The Commissioner of Income Tax vs South India Corporation (Agencies) Limited

P.P.S. Janarthana Raja, J.—The present appeals are filed u/s 260A of the Income Tax Act, 1961 by the Revenue, in I.T.A. Nos.

2656/Mds/95, 2657/Mds/95, 1553/Mds/94, 1919/Mds/94, 2676/Mds/96, 43/Mds/96, 44/Mds/96, 45/Mds/96, 46/Mds/96, 47/Mds/96,

1612/Mds/94, 1922/Mds/94 and 2600/Mds/96 for the assessment years 1990-91, 1991-92, 1989-90, 1992-93, 1993-94 and 1986-87 to

1989-90, passed by the Income Tax Appellate Tribunal, Madras, ''B'' Bench raising the following common substantial questions of law.

ITA Nos. 2656 and 2657/Mds/95 for the assessment years 1989-90 and 1992-93:

Whether in the facts and circumstances of the case, the Tribunal was right in holding that the 60% of the expenses incurred on partly convertible

debenture had to be allowed as deduction?

ITA Nos. 1553 and 1919/Mds/94, 2676 and 43 to 47/Mds/96 for the assessment years 1986-87 to 1988-89, 1992-93, 1993-94:

Whether in the facts and circumstances of the case, the Tribunal was right in holding that the mamool paid at harbour customs airport is to be

allowed as a deduction?

ITA Nos. 1553, 1919, 1612, 1922/Mds/94, 2657/Mds/95, 2656 and 2657/Mds/95, 43 to 47/Mds/96 for the assessment years 1990-91, 1991-

92, 1992-93, 1989-90, 1992-93, 1986-87 to 1988-89, 1992-93:

Whether in the facts and circumstances of the case, the Tribunal was right in holding that the payment of incentives to Dock Labour Board

workers had to be allowed as a deduction.

ITA Nos. 43 and 45/Mds/96 for the assessment years 1986-87 and 1988-89:

Whether in the facts and circumstances of the case, the Tribunal was right in holding that the claim of the loss from the Films Division had to be

allowed?

ITA Nos. 1612 and 1922/Mds/94, 2657/Mds/95, 2600/Mds/96 for the assessment years 1990-91, 1991-92, 1992-93, and 1993-94:

Whether in the facts and circumstances of the case, the Tribunal was right in holding that the interest paid on the borrowings from the subsidiary

company is an allowable deduction when the assessee had enough funds?

ITA Nos. 1919/Mds/94, 2676 and 43 to 47/Mds/96 for the assessment years 1991-92, 1986-87 to 1988-89, 1992-93 and 1993-94:

Whether in the facts and circumstances of the case, the Tribunal was right in holding that inclusion of interest from Sundaram Industries for the

amounts advanced by the assessee had to be deleted?

ITA No. 2676/Mds/96 for the assessment year 1993-94:

Whether in the facts and circumstances of the case, the Tribunal was right in holding that interest paid towards the loan taken for acquiring spic

zero bonds, had to be allowed as a deduction while computing the income from other sources.

The assessee company is carrying on business in agency, trading, engineering, stevedoring, clearing and forwarding, shipping etc. The

assessment years involved are 1986-87, 1987-88, 1988-89, 1989-90, 1990-91, 1991-92, 1992-93 and 1993-94.

3.1. The common questions of law stated above for these assessment years are taken up as follows:

Question No. 1:

Whether in the facts and circumstances of the case, the Tribunal was right in holding that the 60% of the expenses incurred on partly convertible

debenture had to be allowed as deduction?

3.2. This question pertains to the assessment years 1989-90 and 1992-93. For the relevant assessment years, the assessee claimed certain

expenditure as debenture issue expenses. The Assessing Officer treated 60% of the claim of expenditure as capital expenditure and the balance

40% as revenue expenditure. Aggrieved by the same, the assessee filed an appeal to the Commissioner of Income Tax (Appeals). The C.I.T.(A)

confirmed the order of the Assessing Officer and dismissed the appeal filed by the assessee. Aggrieved by the order, the assessee filed an appeal

to the Income Tax Appellate Tribunal (hereinafter referred to as the ""Tribunal""). The Tribunal held as follows:

The last of the issue is with regard to expenses incurred on Debenture Issue being treated as capital expenditure. The authorities have treated part

of the expenditure as capital expenditure on the reasoning that at the time of redemption of the Debenture, the holders of the Debentures were

entitled to certain shares. The issue of shares is a future event which may or may not happen. At present, the expenditure incurred was on the issue

of Debentures only and hence the expenses incurred on obtaining a loan is a revenue expenditure. We accordingly uphold the claim of the

assessee.

3.3. The Assessing Officer had bifurcated the expenditure and allowed only 40% as revenue expenditure, without any basis. The Tribunal correctly

held that the disallowance of 60% is without any basis and the Assessing Officer was wrong in treating part of the expenditure as capital

expenditure on the reasoning that at the time of redemption of debentures, the holders of the debentures would be entitled to certain shares. The

issue of shares is a future event which may or may not happen.

