Commissioner of Income Tax vs Shree Digvijay Cement Co. Ltd.

Mankad, J.—In this reference made at the instance of the Revenue, three questions have been referred to us for our opinion u/s 256(1) of the income tax Act, 1961 (hereinafter referred to as "the Act"). Each question involves different and distinct set of facts and, therefore, it would be convenient to deal with each question separately. Question No. 1, which is referred to us, reads as under:

Whether, on the facts and in the circumstances of this case, the Tribunal was right in law in holding that the assessee was entitled to relief u/s 84/80J of the Act in respect of the 4th kiln at Sikka for the assessment years 1964-65 and 1970-71?

The facts which are relevant to this question are as follows. The assessee-company was granted a licence for substantial expansion of its establishment at Sikka for manufacture of Portland cement. It was granted licence to set up a 4th kiln for such expansion. The assessee-company already had three kilns and the fourth kiln was set up for manufacture of Portland cement. The assessee-company invested about Rs. 1.08 crores in the installation of the 4th kiln at Sikka. It may be mentioned that the total investment in plant and machinery at Sikka came to about Rs. 2 crores. As a result of the installation of the 4th kiln, production capacity of cement was increased by 2 lakh tonnes. The expansion, according to the assessee, was substantial involving investment of large capital and employment of additional labour force. The assessee-company claimed relief u/s 84/80J of the Act in respect of the fourth kiln at Sikka for the assessment years 1964-65 to 1970-71. Section 84 which is deleted with effect from April 1, 1968, by the Finance (No. 2) Act of 1967 was almost in identical terms with section 80J, which came into force from April 1, 1968. In other words, the conditions which are requited to be satisfied for claiming relief under both these provisions are almost same. The assessee-company claimed relief u/s 84 of the Act for the assessment years 1964-65 to 1967-68 and u/s 80J for the assessment years 1968-69 to 1970-71. Provisions of sections 84 and 80J are similar to the provisions contained in section 15C of the Indian income tax Act, 1922. It was contended on behalf of the assessee-company that all the requirements of section 84/80J were satisfied and, therefore, it was entitled to claim relief under the said provisions in respect of its fourth kiln at Sikka. In out opinion, the question referred to us is directly covered by the decisions of the Supreme Court in Textile Machinery Corporation Limited, Calcutta Vs. The Commissioner of Income Tax, West Bengal, and Commissioner of Income Tax, West Bengal-I Vs. Indian Aluminium Co. Ltd., . In the instant case before us, there was substantial expansion when the assessee-company installed a fourth kiln. Production capacity of cement was increased by two lakh tonnes. There was, therefore, substantial increase in the production of the assessee-company as a result of the installation of a fourth kiln. The evidence on record discloses that various machineries independent of the existing machineries were installed along with installation of the fourth kiln. As held by the Supreme Court in the case of Textile Machinery Corporation Limited, Calcutta Vs. The Commissioner of Income Tax, West Bengal, , which was a case of section 15C of the Indian income tax Act, 1922, in order to be entitled to benefit u/s 84/80J, following facts have to be established by an assessee : (1) investment of fresh capital, (2) manufacture or production of articles yielding additional profit attributable to the new outlay of capital, (3) employment of requisite labour, and (4) separate and distinct identity is given. All the tests laid down by the Supreme Court in the above decision are satisfied in the instant case. In other words, conditions for claiming relief u/s 84/80J are satisfied in this case. There is investment of fresh capital and additional labour force is employed by the assessee-company as a result of the installation of the fourth kiln. The expanded unit has a separate and distinct identity, and there is substantial increase in the production in the assessee-company. It was stated before us that the profits attributable to the new unit have been worked out by the ITO. In our opinion, therefore, the Tribunal was right in upholding the claim of the assessee-company. Question No. 1 is, therefore, answered in the affirmative and against the Revenue.

Question No. 2 referred to us is with regard to the amounts paid to Cement Allocation and Co-ordinating Organisation (hereinafter referred to as "CACO") in the assessment years 1968-69 and 1970-71. The assessee had paid Rs. 1.85,983 to CACO in the assessment year 1968-69 and Rs. 17,536 in the assessment year 1969-70. It claimed deduction of these amounts as allowable business expenditure u/s 37 of the Act.

