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V. Ramakrishna and Sons Limited Vs. Commissioner of Income-tax, Tamil Nadu-i, Madras - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case Nos. 510 to 512, 754 to 758 of 1976, and 1433 to 1437 of 1977 (Reference Nos. 383 to 385, 6
Judge
Reported in[1984]149ITR554(Mad)
ActsIncome Tax Act, 1961 - Sections 33, 33(1) and 147
AppellantV. Ramakrishna and Sons Limited
RespondentCommissioner of Income-tax, Tamil Nadu-i, Madras
Appellant AdvocateM. Uttama Reddy, Adv.
Respondent AdvocateJ. Jayaraman and ;Nalini Chidambaram, Advs.
Excerpt:
direct taxation - rebate - sections 33 and 147 of income -tax act, 1961 - whether assessee company entitled to development rebate in relevant accounting year - assessee company's main object in memorandum of association was to carry business of managing agents and permit assessee to enter arena of business of its managed companies in time of need - plant and machinery installed by assessee were new and put to use - user of machinery in test production or experimental manufacturing was user for purposes of assessee's business - as per section 33 (1) claim for development justified whether or not product find its way into market on commercial scale. - - both the department and the tribunal, however, were satisfied thaw the last condition which the assessee had to fulfill for grant of.....balasubrahmanyan, j. 1. the main point in this group of income-tax references concerns the claim of the assessee concerned for grant of development rebate on certain new machinery and plant and also the claim to deduct expenses and losses connected with that new unit. the assessee is a managing agency company. it was the managing agent of a public company called 'k.c.p. ltd.' in 1954, the assessee promoted a wholly-owned subsidiary of k.c.p. ltd. called 'ramakrishna basic industries corporation ltd.' this subsidiary was formed to run a factory for producing cast iron pipes. this new company got an industrial license from the central government for that purpose. it had also imported machines from abroad. but that company for various reasons could not set up the factory and install and work.....
Judgment:

Balasubrahmanyan, J.

1. The main point in this group of income-tax references concerns the claim of the assessee concerned for grant of development rebate on certain new machinery and plant and also the claim to deduct expenses and losses connected with that new unit. The assessee is a managing agency company. It was the managing agent of a public company called 'K.C.P. Ltd.' In 1954, the assessee promoted a wholly-owned subsidiary of K.C.P. Ltd. called 'Ramakrishna Basic Industries Corporation Ltd.' This subsidiary was formed to run a factory for producing cast iron pipes. This new company got an industrial license from the Central Government for that purpose. It had also imported machines from abroad. But that company for various reasons could not set up the factory and install and work those machines. The assessee took over those machines at cost and installed them in a factory built by it. The machines were to be run on electricity. The assessee had no power connection for its factory. Hence, it borrowed electrical energy form K.C.P. Ltd., whose factory was nearby. After installation of the machinery, the assessee ran the plant on an experimental basis. For the trial runs, the assessee required raw materials, such as pig from and other ingredients, such as cooking coal. The assessee bought certain quantities of these items. In the trial runs given to the machines, a portion of these materials were used up and the rest remained in stock. The experimental production left the assessee on hand with a certain quantity of finished products such as 12 inch caliber 'spun pipes'. But these pipes also lay in stock. They were not marketed, nor intended to be marketed. As it turned out, the trial run of the new machines with the resultant production of sample pipes was the only activity that the assessee did in this venture. After the initial spurt of experimentation, the factory went into a state of suspended animation. The finished products and the products and the semi-finished products turned over during the trial runs and the unused stock of raw materials and ingredients which were left behind were carried over in stock from year to year. The finished articles turned out in the experimental production were not sold, nor were the stocks of raw materials and other ingredients replenished. After a few years, the assessee took a decision and let out this factory on lease to a third party at a fixed rent.

2. The present references relate to the period before the assessee leased out the plant. Two questions arise. The first relates to the installation of the pipe-casting machinery : the controversy is whether the assessee is entitled to development rebate in that year. The other question relates to the expenses and losses incurred by the assessee in that factory; the controversy is whether the assessee is entitled to an allowance therefore in the computation of its business income.

