1. In this reference five questions are referred to us, some at the instance of the revenue and some at the instance of the assessee. The questions which are scattered over the statement of case may first be noted :
Question No. 1 :
'Whether, on the facts and in the circumstances of the case, the loss suffered by the assessee on sale of certain Government securities was allowable as a revenue loss for the assessment years 1960-61 and 1962-6 ?' The question is at the instance of the Commissioner.
Question No. 2 :
'Whether, on the facts and in the circumstances of the case, the company was entitled to deduct the sum of Rs. 62,484 for the assessment year 1960-61, Rs. 1,41,951 for the assessment year 1961-62 and Rs. 1,21,709 for the assessment year 1962-63, claimed under the head `Sundry trade expenses' while determining its business Income-tax ?' This question is at the instance of the assessee.
Question No. 3 :
'Whether, on the facts and in the circumstances of the case, the amounts of Rs. 14,649 and Rs. 8,665 being expenditure incurred by the assessee in prosecuting its income-tax appeals were allowable as deductions in determining its business profits for the assessment years 1961-62 and 1962-63 ?' This question is at the instance of the assessee.
Question No. 4 :
'Whether, on the facts and in the circumstances of the case, the Tribunal could direct the Income-tax Officer to examine the claim of the assessee relating to the levy of interest under s. 18A(6) and reduce the interest charged to the extent that it covered the period of the pendency of the assessment for which the assessee could not be held responsible ?' This question is at the instance of the Commissioner.
Question No. 5 :
'Whether, on the facts and in the circumstances of the case, the assessee-company was entitled to the development rebate on the refrigerator while determining its profits for the year 1962-6 ?' This question is at the instance of the assessee.
2. Of these five questions, we may dispose of questions Nos. 2 and 5, which questions are both at the instance of the assessee. As far as question No. 2 is concerned, Mr. Dwarkadas on behalf of the assessee submitted that he does not wish the same to be answered; and since the question has been referred to us at the instance of the assessee, we shall refrain from answering the same.
3. As far as question No. 5 is concerned, which also is at the instance of the assessee, the assessee has called upon us, by consent, to answer it in the negative and in favour of the revenue. The question will accordingly be so answered.
4. We will now take up for consideration question No. 3, which may be briefly disposed of, as it appears to be covered by two decisions, one of the Full Bench of this court and another of the Supreme Court; these decisions, respectively, are : R. B. Bansilal Abirchand Spinning and Weaving Mills v. CIT : 81ITR34(Bom) and CIT v. Birla Cotton Spinning and Weaving Mills Ltd. : 82ITR166(SC) . For the purpose of this question, we are concerned with the assessment years 1961-62 and 1962-63, in which years the assessee-company had incurred certain expenditure in connection with prosecution of various income-tax appeals. These expenses included appeal fees, travelling expenses and professional fees paid to the person who represented the case of the assessee before the Tribunal. We are not concerned with the actual amounts, but the aggregate figures for the two years are mentioned in the question.
5. It was brought to our attention that the question was required to be answered in favour of the assessee by reason of the decision of the Full Bench of this High Court in R. B. Bansilal Abirchand Spinning and Weaving Mills' case : 81ITR34(Bom) and the decision of the Supreme Court in Birla Cotton Spinning and Weaving Mills' case : 82ITR166(SC) . As a matter of fact, both the cases are directly on point. Before the Tribunal, the decision of the Calcutta High Court in Birla Cotton Spinning & Weaving Mills Ltd. v. CIT : 64ITR568(Cal) had been cited on behalf of the assessee. But the Tribunal had chosen to follow the ratio (according to the Tribunal) in S. D. Sharma v. CIT : 45ITR107(Bom) which was a Bombay case; it is this Calcutta decision which has been subsequently affirmed by the Supreme Court in : 82ITR166(SC) . It has been held by the Supreme Court that similar expenses which were claimed by the assessee before it were expenses incurred for the preservation and protection of the assessee's business and must be regarded as incidental to the business and necessitated and justified by principles of commercial expediency. In that view of the matter, the question will be required to be answered in the affirmative and in favour of the assessee, and further elaboration, in our opinion, does not appear to be necessary as far as this question is concerned.
