Commissioner of Income Tax vs Garden Silk Mills Pvt. Ltd.

D.M. Dharmadhikari, C.J.—In this reference made to this court at the instance of the Revenue for the assessment years 1975-76, 1976-77 and 1978-79, the following questions of law have been posed for our answer :

"(i) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the assessee was entitled to extra-shift allowance on air-conditioning plant ?

(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the assessee was entitled to a deduction of the sum of Rs. 58,250 paid to the Income Tax practitioners in respect of the proceedings of Garden Silk Weaving Factory ?

(iii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that notwithstanding the provisions of Section 80VV of the Income Tax Act, 1961, the assessee was entitled to a deduction in respect of the sum of Rs. 58,250 paid by the assessee in respect of the proceedings of Garden Silk Weaving Factory ?

(iv) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the assessee was entitled to a deduction of the sum of Rs. 65,832 paid to the Income Tax practitioners in respect of the proceedings of the Garden Silk Mills Pvt. Ltd. ?

(v) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that notwithstanding the provisions of Section 80VV of the Income Tax Act, 1961, the assessee was entitled to a deduction in respect of the sum of Rs. 65,832 paid by the assessee to the Income Tax practitioners in respect of the proceedings of Garden Silk Mills Pvt. Ltd. ?"

Only a few facts deserve to be noticed for deciding the questions referred. The assessee, Garden Silk Mills Private Limited, Surat (hereinafter referred to as "the assessee-company" for short), under an agreement executed on December 1, 1971, purchased the assets with all liabilities of a going business concern carrying on its trade in the firm name and style of Garden Silk Weaving Factory (hereinafter referred to as "the firm" for short). For the relevant assessment periods aforesaid, the assessee-company claimed deduction as depreciation u/s 32 of the Income Tax Act, 1961, towards "extra-shift allowance" on air-conditioning plant. The Assessing Officer disallowed the claim of deduction towards extra-shift allowance, but the Commissioner of Income Tax (Appeals), following the decisions of the Tribunal in the earlier years, directed the Assessing Officer to examine the claim of the assessee in respect of the depreciation and allowed extra-shift allowance in respect of such items for which extra-shift allowance had been allowed by the Tribunal in the earlier years. The Tribunal upheld the directions of the Commissioner of Income Tax (Appeals) and rejected the objections to the allowance raised on behalf of the Department.

Question No. (i) is whether the Tribunal was right in entertaining the claim of the assessee towards extra-shift allowance on air-conditioning plant.

Learned counsel Mr. B. B. Naik, appearing for the Revenue, submits that such extra-shift allowance on air-conditioning plant could not have been allowed as it was not a part of the main plant of the assessee which is engaged in manufacture of artificial silk, On behalf of the Department, learned counsel submits that such extra-shift allowance as depreciation was rejected under similar circumstances by a Division Bench of this court in the case of Commissioner of Income Tax Vs. Kiran Crimpers, and the decision squarely covers the question raised to be answered against the assessee.

Learned counsel Mr. J. P. Shah, appearing for the assessee, submits that the Division Bench decision of this court in Commissioner of Income Tax Vs. Kiran Crimpers, , deserves to be reconsidered in light of the latest decision of the Supreme Court in CIT v. Anand Theatres [2000] 244 ITR 81, where a nursing home is held to be a plant. He tried to distinguish the decision in the case of Commissioner of Income Tax, Trivandrum Vs. M/s. Anand Theatres, , of the Supreme Court. On behalf of the assessee, it is contended that air-conditioning plant is an integral part of the total plant of the assessee for manufacture of artificial silk and the air-conditioning plant being an integral or composite part of the main plant, extra-shift allowance as depreciation u/s 32(1) was rightly allowed. Strong reliance has been placed on the later decision of the Supreme Court in the case of Commissioner of Income Tax, Karnataka Vs. M/s. Karnataka Power Corporation, .

We have considered the submissions made by learned counsel for the Revenue and the assessee on question No. (i) relating to extra-shift allowance on air-conditioning plant. After going through the decisions of the Supreme Court including the latest decision in the case of Commissioner of Income Tax, Karnataka Vs. M/s. Karnataka Power Corporation, on which heavy reliance has been placed, we find that they are distinguishable and are of no assistance to the contentions raised on behalf of the assessee.

We find that such extra-shift allowance on air-conditioning plant was rightly held not allowable in view of certain provisions contained in Section 32(1)(ii) read with Rule 5 and Appendix I to the Income Tax Rules which were in force at the relevant period. Assuming that the air-conditioning plant is essential in the manufacturing process of artificial silk and is an integral part of the composite plant of the assessee, in view of the specific provisions contained in Part I of Appendix I of Rule 5 of the Income Tax Rules, extra-shift allowance is expressly not allowable on air-conditioning plant. In the case of Commissioner of Income Tax Vs. Kiran Crimpers, the Division Bench of this court had rested its decision on the conditions of Part I, Appendix 1 under Rule 5 of the Income Tax Rules, and came to the conclusion in the following words (page 95) :

"Obviously, when air-conditioning machinery, has been enlisted as a separate item of machinery or plant for the purposes of computation of rate of depreciation and it has also been enlisted for no extra-shift allowance, it cannot be treated as artificial silk manufacturing machinery by treating it to be necessary part of the unit manufacturing artificial silk falling under that item unless it has become integral part of other machinery. It is well known principle of interpretation that where there are two entries covering the same item, one special and another general, the applicability, of the general provision shall be excluded."

On the provisions contained in Appendix I to Rule 5 of the Income Tax Rules read with Section 32(1)(ii) of the Act, we find ourselves in respectful agreement with the conclusion arrived at by the Division Bench in the case of Commissioner of Income Tax Vs. Kiran Crimpers, and in our opinion, the decisions of the Supreme Court on which reliance has been placed by learned counsel for the assessee, are of no assistance in answering the question which has to be answered in favour of the Revenue and against the assessee.

The firm whose running business was purchased by the assessee-company had to pay two sums of money particularly Rs. 58,250 and Rs. 65,832 as remuneration of its Income Tax practitioners or their fees for Income Tax cases. The aforesaid monetary liability in the figures mentioned above towards remuneration payable to Income Tax practitioners was taken as liability by the assessee-company and the same was discharged in the assessment years in question by the assessee-company. The assessee-company claimed a deduction of the said remuneration paid to the Income Tax practitioners as business expenditure u/s 37 of the Income Tax Act, The provisions of Section 80VV, as they stood then, allowed deduction towards expenditure incurred by the assessee in the previous year in respect of any proceedings before any tax authority, Appellate Tribunal or court. In relation to taking over of any liability under the Act, the proviso to Section 80VV, however, restricted the deduction on this head to the extent of only Rs. 5,000.

The case of the assessee before the tax authorities was that, irrespective of the provisions of Section 80VV, the remuneration paid to the Income Tax practitioners by the assessee as a liability of the firm, from which it purchased the running business, should be allowed as business expenditure u/s 37 of the Act. It is on the above factual and legal premises that questions Nos. (ii) to (v) have been posed. A bare look at the questions would show that questions Nos. (ii) and (iii) are overlapping in relation to the claim towards business expenditure in the sum of Rs. 58,250 paid to the Income Tax practitioners and questions Nos. (iv) and (v) are overlapping which are in relation to the sum of Rs. 65,832 paid as remuneration to the Income Tax practitioners. The said questions Nos. (ii) to (v), therefore, can conveniently be dealt with together and a common answer may be given.

The Tribunal held that the Income Tax practitioners have been so paid by the assessee-company on behalf of the predecessor firm and the said payments, therefore, do not relate to the proceedings in connection with the settlement of Income Tax liability of the assessee-company. Services rendered by various Income Tax practitioners were to the firm and not to the assessee. The provisions of Section 80VV are not applicable to the said payments as the payments were made to discharge the liability which was taken over by the assessee-company from the predecessor firm.

