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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 ..... machinery since it comes into contact with crude oil and reduced crude oil, which were corrosive chemicals. The learned departmental representative, Shri Srivastava, submitted to us that there was no definition of 'corrosive chemicals' under the 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 chemica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he other hand, the assessee's learned counsel, Shri Mehta, submitted that what is the written down value of the assets of a company, which is amalgamated with another company is to be governed by Explanation 2A of section 43(6) and not by Explanation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee-company for the purpose of depreciation admissible on these capital assets. On this issue, therefore, the order of the Commissioner (Appeals) is reversed. 7. The next grievance again common to all the years under appeal before us 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 mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being treated as 'plant' for the assessment year 1978-79. He also cited before us a decision of the Hon'ble Andhra Pradesh High Court in the case of CIT v. Coromandel Fertilisers Ltd. [1985] 156 ITR 283, wherein their Lordships laid down 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' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o us that the guest houses were meant for use by the employees. In these circumstances, according to Shri Mehta, for the assessment years prior to the assessment year 1979-80, which was covered by the clarificatory sub-section (5) of 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 al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l basis was admissible and was rightly allowed by the Commissioner (Appeals). 17. We have carefully considered the rival submissions. At the outset it will be necessary to point out that one of the assessment years in the case 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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ube India Ltd. against the profits of the assessee-company which was the amalgamating company. 19. The learned departmental representative, Shri Srivastava, submitted to us that there was no provision in section 80J for unabsorbed 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 Line ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the forecast for the year 1976 prepared in May 1976 forecasting a taxable income of Rs. 460 lakhs and in September 1976 forecasting a taxable income of Rs. 700 lakhs, which was based on various components constituting the 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- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection (5) of section 40A, so far as they are relevant to our purpose as they then stood, are as follows : "(5)(a) Where the assessee--- (i) incurs any expenditure which results directly or indirectly in the payment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us that the claim of deduction of provision for payment of pension, etc., to the former employees of Caltex Oil Refining India Ltd., which had amalgamated with the assessee-company, based on the certificate of an 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 Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er/consumer meetings and conferences, 50 per cent of the assistance towards cost of uniforms for service station attendants, training expenses for dealer/service salesmen and incentive/awards to dealer/service 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken over from Caltex Oil Refining India Ltd. and the closing stock of those products at the end of the year made by the ITO was perfectly justified and was wrongly deleted in appeal by the Commissioner (Appeals). 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, th ..... 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