Ita 262/09 & Co Cases v. Ita 262/09 & Co Cases

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K.MOHANAN WEDNESDAY, THE 9TH SEPTEMBER 2009 / 18TH BHADRA 1931 ITA.No. 262 of 2009() --------------------- ITA.64/2006 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/APPELLANT --------------------------------------- THE COMMISSIONER OF INCOME TAX, TRIVANDRUM. BY ADV. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) & ADV. SRI JOSE JOSEPH RESPONDENT(S): RESPONDENT ------------------------- M/S.TRAVANCORE TITANIUM PRODUCTS LTD., KOCHUVELI, TRIVANDRUM. THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSION ON 09/09/2009, ALONG WITH ITA NOS.994, 1031, 1034, 1055, 1057, 1105, 1106, 1129, 1138,& 1555 OF 2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.N. RAMACHANDRAN NAIR &V.K.MOHANAN, JJ. ----------------------------------------------- I.T.A. Nos.262, 994, 1031, 1034, 1055, 1057, 1105, 1106, 1129, 1138 & 1555 of 2009. ------------------------------------------------ Dated, the 9[th] day of September , 2009 JUDGMENT Ramachandran Nair, J. These appeals are filed by the Revenue againstcommon order of the Tribunal pertaining to the income taxassessments of the respondent company for the years1991-92 to 1997-98 and 1999 -2000 to 2002 - 2003. Therespondent is a State Government undertaking with 80% ofthe shares held by the Kerala Government. Therespondent company located in Trivandrum is engaged inmanufacture and sale of titanium dioxide. Being agovernment company it is under the control of theGovernment and its Board of Directors is also constitutedwith the government nominees including GovernmentSecretaries. The company is located in the extensiveland leased from the Government on a paltry lease rent. Besides this, the Government is rendering a lot of servicesand incentives by way of reduction of sales tax for marketingthe products of the company whenever there is slump in themarket. In consideration of the services rendered by theGovernment, the State Government issued GovernmentOrder, i.e. G.O.(MS)48/88/ID dated 25.3.88 directing therespondent company to pay service charges at the rate ofRs.1000/- per tonne for the titanium dioxide produced and soldby the respondent with effect from 1.4.87. The companystarted remitting service charges claiming deduction of thesame in the income tax returns filed for the relevantassessment years. Even though the claim was allowed byassessing officer from 1988-89 to 1990-91, while completingthe assessment year 1991-92 and subsequent assessmentyears, the assessing officer disallowed the claim ofdeduction of service charges paid by respondent holding thatit is not a business expenditure allowable under section 37(1)of the Income Tax Act. However, in appeal filed against theassessment for the years 1991-92 to 1995-96, different Benches of the Tribunal took divergent views and the mattercame in reference before this Court. This Court videjudgment, reported in Commissioner of Income Tax v.Travancore Titanium Products Ltd.([2004] 265 ITR 526)remitted the case to the assessing officer stating that thematter should be decided after considering the governmentorders and the basis for the demand of service charge.Even though in the revised assessment proceedings thePrincipal Secretary to Government and Department ofIndustries and the Managing Director furnished variousproceedings received from the Government regardingservices rendered by the government officials and sacrificesmade by the Government for the benefit of the successfulrunning of the company, the assessing officer turned downthe claim by holding that the claim is not allowable undersection 37(1) of the Income Tax Act. Against the revisedorder issued by the assessing officer declining to allow thededuction, the assessee filed another appeal along withappeals against the regular assessments for subsequent years before the first appellate authority who allowed theclaim. On second appeals filed by the department, theTribunal confirmed the orders of the first appellate authorityand dismissed the appeals. It is against these orders theRevenue has filed these eleven appeals. 2. We have heard Senior Counsel Sri P.K.R.Menonappearing for the appellant and have gone through the ordersof the Tribunal and that of the lower authorities. 3. The first contention raised by the appellant is that theTribunal has not strictly followed the observations of theDivision Bench in the judgment referred above whereby thematter was remanded to the assessing officer. According tothe counsel, based on the earlier judgment of this Court, theclaim could be allowed only if the respondent proves theexact service rendered by the Government which justifiesthe payment of service charges by it to the Government. TheHigh court, no doubt, referred to a Full Bench decision ofthis Court in Ram Bahadur Thakur Ltd. v. C.I.T.(KER.)