The Tribunal, however, considered the claim favourably to the assessee u/s 37 of the Act. The Tribunal relied on the decision of the Bombay High Court in the case of Commissioner of Income Tax, Bombay City-II Vs. Bombay Hing Supply Co., . It was a case based on the provisions contained in Section 10(2)(xi) of the Indian Income Tax Act, 1922, which is held to be analogous to Section 36(1)(vii) of the Act of 1961. Placing reliance on the aforesaid Bombay High Court decision, for allowing the claim of the assessee-company, as a "business expenditure" being amounts paid as fees to the ''income tax practitioners, the Tribunal reached its conclusion thus :

"Applying the above test to the facts of the present case, the liability to pay the amounts due to the advocates and Income Tax practitioners was taken over by the assessee-company when it took over the running business. The profits from the said business was taken over is subject to charge. As a corollary discharge of trading liability is an allowable deduction particularly when this is a case of succession to the business. We, therefore, uphold the decision of the Commissioner of Income Tax (Appeals) for the reasons stated by us as aforesaid."

Learned counsel Mr. B. B, Naik, appearing for the Revenue, has seriously questioned the correctness of the conclusion reached by the Tribunal in allowing payments to the Income Tax practitioners as "business expenditure". He invited the attention of this court to the relevant terms of the agreements dated December 1, 1971, under which the running business of the firm was purchased by the assessee-company. It is submitted that since a going concern was purchased with assets and liabilities, payments of fees as liability of the firm to Income Tax practitioners'' remuneration, was part of purchase price of the going concern. It is contended on behalf of the Revenue that such discharge of liability of the firm by the assessee-company cannot be claimed as "business expenditure" u/s 37 of the Act. On behalf of the Revenue, it is also argued that the decision of the Bombay High Court in the case of Commissioner of Income Tax, Bombay City-II Vs. Bombay Hing Supply Co., , is clearly distinguishable on the facts noted by the Tribunal in its order.

Learned counsel appearing for the assessee in supporting the reasonings and conclusion of the Tribunal, strenuously urged that the remuneration payable to the Income Tax practitioners was liability of the firm taken over with assets by the assessee-company, but the said liability towards Income Tax practitioners was discharged by the assessee-company as its business expenditure. The Income Tax practitioners continued to represent the assessee-company and fees payable to them by the predecessor firm were required to be paid to maintain cordial relationship with the Income Tax practitioners. It was, therefore, a business expenditure of the assessee-company, may be, this payment towards remuneration was a past liability of the firm. Reliance is placed on certain observations of Chagla C. [. delivering the judgment for the Division Bench of the Bombay High Court reported in the case of Aruna Mills Ltd. v. CIT : [1957]31ITR153(Bom) . It is submitted that "commercial expediency" should be taken into consideration under which past remuneration due to practitioners was paid by the assessee-company. Reliance is placed in the case of Commissioner of Income Tax, Andhra Pradesh Vs. Dhanrajgiri Raja Narasingirji, ; COMMISSIONER OF Income Tax, GUJARAT II Vs. RAIPUR MANUFACTURING COMPANY LTD., and M/s. Sri Venkata Satyanarayana Rice Mill Contractors Co. Vs. Commissioner of Income Tax, Andhra Pradesh, II, .

It is clear from the terms of the agreement, dated December 1, 1971, under which the assessee-company purchased the assets with liabilities of the going concern, i.e., the firm, that remuneration outstanding against the firm and payable to the Income Tax practitioners, was also a liability taken over by the assessee-company. The main question that falls for consideration is whether the discharge of this past liability of the firm towards payment of remuneration to the Income Tax practitioners can be said to be "expenditure" incurred by the assessee-company "wholly and exclusively" for the purpose of its business which is a legal requirement for allowing such expenditure by the assessee u/s 37 of the Act. The decision of the Bombay High Court in the case of Commissioner of Income Tax, Bombay City-II Vs. Bombay Hing Supply Co., , which was the sole basis for the Tribunal to allow payment as "business expenditure" of the assessee-company, appears to be distinguishable on the facts. The facts of that case were that the business of a firm was transferred along with assets and outstandings to A on behalf of ABC after the business was put to an auction as a going concern. ABC formed a partnership and wrote off certain debts, a deduction in respect of which was claimed in computing the business income of ABC firm. It is on the above facts that it was held that the successor company was permitted to write off the trading debts in the year of account when they became irrecoverable even though the debt may be due from its customers in respect of the dealings of a period prior to the change of ownership.

