TMI Blog2007 (4) TMI 396X X X X Extracts X X X X X X X X Extracts X X X X ..... .26 lakhs being Renovation Modernisation levy collected by the appellant. The ld. CIT(A) erred in holding that this was a case of application of receipts and not that of diversion of income at source. 2. Without prejudice to Ground No. 1 above, the ld. CIT(A) erred in holding that the amount collected towards Renovation Modernisation levy was not in the nature of a capital receipt exempt from tax. 3. The ld. CIT(A) erred in confirming the inclusion in the income of an amount of Rs. 1,800.15 lakhs being Research Development levy collected by the appellant. The ld. CIT(A) erred in holding that this was a case of application of receipts and not that of diversion of income at source. 4. Without prejudice to Ground No. 3 above, the ld. CIT(A) erred in holding that a portion of the amount collected towards Research Development levy was not in the nature of a capital receipt exempt from tax." 3. Briefly stated, the facts of the case are that the assessee-company filed its return of income for the assessment year under appeal, i.e., assessment year 1997-98 on 1st December, 1997 declaring income at Rs. 17,141.19 lakhs before set off of losses and NIL total income after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 (SC); CIT v. Travancore Sugars Chemicals Ltd. [1973] 88 ITR 1 (SC); Somaiya Orgeno Chemicals Ltd. v. CIT [1995] 216 ITR 291 (Bom.), CIT v. Salem Co-op. Sugar Mills Ltd. [1998] 229 ITR 285 (Mad.); and, Dalmia Cement Ltd. v. CIT [1999] 237 ITR 617 (SC). Without prejudice to the aforesaid submissions, the assessee also claimed before the Assessing Officer that a portion of the aforesaid levies were to be utilized for the purposes of the capital expenditure and hence they were in the nature of capital receipts not liable to income-tax. In support of its case, the assessee filed a copy of the letter dated 15th March, 2000 issued by the Department of Atomic Energy before the Assessing Officer which stated that the aforesaid levies collected by the assessee would not form part of the general sales income of the assessee and also that they were to be kept separately and distinct from the funds of the assessee. The Assessing Officer, however, did not accept the aforesaid submissions and treated the levies so collected as income of the assessee and thus brought the same to the charge of income-tax. Rejecting the plea of the assessee that the impugned receipts collected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee to collect the aforesaid levies was issued on 11th July, 1996 and hence would be relevant for the assessment year under appeal, i.e., assessment year 1997-98. ( ii )In the letter dated 15th March, 2000 issued by the Department of Atomic Energy, a reference was made to the said Notification laying down the norms for fixing the tariff for Nuclear Power Stations. The letter further states: "This is to reiterate that the amount collected as Decommissioning levy, Research Development levy and Renovation and Modernisation levy is not to be construed as part of the general sales income of Nuclear Power Corporation of India Ltd. The amount collected as the abovementioned levies should be kept separately, distinct from the funds of NPCIL and shall be used for the specific purposes for which the levies are collected". It is evident on bare perusal of the aforesaid letter that it was issued after the expiry of the year under appeal. It is equally clear that the levies collected by the assessee were to be retained and utilized by the assessee for specified purposes. The restriction placed by the said letter was with regard to the utilization or application of the levies collected. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvest the balance amount in the said Fund in specified forms of investments; (8) income from investments so made shall also be credited to the said Fund and that any amount remaining un-invested shall be deemed to earn rupees equivalent of a 12 per cent return per annum; (9) the Board of the assessee-company shall formulate guidelines fixing investment criteria in line with the Government of India guidelines for investment of surplus funds of PSUs; and (10) the said Fund will be a capital reserve and will not be distributable as dividend. Substituting Para 1.17 contains the parameters for R M Levy, which are similar to those for R D Levy and hence they are not being specifically dealt with. 6. In support of its case that the impugned levies stood diverted at source by an overriding title before they could reach the assessee as its income, the assessee submitted, inter alia, before the CIT(A) that the R M levy ( i ) was collected together with the tariff for the sale of electricity to cover the equity portion of the expenditure on renovation and modernization activities; ( ii ) was collected on behalf of the Government and therefore the amount so collected belonged to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel for the assessee invited our attention to the factual aspects of the case and, in particular, to the stipulations contained in the letters and Notifications issued by the Department of Atomic Energy, which have already been referred to earlier in this order. He invited our attention to the observation made by the Assessing Officer at page 6 of the assessment order which reads: "To this extent, the contention of the assessee is accepted that there is diversion of title" and submitted that the Assessing Officer after having accepted that there was diversion of title ought to have excused the impugned levies from taxation. Reiterating the arguments taken by the assessee before the Assessing Officer and the learned first appellate authority, he further submitted that the assessee collected the impugned levies for and on behalf of the Central Government as its agent and hence they could not be taxed in the hands of the assessee. His next submission was that the levies collected stood diverted at source by overriding title and hence they were not taxable in the hands of the assessee. His alternative submission was that the impugned receipts were in the nature of capital receipts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at if the amount (sales tax in that case) is received by the assessee in his character as a trader, the amount would form part of his trading or business receipt and that it is the true nature and quality of receipt and not the head under which it is entered in the account books as would prove decisive and further that if a receipt is a trading receipt, the fact that it is not so shown in the account books of the assessee would not prevent the assessing authority from treating it as trading receipts. 11. He further submitted that the mere fact that the levies were set apart as reserves would not distract the position that the receipts were generated in the ordinary course of the business of the assessee and were thus business receipts of revenue character. According to him, reserve is created out of the profits/surplus generated by the proprietor over and above the capital contributed by him and therefore the reserves represent the accretion to profit and therefore are in the nature of application of profit/income after they have accrued to the assessee and not diversion of income at source in favour of any third party. 