9911796707
TMI Blog1983 (3) TMI 102X X X X Extracts X X X X X X X X Extracts X X X X ..... dressed to the ITO by the assessee now in appeal before us. The said company was virtually a sick unit. This Rieta Biscuit Co. (P.) Ltd. had, as on 31-8-1977, the following shareholders registered in the shareholders' list : " Sl. No. Name No. of equity shares held 1. Shri Om Sarup Aggarwal 660 2. Shri Madan Lal Agarwal 470 3. Shri Anand Sarup 852 4. Shri Sant Lal 589 5. Smt. Vidya Vati 188 6. Shri Vidya Sagar 411 7. Shri Yash Paul 340 8. Smt. