COMMISSIONER OF INCOME-TAX VS A.V. THOMAS & CO. LTD, 1999 PTD-KERALA-HIGH-COURT-INDIA 112 (1999)

1999 PTD 112

[225 I T R 29]

[Kerala High Court (India)]

Before Mrs. K.K. Usha and G. Sivarajan, JJ

COMMISSIONER OF INCOME-TAX

Versus

A.V. THOMAS & CO. LTD

I.T.R. No. 74 of 1994, decided- on 10th January, 1997:

(a) Income-tax---

----Business expenditure---Disallowance---Subsection (3-A) of S.37 applies only to those items of expenditure which are not covered by Ss.30 to 36 but covered by S.37(1)---Non obstante clause in subsection (3-A) of S.37 relates only to computation of allowance referred to in S.37(1) in respect of expenditure covered by S.37(1)---Section 31 relates to repairs and premium paid in respect of insurance of cars whereas subsection (3-B) of S.37 deals with expenditure incurred on running and 'maintenance of motor cars-- Section 37(3-A) has no application in respect of expenditure incurred for repairing car and premium paid for its insurance---Indian Income Tax Act, 1961, Ss.30, 31 & 37(1), (3-A), (3-B).

(b) Income-tax---

----Special deduction---Export business---Deduction in respect of profits retained for export business---" Export turnover", definition of-- Quantification of amount of deduction geared to export turnover and not to income---Loss suffered in business of export of cardamom---Deduction allowable---Indian Income Tax Act, 1961, Ss.80-AB & 80-HHC.

The assessee was engaged in sale, and distribution of pesticides, running of a steamer agency, export of cardamom, etc. For the assessment year 1985-86, the Income-tax Officer disallowed certain amounts relating to the cost of repairs and insurance premium of motor, cars from the expenditure by applying the provisions of section 37(3-A) of the Income Tax Act, 1961. The Commissioner (Appeals) allowed the claim of the assessee for deduction. The Tribunal upheld the order of the Commissioner (Appeals) to the effect that the provisions contained under section 37(3-A) could be applied only in regard to the expenditure covered by an allowance under section 37(1) of the Act and not in respect of cost of repairs, insurance, etc., of cars which are allowed under section 31 of the Act. On a reference:

Held, (i) that in view of the definition of the term "plant" under section 43(3), a car is also a plant. Therefore, the amount paid for repairs and towards insurance policy for car could be claimed deduction.

(ii) That a reading of section 37(1) would make it clear that the section was intended to take in expenditure which was not covered by sections 30 to 36. The provisions contained in subsection (3-A) would apply only to those items of expenditure, which were not covered by sections 30 to 36, but were covered by section 37(1). The non-obstante clause in sub section (3-A) relates only to the computation of the allowance referred in section 37(1) in respect ff expenditure covered by section 37(1). A reference to the provisions in subsection (3-B) would make the above position further clear. The expenditure covered by section 31 related to repairs and premium paid in respect of insurance of cars, whereas what was contemplated under subsection (3-B) is expenditure incurred on running and maintenance of motor cars which is entirely different. Therefore, the Tribunal was right in holding (hat section 3 7(3-A) had no application in the case of expenditure incurred for repairing car and the premium paid for its Insurance.

CIT v. Chase Bright Steel Ltd (No. 1) (1989) 177 ITR 124 (Bom.); CIT v. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal.) and CIT v. Price Waterhouse (1994) 207 ITR 564 (Cal.) fol.

