LUCAS T.V.S. LTD. VS COMMISSIONER OF INCOME-TAX, 1998 PTD-MADRAS-HIGH-COURT-INDIA 1657 (2012)

January, 1996.

(a) Income-tax--

----Export markets development allowance---Weighted deduction ---Export inspection agency fees---Eligible for weighted deduction---Premium paid to Export Credit Guarantee Commission to insure against non-recovery of price from foreign buyer---Eligible for weighted deduction--Export pre-shipment advance interest---Not eligible for weighted deduction---Indian Income Tax Act, 1961, S.35B(1)(b).

(b) Income-tax---

----Business expenditure---Company---Registration fees paid to Registrar of Companies for increasing capital---Not capital expenditure ---Deductible-- Indian Income Tax Act, 1961, S.37.

(c) Income-tax---

----Business expenditure---Company---Surtax---Not deductible in income-tax assessment---Indian Income Tax Act, 1961, S.37. .

(d) Income-tax---

----Company---Company in which public are . substantially interested-- Assessee not a company in which public are substantially interested---Indian Income Tax Act, 1961, S.2(18)(b).

The qualification for weighted deduction under section 35B(1)(b)(vi) of the Income Tax Act, 1961, is the furnishing of technical information for the promotion of export sales. Unless export inspection is done and a certificate is obtained, goods cannot be exported to foreign countries. The certificate issued by the export inspection agency would amount to furnishing technical information with regard to the goods to be exported. Export inspection agency fees are, therefore, eligible for weighted deduction under section 35B(1)(b)(vi).

Union Carbide India Ltd. v. CIT (1987) 165 ITR 558 (Cal.) fol.

Where the assessee paid a sum by way of premium to the Export Credit Guarantee Commission partly for covering risk during transit of goods and partly for the Corporation's standing guarantee to the assessee in respect of the goods exported for the purpose of recovery of the value of the goods and the Tribunal confirmed the order of the Commissioner of Income-tax (Appeals) holding that part of the payment relating to coverage of risk in transit alone was eligible for weighted deduction, on a reference:

Held, that payment made to the Export Credit Guarantee Corporation to ensure the financial capacity of the foreign buyer to fulfil the commitment of deferred payment and insulate the assessee against the risk of non-recovery from the foreign buyer was covered by sub-clause (viii) of section 35B(1)(b) and entitled to weighted deduction.

CIT v. Alleppey Co. Ltd. (1994) 207 ITR 598 (Ker.); CIT v. J.B.

Advani & Co. (Mys.) (Pvt.) Ltd. (1987) 163 ITR 638 (Kar.); CIT v. Navabharat Enterprises (P.) Ltd. (No.l) (1988) 170 ITR 326 (AP) and CIT v. N.C. John and Sons Ltd. (1994) 208 ITR 57 (Ker.) fol.

The assessee is not entitled to weighted deduction on expenditure incurred by way of interest paid on export pre-shipment advance.

Lucas TVS Ltd. v. CIT (1996) 217 ITR 382 (Mad.) fol.

Registration fees paid by a company to the Registrar of Companies for increasing the capital is an allowable deduction as revenue expenditure.

CIT v. Kishenchand Chellaram (India) P. Ltd. (1981) 130 ITR 385 (Mad.) fol.

Surtax paid is not allowable as a deduction in the assessment under the Income Tax Act, 1961.

Sundaram Industries Ltd. v. CIT (1986) 159 ITR 646 (Mad.) fol.

Held also, that the assessee was not a company in which the public are substantially interested in the assessment year under consideration.

CIT v. Lucas TVS Ltd. (1995) 214 ITR 700 (Mad.) fol.

Brooke Bond India Ltd. v. CIT (1992) 193 ITR 390 (Cal.); Carona Sahu Co. Ltd. v. CIT (1995) 213 ITR 106 (Bom.); CIT v. Vippy Solvex Product P. Ltd. (1986) 159 ITR 487 (MP); Forbes Forbes Campbell & Co Ltd. v. CIT (1994) 206 ITR 495 (Bom.); Hindustan Gas and Industries Ltd. v. CIT (1979) 117 ITR 549 (Cal.) Isabgul Export Corporation v. CIT (19941 205 ITR 227 (Guj.); Mohan Meakin Breweries Ltd. v. CIT (No.2) (1979) 117 ITR 505 (HP), Shri Ambica Mills Ltd. v. CIT (1992) 198 ITR 99 (Guj.) and Testeels Ltd. v. CIT (1994) 205 ITR 230 (Guj.) ref.

