Carborandum Universal Ltd. vs Commissioner of Income Tax

Ramanujam, J.—The petitioner herein is a company by name Carborandum Universal Ltd. and it prays for the issue of a writ of

certiorarified mandamus by this court quashing the orders of the 2nd respondent dated September 22, 1978, confirming the order of the 1st

respondent dated March 30, 1978, and to direct respondents 1 and 2 herein accord approval to the petitioner as required in their application

dated October 27, 1975, under r. 2(1) of Part C of the 4th Schedule to the I.T. Act, 1961.

The circumstances under which the petitioner has approached this court with this writ petition may briefly be noted. The petitioner is a public

limited company incorporated in the year 1954 under the Indian Companies Act, 1913, with a paid up capital of Rs. 70 lakhs and it is engaged in

the manufacturer of bonded abrasives, coated abrasives, aluminium-oxide grains and refractories all of them being listed in the Fifth and Sixth

Schedules to the I.T. Act, 1961. On 26th August, 1970, the petitioner created a fund known as ""Cumi Employees Gratuity Fund"" by executing an

irrevocable trust, the sole purpose of which was the provision of gratuity to their employees then numbering about 1,354. On October, 15, 1970,

the petitioner applied under r. 2(1) of Part C of the 4th Schedule to the 1st respondent herein for the grant of approval of the said fund. The 1st

respondent required certain rectifications to be carried out in the deed of trust. Further, the Payment of Gratuity Act, 1972, enacted by Parliament

had come into force on September 16, 1972, and as such it became necessary to make several adaptations in the trust deed to bring it in

conformity to the provisions of the said Act. Accordingly the petitioner executed a fresh deed of trust dated January 2, 1975, and applied for

approval of the fund to the 1st respondent afresh on October 27, 1975.

In the course of scrutiny of the petitioner''s application dated October 27, 1975, the 1st respondent found that the trustees of the gratuity fund

had granted a loan of Rs. 75,000 to M/s. Swadesamitran Ltd., a company engaged in the publication of a Tamil daily newspaper, on the security

of the first simple mortgage of certain property described as ""two pieces of printing machinery embedded in the earth of the following description at

Nos. 7 and 8, Mount Road, Madras-2......""This loan was made on a deed of mortgage dated November, 3, 1970, registered with the Sub-

Registrar of Assurances as document No. 1105/1970. The stamp duty on the instrument of mortgage was the same as applicable to a mortgage of

immovable property. The mortgage deed was registered after producing the Income Tax clearance certificate from the ITO concerned. The 1st

respondent, after scrutinising the application for approval of the trust, called for certain particulars and also suggested suitable amendments to the

rules of the Fund to conform to the requirements of the I.T. Act and the Rules. Thereafter by a supplemental deed dated August 16, 1976, some

of the suggested amendments were carried out. By another supplemental deed dated May 11, 1977, further amendments to the trust deed were

made to conform to the I.T. Act and the Rules. Thereafter, by a letter dated May, 26, 1977, the petitioner sent the following documents to the

ITO, Companies Circle I(1), for transmission to the 1st respondent.

(1) Original supplemental deed dated 11-5-1977.

(2) True copy of the minutes dated 10-11-1975.

(3) True copy of the minutes dated 5-5-1977.

(4) Valuer''s certificate regarding the valuation of the amount to be transferred to the gratuity fund.

The 1st respondent gave a personal hearing to the petitioner on May 31, 1977, during which it was pointed out to the petitioner that the

investment of Rs.75,000 made under the mortgage deed dated November 3, 1970, with M/s. Swadesamitran Ltd. was not in accordance with the

I.T. Rules. Thereafter, them petitioner took time for producting legal opinion on the question as to whether the mortgage covered by the deed

dated November 3, 1970, is on movable property or on immovable property. The petitioner thereafter sent two legal opinions, one on July 14,

1977, and another on December 28, 1977, both of which were to the effect that the mortgage dated November, 3, 1970, is in respect of

immovable property. Thereafter, the 1st respondent by his order dated March 30, 1978, granted approval of the Fund created by the fresh deed

of trust dated January 2, 1975. Thus, the petitioner''s request for approval of the Fund as and from August, 26, 1970, was not granted. But the

Fund was approved only with effect from January 2, 1975. Aggrieved by the refusal of the 1st respondent to accord approval to the Fund from

August, 26, 1970, the petitioner preferred an appeal to the 2nd respondent herein under r. 8 of Part C of the 4th Schedule of the I.T. Act

contending, inter alia, that in construing the mortgage deed dated November 3, 1970, the 1st respondent has committed an error of law and that, in

any event, the grant of approval should be given at least from April 1, 1973, in accordance with the provisions of sub-s. (7) of s. 40A of the I.T.

