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Commissioner of Income-tax, Bombay City-i Vs. Indian Textile Engineers Pvt. Ltd. and Another - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 103 of 1973
Judge
Reported in(1982)30CTR(Bom)234; [1983]141ITR69(Bom); [1982]11TAXMAN48(Bom)
Acts Income Tax Act, 1961 - Sections 9
AppellantCommissioner of Income-tax, Bombay City-i
RespondentIndian Textile Engineers Pvt. Ltd. and Another
Excerpt:
.....account of bad and doubtful debts - no provision in act of 1961 for treating subvention payment as trading receipt - payment to reimburse company in respect of debts which are not considered as trading debts under act of 1961 - such receipt cannot be treated as trading receipt - subvention payment not to be treated as trading receipt of company - question referred answered in negative. - - ,.made a provision of 3,30,000 pounds for bad and doubtful debts of sudan american textile industry ltd. ,.(2,50,000 pounds) and of sundry debtors in indonesia (80,000 pounds). the provision of 3,30,000 pounds for bad and doubtful debts, being a permissible deduction under the law of u. , 3,30,000 pounds were allowed as a bad debts. secondly, the provision of 3,00,000 pounds for bad and doubtful..........act, 1953 (u.k.), under which the subvention payment of 3,00,000 pounds can be treated as a trading receipt. secondly, the provision of 3,00,000 pounds for bad and doubtful debts, which was an allowable deduction under the u.k. act, is not a permissible deduction under our act. while determining the income of the assessee for the assessment year 1966-67 the ito held that the sum of 3,00,000 pounds could not be deducted in computing the total income of platt bros. (sales) ltd. under r. 10 (ii). the ito further held that the receipt of 3,00,000 pounds by platt bros. (sales) ltd.,. as a subvention payment under the terms of the agreement dated february 22, 1957, was income of that company and so was liable to be included in its total income. as a result, 3,00,000 pounds was treated.....
Judgment:

Sujata V. Manohar, J.

1. The assessees in the reference are Indian Textile Engineers Pvt. Ltd., agents of Platt Bros. (Sales) Ltd., Bombay. One Textile Machinery Makers Ltd., is a company registered in the United Kingdom carrying on business of manufacture and sale of textile machinery and spare parts. It has a number of subsidiary companies. Platt Bros., (Sales) Ltd., which is also a company incorporated in the U.K., is a subsidiary of Textile Machinery Makers Ltd. Similarly, Platt Brothers & Co. Ltd., Platts (Barton) Ltd., Howard Ltd. Howard & Bullough Ltd.,. and Dobson & Barlow Ltd., which are all companies registered in the United Kingdom, are also subsidiary companies of Textile Machinery Makers Ltd. All these subsidiary companies carry on the business of manufacture and sale of textile machinery and spare parts under the control of the parent company. The assessee-company is a selling agent of Platt Bros. (Sales) Ltd.,. in India.

2. Section 20 of the Finance Act, 1953, of the United Kingdom makes a provision for a subvention payment to one associated company, in respect of losses that may be incurred by it, by other associated companies. Under the provisions of s. 20 of the Finance Act, 1953 (U.K.). Under cl. I of the agreement it is provided as follows :

'1. The subsidiary companies hereby jointly and severally mutually COVENANT and AGREE with themselves and with the parent company that when and if directed by the parent company they will bear the losses incurred by any one or more of them and will make or receive a subvention payment in accordance with the provisions of section 20, Finance Act, 1953 (or any statutory modification or re-enactment thereof).'

3. This agreement was in operation for the assessment year 1966-67. During that assessment year Platt Bros. (Sales) Ltd.,. made a provision of 3,30,000 pounds for bad and doubtful debts of Sudan American Textile Industry Ltd.,. (2,50,000 pounds) and of sundry debtors in Indonesia (80,000 pounds). The provision of 3,30,000 pounds for bad and doubtful debts, being a permissible deduction under the law of U.K., 3,30,000 pounds were allowed as a bad debts. On the allowance of this deduction the company's results turned into a loss. Thereupon pursuant to the agreement dated February 22, 1957, the other associated companies contributed a sum of 3,00,000 pounds to Platt Bros., (Sales) Ltd.,. as a subvention payment in accordance with the terms of the above agreement.

