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Commissioner of Income-tax Vs. CochIn Refineries Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax Reference Nos. 101 and 102 of 1979 and 47 of 1980
Judge
Reported in(1984)43CTR(Ker)103; [1985]154ITR345(Ker)
ActsIncome Tax Act, 1961 - Sections 80I and 80J; Income Tax Rules, 1962 - Rule 19A
AppellantCommissioner of Income-tax
RespondentCochIn Refineries Ltd.
Appellant Advocate P.K. Ravindranatha Menon, Adv.
Respondent Advocate K.V.R. Shenoi and; K.A. Nayar, Advs.
Excerpt:
.....a mandate that the total income of the concerned assessee must be computed in accordance with the other provisions of the act without reference to section 80e and since in the instant case it is income from business, the same as per section 29 will have to becomputed in accordance with sections 30 -43 which would include section 41(2). it is also clear that under the second step, the profits and gains attributable to the business of the specified industry (here generation and distribution of electricity) forms a component of the total income spoken of in the first step. on a proper construction of sub-section (1) and having regard to the legislative mandate contained in the three steps that are required to be taken in the manner indicated above, we are clearly of the view that the item..........80e ; secondly, ascertain what part of the total income so computed represents the profits and gains attributable to the business of the specified industry (here generation and distribution of electricity) ; and, thirdly, if there be profits and gains so attributable, deduct 8% thereof from such profits and gains and then arrive at the net total income exigible to tax. as regards the first step mentioned above, the important words in sub-section (1) are those that appear in parenthesis, namely, 'as computed in accordance with the other provisions of this act' and these words clearly contain a mandate that the total income of the concerned assessee must be computed in accordance with the other provisions of the act without reference to section 80e and since in the instant case it is.....
Judgment:

Kochu Thommen, J.

1. The following questions concerning the assessment years 1969-70 and 1970-71 have been, at the instance of the Revenue, referred to us by the Income-tax Appellate Tribunal/Cochin Bench :

'1. A. Y. 1969-70 : Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the interest income, income from machine shops and mobile equipments, miscellaneous receipts, etc., qualify for exemption under Section 80-I of the Income-tax Act ?

2. A. Y. 1970-71 : Whether the Tribunal is justified, in the facts and in the circumstances of the case, in holding that the miscellaneous receipts are eligible for exemption under Section 80-I of the Income-tax Act ?

3. A. Y. 1969-70 : Whether, on the facts and in the circumstances of the case and on an interpretation of the agreements entered into by the company with certain financiers, the Tribunal is right in law in treating the medium-term dollar loans as debentures for the purpose of computing relief under Section 80-I ?

4. A. Y. 1970-71 : Whether, on the facts and in the circumstances of the case and on an interpretation of the agreements entered into by thecompany with certain financiers, the Tribunal is right in law in treating the medium-term dollar loans as debentures for the purpose of computing relief under Section 80-I ?'

2. The last two questions are covered by the decision of this court in CIT v. Cochin Refineries Ltd. : [1983]142ITR441(Ker) , in favour of the assessee and are accordingly answered in the affirmative, that is, in favour of the assessee and against the Revenue.

3. The first two questions concern the assessment years 1969-70 and 1970-71 relating to the interest received from bank deposits and investments as well as the income derived by the hire of machines and cars and certain other miscellaneous receipts. The receipts arising for consideration are the following : During the accounting year relevant to the assessment year 1969-70, a sum of Rs. 10,18,145 had been received by the assessee as interest from deposits and Rs. 1,222 as interest on investments. The assessee had also received a sum of Rs. 3,48,902 as higher charges on machines and cars and a sum of Rs. 80,475 as miscellaneous receipts. In the following accounting year relevant to the assessment year 1970-71, the assessee had received a sum of Rs. 1,28,226 as miscellaneous receipts.

4. The assessee is a company which carries on business as a priority industry as defined under Section 80B(7) of the I.T. Act, 1961 (the 'Act'). For the relevant accounting years, the assessee's claim for the inclusion of these amounts in the computation of deduction under Section 80-I was rejected by the ITO, although in regard to certain other items the request was granted. On appeal by the assessee, the AAC held that the company was entitled to the deductions claimed in regard to these disputed items also. The Department's appeal was dismissed by the Income-tax Appellate Tribunal. The Tribunal found that the company was entitled to include these items in computing the deduction under Section 80-I.

5. It is contended on behalf of the Revenue that there is no evidence that the amounts realised by way of interest or hire charges or in respect of miscellaneous items were the result of any trading activity of the company. Counsel for the Revenue contends that these items represent income from other sources and they do not constitute profits and gains of the company for the purpose of deduction under Section 80-I.

