Commissioner of Income Tax vs Sundaram Industries Ltd.

R. Jayasimha Babu, J.

Four questions have been referred by the Tribunal. They concern a company, which is engaged in the activity of retreading tyres. The assessment

years are 1982-83 and 1983-84.

The first question is regarding the correctness of the Tribunal''s view that the amounts which had earlier been shown in the assessee''s book as

sundry credit balances of the customers and written back in the profit and loss account of the assessee is not taxable as the assessee''s income.

Counsel for the revenue relied on the decision of the Supreme Court in the case of Commissioner of Income Tax, Madurai Vs. T.V. Sundaram

Iyengar and Sons Ltd., , and submitted that the decision of the Tribunal runs counter to the law laid down by the Supreme Court in that decision.

That decision was rendered by the Apex Court in the background of the facts as observed by the court :

There is no dispute that the deposits in the case before us were received from trade parties who had not made any claim for repayment of the

balance. The Income Tax Officer has pointed out that the amount had arisen as a result of trading transaction and had a character of income.... The

Commissioner (Appeals) found that the assessee wrote back the amounts to its profit and loss account because the various trading parties did not

claim these amounts for a long time. The amounts represented credit balances in the name of the trading parties and was taken to its profit and loss

account. The Commissioner (Appeals) held that these amounts were not revenue receipts but were of capital nature"".

The Commissioner had held that the provisions of section 41(1) of the Income Tax Act were not attracted in the facts of the case because (page

351) : ""the assessee''s liability to pay back the amounts to its customers had not ceased"". The Tribunal had agreed with the view of the

Commissioner. The Apex Court, after setting out those facts, observed :

The amounts were not given and retained as security to be retained till the fulfilment of the contract. There is no finding to that effect. The deposits

were taken in the course of the trade and adjustments were made against these deposits in the course of trade. The unclaimed surplus retained by

the assessee will be its trade receipt. The assessee itself treated the amount as its trade receipt by bringing it to its profit and loss account.

Towards the end of the judgment, the court, after referring to the observations of Atkinson J. in the case of Jay''s The Jewellers Ltd. v. IRC (1947)

29 TC 274 (KB), observed :

If a commonsense view of the matter is taken, the assessee, because of the trading operation, had become richer by the amount which it

transferred to its profit and loss account. The moneys had arisen out of ordinary trading transactions. Although the amounts received originally

were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of

the deposit became time barred and the amount attained a totally different quality. It became a definite trade surplus. Atkinson J. pointed out that in

Tattersall''s case (supra) no trading asset was created. Mere change of method of bookkeeping had taken place. But, where a new asset came into

being automatically by operation of law, commonsense demanded that the amount should be entered in the profit and loss account for the year and

be treated as taxable income. In other words, the principle appears to be that if an amount is received in the course of trading transaction, even

though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the

assessee''s own money because of limitation or by any other statutory or contractual right. When such a thing happens, commonsense demands

that the amount should be treated as income of the assessee.

In the present case, the money was received by the assessee in the course of carrying on his business. Although it was treated as deposit and was

of capital nature at the point of time it was received, by efflux of time the money has become the assessee''s own money. What remains after

adjustment of the deposits has not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee

itself has treated the money as its own money and taken the amount to its profit and loss account. There is no explanation from the assessee why

the surplus money was taken to its profit and loss account even if it was somebody else''s money. In fact, as Atkinson J. pointed out that what the

assessee did was the commonsense way of dealing with the amounts"".

The court answered the question raised by the department, viz., ""whether, on the facts and in the circumstances of the case, the Appellate Tribunal

is right in law in deleting the addition made by the Income Tax Officer representing unclaimed sundry credit balances written back to the profit and

loss account by the assessee during the previous year relevant for the assessment year under consideration"", in favour of the revenue.

The question referred to us in this case is almost on identical terms. The first question reads thus :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the sundry credit balances of the

customers written back in the profit and loss account were not taxable as income ?

The similarity in the questions framed is not a matter of surprise, as the assessee here is an associate company of the company which was a party

to the decision of the Supreme Court in the case of Commissioner of Income Tax, Madurai Vs. T.V. Sundaram Iyengar and Sons Ltd., .

That decision of the Apex Court was rendered by a Bench of three learned judges of the court.