4. The income in India of the assessee-company, who are the agents of Platt Bros. (Sales) Ltd., for the assessment year 1966-67 is admittedly to determined under the provisions of s. 9 of the I.T. Act, 1961, read with r. 10 (ii) of the I.T. Rules, 1962. Under s. 9 all income of a non-resident, accruing or arising whether directly or indirectly through or from any business connection in India, or through or from any property in India, is, inter alia, deemed to accrue or arise in India. Under r. 10 (ii), in any case in which the ITO is of the opinion that the actual amount of the income accruing or arising to any non-resident, whether directly or indirectly, through or from any business connection in India cannot be definitely ascertained, the amount of such income may be calculated 'on any amount which bears the same proportion to the total profits and gains of the business of such person (such profits and gains being computed in accordance with the provisions of the Act), as the receipt so accruing or arising bear to the total receipts of the business.'

5. The income of the assessee-company has been determined by the application of r. 10 (ii) of the I.T. Rules, 1962. The application of r. 10 (ii) involves the computation of the total income of Platt Bros. (Sales) Ltd.,. by applying the provisions of the I.T. Act, 1961. Our I.T. Act, does not have any provision comparable to s. 20 of the Finance Act, 1953 (U.K.), under which the subvention payment of 3,00,000 pounds can be treated as a trading receipt. Secondly, the provision of 3,00,000 pounds for bad and doubtful debts, which was an allowable deduction under the U.K. Act, is not a permissible deduction under our Act. While determining the income of the assessee for the assessment year 1966-67 the ITO held that the sum of 3,00,000 pounds could not be deducted in computing the total income of Platt Bros. (Sales) Ltd. under r. 10 (ii). The ITO further held that the receipt of 3,00,000 pounds by Platt Bros. (Sales) Ltd.,. as a subvention payment under the terms of the agreement dated February 22, 1957, was income of that company and so was liable to be included in its total income. As a result, 3,00,000 pounds was treated as a part of the income of Platt Bros. (Sales) Ltd., and they were not allowed to deduct the sum of 3,00,000 pounds as a permissible deduction for computing the total income of the company. The decision of the ITO was upheld by the AAC. The Tribunal, however, held that the receipt of 3,00,000 pounds by Platt Bros. (Sales) Ltd., being a subvention receipt, could not be treated as an income in the hands of that company. This receipt, therefore, should be excluded while calculating the total income of the company. There was no dispute that the deduction of 3,00,000 pounds for doubtful debts was not a permissible deduction under the I.T. Act. From this decision, at the instance of the Commissioner of Income-tax the following question has been referred to us for our opinion :

'Whether, on the facts and in the circumstances of the case, the subvention payment of 3,00,000 pounds received by the assessee-company was liable to be taken into account in the computation of the profit liable to tax in India under rule 10 (ii) of the Income-tax Rules, 1962 ?'

6. The answer to this question revolves around the exact nature of a subvention payment made under the provisions of s. 20 of the Finance Act, 1953 (U.K.). The relevant provisions of s. 20 of the Finance Act, 1953 (U.K.), read as follows :

'(1) Subject to the provisions of this section, where a company has a deficit for tax purposes during any accounting period of the company, and receives a subvention payment in respect of that period from an associated company having a surplus for tax purposes in the corresponding period, then in computing for the payment shall be treated as a trading receipt receivable by the one company on the last day of the accounting period during which it has the deficit, and shall be allowed as a deduction to the other company as if it were a trading expense incurred on that day.

(2) Subject to the next following sub-section, a payment made by one company to another shall be treated as a subvention payment within the meaning of this section if, but only if, it is made under an agreement providing for the paying company to bear or share in losses or a particular loss of the payee company, and is not a payment which (apart from this section), would be taken into account in computing profits or gains or losses of either company or on which (apart from this section and from any relief from tax), the payee company would be liable to bear tax by deduction or otherwise :

Provided that a payment in respect of any accounting period of the payee company shall not be treated as a subvention payment unless made in or before the year of assessment following that in which the period ends.

(3) If a company receives subvention payments from one or more associated companies in respect of the same accounting period to an aggregate amount exceeding its deficit for tax purposes during that period, or if a company makes subvention payments to one or more associated companies to an aggregate amount exceeding its surplus for tax purposes in the period which is the corresponding period in relation to those payments, the excess shall be disregarded for the purposes of this section ; and, where payments to or from than one company are in question, the payments shall be treated as abating in such manner as may be agreed between all the companies concerned or, in default of agreement, determined by the Commissioners of Inland Revenue.......'