The assessee claimed deduction of a sum of Rs.1,52,764 under section 80-HHC of the Act on the turnover relating to the export of cardamom. The assessee had suffered loss in the business of export of cardamom. The Assessing Officer took the view that under the provisions of section 80-AB, any deduction under section 80-HHC could be allowed only it the gross total income included any income of the nature specified in that section and that since the export had resulted in a loss, no amount could be allowed as a deduction under section 80-HHC. The first Appellate Authority took the view that section 80-AB had no application when a claim was put forward under section 80-HHC, that the assessee had satisfied all the conditions necessary under section 80-HHC before its amendment with effect from April 1, 1986, and, therefore, it was entitled to the deduction. The Tribunal affirmed the order of the first Appellate Authority and held that, even after the amendment which came into force from April 1, 1986, the assessee was entitled to the deduction under section 80-HHC. On a reference:

Held, that a reading of section 80-AB would show that computation of deduction was geared to the amount of income, but coming to the provisions contained in section 80-HHC quantification of the amount of deduction was geared to the export turnover and not to the income. The term "export turnover" was defined as "sale proceeds of any goods, etc., exported out of India". Section 80-HHC was introduced by the Finance Act, 1983, to encourage export. Therefore, the assessee was entitled to claim deduction under section 80-HHC even if it had suffered loss in its business of export of cardamom.

CIT v. H. M. T. Ltd. (No. 1) (1993) 203 ITR 811 (Kar.) ref.

P.K.R. Menon and N.R.K. Nair for the Commissioner.

C.N. Ramachandran Nair for the Assessee.

JUDGMENT

MRS. K.K. USHA, J.---At the instance of the Revenue, the Income-tax Appellate Tribunal, Cochin Bench, has referred the following questions arising out of the order of the Tribunal dated October 30, 1992, in I.T.A. No.736/(Coch) of 1987 for the opinion of this Court:

"(1) Whether, on the facts and in the circumstances of the case,--

(i) the expenditure in respect of repairs and insurance of motor cars can be included in the expenditure incurred on running and maintenance of motor cars for purpose of restriction under section 37(3-A) of the Income Tax Act ?

(ii) the Tribunal is right in law in holding 'repairs and insurance' are governed by section 31 and taxes are regulated under section 30 such expenditure cannot be construed as running and maintenance expenditure of motor cars described under section 37(3-A) of the Act ?

(2) Whether, on the facts and in the circumstances of the case and also on an interpretation of the relevant provisions, the assessee is entitled to deduction under section 80-HHC of the Income Tax Act, 1961?"

The relevant facts are as follows: The assessee is a company engaged in sale and distribution of pesticides, running of a steamer agency, export of cardamom, etc. For the assessment year 1985-86, while completing the assessment, the Income-tax Officer disallowed certain amounts relating to the costs of repairs and insurance premium of motor cars from the expenditure by applying the provisions under section 37(3-A) of the Income Tax Act. 1961. The assessee successfully challenged the disallowance before the Commissioner of Income-tax (Appeals). On an appeal tiled by the Revenue, the Tribunal upheld the view taken by the first appellate authority that the provisions contained under section 37(3-A) can be applied only in regard to the expenditure covered by an allowance under section 37(1) of the Income Tax Act and not in respect of the cost of repairs, insurance, etc., of the car which are allowed under section 31 of the Income Tax Act.

The assessee had also claimed a deduction under section 80-HHC to the extent of Rs.1,52,764 on the export of cardamom. This claim was disallowed by the assessing authority on the ground that since the net result of cardamom export was loss, no deduction can be claimed as per the provisions of section 80-AB. On appeal by the assessee, the Commissioner of Income-tax (Appeals) took the view that under section 80-HHC the only requirement was that there should be an export of commodities other than the prohibited variety and on such exports, the assessee had received convertible foreign exchange. The Tribunal upheld the above view in the appeal filed by the Revenue.

It is not disputed before us that the claim regarding expenditure incurred by the assessee for repair and insurance of the car would come under section 31 of the Income Tax Act, 1961. But, according to learned standing counsel for the Revenue, the non obstante clause in section 37(3-A) would exclude the provisions contained under section 31(i), and therefore, the-provisions contained under section 37(3-A) would be applicable in the case of the assessee. On the other hand, learned counsel for the assessee would contend that section 37(3-A) would take in only those matters which come under section 37(1) and not under section 31. In order to appreciate rival arguments it is necessary to refer to the relevant provisions of law. Section 31 reads as follows:

"31. Repairs and insurance of machinery, plant and furniture.---In respect of repairs and insurance of machinery, plant or furniture used for the purposes of the business or profession, the following deductions shall be allowed:

(i) the amount paid on account of the current repairs thereto;

(ii) the amount of any premium paid in respect of insurance against risk of damage or destruction thereof."

