The liability to pay sales tax by instalments cannot be treated to be beyond the provisions of section 43B of the Act

Whether the liability has been deferred or not has to be considered not from the simplistic point of the term ‘defer’ but in context of the incentive scheme for deferral, as is evident from the circular issued by Central Board of Direct Taxes. The subject matter of Circular no. 496 dated 25th September, 1987 is Sales Tax Deferral Scheme and applicability of provisions of section 43B of the Act.

The circular would be applicable provided the sales tax due and payable is deferred as an incentive offered by the deferral scheme. This becomes clear from paragraph no. 3 of the circular which states that representations have been received from various State Governments that cases of deferred sales tax payments should be excluded from the purview of section 43B of the Act as otherwise the operation of the provision has the effect of diluting the incentive offered by the deferral schemes. Hence, in the first instance, provisions of section 43B of the Act stand attracted in relation to a statutory liability i.e. the sales tax liability. However, if such liability is deferred, by way of an incentive granted to an assessee by the State Government, in accordance with the circular issued by Central Board of Direct Taxes if the State Government has made a statutory provision to the effect that the sales tax deferred under the scheme shall be treated as actually paid, such a deeming provision would meet the requirements of section 43B of the Act. Therefore, it is apparent that mere deferral of sales tax liability by granting of instalments is not sufficient. The deferral has to be under an incentive scheme. Only then, the circular issued by Central Board of Direct Taxes read with the second proviso appearing under section 47(4) of the Sales Tax Act would become applicable so as to take an assessee out of the purview of provisions of section 43B of the Act. In the present case, admittedly, at no stage has the assessee been granted any incentive under the deferral scheme formulated by the State Government. In the circumstances, the finding recorded by the Tribunal that the liability to pay sales tax by instalments cannot be treated to be beyond the provisions of section 43B of the Act is justified in law and does not warrant interference.

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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

INCOME TAX REFERENCE No. 6 of 1998

Saurashtra Cement Limited – Applicant(s)

Versus

The Commissioner of Income Tax – Respondent(s)

Date of Judgement: 16/06/2010

J U D G M E N T

(Per Mr. Justice D.A. Mehta)

1. There are cross-references filed both by the assessee and Income Tax Department for the same assessment year and hence, Income Tax Appellate Tribunal, Ahmedabad Bench ‘B’ has drawn a consolidated statement of case and referred the following questions for opinion of this High Court under section 256(1) of Income Tax Act, 1961 (the Act).

Questions at the instance of the assessee

1. Whether on facts and in the circumstances of the case, the Tribunal was right in law in holding that unpaid Royalty is disallowable u/s. 43B of the Act?

2. Whether on facts and in the circumstances of the case, the Tribunal was right in law in holding sales tax deferred in accordance with the letter dated 30.9.92 of the Government of Gujarat is dis allowable u/s.43B of the Act?

3. Whether on facts and in the circumstances of the case, the Tribunal was right in law in disallowing Rs.2,21,600/- out of expenditure on presentation of articles on the ground of absence of details of beneficiaries?

4. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the depreciation u/s.32 is allowable only to the legal owner of the asset?

Questions at the instance of the Revenue

1. Whether the Appellate Tribunal is right in law and on facts in deleting the dis allowance made u/s.43B in respect of unpaid interest on sales tax amounting to Rs. 3,95,52,722/-?

2. Whether the Appellate Tribunal is right in law and on facts in deleting the dis allowance made in respect of claim of deduction of Rs. 3,38,64,423/- stated to be on account of withdrawal of concession by the State Bank of India?

3. Whether on the facts and in the circumstances of the case the Appellate Tribunal is right in directing the A.O. to allow deductions u/s. 80HH and sec.80I as claimed by the assessee?

2. The assessment year in question is 1992-93, the relevant previous year being financial year commencing on 01st April, 1991 and ending on 31st March, 1992. The assessee is a public limited company. An assessment came to be framed under section 143(3) of the Act where under assessee’s claim for deduction of liability of royalty and sales tax came to be disallowed by invoking provisions of section 43B of the Act; similarly, liability of interest paid/payable also came to be disallowed; an amount payable to State Bank of India was also disallowed. The claim for relief under section 80HH and section 80I of the Act was also disallowed; expenditure on gift articles was also disallowed.

3. The matter was carried in appeal before Commissioner (Appeals) and thereafter before Tribunal. The Tribunal vide impugned order dated 29th November, 1996 has granted partial relief against which Revenue is in reference on some of the issues while issues on which relief has not been granted to the assessee, reference has been made by the Tribunal at the behest of the assessee.

Assessee’s Question No. 1

4. In relation to the first question at the instance of the assessee regarding unpaid royalty, the same has been treated as being hit by section 43B of the Act. On behalf of the assessee, it was submitted that royalty would be disallowable only if the same is treated as a fee as held by the Apex Court in the case of Commissioner of Income-Tax vs. McDowell and Co. Ltd. (No.1), (2009) 314 ITR 167. That the Tribunal has failed to consider and record a finding as to whether the amount of royalty payable is actually in the nature of a fee or not. That though the Tribunal in its impugned order has referred to the amended provision of section 43B of the Act without recording any finding of facts, the Tribunal has upheld the orders of the Assessing Officer and Commissioner (Appeals). In this context, attention was invited to paragraph no.17 of the impugned order of Tribunal to submit that the Tribunal after recording that the facts under which the amount of royalty is being paid have not come on record in full could not have disallowed the amount without recording the correct facts.

