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Petitioner: BHOR INDUSTRIES LTD. VS Respondent: COMMISSIONER OF INCOME TAX, CENTRAL, BOMBAYHonorable Justice TAMBEN. A. Palkhivala,G. N. Joshi
1969 P T D 33
1969 P T D 33
[Bombay (India)]
Before Y. S. Tambe and V. S. Desai, JJ
BHOR INDUSTRIES LTD.
versus
COMMISSIONER OF INCOME TAX, CENTRAL, BOMBAY
Income tax Reference No, 11 of 1959, decided on 15th June 1962.
Business expenditure----
----- Capital expenditure Agreement with ruler of Native State for monopoly rights, tax concessions and immunity from labour and industrial laws for a term of years Percentage of annual profits paid to ruler under agreement Capital expenditure-Non resident Income Receipt by cheque Remand by appellate Tribunal to provide opportunity to let in evidence regarding mode of sending cheques and request of assessee--Whether proper Income tax Act, 1922, Ss. 4(1) (a), 10 (xv),& 33.
For the purpose of introducing new industries in the Native State of Bhor, the assessee, a private company incorporated in that State, entered into an agreement with the Diwan of that State on February 18, 1943. By that agreement the State agreed (i) to give the assessee, the sole monopoly for starting and working factories for proofing of cloth ; (ii) not to increase land tax (except by way of general increase on all landholders) or impose additional tax on lands of the assessee; (iii) not to charge income tax and taxes on profits of any kind, and (iv) to exclude the application of industrial acid labour laws to the assessee, all for a period of ten years. In consideration of these benefits the assessee agreed to pay the State every year by way of royalty 6 per cent. of its profits for the first ten years and 12 per cent. of its profits for the next five years the profits being ascertained after making provision for payment of 25 per cent. of the profits for the use of patents and provision for depreciation in accordance with the Indian Income tax Act. In pursuance of this agreement the assessee paid to the Bhor State a sum of Rs. 34,630 in the account year relevant for the assessment year 1946-47 :
Held, that the agreement was entered into with a view to start a business and the liabilities under the agreement were incurred in order to secure the benefits which would ensure certain set of circumstances for its business at its commencement or during its early stages. Payments on such account could not be said to be made to get rid of an onerous liability of a business which was chargeable to revenue. No business liability existed when the liability was incurred under the agreement. It was incurred to ensure that no liability would arise. Nor was the payment expenditure laid out for the running of the business. The expenditure was not chargeable to revenue but was capital expenditure.
The assessee, which carried on the business of dyeing, printing and bleaching cloth in the Bhor State, outside British India, did work for three British Indian companies. In payment thereof the three companies sent cheques drawn on banks in British India. The assessee's local banker, acting as its agent for collection, presented the cheques at the office of the British Indian banks for encashment. The Income tax Officer held that the monies had been received in British India and that the assessee was liable to be taxed on those receipts under section 4(1) (a) of the Indian Income tax Act, 1922. The assessee appealed to the Appellate Assistant Commissioner. By the time the appeal was heard the decision of the Supreme Court in the case of Ogale Glass Works Ltd, (1954) 25 I T R 529 was available. Relying on the decision the Appellate Assistant Commissioner held that the monies were received in the Bhor State. On further appeal, the Appellate Tribunal remanded the case with a direction to give the parties an opportunity to lead evidence to ascertain whether the cheques were sent by post or by hand and whether the cheques, if sent by post, were sent on the request of the assessee, either express or implied, on the ground that these aspects were not before the Income tax Officer when the matter was before him :
Held, that the Tribunal bad not acted arbitrarily or capriciously in remanding the matter for a further enquiry even though the department had not asked for an inquiry into those facts or stated that it had any further evidence to lead. The Tribunal did not misdirect itself in making the order of remand.