The present case is not one regarding writing off of the trading debts in the year of account after they became irrecoverable in the hands of the assessee-company and after the transfer of business to it.

There appears to be great force in the submissions made on behalf of the Revenue that the remuneration payable to the Income Tax practitioners by the predecessor firm was a liability taken over with assets by the successor-company and it was discharged by the assessee in the assessment years in question not as a "business expenditure" but as a past liability against the firm which was agreed to be discharged by the assessee-company under the terms of the agreements. As the going concern was purchased with assets and liabilities, the liability constituted an integral part of the purchase consideration. It is not possible to agree with the submission made on behalf of the assessee-company that the outstanding remuneration payable by the predecessor firm was paid by the assessee-company to maintain cordial relationship with the same practitioners who continued to represent the assessee-company in its Income Tax cases. It is likely that in clearing the past liabilities towards remuneration to the Income Tax practitioners, one of the considerations was to maintain good relationship with standing counsel of the assessee-company but it cannot be held that past liability towards remuneration was discharged solely as "business expenditure". Under the express terms of the agreement, along with the other liabilities, liability towards remuneration was also taken over by the assessee-company. This payment to practitioners thus was a payment made to fulfil the terms of the agreement of purchase and it was not a business expenditure incurred in the relevant assessment years. Clause 4 of the agreement clearly stipulates :

"For the purpose of taking over the said business of the firm together with all the assets, properties, effects and rights thereof as provided in clause hereof, the parties hereto have mutually agreed that all the assets and liabilities of the assignor''s firm shall be taken over by the assignee as from the 1st January, 1972."

Similarly, Clause No. 6 in its relevant part reads :

"The assignee shall be entitled to all the assets and properties movable and immovable hereinabove mentioned belonging to the firm and shall be liable to discharge all the liabilities of the firm as on December 31, 1971, irrespective of the execution of the deed of assignment hereby agreed to be executed by and between the assignors and the assignee . . . and shall likewise be liable to discharge all the liabilities of the assignors."

There arc similar terms and expressions in several parts of the agreement. It is clear to us that past dues of the Income Tax practitioners payable by the predecessor firm were actually paid in the assessment years by the successor company not only for maintaining and continuing good relationship with such Income Tax practitioners but to discharge its liability under the express terms of the agreement of purchase of the going concern of the firm. Such payment towards remuneration to the Income Tax practitioners cannot, therefore, be held to be expenditure incurred "wholly and exclusively" for the purpose of business of the assessee-company in the relevant assessment years, The Tribunal was, therefore, in error in allowing such business expenditure u/s 37 of the Act. The decisions on which reliance has been placed on behalf of the assessee, for the aforesaid reasons, are totally distinguishable. In the case of Commissioner of Income Tax, Andhra Pradesh Vs. Dhanrajgiri Raja Narasingirji, , certain legal expenses were incurred for conducting criminal prosecution instead of leaving the case in the hands of the prosecuting agency of the Government. It was held to be business expenditure.

In the case of COMMISSIONER OF Income Tax, GUJARAT II Vs. RAIPUR MANUFACTURING COMPANY LTD., , the assessee-company made certain payments under an express agreement with the official liquidator for reimbursing the amount defalcated by a member of the co-operative credit society of the employees. That was held and allowed as business expenditure required for buying peace. The case of Sri Venkata Satyanarayana Rice Mill [1987] 223 ITR 101 is also distinguishable where some contribution was made by the assessee to public welfare fund as commercial expediency and that was allowed as a deduction.

All the above cases relied on on behalf of the assessee are clearly distinguishable on the facts and render no assistance to the assessee in this case.

For the reasons aforesaid, questions Nos. (ii) to (v), in our considered opinion, are liable to be answered against the assessee and in favour of the Revenue. The questions referred are thus answered accordingly. Reference thus stands disposed of by answering all questions posed before us in favour of the Revenue and against the assessee. There shall be no order as to costs.