3. On the first question relating to grant of development rebate, the statutory requirement is that in order to be eligible for this grant, plant and machinery (i) must be new, (ii) must be owned by the assessee, (iii) must be installed in the year of claim, and (iv) must also be used for the purpose of the business carried on by the assessee. In this case, the Department at no stage disputed the position that the plant and machinery in question fulfilled the first three conditions. They were new, imported items. The assessee had purchased them form the subsidiary company which it had promoted. The machines had also been installed in the relevant accounting year. Both the Department and the Tribunal, however, were satisfied thaw the last condition which the assessee had to fulfill for grant of development rebate had not been fulfilled in this case. According to them, the item of machinery was not, during the relevant year of account, 'used for the purpose of the business carried on by the assessee', within the meaning of the relevant provision, namely, s. 33(1)(a) of the Income-tax Act, 1961.

4. Both the Department and the Tribunal apparently made a distinction between two stages of a business : (i) the stage when a business is just set up, and (ii) the subsequent stage when the business gets going and is being carried on. According to their line of thinking, the former was the position in the present case. For coming to this conclusion, they viewed the assessee's pipe-manufacturing plant as a new business venture, unconnected with the business which the assessee was all along carrying on, namely, managing agency business. On the basic that this unit was new venture, the Tribunal held that it did not pass the preliminary stage of setting up. The installation of the factory and even the trial run of the machinery were only preliminary. Business had not been commenced and production on a commercial scale had not started. There was only experimental production. Even the products turned out as the trial run of the factory had not been marketed. In this view, the Tribunal held that the machinery cannot be said to have been used for purposed of a business carried on by the assessee during the accounting year.

5. Before the Tribunal, the contention raised for the assessee was that the new pipe-producing unit could not be regarded as a new business at all, but must be regarded as a feature, or as a manifestation, of the assessee's existing business of managing agency. It was urged that the managing agency business was such an all-embracing business that acquiring the machinery from a company sponsored or promoted by the managing agent and setting up that machinery with a view to starting a production unit on its own account would amount to using the machinery for the purpose of the managing agency business, and, in that comprehensive conception, there was no scope for attempting to make any distinction between setting up a factory and running it as a commercial undertaking. The Tribunal, however, rejected these contentions. We are asked to examine the Tribunal's postulates and reasoning.

6. Development rebate is conditional on the carrying on of the business and on the user of the new machinery in that business. But the grant is not a yearly recurring grant. It is a capital allowance, like depreciation but, unlike depreciation, it is granted only in one year, either in the year of installation or in the next year of first user of machinery. The assessee had claimed development rebate on the new machinery in the year of installation. The assessee had also claimed, for that year as well as the succeeding years, certain other allowances which related to expenses and losses. These claims were also disallowed by the Department for the self-same reason, namely, that the expenses were incurred and losses were suffered by the assessee, not in a business which the assessee was carrying on, but in relation to production unit which had been barely set up, without any business being carried on with in any of barely set up, without any business being; carried on with it in any of the years. The assessee has come on reference to this court not only on the denial of development rebate but also on the disallowance of the other expanses and losses connected with the pipe-producing unit.

7. The denial of development rebate as well as the disallowance of expenses thus raise the same basic question : was the plant a new and separate business of the assessee, or was it but a feature of the assessee's already existing business of the managing agency