5. As against that, on behalf of Revenue, it was submitted that Commissioner (Appeals) had recorded that the amount was payable under the Mines and Minerals (Regulation and Development) Act, 1957 and, therefore, no interference was warranted.

6. Insofar as the law on the subject is concerned, the Apex Court has held that the requirement of section 43B of the Act is actual payment. That the words “tax”, “duty”, “cess” or “fee” constitute a class denoting various kinds of imposts by the State and such power can be exercised only under any law authorising levy and collection. Therefore, in the first instance, the Tribunal shall have to record as to whether on facts, the amount payable as royalty by the assessee is a statutory impost. Only if such a finding is recorded would provisions of section 43B of the Act get attracted. Admittedly, in the facts of the present case, the impugned order of Tribunal in the first sentence of paragraph no.17 records “…It is to be seen that the facts under which the amount of royalty is being paid by the assessee have not come on record in full.”. Once the Tribunal had recorded such a finding, it was not open to the Tribunal to thereafter disallow the claim for deduction without ascertaining facts and recording a finding as to whether the amount was payable as a statutory impost.

7. In the circumstances, question no.1 as referred at the instance of the assessee is left unanswered leaving it open to the Tribunal to decide the issue afresh after considering the law enunciated by the Apex Court as referred to in the case of CIT vs. McDowell and Co. Ltd. (No.1) (supra).

Assessee’s Question No. 2

8. Insofar as the second question referred at the instance of the assessee is concerned, the case of the assessee is that the sales tax liability has been deferred in accordance with the letter dated 30th September, 1992 issued by Government of Gujarat and hence, considering the Circular issued by Central Board of Direct Taxes, the judgment of this High Court in the case of Commissioner of Income Tax Vs. Shree Talal Taluka Sahakari Khand Udyog Mandli Ltd., (2003) (259) ITR 21 and the second proviso appearing under section 47(4) of the Gujarat Sales Tax Act, 1969 (the Sales Tax Act), provisions of section 43B cannot be held to be attracted, and if attracted, the liability is deemed to have been discharged entitling the assessee to the deduction claimed without any disallowance. Learned senior counsel appearing on behalf of the assessee placed reliance on communication dated 30th September, 1992 appearing as Annexure 2 to the assessment order to submit that the State Government had granted facility to discharge sales tax liability in instalments and, therefore, even if the term deferment had not been used it would amount to granting of deferment and the second proviso of section 47(4) of the Sales Tax Act would stand attracted and satisfied entitling the assessee to the deduction claimed for. Attention was also invited to the Circular issued by Central Board of Direct Taxes dated 25th September, 1987 as appearing at (1988) 169 ITR (Statutes) 53 to submit that even the requirement laid down by the said circular stood satisfied and the claim for deduction could not have been disallowed. It was submitted that the Tribunal had erred in holding that this was a statutory liability and provisions of section 43B of the Act got attracted. In fact, the liability in question was a contractual liability. Alternatively, if it was a statutory liability, as submitted earlier, it was deferred in accordance with the requirement of the circular issued by Central Board of Direct Taxes and was governed by the ratio laid down by this High Court in the case of CIT vs. Shri Talal Taluka Sahakari Khand Udyog Mandli Ltd. (supra).

9. On behalf of Revenue, reliance was placed on the findings recorded by the Tribunal to submit that this was a statutory liability and merely because the State Government had granted instalments in exercise of powers under the first proviso of section 47(4) of the Sales Tax Act, the nature of the liability would not change so as to take it out of the purview of section 43B of the Act. The counsel also referred to the communication dated 30th September, 1992 to submit that the State Government had merely granted facility to discharge the sales tax liability in instalments and, therefore, the Tribunal was justified in applying provisions of section 43B of the Act.

10. The communication dated 30th September, 1992 may be reproduced for this issue as well as the issue relating to unpaid interest on sales tax in Revenue’s reference.

“Please refer to your letter dated 15th September, 1992, addressed to the Minister for Industries, Gujarat, regarding the payment of Sales Tax dues.

1. The Government of Gujarat is agreeable to the following arrangements for the clearance of the arrears of sales tax dues along with interest in the manner indicated below:

2. The company had agreed during the discussions with the Minister (Industry) and Minister (Finance) held on 23rd September, 1992, that it will immediately withdraw its petition from the High Court unconditionally. The Company shall accordingly withdraw its petition from the High Court and inform the Government suitably. The facility for payment of sales tax dues in instalments will be operative only after the petition is withdrawn by the Company.

3. By granting the facility for payment of tax and interest in instalments, the Government of Gujarat neither recognises nor accepts any contentions and averments mentioned in the petition filed by the company. The facility agreed upon do not in any way confer any right of incentives to the company under the incentive scheme of Industries and Mines Department or under any other scheme.

4. The company shall make down payment of Rs.9 crores (Rupees nine crores) to be paid in two instalments of equal amounts payable by 1st October, 1992, and 1st November, 1992, respectively.