Learned counsel for the respondent-assessee, however, contended that a later judgment of the Supreme Court, though rendered by a two-judge

Bench, should govern this case. The decision relied on is in the case of Commissioner of Income Tax, Calcutta Vs. Sugauli Sugar Works P. Ltd., .

It may be noticed at the outset that that judgment, unfortunately does not refer to the decision rendered by the larger Bench in the case of CIT v. T.

V. Sundaram Iyengar and Sons Ltd. (supra). In that case, the assessee therein, had in the assessment year 1965-66, transferred certain amounts

out of the suspense account running from 1946-47 to 1948-49 to the capital reserve account. The Income Tax Officer had found that part of the

amount so transferred was with reference to the deposits and advances which had been paid back and included the balance u/s 41 of the Act in

the total income of the assessee. The Tribunal, however, accepted the assessee''s contention that it is a unilateral entry in the accounts and would

not bring the matter within the scope of section 41(1) of the Act. The High Court agreed with the Tribunal, and the decision of the High Court was

upheld by the Apex Court. It was observed by the court that the mere fact that the assessee has made an entry of transfer in his accounts

unilaterally will not enable the department to say that section 41(1) of the Act would apply, as the sine qua non for the application of section 41 of

the Act was that the assessee should have obtained a benefit by virtue of remission or cessation of the trading liability.

We are now confronted with two rulings of the Apex Court which are apparently contradictory. In this situation, we must prefer the one rendered

by a larger'' Bench. It has been held by the Supreme Court that decisions of larger Benches bind even Benches of smaller strength within the

Supreme Court. Moreover, the decision rendered in the earlier case by the three-judge Bench was with reference to a question which is almost

identical to the one we are required to consider. The court held therein that when the assessee itself had treated the money as its own money, and

taken the amounts to its profit and loss account, and there is no explanation from the assessee as to why it did so, if it was somebody else''s

money, commonsense demands that the amount should be treated as income of the assessee. The facts of this case being practically identical to the

facts of the case of T. V. Sundaram Iyengar and Sons Ltd. (supra) and that decision having been rendered by a larger Bench, we are bound by

that judgment. We answer the question referred to us in favour of the revenue, and against the assessee.

The second question is as to whether the Tribunal was right in law in allowing relief under sections 32A, 80J and 80HH for the income from tyre

retreading unit, treating it as industrial undertaking. This court has already held in the case of Commissioner of Income Tax Vs. Madurai Pandian

Engineering Corporation Ltd., that retreading did not amount to the production of a new article entitling the assessee to the relief under sections

80J and 80HH of the Income Tax Act. In so holding, this court followed the decision of the Supreme Court in the case of P.C. Cheriyan Vs. Mst.

Barfi Devi, . That decision squarely applies to the facts of this case. We answer the second question in favour of the revenue, and against the

assessee.

The third question referred to us is as to whether the Tribunal was right in law in holding that the assessee was entitled to deduction u/s 80HH of

the Act in respect of miscellaneous income and interest on deposits treating them as receipts derived from industrial undertaking. This court in the

case of Fenner (India) Ltd. Vs. Commissioner of Income Tax (No. 2), , has held that scrap materials which had a saleable value, and which were

a by-product of the manufacture of other rubber articles, when sold and resulted in an income to the assessee had a direct nexus with the industrial

undertaking, and that the profit from the sale of scrap materials was eligible for deduction u/s 80HH of the Act. In the light of that judgment, we

must hold that in respect of the miscellaneous income earned from the sale of scrap, the assessee was entitled to the benefit of section 80HH of the

Act. In so far as interests on deposits are concerned, such interest cannot be regarded as income derived from the industrial undertaking, and it has

already been so held by this court in the case of Commissioner of Income Tax Vs. Pandian Chemicals Ltd., . We, therefore, answer the second

part of that question regarding interest on deposits by holding that such interest is not interest derived from the industrial undertaking, and does not

qualify for deduction u/s 80HH of the Act.

The last question referred to us is as to whether the Tribunal was right in law in holding that the cost of the building under construction was also to

be included for the purpose of working out the capital employed while determining the deduction u/s 80J of the Act. This question is required to be

answered in favour of the assessee in the light of the decision of this court in a case to which the assessee itself was a party, viz., Commissioner of

Income Tax Vs. Sundaram Industries Ltd., , wherein, a similar question was answered in favour of the assessee. That question is answered in

favour of the assessee. Parties to bear the respective costs.