Abdul Kayoom v. Commissioner of Income tax (1962) 44 I T R 689 (S C) ; Anglo Persian Oil Company Limited v. Dale (1931) 16 Tax Cas. 253 ; Asssm Bengal. Cement Co. Ltd. v. Commissioner of Income tax (1955) 27 1 T R 34 ; (1955) 1 S C R 972 ; In re: Benarsidas Jagannath (1947) 15 I T R 185 ; Commissioner of Income tax v. New Jehangir Vakil Mills Ltd. (1956) 30 I T R 664 ; Commissioner of Income tax v Ogale Glass Works Ltd. (1954)25 IT R 529 ; 24 Comp. Cas. 520 ; (1955) l S C R 185 ; Green v. Cravens Railway Carriage & Wagon Co. Ltd (1951) 32 Tax Cas. 359 ; Hancock v. General Reversionary and Investment Company Limited (1918) 7 Tax Cas. 358 ; New Jehangir Vakil Mills Ltd v. Commissioner of Income tax (1959) 37 I T R 11 ; (1960) 1 S C R 249 ; Pingle Industries Ltd. v. Commissioner of Income tax (1960) 40 I T R 67 ; (1960) 3 S C R 681 and Wilson v. Nicholson Sons & Daniels Ltd. (1943) 25 Tax Cas. 473 ref.
STATEMENT OF CASE
By these two reference applications, which are consolidated and disposed of by a common order as the questions are common in both the references except that there is a fifth question in R. A. No. 389, the assessee company requires the Appellate Tribunal to state a case to the High Court on questions of law which are said to arise out of the Tribunal's orders in I. T. As. Nos, 8639 and 8198 of 1956 57. In our opinion only one question of law arises and that is as to whether the sum of Rs. 34,650 paid to Bhor State is a permissible deduction under section 10(2) (xv) of the Act. We, therefore, hereby draw up a statement of the case and refer it to the High Court of Judicature at Bombay under section 66(1) of the Indian Income-tax Act.
2. The facts briefly are that the assessee is a private limited company incorporated in the former Indian State of Bhor with its registered office at Bhor. Before the commencement of the business in the Bhor State an agreement was entered into between the assessee and the Diwan of Bhor State on b. half of the Bhor Durbar, whereby certain monopolistic and other concessions were sought and granted to the assessee. For the relevant assessment year 1946-47 the assessee was assessed as a non-resident company.
3. The assessee's business consists, inter alia, of dyeing, printing and bleaching cloth. The entire dyeing, printing and bleaching work at Bhor was done for four allied companies belonging to the Thackersey group, three of whom had their registered offices in the then British India, whereas the fourth company had its registered office at Bhor. It was common ground that these three companies sent their grey cloth to the assessee company for bleaching, dyeing and processing at Bhor. It was also common ground that the dyes and chemicals for bleaching were purchased in British India.
4. The Income-tax Officer, by invoking section 42(1) read with section 42(3) of the Act, estimated the profit on such purchasing operations at f0 % of the total profit of the printing department which amounted to Rs. 4,35,012. The Appellate Assistant Commissioner, on appeal, considered that 20 % would be a more appropriate estimate than 50 % and therefore arrived at the figure of such profit at Rs. 87,002. The assessee came on appeal to the Tribunal in I. T. A. No. 8198 of 1956 57; urging that the estimate of profit by the Appellate Assistant Commissioner at 20 % was excessive and this should have been taken at 2% only. The only other ground of appeal was that the sum of Rs.: 34,650 paid to the Bhor Durbar should have been allowed as an expenditure. wholly laid out for the purposes of the assessee's business.
5. The Income-tax Officer had also taken the view that the amount received from the aforesaid three companies of the Thackersey, group were received, in the taxable territories because the cheques were drawn on British Indian banks and as such there was thus a receipt of monies in British India leading to the receipt of profits under section 4(l)(a)". Against this finding of the Income tax Officer the assessee, had also appealed to the Appellate Assistant Commissioner urging that the Income tax Officer, had erred in holding that the receipts were in the taxable territories because the cheques were drawn on British Indian Banks. Reliance was placed on the case of Ogale Glass Works Ltd, ((1951) 25 I T R 529): Relying on the first part of this judgment the Appellate Assistant Commissioner held that the entire printing, dyeing and bleaching receipts of Rs. 4,0,220 had accrued or arisen in the State of Bhor and only 20 % thereof, i.e. Rs 87,002, should be held, as taxable in the then British Indian territories under section 42(1) read with section 42(3) of the Act. The assessee thus received a relief of Rs. 3,16,218 as a result of the Appellate Assistant Commissioner's order. Against this finding the Department came up on appeal to the Tribunal in I. T. A. No. 8639 of 1956-57.