5. The balance of arrears of Sales tax amount as may be communicated by the Sales Tax Department shall be paid by the Company in ten half yearly installments each of equal amount, payable on or before following dates.

5. Interest at the rate of 12% per annum shall become payable on the amount of tax outstanding at the end of every month and such interest shall be calculated for the period commencing from the due date of payment of sales tax and till the amount is paid. The instalments for payment of interest amounts shall commence from 1st July, 1998 and the company shall continue to pay instalments accordingly at six monthly intervals till the entire liability of interest is cleared. The amount of instalment towards interest shall be the amount payable towards instalment of tax arrears.

The Company shall give an undertaking in writing that –

a. It agrees to make payments of instalments towards arrears of a tax and interest as per the amount and the time schedule as may be decided by the Sales Tax Commissioner/ State Government.

b. The Company give further undertaking that it will not resort to any litigation with reference to arrangements communicated in this letter.

c. The company shall pay current dues of tax payable in September 1992 and thereafter. Any default in the payment of current dues will be dealt with as per the usual stipulations and instructions of the Sales Tax Department.

These arrangements shall become effective after the case filed by the Company is withdrawn from the High Court and the Company actually pays the first instalment towards down payment.

You are requested to contact the Sales Tax Department in this regard.”

11. As can be seen from the communication dated 30th September, 1992, the Finance Department of State Government has informed the assessee company that the Government of Gujarat is agreeable to the arrangement stated in the communication for the clearance of the arrears of sales tax dues in the manner indicated. Thus, it is apparent that the arrangement is for the clearance of the arrears of sales tax dues. It is not as if there was no statutory liability. The liability to pay sales tax arises immediately upon a sale having been made. The liability is not dependent upon anything else, namely whether any incentive scheme is available, where under an assessee may get exemption or may be entitled to deferral of the liability. The liability is accrued in law once the sale has been effected. Hence, mere granting of instalments would not change the nature of the liability.

12. As to whether the liability has been deferred or not has to be considered not from the simplistic point of the term ‘defer’ but in context of the incentive scheme for deferral, as is evident from the circular issued by Central Board of Direct Taxes. The subject matter of Circular no.496 dated 25th September, 1987 is Sales Tax Deferral Scheme and applicability of provisions of section 43B of the Act. The circular would be applicable provided the sales tax due and payable is deferred as an incentive offered by the deferral scheme. This becomes clear from paragraph no.3 of the circular which states that representations have been received from various State Governments that cases of deferred sales tax payments should be excluded from the purview of section 43B of the Act as otherwise the operation of the provision has the effect of diluting the incentive offered by the deferral schemes. Hence, in the first instance, provisions of section 43B of the Act stand attracted in relation to a statutory liability i.e. the sales tax liability. However, if such liability is deferred, by way of an incentive granted to an assessee by the State Government, in accordance with the circular issued by Central Board of Direct Taxes if the State Government has made a statutory provision to the effect that the sales tax deferred under the scheme shall be treated as actually paid, such a deeming provision would meet the requirements of section 43B of the Act. Therefore, it is apparent that mere deferral of sales tax liability by granting of instalments is not sufficient. The deferral has to be under an incentive scheme. Only then, the circular issued by Central Board of Direct Taxes read with the second proviso appearing under section 47(4) of the Sales Tax Act would become applicable so as to take an assessee out of the purview of provisions of section 43B of the Act. In the present case, admittedly, at no stage has the assessee been granted any incentive under the deferral scheme formulated by the State Government.

13. In the circumstances, the finding recorded by the Tribunal that the liability to pay sales tax by instalments cannot be treated to be beyond the provisions of section 43B of the Act is justified in law and does not warrant interference.

Assessee’s Question No. 3

14. Insofar as dis allowance of Rs. 2,21,600/- incurred on presentation of articles is concerned, the facts as are necessary may be briefly stated. The assessee claimed a sum of Rs. 4,21,600/- as expenditure incurred on various presentation articles like silver sets, dry fruits, fruits, sarees etc. The Assessing Officer disallowed the said amount on the ground that the details of the recipients were not available and rule 6B of the Income Tax Rules, 1962 (the Rules) was attracted. The assessee has succeeded partially before Tribunal, the Tribunal having granted relief to the extent of Rs. 2 lakhs while upholding the disallowance to the tune of Rs.2,21,000/-. On behalf of the assessee, it was submitted that none of the articles in question bear the logo of the company and, therefore, could not be treated as articles advertising the product of the assessee so as to be governed by provisions of rule 6B of the Rules. The submission was that the expenditure was otherwise allowable under section 37(1) of the Act as having been incurred wholly and exclusively for the purpose of business and only the portion which could be treated as having advertisement value was dis allowable under rule 6B of the Rules. That considering the total turnover of the assessee company and the amount of expenditure incurred and the nature of articles, it was not possible to maintain the details of the recipients and, therefore, no amount of dis allowance could have been retained by the Tribunal.

15. On behalf of Revenue, reliance has been placed on the findings recorded by the subordinate authorities and the Tribunal.

