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TMI Blog1986 (2) TMI 91X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Act, 1961 ('the Act') and, therefore, what are corrosive chemicals have to be understood by what is known in common parlance. Viewed in this context, according to Shri Srivastava, crude oil and reduced crude oil cannot be considered corrosive chemicals. On the other hand, the assessee's learned counsel, Shri Mehta, referred to the expert's opinion, which was before the lower authorities, according to which crude oil consisted mainly of a mixture of hydrocarbons of many chemical types and of varying degrees of molecular complexities and also contained small proportions of compounds of oxygen, nitrogen and sulphur as a result of which both crude oil and reduced crude oil were corrosive chemicals. Shri Mehta vehemently argued before us that what is a corrosive chemical has to be determined by experts and not by the laymen and, therefore, in the absence of any definition of 'corrosive chemicals' in the Act, what are corrosive chemicals have to be decided by the experts. On this basis, Shri Mehta submitted that the direction of the Commissioner (Appeals) to allow higher rate of depreciation at the rate of 15 per cent on the assessee's plant and machinery, which came in contac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anation 3, which was wrongly invoked by the ITO. Elaborating on his argument, Shri Mehta pointed out that Explanation 3 of section 43(6) was with a view to prevent double benefit of set off of depreciation allowed to be carried forward and its exclusion for the purpose of written down value and consequently, terminal allowance on sale, which is not the case here. According to Shri Mehta, the assessee-company should not be put to the double disadvantage of the carried forward depreciation in the case of Lube India Ltd. not being available to it and this carried forward depreciation also being deducted for the purpose of working out the written down value on which depreciation will be admissible to the assessee-company on the assets of Lube India Ltd. taken over by the assessee-company on amalgamation. 6. We have carefully considered the rival submissions. Explanations 2A and 3 of clause (6) of section 43 are as follows: "Explanation 2A: Where, in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated company, and the amalgamated company is an Indian company, the written down value of the transferred capital asset to the amalgama ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is against the direction of the Commissioner (Appeals) that the gratuity exempt under section 10(10) of the Act, should not be taken into consideration for the purpose of working out the disallowance under section 40A(5) of the Act. Both the learned departmental representative, Shri Srivastava, as well as the assessee's learned counsel, Shri Mehta, submitted to us that this very issue also cropped up before the Special Bench of the Tribunal in the case of IAC v. Kodak Ltd. [1983] 3 SOT 517 (Bom.) and the arguments of both the sides were the same as were before the Tribunal in the case of Kodak Ltd. 8. We have carefully considered the rival submissions. Following, with respect, the order of the Special Bench of the Tribunal in the case of Kodak Ltd., we hold that gratuity to the extent to which it is exempt under section 10(10) should not be considered for the purpose of making the disallowance under section 40A(5). We would, however, like to make it clear that if gratuity exceeds the amount exempt under section 10(10), the excess only would have to be considered for the purpose of disallowance under section 40A(5) and not the entire amount of gratuity. It was brought to our not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn that the determination of whether roads within the factory compound constitute buildings or plant depends upon the particular situation of the roads, the use to which they are put and in particular whether they were an integral part of the factory in which the business was carried on and considering these tests the roads there amounted to 'plant'. He, therefore, justified the order of the Commissioner (Appeals) on this issue. 11. We have carefully considered the rival submissions. With very great respect to the decision of the Hon'ble Andhra Pradesh High Court in the case of Coromandel Fertilisers Ltd., which was considering the facts of that case, we are inclined to follow the ruling of the Hon'ble Bombay High Court in the case of Sandvik Asia Ltd. with which we respectfully agree and which is also a binding authority for us. We may also point out that even if the ITO for some assessment years has herself treated the roads and culverts as 'plant' or the Commissioner (Appeals) treated them as 'plant' and the revenue did not come up in appeals before us, this will not act as estoppel to our coming to a decision on this issue on merits in the light of the ruling of the Hon'ble B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f section 37 inserted by the Finance Act, 1983 with retrospective effect from 1-4-1979, the expenses on the guest houses under consideration here were admissible and were rightly allowed by the Commissioner (Appeals). 