3.4. The Tribunal considered and followed the principles enunciated in the Apex Court judgment reported in India Cements Ltd. Vs.

Commissioner of Income Tax, Madras, , which, in fact, followed by the Delhi High Court in Commissioner of Income Tax v. Thirani Chemicals

Limited (2006) 204 CTR 146 holding that expenditure incurred on the issue of debentures is a permissible deduction u/s 37 of the Act.

3.5. The learned Counsel appearing for the Revenue has not produced any material or evidence to take a different view. The reasoning of the

Tribunal was based on relevant materials and evidence and there is no error or infirmity in the order of the Tribunal to warrant interference. In view

of the same, no substantial question of law arises for consideration by this Court and hence, the appeal in respect of question No. 1 is dismissed.

Question No. 2:

Whether in the facts and circumstances of the case, the Tribunal was right in holding that the mamool paid at harbour customs airport is to be

allowed as a deduction?

4.1. This question pertains to the assessment years 1986-87, 1987-88, 1988-89, 1992-93 and 1993-94. For the relevant assessment years, the

assessee claimed certain expenses incurred at Harbour, Customs, Airport etc. as revenue expenditure. The Assessing Officer disallowed the

expenditure. Aggrieved by the order, the assessee filed an appeal to the C.I.T. (A). The C.I.T.(A) held that the assessee is entitled to deduction

and allowed the appeal filed by the assessee. Aggrieved by the order, the Revenue filed an appeal to the Tribunal. The Tribunal confirmed the

order of the C.I.T.(A) and dismissed the appeal.

4.2. Both the C.I.T.(A) as well as Tribunal had given a concurrent finding that these expenses were incurred by the assessee in connection with

release of various goods and found that these were eligible expenses and also given a finding that the expenditure was inevitable.

4.3. In view of the factual finding given by the Tribunal and the conclusion based on the material and evidence available on record, there is no error

or infirmity in the order of the Tribunal to warrant interference.

4.4. In our considered opinion, the question No. 2 has not been happily worded. Even though learned Counsel for the appellant submits that the

question only deals with the expenses paid at harbour customs, but the same has colloquially been described in the question as ""mamool"", we are

unable to appreciate the said explanation as all the authorities have only meant and used the word, expenses incurred by the assessee and not the

word, ""mamool"" which is unusual in business transaction. Hence, while reframing the question No. 2 as,

Whether in the facts and circumstances of the case, the Tribunal was right in holding that the expenses incurred paid at harbour customs airport is

to be allowed as a deduction?

we still hold that no substantial question of law arises as the expenses incurred by the assessee in this regard is nothing but an inevitable expenditure

as factually found by the Tribunal. Hence, finding no substantial question of law that arises for consideration, the appeal as regards question No. 2

is also dismissed.

Question No. 3:

Whether in the facts and circumstances of the case, the Tribunal was right in holding that the payment of incentives to Dock Labour Board workers

had to be allowed as a deduction?

5.1. This question pertains to the assessment years 1986-87 to 1988-89, 1989-90, 1990-91, 1991-92 and 1992-93. The assessee paid

incentives to Dock Labour Board workers, share handling workers, tally clerks and lorry drivers. The said amount was paid to the workers as

incentives to speed up the stevedoring work carried on by the assessee. The Stevedoring is one of the business activities of the assessee company

which is a registered employer of the Madras Dock Labour Board. The said amount was paid in cash to the workers of the Madras Dock Labour

Board as incentives to speed up the stevedoring work. The Assessing Officer allowed only 50% of the amount by following the earlier order.

Aggrieved by the order, the assessee filed an appeal to the C.I.T.(A). The C.I.T.(A) allowed the appeal. Aggrieved by the order of the C.I.T.(A),

the Revenue filed an appeal to the Tribunal. The Tribunal dismissed the appeal filed by the Revenue and confirmed the order of the C.I.T.(A).

5.2. There is a factual finding by both the authorities that the payments were made in accordance with the list that was provided in the Dock

Labour Board. The incentives paid do not exceed 3% of the gross receipts and also is a customary payment incurred over a number of years and

accepted as genuine in earlier years by the Department. The payment was necessitated to utilise the full capacity of manpower from the workers,

to avoid demurrage charges and to keep the contract commitments made to the stevedors to discharge the tonnage as stipulated in the agreements

between the stevedors and the principals. Both the authorities found that there is no breach of law in making payments which were essentially

incidental to the carrying of the appellant''s business with a view to earning profits. The finding given by both the authorities is based on valid

materials and evidence and there is no error or legal infirmity in the order of the Tribunal and hence, does not require interference. In view of the

above, no substantial question of law arises for consideration of this Court and hence, the appeal with respect to question No. 3 is dismissed.

Question No. 4:

Whether in the facts and circumstances of the case, the Tribunal was right in holding that the claim of the loss from the Films Division had to be

allowed?