16. As can be seen from the impugned order of Tribunal, the Tribunal has recorded that though it could not be denied or ruled out that such expenses have to be incurred out of business expediency in the ordinary course of business it could not be at the same time stated that the expenses claimed were wholly and exclusively incurred for the purpose of business in absence of details of the beneficiaries and hence, the expenses claimed could not be allowed fully. Thereafter, the Tribunal has considered the turnover of business, the expenditure claimed and allowed during the preceding year and considering the totality of the circumstances, treated expenses to the extent of Rs.2 lakhs as having been incurred for the purpose of business while retaining the disallowance of balance to the tune of Rs. 2,21,600/-. Thus, the finding recorded by the Tribunal is primarily on the facts and does not involve any principle of law so as to warrant interference.

Assessee’s Question No. 4

17. Insofar as the fourth question referred at the instance of the assessee is concerned, the facts are that the assessee claimed depreciation on office building at Ahmedabad but the legal title to the property was yet to be conferred in favour of the assessee company. Accordingly, the Tribunal upheld the finding recorded by the Assessing Officer that in absence of any legal ownership of the property, depreciation was not allowable.

18. It is an accepted position between the parties that the issue now stands concluded in favour of the assessee by virtue of the Apex Court judgment in the case of Mysore Minerals Ltd. vs. Commissioner of Income-Tax, (1999) 239 ITR 775 wherein it is held that the intention of the Legislature in enacting section 32 of the Act would be best fulfilled by allowing deduction in respect of depreciation to the person in whom the dominion over the building vests and who is entitled to use the building in his own right for the purposes of his business or profession. The finding of the Tribunal hence in relation to this issue cannot be sustained. It is held that the Tribunal was not justified in denying depreciation under section 32 of the Act to the assessee.

Revenue’s Question No.1

19. Question no.1 referred at the instance of Revenue relates to unpaid interest on sales tax which was disallowed by the Assessing Officer invoking provisions of section 43B of the Act, but has been allowed by the Tribunal on the footing that said amount does not partake the characteristic of a statutory liability.

20. The amount of interest has become payable on the basis of communication dated 30th September, 1992 issued by the Finance Department of the State Government under which an arrangement had been worked out between the parties. On behalf of Revenue, it was submitted that the Tribunal had committed an error in holding that the interest was not a statutory liability. That in fact, the interest was statutorily leviable under section 47(4A) of the Sales Tax Act and by virtue of the communication dated 30th September, 1992, only remission had been granted by the State Government under section 55 of the Sales Tax Act. That the said liability could not be treated to be a contractual liability and had to be treated as part and parcel of sales tax payable so as to attract provisions of section 43B of the Act.

20.1 Reading extensively from the communication dated 30th September, 1992, more particularly paragraph no.5 of the said communication, it was submitted that the said paragraph used the language employed by section 47(4A) of the Sales Tax Act and thus, was a statutory liability. That merely because the rate of interest had been reduced to 12% from the statutory prescribed rate of interest, the nature of liability did not undergo change and Tribunal had committed an error in holding that section 43B of the Act was not applicable. The judgment of this High Court in the case of Shree Digvijay Cement Co. Ltd. Vs. Commissioner of Income-Tax, (2007) 289 ITR 250 was relied upon in support of the submissions made.

21. On behalf of the assessee, it was submitted that it was not only the rate of interest which was different from the statutory rate of interest but the interest would not partake the character of a statutory liability so as to be equated with tax to attract provisions of section 43B of the Act. That the arrangement worked out under communication dated 30th September, 1992 was not in accordance with the statutory provisions of the Sales Tax Act but was dehors such provisions and the State Government had in exercise of its plenary powers granted certain reliefs to the assessee by way of an arrangement/agreement. Therefore, the impugned order of Tribunal was justified in law.

22. The reliance on judgement of this High Court in the case of Shree Digvijay Cement Company Limited (supra) by the Revenue would not carry the case of Revenue any further. In the said case, in the first instance, the Court was not called upon to decide the nature of liability. Admittedly, as recorded by the Court “at the outset, it is required to be noted that the assessee claimed deduction of Rs. 7,38,11,883/- under section 43B of the Act on account of interest at the rate of 24% per annum under section 47(4A) of the Gujarat Sales Tax Act on the outstanding sales tax amount.” whereas in the facts of the present case, there is a dispute as to whether the interest is payable by virtue of provisions of section 47(4A) of the Sales Tax Act. Secondly, as can be seen from the question which was posed before the High Court, the dispute was as to whether the said amount of interest can be disallowed in the course of making prima facie adjustment under section 143(1)(a) of the Act. Therefore, the observations made in the said judgement would not assist the Revenue.

23. Insofar as remission under section 55 of the Sales Tax Act is concerned, only sub-section (1) of section 55 of the Sales Tax Act empowers the State Government to grant remission as to whole or any part of the tax, penalty or interest payable in respect of any period by any dealer. However, such a remission can be granted by the State Government only if it is necessary to do so in public interest, or to grant concession in case of double taxation, or to redress any inequitable situation. It is nobody’s case that in the facts of the present case the State Government made any order recording that a remission in the rate of interest was either necessary in the public interest or was a case of double taxation so as to grant concession, or was required for the purposes of redressing any inequitable situation. Thus, on a plain reading of provisions of section 55 of Sales Tax Act and the language employed by the communication dated 30th September, 1992, it is not possible to accept this contention raised by Revenue.

