Damodar Mangalji Mining Co. vs Joint Commissioner of Income Tax

D.Y. Chandrachud, J.—The appeal arises from a decision of the Tribunal dt. 2nd Jan., 2006 for asst. yr. 1997-98. The appeal filed by the assessee has been admitted on the following substantial questions of law:

(a) Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that the liability to pay additional barge freight arose in the subsequent year on the basis of the letter from GMOEA, even though the appellant follows mercantile system of accounting?

(b) Whether the Tribunal is right in law in holding that the higher rate of depreciation is available only to trucks given on hire basis and not to trucks given on lease?

(c) Whether on a proper interpretation, the Tribunal has misdirected itself in not following the guidelines laid down by the Bombay High Court in Commissioner of Income Tax Vs. Bangalore Clothing Co., which decision was rendered after Expln. (baa) was inserted in s. 80HHC and subsequent to decision in Commissioner of Income Tax Vs. Kantilal Chhotalal,

Re question (a):

The assessee is engaged in the business of mining and export of ore. In the course of its business, the assessee engages barges, for which freight is paid. For the previous year relevant to the assessment year in question, the assessee debited a sum of Rs. 3,80,059 over and above the actual payment of freight. According to the assessee, the demand of the barge owners for revision of rates had been considered by the Mine Owners'' Association and on 9th May, 1997 enhanced rates had been allowed to the barge owners with retrospective effect. The assessee made a provision in its accounts since the return for asst. yr. 1997-98 was still to be filed and claimed the additional amount which had been paid by way of rent to the barge owners. The claim for the additional amount was disallowed by the AO on the ground that the amount was not paid, nor had it become due upto 31st March, 1997. In appeal the CIT(A) held that in the mercantile system of accounting, a contractual liability accrues on settlement of a dispute and not before it. Hence, the liability was held to have accrued on 9th May, 1997. Hence, the CIT(A) held that it was allowable only in asst. yr. 1998-99 and not for asst. yr. 1997-98. The Tribunal also held in appeal that the dispute was settled on 9th May, 1997 and hence the liability accrued only during financial year 1997-98 relevant to asst. yr. 1998-99.

The learned counsel appearing on behalf of the assessee has fairly stated that in view of the findings of the CIT(A) and the Tribunal, the claim may be allowed for asst. yr. 1998-99. In both the order of the CIT(A) and of the Tribunal it has been consistently held that since the liability accrued on 9th May, 1997 the claim was allowable only for asst. yr. 1998-99. Hence, though the assessee would not be entitled to claim for asst. yr. 1997-98 it would be so entitled for asst. yr. 1998-99-That disposes of question (a).

Re question (b):

The assessee had leased out 19 trucks to M/s. Damodar Mangalji & Co. Ltd. for a period of five years who in turn hired the trucks to drivers with the condition that they would transport the ore of the assessee. The AO held that the assessee was entitled to normal depreciation of 25 per cent as against the claim to a depreciation of 40 per cent. The CIT(A) has distinguished between the hiring and leasing of the vehicles.

In appeal against the order of the CIT(A), the Tribunal was of the view that in case of a leasing of vehicles the entire expenditure on maintenance and running is borne by the lessee whereas in the case of hiring of trucks the entire expenditure is borne by the hirer. On this basis, the Tribunal was of the view that the burden of wear and tear will be greater on the hirer as compared to the lessor. As a result, the Tribunal held that a higher depreciation will be allowable only to the hirer of a vehicle and not to a lessor.

The issue which is raised in question (b) will be governed by the judgment of the Supreme Court in I.C.D.S. Ltd. Vs. Commissioner of Income Tax, Mysore and Another, . In that case, it was argued by the Revenue that depreciation can be claimed by an assessee only in a case where the assessee is both, the owner and user of the asset. In that context, the Supreme Court has observed as follows:

We would like to dispose of the second contention before considering the first. The Revenue argued that since the lessees were actually using the vehicles, they were the ones entitled to claim depreciation, and not the assessee. We are not persuaded to agree with the argument. The section requires that the assessee must use the asset for the ''purposes of business''. It does not mandate usage of the asset by the assessee itself. As long as the asset is utilized for the purpose of business of the assessee, the requirement of s. 32 will stand satisfied, notwithstanding non-usage of the asset itself by the assessee. In the present case before us, the assessee is a leasing company which leases out trucks that it purchases. Therefore, on a combined reading of s. 2(13) and s. 2(24) of the Act, the income derived from leasing of the trucks would be business income, or income derived in the course of business, and has been so assessed. Hence, it fulfils the aforesaid second requirement of s. 32 of the Act viz., that the asset must be used in the course of business.

