2002 (7) TMI 8 - HC - Income Tax

(i) Whether, Tribunal was right in law in holding that the assessee-company is entitled to a deduction u/s 80J of the Income-tax Act, 1961, in respect of its new unit? - (ii) Whether, Tribunal was right in law in holding that section 40(c)(ii) and not section 40A(5) should be applied in allowing the deduction in respect of salary, perquisites, etc., to the managing director of the assessee-company in the AY 1980-81? Both the questions are answered against the Revenue and in favour of the assessee In respect of validity of charge or mortgage on the plant and machinery, held that the assessee had created a charge on its plant and machinery by entering into a trust deed with the directors, and also registered the charge with the Registrar of Companies as required under the Companies Act and that would suffice to create a charge over the plant and machinery of the assessee s company. Once there is a valid charge over the properties of the company, the disallowance of the interest payments is not correct

Issues:
1. Valid charge or mortgage created by deed of hypothecation trust.
2. Disallowance of interest under section 40A(8) of the Income-tax Act.
3. Entitlement to deduction under section 80J of the Income-tax Act.
4. Application of sections 40(c)(ii) and 40A(5) for deduction in respect of salary, perquisites, etc.

Issue 1: Valid charge or mortgage created by deed of hypothecation trust.
The case involved questions regarding the creation of a valid charge or mortgage by a deed of hypothecation trust dated April 1, 1979. The Income-tax Officer disallowed interest payments on deposits, citing the absence of a charge or mortgage on the properties of the assessee-company. However, the Commissioner of Income-tax (Appeals) held that a floating charge was created by hypothecation, and the security was registered with the Registrar of Companies. The Appellate Tribunal later reversed this decision, stating that no valid charge was created due to the absence of registration under the Registration Act. The High Court, considering previous judgments, ruled in favor of the assessee, emphasizing that registration under the Companies Act was sufficient to create a valid charge over the company's properties.

Issue 2: Disallowance of interest under section 40A(8) of the Income-tax Act.
The dispute revolved around the disallowance of interest payments under section 40A(8) of the Income-tax Act. The Income-tax Officer disallowed a portion of interest payments on fixed deposits, leading to appeals and counter-arguments. The Commissioner of Income-tax (Appeals) partially allowed the appeals, but the Appellate Tribunal sided with the Revenue, emphasizing the lack of a valid second mortgage and unregistered deed of hypothecation. The High Court, referencing previous decisions, held that the registration with the Registrar of Companies under the Companies Act was sufficient to establish a valid charge, thereby ruling in favor of the assessee.

Issue 3: Entitlement to deduction under section 80J of the Income-tax Act.
The case involved the eligibility of the assessee for a deduction under section 80J of the Income-tax Act concerning a new industrial undertaking set up in Andhra Pradesh. The Income-tax Officer initially rejected the claim, stating it was an expansion of an existing unit. However, the Commissioner of Income-tax (Appeals) and the Appellate Tribunal allowed the deduction, noting substantial fresh capital investment and the establishment of a separate industrial unit. The High Court upheld this decision, emphasizing the conditions under section 80J were met, including fresh capital investment, employment of labor, and a distinct identity of the new unit.

Issue 4: Application of sections 40(c)(ii) and 40A(5) for deduction in respect of salary, perquisites, etc.
The question arose regarding the application of sections 40(c)(ii) and 40A(5) for allowing deductions related to salary and perquisites of the managing director of the assessee-company. Citing relevant precedents, the High Court upheld the Tribunal's decision, stating that section 40(c)(ii) applied, as the ceiling prescribed was higher than that of section 40A(5). The Court found the Tribunal's order legally correct and ruled against the Revenue, affirming the higher ceiling limit under section 40(c)(ii) for the deduction.

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