TMI Blog1982 (3) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... t. of India introduced incentives for encouraging export. One incentive was that the exporters will get import licences for certain items so that they can recoup their losses, if any, which they may have incurred in their export business. The other incentive was by way of tax concession and higher rebate. The assessee-company exported carpets manufactured by it. It received import licence in respect of certain dyes, chemicals, wool and wool tops because of the carpets exported by it. It incurred a loss on the export of carpets. It sold the dyes, chemicals, wool and wool tops imported by it on the strength of the import licence given to it by the Govt. of India. It earned huge profits on such sales. For the assessment year 1964-65 profit on the sale of wool and wool tops and dyes was Rs. 18,84,498, whereas the loss in the export of carpets was Rs. 15.01,586. The net profit of the company in both these business activities was Rs. 3,82,912. The Tribunal has held that there is no dispute that the export operations and the sale of import entitlements constitute the same business of the assessee. This is also clear from the fact that all the departmental authorities have allowed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be profit and gains " derived " from the sale of goods out of India. On the facts found, it is clear that the Government had granted incentives for encouraging exports. One part of the incentive was import entitlement. The assessee's case is that because of this import entitlement it was able to export carpets at below its cost price. In view of the incentive, it seems clear that the export of goods by the assessee yielded two kinds of returns. One was the sale price for the carpets and the other, receipt of import entitlements. Both these receipts Were directly due to the export of carpets. The import entitlements were assets of high value. They were given in order to enable the exporter to recoup his losses in the actual sale of the exported goods. In our opinion, both these receipts, together constituted the income derived from the export of goods. Profits arising out of their combined value would be profits derived from the export of goods. If, instead of granting incentive in kind, i.e., import licence of certain raw materials, the Government had granted an incentive in the form of cash subsidy, the cash subsidy could not but be said to be, in fact, derived from export. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, the Tribunal misconceived the true effect of the aforesaid decision of the Privy Council. In the case before the Privy Council, the nature or character of the relationship underwent a legal change. Rent was payable because of the relationship of landlord and tenant, but the interest on arrears of rent was payable because of the relationship of creditor and debtor. In the present case, the Tribunal has held that the business of export of carpets and the sale of import entitlements was part of the same business of the assessee. We have shown above that the price fetched by the export of carpets as well as the sale of the import entitlements were parts of the same business of export, Both directly resulted from the activity of export. The Tribunal went on to observe : "If the assessee instead of selling the import entitlements, imports the raw materials and utilizes them in the manufacture of carpets and sells a part of the production in the internal market, the profits arising from those sales can certainly be attributed to the benefits derived from the import of raw materials. But such profits cannot be treated as profits derived from the export of goods." This observation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x under the I.T. Act in accordance with the provisions of s. 194 of the Act and is also a company as is referred to in s. 108 of the I.T. Act, is entitled to a rebate of 30% or 35%, as the case may be, out of the income-tax rate of 80% on its income. There is no dispute that the arrangements mentioned above have made by the assessee-company. The question, however is whether the assessee is a company as is referred to in s. 108. Section 108 says : "108. Nothing contained in section 104 shall apply (a) to any company in which the public are substantially interested ; or (b) to a subsidiary company of such company if the whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year." Admittedly, the assessee is a 100% subsidiary of O.C.M. (London) Ltd. It comes within the purview of cl. (b) of s. 108, that is to say, it is a subsidiary company. But the question is whether it is a subsidiary company of " such company Such company " refers to the company mentioned in cl. (a), namely, to a company in which the public are substantially interested. Section 2(17) of the I.T. Act defines a company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ub-section (b) has three sub-clauses. Under el. (b)(i), its shares carrying not less than 50% of its voting power should be held either by the Government, a Corporation or by a company as described in sub-cl. (c) or the public. Under cl. (b)(ii), the said shares should either be subject of dealings in any recognized stock exchange in India or be freely transferable among the public and under el. (b)(iii) there is yet another condition. It will be seen that the word " and " occurs between cls. (ii) and (iii) of cl. (b). It is thus apparent that in order to come within the purview of el. (b), the company must fulfil the requirements of all the three of its sub-clauses. The Tribunal has held that the term " public " occurring in sub-cl. (d) of el. (b)(i) refers to the public in India. Admittedly, the shares of O.C.M. (London) Ltd. are all held by persons in England. The Tribunal held for this reason O.C.M. (London) Ltd. does not come within the purview of sub-clause (d) of sub-section (b)(i) ". The Tribunal further found that there was no evidence that the shares of O.C.M. (London) Ltd. were