(F.B)[2003] 261 ITR 390) and directed the assessing officer to -:5:- follow the guidelines laid down therein while considering therespondent’s claim for deduction under section 37(1) of the ITAct. According to the counsel for the Revenue, the servicecharges paid by the respondent company do not fall withinthe para metres laid down by the Full Bench in the abovecase. However, we do not think neither the first appellateauthority nor the Tribunal has deviated from the directionscontained in the judgment of this Court, in as much as theyhave considered in detail the nature of the services, sacrificesand incentives provided by the State Government to therespondent company based on documents produced andconsidered the claim with reference to the statutoryprovision which is extracted in para 19 of the order. For easyreference, section 37 (1) is extracted herein: “37(1) Any expenditure (not beingexpenditure of the nature described in sections30 to 36 and not being in the nature of capitalexpenditure or personal expenses of theassessee), laid out or expended wholly andexclusively for the purposes of the business orprofession shall be allowed in computing theincome chargeable under the head “Profits andgains of business or profession”. Explanation.- For the removal of doubts, it ishereby declared that any expenditure incurredby an assessee for any purpose which is anoffence or which is prohibited by law shall notbe deemed to have been incurred for thepurpose of business or profession and nodeduction or allowance shall be made inrespect of such expenditure.” (2) { ****} “37(1) Any expenditure (not beingexpenditure of the nature described in sections30 to 36 and not being in the nature of capitalexpenditure or personal expenses of theassessee), laid out or expended wholly andexclusively for the purposes of the business orprofession shall be allowed in computing theincome chargeable under the head “Profits andgains of business or profession”. Explanation.- For the removal of doubts, it ishereby declared that any expenditure incurredby an assessee for any purpose which is anoffence or which is prohibited by law shall notbe deemed to have been incurred for thepurpose of business or profession and nodeduction or allowance shall be made inrespect of such expenditure.” (2) { ****} (2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made inrespect of expenditure incurred by an assesseeon advertisement in any souvenir, brochure,tract, pamphlet or the like published by apolitical party”. The only question to be considered is whether service chargespaid by the respondent company to the State Government iseligible for deduction under section 37(1) of the Act as heldby the first appellate authority in the appeal filed againstrevised assessment which is confirmed by the Tribunal. Aspointed out by the Division Bench in the earlier judgment, wehave to consider the exact nature and scope of services,sacrifices and incentive provided by the Government justifyingthe payment of service charges by the respondent company to the State Government. However, beforeproceeding to consider the issue in detail, we are constrainedto take a little different view from the one taken by theearlier Division Bench of this Court while remanding the case.The court has forgotten the fact that respondent company isa fully owned Government company under the Government ofKerala with 80 per cent shares held by the Government.Being a company under the control of the Government, it isbound to comply with all the Government Orders and theBoard of Directors itself is constituted with the GovernmentSecretaries and other nominees as members. TheDepartment does not raise a dispute that the claim of thecompany is not bona fide or that the company has notmade payment of service charges to the Government in termsof the Government Order. Therefore, the claim of deductionhas to be considered with reference to the peculiarcircumstances of the company which has no discretion inregard to the payment of the service charges to theGovernment as it is bound to comply with the Government Orders. So much so, we are of the view that the parametersapplicable in the case of a private company that too withrespect to the claim for business expenditure, are exactlynot applicable in the case of public sector company whether itis under the control of the State Government or CentralGovernment. In fact, many public sector companies are notformed just to make profit alone but are supposed to achievelarger objectives for the Society and the State. Section 37(1)is the residuary provision provided under the Income Tax Actenabling assessee engaged in business to claim allexpenditure laid out or expended wholly and exclusively forthe purposes of the business. By making payment ofservice charge, the respondent company has discharged onlythe obligation under Government Orders. It cannot carry onbusiness by violating Government Orders and remain as adefaulter to the Government. Therefore, on the face of it,payment of service charge to the Government