14. We have carefully considered the rival submissions. There is no evidence either before the lower authorities or even before us at the time of hearing of the appeals that the guest houses were intended for the exclusive use of the whole-time employees while on leave. On the other hand, in response to a specific query by the Bench it was admitted that the guest houses were used by persons who were not employed in the assessee-company as well. In these circumstances, considering the ruling of the Hon'ble Karnataka High Court in the case of N.G.E.F. Ltd. and the totality of the facts and circumstances, we have no hesitation in coming to the conclusion that the claim of deduction of guest house expenses was not admissible and was wrongly allowed by the Commissioner (Appeals). On this issue, therefore, again, the order of the Commissioner (Appeals) is reversed. 15. The next grievance common to the assessment years 1977-78 to 1979-80 is against the direction of the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Caltex Oil Refining (India) Ltd., considered by the Tribunal in the order cited by the assessee's learned counsel, Shri Mehta, related to the assessment year 1971-72, which is not covered by section 40A(7), which was inserted by the Finance Act, 1975 with retrospective effect from 1-4-1973. The language of section 40A(7) clearly lays down that unless the conditions prescribed by clause (b) of section 40A(7) are fulfilled, no deduction shall be allowed in respect of any provision whether called as such or by any other name made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason. It is not under dispute that the conditions laid down by clause (b) of section 40A(7) have not been met in the present case. This means that the lump sum benefits paid to the employees on their retirement or on the termination of their employment, which is another name for gratuity, is hit by the provisions of section 40A(7). Coming to the payment of annuity, again to the employees on their retirement, the past practice has been, as mentioned by the learned departmental representative, Shri Srivastava, and not controverted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orbed deduction in the case of an amalgamating company being considered and allowed against the profit of the amalgamating company and, therefore, the direction of the Commissioner (Appeals) to this effect was against the provisions of law. 20. On the other hand, the assessee's learned counsel, Shri Mehta, referred to the Board's Circular Letter F.No.15/5/63-IT (A-I) dated 13-12-1963 (see Taxmann's Direct Taxes Circulars, Vol. 1, 1985 edn., p. 535) where the Board agreed with the view that the benefit of section 84 of the Act (corresponding to section 80J under consideration here) attaches to the undertaking and not to the owner thereof and, consequently, the successor will be entitled to the benefit for the unexpired period of five years provided the undertaking is taken over as a running concern. Shri Mehta on the authority of the decisions of the Hon'ble Supreme Court in the cases of Navnit Lal C. Javeri v. K.K. Sen, AAC [1965] 56 ITR 198 and Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913 submitted to us that the circulars issued by the Board are binding on the revenue authorities. 21. We have carefully considered the rival submissions. In view of the rulings of the Hon'ble Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he business, objectives, targets and budgets prepared by the various segments of the business for the key result areas, the various controls exercised by the Government of India on prices and profits, the numerous directions issued by the Government from time to time and all the other relevant facts and circumstances. It was also pointed out by Shri Mehta that the assessee was a Government-owned company and, therefore, there could be no intention of the company to deliberately underestimate the estimate of income and the advance tax payable based thereon in the first two instalments. He, therefore, justified the order of the Commissioner (Appeals) on this issue. 