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Indian Emporium Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Cochin
Decided On
Judge
Reported in(1984)7ITD101(Coch.)
AppellantIndian Emporium
Respondentincome-tax Officer
Excerpt:
.....had also increased. it was also explained that the main increase was due to the purchase of a fishing trawler and the firm was engaging itself in fishing business for the first time. it was also pointed out that the department has not questioned the experience and competency of the general manager, who is a person greatly respected, in trade and the government circles. it was pointed out that he was appointed as convener of an ad hoc committee for coir yarn by the board and was also a member of the state trading corporation's trade delegation to the united kingdom. it was after considering these aspects that the tribunal upheld the salary of rs. 27,750 for the assessment year 1977-78. as against this, it was pointed out by the learned departmental representative that the salary had.....
Judgment:
1. This appeal by the assessee relates to the assessment year 1978-79 for which the relevant accounting period ended on 30-6-1977.

3.1 Ground No. 2 : This is to the effect that the Commissioner (Appeals) erred in confirming the disallowance of a portion of the salary paid to the general manager of the assessee-firm. During the relevant accounting period, a sum of Rs. 36,000 was paid as salary to the general manager. Shri V.V. Job. The partners of the firm are his wife and children. Shri V.V. Job was paid a salary of Rs. 15,000 during the assessment year 1976-77 and Rs. 27,750 during the assessment year 1977-78. This was enhanced to Rs. 36,000 during the year 1978-79, being the year under appeal.

3.2 The ITO allowed only Rs. 27,000 and disallowed the balance amount of Rs. 9,000 under Section 40A(2) of the Income-tax Act, 1961 ('the Act'). This was confirmed by the Commissioner (Appeals).

3.3 The matter relating to the assessment year 1977-78 came up before the Tribunal in IT Appeal No. 367 (Coch.) of 1979 and by the order dated 29-8-1981, the Tribunal held that the salary of Rs. 27,750 cannot be considered to be excessive or unreasonable. The question for consideration is whether there is justification for enhancement of the salary to Rs. 36,000 during 1978-79. In support of the enhancement, it was pointed out on behalf of the assessee that the sales turnover which was Rs. 47.2 lakhs during 1977-78 had gone up to Rs. 67.1 lakhs during 1978-79. Similarly, the gross profit had gone up from Rs. 7.55 lakhs to Rs. 9.32 lakhs. Although the percentage of the gross profit went down from 16 per cent in 1977-78 to 14 per cent during 1978-79, it was pointed out that the overall business had increased and along with that the responsibilities and duties of the general manager had also increased. It was also explained that the main increase was due to the purchase of a fishing trawler and the firm was engaging itself in fishing business for the first time. It was also pointed out that the department has not questioned the experience and competency of the general manager, who is a person greatly respected, in trade and the Government circles. It was pointed out that he was appointed as convener of an ad hoc committee for coir yarn by the board and was also a member of the State Trading Corporation's Trade Delegation to the United Kingdom. It was after considering these aspects that the Tribunal upheld the salary of Rs. 27,750 for the assessment year 1977-78. As against this, it was pointed out by the learned departmental representative that the salary had been increased from Rs. 15,000 to Rs. 27,750 during the earlier year and that there is no justification for increasing the salary further during the assessment year. The learned departmental representative also relied upon the ruling of the Kerala High Court in the case of CIT v. Westcoast Shipping Agencies (P.) Ltd. [1981] 127 ITR 442.

3.4 It is true that the salary of Rs. 15,000 paid in the year 1976-77 was enhanced to Rs. 27,750 for the assessment year 1977-78. But, there has been increase in the gross turnover from Rs. 47.2 lakhs to Rs. 67.1 lakhs and the gross profit from Rs. 7.55 lakhs to Rs. 9.32 lakhs. Even according to the learned representative for the assessee, the increase was mainly due to the firm engaging in fishing business for the first time. There has, therefore, been new investment and the increase in the turnover cannot, therefore, be attributed solely to the efforts of the general manager with reference to the existing business. But it is clear that the general manager had to look after a new item of business also. In the case of Westcoast Shipping Agencies (P.) Ltd. (supra), relied upon by the learned departmental representative, the claim for enhancement was disallowed on the ground that there was no material to support the same. The position is different in the present case. We would, therefore, hold that a salary of Rs. 33,000 will be reasonable.

