Only profit on the sale of the licence should be chargeable to tax under s 28(iiia) and not the profit which may come in the future on the sale of the licence

GKW Limited Vs CIT (Calcutta High Court)- Only profit on the sale of the licence should be chargeable to tax under s 28(iiia) and not the profit which may come in the future on the sale of the licence.

Provisions relating to payment of advance tax are applicable in a case where the total income is deemed to be 30% of the book profits under s 115JA and the Tribunal was justified in upholding the charging of interest under s 234B in the appellant’s case for AY 1997–1998.

Expenditure incurred on the rent and repairs and maintenance of the guest house is allowable under s 30.

IN THE HIGH COURT AT CALCUTTA

Special Jurisdiction (Income-Tax)

(Original Side)

I.T.A. No. 1 of 2004

GKW Limited Vs Commissioner of Income Tax, WB-IV

Heard on. 21.06.2011.

Judgement on: 13th July, 2011.

ORDER

Bhaskar Bhattacharya, J.:

This appeal under Section 260A of the Income-tax (“Act”), 1961 is at the instance of an assessee and is directed against order dated August 28, 2003 passed by the Income-tax Appellate Tribunal, “C” Bench, Kolkata in Income-tax (Appeal) being ITA No.1153 (Cal) of 2001 for the Assessment Year 1997- 98 dismissing the appeal filed by the assessee.

Being dissatisfied, the assessee has come up with the present appeal.

The facts giving rise to filing of this appeal may be summed up thus:

a) The assessee is a public limited liability company within the meaning of the Companies Act, 1956 and is assessed under the Act and the present appeal arises out of the appellant’s assessment for the Assessment Year 1997-98 for which the relevant previous year was financial year ended on March 31, 1997.

b) The appellant carries on business of manufacture of alloy free cuttings and special sheets, black and bright bars, electrical stamping, lamination, strip wound cores, bolts and nuts, rivets and spikes for special purpose machinery etc.

c) One M/s. Powmex Steel Limited was merged with the appellant with effect from October 01, 1995 and become a division of the appellant.

d) Exports were made by the said division under the Advance Licence Scheme of the Government in terms of which raw-materials required for the export of high-speed steels could be imported duty-free. Under the said scheme, it was permissible to procure the raw-materials for the export product from the local market and subsequently, import the raw-materials duty-free on the basis of Advance License granted by the Government.

e) The benefit of making import without payment of customs duty accrues, according to the appellant, only at the time of actual import and if the domestic price of the raw-materials is lower than that of the landed cost of the imported materials, it would not be sensible to import the raw-materials under the Advance Licence. Over and above, at times, advance licences cannot be utilised within the period of validity thereof and in such cases, no actual benefit is obtained.

f) Prior to the previous year ending on March 31, 1997, the benefit of duty-free imports was accounted for in the books of accounts as and when the same accrued, i.e., at the time of actual import. Because of the duty–free import, the cost of the imported raw-materials accounted for in the books of accounts did not include any amount on account of import duty. As a result, the amount of expenditure debited to the profit and loss account on account of cost of raw-materials was a lower figure and consequently, the profits were higher.

g) In its accounts for the previous year ending on March 31, 1997, the appellant passed a book entry debiting export benefit receivable account and crediting miscellaneous income by a sum of Rs. 228.34 lac. The said amount represented the customs duty benefit which would have accrued to the appellant on the import of raw-materials in future. The said amount was worked out with reference to the duty-free import entitlement on the basis of the exports made by the appellant during the Financial Years 1993- 94 to 1996- 97 on the assumption that the appellant would actually receive the import licence and utilise the same within the validity period.

h) The quantum of customs duty benefit was taken at 22% of the import entitlement on the assumption that the customs duty rate would be 22% at the time of import which the appellant would not have to pay. The appellant did not sell any license at all and the sum of Rs.228.34 lac was a notional figure and was not income accrued to the appellant during the previous year relevant to the assessment year.

i)The appellant during the previous year ending on March 31, 1997 deposited fixed asset at a profit of Rs. 6,02,91,024/-. The said amount was reflected in the appellant’s profit and loss as forming part of the miscellaneous income along with the notional export benefits receivable of Rs. 228.34 lac.

j) In its return for the Assessment Year 1997- 98, the appellant claimed that the said sum of Rs.228.34 lac credited to the profit and loss account was a notional figure not liable to income-tax. Accordingly, the said amount was claimed as a deduction from the profits as per profit and loss account.

k) In the computation of book profit under Section 11 5JA of the Act, the appellant claimed that the profit of Rs. 6,02,91,024/- credited to the profit and loss account on account of disposal of fixed assets did not form part of the book profits for the purposes of the said section.