6. We must now come to question No. 1. For the purpose of answering this question a few facts will be required to be stated. The assessee before us is a limited company doing business mainly as building contractors. We are concerned, as far as this question is concerned, with the assessment years 1960-61 and 1962-63. For these two assessment years, the assessee had claimed an allowance of loss suffered by it on sale of certain Government securities. The loss suffered was Rs. 4,380 for the year 1960-61 and Rs. 7,360 for the year 1962-63. It was contended by the assessee that whilst tendering for contracts with the Government it was required to deposit various amounts and the deposits were made either in cash or in Government securities. According to the assessee, it was for this purpose that it acquired certain Government securities and lodged them with the Government and other authorities from time to time. The interest received by the assessee from these securities was included in its profits. It may be stated that for the assessment year 1960-61, the assessee had earned interest of Rs. 15,642 from such Government securities and for the assessment year 1962-63, the interest so earned came to Rs. 3,171. The practice of the assessee was to dispose of the securities when they matured and due for conversion. On some occasions if there was a time lag between two contracts, the assessee disposed of the securities lodged for the old contracts and bought new ones when a new contract was in the offing. In these operations sometimes there was a profit and sometimes a loss occurred. For the two years in question, however, there were losses in the amounts mentioned. In considering the assessee's claim for deduction of these losses in the determination of its business profits, the ITO held the same to be losses incurred on sale of investments and not business losses.
7. The assessee, being dissatisfied with the decision of the ITO, carried the matter in appeal to the AAC, who confirmed the view taken by the ITO. In his view also the securities in question were required to be classified as investments and, therefore, the loss was required to be regarded only as a capital loss.
8. The assessee thereafter carried the matter in further appeal to the Income-tax Appellate Tribunal. The Tribunal accepted the submission made on behalf of the assessee that the loss suffered by the assessee was one which was clearly incidental to its business. The relevant portion of the decision of the Tribunal has been extracted in para. 5 of the statement of case and the same may be usually extracted inasmuch as it appears to us to take a very practical and businesslike approach to the question under consideration which approach in our opinion, is also legally valid. According to the Tribunal :
'2.... The loss suffered by the assessee was clearly incidental to the business. The assessee could have deposited cash and in consequence it would have to forgo interest on securities which it had earned. On the other hand, it had chosen the alternative of depositing securities which had given it interest on securities on the one hand and a small loss in the disposal of the securities on the other. On balance the company had gained by reason of the alternative adopted by it. The decision to adopt that alternative was essentially a business decision. The operation connected with the disposal of the securities was an integral part of the assessee's business operations. By no stretch of imagination could the securities be treated as the assessee's investment. For one thing, by themselves they can hardly be considered an attractive investment for a company of the kind. Nor is it possible to say that they formed a part of the permanent structure of the company. All that the company did was to earn some return from the deposits that were inevitable in a business of this kind and the loss suffered by it on one branch of the transactions was clearly connected with the business and allowable as a revenue loss. We would, therefore, allow the loss for both the years.'
9. Before us Mr. Joshi on behalf of the revenue very briefly repeated the submissions which had appealed to the ITO and the AAC. It was, however, pointed out that it was not possible to characterise the approach of the Tribunal as in any way improper; and once that approach was accepted, then the necessary conclusion which was the very same as arrived at by the Tribunal must follow. It is clear from the facts recited by the Tribunal that the assessee had not invested in Government securities as an investment, but it preferred to make deposits by way of Government securities at the time of tendering for contracts instead of making such deposits in cash which would yield no interest at all. This was a businessman's decision taken in the course of his business, and the decision to keep deposits in the form of Government securities was, therefore, not in the nature of ordinary investment. If then such a businessman realises a loss when these securities are disposed of, we are of opinion that such loss must be allowable as a deduction in computing his business profits; and in this view of the matter, the question referred to us will have to be answered in the affirmative and in favour of the assessee.
10. This brings us to a consideration of question No. 4. The question has been referred to us at the instance of the Commissioner. It arises for the assessment year 1961-62 and concerns the levy of interest under s. 18A(6). Tax amounting to Rs. 5,13,460 was demanded under s. 18A from the assessee in the financial year 1960-61 for the assessment year 1961-62. The assessee submitted an estimate according to which the tax payable was Rs. 3,06,000. This amount was paid by the assessee as advance tax. The return of income was filed on 26th February, 1962. However, the assessment was actually completed on 28th March, 1966. At that time, the total tax liability of the assessee was determined to be Rs. 5,63,596. The ITO accordingly levied interest of Rs. 77,697.50 under s. 18A(6). This included interest for the period January 1, 1961, to March 21, 1966, due credit being given for the tax paid on provisional assessment which was made on 13th March, 1962. The calculations are to be found in annex. `A' to the statement of case. It may be mentioned that subsequently the figure was reduced to Rs. 25,739 as a result of the assessee's success in the quantum appeal before the AAC.
11. The assessee carried the matter in appeal to the AAC. As some argument has been advanced based on such ground, the said ground, which is ground No. 32, may be fully set out; the same reads as under :
'Ground No. 32.
(a) The Income-tax Officer erred in levying interest under section 18A(6) on the appellants amounting to Rs. 77,697.51.
The appellant's total income, if determined having regard to the contention raised in the above grounds of appeal, would be such that the tax paid by the appellants on the basis of their own estimate would not be less than 80% of the tax payable thereon and no interest could be levied on the appellants.'
12. Now, if this ground be read properly, the contention was obviously that there was no warrant for the levy of penal interest since the opening words of sub-s. (6) of s. 18A which alone would justify levy of penal interest were not satisfied. Thus, if the tax determined on regular assessment had been so substantially reduced in the appeal that the advance tax paid on estimate would be 80% or more of the said regular tax, then, it was the contention of the assessee, that no interest as contemplated by s. 18A(6) could be levied and the portion of the order levying such interest would be entirely required to be cancelled and full relief in the matter of interest afforded to the assessee. Unfortunately for the assessee, the AAC did not reduce in the quantum appeal the figure of assessable profits liable to tax to the extent as wanted by the assessee, but some reduction undoubtedly was made. Unfortunately for the assessee, the reduction was not as much as was required for the assessee to claim that the necessary conditions for applying s. 18A(6) were not satisfied. It may be repeated that it was as a result of this reduction in the company's regular tax that the calculation of penal interest was reduced from Rs. 77,697.50 to Rs. 25,739.
13. The AAC dealt with this portion of the appeal in the following words :
'27. Re : Levy of interest under section 18A(6) and section 18A(7). -It is contended that the Income-tax Officer erred in levying penal interest under section 18A(6) amounting to Rs. 77,697 and section 18A(7) amounting to Rs. 23,256. In this case a return of income was filed on 26-2-62 and the assessment was actually completed on 23-3-1966. It was not on account of any fault on the assessee's part. Since the assessee in this case filed an estimate of income under section 18A of the Act and the Income-tax Officer noticed after the completion of the assessment proceedings that the estimate so filed was less than 80% of the tax payable by the appellant company, I am satisfied that the interest under section 18A(6) was correctly levied by the Income-tax Officer. The representative of the appellant-company contended that in accordance with rule 48 of the Income-tax Rules the Income-tax Officer is competent to reduce the interest under section 18A if the assessment is completed after one year after the submission of the return. I find that the Income-tax Officer is competent to reduce or waive the penal interest in accordance with this rule only if it is proved that the delay in completion of the assessment was not on account of the assessee. No evidence has been led before me to prove that the delay in completing the assessment was not on account of the assessee. In the circumstances, I am satisfied that the Income-tax Officer correctly levied penal interest under section 18A(6).
Under rule 48(5) it is provided that the Inspecting Assistant Commissioner of Income-tax may consider and waive interest payable under section 18A(6) in justifiable cases. The representative of the appellant company explained that the IAC has not applied his mind regarding the waiver of interest in this case. I feel the appellant-company is incompetent to agitate this point in the appeal before me. It is up to the appellant-company to take up the matter with the IAC if they so desire.'
