Commissioner of Income Tax vs Oswal Woollen Mills

The following questions of law have been referred for the opinion of this Court by the Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh (for short, "the Tribunal"), arising out of its order dated August 18, 1994, in ITA Nos. 612 and 631/Chandi/89, for the assessment year 1985-86:

RA No. 292

Whether, on the facts and in the circumstances of the case and on a proper interpretation of Section 37(3A/3B), the Income Tax Appellate Tribunal was right in law in holding that the driver''s salary was not to be included while working out the disallowance u/s 37(3A) of the Income Tax Act, 1961 ?

RA No. 293

(i) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in allowing the assessee''s claim on account of leave with wages/salary in spite of the fact that it was simply a provision and a contingent liability ?

(ii) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that the refinery units of the assessee-company as industrial undertaking for the purpose of investment allowance ?

The Assessing Officer disallowed the claim for deduction to the extent of 20 per cent. in respect of the drivers'' salary in view of the provisions of Section 37(3B) of the Income Tax Act, 1961 (for short, "the Act"), which disallowed the expenditure on car maintenance. The Tribunal reversed the said view on the ground that the said expenditure was covered by Section 37(1) of the Act and could not be treated as expenditure incurred on running and maintenance of motor cars for purposes of Section 37(3B) of the Act.

The assessee claimed deduction in respect of payment towards leave with wages/salary by treating the same as liability during the year which was disallowed on the ground that the liability was not ascertained one. The appellate authority accepted the claim of the assessee on the ground that it was following the mercantile system of accounting. This view was affirmed by the Tribunal following the earlier assessment years, i.e., 1983-84 and 1984-85.

The assessee claimed investment allowance in respect of its refinery unit for new machinery. The Assessing Officer disallowed the same on the ground that the refinery was not a manufacturing process/industrial undertaking. The appellate authority accepted the plea of the assessee following the decision in the earlier years and the Tribunal also upheld the same in view of the decision on the same issue relating to the assessment year 1983-84.

We have considered the rival submissions and perused the record.

We proceed to answer the questions referred as under:

Re: Question in RA No. 292

Learned Counsel for the Revenue relied upon the judgment of the hon''ble Supreme Court in Britannia Industries Ltd. Vs. Commissioner of Income Tax, West Bengal, Kolkata and Another, , wherein the question of interpretation of Section 37(3B) of the Act in the context of disallowance for guest house was examined and it was held that the said provision being a special provision, the disallowance will apply irrespective of other provisions. Contrary view taken by the Full Bench of the Kerala High Court in Commissioner of Income Tax Vs. Travancore Cements Ltd., , wherein distinction was made between the expression "repairs" used in Section 31 of the Act and the expression "maintenance" used in Section 37(3B) of the Act in the context of maintenance of cars, was disapproved and the view taken by the Calcutta High Court in Kesoram Industries and Cotton Mills Ltd. Vs. Commissioner of Income Tax, , Commissioner of Income Tax Vs. Upper Ganges Sugar Mills Ltd., , Commissioner of Income Tax Vs. Biswanath Tea Co. Ltd., , to the effect that the intention of the Legislature was to exclude the provisions of Sections 30 to 36 of the Act was upheld. It was also observed that Section 37(1) of the Act excluded any expenditure allowable under Sections 30 to 36 of the Act and if the expenditure was disallowable u/s 37(3) of the Act, the same could not be held to be allowable under Sections 30 to 36 of the Act or Section 37(1) of the Act. It was observed by the hon''ble Supreme Court in Britannia Industries Ltd. Vs. Commissioner of Income Tax, West Bengal, Kolkata and Another, :

In our view, the intention of the Legislature appears to be clear and unambiguous and was intended to exclude the expenses towards rents, repairs and also maintenance of premises/accommodation used for the purposes of a guest house of the nature indicated in Sub-section (4) of Section 37. When the language of a statute is clear and unambiguous, the courts are to interpret the same in its literal sense and not to give it a meaning which would cause violence to the provisions of the statute. If the Legislature had intended that deduction would be allowable in respect of all types of buildings/accommodations used for the purposes of business or profession, then it would not have felt the need to amend the provisions of Section 37 so as to make a definite distinction with regard to buildings used as guest houses as defined in Sub-section (5) of Section 37 and the provisions of Sections 31 and 32 would have been sufficient for the said purpose. The decisions cited by Dr. Pal contemplate situations where specific provision had been made in Sections 30 to 36 of the Act and it was felt that what had been specifically provided therein could not be excluded u/s 37. The clarification introduced by way of Sub-section (5) to Section 37 was also not considered in the said case.

Learned Counsel for the assessee, inter alia, relied upon the judgments in National Engineering Industries Ltd. Vs. Commissioner of Income Tax, , Commissioner of Income Tax Vs. Sholinger Textiles Ltd., , Century Spinning and Manufacturing Co. Ltd. Vs. Commissioner of Income Tax, and Commissioner of Income Tax Vs. Upper India Steel Manufacturing and Engineering Co. (P.) Ltd., .

The above judgments were rendered prior to the judgment of the hon''ble Supreme Court in Britannia Industries Ltd. Vs. Commissioner of Income Tax, West Bengal, Kolkata and Another, . In Commissioner of Income Tax Vs. Upper India Steel Manufacturing and Engineering Co. (P.) Ltd., this Court considered the issue and held that Section 37(3B) of the Act did not exclude expenses permissible u/s 31 of the Act and the same have to be taken as different from expenses on maintenance of motor cars. It was held that Section 37(3B) of the Act did not apply to expenditure covered under Sections 30 to 36 of the Act. This Court derived support from the decision of the Kerala High Court in Commissioner of Income Tax Vs. Travancore Cements Ltd., , Commissioner of Income Tax Vs. Price Waterhouse, and the Bombay High Court in Commissioner of Income Tax Vs. Chase Bright Steel Ltd. (No. 1), . The said three decisions have been overruled by the hon''ble Supreme Court in Britannia Industries Ltd. Vs. Commissioner of Income Tax, West Bengal, Kolkata and Another, .

Learned Counsel for the assessee sought to make a distinction by contrasting the expression "in the nature of guest house" used in Section 37(3) of the Act with the expression "running and maintenance of motor cars". Reading the provision as a whole, the distinction sought to be made out is not material. The expression "running and maintenance of motor cars" would clearly include the expenditure on hiring a drive for running, the said motor car.

Accordingly, the question referred is answered in favour of the Revenue and against the assessee.

Re: Q. Nos. (i) and (ii) in RA No. 293 ;

Learned Counsel for the assessee submitted that the questions in RA No. 293 came up for consideration in the case of the assessee for the earlier assessment year and were decided in favour of the assessee. The said case is reported in Commissioner of Income Tax Vs. OSWAL WOOLLEN MILLS LTD. and Another, wherein the earlier order of this Court in the case of the assessee reported in Commissioner of Income Tax Vs. Oswal Woollen Mills Ltd., has been followed for decision on Question No. (i).

With regard to Question No. (ii), it was held that refinery units of the assessee were industrial undertakings for the purpose of investment allowance.

The same questions were also gone into in the case of the assessee by this Court vide order dated September 15, 2006, in ITR No. 61 of 1988 Commissioner of Income Tax Vs. Oswal Woollen Mills Ltd. (No. 3), in respect of the assessment year 1981-82 and answered against the Revenue and in favour of the assessee, following the earlier order of this Court in Commissioner of Income Tax Vs. OSWAL WOOLLEN MILLS LTD. and Another, .

In view of the above, the said questions are answered against the Revenue and in favour of the assessee.

Reference is disposed of accordingly.