P.P.S. Janarthana Raja for the Assessee.

S.V. Subramaniam for the Commissioner.

JUDGMENT

THANIKKACHALAM, J. ---At the instance of the assessee and the Department, the Tribunal referred the following questions for the opinion of this Court, for the assessment year 1974-75, under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"):

By the assessee:

"(1)Whether the Tribunal was right in holding that the relief under section 35B is not available on export inspection agency fee, premium to the Export Credit Guarantee Corporation and export pre-shipment advance interest?

(2)Whether the Tribunal was right in holding that the expenditure incurred for increasing the capital is not in the nature of revenue expenditure?

(3)Whether the Tribunal was right in holding that the surtax paid is notan allowable deduction?"

By the Department:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee is a company in which the public are substantially interested within the meaning of section 2(18)(b)?"

In so far as question No.l is concerned, the Income-tax Officer had disallowed the assessee's claim for weighted deduction under section 35B of the following items:

Rs.

On appeal by the assessee, the Commissioner of Income-tax (Appeals) held that item No.l was an obligatory item in all exports, since without such inspection, the goods could not be exported and that it was hence expenditure on the distribution of the goods within the meaning of first part of section 35B(1)(b)(iii). Regarding item No.2, this sum according to the Commissioner of Income-tax was paid by way of premium partly for covering risk during the transit of goods and partly for the Corporation's Standing guarantors to the assessee in respect of the goods exported for the purpose of the recovery of the value of the goods. The Commissioner Income-tax held that Rs.150 out of the above sum could be taken as relating to the coverage of risk in transit and is entitled to weighted deduction, but not the balance relating to the recovery of the invoice amounts, which was after the export of the goods. Regarding item No.3, the Commissioner of Income-tax held that this item being expenditure incurred in India for the distribution, supply or provision outside India of such goods will be hit by the first part of section 35B(1)(b)(iii). On the assessee's appeal on this point, the Tribunal upheld the Commissioner of Income-tax (Appeals') finding regarding items Nos.1 and 2. Regarding the third item also the Tribunal agreed with the Commissioner of Income-tax, but for a different reason that this payment related to the realisation of export price and was hence not expenditure incurred as such on the distribution of goods. The Commissioner of Income-tax had also upheld the Income-tax Officer's disallowance of the assessee's claim for deduction of the registration fees of Rs.33,900 paid for increasing the capital as capital expenditure being incurred towards the capital structure of the company, relying on Mohan Meakin Breweries Ltd. v CIT (No.2) (1979) 117 ITR 505 (HP). The Tribunal, on an appeal by the assessee, upheld the order of the Commissioner, relying upon the Calcutta High Court's decision in Hindustan Gas and Industries Ltd. v. CIT (1979) 117 ITR 549. The Tribunal, thus, dismissed the assessee's appeal. The assessee in its appeal before the Tribunal had raised a further contention that surtax liability of Rs.2,17,094 was an admissible deduction. The Commissioner of Income-tax (Appeals) held that the Income-tax Officer's disallowance of the assessee's claim is in order. On further appeal, the Tribunal upheld the Commissioner's view, following the decision of the Special Bench (Bombay) of the Tribunal, dated December 1, 1977, in the case of Amar Dye Chem. Ltd. in which it was held that the surtax liability is not deductible in computing the assessee's income from business under section 28 and/or sections 29 to 43A of the Act.

In so far as the question suggested by the Revenue is concerned, the contention was that the assessee should not be treated as a company in which the public were substantially interested, as held by the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) on the assessee's appeal, had reversed the Income-tax Officer's finding on this point against the assessee, following an earlier order of the Tribunal in the assessee's own case, for the assessment year 1967-68 to 1972-73. Thus the Tribunal upheld the Commissioner's view on this aspect.

