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Commissioner of Income-tax Vs. Carborundum Universal Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 341 of 1970 (Reference No. 102 of 1970)
Judge
Reported in[1977]110ITR621(Mad)
ActsIncome Tax Act, 1961 - Sections 28 and 30 to 43A
AppellantCommissioner of Income-tax
RespondentCarborundum Universal Ltd.
Appellant AdvocateJ. Jayaraman, Adv.
Respondent AdvocateR. Balasubramanyan, Adv.
Cases ReferredBadridas Daga v. Commissioner of Income
Excerpt:
.....because payment not contributed to approved superannuation fund - question answered in negative against assessee. - - the income-tax officer disallowed the amount and the appeal preferred by the assessee to the appellate assistant commissioner of income-tax proved unsuccessful. ' the plain words of section 5(e) clearly indicate that amount borrowed for the purpose of purchasing the land giving rise to the agricultural income is amount laid out or expended wholly and exclusively for the purpose of the land. the extract from the judgment of the supreme court which we have made above will clearly show that if an expenditure comes within any of the enumerated classes of allowances, the case can be considered under the appropriate class. on the other hand, this decision in a way..........of the business shall be allowed in computing the income chargeable under the head ' profits and gains of business or profession '. the benefit of deduction under section 37 will be available only when the expenditure is not of the nature specified in sections 30 to 36. in the present case, the expenditure for which deduction is claimed is a contribution to a superannuation fund and is, therefore, of the nature specified under section 36(i)(iv) and, hence, the benefit of deduction cannot be allowed. the appellant sought to get the benefit of deduction under section 28 in the following manner......'4. the tribunal, after referring to the decision in commissioner of income-tax v. mysore sugar co. ltd. : [1962]46itr649(sc) and also the decision in calcutta co. ltd, v. commissioner of.....
Judgment:

Ismail, J.

1. The Income-tax Appellate Tribunal, Madras Bench, under Section 256(1) of the Income-tax Act, 1961, hereinafter referred to as ' the Act ', has stated a case and referred the following question of law for the opinion of this court:

' Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the sum of Rs. 17,575 contributed by the assessee-company to the U.K. Carborundum Company Superannuation Fund is deductible while computing the profits or gains of the business of the assessee under Section 28 of the Income-tax Act, 1961 ?'

2. The assessee is a company and it carried on the business of manufacture and sale of abrasives. It entered into technical assistance and collaboration agreement with the foreign company by name Corborundum Company under which it received technical information and know-how with respect to the manufacture of bonded abrasive products and coated abrasive products. One of the terms of the agreement, namely, Clause (6), provided for the foreign company furnishing necessary technical personnel for the operation of the plant of the assessee-company. Clause (7) of the agreement provided for payment of remuneration to the said foreign personnel and stated :

' It is also agreed that the salaries and expenses in India of personnel of Carborundum or of its subsidiaries, which (sic) in India to render services to Carborundum Universal will be paid by Carborundum Universal together with their necessary and reasonable travelling expenses. '

3. One of the orders of appointment of a person by narpe T. W. Jackson as general works manager in the assessee's factory at Thiruvottiyur has been enclosed as annexure ' E ' to the reference. Paragraph 9 of this annexure ' E ' stated :

' Pension scheme coverage or equivalent will be provided for you in the U. K. or in India, as may be practicable, when you become eligible to join such a scheme. The cost of pension contributions, excluding voluntary, will be borne by the company (the assessee).'

3. For the accounting year relevant to the assessment year 1964-65, the assessee had paid a sum of Rs. 17,575 by way of contribution to the U. K. Superannuation Fund in respect of three of the foreign personnel and it claimed a deduction of this sum in the computation of its profits and gains of the business. The Income-tax Officer disallowed the amount and the appeal preferred by the assessee to the Appellate Assistant Commissioner of Income-tax proved unsuccessful. However, on a further appeal to the Income-tax Appellate Tribunal, the Tribunal allowed the appeal and directed the deduction of that amount. In paragraph 3 of its order, the Tribunal pointed out:

'The appellant contributed a sum of Rs. 17,575 to the foreign company superannuation fund and claimed this amount ns an allowable deduction. This is not an allowable deduction under Section 36(1)(iv), as the contribution by the appellant was not towards a recognised provident fund or an approved superannuation fund. Realising the difficulty, the appellant sought to get the benefit of deduction under Section 37 which provides that any expenditure laid out or expended wholly and exclusively for the purpose of the business shall be allowed in computing the income chargeable under the head ' profits and gains of business or profession '. The benefit of deduction under Section 37 will be available only when the expenditure is not of the nature specified in sections 30 to 36. In the present case, the expenditure for which deduction is claimed is a contribution to a superannuation fund and is, therefore, of the nature specified under Section 36(I)(iv) and, hence, the benefit of deduction cannot be allowed. The appellant sought to get the benefit of deduction under Section 28 in the following manner......'

4. The Tribunal, after referring to the decision in Commissioner of Income-tax v. Mysore Sugar Co. Ltd. : [1962]46ITR649(SC) and also the decision in Calcutta Co. Ltd, v. Commissioner of Income-tax : [1959]37ITR1(SC) , held that the contribution to the superannuation fund is reasonably attributable as business expenditure and, therefore, it can be deducted under Section 28 of the Act itself. It is only on this basis the appeal preferred by the assessee was allowed by the Tribunal. It is thereafter, at the instance of the department, the Tribunal has referred the question set out above for the opinion of this court.

5. For the purpose of deciding this question, it is necessary to refer to the relevant statutory provisions. Section 28 of the Apt, so far as is relevant for the purpose of this case, states that the income shown thereunder shall bechargeable to income-tax under the head, 'profits and gains of business or profession ' and under item (i) is shown ' the profits and gains of any business or profession ' which was carried on by the assessee at any time during the previous year. Section 29 states that the income referred to in Section 28 shall be computed in accordance with the provisions contained in Sections 30 to 43A. Sections 30 to 43A deal with specific items which may be deducted in computing the profits and gains of business. Section 36 has the marginal note ' other deductions ' and it enumerates certain deductions therein which should be made in computing the income referred to in Section 28. One such deduction is contained in Section 36(1)(iv) and the same is as follows :

' any sum paid by the assessee as an employer by way of contribution towards a recognised provident fund or an approved superannuation fund, subject to such limits as may be prescribed for the purpose of recognising the provident fund or approving the superannuation fund, as the case may be ; and subject to such conditions as the Board may think fit to specify in cases where the contributions are not in the nature of annual contributions of fixed amounts or annual contributions fixed on some definite basis by reference to the income Chargeable under the head 'Salaries' or to the contributions or to the number of members of the fund.'

6. Section 37, with the marginal note 'General', states in Sub-section (1) thereof :

' Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ' Profits and gains of business or profession '. '

7. As we have pointed out already, the Tribunal has taken the view that the expenditure involved in the present case is of a nature described in Section 36(1)(iv) and, therefore, the residuary provision contained in Section 37 will not be attracted. However, the Tribunal allowed the deduction under Section 28 itself holding that any expenditure incurred for the purpose of carrying on business can be deducted for arriving at the true profits and gains of the business. The question for consideration is whether this conclusion of the Tribunal is correct or not.