8. For an answer to this question it would be necessary to understand the institution of managing agency, peculiar to this country. Managing agency is now a thing of the past, even in our country. Our company law, it its evolution, sentenced it to a slow death, When the system was in vogue, it had a peculiar nature, It was something more than an agency. It was something more than a system of management. It was regarded as a kind of business in itself, capable of being carries on not only by individuals, either alone or in partnership, but also by incorporated bodies. What is more, this business was conceived of as covering responsibilities and concerns which were many and various, extending to several fields of activity, in addition to management tasks, pure and simple. Mr. Uttama Reddy, learned counsel for the assessee, gave us illustration, even from the pages of reports of tax cases, of the infinite variety of features of the managing agency business. In Tata Sons Ltd. v. CIT : [1950]18ITR460(Bom) , the question was whether expenses incurred by a managing agent, while undertaking part of the bonus commitment of the managed company, were allowable as part of the legitimate business expenses of the managing agent. The Bombay High Court held that although the workmen concerned were not employed by the managing agent, the payment of the bonus can still be regarded as a concern of the managing agent. In CIT v. Chandulal Keshavalal and Co. : [1960]38ITR601(SC) , the Supreme Court held that loss of remuneration forgone by the managing agent out of respect for the bad financial condition of the managed company must be held to be dictated by considerations of commercial expediency. In another managing agency case, CIT v. J. K. Industries (Pvt) LTD. : [1969]71ITR594(Cal) , the Calcutta High Court expressed the view that foreign tour expenses of a director of a managing agency company were legitimate business expenditure allowable as such, even though the tour was undertaken for advancing the interests of the managed company.

9. Mr. Jayaraman, for the Revenue, submitted that in all these illustrative cases the court were able to discover a nexus of the managed company's business with the business of the managed company. That kind of conclusion alone, he said, was not enough for deciding the issue in the present case. According to Mr. Jayaraman, the question to be faced and examined by this court was whether the spun pipe factorywhich the assessee in the instant case had installed can be said to passed beyond the state of being set up and to have been geared into actual production in a commercial sense for being described as a business being carried on during the years concerned.

10. We may, up to a point, agree with Mr. Jayararaman as to what the precise scope of our inquiry should be in the present case. But one of the questions which the assessee had raised in these references is whether the Tribunal was right in holding that the assessee's take-over of the pipe-casting plant and machinery from the managed company did not form part of, or was not even incidental to, the assessee's managing agency business. This question also has to be faced and answered. It is in this context that Tata Sons Ltd. v. CIT : [1950]18ITR460(Bom) , and other cases referred to us by Mr. Uttama Reddy must be considered as imparting an important lesson that the business of a managing agency transcends mere managerial or supervisors activities, and comprehends fairly everything for which the managed concerns themselves come into existence. In this all-comprehensive conception of the managing agency business, and particularly in the face of the relationship between the assessee and Ramakrishna Basic Industries Corporation Ltd., as a holding company and its subsidiary, the conclusion is inescapable that the assessee was very much engaged in advising its own 'managing agency' business when it took over the pipe-casting plant and machinery from its subsidiary and set up a factory of its own. The Tribunal's conclusion to the contrary is, in our judgment, wrong, based, as it is, on an inadequate comprehension of the nature of a managing agency.

11. The Tribunal sough support for their decision in the object clauses in the memorandum of association of association of the assessee-company. We think the Tribunal's reference to the object clauses is not to the point. If the inquiries were about the intra vires or ultra vires nature of a particular activity of an incorporated company, it would be pertinent for a tribunal or court to address itself to the terms of the memorandum of association and the scope of the object clauses. But where the question is, as in this case a factual question, namely, whether the take over of a particular venture was actually done by the assessee as one in the case of its business of managing agency, a meticulour examination of object clause is not only uncalled for, but it would throw no light on the problem. Whether a particular line of trade is part of an assessee's existing business or quite a departure from it a factual question. There is no denying that the assessee-company's main object, as se out in its memorandum of association, was the carrying on of the business of managing agents. This object, as we have shown earlier, is comrehensive enough to permit the assessee to enter the arena of the business of any of its managed companies, in time of need or by way of extending assistance.