In so far as question No. l is concerned, export inspection agency fee of Rs.826 was paid, since it is obligatory on the part of the assessee in all exports and was done before the export. Without such inspection, the goods could not be exported. The Tribunal agreed with the view taken by the Commissioner of Income-tax (Appeals) that this would be part of the expenditure of the distribution of the goods exported and would come under the first part of sub-clause (iii) of clause (b) of section 35B(1). The assessee claimed weighted deduction on the fees paid for, export inspection agency. The admitted position is that the expenditure mentioned in the above referred question was incurred by the assessee in India, though in connection with carriage of goods to the destination outside India. Since this expenditure was incurred in India, the assessee is not entitled to weighted deduction on the export inspection agency fees This was the view taken by the Bombay High Court in Forbes Forbes Campbell & Co. Ltd. v. CIT (1994) 206 ITR 495. A similar view was taken by the Bombay High Court in Carona Sahu Co. Ltd. v. CIT (1995) 213 ITR 106. A similar view was also taken by the Gujarat High Court in Shri Ambica Mills Ltd. v. CIT (1992) 198 ITR 99. However, the Calcutta High Court in Union Carbide India Ltd. v. CIT (1987) 165 ITR 558 held that the export agency inspection fee paid by the assessee for the purpose of obtaining the certificate, which was a necessary requirement for the export of goods, amounted to expenditure incurred for furnishing to a person outside India technical information for the promotion of sales of such goods within the meaning of section 35B(1)(b)(vi) and that the assessee was entitled to weighted deduction on such expenditure. If this item of expenditure falls under section 35B(1)(b)(vi), this expenditure is entitled to weighted deduction. The qualification for deduction under this provision is furnishing of technical information for the promotion of - ex-port sales. According to the assessee unless this inspection was done and certificate is obtained, goods cannot be exported to foreign countries. It was submitted that his certificate would furnish the technical information with regard to the goods to be exported to the foreign countries. We agree with the assessee that this item of expenditure is entitled to weighted deduction, since the certificate issued by the export inspection agency would amount to furnishing technical information with regard to the goods to be exported. Even though this was not the case put forward before the Tribunal, inasmuch as this line of argument was advanced before us, we would prefer to accept it on the basis of the decision of the Calcutta High Court cited supra.

The next item in question No. l relates to premium paid to the Export Credit and Guarantee Corporation. This sum was paid by way of premium partly for covering risk during the transit of goods and partly for the Corporation standing as guarantors to the assessee in respect of the goods exported for the purpose of recovery of the value of the goods. The Commissioner of Income-tax (Appeals) held that Rs. 150 out of the above sum of ks.315 could be taken as relating to the coverage of risk in transit and is entitled to weighted deduction, but not on the balance relating to the recovery of the invoice amount which was after the export of the goods. Having regard to the nature of the service rendered by the above, the Tribunal agreed with the finding of the Commissioner of Income-tax (Appeals). In CIT v. Navabharat Enterprises (P.) Ltd. (No.l) (1988) 170 ITR 326, the Andhra Pradesh High Court held that the payment made to the Export Credit Guarantee Corporation to ensure the financial capacity of the foreign buyer to fulfil the commitment of deferred payment and insulate the assessee against the risk of non-recovery from the foreign buyer was covered by sub-clause (viii) of section 35B(1)(b). The assessee is, therefore, entitled to weighted deduction under section 35B in respect of the abovesaid expenditure. This was the view taken by the Karnataka High Court in CIT v. J.B. Advani & Co. (Mysore) (Pvt.) Ltd. (1987) 163 ITR 638. This was also the view taken by the Kerala High Court in CIT v. Alleppey Co. Ltd. (1994) 207 ITR 598. The same view was taken by the Kerala High Court again in CIT v. N.C. John and Sons Ltd. (1994) 208 ITR 57.

The next item in question No. l is, export pre-shipment advance interest of Rs.16,511. The Commissioner of Income-tax (Appeals) upheld the disallowance of this claim on the ground that it is expenditure incurred in India for the distribution, supply or provision outside India of such goods and hence would be hit by the first part of sub-clause (iii) of section 35B(1)(b). On appeal, the Tribunal upheld the Commissioner of Income-tax (Appeals)' view, though for a different reason that this payment relates to the realisation of the export price and is not an expenditure incurred as such on the distribution of the goods. In CIT v. Vippy Solvex Product Pvt. Ltd. (1986) 159 ITR 487, the Madhya Pradesh High Court held that this item of expenditure was incurred by the assessee in connection with the execution of a contract for the supply of goods outside India. Therefore, the assessee is entitled to weighted deduction.