6. The assessee's appeal, I. T. A. No. 8198 of 1956-57, was dismissed by the Tribunal. The Tribunal, upon considering all the materials on record and the attendant circumstances of the case, saw no reason to differ from the estimate made by the Appellate Assistant Commissioner at 20% of the profit which could reasonably be attributed to the purchase operations in British India. This finding of the Tribunal is obviously a finding of fact and no question can be spelt therefrom.
7. As regards the departmental appeal, I. T. A. No. 8639 of 1956-57, the Tribunal came to the conclusion that Ogale's case had not been properly understood by the Appellate Assistant Commissioner who had merely relied upon the first part of that judgment and had lost sight of the material point whereby Ogale Glassworks had lost the appeal before the Supreme Court. The Tribunal also found that the assessment order in the instant case was passed on March 22, 1951, before the Supreme Court decision was reported or received and, therefore, the Income tax Officer could not possibly have known the correct approach to the question at issue. The Tribunal also found that by the time the Appellate Assistant Commissioner came to decide the appeal which was on December 14, 1956, the aforesaid Supreme Court's decision was before him. No one however was present on behalf of the Department. The Appellate Assistant Commissioner had very properly taken into consideration the aforesaid decision but unfortunately not the whole of it. He merely rests content with disposing of the Income tax Officer's main objection in these words ;
"3. It is contended on behalf of the appellant company that no portion of the appellant's profit from the dyeing, printing and bleaching department can be, assessed to tax under the Indian "Income tax Act. It is conceded that most of the purchases were made in the taxable territories. But Mr. Mulla argues that 'the profit on the purchases is negligible and at any rate it cannot exceed 2 % which the assessee would have had to pay to commission agents if he had preferred to purchase through the commission agents. As regards the sales it is contended that all the sales were made a1 Bhor and, therefore, no part of the profit accrues or arises in the taxable territories. It is stated that goods were handed over to the appellant at Bhor and the appellant after processing them had handed them over to the representative of the resident companies. The Incometax Officer's view that the receipts were in the taxable territories because the cheques were passed on the British Indian banks is disputed. My attention is drawn by Mr. Mulla to the decision of the Supreme Court in Ogale Glass Works Ltd. (1954) 25 I T R 529: In that case the Supreme Court decided that as the cheques were not dishonoured, there was an implied agreement under which the cheques were accepted unconditionally as payment and that even if the cheques were taken conditionally, the cheques not having been dishonoured but having been cashed the payment related back 'to the dates of the receipt of the cheques and in law the dates of payments were the dates of the delivery of the cheques. Mr. Mulla contended that considering the close relationship that the appellantcompany had with the three other companies there was no danger whatsoever of dishonouring the cheque and that, therefore, the appellant had accepted the cheques as unconditional discharge of the liabilities of the resident companies. Mr. Mulla, therefore, argues that no part of the income of the appellant from the dyeing, printing and bleaching department can be assessed under the Indian Income-tax Act. As regards the profit from leather cloth proofing department, Mr. Mulla's argument was that the profit on the purchases is negligible and since the appellant does not deal in raw materials, no profit can be attributed to purchases. As regards the sale of dosuti and packing materials, Mr. Mulla does not press this contention that no part of the profit from this department should be assessed to tax under the Indian Income-tax Act. But Mr. Mulla argues that only the profit that could be attributed to the selling operations can be taxed.
Mr. Mulla has two other contentions and these are (1) that the Income tax Officer should have allowed the royalty paid to the Maharaja of Bhor as per the agreement dated February 18, 1943, and (2) that the appellant should not have been charge penal interest.
4. I find that there is considerable force in these arguments of Mr. Mulla that no part of the profit of the appellant can be taxed under section 4(1)(a). Mr. Mulla is correct in arguing that the receipts were in the State of Bhor. The decision of the Supreme Court in Ogale Glass Works Ltd. relied upon by Mr. Mulla supports his argument inasmuch as the Supreme Court had held that the receipt of cheque, unless circumstance warrant, should be taken as an unconditional discharge of the liability and that even if it is taken as a conditional discharge, the payment related back to the date of receipt of the cheque, and that, in law, the dates of payments are the dates of delivery of the cheques. It is not denied that the payments were received at Bhor. Thus the appellant received these amounts at Bhor. Moreover, there is no evidence to show that the cheques were posted on a request from the appellant company either express or implied. On the contrary a letter written by a director of one of the resident companies to the appellant company on December 6, 1944, confirming the arrangements between the two companies, clearly indicates that the payment should be made at Bhor. Thus no part of the appellant's income can be taxed under section 4(1)(a)."