12. The Tribunal in their order have referred to clause 3(i) of the assessee's memorandum and observed that this clause does not enable the assessee to take over the pipe-casting plant of its subsidiary and run that unit as its own. We have perused the clause in question. It does not bear the construction which the Tribunal have preferred to place on it. For, even under that clause, nothing prevents the assessee from 'acquiring the whole or any part of the undertaking of any business or operation which may appear likely to assist or benefit this company or to enhance the value of any property or business of this company'. We are satisfied that, quite; in terms of this objects clause, the assessee was competent to buy the spun-pipe plant and run it on its own, since it was clear to the assessee that it was the only way at once to assist its subsidiary and to benefits own business. We are, therefore, of the view that the Tribunal was in error in thinking that the assessee's take-over of the pipe-casting unit was ultra vires its objects and outside the scope of the managing agency business.

13. The proper view of the object clause of the assessee-company and also of the particular circumstances in which the assessee took over its subsidiary's plant must be that the assessee was engaging itself only on yet another aspect of its integrated business and not something which was a new or stage activity. In this view, which is the only reasonable conclusion in this case, the two material questions raised in these reference are easily answered. One of them as we earlier indicated, is about the claim for allowance of development rebate under s. 33 of the I.T. Act. According to the Tribunal, all that the assessee did with the pipe-casting machinery and plant was to install them in a factory, but the carrying on of a frular business. In this view, the Tribunal disallowed the allowance of development rebate. We hold that the Tribunal's decision is based on a misread in; g of the statutory provision. Other things remaining equal, development rebate under s. 33(1) is allowable where the plant and machinery is not only installed, but 'is wholly used for the purposes of the business carries on by' the assessee. The same idea is put in clearer words in the same provision when it says that the machinery or plant must be 'first put to use' either in the year of installation or in the immediately succeeding year. As a court of construction, we must read the words of this section as we find them without putting any gloss of our own. What of this section requires is that the plant or machinery after installation must be 'used' or 'first put to use' for the purpose s of the assessee' business. The section does not require that even must be carrying on the business. The section does not require that even in the very year of installation or in the year of the first user, the assessee must be carrying on the business. The section does not necessary that the installation and fist user must be 'in the cause of carrying on the business'. 'For the purpose of' is different from 'in the course of'. In this case, there is evidence to show that the factory was run on experimental production, and some quantity of pipes was actually turned out from the machines. The fact that the pipes so produced were not marketed or that the assessee did not commence regular production on a commercial scale cannot erase the fact that the pant and machinery were new, that they were installed and they were put to use. We have earlier held that the very take over of the plant and machinery by the assessee was 'for the purpose' of advancing the assessee's business of managing agency. Hence, the user of the machinery in test production or experimental manufacture was still user for the purposes of the assessee's business. In our judgment, s;. 33(1) would justify a claim for development rebate, whether or not the user of the machinery results in turning out products which find their way into the market on a commercial scale. The Tribunal was, therefor, not justified in refusing the allowance of development rebate to the assessee on the items of plant and machinery in question.

14. The other material question for our decision relates to the subsequent account years, that is to say, account years subsequent to the year of installation. of the pipe-casting factory and its trial run. As we earlier indicated, the spun-pipes produced during the experimental production remained as part of the stock or inventory of the assessee had engaged towards wages and staff for the specific purpose of the factory. In the subsequent years, since the factory was put to a test run, the factory. In the subsequent years, since the factory did not go into production, no expenses towards wages and the like were apparently debated to the profit and loss account. On the credit side, the cost value of the pipes turned out under the experimental production and lying unsold in the godown were apparently the subject of closing stock valuation year by year as a necessary part of the inventory. The result of this carry-over of the inventory from year to year and also the incurring of the expenses for keeping in trim the spun-pipe factory were business realities which the assessee had face even though no production was actually carried on, and, hence, they were reflected in the assessee's account. These items of debit and credit also got reflected in the returns made by the assessee from year to year. Since there was no production on a commercial scale and not even a sale of the experimental pipes, the assessee only returned losses in this line of business. The claim for losses was, however, rejected by the ITO and the Tribunal for the some reason which weighed with them in rejecting the claim for development rebate. They held that since the spun-pipe factory was not part of the assessee's managing agency business, any loss incurred in that venture cannot be regarded as a loss 'incidental' to the assessee's business. The question which the assessee has raised before us, is whether this conclusion is the correct one in the circumstances.

