New Haven Bearing (P) Ltd. vs Commissioner of Income Tax

A.R. Dave, J.—The Tribunal, Ahmedabad Bench ''A'', has referred to this Court the following questions for its opinion under the provisions of s. 256(2) of the IT Act, 1961 :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the receipts of Rs. 21,459 for asst. yr. 1978-79 and Rs. 23,430 for asst. yr. 1979-80 on sale of import entitlements were taxable as the ''business income'' of the appellant ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the import entitlements were not a capital asset but a benefit taxable under s. 28(iv) of the Act ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the ceiling limit of 10 per cent prescribed under s. 80G(4) of the IT Act, 1961, applied to the quantum of actual deduction admissible under that section and not to the aggregate amount of qualifying donation referred to in that section ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the disallowance of interest Rs. 26,432 for asst. yr. 1979-80, Rs. 60,389 for asst. yr. 1980-81 and Rs. 1,08,888 for asst. yr. 1981-82 paid on advances by directors and their family members under s. 40A(8) of the Act was not justified ?"

Question Nos. 1 and 2 have been referred to at the instance of the assessee whereas question Nos. 3 and 4 have been referred to at the instance of the Revenue.

So far as question Nos. 1 and 2 are concerned, the learned counsel appearing for the appellant-assessee has fairly submitted that the said questions are now no more res integra in view of the provisions of s. 28(iiia) of the IT Act, 1961 (hereinafter referred to as ''the Act''). For the asst. yrs. 1978-79 and 1979-80, the assessee had received certain amount on sale of import entitlement. For the asst. yr. 1978-79 the assessee received Rs. 21,459 whereas for the asst. yr. 1979-80, the assessee had received Rs. 22,430. The assessee had submitted in its returns and before the ITO that the said amounts received by the assessee-company were in the nature of capital receipts and, therefore, they should not be taxed as revenue receipts. The said submission was rejected by the ITO and the said sums were taxed as revenue receipts. Being aggrieved by the said decision of the ITO, the assessee had filed an appeal before the CIT(A) but the CIT(A) rejected the contention raised before him by the assessee in view of the decision delivered in the case of Agra Chain Mfg. Co. Vs. Commissioner of Income Tax, . Being aggrieved by the said decision, the assessee had approached the Tribunal but the Tribunal also held against the assessee by coming to the conclusion that the said amounts were in the nature of revenue receipts and they were rightly taxed by the ITO.

In view of the amendment in s. 28, of the Act, the relevant portion of the section operating at the relevant time is as under :

"Section 28(iiia) profits on sale of a licence granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947);"

The said section has come into force w.e.f. 1st April, 1962. In view of the said legal position, the learned advocate appearing for the assessee has fairly conceded that the said two issues will have to be decided in favour of the Revenue by holding that the receipts in question were of revenue nature and, therefore, they were rightly taxed as revenue receipts.

So far as question No. 3 is concerned, the learned advocates appearing for the respective parties have argued at length. Before dealing with the arguments it would be worthwhile to narrate the circumstances in which the said question has arisen. The relevant facts are as under.

The assessee had donated a sum of Rs. 50,000 during the asst. yr. 1977-78. His gross total income for the said year was Rs. 4,76,616 as per the return filed by him. The assessee had claimed 50 per cent of the amount of donation being Rs. 25,000 as deduction under the provisions of s. 80G of the Act. The ITO did not allow the deduction as claimed by the assessee. Being aggrieved by the said assessment with regard to deduction of donation under s. 80G of the Act, the assessee had preferred an appeal before the AAC. The AAC rejected the appeal by observing that the deduction allowed by the ITO was just and proper.

Being aggrieved by the said decision rendered by the AAC, the assessee had filed an appeal before the Tribunal and the said appeal was allowed. In the circumstances, the third issue has been raised at the instance of the Revenue.

For the purpose of considering deduction under the provisions of s. 80G, the ITO, first of all, arrived at 10 per cent of the gross total income of the assessee and thereafter he deducted a further sum to the extent of 50 per cent of the said amount for the purpose of arriving at the maximum amount of deduction. The ITO was of the view that deductions under s. 80G(1) and 80G(4) are to be read in such a manner that an assessee can get deduction only to the extent of 50 per cent of the 10 per cent of the gross total income of an assessee. The contention of the assessee was that 50 per cent of the amount donated should be deducted from his income subject to maximum ceiling of 10 per cent of the gross total income.

As stated hereinabove, even before the AAC in appeal, the assessment arrived at by the ITO was upheld. The Tribunal, following judgment delivered in the case of Hyderabad Race Club Vs. Addl. Commissioner of Income Tax, and in view of Circular No. 281, dt. 2nd Sept., 1980 issued by the CBDT, the Tribunal accepted the contention raised by the assessee.

The learned advocate Shri Mihir Joshi, appearing for the Revenue, has submitted that the view expressed by the Tribunal is unjust and improper in view of the judgments delivered in the cases of Commissioner of Income Tax Vs. Canara Bank, and Commissioner of Income Tax Vs. New Shorrock Spg. and Mfg. Co. Ltd., . It has been submitted by the learned advocate that as per the provisions of s. 80G() and (4), the assessee cannot have deduction in excess of 50 per cent of the 10 per cent of the gross total income of the assessee. He has submitted that sub-ss. (1) and (4) of s. 80G are to be read together and upon harmonious reading of the said sub-sections, their effect is as stated hereinabove. We are not recording the submissions in details as they are discussed at length in the judgments referred to hereinabove.

