Case Law Details

Case Name : Hindustan Petroleum Corpn. Ltd. Vs Deputy Commissioner of Income-tax (ITAT Mumbai)
Appeal Number : IT Appeal No. 2124, 5856 TO 5858 (MUM.) OF 1999
Date of Judgement/Order : 31/07/2012
Related Assessment Year : 1992-93 TO 1995-96
Courts : All ITAT (5316) ITAT Mumbai (1657)

IN THE ITAT MUMBAI BENCH ‘G’

Hindustan Petroleum Corpn. Ltd.

versus

Deputy Commissioner of Income-tax

IT APPEAL NOs. 2124, 5856 TO 5858 (MUM.) OF 1999

[ASSESSMENT YEARS 1992-93 TO 1995-96]

JULY 31, 2012

ORDER

Vijay Pal Rao, Judicial Member

These 4 appeals by the assessee are directed against separate orders of CIT(A) for the assessment year 1992-93 to 1995-96 respectively.

2. For the assessment year 1992-93 the assessee has raised the following concise grounds:

1. Deduction u/s. 8OHH/801/801A- LPG Bottling Plant – Rs. 6,08,21,000/-

On the Facts and in the Circumstances of the case and in law, the CIT(A) erred in confirming the disallowance of Rs. 6,08,21,000/- being the claim for deduction u/s 8OHH, 801/801A towards LPG Bottling Plant.

3. Ground no. 1 is regarding disallowance of deduction u/s 80HH, 80I/80IA towards LPG Bottling Plant, which is common in all the 4 years.

4. The assessee claimed that deduction under section 80 HH, 80I & 80 on LPG bottling plant. The Assessing Officer was of the view that bottling plant on which assessee is claiming deduction under section 80HH and 80IA/80I are not eligible for such deduction as no manufacturing activities were carried out therein. Relying on the decision of the Gujarat High Court in case of State of Gujarat v. Kosan Gas Co. [1992] 87 STC 236, the Assessing Officer disallowed the claim of the assessee on the ground that the manufacturing of LPG takes place in the refineries and not at bottling plant. Once LPG is manufactured in the refinery, for industrial and bulk users, it is sold in tanks and tankers; but for the domestic use, it is sent to bottling plants. The major activity carried out at bottling plant is refilling and bottling of the LPG into smaller cylinders. Accordingly, the Assessing Officer held that there is no manufacturing involved in the said bottling plant.

4.1 On appeal, the CIT(A) confirmed the disallowance made by the Assessing Officer on identical reasons.

5. Before us, the learned senior counsel for the assessee has explained the process of bulk LPG unloading, storage, handling and filling in cylinders. He has further contended that the Hon’ble jurisdictional High Court, in the case of the assessee, while deciding the dispute of electricity tariff charged by the Maharashtra State Electricity Distribution Co Ltd (MSEDCL) vide decision dated 19.1.2012 in Writ Petition No. 9455 of 2011 in case of Hindustan Petroleum Corpn. Ltd v. MSDCEL has held that the activity of a gas bottling plant is a manufacturing activity. He has pointed out that the Hon’ble jurisdictional High Court followed the decision of Hon’ble Gujarat High Court in case of BPCL v. State of Gujarat wherein an identical issue of electricity tariff was involved. The learned senior counsel has further submitted that in pursuant to the decision of honourable jurisdictional High Court, Electricity Ombudsman has decided the issue vide order dated 26th of March 2012 and held that the assessee is conducting manufacturing activity in its bottling plant situated at Hazarwadi, district Sangli.

5.1 The ld senior counsel then referred the notification number S.O.627(E) issued under section 80 IB(4) dated 4/8/1999 and submitted that at serial number 13 of the said notification, gas based intermediate products industry manufacturing or producing includes gas distribution and bottling. Thus, the ld Sr counsel has submitted that as per the said notification, gas distribution and bottling has been treated as manufacturing or producing industry.

5.2 The ld Sr counsel has also referred the Gas Cylinders Rules 2004 and submitted that as per rule 2 (xxxii), the definition of ‘manufacture of gas’ means filling of a cylinder with any compressed gas and also includes transfer of compressed gas from one cylinder to another cylinder.