15. We do not think that a separate discussion either of the facts of the facts or of the law is called for, to answer this question. On the basis of our decision which we have earlier set out that the assessee's managing agency business comprehends the take-over of the subsidiary company's plant and machinery, year after year, in this factory must necessarily be regarded and losses, in the course of, or as incidental to the assessee's business. It is true that the production in the factory was in a state of suspended animation. But, there was no indication that the assessee had completely closed down this business. On the contrary, the fact that the assessee had leased out the factory in fine fettle and in good working condition shows that although the factory was idle, the business was by no means extinct. It follows, therefore, that every year's results of this business must include not only the valuation of the closing stock, but also all expenses chargeable against it. We must, accordingly, hold that the Tribunal was in error in disallowing the claim for expenditure and losses in the years subsequent to the installation of the spun-pipe factory by the assessee.

16. Although the two question which we have dealt with thus far are the only material issues on the material issues on the merits of the assessments under reference, we have been required to go into a jurisdictional point in relation to two of the assessment years concerned. The question raised is as to the validity of the reassessements for 1960-61 and 1961-62.

17. The ITO purported to reopen the original assessments for these two years under s. 147(a) of the I.T. Act, 1961. In the original assessments for these two years, the ITO allowed development rebate to the assessee on the machinery and plant installed by the assessee in its spun-pipe manufacturing factory. The Officer's stand in the reassessment proceedings under s. 147(a) was not only that the grant of the allowance for development rebate was wrong, but that the erroneous grant was rendered possible in the original assessment only because the assessee had withheld from the Department material facts necessary for a proper evaluation of the assessee's claim for development rebate.

18. The whole basis of the reassessments proceedings thus was that development rebate had been wrongly granted. In the view we have expressed in the foregoing paragraphs that the assessee was entitled to development rebate on the plant and machinery in the spun-pipe factory, this very basis of the reassessment must go overboard. Nevertheless, we shall briefly deal with the issue as to the validity of the reassessment proceedings since they have been raised in the Department's references.

19. The record shows that while filing its original return for 1960-61, the assessee clearly informed the ITO about the installation of the spun-pipe plant machinery and also the manufacture of pipes of a certain calibre whicch remained in stock unsold. Trecord further shows that the ITO had made a note of this information in his note-sheet for 1960-61. In the note-sheet for the next 1961-62 also, the offer had made a clear entry to the effect that after the manufacture of a few pipe, the production had been suspended. In the face of this written record of the Department, we cannot hold that there was any omission on the assessee's part to do its part of the duty, namely, to place material facts assessee's part to do its part of the duty, namely, to place material facts before the Officer. It is true that the assessee did not prepare and file a separate profit and loss account for the spun-pipe factory for either of the account years relevant to the assessment years 1960-61 and 1961-62. As usual, the assessee prepared a single profit and loss account for its entire business, which included the results of this unit. But even with the full factual information given to the Department by the assessee about the spun-pipe factory, the Officer did not call for any separate break-up figures relating to that unit. It might be that the assessee did not put figures relating to that unit. It might be that assessee did not put the ITO wise by suggesting that if a particular narrow view of s. 33(1) were taken, the claim for development rebate on the spun-pipe machinery could be rejected. But s. 147(a) does not require the assessee to do any more than place the material facts fully and truly before the Officer, in so far as they are relevant for the assessment. It is no part of the responsibility of the assessee to assist the Officer in drawing an inference from the facts, adverse to the assessee's own interests so as to deny the claim for development rebate, or to deny the claim for deduction of losses or expenses. Drawing inferences from facts placed by the assessee, interpreting the law and applying it to the facts are all processes to be undertaken by the assessee. It is his Officer to draw a correct inference either of facts or of law thereby income escapes assessment or thereby some allowance is wrongly granted in the original assessment, then not only it is not open to the Officer to blame the assessee for it, but he cannot also reopen the assessment under s. 147(a) of the Act to repair the damage caused by his own laches. But this is precisely what has happened in this case. We not properly invoked in this case. to reopen the assessee's assessments for 1960-61 and 1961-62. We agree with the Tribunal's decision which is to a similar effect.

