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Commissioner of Income-tax Vs. Indian Jute Mills Association - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 126 of 1976
Judge
Reported in(1981)23CTR(Cal)198,[1982]134ITR68(Cal)
ActsIncome Tax Act, 1961 - Sections 14 to 44B; ;Indian Trade Unions Act, 1926
AppellantCommissioner of Income-tax
RespondentIndian Jute Mills Association
Appellant AdvocateAjit Kumar Sengupta and ;Prabir Majumdar, Advs.
Respondent AdvocateP.K. Pal and ;R.P. Banerji, Advs.
Cases ReferredJivabhai Purshottam v. Chhagan Karson
Excerpt:
- .....incurred solelyfor the purpose of protection or advancement of the common interests of the assessee-association. in this regard reference was made to the provisions of section 37(1) of the act to contend that the depreciation under section 32 was treated as any other expenditure enumerated in section 37(1) of the act. it was further submitted that commercial principles must be applied for the determination of the deficiency. on the other hand, on behalf of the revenue, the grounds indicated in the order of the ito as well as the aac were canvassed. the tribunal, after considering the rival contentions, was of the view that the nature of the expenditure allowed under section 44a of the act had not been fully spelt out. the tribunal was also of the view that in the commercial.....
Judgment:

Sabyasachi Mukharji, J.

1. In this reference under Section 256(1) of the I.T. Act, 1961, the following question has been referred to this court:

' Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that depreciation debited in the accounts was ' expenditure incurred ' by the assessee within the meaning of Section 44A of the I.T. Act, 1961, and should be deducted in computing the deficiency under the said section for the assessment year 1969-70 '

2. The assessee is the Indian Jute Mills Association and the relevant assessment year is 1969-70, corresponding previous year being the year ended on 31st December, 1968. The assessee had income from interest on securities, income from jute chronicle and interest. The assessee's total income from these sources was Rs. 98,835. Before the ITO, by a letter dated 6th October, 1961, the assessee claimed the benefit of deduction of deficiency for Rs. 19,934 in accordance with the provisions of Section 44A of the I.T. Act, 1961. Along with the said letter, a computation showing the said deficiency of Rs. 19,934 was filed and this included a sum of Rs. 14,846 representing in respect of furniture, air-conditioner, etc., which was debited in the accounts. The assessee is registered under the Indian Trade Unions Act, 1926. The ITO disallowed this amount of deficiency for the computation of deficiency as, in his opinion, being a non-trading association, was not entitled to claim depreciation. In support, it was observed that such a depreciation could not be claimed since the assets were not used in the business. He, therefore, restricted the deficiency to Rs. 5,088, being the difference between Rs. 19,934 and Rs. 14,846.

3. The assessee, being aggrieved by the aforesaid order of the ITO, went up in appeal before the AAC. The AAC upheld the order of the ITOobserving that the depreciation was not an expenditure to be taken into account for computing the deficiency under Section 44A of the Act.

4. Being dissatisfied with the order of the AAC, the assessee went up in further appeal before the Tribunal. It was the case of the assessee before the Tribunal that the amount of depreciation, which was calculated according to the provisions of the Act and which was not claimed for computation of income under any other head, was an expenditure incurred solelyfor the purpose of protection or advancement of the common interests of the assessee-association. In this regard reference was made to the provisions of Section 37(1) of the Act to contend that the depreciation under Section 32 was treated as any other expenditure enumerated in Section 37(1) of the Act. It was further submitted that commercial principles must be applied for the determination of the deficiency. On the other hand, on behalf of the revenue, the grounds indicated in the order of the ITO as well as the AAC were canvassed. The Tribunal, after considering the rival contentions, was of the view that the nature of the expenditure allowed under Section 44A of the Act had not been fully spelt out. The Tribunal was also of the view that in the commercial world, viz., the ascertainment of the true profits of a business, always involved a deduction of depreciation, because it was one of the several items that appeared in the profit and loss account. Under the provisions of the Act, depreciation was found allowable in the determination of the income from business as also that of certain categories falling under the head 'Other sources'. The Tribunal was of the view that there could not be any dispute that the assets on which depreciation had been claimed were used for the purposes for which the association was set up, viz., the purpose of protection or advancement of the common interests of the members of the association. According to the Tribunal, the provisions of Section 44A should be construed liberally and the Tribunal directed the ITO to allow further deduction of Rs. 14,946 by way of depreciation. In those circumstances, the question indicated above has been referred to this court.

