2013 (10) TMI 1081 - HC - Income Tax

Whether the assessees are entitled for investment allowance under section 32A(1)(2)(iii) or they should be denied on the ground that they manufacture articles specified in item 5 of the Eleventh Schedule - Legal fiction extension beyond legitimate field Held that - The Explanation under consideration has to be construed as expanding description or definition of blended flavouring concentrates so as to include synthetic essences in any form. If the blended flavouring concentrates includes synthetic essences by fiction, it is logical that such fiction would have applied even from the date anterior to the expression of intention by Parliament. The words shall be deemed always to have included , therefore, have to be given a limited meaning of understanding the blended flavouring concentrates as always including the synthetic essences - In so far as denying the benefit of investment allowance under section 32A(2)(iii) is concerned, it can only be with effect from April 1, 1988 Decisions of Madras High Courts in CIT v. Black Diamond Beverages Ltd. 1992 (2) TMI 17 - CALCUTTA High Court and CIT v. Soft Beverages P. Ltd. 2003 (12) TMI 5 - MADRAS High Court distinguished - Decided against the Revenue. Disallowance of interest - the question was whether there is any nexus between the monies borrowed and advances made by the assessee - ITAT did not allow the revenue to produce additional evidence and decided in favor of assessee - Whether finding of fact can be a subject matter of reference under section 256(1) or 256(2) Held that - In a reference under section 256, the High Court must accept the finding of fact reached by the Appellate Tribunal - If a question of fact is examined, while answering reference, the High Court would be acting in excess of jurisdiction - Every question referred to the High Court ordinarily contains a phrase . . . in the facts and circumstances of the case or . . . in the circumstances of the case . This means the question of law referred to in the background of the facts found by the Appellate Tribunal and not facts which are to be fished out by the High Court at the instance of either of the parties - The Appellate Tribunal is a final fact finding authority. The High Court cannot go beyond the facts found by the Tribunal. Whether it is an assessee or the Revenue, all questions of fact have to be raised at the time of hearing of the appeal before the Tribunal and in the reference, no fresh hearing of disputed questions of fact is possible nor permissible - The view taken by the Tribunal with reference to the question of fact is final and the question of law would not arise for opinion under section 256(2) of the Act Decided against the Revenue.

Summary

Issues Involved:
1. Investment allowance eligibility under section 32A of the Income-tax Act, 1961.
2. Disallowance of interest due to lack of nexus between borrowed funds and advances made.

Detailed Analysis:

Issue 1: Investment Allowance Eligibility under Section 32A
Background:
The core issue revolves around whether the assessee is entitled to investment allowance under section 32A of the Income-tax Act, 1961, despite using synthetic essences in the manufacture of aerated waters. The relevant years are 1981-82 and 1982-83 for R.C. No. 85 of 1997, and 1985-86 and 1986-87 for R.C. No. 125 of 1999. The Income-tax Officer initially allowed the investment allowance, but the Commissioner of Income-tax (Appeals) disallowed it, arguing that the items manufactured fell under item 5 of the Eleventh Schedule.

Arguments:
The Revenue argued that synthetic essences should be included under "blended flavouring concentrates" as per the Explanation added by the Finance Act, 1987, which should have retrospective effect. They cited decisions from the Calcutta and Madras High Courts supporting this view.

The assessees contended that the Explanation could not be applied retrospectively and that it only clarified the definition of "blended flavouring concentrates," which should not affect assessments prior to April 1, 1988.

Consideration and Finding:
The court analyzed the relevant provisions of section 32A and the Eleventh Schedule, noting that the Explanation to item 5 was inserted to clarify that "blended flavouring concentrates" include synthetic essences. The court reviewed legislative documents and case law to determine whether the Explanation should have retrospective effect. It concluded that the Explanation was intended to clarify the definition without denying investment allowance for years prior to 1988-89.

Conclusion:
The court held that the Explanation, though clarificatory, did not intend to deny the investment allowance retrospectively. Therefore, the assessees were entitled to the investment allowance for the relevant assessment years.

Issue 2: Disallowance of Interest Due to Lack of Nexus
Background:
In R.C. No. 125 of 1999, the issue was whether the Income-tax Appellate Tribunal was right in deleting the disallowance of interest on the grounds that the Revenue failed to establish a nexus between borrowed funds and advances made by the assessee to its subsidiary.

Arguments:
The Revenue argued that the Tribunal's decision was based on fresh evidence not presented before the lower authorities, violating rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963. The assessee countered that the Tribunal's finding was a question of fact, which should not be reconsidered by the High Court under section 256(2).

Consideration and Finding:
The court noted that section 36(1)(iii) allows deduction of interest paid on borrowed capital used for business purposes. The Tribunal found that the advances were made from the assessee's own funds, not borrowed funds, based on the evidence presented. The court emphasized that findings of fact by the Tribunal are final and cannot be re-evaluated by the High Court in a reference under section 256.

Conclusion:
The court upheld the Tribunal's decision, affirming that the disallowance of interest was correctly deleted based on the factual finding that there was no nexus between borrowed funds and the advances made.

Final Judgment:
The court answered both issues in favor of the assessee and against the Revenue, affirming the entitlement to investment allowance and the deletion of interest disallowance. The reference cases were disposed of without any order as to costs.