In view of the definition of the term "plant" under section 43(3) a car is also a plant. If that be so, the amount paid for repairs and towards insurance policy for car can be claimed as deduction. Sections 30 to 36 deal with different types of deductions that can be claimed in respect of expenditure. Section 37(1) is in the nature of a residuary provision, which reads as follows:

"37. General.---(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in -the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession. "

A reading of the above provisions would make it clear that the deductions referred in sections 30 to 36 are excluded from the purview of section 37(1). Now, we will go to section 37(3-A) and the relevant portions of section 37(3-B). Section 37(3-A) reads as follows:

"Notwithstanding anything contained in subsection (1), where the expenditure or, as the case may be, the aggregate expenditure incurred by an assessee on any one or more of the items specified in subsection (3-B) exceeds one hundred thousand rupees, twenty per cent. of such excess shall not be allowed as deduction in computing the income chargeable under the head 'Profits and gains of business of profession'."

Relevant portion of section 37(3-B) reads as follows:

"the expenditure referred to in subsection (3-A) is that incurred on---. . .

(ii) running and maintenance of aircraft and motor cars; or ...

(c) expenditure on running and maintenance of aircraft and motor cars shall include,---

(i) expenditure incurred on chartering any aircraft and expenditure on hire charges for engaging cars plied for hire;

(ii) conveyance allowance paid to employees and, where the assessee is a company, conveyance allowance paid to its directors also. "

We are unable to accept the contention raised by the Revenue that exclusion of sections 30 to 36 under section 37(1) is set at naught by the non-obstante clause in section 37(3-A). A reading of section 37(1) would make it clear that this section is intended to take in expenditure which are not covered by sections 30 to 36. The provisions contained under subsection (3-A) would apply only to those items of expenditure, which are not covered by sections 30 to 36, but covered by section 37(1). The non -obstante clauses in subsection (3-A) relate only to the computation of the allowance referred in section 37(1) in respect of expenditure covered by section 37(1). A reference to the provisions under subsection (3-B) would make the above position further clear. The expenditure covered by section 31 relates to repairs and premium paid in respect of insurance of cars, whereas what is contemplated under subsection (3-B) is expenditure incurred on running and maintenance of motor cars which is entirely different. We are, therefore, of the view that the Tribunal has correctly held that section 37(3-A) has no application in the case of expenditure incurred for repairing car and the premium paid for its insurance. Our above view is fortified by the decisions of the High Courts of Bombay and Calcutta in CIT v. Chase Bright Steel Ltd. (No.l) (1989) 177 ITR 124 (Bom.), CIT v. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal.) and CIT v. Price Waterhouse (1994) 207 ITR 564 (Cal.).

The second question relates to the claim put forward by the assessee under section 80-HHC of the Income Tax Act, 1961, for a sum of Rs.1,52,764 on the turnover relating to the export of cardamom. As per the returns, the assessee had suffered loss in the business of export of cardamom. The assessing authority disallowed the claim. It took-the view that as per the provisions of section 80-AB any deduction under section 80 can be allowed only if the gross total income includes any income of the nature specified in that section. Since the export has resulted only in loss, no amount can be allowed as a deduction under section 80-HHC in view of the provisions of section 80-AB. The first appellate authority took the view that section 80-AB has no application when claim is put forward under section 80-HHC. The assessee has satisfied all the conditions necessary under section 80-HHC before its amendment with effect from April 1, 1986, and, therefore, it is entitled to deduction to the extent of Rs.1,52,764. The Tribunal, on appeals by the Revenue, agreed with the first appellate authority and held that even after the amendment which came into force from April 1, 1986, the assessee is entitled to deduction under section 80-HHC.