14. The AAC, it seems, has approached the appeal before him in the following manner : (1) That the AAC could go into the question whether penal interest could be reduced or waived as provided by r. 48(1). The AAC, however, reaffirmed the decision implicit in the order of the ITO which was to the effect that no reduction or waiver of the penalty was called for under the said rule and accordingly full penalty was leviable. (2) As far as r. 48(5) is concerned, the AAC's view seems to be that it was for the IAC to give relief to the assessee, if so advised, under that sub-rule; and for this purpose the assessee was advised to approach the ITO, if they so desired. In the view of the AAC, he (the AAC) could not take any action under r. 48(5) and grant relief to the assessee.
15. Being aggrieved by this portion of the AAC's order, the assessee carried the matter in further appeal to the Tribunal, where the relevant ground of appeal reads as follows :
'The AAC should have held that the appellant was not at fault for the late completion of the assessment and no interest could be levied under s. 18A(6) read with rule 48(5). The AAC should have further held that the appellant neither under-estimated the tax payable by them nor wrongly deferred the payment of tax having regard to the facts pertaining to the submission of estimate.'
16. Before the Tribunal on behalf of the department it was submitted that examination of the levy of interest was not permissible at the appellate stage. But this objection was overruled by the Tribunal and the Tribunal directed the ITO to examine the claim of the assessee that there was a period of pendency of the assessment for which the assessee could not be held responsible. The ITO was directed that if there was substance in such contention, the interest charged should be reduced to the extent of that period. We are informed that after that direction the ITO has reduced the penal interest to the figure of Rs. 6,652.
17. Mr. Joshi, however, has very strenuously urged that no appeal was competent either to the AAC or to the Tribunal thereafter on the computation of the amount of penal interest. According to his submission, the Tribunal was in error in the view that it took, based on the decision of this court in Mathuradas B. Mohta v. CIT : 56ITR269(Bom) . He submitted that the right of appeal was a restricted one and was not available to such contentions as were urged by the assessee before the AAC and the Tribunal. On the other hand, Mr. Dwarkadas supported the order of the Tribunal on several contentions which will be later on required to be examined. Mr. Joshi's principal contention was that the decisions of this court on which reliance had been placed by the Tribunal had been explained by the Full Bench of this High Court in CIT v. Daimler Benz A. G. : 108ITR961(Bom) and that, in view of the principles laid down in the said Full Bench decision, the decision of the Tribunal could not be supported.
18. Now, the said decision of the Full Bench in Daimler Benz case : 108ITR961(Bom) was concerned with properly interpreting and applying the provisions of s. 30 of the Indian I. T. Act, 1922, which provided for the right of appeal against the assessments under this Act. The said section specifically provided for appeals against assessments made or orders passed under the several sections of the Indian I. T. Act, therein mentioned. But an order for levy of penal interest under s. 18A(6) is not one of such sections specifically provided for. The question then is whether such an order in within the compass of the words 'denying his liability to be assessed under this Act' as are to be found within the phraseology employed by this section, which were the very words which came to be considered by the Full Bench in Daimler Benz case : 108ITR961(Bom) . Before, however, dealing with the said case in further detail, brief reference may be made to r. 48 of the Indian I. T. Rules, 1922, which was relied on by the assessee in the grounds of appeal both before the AAC and subsequently before the Tribunal.
19. Rule 48(1) and (5) are required to be fully set out and read as follows :
'48. The Income-tax Officer may reduce or waive the interest payable under section 18A in the case and under the circumstances mentioned below, namely -
(1) When the relevant assessment is completed more than one year after the submission of the return, the delay in assessment not being attributable to the assessee......
(5) Any case in which the Inspecting Assistant Commissioner considers that the circumstances are such that a reduction or waiver of the interest payable under section 18A(6) is justified.'
20. A bare reading of the rule would suggest clearly that the said rule deals with the stage of reduction or waiver, which is subsequent to the stage of levying penal interest payable under s. 18A and this is clearly what the AAC has indicated in para. 27 of his order.