The Tribunal held :
"The decision of the Supreme Court relied upon by Mr. Mulla supports his argument inasmuch as the Supreme Court had held that the receipt of cheque should be taken as an unconditional discharge of the liability and that even if it is taken as a conditional discharge the payment related back to the dates of receipt of the cheques and that in law the dates of payments are the dates of the delivery of the cheques. It is not denied that payments were received in Bhor. Thus the assessee received these amounts in Bhor. Moreover, there is no evidence to show that the cheques were posted on a request from the assessee company either express or implied. This clearly indicates that the Appellate Assistant Commissioner completely lost sight of the real point on which the assessee Ogale Glass Works lost its case before the Supreme Court. The Supreme Court accepted the alternative contention of the department that "the posting of the cheques at Delhi operated as a payment in British India". As the assessee had asked for the cheques to be remitted, the Supreme Court held that the posting of the cheques in Delhi by Government amounted to payment in Delhi and, therefore, income, profits and gains in respect of the sales made were received in British India within the meaning of section 4(1)(a) of the Act and the decision of the Bombay High Court was reversed. This aspect as to remittance and place of posting of the cheque became of vital importance after the receipt of the Supreme Court decision.
It was the duty of the Appellate Assistant Commissioner to have given the assessee and the Income tax Officer a specific opportunity of proving whether the cheques were received by hand or were posted and if so at whose request."
As this aspect of the question had not been considered at all by the Appellate Assistant Commissioner, the Tribunal, fully realising that such an enquiry would result in hardship to the assessee but as revenues were involved and a case directly in point having been brought to its notice by the Departmental Representative, in the interest of justice, set aside the said order of the Appellate Assistant Commissioner in this respect only and restored the appeal to his file with the direction that he should give both the parties an opportunity of leading evidence and to ascertain whether the cheques were sent by post or by hand and whether the cheques were sent on the request of the seller either express or implied and the post office if any at which the cheques were posted and the quantum thereof and thereafter to dispose of the appeal in accordance with law.
8. The direct authority of the Bombay High Court was the case of New Jehangir Vakil Mills Ltd. ((1956) 30 I T R 664, 670) where their Lordships observed :
"But we cannot shut out the necessary inquiry which even from our own point of view is necessary to be made in order that we should satisfactorily answer the question raised in this reference .we cannot overlook the fact that if tax is legitimately due to the revenue, the revenue should not be deprived of that tax even though the Department may not have been as vigilant in prosecuting its claim as we should have desired."
The aforesaid order passed by the Tribunal under section 33(4) and limiting the fresh inquiry to the specific point at issue, which was before it in the departmental appeal, is one which was passed judicially in the exercise of the discretion vested, and not arbitrarily or capriciously and as such cannot give rise to any, question of law. The assessee's right of appeal and reference from the further order of the Appellate Assistant Commissioner remains intact and preserved. The assessee according to Mr. Mulla would have had no objection if the entire order of the Appellate Assistant Commissioner was set aside but as only the specific point which arose in the appeal filed by the Department as been referred back, the assessee objects. The objection is without any substance. The provisions of section 33(4) are clear and no question of law can be spelt from part of the Tribunal's order.
9. The facts pertaining to the only question of law which arises out of the order of the Tribunal are as follows
"Before the commencement of the business at Bhor on ..the
assessee had already entered into an agreement dated 18th February 1943 (annexed hereto as Annexure "A" and forming part of the case). The assessee had asked for certain monopolistic rights and concessions from the Bhor Durbar. The relevant concessions agreed to be allowed under the agreement were :
(1) That the assessee would have the sole monopoly for starting and working a factory or factories for proofing of cloth of various types and that the State will not grant any, licence or permit nor will it allow any other person, firm or company or other association to manufacture articles similar to the articles manufactured y the party of the second part. for a period of at least ten years from the date of the starting of the industry.