It is contended before us by learned standing counsel for the Revenue that since the expenditure incurred by the assessee in its business of export of cardamom is higher than the income, there is no scope for exemption. Section 80-AB would show that each business has to be considered separately. Reliance was placed by the Revenue on a decision of the High Court of Karnataka in CIT v. H. M. T. Ltd. (No. 1) (1993) 203 ITR 811.

Section 80-AB and section 80-HHC come under Chapter VI-A of the Income Tax Act, 1961, dealing with deductions to be made in computing total Income. While section 80-AB comes under the heading "A General", section 80-HHC comes under the head "Deduction in respect of certain incomes". Section 80-AB and section 80-HHC read as follows:

"80-AB. Deductions to be made with reference to the income included in the gross total income.---Where any deduction is required to be made or allowed under any section (except section 80-M) included in this Chapter under the heading C-- Deductions in respect of certain income' in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income. "

'80-HHC. Deduction in respect of exhort turnover--- (I) Where the assessee, being an Indian company or a person (other than a company), who is resident of India, export out of India during the previous year relevant to an assessment year any goods or merchandise 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, the following deductions, namely:--

(a) a deduction of an amount equal to one per cent of the export turnover of such goods or merchandise during the previous year; and

(b) a deduction of an amount equal to five per cent. of the amount by which the export turnover of such goods or merchandise during the previous year exceeds the export turnover of such goods or merchandise during the immediately preceding previous year'.

(2)(a) This section applies to all goods or merchandise (other than those specified in clause (b) if the sale proceeds of such goods or merchandise exported out of India are received by the assessee in convertible foreign exchange.

(b) the goods or merchandise referred to in clause (a) are the following, namely:--

(i) agricultural primary commodities, not being produce of plantations ;

(ii) mineral oil;

(iii) minerals and ores; and

(iv) such other goods or merchandise as the Central Government may, by notification in the Official Gazette, specify in this behalf.

(3) No deduction under clause (b) of subsection (1) shall be allowed unless the assessee had, during the immediately preceding previous year, exported out of India goods or merchandise to which this section applies. .

Explanation. ---For the purposes of this section,

(a) convertible foreign exchange' means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purpose of the foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder ;

(b) export turnover means the sale proceeds of any goods or merchandise exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customers station as defined in the Customs Act, 1962 (52 of 1962)."

A mere reading of section 80-AB would show that computation of deduction is geared to the amount of income, but coming to the provisions contained under section 80-HHC quantification of the amount of deduction is geared to the export turnover and not to the income. The term "export turnover" is defined as "sale proceeds of any goods, etc., exported out of India". Apparently section 80-HHC was introduced by the Finance, Act, 1983 to encourage export. We are, therefore, in full agreement with the view taken by the Tribunal that the assessee is entitled to claim deduction under section 80-HHC even if it has suffered loss in its business of export of cardamom. The decision of the Karnataka High Court is of no help to the Revenue. It was a case where provisions contained under sections 80 AB, 80-J and 80-HH were considered. It was held that for the purpose of sections 80-J and 80-HH, profits and gains of new undertakings are not commercial profits but only such profits as are computed in the manner laid down under the Act in pursuance of section 80-AB, as if each undertaking was a separate assessee. In section 80-Hli the deduction has to be quantified with reference to profits and gains and in section 80-J with reference to the capital employed and not with reference to turnover as in the case of section 80-HHC. Therefore, the above decision has no application to the present case.

In the light of the above discussion, we answer question No. l (i) in the negative, against the Revenue and in favour of the assessee. Question No. l (ii) in the affirmative, against the Revenue and in favour of the assessee. Question No.2 in the affirmative, against the Revenue and in favour of the assessee.

A copy of this judgment, under the seal of this Court and the signature of the Registrar, will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.

M.B.A./1647/FCOrder Accordingly.