l) In the order dated March 31, 2000 passed under Section 143(3) of the Act, the Assessing Officer treated the sum of Rs.228.34 lac as the appellant’s income on the ground that the appellant had itself shown the same as such in its books of accounts. The Assessing Officer in computing the book profits under Section 115JA did not exclude the sum of Rs. 6,02,91,024/- on account of profit on sale of fixed assets on the ground that the Department had preferred an appeal before this Honourable Court against the order dated July 14, 1999 of the Tribunal. In the said order, the Assessing Officer also considered rent of Rs.1.32 lac and repairs and maintenance of RS.2,43,131/- in respect of guest house for the purpose of dis allowance under Section 37(4) of the Act.

m) Being aggrieved, the appellant preferred an appeal before the Commissioner of Income-tax (Appeals). Before the Commissioner of Income-tax (Appeals,) the appellant filed written submission, inter alia, in respect of its claim for exclusion of the rent and repairs and maintenance charges of guest house in computing the dis allowance under Section 37(4), exclusion of the sum of Rs. 228.34 lac on account of duty-free import entitlement in computing the total income and exclusion of Rs. 6,02,91,024/- on account of profit on sale of fixed assets in computing the book profits under Section 115JA .

n) The Commissioner of Income-tax (Appeals), however, by an order dated March 20, 2001 dismissed the said appeal.

o) Being dissatisfied, the appellant preferred an appeal before the Tribunal below and reiterated the same points as advanced before the Commissioner of Income-tax (Appeals).

p) The Tribunal by an order dated August 28, 2003 dismissed the said appeal by affirming the order passed by the Commissioner of Income-tax (Appeals).

Against the decision of the Tribunal, the assessee has come up with the present appeal.

A Division Bench of this Court at the time of admission of this appeal formulated the following substantial questions of law for determination in this appeal:

“i) Whether the Tribunal was justified in law in holding that rent and repairs and maintenance referable to guest house allowable under Section 30 of the Income Tax Act, 1961 were to be disallowed under section 37(4)?(sic).

“ii) Whether the Tribunal mis-directed (sic) itself in law in holding that the notional figure of Rs.228.34 lacs (sic) in respect of duty free import entitlement accrued as income during the financial year ender March 31, 1997 relating to the assessment year 1997-98?(sic).

“iii) Whether the Tribunal was justified in law in holding that the profit on sale of fixed assets amounting to Rs. 6,02,91,024/- formed part of the book profit under Section 115JA of the Income Tax Act, 1961? (sic).

“iv) Whether the provisions relating to payment of advance tax are applicable in a case where the total income is deemed to be 30% of the book profit under Section 115JA and the Tribunal was justified in upholding the charging of interest under Section 234B in the appellant’s case for the assessment year 1997-98? (sic).”

Mr. Khaitan, the learned Senior Counsel appearing on behalf of the appellant, at the very outset, has fairly conceded before us that so far the point No. (i) is concerned, in view of the decision of the Supreme Court in the case Britannia Industries Ltd. vs. Commissioner of Income-tax, reported in (2005) 278 ITR 546, the said point should be decided against his client by answering the same in the affirmative. Similarly, according to Mr. Khaitan, so far the point No.(iv) is concerned, in view of the Supreme Court decision in the case Joint Commissioner of Income-tax vs. Rolta India Ltd., reported in (2011) 330 ITR 470, the aforesaid point should also be answered against his client in the affirmative.

Mr. Khaitan has, therefore, restricted his submissions to the point nos. (ii) and (iii) as indicated above.

As regards the point no. (ii) is concerned, Mr. Khaitan contended that as provided in Section 28 (iii a) of the Act, it is the profits on sale of a licence granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947) which is chargeable to income tax but not a notional figure given in the accounts which the assessee may ultimately decide not to utilize or sell. Thus, according to Mr. Khaitan, the Tribunal below erred in law in treating the amount of Rs.228.34 lakh as an income for the purpose of assessment.

Mr. Bhowmick, the learned counsel appearing on behalf of the Revenue, has on the other hand, opposed the aforesaid contention of Mr. Khaitan and has supported the order passed by the Tribunal.

In order to appreciate the said point, it will be convenient to refer to the provisions contained in Section 28 of the Act which is quoted below:

“28. Profits and gains of business or profession.—The following income shall be chargeable to income tax under the head “Profits and gains of business or profession”,—

(i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year;

(ii) any compensation or other payment due to or received by,—

(a) any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto;

(b) any person, by whatever name called, managing the whole or substantially the whole of the affairs in India of any other company, at or in connection with the termination of his office or the modification of the terms and conditions relating thereto;

(c) any person, by whatever name called, holding an agency in India for any part of the activities relating to the business of any other person, at or in connection with the termination of the agency or the modification of the terms and conditions relating thereto;

(d) any person, for or in connection with the vesting in the Government, or in any corporation owned or controlled by the Government, under any law for the time being in force, of the management of any property or business;

(iii) income derived by a trade, professional or similar association from specific services performed for its members;

(iii-a) profits on sale of a licence granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947);

(iii-b) cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India;

(iii-c) any duty of customs or excise repaid or repayable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971;

(iii-d) any profit on the transfer of the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme under the export and import policy formulated and announced under Section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992);

(iii-e) any profit on the transfer of the Duty Free Replenishment Certificate, being the Duty Remission Scheme under the export and import policy formulated and announced under Section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992);

(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;

(v) any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm:

Provided that where any interest, salary, bonus, commission or remuneration, by whatever name called, or any part thereof has not been allowed to be deducted under clause (b) of Section 40, the income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted.

