TMI Blog1991 (3) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment year 1976-77. (b) Claim for liquidated damages amounting to Rs. 6,00,638 payable to the Department of Defence Supplies for breach of contract for the assessment year 1975-76 and consequential addition for the assessment year 1977-78. (c) Claim for initial depreciation on electric generators installed in the factories for the assessment year 1975-76. (d) Liabilities becoming time-barred and written back for the assessment years 1976-77, 1977-78 and 1978-79. We shall first take up question No. 1 in Income-tax Reference No. 359 of 1982, questions Nos. 1, 2 and 3 in Income-tax Reference No. 42 of 1990 and question No. 2 in Income-tax Reference No. 73 of 1985, together as they deal with the same issue. The said questions are as follows : Question No. 1 in I.T.Reference No. 359 of 1982 : " Whether, on the facts and in the circumstances of the case and on a proper interpretation of the amendments made to the payment of Bonus Act, 1956, and the Income-tax Act, 1961, with effect from September 25, 1975, the Tribunal was right in holding. (i) that the provisions of the Payment of Bonus (Amendment) Ordinance, 1975, including those contained in section 29 thereof which ame ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the provision of Rs. 8,02,086 under the head 'Provision of Bonus' for earlier years written back during the year under appeal should not be added back even though the assessee has contested the Tribunal's order for the assessment year 1975-76 involving this issue?" The facts relating to the aforesaid five questions are that, for the assessment year 1975-76, the assessee claimed that it should be allowed deduction at 20% of the wages as bonus. The Tribunal, however, allowed minimum bonus statutorily payable at 4%. The assessee actually paid the minimum statutory bonus of 4% and the extra 16% which it had claimed in the assessment year 1975-76 was written back by it in the assessment year 1976-77 and offered for taxation. The claim for deduction of the said extra 16% bonus was disallowed by the Tribunal for the assessment year 1975-76 and, consequently, the same amount written back in the previous year relevant to the assessment year 1976-77 has been deleted from the assessment in the assessment year 1976-77. At the hearing, Mr. Bajoria, learned counsel for the assessee, has submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the addition of Rs. 6,00,638 being liquidated damages debited as provision in the assessment year 1975-76 but written back in the accounts in the assessment year 1977-78 as the provision is no longer- required ? " The controversy is with regard to the claim for deduction of Rs. 6,00,638 for the assessment year 1975-76 on account of liquidated damages which, according to the assessee, became payable on account of the breach on its part of the contract entered into with the Department of Defence Supplies. The deduction for the said sum was not allowed by the Tribunal on the ground that it did not accrue to the assessee in the relevant previous year. Ultimately, however, the assessee did not have to pay the said sum of Rs. 6,00,638 on account of damages to the Department of Defence Supplies and, accordingly, it wrote back the said sum in the previous year relevant to the assessment year 1977-78 and offered the same for taxation. The Tribunal, in view of disallowance of the claim in the assessment year 1975-76, deleted the addition made in the assessment year 1977-78 when the said sum was written back in the accounts. Mr. Bajoria, learned counsel for the assessee, has submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2(1)(vi) of the Act. The Income-tax Officer disallowed the claim on the ground that the assessee was not engaged in the business of generation and distribution of electricity but was engaged in the business of manufacturing electrical meters and defence stores and as such it was not entitled to claim such initial depreciation. On appeal, the Commissioner of Income-tax (Appeals) accepted the contention of the assessee that, although the electricity generated by it was used for captive consumption, still it could not be said that the assessee was not engaged in the business of generation of electricity and as such the claim of the assessee for initial depreciation was valid. On appeal by the Income-tax Officer against the order of the Commissioner of Income-tax (Appeals), the Tribunal held that the assessee was not engaged in the business of generation of electricity since (i) it had not sold such electricity to outsiders and had used it captively, and (ii) the business of generation of electricity and electric meters and Defence Stores constituted the same business. The Tribunal reversed the order of the Commissioner of Incometax (Appeals) and disallowed the claim of the assessee fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sumption, Mr. Bajoria contends, it cannot be said that the assessee is not engaged in the business of generation of electricity. According to him, the concept of " business " does not rule out cases of captive consumption. It does not require that the transaction must be with third parties. It is contended that merely because an article produced or manufactured is not sold to third parties but used by the assessee for its own business requirement, it cannot mean that the assessee is not engaged in the business of manufacture or production of such article captively consumed. Mr. Bajoria has relied on several decisions in support of his contention that although the assessee is not engaged in the business of generation and distribution of electricity, the electricity generated by it through the generators is used for its captive consumption and as such it cannot be denied the benefit of initial depreciation. The first decision cited by Mr. Bajoria is in the case of CIT v. Hindusthan Motors Ltd. [1981] 127 ITR 210 (Cal). There the question involved was about allowance of development rebate under section 33(1)(iii)(c)(A)(a) of the Act. The provisions of the said section are analogou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme Court expressed the view that the expression attributable had a wider amplitude than the expression derived from, thereby intending to cover receipts from sources other than the actual conduct of the business of the specified industry. Therefore, whatever total profits the assessee-company was making were certainly attributable to one of the types of transactions contemplated by the Schedule. Here the assessee was carrying on the operation of assembly and also manufacture. As such, the profits, and gains of any operation are entitled to relief or rebate as contemplated under the section. The assessee is also carrying on the operation of the manufacture of automobile ancillaries and the total profits and gains of the assessee were attributable to some of the operations being carried out in production and manufacture of automobile ancillaries. If that is the position, then, the very fact that the assessee was using part of the automobile ancillaries produced by it and used for itself and not for sale in the market separately would not deprive the assessee of the relief granted on the plea that one could not trade with oneself or earn any profit in respect of transaction wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The next decision cited is in the case of CIT v. Orient Paper Mills Ltd. [1974] 94 ITR 73 (Cal). In this case, the assessee was engaged in the business of manufacturing paper. For the manufacture of such paper, it was purchasing caustic soda from the market. It decided to set up its own plant for manufacture of caustic soda and the soda so manufactured was used by it captively for the manufacture of paper. The assessee's claim for allowing relief in respect of caustic soda plant as a new industrial undertaking was rejected on the ground that the assessee was captively consuming the said caustic soda and what it was purchasing from the market earlier was now being produced by it and it was a mere case of reconstruction of its existing business. The contention of the Revenue was rejected by this court and it was held that the assessee was entitled to claim relief in respect of its caustic soda plant as a new industrial undertaking. The fact that the caustic soda produced was captively consumed and not sold to third parties did not stand in the way of holding that the assessee was engaged in the business of manufacturing caustic soda in its new industrial undertaking. The said decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... May 31, 1974, in a small-scale industrial undertaking (as defined) for manufacture or production of any article or thing. It will be evident from the scheme of the Act that initial depreciation is allowable in respect of machinery and plant installed in certain selected industries after May 31, 1974. The object of the introduction of the said provision Was to encourage and give an impetus to the business of operation of ships or aircraft, generation and distribution of electricity or any other form of power and 24 specified items mentioned in the Ninth Schedule which are connected with industrial development. Thus, the object of the provision is to give an impetus and encouragement to the industry which is engaged in the business of generation or distribution of electricity or any other form of power. Admittedly, the assessee was not engaged in the business of generation or distribution of electricity or any other form of power. Unless a licence is obtained by the assessee for generation or distribution of electricity under the Indian Electricity Act, 1910, and the Electricity (Supply) Act, 1948, it cannot generate or distribute electricity. As for example, CESC Ltd. is engaged i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf of the assessee that an industry is not known by the raw material which it uses but it is known by the finished product which it produces. For example, a glass industry is not known as a sand industry which is the basic raw material for the purpose of production of glass water nor a textile industry is known as cotton industry, because textile is manufactured from cotton. Similarly, though the company may be manufacturing nylon-6 from caprolactum, yet it could only be considered in its broad sense as petrochemical industry." Electricity cannot be taken to be a raw material. It is necessary to operate machines or plants. It has got nothing to do with the ultimate product that is produced. If this contention is accepted that electricity is raw material for the production of articles or things or electricity as such is generated for captive consumption, then all the industries irrespective of the articles or things produced would be eligible to claim investment allowance wherever and whenever generators are installed. This is not a case where goods have been manufactured or produced for captive consumption. If a car manufacturer instals a plant for manufacture of tyres, batteri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or a component or ancillary of the end product manufactured by the assessee. Mr. Bajoria has commented on the finding of the Tribunal that the business of generation of electricity and manufacture of electricity meters constitute one and the same business. According to him, the Tribunal had created a confusion in holding that the activity of generating electricity and manufacture of electricity meters and Defence stores constitute the same business. According to Mr. Bajoria, because two business activities constitute the same business, the nature and identity of such different businesses are lost and only one of them exists. The question is not whether the assessee was carrying on one or two different businesses. The question is whether generation of electricity can be said to be a business activity of the assessee in the sense in which it is commonly understood. In section 2(13) of the Income-tax Act, 1961, " business " has been defined as under : " 'Business ' includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture." The words used in this definition are wide, but underlying each of them is the fundamental id ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich were time-barred was not assessable?" I. T. Reference No. 38 of 1987 For the assessment year 1977-78 : " Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in deleting the addition of Rs. 83,174 representing liabilities written back in the assessment year .1977-78 ? " For the assessment year 1978-79 : " Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the addition on account of liabilities no longer required and so written back in the assessment year 1978-79 ? " The facts out of which the question for the assessment year 1976-77 arose are that, during the year under reference, the assessee wrote back certain trade liabilities amounting to Rs. 37,555 on the ground that the liabilities had ceased to exist, being time-barred. The Income-tax Officer, invoking the provisions of section 41(1) of the act, added the same to the income of the assessee. Against the addition made by the Income-tax Officer, the assessee came in appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals), following the decision of this court in CIT v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It appears that the Tribunal, while drawing up the statement of case, has mixed up the facts relating to the other issues involved regarding claim for liquidated damages made in the earlier assessment year which had been disallowed in such earlier year and written back in the later year. The issue involved, however, is with reference to the unilateral writing back of the past liabilities on the part of the assessee to the extent of Rs. 83,174 for the assessment year 1977-78. It is not a case of disallowance of any expenditure in the earlier years and the amount relating thereto being written back and being taxed in the later assessment year. The amounts representing the said sum of Rs. 83,174 were allowed in full as deduction in the respective assessment years and there is no question of it not having been allowed in the earlier years or any dispute pending before this court on the question of their allowability. As indicated, the issue involved is with reference to the writing back of the sums which have been allowed in the earlier years with reference to the provisions of section 41(1) of the Act on the ground that there has been a remission of cessation of liability. Unfortun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of liabilities written back. The point at issue stands concluded by the order of the Tribunal in the case of the assessee for the assessment year 1976-77 in ITA No. 343 (Cal) of 1983, dated April 11, 1984. Respectfully following the aforesaid order of the Tribunal, we would uphold the order of the Commissioner of Income-tax (Appeals) on this point. " For the assessment year 1978-79, the Income-tax Officer has recorded the facts relating to existing liabilities written back and sought to be taxed under section 41(1). He recorded thus : "Profit and Loss Account has been credited with a sum of Rs. 3,12,984 being excess liabilities written back. It is claimed that, out of this amount, a sum of Rs. 55,625 is to be ignored for the purpose of computation of total income on the ground that the company will have to pay the amount to the, creditors on demand by the creditors. The claim of the assessee is not acceptable. The amount of Rs. 55,625 has been written back as the liability has ceased to exist on becoming time-barred. According to the assessee, writing back is the result of the assessee's unilateral action and hence the amount is not income under section 41(1). 1 do not agree wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d circumstances, the amount of Rs. 83,174 was treated by the Income-tax Officer as income under section 41(1) and included the same in the total income of the assessee. " It would thus be evident that the facts stated in the statement of case by the Tribunal are erroneous relating to these two assessment years 1977-78 and 1978-79. There is no question of any sum not having been allowed in the earlier years which was being written back in these years and which was sought to be taxed. As already stated, the amount in question had been allowed as deduction in the earlier years and these sums were being unilaterally written back on the ground that the liabilities had become barred by limitation. Since the details of the nature of the liabilities and the amounts written back have not been incorporated in the statement of case by the Tribunal, we directed the parties to produce before us the details. By consent, the statement which has been furnished has been looked into by us. From the details, it appears that the amounts related to supply of raw materials, components, stores and spare parts for the different divisions of the company. Very small amounts ranging from Rs. 4.55 to Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orted as Kesoram industries and Cotton Mills Ltd. v. CIT [1992] 196 ITR 845), where judgment was delivered on March 1, 1991, the contention of the assessee cannot be accepted. It has been held that the onus is upon the assessee to establish that, in law, it would not be entitled to treat the amounts written back as part of its income or its liability did not cease. Whether or not the liability of the assessee has been fully discharged is within the special knowledge of the assessee, and it has to prove that, in fact, the liability subsists. When the assessee itself comes to the conclusion that the amount in question would not be claimed by the concerned persons and does not take such amount to the reserve account but writes it back in the profit and loss account, the reasonable inference that will follow from the facts and circumstances and the conduct of the assessee is that the amount which was provided for was not in fact necessary and it was an excess provision. No longer was there any liability. Another fact is also relevant. It has been held that smallness of the amount involved in individual cases would furnish a reasonable basis for holding that such creditors were not inte ..... X X X X Extracts X X X X X X X X Extracts X X X X
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