8. We are of the opinion that the above view of the Tribunal is not correct. Simply as a matter of construction we reach the conclusion that once a particular item of expenditure is of the nature specifically described in any of the statutory provisions contained in Sections 30 to 43A of the Act, the said expenditure cannot be deducted under Section 28 simply because it does not become eligible for deduction under the specificprovision. In the present case an amount of Rs. 17,575 has been incurred by way of contribution to the superannuation fund in the U.K. of the foreign personnel. Section 36(1)(iv) of the Act deals with payment of the same nature, but it contemplates contribution to an approved superannuation fund. Simply because in the present case the superannuation fund in the U.K. will not come within the expression of 'approved superannuation fund' as contained in Section 36(1)(iv), it cannot be held that the said sum cm be deducted under Section 28 itself. The nature of payment is one thing and the eligibility of that payment for deduction is another. Once the nature of the payment is one as is provided for in the statutory provisions, its eligibility for deduction has to be found within the four corners of the said statutory provisions and when it is found that the said payment is not eligible for deduction under the particular statutory provision, it cannot be held to be deductible under the general principle, though the amount has been spent for the purpose of earning an income and, therefore, for arriving at the true profits and gains of the business commercially that amount should be deducted. In this particular case, as we have pointed out already, there can be no dispute about the fact that the nature of payment is one as described in Section 36(1)(iv) but the said payment cannot be deducted under Section 36(1)(iv) because it is not a contribution to an approved superannuation fund. In view of this position it cannot be held though the payment is not deductible under Section 36(1)(iv) still it can be deducted under Section 28 of the Act on the general principle of arriving at the true profits and gains of the business in a commercial sense.

9. There is one decision of this court which supports the principle which we have enunciated in this behalf, and, that is, N.M. Rayaloo Iyer and Sons v. Commissioner of Income-tax : [1954]26ITR265(Mad) , where this court had occasion to consider whether payment of commission made to branch managers or assistant managers would constitute permissible deduction under the Indian Income-tax Act and the Excess Profits Tax Act. In dealing with this question, this court pointed out (page 290) :

'As there is a specific provision in the Income-tax Act, circumscribing the limits under which a commission or bonus paid to an employee is to be allowed as a deduction, that specific provision, in our opinion, must prevail and resort cannot in these circumstances be had to Section 10(2)(xv) of the Income-tax Act. This is also the view taken by the Bombay High Court in Subodhchandra Popatlal v. Commissioner of Income-tax : [1953]24ITR566(Bom) . It is an accepted canon of construction of statutes that a specific provision always prevails and excludes a general provision. This aspect of the case, however, was not kept in mind by the income-tax authorities and the Appellate Tribunal in considering the claims for deduction put forwardby the assessee. The departmental authorities and the Appellate Tribunal dealt with the claims as falling within the purview of Section 10(2)(xv) of the Income-tax Act. '

10. In our view, the principle enunciated in the above decisions applies to the facts of the present case, and if so applied, it will follow that Section 36(1)(iv) of the Act having actually provided for deduction of contribution to provident fund and superannuation fund, the eligibility for such deduction has to be found within the four corners of that provision and if a particular deduction is found ineligible under that provision because it does not satisfy the requirement of that provision, it cannot be claimed as a deduction under the general provision, namely, Section 28, on the ground that for the purpose of arriving at the true profits and gains of the business commercially, this amount has to be deducted.

11. The learned counsel for the assessee drew our attention to another decision of this court, namely, C. Ramaswamy v. Commissioner of Agricultural Income-tax : [1964]51ITR164(Mad) , wherein this court held that though borrowing capital for the purpose of purchasing an estate is a capital expenditure, payment of interest on the borrowed capital is not a capital expenditure and that a partner of a registered firm earning agricultural income is entitled to claim by way of deduction interest paid on the capital borrowed by him for acquiring the estate giving rise to the income under Section 5(e) of the Madras Agricultural Income-tax Act, 1955, though not under Section 5(k) and contended that the decision supported the claim of the assessee in the present case. We are unable to accept this argument. That decision dealt with Section 5(k) and Section 5(e) of the Madras Agricultural Income-tax Act, 1955. Section 5(k) of that Act provided :

' any interest paid in the previous year on any amount borrowed and actually spent on the land from which the agricultural income is derived :

Provided that the need for borrowing was genuine having due regard to the assets of the assessee at the time :