The disallowance will, therefore, be reduced to Rs. 3,000.

4.1 Ground No. 3 : This is to the effect that the Commissioner (Appeals) erred in confirming the disallowance of investment allowance in respect of a fishing trawler acquired by the assessee during the relevant accounting period. The claim was disallowed by the ITO on the ground that the allowance is not admissible in respect of fishing boats. The Commissioner (Appeals) held that investment allowance will be allowable only in the case of ships, that the fishing boats are not ships and that investment allowance was not, therefore, admissible.

4.2 Before us, the learned representative for the assessee relied upon the decision of the Tribunal dated 22-6-1977 in the case of ITO v.Eduthan Fishing Corpn. [IT Appeal No. 7 (Coch.) of 1976-77]. The question that came up for consideration in that case was whether development rebate can be allowed in the case of fishing boats at the rate of 40 per cent which is allowable to ships, In dealing with the question, the Tribunal held that "Under the rules governing allowance of depreciation, boats like inland vessels, speed boats and ocean going ships are all classified under the broad head of ships. These rules framed under Section 32 of the Act could be relied on for the interpretation of the word 'ship' appearing in that section. Section 32 deals with depreciation on ships, machinery, plant, furniture and buildings. Section 33 of the Act which deals with development rebate confines itself to ships, machinery and plant. It would be reasonable to assume that the word 'ship' in Section 33 has the same meaning as in Section 32. The meaning attributable to that word in Section 32 being made clear by the rules, we have to come to the conclusion that these three boats are ships." It was contended by the learned representative for the assessee that the ruling will hold good also in the case of investment allowance under Section 32A of the Act.

4.3 As against this, it was contended by the learned departmental representative that the ruling of the Tribunal relied upon by the assessee related to the claim for development rebate and that it is no authority for holding that fishing trawler will be a ship for allowing investment allowance under Section 32A. It was then contended by the learned departmental representative that even assuming that fishing trawler is a ship for the purpose of Sub-section (1) of Section 32A, the conditions of Sub-section (2) are not satisfied, because, under the same, the ship must have been acquired by an assessee engaged in the business of operation of ships. It was contended that, in the present case, the assessee is not engaged in the business of operation of ships and that the business of the assessee is only processing and export of fish. In support of this contention, the learned departmental representative relied upon the ruling of the Kerala High Court in the case of Cochin Co. v. CIT [1978] 114 ITR 822. It was pointed out that in this case the claim for development rebate was turned down by the High Cotirt for the reason that an assessee engaged in the processing and export of fish cannot claim to be a shipping concern.

4.4 In reply, it was contended by the learned representative for the assessee that the decision in the case of Cochin Co. (supra) related to the interpretation of the term 'shipping company' as occurring in a circular issued by the CBDT and it has no application to the present case. It was also contended that Sub-section (2) of Section 32A only requires that the new ship must have been acquired by the assessee engaged in the business of operation of ships and that if it is held that fishing trawler is a ship then the assessee, who is operating a fishing trawler should be deemed to be engaged in the business of operation of ships.