5.3 The ld Sr counsel has thus pointed out that the honourable Gujarat High Court has considered the cylinders rules while deciding the issue in the case of Bharat Petroleum Corpn. Ltd. v. State of Gujarat, which has been followed by Hon’ble jurisdictional High Court in the case of the assessee while deciding the dispute of levy of tariff on the basis of the category of the activity of the assessee.

5.4 The ld Sr counsel, then referred Chapter 27 of Central Excise Tariff Act and submitted that the process of compression of natural gas for the purpose of marketing it as compressed natural gas for use as a fuel or any other purpose shall amount to manufacture. The LPG is also compressed for the purpose of marketing and that can be used and therefore, falls under the term manufacture.

5.5 He has further submitted that in the case of BPCL, the Asstt. Commissioner of Central Excise vide his order dated 23/10/1998 held that the change from bulk to smaller cylinders with regulator amounts to manufacture.

5.6 The learned senior counsel has referred the Bombay Sales Tax Act and submitted that as per schedule C II, sales of petroleum products including liquefied petroleum gas manufactured or produced by the any of the companies or corporations are exempt. The ld. Sr. counsel has thus submitted that LPG cylinder is a different commercial product than the bulk LPG. He has contended that the decision of honourable Gujarat High Court relied upon by the Assessing Officer as well as CIT(A) has been distinguished by the honourable jurisdictional High Court while deciding the case of the assessee on the issue of electricity tariff. Thus, the ld. Sr. counsel has submitted that the various process carried out with respect to the commodity as a marketable commodity which is different from its original and therefore, the process has taken place to transform the commodity into a commercially different commodity.

5.7 On the other hand, the learned CIT-D.R. has submitted that the Cylinders Rules 2004 framed under Explosives Act came into force from the year 2004 are not relevant and applicable for the assessment year under consideration. He has further contended that input is gas and output is also gas and there is no change in the main commodity. Filling the gas cylinder is only a mode of supply and marketing and the property of gas remains the same. The ld DR has further contended that the odour which is mixed in gas only for safety purpose and in compliance of safety rules therefore, mixing of odour does not change any property of the original comedy.

5.8 The learned D.R. has referred the definition of manufacture under section 2 (29BA) and submitted that the manufacturing means that change in a non-living physical object or article or thing, resulting in transformation of the object or article or thing into a new and distinct object or article or thing; bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure.

5.9 The ld DR has thus, submitted that when there is no change in the chemical composition or other properties of the gas in the activity of filling the cylinder, then this activity could not amount to manufacture. He has further submitted that the notification under section 80 IB(4) has also been issued on 4.8.99, which is subsequent to the assessment years under consideration. He has further submitted that the notification was issued to give benefit of the activities, which are otherwise not eligible for deduction. The learned DR has further contended that the definition under Central Excise Act is a deeming meaning of manufacture in a similar manner as it is deemed income under the Income Tax Act. Therefore, the meaning given under the Central Excise Act cannot be adopted under the Income Tax Act. He has further submitted that the decision of honourable jurisdictional High Court is under electricity tariff Act which is a State Act and cannot overrule the Central Act. The value addition is an important factor for deciding the activity being manufacturing. There is no value addition is an important factor for deciding the activity as manufacture. There is no value addition in the activity of filling the gas in the cylinder; therefore, the same cannot be treated as manufacture. The learned D.R. has relied upon the orders of the authorities below.

5.10 In the rebuttal, the Sr counsel has submitted that the Hon’ble High Court has relied upon the Gas Cylinders Rules as notified under the Explosives Act 1884; therefore, when the Hon’ble High Court has considered the same rules while deciding the question of nature of activity, then the same has to be followed.

6. We have considered the rival submissions as well as relevant material on record. Liquefied Petroleum Gas (in short LPG) is one of the petroleum fuels; however, we are concerned with LPG used as domestic and non-domestic fuel, particularly for kitchen use. There is no dispute that the LPG is produced in the refinery cannot be directly supplied to the consumer for domestic use because of various reasons of handling, storage and safety. LPG bottling or filling the gas in the cylinder is not a simple activity and cannot be performed under normal conditions. This is a highly technical and complex activity which requires precise functions of technically expert persons or machines.