6. The contention of the assessee in regard to interest is that it was profit received from amounts deposited in banks or other investments for the purpose of repayment of loans on the due dates. The amounts were so deposited as the loans were then not due for repayment. These deposits were for short duration and were subsequently utilised for repayment of the loans. The profits realised by way of interest from these deposits and investments qualify for deduction in terms of Section 80-I. In support of thiscontention, the assessee relies mainly on the observation of the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT : [1978]113ITR84(SC) .

7. In regard to the receipts from the hire of machines and cars, it is contended, that these machines and cars are the commercial assets of the company and they were let out during the periods when they are not required for the use of the company. The hire charges thus received by the company are the result of the commercial use to which these commercial assets had been put and were accordingly exigible to deduction under Section 80-I. The same argument is urged in regard to the various miscellaneous items.

8. Before we read the relevant section, we could refer to the decision of this court in Collis Line Pot. Ltd. v. ITO : [1982]135ITR390(Ker) , where the question as to the nature of the interest received by the assessee was considered by one of us (Kochu Thommen J.). That was a case where it was contended that the assessee was entitled to set off the unabsorbed development rebate in terms of Section 33 against interest received from amounts deposited in bank on the basis that such interest was part of the profits and gains of the business and not income from other sources. Rejecting that contention, it was held (p. 393) :

'The assessee is not a banking company. Money was not deposited by it by way of money-lending as a business. That was not its object. The interest arose from amounts deposited in bank otherwise than by way of business. The amount was deposited because money was lying idle and it was safer and wiser to put it in the bank. The interest thereby earned was incidental to the main purpose of the deposit, which was safe keeping and not earning profits. Such income is rightly found to be income from other sources.''

9. A Division Bench of the Madras High Court consisting of P. Govindan Nair C.J. and V. Ramaswami J. had occasion to consider in Addl. CIT v. Vellore Electric Corporation Ltd. : [1979]119ITR523(Mad) , a claim for deduction under Section 80-I on the basis of facts which are almost identical to those of the present case. Rejecting the assessee's contention that interest received from money deposited was attracted by Section 80-I, the court held (p. 526) :

'Thus the deduction is possible only in respect of profits and gains arising from specific activities or business of generation or distribution of electricity or any other form of power. The immediate source of income in this case is the investments in Government securities. This investment and the realisation of interest has no direct bearing on the business of generation or distribution of electricity of the assessee.'

10. Counsel for the assessee, however, contends that in view of the decision of the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT : [1978]113ITR84(SC) and other decisions, the question has to be seen in a totally different light and the assessee is entitled to claim deduction in respect of the interest and other disputed items.

11. The Supreme Court in the above-mentioned case held that the amounts realised by way of balancing charges arising from the sale of old machinery and buildings were deductible in terms of Section 80E as it stood then. That section was, in substance, identical to Section 80-I, as it was at the relevant time. The court said that, although in actual fact the proceeds of sale of machines and buildings constituted capital receipt and not revenue receipt, they were by fiction of law treated as profits and gains of the business so as to warrant the inclusion of such amounts also in the computation of the assessee's profits and gains with reference to Sections 30 - 43. Accordingly, the court found that the notional income, although not derived from the business activity of the company, was sufficiently connected with its business so as to be attributable to it : so much so, Section 80E, as it then stood, was attracted. In so stating, the court drew a distinction between the expressions 'attributable' as appearing in Section 80E and 'derived' under Section 80J, and said that Section 80E was wider in scope than Section 80J. Accordingly, court held that even such income which had not been directly derived from business could be treated as profits and gains for the purpose of Section 80E, so long as it had sufficient nexus so as to be attributable to the business.

12. In referring to the three steps by which Section 80E was operated for the purpose of computing the deduction, this is what the court said (p. 91) :

'First, compute the total income of the concerned assessee in accordance with the other provisions of the Act, i.e., in accordance with all the provisions except Section 80E ; secondly, ascertain what part of the total income so computed represents the profits and gains attributable to the business of the specified industry (here generation and distribution of electricity) ; and, thirdly, if there be profits and gains so attributable, deduct 8% thereof from such profits and gains and then arrive at the net total income exigible to tax. As regards the first step mentioned above, the important words in Sub-section (1) are those that appear in parenthesis, namely, 'as computed in accordance with the other provisions of this Act' and these words clearly contain a mandate that the total income of the concerned assessee must be computed in accordance with the other provisions of the Act without reference to Section 80E and since in the instant case it is income from business, the same as per Section 29 will have to becomputed in accordance with Sections 30 - 43 which would include Section 41(2). It is also clear that under the second step, the profits and gains attributable to the business of the specified industry (here generation and distribution of electricity) forms a component of the total income spoken of in the first step. Reading these two steps together, therefore, it is obvious that in computing the total income of the concerned assessee, the balancing charge arising as a result of the sale of old machinery and buildings and worked out as per Section 41(2), irrespective of its real character, will have to be taken into account and included as income of the business. In other words, the balancing charge as worked out under Section 41(2) will have to be taken into account before computing the deduction of 8% under the third step. On a proper construction of Sub-section (1) and having regard to the legislative mandate contained in the three steps that are required to be taken in the manner indicated above, we are clearly of the view that the item of Rs. 7,55,807 will have to be taken into account before computing the 8% deduction contemplated by the said provision.'