Provided further that the interest allowed under this clause shall be limited to nine per cent. on an amount equivalent to twenty-five per cent. of the agricultural income from the land in that year. '

12. Section 5(e) of that Act reads :

'any expenditure incurred in the previous year (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of the land. '

13. The Bench held (page 167) :

'Can it be said that the expense was laid out or expended wholly and exclusively for the purpose of the land It is worthwhile to note the difference in terminology between Section 5(e) and Section 5(k). The wordsin Section 5(k) are ' amount borrowed and actually spent on the land '; and the words in Section 5(e) are 'expenses of the assessee laid out or expended wholly and exclusively for the purpose of the land.' The plain words of Section 5(e) clearly indicate that amount borrowed for the purpose of purchasing the land giving rise to the agricultural income is amount laid out or expended wholly and exclusively for the purpose of the land. But, the borrowed capital cannot be claimed as deduction as the spending of the amount is in the nature of a capital expense. Interest paid on such borrowing would, however, stand on a different looting as the expense incurred by paying interest is not a capital expense ; but yet it is laid out and expended wholly and exclusively for the purpose of the land.'

14. On this opinion, the court held that the interest paid on the borrowed capital would be a permissible deduction under Section 5(e) of that Act. For more than one reason we are of the view that the decision has no application to the present case. In the first place, Section 5(e) of the Madras Agricultural Income-tax Act, 1955, corresponds to the residuary provision in Section 10(2)(xv) of the Indian Income-tax Act, 1922, and Section 37 of the Act. Bat there is one difference in the language between Section 5(e) of the Madras Agricultural Income-tax Act, 1955, and Section 37 of the Act. Section 37 of the Act, while referring to any expenditure excludes expenditure of the nature described in Sections 30 to 43A. But no such provision is found in Section 5(e) of the Madras Agricultural Income-tax Act, 1955. Secondly, Section 5(k) of the Madras Agricultural Income-tax Act, 1955, dealt with the amount borrowed and ' actually spent on the land ' and, therefore, that will not include the amount borrowed for the purchase of the land. Consequently, Section 5(e) of the Madras Agricultural Income-tax Act, 1955, was applied because the interest involved in the case was not of the nature covered by Section 5(k) of the Madras Agricultural Income-tax Act, 1955. In this case, as we have pointed out already, the Tribunal itself held that Section 37 does not apply because the payment to the superannuation fund in the U.K. is of the nature contemplated by Section 36(1)(iv) of the Act and, therefore, the Tribunal rested its conclusion only on the general commercial principle with reference to the ascertainment of ' profits and gains of business ' occurring in Section 28 of the Act.

15. That leaves out the two decisions on which the Tribunal itself relied inthe present case. As we have pointed out already, the first decision isCommissioner of Income-tax v. Mysore Sugar Co. Ltd. : [1962]46ITR649(SC) . The Tribunal has relied on the following passage, which occursafter the Supreme Court has referred to clauses (i) to (xiv) of Section 10(2)of the Indian Income-tax Act, 1922 :

' The clauses expressly provide what can be deducted ; but the general scheme of the section is that profits or gains must be calculated after deducting outgoings reasonably attributable as business expenditure but so as not to deduct any portion of an expenditure of a capital nature. If an expenditure comes within any of the enumerated classes of allowances, the case can be considered under the appropriate class ; but there may be an expenditure which, though not exactly covered by any of the enumerated classes, may have to be considered in finding out the true assessable profits or gains. This was laid down by the Privy Council in Commissioner of Income-tax v. Chitnavis [1932] 2 Comp Cas 464 ; [1932] LR 59 IA 290 , and has been accepted by this court. In other words, Section 10(2) does not deal exhaustively with the deductions, which must be made to arrive at the true profits and gains. '

16. In that case, the Supreme Court was considering the claim made by the assessee for deduction of certain advances paid to cane-growers which could not be recovered. It is in the context of considering the claim of the assessee for deduction of that amount in arriving at the profits and gains of the business, the Supreme Court made the above observation and held that the loss incurred by the assessee was a loss on the revenue side and was deductible. We are of the opinion that that decision does not support the case of the assessee in the present case. The extract from the judgment of the Supreme Court which we have made above will clearly show that if an expenditure comes within any of the enumerated classes of allowances, the case can be considered under the appropriate class. In this particular case, the payment in question comes within the enumerated classes of allowances, namely, payment to a provident fund or superannuation fund dealt with under Section 36(1)(iv) of the Act, and, therefore, the said decision does not help the case of the present assessee.