12. In support of his submissions, he has relied upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... second Notification did not alter the fact that both the levies were intended to generate financial resources to enable the assessee to use and apply them for meeting its expenditure. (4)Second Notification also did not alter the position that none of the levies collected by the assessee would be passed over or was actually passed over to the Government. Both the levies were collected and retained by the assessee for its use. What the second Notification provided was the manner in which the levies would be used by the assessee for its own purposes. (5)Second Notification specifically provided that both the levies would not form part of the tariff or sales income in the hands of the assessee. In other words, a distinction was created between the tariff forming part of sales income and the levies, which were declared to be not forming part of the tariff or sales income of the assessee. The fact however remains that the levies were required to be collected along with tariff though under a separate head. Notwithstanding the stipulation in the second Notification that the levies would not form part of sales income of the assessee, the assessee was to retain the levies collected and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nance allowance to the dependants under a decree of the court, without the maintenance allowance being charged upon the property yielding income, was held to be a case of application of income. In Sijua (Jharriah) Electric Supply Co. Ltd. s case ( supra ) the Hon ble High Court has considered the judgment in Sitaldas Tirathdas case ( supra ) and held as under : "The concept of real income or diversion of income by an overriding title was explained by Hidayatullah, J. in the case of Sitaldas Tirathdas ( supra ) at pages 374-375 : In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Whereby the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submissions, the Hon ble Supreme Court has held that income earned from that business accrued to the assessee directly which was merely applied by the State Government to discharge the obligations of the assessee. 18. On perusal of catena of decisions on the subject, it transpires that, in order to constitute diversion of income at source by overriding title, following facts must be established : ( i )There must be income arising out of the corpus held by the assessee; ( ii )A portion of the income so generated must be charged to the source itself by an overriding title in favour of a third party or, in other words, the obligation must attach to the source of income in that the income itself should not accrue to the receiver and not to the receiver of the income to apply it in a particular manner; ( iii )The income so charged must be passed on or is required to be passed or, in other words, is required to be diverted in favour of a third party before it reaches the assessee; and ( iv )The assessee, after the income stands diverted at source by a superior title, is no longer concerned with that income or, in other words, the assessee must be completely divested of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the impugned levies. 21. The alternative plea of the assessee that the impugned levies are in the nature of capital receipts has been dealt with by the learned CIT(A) in Para 15 of his order. In order to constitute capital receipt, the receipt should be traceable to loss of capital. The assessee has not collected the levies against loss of capital. They were included and collected along with the tariff in the ordinary course of business. Once they have been so collected, their ultimate destination or application will not change their character from being business receipts to capital receipts. In our view, the CIT(A) has correctly held that the impugned receipts were not capital receipts. We endorse his order. 22. We have considered all the submissions made including the judicial authorities referred to by the parties though we have not individually commented upon them as the decision in the present case has turned essentially on facts. 23. In view of the foregoing, Ground Nos. 1 to 4 taken by the assessee are dismissed. 24. Ground No. 5 taken by the assessee reads as under : "5. The ld. CIT(A) erred in confirming the disallowance of Rs. 11.04 lakhs as prior per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lated to ." 28. At the time of hearing, the ld. counsel for the assessee submitted that both the aforesaid issues were challenged before the CIT(A) but he has not adjudicated upon them and hence they should be restored to his file for adjudication. Ld. Departmental Representative also agreed with the aforesaid submission. In this view of the matter, the issues raised in both the aforesaid grounds namely ground Nos. 6 and 11 are restored to the file of the CIT(A) for adjudication in accordance with law after giving reasonable opportunity of hearing to both the parties. Ground Nos. 6 and 11 are treated as allowed for statistical purposes. 29. Ground No. 7 reads as under : "7. The ld. CIT(A) erred in confirming the disallowance of Rs. 12.29 lakhs being provision made for doubtful advances." 30. We have heard the parties. The ld. CIT(A) has dealt with the issue in Paras 25-27 of his order as under : "25. The facts of the case, in respect of the above dispute, are that the Assessing Officer, in course of the assessment proceedings, found that the appellant company had debited a sum of Rs. 12.29 lakhs on account of provision for doubtful debts. It was submitted before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowance amounting to Rs. 1,14,482 in respect of Guest House buildings included in the guest house expenses of Rs. 18.35 lakhs." 33. We have heard the parties. The ld. counsel for the assessee submits that the guest-houses are essentially in the nature of transit house for the employees and hence should not be denied deduction in view of the decision of Hon ble Bombay High Court in Greaves Cotton Co. Ltd. v. CIT [2005] 279 ITR 42 . The ld. CIT(A) has not examined the case in the aforesaid prospective. The issue is therefore restored to his file for a fresh decision in accordance with law after giving reasonable opportunity of hearing to the assessee. Ground Nos. 8 and 9 are treated as allowed for statistical purposes. 34. Ground No. 10 reads as under : "10. The ld. CIT(A) erred in not specifically directing the Joint Commissioner to allow interest under section 244A up to the date of adjustment of the refund." 35. We have heard the parties. We find that the ld. CIT(A) has restored the issue to the file of the Assessing Officer with a direction to do the needful in accordance with law. Since the CIT(A) himself has directed the Assessing Officer to decide the matt ..... X X X X Extracts X X X X X X X X Extracts X X X X
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