2003 (9) TMI 29 - HC - Income Tax

Amount paid on account of overriding title to the wife of vendor - (i) Whether Tribunal was right in holding that a sum of Rs. 9, 812 is not admissible deduction for the purpose of computing the total income of the assessee? Clause 4 of the sale deed specifically mentions that the amount in question is charged on the net profits of the assessee-company and the assessee-company had accepted this obligation as a condition of its purchase of the going concern. Hence it is not a case of mere application of income but it is a case of diversion of income by an overriding charge. Hence the amount paid has to be deduced from the income of the assessee - The x-ray machine is definitely involved in the processing of goods as the x-ray plates are blank and films are created on exposure which are converted into images only after due processing thus assessee is an industrial company under section 2(7) of the Finance Act 1979

Summary

Issues:
1. Deductibility of a sum paid as an overriding charge for computing total income.
2. Classification of the assessee as an 'industrial company' under the Finance Act, 1979.

Issue 1: Deductibility of Overriding Charge:
The case involved a private limited company that took over a business and agreed to pay an annual overriding charge to the previous owner's wife. The dispute centered around whether this payment was deductible for computing total income. The Tribunal rejected the claim, but the High Court analyzed the legal position extensively. Referring to various precedents, the Court discussed the distinction between application of income and diversion by overriding title. It emphasized that an obligation attached to the source of income signifies diversion, not mere application. In this case, the overriding charge was an integral part of the sale deed, constituting a diversion of income. The Court criticized the Tribunal's misdirection and held that the payment should be deducted from the income of the assessee. Additionally, the Court addressed the reasonableness of the payment, emphasizing that the Income-tax Officer cannot dictate salaries unless they are unrealistic, supporting the allowance of the claim.

Issue 2: Classification as an 'Industrial Company':
The second issue revolved around whether the assessee qualified as an 'industrial company' under the Finance Act, 1979. The Tribunal relied on a Madras High Court decision regarding development rebate on an x-ray machine to support its finding. The High Court concurred with this view, citing similar judgments and Circular No. 347 by the Central Board of Direct Taxes. It determined that the assessee's unit, engaged in processing x-ray films, met the criteria for being classified as an industrial company. The Court highlighted that processing or manufacturing activities were sufficient for this classification. Noting the involvement of the x-ray machine in processing goods, the Court affirmed the assessee's entitlement to the concessional rate of tax, aligning with precedents emphasizing the processing nature of activities.

In conclusion, the High Court ruled in favor of the assessee on both issues. It allowed the deduction of the overriding charge as a diversion of income and upheld the classification of the assessee as an 'industrial company' under the Finance Act, 1979. The judgment provided a detailed analysis of legal principles and precedents to support its conclusions, ensuring a thorough examination of the issues at hand.