Cement was decontrolled with effect from January 1, 1966, at the behest of the Government. The cement manufacturers formed a voluntary organisation known as "Cement Allocation and Co-ordinating Organisation" to ensure smooth implementation of cement decontrol scheme for equitable distribution for consumers throughout the country. CACO framed schemes for fixation of prices and allocation and distribution of cement, which were binding on its members. CACO operated various trust accounts and the amounts received from its members were utilised for equalising price, freight and other differentials on pro rata basis. The assessee-company paid Rs. 1,85,983.32 and Rs. 17,536 in the assessment years 1968-69 and 1969-70, respectively, to CACO by way of its contribution. The Tribunal reversing the decision of the AAC held that the expenditure incurred by the assessee-company was allowable expenditure. It was held that the expenditure was incurred in the course of the business and it was incurred out of commercial expediency. The Tribunal observed that CACO was established at the behest of the Government and the assessee as a businessman was obliged to become a member of CACO. As a member of CACO, it was obligatory on it to pay contributions to CACO. Therefore, the aforesaid expenditure was incurred in the course of business. In our opinion, no exception can be taken to the view taken by the Tribunal. As observed by the Tribunal, the assessee-company was obliged to become a member of CACO which was formed at the behest of the Government. It was required to make contributions to CACO to carry out its objects. Such contributions were, therefore, made on account of business expediency and for the purpose of the business of the assessee-company. We have, therefore, no hesitation in upholding the view taken by the Tribunal. Question No. 2 shall, therefore, have to be answered in the affirmative and against the Revenue.

Third question which is referred to us at the instance of Revenue is as follows:

Whether, on the facts and in the circumstances of this case, the Tribunal was right in law in holding that for the assessment year 1969-70, the sum of Rs. 2,15,418, which was deducted as provision for liability payable to the S.T.C. by ''CACO'', could not be said to be a contingent liability in the hands of the assessee as the same was ascertained and adjusted in the accounts of the assessee with the ''CACO'' and is, therefore, not liable to be assessed in the hands of the assessee and/or was allowable as business expenditure?

In the assessment year 1969-70, the assessee''s share from CACO worked out to Rs. 2,61,986.44. The assessee-company, however, credited a sum of Rs. 8,410 in its accounts after making adjustments of certain amounts. One of the amounts which was adjusted against the aforesaid share of Rs. 2,61,986.44, was Rs. 2,15,418.17 for provision for "liability to S.T.C. towards likely deficit in cement agency account of S.T.C". It was contended on behalf of the assessee-company that the liability of the assessee-company to pay the aforesaid amount was ascertained and, therefore, it was entitled to deduct the said amount from its business income. Revenue''s contention, on the other hand, was that the liability was a contingent liability and consequently not admissible deduction. The Tribunal allowed the assessee-company''s claim observing that the amount was already debited to the assessee-company''s account. According to the Tribunal, the liability of the assessee-company was an ascertained liability. The view taken by the Tribunal is challenged by the Revenue before us.

Now, it we turn to the annual report and accounts of the assessee-company for the calendar year 1968, relevant to the assessment year 1969-70, we find the following note in so far as it is relevant to the aforesaid dispute at Sr. No. 12 on page 18 of the report:

Sales include Rs. 8,410 being the net amount of surplus receivable from CACO for the calendar year 1967, after the set-off of the amount of Rs. 1,38,158 in respect of Sahu Jain group of companies and Rs. 2,15,418 retained by the CACO for meeting the contingent liability to the State Trading Corporation of India for the calender year 1966, as per the statements of accounts received from CACO.

The above note makes it clear : (i) that the liability to the State Trading Corporation of India was for the calendar year 1966; and (ii) such liability was a contingent liability. In the face of this note, we are unable to understand as to how the liability of Rs. 2,15,418 could be held to be an ascertained liability. The liability, if any, is of the calendar year 1966, which is the year of account relevant to the assessment year 1967-68. Therefore, having regard to the method of accounting followed by the assessee-company, even if the said liability was ascertained liability claim in respect thereof could be made only in the assessment year 1967-68. We, however, find that the liability is not ascertained but only contingent. No amount payable to the State Trading Corporation of India was determined. In other words, the liability, if any, of the assessee-company was not ascertained. Merely because CACO retained the aforesaid amount of Rs. 2,15,418 for contingent liability, as stated above, the assessee-company is not entitled to deduct that amount in the computation of its income from the assessment year 1969-70. The Tribunal, in our opinion, was, therefore, wrong in allowing the aforesaid claim of the assessee for the assessment year 1969-70. In the result, we answer question No. 3 set out above in the negative and against the assessee. Reference, answered accordingly with no order as to costs.