6.1 Even prior to the process of filling the gas into cylinder, there are certain measures to ensure that the cylinder is entirely empty; without any air or other particles, dirt and grease or any other substance. In order to prepare the cylinder ready to fill up with the gas, the air inside the cylinder is removed by using vacuum pumps and then filled with a few grams of LPG The cylinders will then be washed by medium pressure water jets to remove all the dirt and grease from the cylinder surface. The cylinders are then filled with LPG by automatic filling carousel. After filling the gas, the cylinder is checked for the correctness and to ensure that no cylinder is remained under filled or over filled. The cylinders are then sent for in-line test bath for checking the valve bung leak and the body leaks. The defective cylinders are separated and sent for the valuation. All the good cylinders are then sent to hot air sealing unit where the cylinders are sealed with the PVC seal by hot crimping.

7. The honourable High Court while passing the decision in case of Hindustan Petroleum Corpn. Ltd. (supra) has observed in para 18 to 24 as under:

“18. In so far as the other aspect whether the activity of running a gas bottling plant is a Commercial activity or a manufacture activity, prima facie, I find that neither the CGRF nor the Ombudsman have considered the relevant provisions of the Explosives Act, 1884 and the Gas Cylinder Rules 2004. The Petitioner has elaborately explained before the Authority below that the process of the industry is not simple refilling LPG Cylinder. It is explained that the activity comprises of LPG suction, vapour distribution, de-gassification, compression of LPG vapour, external and internal cleaning, hydro pressure test, refilling, sealing, quality control etc. Prima facie, the aforesaid activity will contribute a “Manufacturing Activity”.

19. Section 4 (h) of the Explosives Act, 1884 defines the word “manufacture” and the same reads thus:

(i) “manufacture” in relation to an explosives includes the process of-

(1) dividing the explosive into its component parts or otherwise breaking up or unmaking the explosives, or making fit for use any damaged explosive; and

(2) re-making, altering or repairing the explosive”

20. In exercise of the power conferred by Sections 5 and 7 of the Explosives Act, 1884, the Central Government has framed the Gas Cylinder Rules, 2004. Rule 2 (XXXIII) defines the word “manufacture of gas” which reads thus:”(xxxiii) “manufacture of gas” means filling of a cylinder with any compressed gas and also includes transfer of compressed gas from one cylinder to any other cylinder”.

21. The Petitioner had relied upon various Judgments before the Electricity Ombudsman, but unfortunately those Judgments have not been discussed and considered. The Petitioner had relied upon the Judgment in the case of Bharat Petroleum Corporation Ltd v. State of Gujarat & Others wherein Hindustan Petroleum Corporation Limited was also a party and the said Judgment is in respect of the Gas Bottling Plant. Special Civil Application No. 6220 of 2001 was filed by the Hindustan Petroleum Corporation Limited. In the said Judgment, the question whether the activity of a Gas Bottling Plant is the manufacturing activity or not, was specifically raised. There the High Court had considered the provisions of The Indian Explosives Act, 1884 and the Gas Cylinder Rules 1981 (Rules which were in force prior to the making of Gas Cylinder Rules, 2004). The High Court has clearly held that the activity of a Gas Bottling Plant is a manufacturing activity. I respectfully agree with the aforesaid Judgment of the Gujarat High Court.

22. Unfortunately, the learned Ombudsman has not considered all these Judgments and has dismissed the representation of the Petitioner. Hence, on the second point, as to whether the Petitioner carries on a manufacturing activity when it is running its Gas Bottling Plant, the matter deserves to be remanded to the Electricity Ombudsman.

23. On remand only, the limited issue as to whether the Petitioner is conducting manufacturing activity or not, will have to be considered and gone into by the Electricity Ombudsman. I have already held that the grievances made by the Petitioner are within limitation.

24. Hence, I pass the following order: Rule is made partly absolute by setting aside the impugned Judgment and Order dated 17th August, 2011 passed by the Electricity Ombudsman in Representation No. 82 of 2011 and the matter is remanded back to the Electricity Ombudsman for a de-novo hearing of the issue as to whether the activity of Gas Bottling Plant is a manufacturing activity or not. In the light of the observation made in paragraphs 17 and 20, the Ombudsman shall apply his mind to the Provisions of the definition of the word “manufacture” under the Explosives Act, 1884 and the term “manufacture of Gas” under the Gas Cylinder Rules, 2004 as also the various Judgments of the different High Courts who have occasion to decide the similar issues. Rule made partly absolute with no order as to costs.”