at any time during the relevant previous year subject of any dealings in any stock excha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ult of fire. They were replaced by asbestos sheets placed on iron angles and girders. This was done in order to avoid risk of fire in future. In the accounting year relevant to the assessment year 1966-67, the assessee-company incurred a total expenditure of Rs. 1,09,102. The assessee-company itself capitalized the expenditure to the extent of Rs. 76,236. It claimed the balance as revenue expenditure. In the next assessment year, the assessee incurred an expenditure of Rs. 66,583. It claimed the entire expenditure under the head " Repairs ". The ITO disallowed the claim for the assessment year 1966-67, but in respect of the assessment year 1967-68 be allowed Rs. 11,277 under the head "Current repairs " and disallowed the balance of Rs. 56,306. He held that this part of the expenditure was capital in nature. The AAC as well as the Tribunal confirmed the view that this expenditure was capital in nature. It held that the expenditure was incurred in effecting major structural alterations to the building and in making some additions to the existing buildings. This was not " Current repairs". It certainly created an enduring benefit to the assessee. The expenditure was, therefore, capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that the freshly constructed roof by asbestos sheets based on iron angles became more enduring than the previously existing roof of khaprail based on ballis, does not change the nature or character of the expenditure. The business asset namely, the building was there. It remained so, though it was made safe from fire for the future. For the Department it was argued that the assessee had initially claimed the expenditure under the head " Current repairs ". It could not be allowed to change its case and claim the expenditure under the head of " Revenue expenditure " for business purposes. This submission stands negatived by the decision of the Supreme Court in CIT v. Kalyanji Mavji Co. [1980] 122 ITR 49 (SC). In that case one of the collieries of the assessee-company bad been requisitioned by the military authorities. They occupied it for several years. After its release, the assessee spent over 11 lakhs in renovating the building, reconditioning the machinery and clearing the land of debris accumulated over a number of years. The Supreme Court held that the expenditure so incurred may not come under the head " Current repairs " and may not be entitled to deduction under s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Asst. Year Name of the person Amount to whom paid Rs. ---------------------------------------------- 1965-66 Mrs. Martin 6,000 Mrs. Wallis 4,250 1966-67 Mrs. Martin 6,000 Mrs. Wallis 3,000 1967-68 Mrs. Martin 6,000 Mrs. Wallis 1,500 1968-69 Mrs. Martin 6,000 1969-70 Mrs. Martin 6,000 ---------------------------------------------- It appears that Mr. Martin joined the company, in 1921 and retired in 1948. He was a director of the company. By a resolution of October 13, 1948, he was sanctioned a pension for his lifetime at Rs. 500 per month with effect from August 15, 1948. He, however, died in 1949. His widow, Mrs. Martin, addressed a letter to the company on February 18, 1950, whereupon the company passed a resolution on March 7, 1950, allowing Mrs. Martin a pension at the same rate, i.e., RR. 500 per month. This was payable to Mrs. Martin till the education of her children necessitated it. Mr. Wallis was another director. He d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as having been made wholly and exclusively for the purposes of the trade." In our opinion, this principle is inapplicable to the facts of the present case. Here the company by a resolution granted pension to the two widows out of regard for their personal financial difficulties. In both cases, the motivating factor was the difficulty that the widows were facing in giving proper education to their daughters. There was no element of facility to the carrying on of the business of the assessee-company acting as a trader in granting the pension to the widows. There was no indirect facility that was or could be obtained in the carrying on of the business by the grant of the pension. In our opinion, the authorities below were justified in declining to accept the claim of the assessee-company, The next submission of learned counsel for the assessee related to the disallowance of Rs. 1,50,000 as provision for sales tax liability for the assessment year 1967-68. It appears that the sales tax authorities of Bombay served notices dated March 26, 1966, on the assessee-company asking them to show cause why sales tax on the goods imported and acquired in Bombay from April 1, 1959, onwards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecause it was being disputed by the assessee nor could it be said that the assessee's claim for provision for the sales tax liability was fictitious. Undeniably, the assessee-company was maintaining accounts on the mercantile basis. In Kedarnath Jule Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363 (SC), it was observed that under sales tax laws the moment a dealer made either purchases or sales which were subject to taxation, the obligation to pay the tax arose and tax liability was attracted. Although that liability could not be enforced till the quantification was effected by assessment proceedings, the liability for payment of tax was independent of the assessment. In our view, from the mere fact that the liability was being disputed by the assessee, though according to the Sales Tax Dept. the assessee was liable, it could not be said that the liability was at this stage contingent so as to be disallowed as a business expense. Learned counsel for the assessee invited our attention to CIT v. Rajeswari Distributors (P.).Ltd. [1980] 125 ITR 618 (Cal). In that case, sales of certain categories of match boxes were not liable to sales tax. By a subsequent