(2) No tax in addition to the existing tax that, may be payable by the landlord to the State to be charged on any land or other immovable property purchased by the assessee.
(3) The assessee shall not be charged any income tax, super tax or any other tax on the profit of any kind whatsoever for a period of ten years whether such taxes are in existence at present or introduced hereafter save and except the toll.
(4) The assessee was to be exempted from the application of the Indian Factories Act for a period of ten years.
(5) In consideration of the benefits granted' to the party of the second part as hereinabove mentioned, the party of the second part agrees to pay to the State every year by way of Royalty for the first five years since the starting of the industry an amount equivalent to 6 (six and quarter) per cent. and for the next five years an amount equivalent to 12 (twelve and half) per cent. of the profits of the company ......
Under the said agreement the assessee paid to the Bhor State a sum of Rs. 34,650 in the relevant year of account. It claimed this as a deduction under section 10(2)(xv). The Tribunal upholding the orders of the departmental officers held :
" ....that the payment was made in 'order to acquire, before the business even commenced, freedom from all competitions, levy of taxes existing or in the future and immunity from the Indian Factories Act. An expenditure to buy off competition is normally a capital expense for it brings into existence an asset of an enduring nature, particularly so, when the payment is agreed to be made even before the business is commenced Assam Bengal Cement Co. Ltd. v. Commissioner of Income tax (1955) 27 I T R 34. Income tax is not deductible as a business expense from the business profits and, therefore, .the securing of an immunity from taxation would also bring into existence an advantage of an enduring nature. In these circumstances it must be held that the expenditure has not been laid out wholly for the purposes of the business and, the disallowance has properly been made:"
10. The question of law that therefore arises is
"Whether on the facts and circumstances of the case the sum of Rs. 34,650 paid to the Bhor State under the agreement is a permissible allowance under section 10(2)(xv) of the Act?"
11. Both parties agree that the facts relevant to the question have all been correctly stated. At the request of the assessee the Appellate Assistant Commissioner's order is Annexed hereto as Annexure "B".
SUPPLEMENTARY STATEMENT OF CASE
In compliance with the requisition of the High Court of judicature at Bombay under section 66(2) dated 29th August 1961, in I. T. R. No. 11 of 1959, in the case of Bhor Industries Ltd. v. Commissioner of Income tax (Central), Bombay, we hereby draw up an agreed statement of the case and refer it to the High Court of Judicatur6 at Bombay under section 66(2) of the Indian Income tax Act, 1922. The question of law on which the Tribunal has been directed to state the case is
"Whether on the facts :of the case, the Tribunal misdirected itself in making the order of remand, which it made on 9th May 1958, in Income tax Appeal No. 8639 of 1956 57?" .
2. The assessee is a private limited company incorporated in the former Indian State of Bhor, with its registered office at Bhor, and non-resident company. The assessee's business consists, inter alia, of dyeing, printing and bleaching cloth in its factories at Bhor. The entire dyeing, printing and bleaching work at Bhor was done for four allied companies, all of which belonged to the same Thackersey group as the assessee, three of whom had their registered offices in the then British India, whereas the fourth company, the Bhor Trading Co. Ltd., has its registered office at Bhor. It is common ground that these companies sent their grey cloth to the assessee company at Bhor for bleaching, dyeing and processing. It is also common ground that the dyes and chemicals for bleaching were purchased in the then British India.
3. For the aforesaid bleaching, the assessee company had agreements with the parties concerned as recorded in the letter dated December 6, 1944, from Messrs Thackersey Mooljee & Co. to the applicant. A copy of the said letter dated December 6, 1944, is Annexure "A" and forms part of the case. One of the conditions of this agreement is that payment was to be made at Bhor.
4. The aforesaid three British Indian Companies sent cheques on British Indian banks to the assessee at Bhor. These were collected through the Swastik Bank, Bhor, and got its account with it credited for the net proceeds deducting commission. During the previous year for the assessment year 1946-47, the assessee company so received Rs. 3,59,625 out of its total receipts of Rs. 4,68,514. It collected the bank charges deducted by the bank from the three constituents on the above cheques only in 1947.
5. The following are some trading data of the printing department useful for this reference taken out of its annual accounts for the year in question which…
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