TMI Blog2003 (10) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... stions of law: "(a) Whether the Tribunal was right in law in holding that the liability of the appellant to ONGC in respect of gas consumption subsequent to January 29, 1987, was contingent liability and was not allowable though the Gujarat High Court had dismissed the writ petition of the appellant challenging the said levy by its judgment delivered in financial year 1993-94 and the Supreme Court had not granted any stay and had earlier by its decision dated May 4, 1990, for the period prior to January 29, 1987 upheld the right of ONGC to demand the price as per their decision which was not open to challenge by the appellant? (b) Whether the Tribunal was right in law in holding that the interest amount claimed by the ONGC in respect of arrears of its claim for gas liability referred to in question No. (a) was also not allowable as the same was contingent liability? (c) Whether the Tribunal was right in law in holding that the profits of Panpharma Division for the purposes of computing the deduction under sections 80HH and 80-I should not be computed on the basis of accounts submitted by the Panpharma Division but after apportioning indirect expenses incurred by the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oresaid amount was also held to be not allowable. The Assessing Officer recomputed the profits of Panpharma Division for the purpose of arriving at the figure which should be permitted as deduction under sections 80HH and 80-I of the Act. Similarly, for the purpose of computation of deduction under section 80HHC, the Assessing Officer held that income relatable to rent, computer charges, service charges, miscellaneous income and insurance claim were required to be reduced before arriving at the figure at which deduction under section 80HHC could be allowed. The appellant carried the matter in appeal before the Commissioner of Income-tax (Appeals) who for the reasons given in his order dated February 28, 1997, confirmed the action of the Assessing Officer. Being aggrieved, the assessee carried the matter in appeal before the TribunaL The Tribunal for the reasons stated in its order dated August 9, 1999, confirmed the action of the Assessing Officer on all the four counts and, hence, the present appeal. I. Liability towards ONGC Mr. K.H. Kaji, the learned advocate appearing on behalf of the appellant, submitted that the appellant had claimed deduction of payment for supply of g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... written contract in existence there is no denial of the fact that ONGC was supplying the gas and the appellant-company was consuming the same, may be on the basis of an oral contract or understanding. However, the liability in question cannot be termed as a statutory liability but was a contractual liability. The case of Kedarnath Jute Mfg. Co. Ltd. [1971] 82 ITR 363 (SC) was a case pertaining to liability incurred on sales and it was in that context that the apex court held that the liability to sales tax arose the moment the dealer made either purchase or sale. The appellant follows the mercantile system of accounting. In the case of CIT v. A. Gajapathy Naidu [1964] 53 ITR 114, the Supreme Court of India has enunciated the law in relation to accrual of income in the following terms: "When an Income-tax Officer proceeds to include a particular income in the assessment, he should ask himself, inter alia, two questions, namely: (i) what is the system of accountancy adopted by the assessee, and (ii) if it is the mercantile system of accountancy, subject to the deeming provisions, when has the right to receive that amount accrued? If he comes to the conclusion that such a right ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discharged by the appellant. In relation to this ground also the Assessing Officer, the Commissioner of Income-tax (Appeals) and the Tribunal have disallowed the claim of the appellant considering the same to be a contingent liability. In the light of what is already stated hereinbefore in relation to the principal liability regarding the gas consumed by the appellant and supplied by ONGC, there is no good reason to take a different view of the matter in relation to interest payable on the arrears of unpaid liability towards consumption of gas. In the result, as far as this ground of appeal is concerned no interference is called for in the absence of any infirmity in the order of the Tribunal. III. Computation of deduction under sections 80HH and 80-I. The appellant-company claimed deduction of the statutory percentage from profits and gains derived from the industrial undertaking, viz., Panpharma Division located in Panch Mahals district. There is no dispute that this division is entitled to deduction under sections 80HH and 80-I of the Act as it fulfills all other conditions stipulated in both the sections. According to the Assessing Officer, in order to claim: deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Assessing Officer and confirmed by the appellate authorities was not warranted. That there was no provision in the Act permitting such exercise of allocation of expenses which were not in fact incurred by Panpharma division, for the simple reason that, it was not necessary for the said division to incur such expenses for the purpose of selling its goods. Reliance was placed on