7.1 It is clear that the honourable High Court has made certain observations with respect to the activities of bottling plant of the assessee which amounts to manufacture. In pursuant to the decision of honourable High Court, the electricity ombudsman has it held in para 8 & 9 in the order dated 26th March 2012 as under it:

“8. It is clear from the above that the Gas Cylinder Rules, 2004, framed Linder the Explosives Act, 1884, came into force from the year, 2004. Rule 2 (xxxii) of the said Rules define “manufacture of gas” as filling of a cylinder with any compressed gas and also includes transfer of compressed gas from one cylinder to any other cylinder. The judgment of honorable division bench of Gujarat High Court in the case of the State of Gujarat and Kosan Gas Company was passed much before the said Gas Cylinder Rules, 2004, came into force. In the case of Bharat Petroleum Corporation Ltd versus State of Gujarat & 3 – Respondent(s) decided on 6th May. 2010 , the honorable High Court of Gujarat held:

“16. having heard the learned advocates appearing for the parties and having considered their rival submissions in light of the statutory provisions and decided case law on the subject and having judiciously examined the decisions/orders under challenge, the Court is of the view that the respondent authorities are not justified in collecting/adjusting and/or enforcing the recovery of electricity duty at the rate of 100% by reclassifying the electrical energy consumed by the petitioner for their activities. The Court has at length discussed this issue in Special (Civil Application No. 5400 of 2001 decided today and for the reasons stated and findings recorded therein, the petitions deserve to be allowed and are accordingly allowed.

17. A part from the said reasoning, one more point which is in favour of the petitioners is that as per the definition of industrial undertaking given in Section 2(bh) of the Act, the petitioners’ activities foil within the ambit of this definition. The Government of India in exercise of power conferred by Sections 5 and 7 of the Indian Explosives Act, l884 has made Rules known as Gas Cylinder Rules, 1981. The Rule-2, subsequently defines the expression manufacturing of gas which means filling of a cylinder with any compressed gas and also includes transfer of compressed gas from one cylinder to any other cylinder. Thus, filling of LPG Gas cylinder is evidently a process of manufacture and, therefore. the petitioners are Industrial Undertakings consuming high tension energy as provided by Section -3(1) and Clause 5 (a) of the Schedule to the Act and as such the respondents had initially correctly levied duty at 20% of the consumption charges.”

9. in pursuance of the definition of the words “manufacture of gas” stipulated in the Gas cylinder Rules, 2004 and respectfully agreeing with the above said judgment, passed on 6th May. 20 10, by the honorable High Court of Gujarat, I pass the following order:

The Appellant is conducting manufacturing activity at its Gas Bottling plant, situated at Hazarwadi, district Sangli.”

7.2 The honourable Jurisdictional High Court has relied upon the decision of Hon’ble Gujarat High Court in case of BPCL v. State of Gujarat wherein it was held in paras number 16 to 18 as under:

“16. Having heard the learned advocates appearing for the parties and having considered their rival submissions in light of the statutory provisions and decided case law on the subject and having judiciously examined the decisions/orders under challenge, the Court is of the view that the respondent authorities are not justified in collecting/adjusting and/or enforcing the recovery of electricity duty at the rate of 60% by reclassifying the electrical energy consumed by the petitioners for their activities. The Court has at length discussed this issue in Special Civil Application No.5400 of 2001 decided today and for the reasons stated and findings recorded therein, the petitions deserve to be allowed and are accordingly allowed.

17. Apart from the said reasoning, one more point which is in favour of the petitioners is that as per the definition of industrial undertaking given in Section 2(bb) of the Act, the petitioners’ activities fall within the ambit of this definition. The Government of India in exercise of power conferred by Sections 5 and 7 of the Indian Explosives Act, 1884 has made Rules known as Gas Cylinder Rules, 1981. The Rule-2, Sub-clause-xxv defines the expression ‘manufacturing of gas’ which means filling of a cylinder with any compressed gas and also includes transfer of compressed gas from one cylinder to any other cylinder. Thus, filling of LPG Gas Cylinder is evidently a process of manufacture and, therefore, the petitioners are Industrial Undertakings consuming high tension energy as provided by Section-3(1) and Clause 5(a) of the Schedule to the Act and as such the respondents had initially correctly levied duty at 20% of the consumption charges.