notification, they were m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be answered against the Department. The second question relates to the assessee's claim for deduction of Rs. 12,852 payable to assessee's principals in London towards its share of liability of the central office expenses. It appears that in order to meet its share of liability, the assessee had to remit to its head office at London every year certain amount as per the debit note received from the principals. The debit note is in terms of pound sterling. The assessee remits the equivalent value in terms of rupees with the permission of the Reserve Bank. During the year 1966, while the sanction of the Reserve Bank was pending, the rupee was devalued and as a result thereof the assessee had to incur an additional liability of Rs. 12,852. There was delay in obtaining the permission of the Reserve Bank and the same was cleared in the calendar year 1968. The assessee claimed the additional amount in the assessment year 1969-70, but the claim was disallowed by the ITO as well as by the AAC on the ground that the assessee was keeping its accounts on mercantile basis and since the devaluation came in the previous year relevant to the assessment year 1967-68, the assessee should have c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in appeal merely because similar claims bad been allowed in subsequent years because for that reason alone it could not be assumed that the prescribed conditions for justifying a claim for exemption were also fulfilled. The case is clearly distinguishable. In the present case all relevant materials were present on record. Further, there was no dispute as to the justification for allowing the deduction. The only feature adverse to the assessee was that initially it was advised that the case was admissible for the year 1969-70, and not for the year 1967-68. In the appeal, the AAC did not uphold this view. The assessee then took the claim in proceedings for the year 1967-68, but by that time, the proceedings were pending in appeal before the Tribunal. This decision is hence not helpful. This question also is answered against the Department. The last submission on behalf of the Revenue relates to donation made by the assessee-company to Khamariah Higher Secondary School and Adarsh Vidyalaya Higher Secondary School for the assessment years 1966-67, 1967-68 and 1969-70. The assessee claimed these donations as admissible business expenditure under s. 37 of the I.T. Act. Its submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mstances of the case, the Income-tax Appellate Tribunal was right in holding that the profits from the sale of import entitlements were not profits derived from the export of goods by the assessee and accordingly not entitled to tax concession provided under section 2(5)(a)(i) of the Finance Act, 1965 ? (2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in holding that the assessee is not a company as is mentioned in section 108(b) on the ground that Oriental Carpet Manufacturers Ltd., London, of which the assessee is a subsidiary was not a company in which the public are substantially interested within the meaning of section 2(18) of the Income-tax Act, 1961, and consequently not entitled to the higher rebate of income-tax as provided in clause 1(b)(ii)(b) of the proviso to paragraph F of Part I of First Schedule to the Finance Act of 1965 ? (3) Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the amounts paid to Mrs. Martin and Mrs. Wallis, widows of the ex-directors of the company, were not laid out wholly and exclusively for business purposes and w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... substantially interested within the meaning of section 2(18) of the Income-tax Act, 1961, and consequently not entitled to the concessional rate of income-tax as provided in clause 1(A)(1)(ii) of paragraph F of Part I of the First Schedule to the Finance Act, 1967 ? (3) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the amounts paid to Mr. Martin and Mrs. Wallis, widows of the ex-directors of the company, were not laid out wholly and exclusively for business purposes and were not permissible business expenditure under section 37 of the Income-tax Act, 1961 ? (4) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 56,306 is a capital expenditure and hence not allowable under section 37(1) of the Income-tax Act, 1961 ? (5)Whether, on the facts and in the circumstances of the case the Tribunal was right In holding that the sum of Rs. 1,50,000 being the provision for the sales tax liability was not a permissible deduction ?" Questions for the year 1968-69: " (1) Whether the Tribunal was right in holding that the assessee was not entitled to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h D of Part II of the First Schedule to the Finance Act, 1965, or Explanation I to Paragraph F of Part I of the First Schedule to the Finance Act, 1965, or that the assessee-company was an 'Industrial Company' within the meaning of section 2(7)(d) of the Finance Act, 1966, and the Finance (No. 2) Act., 1967, or section 2(6)(d) of the Finance Act, 1968, or section 2(6) of the Finance Act. 1969, so as to be entitled to the concessional rates of tax in the assessment years 1964-65, 1965-66, 1966-67, 1967-68, 1968-69 and 1969-70 ? (2) Whether, on the facts and in the circumstances of the cage, the Tribunal was legally correct in allowing the assessee to raise an additional ground regarding the claim of Rs. 12,852, being payment to Central Office., London, for the assessment year 1967-68, when the same was not raised either before the Income-tax Officer or the AAC in that year? (3) Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in allowing donations made to Khamariah Higher Secondary School and Adarsh Vidyalaya Higher Secondary School as business expenditure under section 37 in the assessment years 1966-67, 1967-68 and 1969-70 ? " O ..... X X X X Extracts X X X X X X X X Extracts X X X X
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