21. It becomes necessary, therefore, to consider what the Full Bench decided in Daimler Benz case : 108ITR961(Bom) and how the apparent conflict between the two earlier decisions of this High Court in Keshardeo Shrinivas Morarka v. CIT : 48ITR404(Bom) and Mathuradas B. Mohta's case : 56ITR269(Bom) was explained. In Morarka's case, the Division Bench, dealing with the reference, took the view that no appeal lay to the AAC against the levy of penal interest correctly computed in accordance with the provisions of s. 18A(6) of the Act. In Mathuradas Mohta's case : 56ITR269(Bom) , the Division Bench notionally equated the levy of interest under s. 18A with the levy of tax. Accordingly, it held that under the phrase 'denying his liability to be assessed under this Act' the assessee would have a right to file an appeal from an order directing him to pay interest under s. 18A. The earlier decision in Morarka's case : 48ITR404(Bom) , however, was not brought to the attention of the later Bench. The Full Bench was really called upon to determine the scope of the words 'denying his liability to be assessed under the Act' occurring in s. 30, which alone would permit an appeal being filed from the imposition or levy of penal interest under s. 18A. The proposition contended for acceptance on behalf of the revenue, that unless the right of appeal was expressly found provided for, there could be no appeal, was accepted, and it was observed as follows (p. 977) :
'It is true that the scheme of section 18A of the Act has for its basis the principle of 'pay as you earn' and in a sense the section deals with the machinery which facilitates the process of early collection of tax but at the same time it cannot be disputed that when an Income-tax Officer resorts to section 18A(1), he implicitly decides that the assessee is one who is under legal liability to pay advance tax. In other words, he first decides that the assessee is in receipt of an income which is not covered by section 18 of the Act, that is to say, an income in respect of which there is no provision for deduction of income-tax at the time of payment. Similarly, he also decides that the assessee is a person who could not be said to be completely outside the ambit of the Act (that is to say, he is not a non-resident). Similarly, he also decides that the assessee is not in receipt of an income which is not chargeable at all (that is to say, his income is not agricultural). If, in respect of such decisions which are implicit in his action in resorting to section 18A(1) of the Act, the assessee feels that the Income-tax Officer has gone wrong, he would be an assessee desiring to 'deny his liability to be assessed under this Act' and, therefore, it would be unfair to deny him the right of appeal to the Appellate Assistant Commissioner. It does not appear to us that if after resorting to section 18A(1) the Income-tax Officer were to proceed against the assessee by way of charging penal interest on him either under section 18A(6) or under section 18A(8) for some default on his part and the assessee were minded to challenge merely the quantum of penal interest charged to him, he would have no right of appeal to the Appellate Assistant Commissioner, inasmuch as the assessee in that event would not fall within the phrase `assessee denying his liability to be assessed under this Act' occurring in section 30(1) of the Act. On a proper construction of the relevant phrase occurring in section 30(1) of the 1922 Act, therefore, we are clearly of the view that in the former type of cases an appeal would lie to the Appellate Assistant Commissioner, whereas no appeal would lie merely against the quantum of penal interest charged by the Income-tax Officer to the assessee.'
22. After referring to a number of cases, to which reference need not be made in this judgment, the Full Bench went on to observe as under (p. 986-7).
'Having regard to the aforesaid discussion of the decided cases it appears to us clear that the correct position would be that the assessee will have no right of appeal to the Appellate Assistant Commissioner merely against the quantum of penal interest charged, that is to say, merely for the purpose of raising a contention that interest charged is excessive or should be reduced or should have been waived altogether but an appeal would lie to the Appellate Assistant Commissioner if he were to deny altogether his liability to pay such interest on the ground that he is not liable to pay advance tax at all or that the amount of advance tax determined as payable by the Income-tax Officer is not correct. In the instant case before us, there is no doubt that the assessee had preferred an appeal to the Appellate Assistant Commissioner in which the principal ground of attack against the charge of penal interest levied against it was that the assessee-company being a non-resident company was not liable to be assessed to advance tax at all inasmuch as its income was under the one or the other head falling under section 18 of the Act and was outside the purview of section 18A of the Act. In other words, it was a clear case of an assessee 'denying its liability to be assessed under this Act' and as such the appeal to the Appellate Assistant Commissioner was competent under section 30(1) of the 1922 Act. The Tribunal's view was, therefore, correct.'
23. It is these observations which will be required to be applied in this reference although Mr. Dwarkadas has contended that in his larger submission the assessee who has filed a quantum appeal will be entitled to agitate in such appeal the question whether penal interest could be levied at all and whether the same has been levied in the proper amount or not. In our opinion, after the decision of the Full Bench, such larger submission is not available to the assessee in this court but the assessee is certainly entitled to canvass the same in a higher forum.