In Brooke Bond India Ltd. v. CIT (1992) 193 ITR 390, the Calcutta High Court held that the goods were shipped and, before shipment, the goods, had to be properly insured and the freight had to be paid. Therefore, it would not be for performance of services outside India. Therefore, the assessee is not entitled to weighted deduction on this expenditure. The Gujarat High Court in Isabgul Export Corporation v. CIT (1994) 205 ITR 227 also held that so far as the expenditure incurred on payment of interest to the bank and bank charges were concerned, it does not fall under any of the sub-clauses of clause (b) of section 3513(1).

In Testeels Ltd. v. CIT (1994) 205 ITR 230, the Gujarat High Court, dissenting from the view on this aspect taken by the Madhya Pradesh High Court in CIT v. Vippy Solvex Product P. Ltd. (1986).159 ITR 487, held that interest on pre-shipment advance would not be entitled to weighted deduction under section 35B of the Act.

In T.C. No.902 of 1982---Lucas TVS Ltd. v. CIT (1996) 217 ITR 382 (Mad.)---in the assessee's own case this Court held that the assessee is not entitled to weighted deduction on the expenditure incurred by way of interest paid on export pre-shipment advance.

Therefore, we are not accepting the order passed by the Tribunal in respect of the first two items as mentioned in question No. l and in so far as the third item is concerned, we agree with the order passed by the Tribunal. Accordingly, in respect of the first two items we answer the question referred to us in the negative and in favour of the assessee and in so far as the third item is concerned, we answer the question in the affirmative and against the assessee.

In so far as question No.2 is concerned, it relates to whether the expenditure incurred would go for increasing the capital. The Commissioner of Income-tax (Appeals) upheld the Income-tax Officer's disallowance of the assessee's claim for deduction of the registration fees of Rs.33,900 for increasing the capital, as capital expenditure being incurred towards the capital structure of the company, relying on Mohan Meakin Breweries Ltd. v. CIT (No.2) (1979) 117 1TR 505 (HP). On the assessee's appeal, the Tribunal upheld the finding of the Commissioner of Income-tax on this point, relying upon the decision of the Calcutta High Court in Hindustan Gas and Industries Ltd. v. CIT (1979) 117 ITR 549. The point whether the registration fees paid would go to increase the capital base or not, came Up for consideration before this Court in CIT v. Kishenchand Chellaram (India) P. Ltd. (1981) 130 ITR 385, wherein this Court held that without capital a company cannot carry on its business and hence the expenses incurred for increasing the capital were bound up with the functioning and financing of the business. Accordingly, the expenditure incurred by way of registration fees paid to the Registrar of Companies for registration, would be an amount laid out wholly and exclusively for the purpose of the business and, therefore, allowable as revenue expenditure.

The question as framed and suggested by the Tribunal on this aspect is not satisfactory. Accordingly, we re-frame the same as under:

"Whether the registration fees paid to the Registrar of Companies would be allowable as revenue expenditure?"

We are not agreeable with the order passed by the Tribunal in holding that the registration fees paid would amount to capital expenditure. In that view of the matter, we answer; the question referred to us in the affirmative and in favour of the assessee.

The third question relates to whether surtax paid is allowable as deduction in the assessment under the Income Tax Act. This question is also directly covered by a decision of this Court in Sundaram Industries Ltd. v. CIT (1986) 159 ITR 646 against the assessee. Accordingly, we-answer this question referred to us in favour of the Department and against the assessee.

At the instance of the Department, one question was referred by the Tribunal. It relates to whether the public are substantially interested in the assessee-company within the meaning of section 2(18)(b) of the Act. This point is also covered against the assessee by a decision of this Court in CIT v. Lucas T.V.S. Ltd. (1995) 214 ITR 700, wherein this Court held that the public are not substantially interested within the meaning of section 2(18)(b) of the Act. Accordingly, we hold that the assessee in not a company in which the public are substantially interested in the assessment year under consideration. In that view of the matter, we answer the question in the negative and in favour of the Department.

In the result, items Nos. 1 and 2 in question No. l are held in favour of the assessee and item No. 3 in question No. l is answered in favour of the Department. In so far as question No 2 is concerned, it is answered in favour of the assessee. In so far as question No.3 is concerned, it is answered against the assessee. In so far as the question referred on behalf of the Department is concerned, it is answered in favour of the Department and against the assessee. No. costs.

M.B.A./1421/FCOrder accordingly.