5. The answer to the question posed involves the determination of the question whether it is a kind of expenditure contemplated under Section 44A of the Act. It will be relevant in this connection to set out Sub-section (1) of Section 44A of the Act, which is as follows :

' 44A. Special provisions for deduction in the case of trade, professional or similar association.--(1) Notwithstanding anything to the contrary contained in this Act, where the amount received during a previous year by any trade, professional or similar association [other than an association or institution referred to in Clause (23A) of Section 10] from its members, whether by way of subscription or otherwise (not being remuneration received for rendering any specific services to such members) falls short of the expenditure incurred by such association during that previous year (not being expenditure deductible in computing the income under any other provision of this Act and not being in the nature of capital expenditure) solely for the purposes of protection or advancement of the common interests of its members, the amount so fallen short (hereinafter referred to as deficiency) shall, subject to the provisions of this section, be allowed as a deduction in computing the income of the association assessable forthe relevant assessment year under the head 'Profits and gains of business or profession' and if there is no income assessable under that head or the deficiency allowable exceeds such income, the whole or the balance of the deficiency, as the case may be, shall be allowed as a deduction in computing the income of the association assessable for the relevant assessment year under any other head. '

6. This section is a special provision for deduction in the case of a trade, professional or similar association. This is important and has some significance as we shall presently note. This provision enjoins, that notwithstanding anything to the contrary contained in this Act where the amount received during a previous year by any trade, professional or similar association, leaving aside the portions which are not relevant for our present purpose, from its members whether by way of subscription or otherwise, falls short of ' the expenditure ' incurred by such association during that previous year, not being expenditure deductible in computing the income under any other provisions of the Act and not being in the nature of capital expenditure, solely for the purpose of protection or advancement of the common interests of its members, the amount so fallen short shall, subject to the provisions of this section, be allowed as deduction. Therefore, we have first to determine whether it is an expenditure incurred and, secondly, we have to determine whether not being an expenditure deductible in computing the income under any other provisions of this Act. There is no dispute that it is not a capital expenditure. It was contended on behalf of the revenue that the key to the meaning of the expression was ' expenditure incurred '. Therefore, it was urged that it should be construed in the sense of paying out the money which goes out of the pocket of the asses-see irretrievably and it could not be so construed as to mean an allowance made for depreciation. Expenditure incurred, according to the revenue, should be construed in conjunction, that means to say, it has to be an expenditure and, secondly, it has to be incurred. In aid of this submission that the expression 'expenditure incurred' should be construed in contradistinction to allowance, learned advocate for the revenue drew our attention to the decision of the Supreme Court in the case of Indian Molasses Co. (P.) Ltd. v. CIT : [1959]37ITR66(SC) . where the Supreme Court observed that ' spending ' in the sense of ' paying out or away ' of money was the primary meaning of expenditure. Expenditure was what was paid out or away and was something which was gone irretrievably. Expenditure, which was deductible for income-tax purposes, was one which was towards a liability actually existing at the time, but the putting aside of money, which might become expenditure on the happening of an event was not expenditure. The Supreme Court was giving this meaning in considering the question whether there was a distinction between the actual liabilityin praesenti and liability in future. Reliance was placed in this connection on the observations of the court at p. 78 of the report, where the Supreme Court observed as follows :