(v-a) any sum, whether received or receivable in cash or kind, under an agreement for—

(a) not carrying out any activity in relation to any business; or

(b) not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services:

Provided that sub-clause (a) shall not apply to—

(i) any sum, whether received or receivable, in cash or kind, on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business, which is chargeable under the head “Capital gains”;

(ii) any sum received as compensation, from the multilateral fund of the Montreal Protocol on Substances that Deplete the Ozone Layer under the United Nations Environment Programme, in accordance with the terms of agreement entered into with the Government of India. Explanation.—For the purposes of this clause,—

(i) ‘agreement’ includes any arrangement or understanding or action in concert,—

(A) whether or not such arrangement, understanding or action is formal or in writing; or

(B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings;

(ii) ‘service’ means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial nature such as accounting, banking, communication, conveying of news or information, advertising, entertainment, amusement, education, financing, insurance, chit funds, real estate, construction, transport, storage, processing, supply of electrical or other energy, boarding and lodging.

(vi) any sum received under a Key man insurance policy including the sum allocated by way of bonus on such policy.

Explanation.—For the purposes of this clause, the expression “Key man insurance policy” shall have the meaning assigned to it in clause (10- D) of Section 10;

(vii) any sum, whether received or receivable, in cash or kind, on account of any capital asset (other than land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital asset has been allowed as a deduction under Section 35-AD;]

Explanation 1.—[Omitted by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988) w.e.f. 1-4-1989.

Explanation 2.—Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as “speculation business”) shall be deemed to be distinct and separate from any other business.”

(Emphasis supplied by us).

If we compare the language employed in sub-section (iii a) with which we are concerned in the present case with the next two sub-sections, i.e. (iii b) and (iii c) as indicated above, it will appear that while in case of sub-section (iii a), it is the profit on actual sale of licence that will be chargeable to tax but in the cases covered by sub-sections (iii b) or (iii c), cash assistance (by whatever name called) received or receivable by any person against exports or any duty of customs or excise repaid or repayable as drawback to any person against exports are chargeable to tax. Thus, the legislature was conscious that in cases covered under sub-section (iii a), only profit on sale of licence should be chargeable but not the profit which may come in future on sale of the licence because the benefit of making import without payment of customs duty accrues to an assessee only at the time of actual import and if the domestic price of the raw-materials is lower than the landed cost of the imported materials, it would not be sensible to import the raw-materials under the Advance License.

 Moreover, at times, the advance licenses may not be utilized within the period of validity thereof and in such cases, no actual benefit is available to an assessee whereas in the cases covered by sub-sections (iii b) or (iii c), there is no scope of non-utilization of the cash assistance or drawback mentioned therein and as such, those are automatically chargeable to tax.

We, thus, find substance in the contention of Mr. Khaitan, the learned counsel appearing on behalf of the appellant that so long the profit has actually accrued to his client on sale of license, the notional figure indicated in the profit and loss accounts of the appellant with the following specific note cannot be chargeable to tax:

“Export Benefit Receivable.

Benefit arising on duty-free import entitlement against export made by the company hitherto accounted for on receipt basis has with effect from the current financial year, been accounted for on accrual basis. As a result, profits for the year are higher by Rs. 228.34 lakhs which include under Miscellaneous income in schedule 15.”

It is now a settled law that if a particular income shown in the account of profit and loss is not taxable under the Act, it cannot be taxed on the basis of estoppel or any other equitable doctrine. Equity is outside the purview of tax laws; a particular income is either liable to tax under the taxing statute or it is not. If it is not, the Income Tax Officer has no power to impose tax on the said income (Ref: Commissioner of Income Tax, Madras Vs. V. MR. P. Firm Muar = AIR 1965 SC 1216).

Therefore, the Tribunal below committed a substantial error of law in treating the amount of Rs.228.34 lakh as chargeable to income tax notwithstanding the fact that the same did not come within the purview of Section 28(iii a) of the Act when the license had not been sold and no profit had come in the hand of the appellant.

We, therefore, answer the point no.(ii) in favour of the assessee and in the affirmative.