In the circumstances, it has been held that what has been postulated is that the assessee must use the asset for the purpose of business. The section does not postulate the use of the asset by the assessee himself.

Appendix I to the IT Rules, 1962 as it stood at the material time provided for an enhanced depreciation of 40 per cent. In view of the law laid down by the Supreme Court in I.C.D.S. Ltd. (supra), question (b) would have to be answered in the negative and in favour of the assessee.

Re question (c):

The assessee had during the course of the financial year relevant to asst. yr. 1997-98 received premium on special import licences of Rs. 1,58,729; an insurance claim on vehicles for Rs. 2,69,500 and was in receipt of service charges of Rs. 1.80,000. The claim of the assessee was that these receipts were intricately linked with the export business and could not be treated as charges within the meaning of Expln. (baa) to s. 80HHC. In appeal, the Tribunal has confirmed the disallowance.

Explanation (baa) to s. 80HHC defines the expression "profits of the business" as follows:

(baa) ''profits of the business'' means the profits of the business as computed under the head ''Profits and gains of business or profession'' as reduced by-

(1) ninety per cent of any sum referred to in cls. (iiia), (iiib) ((iiic), (iiid) and (iiie) of s. 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and

(2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India;

Under s. 80HHC, a deduction is allowed to the extent of profits derived by the assessee from the export of goods or merchandise to which the section applies. The provisions of s. 80HHC and more particularly Expln. (baa) have been construed in the judgment of the Supreme Court in Commissioner, Income Tax, Thiruvananthapuram Vs. K. Ravindranathan Nair, . Sub-s. (3) of s. 80HHC stipulates the manner in which the profits derived from such export would be computed. Sub-s. (3) provides as follows:

(3) For the purposes of sub-s. (1)-

(a) where the export out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee;

(b) where the export out of India is of trading goods, the profits derived from such export shall be the export turnover in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export.

In K. Ravindranathan Nair (supra), the Supreme Court has held that the formula in s. 80HHC(3) provides for a fraction of export turnover divided by the total turnover to be applied to business profits calculated after deducting 90 per cent of the sums mentioned in cl. (baa) of the Explanation. Hence, profit incentives and items such as rent, commission, brokerage charges etc., though they form part of the gross total income have to be excluded as they are "independent incomes" which have no element of export turnover. In K. Ravindranathan Nair (supra), the Supreme Court has held that where charges, though part of the gross total income, constitute independent incomes like rent, commission and brokerage 90 per cent of the said sum has to be reduced from gross total income to arrive at business profits and has to be included in the total turnover in the said formula to arrive at the business profits in terms of Expln. (baa). The Supreme Court has held as follows:

In other words, receipts constituting independent income having no nexus with exports were required to be reduced from business profits under cl. (baa). A bare reading of cl. (baa)(1) indicates that receipts by way of brokerage, commission, interest, rent, charges, etc., formed part of gross total income being business profits. But for the purposes of working out the formula and in order to avoid distortion of arriving at the export profits, cl. (baa) stood inserted to say that although incentive profits and "independent incomes" constituted part of gross total income, they had to be excluded from gross total income because such receipts had no nexus with the export turnover.

The view which has been taken by the Tribunal is therefore consistent with the law which has been laid down by the Supreme Court, though subsequently in K. Ravindranathan Nair''s case (supra). But, the learned counsel appearing on behalf of the assessee submits that the issue with regard to the construction of Expln. (baa) did not really arise for determination before the Supreme Court and therefore, the judgment should not be treated as an authority on the interpretation of the provision. We are unable to accept the submission. During the course of the judgment, the Supreme Court has specifically construed the provisions of Expln. (baa). The interpretation of the law laid down by the Supreme Court is binding on this Court.

In the circumstances and for the reasons aforesaid, we answer question (c) by confirming the view of the Tribunal against the assessee. The appeal shall accordingly stand disposed of in these terms. There shall be no order as to costs.