7. Under s. 20 of the Finance Act, 1953 (U.K.), a subvention payment relates to a deficit which the company has for tax purposes. It receives this subvention payment from an associated company having a surplus for tax purposes. Under sub-s. (2) it is further stated that the amount which is received by the payee-company as a subvention payment is an amount which would not be ordinarily taken into account in computing the profits or losses of the payee-company, but for the express provisions of s. 20. Section 20 expressly provides that in computing the profits or losses of these companies for the purpose of income-tax, subvention payment shall be treated as a trading receipt in the hands of the payee-company and as an allowable deduction to the payee-company, as if it were a trading expense. Thus, a subvention payment is a payment of an amount, which would not, but for the provisions of s. 20 be taken into account in the computation of the profits or losses of either of the companies, namely, the payee company and the paying-company.

8. Under sub-s. (2) in order that a payment made by one company to the other could be treated as a subvention payment, it is necessary that there should be an agreement providing for the paying-assessee to bear or share in the losses of the payee-company. The agreement, in the present case, dated February 22, 1957, is an agreement under s. 20(2). Under the agreement the associated companies of Platt Bros., (Sales) Ltd.,. have contributed by way of subvention payments a sum of 3,00,000 pounds in order to make good the loss suffered by Platt Bros. (Sales) Ltd.,. on account of their making a provision of 3,00,000 pounds for doubtful debts. The payment of 3,00,000 pounds is thus directly related to and is made for the purpose of reimbursing the payee for the loss suffered by it on account of its making a provision for bad and doubtful debts.

9. Since there is no provision in the I.T. Act, 1961, corresponding to s. 20 of the Finance Act, 1953 (U.K.), we have to examine the nature of the receipt of 3,00,000 pounds in order to determine whether it can be considered as a part of the income of the assessee-company or not. In order to determine the nature of the receipt it is necessary to bear in mind the purpose for which this amounts has been received by the assessee-company. There is no doubt that this amount has been received by Platt Bros. (Sales) Ltd.,. towards the loss which it suffered and this loss is on account of certain bad or doubtful debts. If the debts in respect of which payments have been made cannot be considered as deductible under the provisions of our I.T. Act, then payment which has been made to reimburse the company in respect of such non-allowable bad debts cannot also be considered as a trading receipt. The receipt of 3,00,000 pounds is intrinsically linked with the loss suffered by the company. If this loss is not to be considered as a trading loss suffered by the company. If this loss is not to be considered as a trading loss for the purpose of income-tax, then the receipt also cannot be considered as a trade receipt, because the receipt is by way of reimbursement of that loss. The receipt, therefore, is de hors the trading activity of the company as far as provisions of the I.T. Act are concerned. Such a receipt cannot be considered as a receipt by way of the income.

10. From the language of s. 20 of the U.K. Act also it is clear that a subvention payment is not ordinarily treated as a trade receipt. In fact, the section lays down that such a payment must be of such a payment must be of such a nature as would not ordinarily qualify as a trade receipt. The section, therefore, further provides that such a payment, though not ordinarily a trading receipt, would be treated as such. There is no such deeming provision under our I.T. Act. Hence, bearing in mind the nature of the payment, it cannot be treated as a trade receipt.

11. Looked at from a slightly different point of view, the receipt is under the agreement dated February 22, 1957. Under this agreement Platt Bros. (Sales) Ltd.,. may, in future, be called upon to make a payment may suffer. Any sum which Platt Bros. (Sales) Ltd.,. may pay to such a company would not be considered as business expenditure deductible payment under the agreement dated February 22, 1957, cannot be treated as business expenditure, then any receipt of such/payment by the company also cannot be considered as a trading receipt, because the nature of the two payments is the same.