24. If the ground taken before the AAC be read fairly, the assessee had taken a plea that no interest at all was chargeable for the reason therein mentioned. That perhaps is a ground available to the assessee in an appeal which could be filed. This, however, is not directly the subject-matter of the reference before us because, obviously, the assessee failed to succeed in establishing the requisite factual basis for the plea in the ground being upheld. Mr. Dwarkadas, however, submitted that once the assessee had filed an appeal and could be said to have properly filed the appeal on the question of levy of penal interest, in such appeal he was entitled to urge also during the course of argument that the quantum of interest was not proper either by reason of some mistake in calculation or by the failure of the ITO or the IAC to give to the assessee the benefit of rr. 48(1) and 48(5). We are afraid that such contention cannot be accepted. We will assume for the purpose of this argument that the phraseology employed in s. 30 of the Act of 1922, on which reliance can be placed, viz., 'denying his liability to be assessed under this Act' includes (for the purpose of this argument only) the contention as was raised by the assessee before the AAC, viz., that penal interest could not be levied on the assessee since the necessary basis for applying s. 18A(6) was not available; even then that would not justify the appellate forum entertaining any further question on the quantum of the penal interest. It has been clearly indicated by the Full Bench, whose decision is binding on us, that the computation of penal interest is not the subject-matter of the appeal. It must equally follow that even if an appeal may lie on the question of liability to pay any penal interest, even then such appeal would not permit the urging of any contention on the computation of penal interest. Further, it would appear to us that, on a fair reading of the rule, the stage of waiver or reduction is a stage subsequent to the ITO computing penal interest which is to be paid by the particular assessee in consonance with the provisions of s. 18A(6). It is open at that stage to the assessee concerned to apply to the ITO or, if that officer fails to grant necessary relief by total or partial waiver or reduction under sub-r. (1) of r. 48, to the IAC whose powers appear to be much wider. If these officers fail to give any relief or fail to consider the assessee's case as they are required to do, then the assessee may have a right to move the Commissioner in his revisional jurisdiction. But such contentions are not within the purview of the ordinary appellate forum provided for in the I. T. Act. It is not possible in these circumstances to accept the contention that since the assessee had filed a quantum appeal or since the assessee had filed a permissible appeal contending that he was not liable to pay any penal interest whatever, then at the hearing of such appeal the assessee was entitled to urge before the AAC in the first instance and thereafter the Tribunal that the quantum of penal interest was required to be reduced on such considerations as have ultimately appealed to the Tribunal, which the Tribunal required the ITO to consider. In the view that we have taken it was not open to the AAC to go into the question whether the ITO was right or not in considering the question whether the delay in assessment could or could not be attributable to the assessee. If that be so, the Tribunal was equally in error in holding that it could in its appellate jurisdiction direct the ITO to consider this point and give necessary relief to the assessee if in the opinion of the officer the delay in assessment was not attributable to the assessee. We do not wish to express any opinion as to whether there is any way in which the ITO or the IAC or the Commissioner can be moved by the assessee today or not. We are concerned in this reference and in the question referred to with the limited point whether such decision or refusal to take a decision on the question of waiving or reducing the interest could be the subject-matter of an appeal to the AAC and thereafter to the Tribunal. For this purpose, we have to consider the provisions of s. 30 as now interpreted by the Full Bench of the High Court in Daimler Benz case : 108ITR961(Bom) . Applying the principles enunciated in the aforesaid Full Bench decision, the question would be required to be answered in favour of the revenue.
25. In the result, the questions referred to us in the reference are answered as follows :
Q. No. 1. -In the affirmative and in favour of the assessee.
Q. No. 2. -Is not pressed by the assessee and is accordingly not answered.
Q. No. 3. -In the affirmative and in favour of the assessee.
Q. No. 4. -In the view that we have taken that no appeal could be filed from the decision of the Income-tax Officer, in the negative and in favour of the revenue.
Q. No. 5. -On the assessee's application and with its consent, answered in the negative and against the assessee.
26. As far as costs are concerned, we direct the parties to bear their own costs of the reference.