13. Applying this principle to Section 80I, as it stood at the relevant time, the 'gross total income', as defined under Section 80B, has to be computed in accordance with the other provisions of the Act, meaning those relevant provisions of the Act other than Section 80-I. Having done so, a deduction of 8% has to be allowed from that part of the income which is the profits and gains attributable to the 'priority industry'. It is only the balance amount so computed that is exigible to tax.

14. Section 80I, as it stood at the relevant time, reads :

'80-I. (1) In the case of a company to which this section applies, where the gross total income includes any profits and gains attributable to any priority industry, there shall be allowed, in accordance with and subject to the provisions of this section, a deduction from such profits and gains of an amount equal to eight per cent. thereof, in computing the total income of the company....'

15. 'Gross total income ' is defined under Section 80B(5) as :

'80B. (5) 'gross total income' means the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter or under Section 280 and without applying the provisions of Section 64.'

16. 'Priority industry' is defined under Section 80B(7) as :

'80B. (7) 'priority industry' means the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Sixth Schedule or the business of any hotel wheresuch business is carried on by an Indian company and the hotel is for the time being approved in this behalf by the Central Government.'

17. It has to be noticed that Section 80I, as it stood during the relevant years, when read with statutory definitions of 'gross total income' and 'priority industry' was in substance identical to Section 80E which was considered by the Supreme Court in Cambay Electric Supply Industrial Co.'s case : [1978]113ITR84(SC) .

18. Section 80I is applicable only in respect of companies which carry on business as a priority industry. The gross total income refers to the totality of the income of the company from all its sources under different heads of income computed under the various provisions of the Act other than Section 80I. The deduction of 8% is related only to a part of that total income which is the profits and gains attributable to the priority industry.

19. The expression 'attributable' was understood by the Supreme Court in Cambay Electric Supply Industrial Co. v. CIT : [1978]113ITR84(SC) , as a reference to the assessee's business of a priority industry as distinguished from his other business. It is in that context that the court said that the word 'attributable' is wide enough to take in not only such profits and gains as are 'derived' from the business of a priority industry, but also the notional income of such industry arising from the balancing charge contemplated under Section 41(2) which partakes of the character of 'escaped profits '. This is what the Supreme Court said in this context (p. 93) :

'As regards the aspect emerging from the expression 'attributable to' occurring in the phrase 'profits and gains attributable to the business of' the specified industry (here generation and distribution of electricity) on which the learned Solicitor-General relied, it will be pertinent to observe that the legislature has deliberately used the expression 'attributable to' and not the expression 'derived from'. It cannot be disputed that the expression 'attributable to' is certainly wider in import than the expression 'derived from'. Had the expression 'derived from' been used, it could have with some force been contended that a balancing charge arising from the sale of old machinery and buildings cannot, be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor-General, it has used the expression 'derived from', as, for instance, in Section 80J. In our view, since the expression of wider import, namely, 'attributable to', has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity.'

20. The court thus emphasised the distinction between the two sections and laid stress on the fact that, for the purpose of Section 80I, it was not necessary that the profits and gains had been 'derived' from the business in the sense that the business activity yielded such profits and gains, but it was sufficient that they were attributable to the business so as to rope in even a notional income referred to under Section 41(2). This decision does not support the contention that any income other than business income qualifies for deduction under the section. Deduction is provided for in respect of profits and gains, whether in actual fact derived from, or by fiction of law attributable to, a priority industry.