18. The petitioners’ claim is further supported by the decision of this Court in the case of Vadilal Gas Pvt. Ltd. v. State of Gujarat (Special Civil Application No. 9691 of 2000 decided on 25.11.2009) wherein the Court after considering the nature of the process undertaken by the petitioner took the view that the petitioner unit is a manufacturing unit within the definition of the Act and hence the petitioners require to pay only 10% duty charges and not 60% charges as demanded by the respondent.”

7.3 Further, as per notification number 627 issued under section 80 IB dated 4.8.99, Gas distribution and bottling activities, being treated as manufacture or producing industry. As considered by the honourable Gujarat High Court as well as hon’ble jurisdictional High Court, the Gas cylinder Rule 2004 issued under Explosive Act 1884 defined manufacturing of gas under section 2(xxxii) as under:

“manufacture of gas’ means filling of a cylinder with any compressed gas and also includes transfer of compressed gas from one cylinder to any other cylinder.”

7.4 As per the Gas Cylinders Rule 2004, filling of cylinder with the compressed gas including transfer of compressed gas from one cylinder to other cylinder is treated as manufacture. Under Excise Act, compressed natural gas marketing is treated as manufacture. Though the Assistant Commissioner Central Excise vide his decision order dated 23rd October 1998 has held the bottling of LPG cylinder as manufacture; however, in the absence of the status of the finality of the said order, we cannot lay much reliance on the same. Bottling Plant of LPG is an essential process for rendering the product marketable and useable for the end consumer.

7.5 It is to be noted that the term used in the section 80HH, 80I/80IA is manufacturing or production. It is settled proposition of law, as laid down by the honourable Supreme Court that the word ‘production’ as used in these sections has a wider connotation in compare to the word ‘manufacture’. Thus, every manufacture characterised as production; but every production need not amount to manufacture. Even the activity, which is something which brings the commercially new product into existence, then the activity constitutes production.

7.6 The case in hand, the process of bottling of LPG makes the LPG capable of being marketed and used by the individual consumers as a domestic kitchen fuel. As we have discussed the process by which the LPG is filled up in the cylinder makes it possible and viable commercial product.

8. In view of the above discussion as well as the decisions has relied upon by the Ld Sr counsel, we hold that the bottling plant wherein the LPG is filled in the cylinders for domestic and non-domestic kitchen use involves various specialised process and therefore, it is an activity of manufacture/production. Accordingly, this issue is decided in favour of the assessee

9. During the course of hearing the Ld Sr counsel has submitted that the assessee does not press ground number 1 for the assessment year 1993-94 which reads as under:

“The Commissioner of Income Tax (Appeals) erred in confirming the disallowance of Rs. 1,40,87,339/- towards right to use technical know-how u/s 37(1) and allowing only 1/6th u/s 35AB.”

9.1 The learned Senior counsel has submitted that for the assessment year 1993-94 the Assessing Officer disallowed the claim regarding right to use technical know-how under section 37(1) and also denied the claim for 1/6th under section 35AB on the ground that the assessee is in appeals. Thus, the learned senior counsel has submitted that if the claim under section 35AB is allowed for 1/6th of the amount, then the assessee does not press the allowance of the claim at 100% under section 37(1).

9.2 The learned A.R. has no objection, if the ground number 1 for the assessment year 1993-94 is dismissed as not pressed.

10. Accordingly, we dismiss the ground number 1 for the assessment year 1993-94 being not pressed and the Assessing Officer is directed to allow the claim under section 35AB to the extent of 1/6th of the amount for the assessment year 1993-94, 1994-95 and 1995-96 as it was allowed in the first year.

11. The next ground raised by the assessee for the assessment year 1993-94, 1994-95 and 1995-96 as under:

“On the facts and in the circumstances of the case and in law Commissioner of Income Tax (Appeals) erred in disallowing the appellant’s claim of excise/custom duty paid of Rs. 7,40,51,245/- and included in closing inventory u/s 43B.”