24. When one reads the entire communication as a whole document, it becomes clear that the Government of Gujarat agreed to the arrangement stipulated in the said communication about the clearance of arrears of sales tax dues alongwith interest in the manner indicated in the communication subject to the conditions stipulated therein. The petition filed by the assessee before the High Court and which was pending had to be withdrawn by the assessee company with further undertaking not to resort to any litigation with reference to the arrangement communicated in the said letter. The arrangement was to become effective after the case filed by the Company was withdrawn from the High Court and the Company actually paid the first instalment towards down payment. Thus, an arrangement had been arrived at between the parties to put an end to the pending litigation and it is not as if the State Government has granted any remission as contended. The document has to be read as a whole as it stands and it is not possible to import anything in the document.

25. In the circumstances, the finding by the Tribunal that the liability of interest could not be termed to be part and parcel of the sales tax liability so as to attract provisions of section 43B of the Act cannot be considered to be incorrect in law in light of what is recorded hereinbefore. In fact, the entire decision of the Tribunal has proceeded on the appreciation of evidence in the form of communication dated 30th September, 1992 and as to whether the said evidence could be considered to be imposing any statutory liability. The finding recorded by the Tribunal is thus justified in the facts and circumstances of the case considering the communication dated 30th September, 1992.

Revenue’s Question No. 2

26. Insofar as the second question referred at the instance of revenue is concerned, the facts are that assessee claimed deduction of Rs. 3,38,64,423/- on account of withdrawal of concession by State Bank of India in the following circumstances. State Bank of India issued letter dated 27th September, 1991 which was received by the assessee on 15th November, 1991. Under the said letter, according to assessee a liability of Rs. 3,38,64,324/- arose and the assessee claimed deduction thereof. According to Revenue, the liability having been disputed by the assessee could not be termed to be liability which had arisen during the year under consideration and was thus not allowable. The Tribunal has upheld the stand of the assessee.

27. On behalf of revenue, it was submitted that the liability in question is, in fact, no liability but only a proposal as can be seen from the letter issued by State Bank of India. At best, it could be treated as a contingent contractual liability, no payment was made in the year under consideration and hence, the liability cannot be stated to have been crystallised during the relevant accounting period so as to be deductible for the assessment year in question. In support of the submissions made, learned counsel for Revenue read extensively from the said communication which appears as part of paragraph no.5.1 of the order made by Commissioner (Appeals). Reliance has been placed on the Apex Court decision in case of Commissioner of Income Tax, Madhya Pradesh, Nagpur and Bhandara Vs. Swadeshi Cotton and Flour Mills Private Ltd., 53 ITR 134 to submit that unless and until a contractual liability is settled either amicably or by adjudication there is no accrued liability to entitle the assessee to a deduction in the year under consideration.

28. As against that, learned counsel for assessee submitted that the said letter issued by State Bank of India was not relatable to any liability being raised for the first time but was in terms of the contract entered into between the parties earlier in point of time, more particularly, communication dated 22nd April, 1988, which was being enforced by State Bank of India. Hence, the impugned order of Tribunal was correct and the assessee had rightly been held to be entitled to deduction as claimed.

29. It is true that the settled position in law has made a distinction between statutory liability and contractual liability. Statutory liability arises immediately upon happening of the event stipulated by the Statute and is neither postponed nor deferred merely because the same is disputed. Insofar as contractual liability is concerned, if a dispute is raised accrual does not take place unless and until the parties to the contract either amicably settle the dispute or the dispute is adjudicated. However, in the facts of the present case, the accrual of liability is not dependent upon any of the aforesaid principles. The letter dated 27th September, 1991 issued by State Bank of India as reproduced by Commissioner (Appeals) in paragraph no.5.1 of the appellate order relates to “RECOVERY OF CONCESSIONS GRANTED”. The same reads as under:-

“Please refer to your letter No. NIL dtd. 29/5/91 addressed to DIBI, a copy of which was endorsed to us, stating therein that the company has began to turn the corner without taking any assistance of the BIFR.

2. We are glad to know that the company has fared well and it has started generating cash profits also. The Company had been given various concessions in the past viz. refund of interest of Rs.96,74,028.28 and concession in the rate of interest on the overdraft accounts etc., vide our letter No.COM:ADV:909 dtd.22/4/1988 with the recompense clause. The said letter reads as under:-

“The bank reserves a right to review the position at any point of time, at its discretion, with a view to discontinuing the concessions or even recovering the value of all the concessions granted.”