the following decisions: (1) CIT v. Jiyajeerao Cotton Mills Ltd. [1995] 79 Taxman 51 (Cal); (2) CIT v. Indian Bank Ltd. [1965] 56 ITR 77 (SC); (3) CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 (SC); (4) CIT v. C. Parakh and Co. (India) Ltd. [1956] 29 ITR 661 (SC); and (5) CIT v. Win Laboratories P. Ltd. [2002] 254 ITR 187 (Bom). Mr. D.D. Vyas, learned standing counsel appearing on behalf of the Revenue, submitted that the accounts were found to be incorrect and not properly drawn and, hence, the exercise undertaken by the Assessing Officer was justified. It was further submitted that for this purpose the power of the Assessing Officer could be found in sections 80HH(6) and 80HH(7) of the Act. It was finally contended that the Tribunal had recorded a finding of fact and no substantia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in the business of the industrial undertaking or the hotel, the Assessing Officer shall, in computing the profits and gains of the industrial undertaking or the hotel for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom." On a plain reading of sub-section (1) of section 80HH it is apparent that the section permits a deduction at 20 per cent. from the profits and gains derived from a newly established industrial undertaking and the pre-condition is that such profits and gains are included in the gross total income of the assessee. Thus, primarily the gross total income of the assessee has to include profits and gains derived from an industrial undertaking; the deduction at 20 per cent. is allowable from such profits and gains. Therefore, the assessee becomes entitled to deduction under this section provided there is an industrial undertaking from which profits and gains have been derived. In other words there has to be a situation where the assessee and the industria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to whether the consideration recorded in the accounts corresponds to the market value of such goods on the date of transfer or not; and if the consideration for such transfer does not correspond to the market value of such goods as on the date of the transfer, then the profits and gains of the industrial undertaking are required to be computed for the purpose of deduction under section 80HH of the Act, as if the transfer had been made at the market value of such goods. Therefore, this sub-section itself stipulates that in cases where an industrial undertaking transfers goods to any other business carried on by the assessee the consideration has to be at the market value, and if it is not so, the Assessing Officer can substitute the figure of consideration for transfer for the purpose of computing deduction under this section. The Explanation below subsection (6) of section 80HH specifically indicates that market value means the price that such goods would ordinarily fetch on sale in the open market. The next question therefore that requires to be resolved is the case of a single buyer and where the seller sells 100 per cent. of the production of the seller to such single buyer w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case was, to say the least, misplaced. The said sub-section comes into play only in a situation where there is a transaction between the assessee carrying on the business of the industrial undertaking and some other person where in the course of the business between them it is so arranged that the business so transacted produces more than the ordinary profits in the hands of the assessee. In the present case, admittedly, there is no business transaction between the assessee and some other person. An industrial undertaking which is a separate unit vis-a-vis the assessee cannot be treated as any other person, as the phrase any other person itself indicates that it has to be a person other than the assessee. In the present case Panpharma division is not other person, and only after its profits are included in the gross total income of the appellant-assessee would the question arise as regards computing the profits and gains derived from the industrial undertaking from which deduction at the stipulated percentage can be granted. As the language employed by section 80-I of the Act is identical in terms, the aforesaid discussion in relation to claim under section 80HH of the Act wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India." Mr. K.H. Kaji, the learned advocate appearing on behalf of the appellant submitted that while defining the profits of the business in sub-clause (1) the Legislature envisaged reduction from the profits of certain items and these items have to be taken as alternative to one another, viz., anyone item could be reduced from the profits of the business. That the approach of the Revenue in reducing the profits by more than one item was not warranted by the plain language employed by the Legislature. It was submitted that use of the word "or" had to be read as one understood in the common parlance. That once 90 per cent. of any sum referred to in section 28(iiia) or section 28(iiib) or section 28(iiic) of the Act was reduced from the profits computed under the head "Profits and gains of business of profession", the Assessing Officer cannot also reduce such profits by way of receipts like brokerage, commission, interest, rent, etc. That the word "or" cannot be subs ..... 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