11.1 The assessee had claimed deduction under section 43 B in respect of excise and custom duty paid during the year and included in the value of closing inventory. The Assessing Officer disallowed the claim of the assessee and observed that for the purpose of valuation of closing stock, all cost is attributable to the same including excise duty are to be considered.

11.2 On appeal the CIT(A) has confirmed the disallowance made by the Assessing Officer on the ground that the similar disallowance was made for the assessment year 1984-85 have been confirmed at by this Tribunal.

12. Before us, the senior counsel has submitted that the issue has been considered and decided by this Tribunal in assessee’s own case for the assessment year 1988-89, 89-98 followed by the decision for the assessment year 1990-91 and 1991-92. Has further submitted that this issue is covered by the decision of Hon’ble Supreme Court in the case of Berger Paints India Ltd. v. CIT [2004] 266 ITR 99/135 Taxman 586 as well as decision of honourable Gujarat High Court in case of Lakhanpal National Ltd. v. ITO [1986] 162 ITR 240/27 Taxman 462.

12.1 On the other hand the learned DR has relied upon the orders of authorities below.

13. We have considered the rival submissions as well as relevant material on the court. At the outset, we note that for the assessment year 1989-90 in order reported in Hindustan Petroleum Corpn. Ltd. v. Dy. CIT [2005] 96 ITD 186/[2004] 141 Taxman 3 (Mum.) (Mag.) this Tribunal has considered and decided it this issue in para 12 and 13 as under:

12. In the second ground of appeal, the assessee is aggrieved that the CIT(A) erred in confirming the partial disallowance of excise/custom duty paid during the year and included in the closing inventory under section 43B, thereby ignoring the ratio of Gujarat High Court in Lakhanpal National Ltd. v. ITO [1986] 162 ITR 240.

13. Learned representative fairly agree that the issue is now covered, in favour of the assessee, by Hon’ble Supreme Court’s judgment in the case of Berger Paints India Ltd. v. CIT [2004] 266 HR 99. Respectfully following the same, we uphold the contention of the assessee and direct the Assessing Officer to allow deduction for entire amount of excise duty and custom duty paid by the assessee irrespective of the excise duty and custom duty included in the valuation of assessee’s closing stock at the end of the accounting year. The assessee gets relief accordingly.

14. Following the earlier order of this Tribunal, we decide this issue in favour of the assessee and against the revenue.

15. The next ground raised by the assessee for the assessment year 1993-94, 1994-95 and 1995-96 is regarding disallowance of expenditure on 20 point programme. We reproduce the ground number 2 for the assessment year 1993-94 as under:

“On the facts and in the circumstances of the case and in law, Commissioner of Income Tax (Appeals) erred in disallowing the expenditure incurred u/s 37(1) toward 20 point programme amounting to Rs. 41,86,000/-“

16. We have heard the ld Sr counsel as well as the ld DR and considered the relevant material on record. At the outset, we note that this issue has been considered and decided by this Tribunal in assessee’s own case for the assessment year at 1989-90 in paras 7 to 10 as under:

7. We find that as held by Hon’ble Karnataka High Court in the case of Mysore Kirloskar Ltd. v. CIT [1987] 166 ITR 836, while ‘the basic requirements for invoking sections 37(1) and 80G are quite different’, ‘but nonetheless the two sections are not mutually exclusive’. Thus, there are overlapping areas between the donations given by the assessee and the business expenditure incurred by the assessee. In other words, there can be certain amounts, though in the nature of donations, and nonetheless, these amounts may be deductible under section 37(1) as well. Therefore, merely because an expenditure is in the nature of donation, or, to use the words of the CIT(A), ‘promoted by altruistic motives’, it does not cease to be an expenditure deductible under section 37(1). In Mysore Kirloskar Ltd.’s case, Their Lordships have observed that even if the contributions by the assessee is in the forms of donations, but if it could be termed as expenditure of the category falling in section 37(1), then the right of the assessee to claim the whole of it as a deduction under section 37(1) cannot be defined. What is material in this context is whether or not the expenditure in question was necessitated by business considerations or not. Once is found that the expenditure was dictated by commercial expediencies, the deduction under section 37(1) cannot be declined. As to what should be relevant for examining this aspect of the matter, we may only refer to the observations of Hon’ble Supreme Court in the case of Sri Venkata Satyanaráyna Rice Mill Contractors Co. v. CIT [1997] 223 ITR 101:

… any contribution made by an assessee to a public welfare fund which is directly connected or related with the carrying on of the assessee’s business or which results in the benefit to the assessee’s business has to be regarded as an allowable deduction under section 37(1) of the Act. Such a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Minister’s Drought Relief Fund or a District Welfare Fund established by the District Collector or any other fund for the benefit of the public and with a view to secure benefit to the assessee’s business, cannot be regarded as payment opposed to public policy. It is not as if the payment in the present case had been made as an illegal gratification. There is no law which prohibits the making of such a donation. The mere fact that making of a donation for charitable or public cause’ or in public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under section 37(1) of the Act when such payment had been made for the purpose of assessee’s business.

8. In the case of CIT v. Madras Refineries Ltd. [2004] 266 ITR 170, Hon’ble Madras High Court has upheld deductibility of the amount spent by the assessee even on bringing drinking water to locality and in aiding local school. While doing so, Their Lordships observed as follows:

The concept of business is not static. It has evolved over a period of time to include within its fold the concrete expression of care and concern for the society at large and the locality in which business is located in particular. Being a good corporate citizen brings goodwill of the local community as also with the regulatory agencies and society at large, thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill.

9. Let us now take a look at the undisputed facts of this case. The assessee is a company owned by the Government of India and working under the control and directions of the Government of India. As the statement of facts clearly sets out, the expenditure on 20-Point Programmes was incurred in view of specific directions of the Government of India. This factual aspect is not even disputed or challenged by the Revenue at any stage. It cannot but be in the business interest of the assessee company to abide by the directions of the Government of India which also owns the assessee-company. In any event, as observed by the Hon’ble Madras High Court in Madras Refineries Ltd.’s case, monies spent by the assessee as a good corporate citizen and to earn the goodwill of the society help creating an atmosphere in which the business can succeed in a greater measure with the help of such goodwill. The monies so spent therefore are required to be treated as business expenditure eligible for deduction under section 37(1) of the Act. What is the expenditure for the implementation of 20-point plant after all? It !solely for the welfare of the oppressed classes of Society, for which even the Constitution of India sanctions positive discrimination, and for contribution to all around development of villages, which has always been the central theme of Government’s development initiatives. An expenditure of such a nature cannot but be, to use the words employed by the Hon’ble Madras High Court in Madras Refineries Ltd.’s case, ‘a concrete expression of care and concern for the society at large’ and an expenditure to discharge the responsibilities of a ‘good corporate citizen which brings goodwill of with the regulatory agencies and society at large, thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill’.

10. Turning to Revenue’s stand that these expenses are not wholly and exclusively for the purpose of business of the assessee-company but, on the contrary, these expenses are voluntarily incurred by the company for the benefit of non-employees, and as such the incurring of such expenditure must be construed as application of income rather than expenditure to earn income, we may only quote a passage from the judgment of House of Lords in the case of Atherton v. British Insulated & Heisbey Cables Ltd. [1925] 10 Tax Cases 155, referred to with approval by the Hon’ble Supreme Court in the case of CIT v. Chandulal Keshavlal & Co. [1960] 8 ITR 601, which reads as follows:

“It was made clear in the above cited cases of Usher’s Wilshire Brewery v. Bruce and Smith v. Incorporated Council of Law Reporting 1914 (6 Tax Cases 477) that a sum of money expended not with a necessity and with a view to direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency and in order to indirectly facilitate, carrying on of the business may yet be expended wholly and exclusively for the purpose of the trade.

It will, therefore, be clear that even if an expense is incurred voluntarily, it may still be construed as ‘wholly and exclusively’. Just because the expenses are voluntary in nature and are not forced on the assessee by a statutory obligation, these expenses cannot cease to be a business expenditure. Keeping all these factors in mind, as also entirety of the case, we are not inclined to sustain the disallowance of Rs. 10,55,648 as expenditure incurred on implementation 20-Point Programrnes. We are, therefore, of the considered view that the authorities below indeed erred in law in declining deduction of expenses incurred on 20-Point Programmes which was, beyond dispute or controversy, at the instance of the Government, and was to discharge the assessee’s obligations towards society and as a responsible corporate citizen.