17. The other decision relied on by the Tribunal is Calcutta Co. Ltd. v. Commissioner of Income-tax : [1959]37ITR1(SC) . In that case, the assessee bought lands and sold them in plots, fit for building purposes, undertaking to develop them by laying out roads, providing a drainage system and installing lights, etc. When the plots were sold, the purchaser paid only a portion of the purchase price and undertook to pay the balance in instalments. The assessee, in its turn, undertook to carry out the development within six months but time was not the essence of the contract. In the relevant accounting year, the assessee actually received in cash only a sum of Rs. 29,392 towards the sale price of lands, but in accordance with the mercantile system of accounts adopted by it, it credited in its accounts the sum of Rs. 43,692 representing the full sale price of--lands. At the same time, the assessee also debited an estimated sum of Rs. 24,809 as expenditure for the developments it had undertaken to carry out, given though no part of that amount was actually spent. The department disallowed theexpenditure. The Supreme Court held that the sum of Rs, 24,809 represented the estimated amount which would have to be expended by the assessee in the course of carrying on its business and was incidental to the business and, having regard to the accepted commercial practice and trading principles, was a deduction which, if there was no specific provision for it under Section 10(2) of the Income-tax Act, was certainly an allowable deduction, in arriving at the profits and gains of the business of the assessee, under Section 10(1) of the Act, there being no prohibition against it, express or implied, in the Act. The Supreme Court also pointed out that the expression 'profits or gains ' in Section 10(1) of the Indian Income-tax Act, 1922, had to be understood in its commercial sense and there could be no computation of such profits and gains until the expenditure which was necessary for the purpose of earning the receipts is deducted therefrom--whether the expenditure was actually incurred or the liability in respect thereof had accrued even though it might have to be discharged at some future date.

18. The Supreme Court in the above case approved the following observations made in its earlier judgment, namely, Badridas Daga v. Commissioner of Income-tax : [1958]34ITR10(SC) :

'The result is that when a claim is made for a deduction for which there is no specific provision in Section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act. '

19. We are of the opinion that this decision also has no application to the present case. On the other hand, this decision in a way supports the conclusion which we have already reached, namely, that inasmuch as the payment in the present case is of a nature contemplated under Section 36(1)(iv) of the Act, the said payment can be deducted only if the conditions specified in that sub-section are satisfied. From this it will follow that there is an implied prohibition in the Act itself for deducting the amount falling within the scope of Section 36(1)(iv), if the conditions mentioned therein are not satisifed. To hold otherwise will have the effect of rendering the specific provisions contained in the Act nugatory and to allow the assessee to circumvent the provisions of the Act and thereby making those provisions a dead letter. Therefore, we are of the opinion that once a payment is of the nature expressly dealt with in the particular provision of the statute, but does not qualify for deduction, since it does not fulfil the conditions prescribed in that particular statutory provision, the said payment cannot be allowed to be deducted on the general principle of ascertaining the profitsand gains of business commercially. In view of this, the payment in the present case being of the nature mentioned in Section 36(1)(iv) of the Act and being payment to the superannuation fund which is not approved for the purposes of that section cannot be claimed as a deduction for arriving at the profits and gains of the assessee's business in the present case.

20. Under these circumstances, we answer the question referred to us in the negative and against the assessee. The department will be entitled to its costs of this reference. Counsel's fee is fixed at Rs. 250.


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