6.1. This question pertains to the assessment years 1986-87 and 1988-89. During the relevant assessment years, the assessee purchased

distribution rights for the Tamil Film and for Exploitation Rights in the District of North Arcot, South Arcot and Chengalpattu for a consideration of

Rs. 80,00,000/- and thereby incurred a loss. The assessee claimed the set off loss from film distribution and the Assessing Officer disallowed the

claim on the ground that the assessee venture into the film distribution business is only to avoid payment of taxes due to Government, legitimately.

Aggrieved by the order, the assessee filed an appeal to the C.I.T.(A). The C.I.T.(A) allowed the appeal. Aggrieved by the order, Revenue filed an

appeal to the Tribunal. The Tribunal dismissed the appeal by following its earlier order of the assessee''s own case relating to the earlier assessment

years.

6.2. The Tribunal has consistently allowed the claim for loss from Films Division. The Revenue has accepted the earlier order and the counsel for

the Revenue has not produced any material or evidence before us to take a different view. When a consistent view has been taken by the Tribunal,

there is no error or infirmity in the order of the Tribunal and it does not require interference and hence, no substantial question of law arises for

consideration of this Court and hence, the appeal in respect of question No. 4 is dismissed.

Question No. 5:

Whether in the facts and circumstances of the case, the Tribunal was right in holding that the interest paid on the borrowings from the subsidiary

company is an allowable deduction when the assessee had enough funds?

7.1. This question pertains to the assessment years 1990-91, 1991-92, 1992-93 and 1993-94. The assessee had advanced an amount to M/s.

Sundaram Industries. In the said advance, the assessee had not charged any interest. The said advances were made to provide working capital to

the subsidiaries. The Assessing Officer calculated the interest at 12% on the minimum balance outstanding during each year and disallowed out of

interest claim of the assessee. Against the disallowance, the assessee filed an appeal to the C.I.T.(A). The C.I.T.(A) confirmed the order of the

Assessing Officer. Aggrieved by the order, the assessee filed an appeal to the Tribunal. The Tribunal allowed the assessee''s claim. The Tribunal

had given a finding that the assessee has a lot of business action with the subsidiaries and carrying on various activities through the subsidiaries.

7.2. There is a factual finding that the assessee had its own free reserves and funds used mainly for running expenses. Also, there was no material

produced by the Revenue to establish that the money borrowed was actually given to its subsidiaries. Hence the conclusion of the Tribunal is based

on material and evidence and it does not suffer from legal infirmity to warrant interference. In view of the above, no substantial question of law

arises for consideration of this Court and hence, the appeal qua question No. 5 is dismissed.

Question No. 6:

Whether in the facts and circumstances of the case, the Tribunal was right in holding that inclusion of interest from Sundaram Industries for the

amounts advanced by the assessee had to be deleted?

8.1. This question pertains to the assessment years 1986-87 to 1988-89, 1991-92, 1992-93 and 1993-94. There was a debit balance in the

books of the assessee company in the name of M/s. Sundaram Industries. No interest was charged by the assessee even though the assessee was

paying interest on its borrowings. The Assessing Officer estimated the interest at 18% and added as income. Aggrieved by the order, the assessee

filed an appeal to the C.I.T.(A). The C.I.T.(A) allowed the appeal filed by the assessee. Aggrieved, the Tribunal filed an appeal to the Tribunal and

the Tribunal dismissed the appeal.

8.2. In respect of the earlier assessment order, for the assessment years 1981-82 and 1982-83, the Tribunal had allowed the claim of the

assessee. In the present case, the Tribunal followed the said earlier order and allowed the claim of the assessee. The Revenue was also not able to

produce evidence or material to take a different view and the said earlier order was accepted by the Revenue. In view of the same, no substantial

question of law arises for consideration of this Court and hence, the appeal apropos question No. 6 is dismissed.

Question No. 7:

Whether in the facts and circumstances of the case, the Tribunal was right in holding that interest paid towards the loan taken for acquiring spic

zero bonds, had to be allowed as a deduction while computing the income from other sources?

9.1. This question pertains to the assessment year 1993-94. During the relevant years, the assessee had acquired Spic Zero Bonds from M/s.

SPIC Limited. The assessee has claimed interest payment as a deductible expenditure. The reasons for the said claim are:

a) Interest claimed as a deduction from other sources being expenditure incurred for earning the same.

b) As the assessee is not a dealer in shares, the interest paid on loan borrowed is allowable as deduction and is not required to be capitalised.

The Assessing Officer disallowed the appellant''s claim for deduction of interest. Aggrieved by the order, the assessee filed an appeal to the C.I.T.

(A). The C.I.T.(A) held that the assessee is entitled to deduction of interest and allowed the claim. Aggrieved, the Revenue filed an appeal to the

Tribunal. The Tribunal dismissed the Revenue''s appeal and confirmed the order of the C.I.T.(A).

9.2. Both the first appellate authority as well as the Tribunal given a factual finding finding that the assessee is a flag-ship company carrying on the

worldwide business and the bonds were acquired for purposes of business. The conclusion arrived at by the authorities were based on material

and evidence and hence no substantial question of law arises for consideration by this Court and hence, the appeal in regard to question No. 7 is

dismissed.

In the result, the tax case is dismissed. No costs.