4.5 The first aspect to be considered is whether fishing trawler will be a ship within the meaning of Sub-section (1) of Section 32A. Under Sub-section (2) the ship must be a new one. There is no dispute about the fact that the fishing trawler is new one. The dispute only relates to the question whether fishing trawler can be termed as a ship for the purpose of the Section. Explanation 1 to Sub-section (2) says that the term 'new ship' shall have the same meaning as in the Explanation to Clause (vi) of Sub-section (1) of Section 32. Explanation 1 to Clause (vi) of Sub-section (1) of Section 32 only says that 'new ship' includes a ship or aircraft which before the acquisition by the assessee was used by any other person, if it was not at any time previous to the date of such acquisition owned by any person resident in India. It is, therefore, clear that the Explanation only deals with the aspect relating to the newness of the ship. The question whether fishing trawler is a 'ship' will, therefore, have to be decided without the aid of any Explanation in the section. The Tribunal has, in its order in the case of Eduthan Fishing Corpn. (supra), held that the word 'ship' in Section 33 has the same meaning as in Section 32 and will, therefore, includea fishing boat. If this is so, we find no reason why the word should not carry the same meaning with regard to Section 32A also. In the case of Cochin Co. (supra) the Kerala High Court did not go into the question whether a fishing trawler will be a ship. In fact, the claim that the fishing trawler will be a ship does not seem to have been contested at all by the department because the claim of the assessee for development rebate was resisted only on the ground that the trawler purchased by the assessee in that case was not a 'new ship'. We, therefore, hold that the fishing boat will be a ship within the meaning of the term as occurring in Section 32A.4.6 The next and the alternative contention of the learned departmental representative is based on Sub-section (2)(a) of Section 32A which provides that a ship or an aircraft for which investment allowance is allowable under Sub-section (1) should be a new ship or new aircraft acquired after the 31-3-1976, by an assessee engaged in the business of operation of ships or aircraft. It was contended by the learned departmental representative that to come under Clause (a) of Sub-section (2), the assessee must be engaged in the business of operation of ships and that in the present case the assessee is engaged in the processing and export of fish and that the assessee is not engaged in the business of operation of ships. This was met by the learned representative for the assessee by contending that if fishing boat is a ship, then, the operation of the fishing boat will be operation of ship and that the assessee can be said to be engaged in the business of operation of ship.

4.7 We may first examine how far the decision of the Kerala High Court in the case of Cochin Co. (supra) supports the stand taken by the learned departmental representative. As already stated earlier, the question whether a fishing trawler will be a ship was not an issue before the High Court and the only question that arose for decision was whether a second hand fishing trawler purchased from a non-resident could be treated as a new ship. In that case, the assessee had purchased the fishing trawler in December 1963 from its previous owner, who was not a resident of India. The claim was for development rebate under Section 33. Sub-section (1)(a) of Section 33 which specifically provided for granting development rebate in the case of a second-hand ship purchased from a non-resident did not apply in the case of the assessee as the same applied only to second-hand ships purchased after 31-3-1964 (vide observation of the High Court towards the close of page 827). The assessee, therefore, rested his claim solely upon a Circular No. 27(LIX-2) [F. No. 27(12)-IT/55], dated 6-7-1955 [see Taxmann's Direct Taxes Circulars Vol. 1, 1980 Edn., pp. 129-30] issued by the CBDT. Under the same, development rebate was to be allowed in the case of a second-hand ship purchased abroad by a shipping concern. It was held by the High Court that the assessee cannot rest its claim on the circular because the assessee was not a shipping concern as the business of the assessee was only the processing and export of fish. It is, therefore, clear that the decision of the High Court rested on the interpretation of the expression 'shipping concern' occurring in the circular. The expression 'an assessee engaged in the business of operation of ships or aircraft' occurring in Section 32A(2) or any similar expression did not come up for consideration of the High Court.

But, the ruling will indicate that an assessee engaged in the processing and export of fish cannot be said to be a shipping concern.

4.8 On a careful consideration of the matter, we are unable to accept the claim of the assessee that the operation of the fishing boat by the assessee will amount to operation of ships within the meaning of Clause (a) of Sub-section (2) of Section 32A. Clause (a) reads thus : A new ship or new aircraft acquired after the 31st day of March, 1976, by an assessee engaged in the business of operation of ships or aircraft ; On a reading of this provision, it appears to us that it covers only the asscssees engaged in the plying of ships or aircraft. As far as the present assessee is concerned, it was engaged only in the business of processing and exporting of fish. In the case of Cochin Co. (supra), the Kerala High Court has clearly held that an assessee engaged in the processing and export of fish cannot be said to be a shipping concern.

To satisfy the requirements of Sub-section (2)(a), the business of the assessee must be the operation of ships. Even accepting the position that fishing boat is a ship and that the assessee is operating fishing boats, the business of the assessee still remains the processing and export of fish. The operation of the fishing boat is incidental. It is not, therefore, possible to say that the assessee is engaged in the operation of ships. We, therefore, hold that the assessee has not satisfied the condition set out in Clause (a) of Sub-section (2) of Section 32A. The claim for investment allowance has, therefore, to fail and the ground is decided against the assessee.

5 to 6. [These paras are not reproduced here as they involve minor issues.]


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