12. Mr. Joshi, learned counsel for the Department, submitted that a subvention payment is similar to the payment of a subsidy. He also submitted that a payment by way of a subsidy is considered as a part of the trade receipts of a company receiving it and can be included in the income of such a company. On the analogy of a receipt by way of a subsidy, a subvention payment should also be considered as a part of the trade receipts of the company. This submission of Mr. Joshi cannot be accepted. In the first place, it would not be correct to say that in every case where a subsidy is received by a company it will be necessarily included in the income of that company. Whether a subsidy can be treated as a part of the income of the company or not will depend upon the purpose for which such a subsidy is given ; for example, if a subsidy is given to a company purely in order that some workers of that company do not become unemployed, it may fall in the same category as an unemployment grant, and it cannot be considered as a part of the trade receipts of that company : (see in this connection Seaham Harbour Dock Co. v. Crook (H.M. Inspector of Taxes) [1931] 16 TC 333. A subsidy, however, which is by way of assistance in the company's trading activities is usually considered as a part of the trade receipts of the company. In this connection, Mr. Joshi drew our attention to a number of decisions, for example, in the case of Dhrangadhra Chemical Works Ltd. v. CIT : [1977]106ITR473(Bom) ; our High Court observed that payments in the nature of a subsidy from public funds to an undertaker to asset in the carrying on of the undertaker's trade or business is a trading receipt that should be brought into account in arriving at the calculation of profits or gains of the undertaking. An exception to this rule has been carved out in a case where the undertaker is a rating authority and the subsidy given by it to its undertaking is the proceeds of rates imposed by it or comes from a fund belonging to the authority. Then in such a case, the identity of the source with the receipt prevents any question of profits arising. In Dhrangadhra Chemical Works' case : [1977]106ITR473(Bom) , a subsidy given by the Government to the manufacturers of soda ash was treated as a revenue receipt since it was given to enable the manufacturers to carry on their business profitably. Ostime H.M. Inspector of Taxes v. Pontypridd and Rhondda Joint Water Board [1946] 28 TC 261 ; [1946] 14 ITR (Supp.) 45 , is a leading case on this topic. In that case certain sums paid to the water board by the District Councils which were its constituent authorities to meet an estimated deficiency of the water board were considered as a part of the trading profit of the board. Similarly, in the case of Ratna Sugar Mills Co. Ltd. v. CIT : [1958]33ITR644(All) , the Allahabad High Court held that a subsidy given to the sugar factories to compensate for an increase for an increase in the wages of the workers was a trade receipt of the sugar mills and was included in the income of the company for tax purposes. In the case of Admadpur Katwa Railway Co. Ltd., In re : [1935]3ITR277(Cal) , a subsidy paid by the State for the payment of a guaranteed percentage of interest on share capital was also treated as income of the company. In all these cases relied upon by Mr. Joshi the subsidy, which was paid, was paid in order to assist the company in its trading activities, either for ensuring a certain guaranteed return or for compensating the company for the heavy expenses incurred by such company in its trading activity. Such a subsidy, being directly related to the trading activity of the company, has to be considered as a part of its trade receipts. A subvention payment stands on a different footing. In the first place, it is not a payment which can be considered as a part of its trade receipts. A subvention payment which can be considered as for assisting the company in its trading activity. It is a payment which is made under an agreement under which a number of companies which are associated with one another agree to reimburse one another for losses suffered. It is essentially a payment for adjustment of profits and losses of associated companies for tax purposes. Such a payment cannot be considered as a payment of a subsidy. A subvention payment further involves mutual obligations to pay in contradistinction to a subsidy which is usually a grant from the Government or a public authority to a company to assist that company in its trade. A subvention payment is treated as a trading receipt under the law of United Kingdom entirely because of an express provision to this effect made under s. 20 of the Finance Act, 1953. But for such a provision, a subvention payment could not have been considered as a trading receipt. There is no such provision under the I.T. Act. In any case, on the facts of the present case, the subvention payment has been made in respect of losses arising on account of debts which are not deductible under the provisions of the I.T. Act, 1961. In other words, the payment in question is to reimburse the company in respect of debts which are not considered as its trading debts under the provisions of the I.T. Act, 1961. The receipt of such an amount cannot in any case, therefore, be considered as a trading receipt.

13. It was argued by Mr. Dastur, learned counsel for the assessee, that even if the payment in question is considered as income it should be treated as income of a casual and non-recurring nature, and on that count also it should not be treated as a part of the company's income for the purposes of income-tax. In this connection, he drew our attention to the terms of the agreement dated February 22, 1957. Under cl. 1 of the agreement the subsidiary companies have agreed to make a subvention payment only when and if they are so directed by the parent company. Mr. Dastur has submitted that under such an agreement there is no legal obligation on the subsidiary companies to make any subvention payment nor do they have any legal right to receive any subvention payment. It is only when the parent company, in its discretion, directs such payment to be made, that the payment is made. He submitted that such a payment must be looked upon as a casual and non-recurring payment. Mr. Joshi, learned counsel for the Department, however, submitted that a subvention payment made and received under an agreement is a payment which cannot be considered as casual or non-recurring because it arises on account of certain obligations which are undertaken by the subsidiary companies by virtue of the agreement. The payments made under the agreement cannot be considered as non-recurring. Prima facie, looking to the nature of the payment, and in view of the fact that the obligation to make and receive such payments is regulated under the agreement dated February 22, 1957, it is not possible to consider such a payment as purely casual or non-recurring. It is not necessary, however, to examine this aspect of the matter further, since we are of the view that the payment made is not a part of the company's income at all.