3. Considering the financial position of the company, we propose to invoke the above provision and recover the concessions granted in the past which comes to Rs.3,38,64,324.15 inclusive of interest upto 30/9/1991 as per annexure enclosed, the details of which are as under:-

a) Concession granted on 22/4/1988                            Rs. 96,74,028.28

Interest on this amount for the period
from April 1988 to September 1991.                             Rs. 82,14,856.00

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Rs.1,78,88,884.28

b) Difference of interest (Normal rate. Concessionary rate) granted in the following accounts:-

A/c. No. 830 Rs. 74,71,271.69

A/c. No. 831 Rs. 79,59,161.56

A/c. No. 52601 Rs. 5,45,006.62

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Rs.1,59,75,439.87

===========

Total Rs.3,38,64,324.15

===========

4. Therefore, you are requested to arrange to pay the above amount at the earliest.”

30. After recording facts in paragraph nos.1 and 2, State Bank of India in paragraph no. 3 states that considering the financial position of the Company, the Bank proposes to invoke the recompense clause referred to before to recover the concessions granted in the past which come to Rs. 3,38,64,324/-. In paragraph no. 4, the assessee has been requested to arrange to pay the amount at the earliest.

31. It is an accepted position that originally the parties had worked out a contract vide earlier letter dated 16th June, 1987 which did not contain any recompense clause. However, vide letter dated 22nd April, 1988, the Bank had introduced a recompense clause by virtue of which the Bank reserved a right to review the position at any point of time, at the discretion of the Bank, with a view to discontinue the concessions or even recover the value of all the concessions granted. A plain reading of the communication dated 27th September, 1991 makes it clear that the Bank has noted that the assessee company has turned corner and started generating cash profits. Therefore, considering the financial position of the Company, the Bank has resorted to the recompense clause as per contract executed vide letter dated 22nd April, 1988 and enforced the said term of contract to recover the same in question. Reading the entire communication as a whole, it becomes clear that it is not a proposal as contended by learned counsel for Revenue but a communication asking the assessee to make arrangement for payment of the amount in question at the earliest. The opening portion of paragraph no.3 which uses the term ‘proposed’ is only a polite way of informing the client by the Bank that the Bank has invoked the recompense clause and calling upon the assessee to make payment accordingly. It is not as if any fresh demand Is being made by the Bank. The demand is being made in light of the existing contract and enforcing the same. In this context, one has to note the finding recorded by the Tribunal that despite the assessee having not made the payment of the amount immediately, at the same time, the communication of the Bank has not been challenged in any court of law by the assessee. In other words, the demand raised by the Bank is not actually disputed. All that the assessee appears to have done is to try and defer the payment as far as possible. This has to be appreciated in light of the fact that the Company which had been incurring losses in the past has just started generating cash profits and thus, would not like to make payment of such a large sum at one go. From this, it cannot be deduced that the liability has not accrued or that the assessee was disputing the liability in question.

32. In the circumstances, the finding recorded by the Tribunal that the assessee is entitled to deduction of Rs. 3,38,64,423/- on account of withdrawal of concessions by State Bank of India is correct in law.

Revenue’s Question No. 3

33. Coming to the last question referred at the instance of Revenue, namely question no.3, the facts in brief are that assessee claimed deduction under sections 80HH and 80I of the Act in relation to the new unit set up by the assessee. The Assessing Officer disallowed the same on the footing that no new unit had come into existence and it was only a case of modernisation of the existing unit. According to the Assessing Officer, the assessee company which was incorporated since more than 30 years ago has been engaged in the manufacture and sale of cement. The Company undertook a modernisation programme in 1980 involving replacement of three old kilns by a new kiln on the footing that the process and technology for manufacturing cement was changed from semi-dry process technology to dry process technology. According to the Assessing Officer, though the installation was completed by August, 1984, the production was temporarily suspended between 07th August, 1994 to 29th August, 1994 and thereafter the manufacturing commenced adopting a new dry process technology. Use of the three old kilns was discontinued from 29th August, 1984 but no deduction had been claimed under either of the provisions, namely sections 80HH and 80I of the Act till the year under consideration. After recording these facts, the Assessing Officer came to the conclusion that the manufacturing process and the product remained the same. The Assessing Officer has set out various stages right from extraction of limestone from the quarries to the final product in the form of cement to conclude that all that the assessee had done was to modernise the manufacturing process and as the basic process remained the same, though there was change of kilns, it could not be stated that a new unit had come into existence. The investment in the new plant was stated to be worth Rs.25.58 crores while plant and machinery which were already in existence worth Rs. 8.98 crores were integrated and used with the new plant and machinery. The Assessing Officer, therefore, disallowed the claim on the footing that this was only a modernisation of the existing plant to manufacture cement. This finding has been confirmed by Commissioner (Appeals). However, the Tribunal has accepted the contention of the assessee.