Act, 1961. The 2nd respondent, however, confirmed the order of the 1st respondent thereby refusing to accord approval of the Fund from any

day prior to January 2, 1975. The petitioner has sought in this writ petition the quashing of the order of the 2nd respondent confirming the order of

the 1st respondent.

According to the petitioner, the impugned order of the 2nd respondent confirming the order of the 1st respondent is vitiated by errors of law and

as such illegal and void for the following reasons : (1) The power conferred under r. 2 of Part C to Sch. 4 of the I.T. Act to the Commissioner to

accord approval to any gratuity fund which in his opinion complies with the requirement of r. 3 from any dated fixed by him is a power coupled

with a duty and, therefore, it should be exercised reasonably having regard to the facts and circumstances, and, in this case, the refusal to grant

approval as and from August 28, 1970, has the effect of imposing on the petitioner a financial liability amounted to Rs. 15 lakhs which by itself

would be sufficient to show that the power has not been exercised reasonably. (2) The petitioner has complied with all the requirements of r. 3,

and, therefore, the approval should have been granted without any reference to r. 101 of the I.T. Rules which is not one of the conditions for grant

of approval. (3) Even if r. 101 is considered as a condition for grant of approval, this rule did not have any statutory or legal force prior to April 1,

1971, on which date alone s. 9(1)(bb) was inserted in Part C of Sch. 4 of the I.T. Act by the T.L. (Amend.) Act, 1970, by which the power to

make rules ""regulating investment or deposit of monies of approved gratuity funds"" was for the first time conferred by the Act, and, as such, r. 101

should be declared to be non est prior to April 1, 1971, and cannot be taken into consideration in according approval to the petitioner''s gratuity

fund. (4) Neither the I.T. Act nor the I.T. Rules specify the effect of the violation of r. 101 which by reference incorporated s. 20(3) of the Trusts

Act and it has been held that a violation of s. 20 would constitute a breach of trust; under s. 23(5) of the Trusts Act, for such breach of trust, the

trustee is liable to make good the loss which the trust property or the beneficiary has thereby sustained. Therefore, there is no warrant for imposing

on the petitioner a financial liability amounting to Rs. 15 lakhs merely because the trustees of the Fund had violated s. 20(e) of the Trusts Act

involving investment of a small amount of Rs. 75,000 on a mortgage. (5) The fresh deed of trust dated January 2, 1975, provides that the gratuity

scheme forming the subject-matter of the trust came into force from December 1, 1970, and, therefore, there is no infringement of r. 101 as has

been held by the 2nd respondent.

Since the approval has been rejected by the respondents for the period anterior to October 22, 1975, mainly on the ground that the trust has

granted a loan of Rs. 75,000 to Swadesamitran Press on hypothecation of movable properties contrary to r. 101, the substantial question to be

considered in this case is whether the mortgage obtained by the petitioner to secure the loan of Rs. 75,000 is a mortgage of immovable property as

contended by the petitioner or whether it is a mortgage of movable property as has been held by the first respondent.

It should be borne in mind that the relevant document evidencing the loan has been executed as a mortgage after paying the stamp duty treating

it as a mortgage of immovable property. The document has been registered under the Registration Act, treating it as a document dealing with

immovable property. Both the lender as well as the borrower have treated the property secured as an immovable property. In those circumstances

we have to consider whether the loan granted is on the security of immovable property or not.

In Mohammed Ibrahim Vs. Northern Circars Fibre Trading Co., , a Division Bench of this court has laid down the tests as to whether the

movables attached to immovable property will itself become immovable property. In that case a machinery was fixed to cement platform and

attached to iron pillars fixed in the ground. Such a machinery was held to constitute immovable property. After construing the definition of

immovable property"" in the Registration Act, the court proceeded to say that if a movable property is directly attached to the earth it will be

immovable proerty for the purpose of the Registration Act though the attachment is not direct. Dealing with the definition ""things attached to the

earth"" occurring in the Transfer of Property Act, the court took the view that it refers to a mediate and not a direct attachment and for the purpose

of determining whether a movable attached to an immovable proeprty is an immovable property the enquiry should be not whether the attachment

is direct or indirect but what is the nature of the attachments and what is its object and purpose, that the degree and nature of the attachment is no

doubt a consideration, that the more important consideration is the object of the annexation which is a question of fact to be determined by the

circumstances in each case and that if a thing is embedded in the earth or attached to what is embedded for the permanent beneficial enjoyment of

that to which it is attached, then it is part of the immovable property and if the attachment is merely for the beneficial enjoyment of the chattel itself,

then it remains a chattel, even though fixed for the time being so that it may be enjoyed and, therefore, the question in each case must depend on