' But there is no case directly on what is ' expenditure ' and if the authorities under the English statute were to be of real assistance, the whole of the matter should have been before us. The question, however, limits the approach to whether the payments made towards the policy were 'expenditure' within Clause (xv). 'Expenditure' is equal to 'expense' and 'expense' is money laid out by calculation and intention though in many uses of the word this element may not be present, as when you speak of a joke at another's expense. But the idea of ' spending ' in the sense of ' paying out or away ' money is the primary meaning and it is with that meaning that we are concerned. ' Expenditure ' is thus what is ' paid out or away ' and is something which is gone irretrievably. '

7. Our attention was drawn to the decision of the Supreme Court in the case of CIT v. Nainital Bank Ltd. : [1966]62ITR638(SC) , the court observed as follows :

' In these appeals counsel for the Commissioner raised two contentions : that by writing off either partially or wholly the amounts due from its constituents in its books of account the bank did not expend or lay out expenditure within the meaning of Section 10(2)(xv): and that, in any event, the expenditure was not laid out wholly and exclusively for the purposes of the business of the bank. In its normal meaning, the expression 'expenditure' denotes spending ' or ' paying out or away ', i.e., something that goes out of the coffers of the assessee. A mere liability to satisfy an obligation by an assessee is undoubtedly not ' expenditure': it is only when he satisfies the obligation by delivery of cash or property or by settlement of accounts, there is expenditure. But expenditure does not necessarily involve actual delivery of or parting with money or property. If there are cross-claims--one by the assessee against a stranger and the other by the stranger against the assessee--and as a result of accounting the balance due only is paid, the amount which is debited against the assessee in the settlement of accounts may appropriately be termed expenditure within the meaning of Section 10(2)(xv). '

8. The Division Bench of the Madras High Court in the case of CIT v. Madras Industrial Investment Corporation Ltd. : [1980]124ITR454(Mad) , had occasion to consider these two decisions. There, during the accounting year which ended on 30th June, 1967, relevant for 'the assessment year 1968-69, the assessee had made a public issue of debentures of the total value of Rs. 1.5 crores at the issue' price of Rs. 98 per bond of Rs. 100, the total discount on the entire issue being Rs. 3 lakhs, and this amount was taken to the discount account in the balance-sheet of the company on the assets side. The period of redemption of debentures was 12 years. The assessee wrote off Rs. 12,500 being the proportionate amount of discount for the period of six months ending on 30th June, 1967. In respect of another debenture issue made in 1958 the assessee wrote off Rs. 10,000, being the proportionate discount, so that the total amount written off during the year was Rs. 22,500. The ITO disallowed the claim for deduction of this amount. The AAC, however, held that only Rs. 12,500, which related to the year in question, was allowable. Before the Tribunal, the assessee claimed that the entire Rs. 3 lakhs ought to have been allowed and the AAC having directed the allowance of only Rs. 12,500, the balance of Rs. 5,87,000 of the discount ought to have been allowed. The Tribunal upheld the claim of the assessee holding that instead of receiving Rs. 100 per bond and returning Rs. 2, the issue price was stated to be Rs. 98, so that a subscriber was required to pay only Rs. 98 per bond at Rs. 100. In that context, the Division- Bench of the Madras High Court, after referring to the aforesaid decisions of the Supreme Court, observed as follows at p. 468 of the report ;

' ' But there is no case directly on what is ' expenditure ' and if the authorities under the English statute were to be of real assistance, the whole of the matter should have been before us. The question, however, limits the approach as to whether the payments made towards the policy were 'expenditure' within Clause (xv). 'Expenditure' is equal to ' expense ' and ' expense ' is money laid out by calculation and intention though in many uses of the word this element may not be present, as when we speak of a joke at another's expenses. But the idea of ' spending ', in the sense of ' paying out or away ' money, is the primary meaning and it is with that meaning that we are concerned. ' Expenditure ' is thus what is ' paid out or away ' and is something which is gone irretrievably.'

