on behalf of the assessee, the Tribunal came to the conclusion that the assessee is the real exporter and the export house was a mere agent. The facts of that case are found to be different from the facts on hand and therefore, the said decision may not be of much help to the assessee except to the extent that some of the agreement terms are similar to the agreement terms under consideration. The learned counsel for the assessee had brought to our notice the Madras High Court's decision reported in Addl. CIT v. Gordon Woodroffe & Co. (Madras) (P.) Ltd. [1977] 110 ITR 880. In that case the assessee was an exporter of tanned hides and skins. It had entered into an agreement with foreign firms to represent it as agents in the foreign markets on 2% commission. Foreign agents placed orders on the assessee. The assessee in its turn was purchasing the goods locally. The local businessmen only despatch goods directly to foreign agent, and the assessee was getting 1% dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 was made. The Income-tax Officer accepted the said partial partition on 28-12-1979 in the assessment for the assessment year 1979-80. In the reassessment for the assessment year 1980-81, the Income-tax Officer included the income relating to the assets which were partitioned in the hands of the HUF in view of section 171(9) of the Act. The assessee filed a writ petition contending that the income from the property which was the subject matter of partial partition should not be treated as income of the HUF, that section 171(9) was violative of Articles 14 and 265 of the Constitution, etc. The Revenue contended that section 171(9) was only for the limited purpose of levy and collection of income-tax and that section 171(9) was enacted as a measure to prevent tax evasion and must, therefore, be upheld having regard to the decision of the Supreme Court in McDowell & Co. Ltd.'s case. In that connection, the Madras High Court held that a legitimate transaction which does not amount to a dubious device is not hit even by the new approach adopted by the English Courts and by the Supreme Court in McDowell & Co. Ltd.'s case. Again, our attention is drawn to the decision of the Supreme Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X
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