the intention of annexation and that such intention may be either express or implied from the circumstances, and that in the absence of proof one

way or the other, the intention to be attributed is that of a person acting from motives of self-interest. In that case a Bone Crushing Mills was

located in the premisesm of a factory. The machinery of the mill was installed on a small cement platform to which it was fixed by means of bolts at

the four corners. It was also held in position by being attached to iron pillars fixed in the ground to a depth of nearly 6 or 7 feet. It was held that as

there was no reason to think that the owner of the factory intended to keep the machinery of the mill and the land to which it was affixed apart and

his object was to become the owner of both for the purpose of carrying on the business for his own individual benefit, the plant and machinery of

the mill, the machinery which stood annexed to the floor of the factory should be treated as immovable property. In J. Kuppanna Chetty, Ambati

Ramayya Chetty and Co. Vs. Collector of Anantapur and Others, , dealing with the definition of ""immovable property"" in s. 3(14) and the

definition of ""movable property"" in s. 3(19) of the Madras General Clauses Act, 1891, it was observed that things attached to earth are not

movable properties are clear from the combined reading of those definitions, but only immovable property and that same also follows from the

definition of ""immovable property"" in s. 3 of the Transfer of Property Act and in s. 2(6) of the Registration Act since the definition of ""immovable

property"" in the Madras General Clauses Act is in pari materia with the definition in the Registration Act and the Transfer of Property Act, and

machinery embedded in the earth for the beneficial enjoyment thereof is immovable property even under the Madras General Clauses Act. In that

case a boiler engine and decorticator which were fixed and embedded in the factory building for the beneficial use of the building as a factory was

held to be an ""immovable property"", in addition to the land and the building. In taking that view the court adopted the tests laid down in the earlier

decision of this court in Mohammed Ibrahim Vs. Northern Circars Fibre Trading Co., . In Perumal Naicker Vs. T. Ramaswsmi Kone and

Another, , a Division Bench of this court has held that a petter engine mounted on cement base and fastened to it by bolts and nuts was not

immovable property as the intention of fixing the engine to the earth is not to make it a permanent part of the earth and that the nature of the engine

and the purpose of its annexure both show that it cannot be regarded as an immovable property, that though the petter engine stood affixed to the

earth the purpose of such affixture was necessary for the user of the engine and such an affixture cannot be viewed as a permanent one. The view

taken by the court was that for a chattel to become part of immovable property and to be regarded as such property, it must become attached to

the immovable property as permanently as a building or a tree is attached to the earth and if the property is a movable property and for its

beneficial use or enjoyment, it is necessary to imbed it or fix it on earth though permanently, that is, when it is in use, then it cannot be regarded as

immovable property for that reason. In The South Indian Bank Ltd. Vs. V. Krishna Chettiar and Brother and Others, , another Division Bench of

this court has laid down the following tests for finding out as to when a movable property fixed to earth will become an immovable property; (i) the

intention of the parties, (2) mode of affixation and whether the affixation is intended to be permanent and (3) the onus of proof that even after

annexation the article continues to be movable is on the person whon alleges it. In Hemendra Lal Roy and Others Vs. Indo-Swiss Trading Co.

Ltd. and Others, , the question arose whether a power house consisting of structures, plants and machineries, transmission lines, etc., which are

really fixtures could be called ""movable property"" for the purpose of s. 49 of the Limitation Act. It was held that until the power house is

dismantled, the machineries, etc., which are fixed to the earth are uprooted and until the buildings are demolished, they cannot be called ""movable

property"". After referring to the fact that ""movable"" or ""immovable"" has not been defined in the Limitation Act, they have applied the definition of

movable"" and ""immovable"" property occurring in the General Clauses Act and as per the said definitions it was held that the power house

including the machinery will be only immovable property.

In this case the security consists of the printing machineries which are embedded in the earth and is used as a press in the undertaking of

Swadesamitran. Having regard to the fact that the owner of the machinery has embedded the same in the earth for the purpose of working his

factory as a press, it should be taken to come within the definition of ""immovable property"". Therefore, the mortgage should be taken to be of only

immovable property. As already stated, the intention of the borrower as well as the lender at the time of the execution of the mortgage is to treat

the machinery which is embedded in the earth as a permanent fixture and as such immovable property.

Since the main question on which the application for approval was rejected for the period in question was on the ground that the mortgage was

of movable property and as we have held that the mortgage is of immovable property, r. 101 cannot be taken to have been violated. It is,

therefore, unnecessary to go into the other questions raised before us.

In the result, the writ petition is allowed and a mandamus will issue directing the respondents to accord approval for gratuity fund to the

petitioner in accordance with the application dated October 27, 1975. There will, however, be no order as to costs.