Commissioner of Income Tax, Tamil Nadu-V vs Dhandayuthapani Foundry (Private) Ltd.

Sethuraman, J.—The following three questions have been referred by the Tribunal under s. 256(1) of the I.T. Act :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the centrifugal pumps and motors

constitute agricultural implements ?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in directing the grant of higher development rebate

and deduction u/s 80I ? and

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the ''margin amount'' paid by the

assessee is loss incidental to the carrying on of business of the assessee and that it should be allowed as revenue loss ?

We shall take up for consideration the first two questions before going into the third question. The assessee claimed relief under s. 80I of the I.T.

Act and also higher development rebate of 35% under s. 33(1)(b)(B)(i) of the Act on the ground that the manufacture and sale of centrifugal

pumps and electric motors constitute agricultural implements falling within the ambit of item (9) of the Fifth and Sixth Schedules of the I.T. Act,

1961. The ITO negatived the contention by holding that the centrifugal pumps and electric motors manufactured by the assessee did not constitute

agricultural implements within the meaning of item (9) of the Fifth and Sixth Schedules. On appeal, the AAC accepted the assessee''s claim and

when the matter came before the Tribunal at the instance of the ITO, the Tribunal confirmed the order of the AAC. The first two questions arise

out of this conclusion of the Tribunal.

In Hargo Industries (Foundries) Vs. The State of Tamil Nadu, , we examined the question whether centrifugal pump set could be taken as an

agricultural implement so as to be exempt from sales tax under the Tamil Nadu General Sales Tax Act, 1959. It was held that, in order to

constitute an agricultural implement, the real test was not whether it was exclusively used for agricultural purposes but whether it was commonly so

used and whether it was intimately and directly connected with the agricultural operations. Judged by these tests, it was held that the pump sets

would be agricultural implements so as to enable the assessee to obtain the exemption under the Sales Tax Act. The same conclusion would have

to hold good with reference to entry (9) in the Fifth and Sixth Schedules to the I.T. Act as it also uses the identical expression ""agricultural

implements"". The first two questions are accordingly answered in the affirmative and in favour of the assessee.

The third question arises on the following facts an it relates to the assessment year 1970-71. The assessee offered to subscribe for Govt.

securities which were issued, as a result of the ""persuasion"" of the sales tax authorities. The sales tax authorities, apart from making assessment on

the assessee, had also control over Form No. XX which are delivery notes to be issued by them for the despatch of goods. Instead of directly

purchasing and then selling the Govt., promissory notes, the assessee paid certain margin amounts to the brokers which represent the difference

between the issue price and the market rate for the respective securities. In other words, the brokers in effect purchased, on behalf of the assessee,

the said securities and sold them immediately, the result of which was a loss of Rs. 1,900. The assessee claimed this amount as a revenue loss

which was disallowed by the ITO. But, on appeal, the AAC held that the purchase of these bonds was intended to subserve a business purpose,

namely, the retention of the goodwill of the Govt., officials which was vital to the well being of every business concern. It was also found that the

purchases were made not with the intention that the securities should be retained as income-yielding investments, but with a view to dispose of

them as quickly as possible in order to release the funds and profitably deploy them for business purposes. The Tribunal, on appeal by the ITO,

confirmed the conclusion of the AAC by holding that the manner of purchase of the securities clearly indicated that the assessee never intended

these purchases as investments and that since the retention of the goodwill of the sales tax authorities was essential for the smooth carrying on of

the business by the assessee, there was justification to hold that the loss was incidental to the carrying on of the business and that should be

allowed as a revenue loss. It is this part of the conclusion of the Tribunal that has brought about the reference of the third question.

A similar question came to be considered by this court in Additional Commissioner of Income Tax Vs. B.M.S. (P.) Ltd., . There also Govt.

Securities had been purchased and sold and losses were incurred. The only difference was that the purchase in that case was at the instance of

road transport authorities with whom the assessee there had to deal. This court held that the loss incurred on the sale of bonds was allowable as a

loss incidental to the business of the assessee. Following the said decision, we answer the third question in the affirmative and in favour of the

assessee. There will be no order as to costs.