34. Learned counsel appearing for Revenue, after reiterating the aforestated facts, which appear in paragraph no.16.3 of the assessment order, submitted that Tribunal had committed an error in coming to the conclusion that a new unit had come into existence. It was pointed out that under sub-section (2) of section 80HH of the Act, various conditions have been prescribed and condition set out in clause (iii) of the said sub-section stipulates that the industrial undertaking is not formed by the transfer to a new business of machinery or plant previously used for any purpose in any backward area, the only exception being as set out in the Explanation under the said sub-section, whereby when any machinery or plant or any part thereof has been previously used for any purpose in any backward area and is transferred to a new business in that area or any other backward area and the total value of the machinery or plant etc. so transferred does not exceed 20% of the total value of the machinery or plant used in the business, then the prohibition stipulated by clause (iii) of the sub-section shall be deemed to be not applicable, i.e. the relevant condition is shown to have been satisfied. In other words, when in the new unit, if any plant and machinery previously used has been integrated and put to use, the value of such previously used plant and machinery should not exceed 20% of the total value of the machinery or plant used in the business. That in the facts of the present case, the Assessing Officer had already given the worth of old plant and machinery as well as investment value of the new plant and machinery, which was respectively Rs.8.98 crores and Rs.25.59 crores, and, therefore, the exception carved out by the Explanation would not apply and the prohibition envisaged by condition no.3 would come into play so as to disentitle the assessee from being granted the relief under section 80HH of the Act. That the Tribunal had wrongly come to the conclusion that three old kilns were to be excluded so as to bring the value of the total plant and machinery within the limit of 20% without appreciating the finding recorded by the Assessing Officer that the use of the three kilns had already been discontinued and the value of old plant and machinery was more than 20% of the total value. Referring to the Apex Court decision in the case of Textile Machinery Corporation Ltd. vs. Commissioner of Income-Tax, West Bengal, (1977) 107 ITR 195, it was submitted that the ratio of the said decision had wrongly been applied by the Tribunal to the facts of the present case when in fact, the said judgement assisted the case of the Revenue. That the said case was a case of reconstruction and applying the analogy, once the value of the total investment when compared to the value of the old plant and machinery indicated that the case of the assessee fell within the prohibited condition, no deduction could have been granted.

35. On behalf of the assessee, learned counsel referred to the following two decisions:-

1. Commissioner of Income-Tax, Gujarat- I Vs. Shree Digvijay Cement Co. Ltd., (1983) 144 ITR 532 Guj.

2. Commissioner of income-Tax, West Bengal- I Vs. Indian Aluminium Co. Ltd., (1977) 108 ITR 367

to submit that the case of the assessee was squarely governed by the aforesaid decisions, more particularly the decision of the Apex Court. Referring to the finding recorded by the Tribunal in paragraph no.36 of the impugned order, it was submitted that this was a finding of fact based on appreciation of evidence and the same had remained unchallenged. That no reference had been sought by revenue on the footing that the aforesaid finding was perverse and hence, no interference was required insofar as the impugned order of Tribunal is concerned.

36. The relevant part of section 80HH of the Act as is material for the present reads as under:-

“Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas.

80HH. (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof.

(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely:-

i. it has begun or begins to manufacture or produce articles after the 31st day of December, 1970 [but before the 1st day of April, 1990], in any backward area;

ii. it is not formed by the splitting up, or the reconstruction, of a business already in existence in any backward area:

Provided that this condition shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section;

i. it is not formed by the transfer to a new business of machinery or plant previously used for any purpose in any backward area;

ii. it employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power.

Explanation : Where any machinery or plant or any part thereof previously used for any purpose in any backward area is transferred to a new business in that area or in any other backward area and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used In the business, then, for the purposes of clause (iii) of this sub-section, the condition specified therein shall be deemed to have been fulfilled.”

Insofar as section 80I of the Act is concerned, the conditions stipulated by sub-section (2) of the said section are identical and it is not necessary to repeat the said provisions.

37. A plain reading of section 80HH of the Act indicates that under sub-section (1) a provision has been made for granting deduction at the stipulated percentage from profits and gains derived from an industrial undertaking which is fulfilling the requisite conditions. Under sub-section (2), four conditions have been prescribed. Insofar as first condition as reflected by clause (i) is concerned, there is no dispute that the assessee has commenced manufacturing after the stipulated date in a backward area. Insofar as condition no.2 is concerned, if the new unit is set up by splitting up, or reconstruction of a business already in existence in any backward area, the deduction under section 80HH of the Act would not be available. In this context, Tribunal has placed reliance on the Apex Court decision in the case of Textile Machinery Corporation Ltd. (supra) to point out that identical clause existed in section 15C of the Indian Income Tax Act, 1922 and hence the ratio of the said judgement would be applicable in entirety. That in the facts of the present case, according to Tribunal merely because an assessee by establishment of new industrial undertaking expands his existing business would not by itself deprive the assessee the benefit available under the provision. The requirement is that there should be a separate and distinct identifiable industrial undertaking. In this context, Tribunal has placed reliance on the evidence in the form of certificate of Director (Operation) to record that the new unit was set up at an adjoining but a separate site involving a new dry process plant as against the existing semi-dry process plant, having 2500 tonnes per day capacity while the earlier plant had lesser capacity. That the earlier plant had achieved production to the tune of Rs. 5,90,849 metric tonnes but the new plant had achieved production up to 9,38.517 metric tonnes per annum. That the new dry process plant was an integral unit by itself and was not dependent upon the old plant. The Tribunal has noted that these facts were brought to the notice of the Assessing Officer under cover of letter dated 17th December, 1994. The findings of the Tribunal in this context read as under:-

“It was specifically mentioned that new plant was complete unit by itself on a separate foundation with its support raw mill, coal mill, kiln, compressors, pre-calcinator, blending C.F. Silo, Electricity installation etc. and that fact was verifiable physically. The layout plan was filled along with it. This plan was not appearing in the paper book and that was called for by the Bench from the assessee in copy of that plan shows the existence of old plant and the establishment of new plant which are on different site altogether and even passage to both the plants are the different.”