17. Following the earlier order of this Tribunal, we decide this issue in favour of the assessee and against the revenue.

18. The next ground raised by the assessee for the assessment year 1993-94 is ground number 4 as under:

“Commissioner of Income Tax (Appeals) erred in allowing only 25% as against the appellants claim of 50% towards entertainment expenses towards employees accompanying the guests.”

19. Out of total expenditure incurred by the assessee on entertainment, the assessee claimed that its staff has participated in these occasions and accordingly attributed to 50% of expenditure so incurred on its staff. Thus, the assessee disallowed 50% towards entertainment u/s 37(2) of the income tax act. The Assessing Officer observed that in any party, the host and staff can’t equal to the numbers of guest and hence as against 50% of the said expenditure, only 25% allocated to its employees. Accordingly, the Assessing Officer disallowed the entertainment expenditure under section 37(2) to the extent of 75% amounting to Rs. 1,69,546/- and allowed only Rs. 58,182/-.

19.1 On appeal the Commissioner of Income Tax (Appeals) has confirmed the disallowance made by the Assessing Officer on similar grounds.

20. We have heard the learned Sr counsel as well as the learned D.R. and carefully considered the relevant material on record. The assessee has claimed 50% of the expenditure incurred towards entertainment as attributable to the staff of the assessee on estimate basis, which was reduced by the Assessing Officer to 25%.

21. In the absence of any material and details regarding the exact number of staff and guest on these occasions, we do not find any reason to interfere with the orders of the lower authorities on this issue. Accordingly, we confirmed the disallowance made by the authorities below.

22. The assessee has also raised additional grounds as under:

“1.  Commissioner of Income Tax (Appeals) failed to appreciate that the mandatory jurisdictional conditions precedent to reopening of the assessment u/s 147/148 of the IT Act were not satisfied in the present case and hence the reassessment was bad in law and void-ab-initio.

 2.  Claim for Dividend paid Rs. 2553.60 lakhs as allowable business and revenue expenditure:-

The Appellants have paid an amount of Rs. 2553.60 lakhs as Dividend for Financial Year 1992-93 (A. Y. 1993-94) Appellants submit that the Company and its shareholders are different persons and hence payment of Dividend is I in fact a payment to its shareholders and not to itself. It is settled by several judgments of the Supreme Court that even when 100% shares are held by GOI, (100% Government Company) the company is not the Government or a Government department but is a separate corporate legal entity. There is no joint Ownership between the Company and its shareholders and the company is a separate Corporate Legal Entity. Dividend once declared has to be paid to. the shareholders and even if it remains unclaimed it has to be deposited in separate account form which shareholders can claim. Capital raised from shareholders is used for the purpose of business and Dividend is paid to maintain the goodwill and to service the capital already raised and not to create any new capital base or capital asset. Therefore Dividend is a revenue expenditure and not a capital expenditure.”

23. The additional ground raised against the validity of reopening is involved only for the assessment year 1992-93 and 1993-94. The additional ground regarding the dividend paid as allowable business expenditure is raised for all the 4 years.

24. At the time of hearing on the Ld Senior counsel has submitted that the assessee does not pressed the additional ground regarding validity of reopening. Accordingly, we dismiss the additional ground regarding validity of reopening of assessment.

25. As regards the additional ground in respect of dividend paid by the assessee claimed as business expenditure.

26. We have heard ld Sr counsel as well as the learned D.R. and considered the relevant material on record. The distribution and payment of dividend is application of income and not an expenditure laid out for earning the income or incurred wholly and exclusively for the purpose of business of the assessee. Accordingly, we do not find any merit in the additional ground raised by the assessee claiming that dividend paid as the business is business expenditure. Hence the same is dismissed.

27. In the result, the appeals filed by the assessee are partly allowed.

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Category : Income Tax (27898)
Type : Featured (4025) Judiciary (12073)
Tags : ITAT Judgments (5498)

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