As regards the point no. (iii) formulated by the Division Bench, in order to appreciate the said question, it would be profitable to refer to the provisions contained in Section 115 JA of the Act which is quoted below:

“115-JA. Deemed income relating to certain companies.—(1) Notwithstanding anything contained in any other provisions of this Act, where in the case of an assessee, being a company, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 2[but before the 1st day of April, 2001] (hereafter in this section referred to as the relevant previous year) is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit.

(2) Every assessee, being a company, shall, for the purposes of this section prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956):

Provided that while preparing profit and loss account, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the profit and loss account laid before the company at its annual general meeting in accordance with the provisions of Section 210 of the Companies Act, 1956 (1 of 1956):

Provided further that where a company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under the Act, the method and rates for calculation of depreciation shall correspond to the method and rates which have been adopted for calculating the depreciation for such financial year or part of such financial year falling within the relevant previous year.

Explanation.—For the purposes of this section, “book profit” means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by—

(a) the amount of income tax paid or payable, and the provision there for; or

(b) the amounts carried to any reserves by whatever name called; or

(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or

(d) the amount by way of provision for losses of subsidiary companies; or

(e) the amount or amounts of dividends paid or proposed; or

(f) the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies;

if any amount referred to in clauses (a) to (f) is debited to the profit and loss account, and as reduced by,—

(i) the amount withdrawn from any reserves or provisions if any such amount is credited to the profit and loss account:

Provided that, where this section is applicable to an assessee in any previous year (including the relevant previous year), the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 [but ending before the 1st day of April, 2001] shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation; or

(ii)  the amount of income to which any of the provisions of Chapter III applies, if any such amount is credited to the profit and loss account; or

(iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account.

Explanation.—For the purposes of this clause,—

(a) the loss shall not include depreciation;

(b) the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation, is nil; or

(iv) the amount of profits derived by an industrial undertaking from the business of generation or generation and distribution of power; or (v) the amount of profits derived by an industrial undertaking located in an industrially backward State or district as referred to in sub¬section (4) and sub-section (5) of Section 80-IB, for the assessment years such industrial undertaking is eligible to claim a deduction of hundred per cent of the profits and gains under sub-section (4) or sub¬section (5) of Section 80-I; or

(vi) the amount of profits derived by an industrial undertaking from the business of developing, maintaining and operating any infrastructure facility as defined as defined in the Explanation to sub-section (4) of Section 80-IA and subject to fulfilling the conditions laid down in that sub-section; or

vii) the amount of profits of sick industrial company for the assessment year commencing from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of Section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses; or

Explanation.—For the purposes of this clause, “net worth” shall have the meaning assigned to it in clause (ga) of sub-section (1) of Section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986).

(viii) the amount of profits eligible for deduction under Section 80-HHC, computed under clause (a), (b) or (c) of sub-section (3) or sub-section (3- A), as the case may be, of that section, and subject to the conditions specified in sub-sections (4) and (4-A) of that section;

(ix) the amount of profits eligible for deduction under Section 80-HHE, computed under sub-section (3) of that section.

(3) Nothing contained in sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of sub-section (2) of Section 32 or sub-section (3) of Section 32-A or clause (ii) of sub-section (1) of Section 72 or Section 73 or Section 74 or sub-section (3) of Section 74-A.

(4) Save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section.”

A plain reading of the aforesaid provisions makes it abundantly clear that where in the case of an assessee, being a company, the total income, as computed under the Act in respect of any previous year relevant to the Assessment Year commencing on or after the 1st day of April, 1997 but before the 1st day of April, 2000 is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit and in such a case, such assessee shall prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. Under Clause 2 of Part II of Schedule VI to the Companies Act, where a company receives an amount on account of surrender of leasehold rights, it is bound to disclose in the profit and loss account the said amounts as non-recurring transaction or a transaction of an exceptional nature irrespective of its nature whether it is capital or revenue. Even under Clause 2(b) of Part II of Schedule VI of the Companies Act, the profit and loss accounts shall disclose every material feature including credits or receipts and debits or expenses in respect of non-recurring transaction or transactions of an exceptional nature which includes profits on sale of fixed assets.

Thus, it is absurd to suggest that the profit on sale of fixed assets amounting to Rs.6,02,9 1,024/- did not form part of the book profit under Section 11 5JA of the Income Tax Act, 1961. We, therefore, find that the Tribunal below rightly decided the aforesaid point in favour of the Revenue and we find no reason to interfere with the said finding.

In the result, the appeal is allowed in part. We answer the point no.(ii) against the Revenue and in the affirmative. As indicated earlier, the point nos.(i), and (iv) have not been pressed at the hearing and as such are answered against the assessee and in the affirmative.

In the facts and circumstances, there will be, however, no order as to costs.

(Bhaskar Bhattacharya, J.)

I agree.

(Sambuddha Chakrabarti, J.)