9. This decision clearly shows that there must be some payment out before there could be any expenditure. There is no such payment out in this case and, consequently, no expenditure.

10. Learned counsel for the assessee drew our attention to another decision of the Supreme Court in support of his contention that actual payment is not contemplated and that appropriate book entries would suffice. He referred to the decision of CIT v. Nainital Bank Ltd. : [1966]62ITR638(SC) . In that case dacoits stole a large quantity of jewellery pledged with the bank. The bank settled the claim of the constituents as follows : When the market value of the jewellery exceeded the amount advanced, the difference was paid by the bank to the constituent; when the market value of the jewellery was less than the amount advanced, the difference was recovered from the constituent. The bank made total payments of Rs. 48,891 and Rs. 1,21,760 in the two years 1952 and 1953, respectively,under reference in that case. It claimed deduction of the respective amounts included in the taxable income. It was held that the amounts paid by the bank were expenditure laid out for the purpose of its business and that the settlement consisted of two constituent elements, payment by the bank of the value of the jewellery pledged with it against the receipt from the constituents of the amount which was recoverable by the bank and that the transaction would appropriately be deemed expenditure and that such expenditure was really laid out for the purpose of business. In the course of the judgment, Shah J., speaking for the court, observed at page 641 as follows :

' In its normal meaning, the expression 'expenditure' denotes ' spending ' or ' paying out or away ', i.e., something that goes out of the coffers of the assessee. A mere liability to satisfy an obligation by an assessee is undoubtedly not ' expenditure ' : it is only when he satisfies the obligation by delivery of cash or property or by settlement of accounts, there is expenditure. But expenditure does not necessarily involve actual delivery of or parting with money or property. If there are cross-claims--one by the assessee against a stranger and the other by the stranger against the assessee--and as a result of accounting the balance due only is paid, the amount which is debited against the assessee in the settlement of accounts may appropriately be termed expenditure within the meaning of Section 10(2)(xv)(of the 1922 Act).'

11. We are not satisfied that this passage is in any manner inconsistent with or runs counter to the earlier decision in the case of Indian Molasses Co. (P.) Ltd. v. CIT : [1959]37ITR66(SC) . The earlier decision was not noticed in the later case, but the later decision is also a case where the money had gone out to the hands of the depositors. There was an adjustment of the accounts. Excepting in cases where the assessee maintained accounts on cash basis, in other cases of mercantile accounts, the expenditure which involved payment out, could be incurred by appropriate book entry being made and not necessary by cash. '

12. The expression 'expenditure' is not defined in the Act, as such. In the context of different statutes, the expression 'expenses' have been construed. For example, in Stroud's Judicial Dictionary, Third Edn., Vol. II, p. 1030, it is noted that in the case of Jones v. Carmarthen Corporation [1841] 10 LJ E. 401, the expression 'expenses' meant actual disbursement, not allowances for loss of time. Therefore, a charge by a town clerk for preparing lists of parliamentary voters was not ' expense incurred ' by him within the Parliamentary Voters Registration Act, 1843. But, again, in the case of R. v. Marsham [1892] 1 QB 371, the Master of the Rolls, Esher, observed that the 'money expended' by a local board and recoverable from the owners or occupiers were not confined to moneysactually paid but include the moneys expended in the sense, the owner or occupier was bound to pay it. It, therefore, appears that the expression must be understood in the context in which it is used, In the principles of accountancy sometimes distribution is treated as expenditure paid out over years. In this context, reference was made to Spicer & Pegler's Book Keeping and Accounts, 17th Edn. Under Section 6, it has been stated that the object of providing for distribution was to spread the expenditure incurred in acquiring the assets over its effective lifetime ; the amount of provision made in respect of the accounting period was intended to represent the proportion of such an expenditure which had expired during the period. Similarly, in Pickles Accountancy, 4th Edn., at p. 0518, it has been noted as follows:

'Provisions for Depreciation, Bad Debts and Discounts

(a) Depreciation.--In normal circumstances the question of providing for depreciation is deferred until the trial balance is extracted and hence will not have been dealt with prior to the preparation of the final accounts. In examination work a note will be appended to the question stating the rate of depreciation to be provided. As the purpose at present is to explain the methods of entry of adjustment detailed consideration of depreciation is dealt with in Chapter 07, but in order to present the student with a rough conception of its nature, it may be stated that depreciation is the inherent decline in the value of an asset from any cause whatever. The wearing out of a machine is a simple and obvious example, but it must be emphasised that this is but one of many causes. As with all other entries, there must be complete double-entry for the depreciation adjustment. The required entry is debit Trading and Profit & Loss account and credit the asset, in respect of which depreciation is being recorded. This entry conforms with the principles already enunciated in that the debit to Trading and Profit & Loss account is necessary because the amount written off represents an expense and the credit to the asset is required as the asset has, Pro tanto, been reduced in value.'

13. Therefore, really from that point of view it is the money expended which is spread out over the effective life of an asset. The Legislature, it seems, has also used the expression ' allowances and depreciation ' in several sections in the scheme in Chap. IV within which Section 44A appears. Reference in this connection may be made to Section 37 of the Act which enjoins that any expenditure not being the expenditure of the nature described in Sections 30 to 36 laid out or expended wholly and exclusively for the purpose of the business or profession should be allowed in computing the income chargeable under the head ' Profits and gains of business or profession'. In Sections 30 to 36 the expressions ' expenses incurred ' as well as 'allowances and depreciation ' had been used. For example, depreciation and allow-ances have been dealt with in Section 32. Therefore, the Legislature was using the expression 'any expenditure' in Section 37 to cover both. It had used both the expressions ' allowances ' as contemplated under Section 32 as well as the actual expenditure as contemplated under Section 30. Section 44A appears in Chap. IV which comprises of Sections 14 to 44B. Again, under the said chapter under sub-heading 'D', Section 44A appears. Sub-heading 'D' deals with profits and gains of business or profession. The depreciation normally an association like the assessee-company would have been entitled to provide for if it was using those assets for the purpose of its business but as it was not carrying on any business as such it was not entitled to any depreciation. Therefore, it cannot be said it is not an expenditure deductible, which describe the quality and nature of the expenditure under the provisions of any Act. If that is the position, it appears to us that the word 'expenditure incurred' is capable of being construed in order to cover the deficiency which has been claimed for by the assessee. It is true that an exemption must be strictly construed and the provisions in the fiscal statute must receive strict construction. We must, however, bear in mind that this is a special provision for deduction in the case of certain computations. In that sense, it is a beneficial provision. It is also a canon of construction that even in a statute which requires to be strictly construed, if there is any beneficial provision it should be liberally construed. This provision in the statute is intended for the benefit of a trade, professional or similar association. In case of doubt, it should, therefore, be construed liberally and in favour of a taxpayer. In this connection, reference may be made to the observations of the learned single judge of the Andhra Pradesh High Court in the case of Nawab Ghazi Jung v. Asst. CED : [1965]56ITR8(AP) . In a different context, a similar principle was reiterated by the Supreme Court in the case of Jivabhai Purshottam v. Chhagan Karson, : [1962]1SCR568 . But we must observe that these observations were made by the Supreme Court not in the context of the fiscal statute but in the context of a Tenancy Act where certain benefits were intended to be given to the tenant.

14. In any view of the matter, having regard to the purpose of the section, as indicated by the heading and having regard to the language used, in our opinion, it is possible to construe the depreciation claimed as expenditure incurred. If such a construction is possible, the assessee is entitled to the benefit of the beneficial construction. In that view of the matter, we are of the opinion that the Tribunal was right in its conclusion and the question is answered in the affirmative and in favour of the assessee.

15. The parties will pay and bear their own costs.

Sudhindra Mohan Guha, J.

16. I agree.


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