24. We have carefully considered the rival submissions. It is not under dispute that the assessee-company is a wholly-owned Government company. There is, therefore, merit in the argument of the assessee's learned counsel, Shri Mehta, that there could be no deliberate intention on the part of the assessee-company to underestimate its income and advance tax payable based thereon in the first two instalments with any motive whatsoever. Considering this, the affidavit of the Financial Controller (Corporate) of the assessee-co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of any salary to an employee or a former employee, or (c) The limits referred to in clause (a) are the following, namely:--- (i) in respect of the expenditure referred to in sub-clause (i) of clause (a), in the case of an employee, an amount calculated at the rate of five thousand rupees for each month or part thereof comprised in the period of his employment in India during the previous year, and in the case of a former employee, being an individual who ceases or ceased to be the employee of the assessee during the previous year or any earlier previous year, sixty thousand rupees:" This clearly shows that two limits have been prescribed, one in the case of an employee where the limit is Rs. 5,000 for each month or part thereof comprised in the period of employment in India during the previous year and another in the case of an ex-employee for which the limit is Rs. 60,000 without any reference to the number of months for which the ex-employee was in employment. It follows, therefore, that in the case of an ex-employee the limit will be Rs. 60,000. The direction of the Commissioner (Appeals) on this issue, therefore, does not appear to be correct and is reversed. 28. We n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n actuary was made before the ITO. We have also dealt with the issue of the claim of deduction of annuity and lump sum benefits to the employees on actuarial basis instead of on actual payment basis in paragraphs 15 to 17 of our order and this will also be applicable to the claim of deduction of provision for pension to the former employees of Caltex Oil Refining India Ltd. Considering all this, the detailed discussion in paragraphs 15 to 17 of our order and the totality of facts and circumstances, we are of the view that the ITO was justified in disallowing the entire provision for payment of pension to the former employees of Caltex Oil Refining India Ltd., which had amalgamated with the assessee-company. The Commissioner (Appeals), therefore, in our view, was not justified in holding that out of the total provision of Rs. 4,54,830 only Rs. 1,04,300 should be disallowed and the balance of Rs. 3,50,530 should be allowed. On this issue, therefore, the order of the Commissioner (Appeals), in our view, appears to be incorrect and is reversed. 30. The next grievance again relating to the assessment year 1979-80 only is against the direction of the Commissioner (Appeals) that the exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e salesmen. In a company of this magnitude with a turnover, which, during the previous year relevant to this assessment year was about Rs. 800 crores and disclosed income of more than Rs. 20 crores, it is unrealistic to expect details of every item comprising Rs. 1,57,393 on sales and contests. The classification of these expenses even according to the assessment order was given by the company by its letter dated 23-12-1981. It is further not under dispute that out of these expenses of Rs. 1,57,393, Rs. 50,000 were estimated by the ITO as expenses of the nature of hospitality and entertainment and there is no dispute on this issue. The balance that remains is only Rs. 1,07,393. There is nothing to suggest that the classification given by the assessee-company even after the estimate of Rs. 50,000 out of these expenses as representing the expenses of the nature of hospitality and entertainment, does not reflect the correct state of affairs. We are, therefore, of the view that the balance amount of Rs. 1,07,393 ought not to have been added to the expenses on advertisements for the purpose of working out the disallowance under section 37(3A). On this issue, therefore, the order of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeals). 35. On the other hand, the assessee's learned counsel, Shri Mehta, submitted to us that this was a peculiar case where Caltex Oil Refining India Ltd. merged in the assessee-company and, therefore, the goods and products of Caltex Oil Refining India Ltd. on its amalgamation with the assessee-company were taken over by the assessee-company at the value according to the books of Caltex Oil Refining India Ltd., while the closing stock was valued according to the assessee's method of accounting regularly employed year after year for all its products including the products taken over from Caltex Oil Refining India Ltd. and remaining at the end of the year. Amplifying his arguments, Shri Mehta submitted that the opening stock of the goods taken over from Caltex Oil Refining India Ltd. according to the value as shown in the books of Caltex Oil Refining India Ltd. was akin to the cost of acquisition of those goods on amalgamation of that company with the assessee-company. He, therefore, justified the direction of the Commissioner (Appeals) on this issue. 36. We have carefully considered the rival submissions. There can be no dispute on the principle that the assessee should val ..... X X X X Extracts X X X X X X X X Extracts X X X X
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