M.P. State Electronics Development vs Deputy Commissioner of Income Tax

This appeal has been admitted for considering the following three substantial questions of law:-

Whether the Tribunal was justified in law in not entertaining the additional ground relating to Sections 80-HH and 80-I of the Income Tax Act, 1961?

Whether on a correct interpretation of Sections 32, 32-A and 34-A of the Act, the Tribunal erred in holding that the set off in respect of depreciation and investment allowance to the extent of balance 1/3rd could not be set off against income from other sources''?

Whether on interpretation of clause (iii)(c) and (iv) of Section 28 of the Income Tax Act, 1961, the Tribunal misdirected itself in law in holding that the disallowance of Rs. 52,46,177/- as made by the Assessing Officer was justified?

As far as question No. 2 is concerned, Shri Sumit Nema fairly stated that now with the passage of time this question no more warrants consideration and therefore, we need not answer the same.

As far as question No. 1 is concerned, parties concerned submits that now in view of the Division Bench judgment of this Court in the case of Steel Ingots (P) Ltd. Vs. Commissioner of Income Tax - [1996]86 Taxman 440 (MP), the Tribunal can entertain the additional grounds relating to 80-HH and 80-I of the Income Tax Act and such a ground can be raised for the first time. In view of the aforesaid judgment, we answer this question in favour of the appellant and hold that the Tribunal committed an error in refusing to answer this question. In the light of the principles laid down in the case of Steel Ingots (P) Ltd. (supra) as this question can be raised even for the first time before the Tribunal, we remand the matter back to the Tribunal for considering the aforesaid question.

As far as the third question is concerned, the same pertains to interpretation of Section 28 of the Income Tax Act and the question as to whether the Tribunal misdirected itself in the matter of disallowing a claim to the sum of Rs. 52,46,177/-. As far as this aspect of the matter is concerned, we find that initially while computing the income of the assessee, the learned Deputy Commissioner of the Income Tax computed the income at Rs. 4,85,45,105/- and made a addition of Rs. 52,46,177/- on account of custom duty payable on the 37 gas cylinders. In fact the total custom duty for the assessment year 1991-1992 for the gas cylinders payable was Rs. 1,85,75,301/- However, by an agreement entered into and by signing of a bond, the custom duty originally payable for 37 cylinders which was Rs. 52,46,177/- was to be paid as a deferred payment and with the passage of bond lapsed and in fact, this amount was not paid. This amount has been allowed as deduction for the year 1991-1992 by way of 100% depreciation on the capitalized cost of these goods whereas, however, now the Income Tax Tribunal has treated this amount to be mercantile income and disallowed the allowance granted by the Commissioner Income Tax Appeal.

We have gone through the reasons given by the Commissioner, Income Tax Appeal in treating the amount to be cost of capital paid or payable in accordance to the provisions of Section 28 whereas, the Tribunal treats it to be liability on mercantile basis for the relevant year.

Shri Nema admits that if the same is treated to be mercantile liability, there is no error in the order passed by the Tribunal but he invites our attention to the justification given by the Commissioner, Income Tax in his order for treating the same to be cost of cylinder (capital asset) and submits that this is not mercantile liability but is capital asset. In fact, in para 17 of his order, the learned Commissioner, Income Tax the Appellate Authority dealt with the matter in the following manner:-

"17. I have gone through the facts and the arguments placed before me in which I find force. The AO who was present during the hearing of the appeal had no objection to the admission of the additional ground. Accordingly, the appeal on this issue is entertained. The appellant''s contention with regard to the additional ground are as under:-

i) Customs duty payable on cylinder forms as integral part of the cost of the cylinders (Capital Asset).

ii) The cylinders are owned by your appellant and at no point of time your appellant has parted with the ownership of the same.

(iii) No benefit has arisen or accrued to your appellant by re-exporting the cylinders for the purpose of re-importing after refilling of the gas as held by learned DCIT (Assessment) by invoking provisions of the Section 28(iv). What section 28(iv) postulates is that taxability of revenue incentives received or other revenue benefits accruing to the assessee e.g. amount received for sale of import entitlement etc. and not the cost of the capital asset paid or payable.

(iv) The custom duty payable on cylinders is not custom duty repaid or repayable as duty drawback to any person under Duty Drawback Rules, 1971. That duty drawback represents income while in case of your appellant, it is not repayment of duty rather it is the duty originally payable on cylinders (Capital Asset) which forms an integral part of cost of capital asset."

And after discussing the aforesaid grounds additional grounds raised in para 18 answered the same as under:-

"18. Thus, it is contended that in order to legally avoid the remittance of customs duty at the time of every import (after refilling) the assessee had made arrangement by executing the said bond with the customs authorities. Hence, by all means there is an ascertained liability accrued towards customs duty on the first import and the payment has only been deferred by the custom authorities. It may also be emphasized that had there been no such liability, it was superfluous to furnish any bond with the customs authorities. In this background, it will be clear that in the assessee''s case, the liability had certainly been ascertained and accrued towards customs duty and what has happened is that the payment only is deferred. It is further argued that the Income Tax Act also does not envisage that in order to qualify for claiming depreciation, the expenses on capital asset should have been actually paid. If it is so, the assets purchased under ''hire purchase agreement'' and by obtaining financial assistance from banks and other financial institutions would have been denied the benefit of depreciation allowance. It is further stated that all the aforesaid arguments were put-forth before the AO during the proceedings u/s 143(1)(a) objecting to the prima facie adjustment of this amount. These objections were also put before the AO at the time of assessment u/s 143(3). In this view of the matter, it is contended that the AO should be directed to allow depreciation on the WDV of the 37 gas cylinders taking into account the accrued liability of customs duty. I have gone through the facts and the arguments placed before me in which I find force. The AO is hereby directed to allow the relief as per the appellant''s claim.

While reconsidering the question, the Tribunal went on the assumption that this is a mercantile liability and therefore, the Assessing Officer has not committed any error but while doing so, we are of the considered view that the justification and reasons given by the Appellate Authority as indicated herein above in paras 17 and 18 has not been adverted to or noted by the Tribunal.

Keeping in view the aforesaid and considering the fact that the matter has already been remanded back for consideration with regard to the additional grounds pertaining to question No. 1, this question is also remanded back for consideration by the Tribunal afresh. The Tribunal in the matter of addition of Rs. 52,46,177/- may rehear the appellant a public sector undertaking and after taking note of the provisions of Section 28, the observations made by the Commissioner, Appeal may determine the same afresh in accordance with law.

With the aforesaid, the appeal stands disposed of.