21. It is further contended by the assessee that the expression 'profits and gains attributable to any priority industry' should take in not only the 'profits and gains' of that industry in the narrow sense, as understood under Section 28, but also all other incomes attributable to a priority industry, irrespective of the heads of income, as distinguished from any other income of the assessee. The assessee as a company may have received income from various sources, other than the priority industry, under various heads, and for the purpose of deduction under Section 80I, the assessee's counsel contends, all receipts falling under different heads of income attributable to the priority industry must be included in computing the deduction under Section 80I. The fallacy of this argument is that the section does not refer to the 'total income' attributable to a priority industry, but to the 'profits and gains' attributable to such an industry. Profits and gains are well understood to mean only the business income, and not any other income. So long as the company has no business of lending money, and so long as the admitted case of the company is that the income derived is only on account of the peculiar situation arising from the time schedule for repayment of the loans, it cannot be stated that the income yielded by the deposits or investments was received in the course of the company's business so as to be treated as a business profit. The principle in Collis Line Pvt. Ltd. v. ITO : [1982]135ITR390(Ker) is in full force applicable to the facts of this case in so far as the nature of the receipts is concerned. More directly in point is the decision of the Madras High Court in Addl. CIT v. Vellore Electric Corporation Ltd. : [1979]118ITR523(All) , with which we are in respectful agreement. The decision of the Supreme Court in Cambay Electric Supply Industrial Co. v. CIT : [1978]113ITR84(SC) , does not, in our view, support the contention of the assessee to the contrary. The amounts received as interest, as we see them, are only receipts from 'other sources' and not 'profits and gains' attributable to the business of the assessee as a priority industry. Accordingly, we are of the view that the Tribunal was in error in holding to the contrary.

22. Coming to the hire charges in respect of machines and cars, counsel for the assessee refers to the decision of the Supreme Court in CEPT v. Shri Lakshmi Silk Mills Ltd. : [1951]20ITR451(SC) , and contends that, being commercial assets, the charges realised by hiring them constituted the business income of the assessee, and they were, therefore, attributable to a priority industry for the purpose of deduction under Section 80-I. In that case, the Supreme Court observed (p. 455) :

'In this case, the company was incorporated purely as a manufacturing concern with the object of making profit. It installed plant and machinery for the purpose of its business, and it was open to it if at any time it found that any part of its plant 'for time being' could not be advantageously employed for earning profit by the company itself, to earn profit by leasing it to somebody else. It is difficult to hold that the income thus earned by the commerical asset is not income from the business of the company that has been solely incorporated for the purpose of doing business and earning profits. There is no material whatever for taking the view that the assessee-company was incorporated with any object other than of carrying on business or trade. Owning properties and letting them was not a purpose for which it was formed and that being so, the disputed income cannot be said to fall under any section of the Indian Income-tax Act other than Section 10. Cases of undertakings of this nature stand on an entirely different footing and are distinguishable from cases of individuals or companies acquiring lands or buildings and making income by letting them on hire.'

23. The question to be examined is whether the assets let out by the company were commercial assets, meaning assets used in business, and whether the act of letting out was itself a commercial activity. In this connection, reference may be made to Sultan Brothers P. Ltd. v. CIT : [1964]51ITR353(SC) , where the Supreme Court stated (p. 358) :

'A very large number of cases was referred to in support of this contention but it does not seem to us that much assistance can be derived from them. Whether a particular letting is business has to be decided in the circumstances of each case. We do not think that the cases cited lay down a test for deciding when a letting amounts to a business. We think each case has to be looked at from a businessman's point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner. We do not further think that a thing can by its very nature be a commercial asset. A commercial asset is only an asset used in a business and nothing else, and business may be carried on with practically all things. Therefore, it is not possible to say that a particularactivity is business because it is concerned with an asset with which trade is commonly carried on. We find nothing in the cases referred, to support the proposition that certain assets are commercial assets in their very nature.'

24. An asset is not in its very nature a commercial asset. It is so only if it is used in business. It is, therefore, necessary to find out whether the assets in question were commercial assets in the sense in which that term is understood by the Supreme Court. If they were used for the purpose of the business of the company, and if they were let out in the course of such business, as in CEPT v. Shri Lakshmi Silk Mills Ltd. : [1951]20ITR451(SC) , the receipts by way of hire charges constituted business income. Whether the memorandum of association of the company had permitted such activity would be germane to the consideration. In the present case, the facts found by the Tribunal are not sufficient to throw clear light on this fundamental question. For example, it is not clear how the sum of Rs. 2,54,610 had been received by the company as hire charges for cars let out to the technicians. Was it in the course of business that the company let out the cars and the technicians used them If the technicians used the cars in connection with the business of the company, it is unlikely that they would have paid the hire charges to the company. It is necessary to find out how in each case the amounts were received by the company. The same difficulty arises in regard to the miscellaneous receipts, for the Tribunal does not seem to have found the relevant facts. We would have expected a detailed consideration of each of these items with reference to the relevant facts which ought to have been determined by the authorities.

25. In the circumstances, we do not answer question No. 2 relating to miscellaneous receipts. Nor do we answer question No. 1, except in regard to interest. Accordingly, question No. 1 relating to interest is answered in the negative, that is, in favour of the Revenue and against the assessee. As regards the assets and miscellaneous receipts referred to in question No. 1 and the miscellaneous receipts in question No. 2, the Tribunal shall call for the relevant records and ascertain the necessary facts and come to its own findings. We direct the parties to bear their respective costs in these tax referred cases.

26. A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.


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