14. Mr. Dastur, learned counsel for the assessee, relied upon the provisions of r. 10(ii) of the I.T. Rules, 1962, in support of his next contention that a subvention payment should be ignored for the purpose of arriving at the income of the company in India. For the purposes of the I.T. Act, in the case of a non-resident, the income accruing or arising whether directly or indirectly through or from any business connection in India, is its income for the purposes of taxation. Rule 10 of the I.T. Rules, 1962, is framed to deal with cases where the actual amount of the income accruing or arising to any non-resident from such business connection in India cannot be definitely ascertained. The amount of income in such a case may be calculated, inter alia, as per sub-r. (ii), namely, on an amount which bears the same proportion to the total profits and gains of the entire business of such a person (such profits and gains being computed in accordance with the provisions of the I.T. Act), as the receipts accruing or arising in India bear to the total receipts of the business. In the present case it is an admitted position that the amount of such income of non-resident company in India cannot be definitely ascertained. Admittedly, therefore, the provisions of r. 10(ii) are attracted to the facts of the present case. Mr. Dastur submitted that r. 10 is designed to ascertain the actual income of the non-resident in India. Sub-rule (ii), therefore, should be so construed as to make it possible for the I.T. authorities to determine as accurately as possible the actual income of a non-resident in India. He submitted that bearing this principle mind, while calculating the total profits and gains of business of a non-resident in India, provided that such items as well as their corresponding entries on the debit or the credit side of the account can be so eliminated. He submitted that a subvention payment was a payment in respect of certain losses. These losses had arisen by virtue of the activities which had taken place wholly outside India. Since such losses as well as payments made to reimburse the company for such losses were both a part of a transaction which had taken place wholly outside India, it could be ignored for the purpose of ascertaining the actual income of the non-resident in India. This submission appears to us to be a very sweeping submission not warranted by the language of r. 10(ii). It is true that this rule must be interpreted bearing in mind its object of arriving at an accurate ascertainment of the income of a non-resident in India. But it would not be possible, in our view, to interpret r. 10(ii) in such a manner that a transaction of the non-resident, which may have taken place outside India, and which may be connected with the business activities of the company in India, can be eliminated in calculating its total world income. Rule 10 (ii) requires that one should first ascertain the ratio of an assessee's receipts in India to its total world receipts. This ratio must be applied to the assessee's total world income in order to arrive at the assessee's income in India. To ascertain the world income of the assessee, one must necessarily take into account receipts and outgoings outside India. They cannot be ignored. It is possible that in a given case a non-resident company may carry on diverse business activities which are separable and in respect of which it has kept separate accounts. Out of its several businesses, it may carry on only one business in India. In such a case, if an activity is carried on wholly outside India, it may be ignored while arriving at the calculations of the profits of the non-resident in India ; for example, if a company carries on the business of manufacturing shoes as well as armaments and it keeps separate accounts in respect of both these activities, then if such a company only carries on the activity of manufacturing shoes in India, it may be possible to say that for the purpose of r. 10(ii) the activity of manufacturing armaments may be ignored for arriving at the income of the company in India. The present case is not such a case. When the company carries on the same business both in India and abroad, it is not possible to dissect its account and to eliminate from this account those items either on the credit or on the debit side which have no connection with its trading activities in India. To do so would defeat the very device under r. 10(ii) to determine the correct ratio of income of the non-resident in India in relation to its total world income. In any case, we need not examine this argument any further ; because, in our view, for grounds already stated, a subvention payment cannot be treated, in the facts and circumstances of the present case, as a trading receipt of the company.

15. The question is, therefore, answered in the negative, that is to say, in favour of the assessee and against the Department. The applicant to pay to the respondent costs of the revenue.


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