After recording thus, the Tribunal has also noted that the departmental representative was given an opportunity to place on record any evidence if the Department had any objection to the aforesaid facts and the evidence but no objections or evidence to the contrary had been filed.

38. In this context, Tribunal has also referred to and relied upon the observations made by this High Court in the case of the assessee in Special Civil Application No.398 of 1991 which came to be decided on 23rd November, 1992. Referring to the said judgement which was forming part of the paper book before the Tribunal, relevant extract has been reproduced by the Tribunal and the same reads as under:-

“Therefore, while reconsidering the case of Saurashtra Cement Co., the respondents will have to bear those aspects also in mind. Further the respondents will also have to consider that an entirely a new plant using different technology was set up on an adjoining land; that the process of establishing new unit was initiated in the year 1980; that though it had initially planned to go for expansion or modernisation, it had decided to establish a new industrial unit, in view of the Resolution dated 27.03.80; that the new unit was not at all connected with the old unit; that the new unit was complete by itself and had its own independent identity; that it had spent a huge amount of Rs.60 crores for setting up this new plant; that its new unit has been considered as a new unit for the purpose of exemption from electricity duty; it is treated as separate factory and separate factory licence has been issued by the Government, and it was also given relaxation from the cement levy obligation on the basis that it was a new cement unit.”

39. On the basis of aforesaid findings of fact after appreciating the evidence on record, Tribunal has concluded that the prohibition envisaged by condition no.2 would not apply as the new unit is not formed by splitting up or reconstruction of a business already in existence, but is an independent unit.

40. Insofar as clause (iii) is concerned, the requirement is that if the new unit is formed by transfer of machinery or plant previously used for any purpose in a backward area relief under section 80HH would not be available except in a case where the value of such previously used plant and machinery does not exceed 20% of the total value of the plant and machinery used in the industrial undertaking.

41. In this context, Tribunal has recorded thus:-

“36. The third contention of Sec. 80HH(2)(iii) is in respect of value of old plant and machinery used in the new unit and admittedly if value of old plant and machinery exceeds 20% the assessee will not be entitled to get the benefit. The ld. CIT(A) in the initial stage observed that it is an old case and value of the old plant and machinery cannot be worked out but later on observed that value of old plant is Rs. 8.98 crores and worth of new plant and machinery Rs.25.58 crores and it exceeds 20% of the cost of new plant. As pointed out above, the ld. counsel for the assessee has given out the working of costs of old machinery and the new unit and same was also submitted to the A.O. Out of value of old plant and machinery Rs. 8.98 crores, the value of old kilns Rs. 3.31 crores it is to be reduced as that was not used. This was the contention of the ld. counsel and not controverted by the authorities below. Now the value of old plant and machinery comes to Rs. 5.66 crores and adding this value to the value of Rs. 25.58 crores, the whole value of new unit comes to Rs. 31.31 crores out of which value of old plant is Rs. 5.66 crores and that is less than 20% of the whole costs and this working, which was before the authorities below from the very beginning stands unchallenged and thus this contention of sec. 80HH(2)(iii) also stands fulfilled.”

42. Learned counsel for Revenue vehemently pointed out that the aforesaid figures were not before the Assessing Officer and that Tribunal could not have taken note of the said figures as recorded in the aforesaid paragraph of the impugned order. Factually, this submission is incorrect as can be seen from summary of facts recorded by Tribunal in paragraph no.29 of the order impugned. The details of the old plant and machinery as well as the new investment were both before the Assessing Officer and Commissioner (Appeals). The Assessing Officer merely went on the footing that this was a case of modernisation and Commissioner (Appeals) referred to the said figures but failed to notice that it was an accepted position that the three old kilns had been discontinued and were no longer used by the new unit. This fact has been recorded by the Assessing Officer himself in the assessment order. Hence, insofar as condition no.3 is concerned, the case of the assessee has been shown to be governed by the exception set out in the Explanation and this finding of the Tribunal has remained uncontroverted.

43. Insofar as condition no.4 is concerned, the number of workers employed is not in dispute and hence, the said condition stipulated by clause (iv) also stands fulfilled.

44. In the circumstances, once the assessee has been able to establish that all the conditions necessary for granting relief stand fulfilled, the impugned order of Tribunal cannot be faulted with on this ground and the Tribunal has rightly held that the assessee was entitled to relief under both section 80HH and section 80I of the Act.

To Summarise:

45. Accordingly, question no.1 at the instance of assessee is left unanswered leaving it open to the Tribunal to record a fresh finding. Question no.2 at the instance of the assessee is answered in the affirmative i.e. against the assessee and in favour of Revenue. Similarly, question no.3 at the instance of the assessee is answered in the affirmative i.e. against the assessee and in favour of Revenue. Question no.4 at the instance of the assessee is answered in the negative I.e. against the Revenue and in favour of the assessee.

45.1 Insofar as the three questions referred at the instance of Revenue are concerned, all three are answered in the affirmative i.e. against the Revenue and in favour of the assessee.

46. Reference stands disposed of accordingly with no order as to costs.