20. We proceed to draw up our answers in formal terms to the questions of law we have discussed in broad terms in the foregoing paragraphs. The references cover the assessee's for the assessment years 1960-61 to 1966-67.

21. For 1960-61 and 1961-62, the following identical question of law arises on the jurisdictional issue raised before the Tribunal at the instance of the Department :

'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the reopening of the assessment under the provisions of section 147(a) was not valid in law ?'

22. Our answer to this question is in favour of the assessee, and it is to the effect that the reassessment is not warranted under s. 147(a). This answer covers the two assessment years 1960-61 and 1961-62.

23. The following question of law is peculiar to the assessment year 1960-61 and it has been raised at the assessee's instance :

'Whether the Tribunal was right in holding that the business of manufacturing was right in holding that the business of manufacturing of spun-pipes was a new business and had not even been 'set up' ?'

24. Our answers to the above question to the above question is against the Department. We do not agree with the Tribunal's finding that the assessee's business in spun-pipes was not even 'set up' during the relevant account year. In any case, this finding is beside the point for purposes of s. 33(1)(b) which requires only that the machinery and plant (and not the business) must be 'installed' or put to use in the account year concerned. There is no dispute that the machinery or plant was actually installed in the dispute that the machinery or plant was actually installed out from the production line a few pipes. The Tribunal's inquiry as to whether a business in spun-pipes has been 'set up' during this wholly beside the point. As we have held earlier in the judgment, the pertinent inquiry is whether the plant or machinery have been set up or have held earlier in the judgment, the pertinent inquiry is whether the plant or machinery have been set up or have had their first use in the relevant account year.

25. The following common question of law, at the assessee's instance figures for the assessment years 1960-61 to 1971-72 :

'Whether the Tribunal was right in holding that the taking over of pipe casting undertaking from Ramakrishna Basic Industries Corporation Limited did not form part of the assessee's main business of promotion and management of companies and was not incidental thereto ?'

26. Our answer to the above question is in the assessee's favour for all the assessment years concerned, for the reasons fully discussed earlier in our judgment.

27. This leaves a number of other questions referred to us by the Tribunal in which the assessee's claim for allowance of expenses and of losses in the spun-pipe venture is in issue. We have earlier held that the assessee should be entitled to deduction of such losses and expenses on the score that the spun-pipe venture was an integral part of the assessee's managing agency business. We, however, discussed the question of allowance of losses and expenses somewhat broadly, in the absence of details and in the absence of clear findings of Tribunal on particular aspects of losses or expenses. Hence, we would leave the following relevant question unanswered. But the Tribunal will we have laid down as general principal governing the eligibility of the assessee to the allowance of losses and expenses in the spun-pipe unit.

28. The questions which we return to the Tribunal for further consideration are the following :

1962-63 and 1963-64

'Whether the Tribunal was right in holding that the assessee was not entitled to deduction of expenditure incurred in connection with the pipe casting plant taken over from Ramakrishna Basic Industries Corporation Limited ?' 1962-63 :

'Whether the Tribunal was right in holding that the assessee was not entitled to the allowance of the loss of Rs. 82,677 relating to the pipe-casting plant ?' 1963-64 :

'Whether the Tribunal was right in holding that the assessee was not entitled to the allowance of the loss of Rs. 71,634 relating to the pipe-casting plant ?' 1964-65 and 1971-72 : 'Whether the Tribunal was right in holding that remuneration and interest paid to the selling agents on the spun-pipe department were not allowable deductions in computing the total income ?'

29. The tax reference are disposed of accordingly with the costs of the assesses. Counsel's fee Rs. 500 (one set).


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