On the other hand, the learned advocate Shri R. K. Patel appearing for the assessee has submitted that the provisions of s. 80G(1) and (4) set up two different types of limits. It has been submitted by him that according to the provisions of s. 80G(1), the extent of deduction is prescribed whereas the provisions of s. 80G(4) sets up the maximum limit to which overall deduction can be granted in respect of donation given by an assessee. He has, therefore, submitted that, first of all deduction which an assessee is entitled to, is to be determined as per provisions of s. 80G(1) and only thereafter it is to be seen whether the amount so determined exceeds the overall limit set up by the provisions of s. 80G(4) of the Act. He has submitted that his submissions are also supported by the judgments delivered in the cases of Hyderabad Race Club vs. Addl. CIT (supra) and in CIT vs. Lukwah Tea Co. Ltd.

Relevant portion of s. 80G, which was in force at the relevant time, reads as under :

"80G Deduction in respect of donations to certain funds, charitable institutions, etc. - (1) In computing the total income of an assessee, there shall be deducted, in accordance with and subject to the provisions of this section, -

(i) in the case where the aggregate of the sums specified in sub-s. (2) includes any sum specified in sub-clause (vii) of clause (a) thereof, an amount equal to the whole of such sum plus fifty per cent of the balance of such aggregate; and

(ii) in any other case, an amount equal to fifty per cent of the aggregate of the sums specified in sub-s. (2).

(2) and (3)** ** **

Section "80G(4) The deduction under sub-s. (1) shall not be allowed in respect of such part of the aggregate of the sums referred to in sub-cls (iv), (v), (vi) and (vii) of clause (a) and in clause (b) of sub-s. (2) as exceeds ten per cent of the gross total income (as reduced by any portion thereof on which Income Tax is not payable under any provision of this Act and by any amount in respect of which the assessee is entitled to a deduction under any other provision of this Chapter), or five hundred thousand rupees, whichever is less."

Both the learned advocates are supported by decisions rendered on the subject by different High Courts. Jurisdictional High Court, that is, the High Court of Gujarat, has not rendered any decision on the subject. In the circumstances, the learned advocate Shri R. K. Patel has also submitted that when two views are possible, the view beneficial to the assessee should be accepted. The said contention was duly considered in CIT vs. New Shorrock Spg. & Mfg. Co. Ltd.''s case (supra) but it was negatived. We also do not propose to accept the said submission as we would like to decide the matter on merits without upholding the said submission.

After hearing the concerned learned advocates at length, we are of the view that the assessee should succeed for the reasons very much recorded in the judgment delivered in Hyderabad Race Club''s case (supra).

We are also of the view that there is a sound reason to accept the view expressed in the case of Hyderabad Race Club (supra). In our opinion, two different types of limits have been set up under the Act for giving deduction under the provisions of s. 80G of the Act.

The first limit is with regard to the extent to which deduction can be granted to an assessee for the donations given by the assessee. In the instance case, we are concerned with the donations covered under the provisions of s. 80G(1)(ii) and we are not concerned with the donations covered under the provisions of s. 80G(1)(i) and, therefore, we limit our discussion only with regard to the donations to which the provisions of s. 80G(1)(ii) are applicable. As per the said sub-section, it is very clear that the assessee is not entitled to deduction of the entire amount donated by him but he is entitled to deduction only to the extent of 50 per cent of the aggregate of the sums donated by him. The said deduction has nothing to do with the total income earned by the assessee at the time of calculating the extent to which the amount is to be deducted.

Once the extent to which the amount of donation to be deducted is arrived at, another limit, namely, maximum amount which can be deducted, as set out in s. 80G(4), comes into play. The said sub-section sets up on overall limit which is 10 per cent of the gross total income or Rs. 5,00,000, whichever is less. The limit prescribed under the provisions of s. 80G(4) has been changed from time to time but at this stage, we are not concerned with the actual amount but we are on the principle as to how the total amount to be deducted from the income of the assessee under s. 80G is to be arrived at.

As stated hereinabove, first of all, the extent to which the donation to be deducted is to be ascertained under the provisions of s. 80G(1). If the amount so arrived at is not in excess of the maximum ceiling put up under the provisions of s. 80G(4), then the assessee is entitled to have the entire amount deducted from his income but if the amount arrived at under the provisions of s. 80G(1) is in excess of the maximum ceiling set up under the provisions of s. 80G(4), the amount which is in excess of the said ceiling shall not be deducted from the income. In other words, maximum limit in such case would be the limit set up under s. 80G(4).

Upon close reading of s. 80G(4) of the Act, it is very clear that the deduction shall not be allowed in respect of such part of the aggregate of the sums which exceeds 10 per cent of the gross total income or Rs. 5,00,000, whichever is less. As the above-referred limit is concerned with the overall maximum limit under the provisions of s. 80G of the Act, we are of the view that the said issue should be decided in favour of the assessee. Nowhere in the section it has been stated that only 50 per cent of the 10 per cent of the gross total income should be deducted from the assessee''s income by way of deduction under s. 80G. To read the section in such a manner would, therefore, not be just and proper.

In the circumstances, we are of the view that the question deserves to be decided in favour of the assessee.

So far as question No. 4 is concerned, the said issue is now no more res integra in view of the judgment delivered in the case of Agew Steel Manufacturers Pvt. Ltd. Vs. Commissioner of Income Tax, . The learned advocates appearing for the respective parties have fairly submitted that the said issue has been decided by the above-referred judgment and, therefore, without entering into further controversy, we are deciding the said issue in favour of the Revenue.

Thus, question Nos. 1 and 2 are decided in the affirmative, that is, against the assessee and in favour of the Revenue. Question No. 3 is decided in the affirmative, that is, in favour of the assessee and against the Revenue and question No. 4 is decided in the affirmative, that is, in favour of the Revenue and against the assessee. The reference is answered accordingly. There shall be no order as to costs.