is a businessexpenditure and it is paid every year and the payment ismandatory for carrying on business. The expenditure so incurred by the company is not hit by the negative clauses insection 37 which are in the nature of capital or personalexpenditure of assessee. Besides this, the payment is alsonot prohibited by law and so much so it is not hit by theexplanation contained in section 37(1). Therefore thepayment is a bona fide expenditure incurred by the companyfor carrying on business which is not prohibited by law. 4. The next question to be considered is whether thedepartment’s case that the Government does not renderservice justifying payment of service charges by the companyis tenable or not. From the details submitted by theSecretary, Department of industries, and the affidavit filed bythe Managing Director of the company, it is clear that theservice charges demanded is not only for services renderedby the Government but mainly for the sacrifices andincentives provided by the State to the company. Eventhough the Tribunal has extracted the entire details in itsorder, we do not think it necessary to repeat the whole of it.However, we proceed to consider some of the services -:10:- rendered by the Government to the company. In the firstplace, all policy decisions of the company are taken by theGovernment. For instance, when the company was closed onalleged pollution, the State Government intervened andmeetings were held to find out solutions to the problem andappointed a committee to inquire into the pollution problemsand the company was started after several months based onenquiry report submitted by the Committee and after thecompany took remedial measures pursuant to theGovernment Order. All liabilities are settled at Ministry leveland the company's problems are sorted out through theGovernment intervention. Government appointed a SpecialOfficer for ensuring raw materials supply to the governmentcompany from another company at moderate cost. The Boardof Directors of the respondent company is constituted withSecretaries to the Government and Government servants andthey are not entitled to additional remuneration which is asaving for the company. Above all, the company is locatedin about 51 acres of land very close to Trivandrun town and, under the Government norms, lease rent payable is 10 percent of the market value. However, in this case, Governmenthas charged only paltry sum of Rs.20547/- per year. In theaffidavit filed by the Managing Director, the new lease rentalpayable at normal rate to the State Government during theyears 1992-93 to 2001-2002 by taking the land value atmoderate rate of Rs.12,000/- per cent would have beenRs.30,49,230/- per year. There can be no doubt that theGovernment has made major sacrifices by retaining thelease rental on a paltry sum of Rs.20547/- per year. In fact,if lease rentals were increased by the Government instead ofdemanding and recovering service charges from thecompany, the department could not have raised objectionagainst the payment of lease rental as a claim not allowableunder the Act. 5. Another incentive given by the Government is in theform of sacrifices to its revenue by way of reduction orexemption for sales tax when the company finds it difficult tomarket the products. In fact, the Tribunal has worked out the 5. Another incentive given by the Government is in theform of sacrifices to its revenue by way of reduction orexemption for sales tax when the company finds it difficult tomarket the products. In fact, the Tribunal has worked out the sacrifices made by the Government at crores of rupees.Further, we notice from the Tribunal's order that in respectof other companies under the control of the Government, theGovernment is charging various charges for their servicesin some cases based on turnover income and in certaincases based on quantity produced. On the whole, we findfrom the Tribunal's order that the successful management ofthe company is mainly on account of the control andpatronage from the Government. Therefore, the demand ofpayment of service charge is essentially a businessexpenditure allowable under section 37(1) of the Act. Theremaining question is only the amount of service charges paideach year by the company. It may not be possible to exactlyidentify and value the services rendered by theGovernment every year and the incentives provided everyyear also may be varying. However, so long as the companymade payment for all these years pursuant to Governmentorders, there is no justification for disallowing the amount incomputation of the income. However, it will be open to the ITA 262/09 & Co cases. Central Board to take up the matter with the StateGovernment so that service charges can be fixed by theGovernment on a rational basis. We dismiss the appeals butwith the above observation. C.N.RAMACHANDRAN NAIR JUDGE V.K.MOHANAN, JUDGE kvm/- ITA 262/09 & Co cases. -:14:- V.K.MOHANAN, J. O.P.No. JUDGMENT Dated:..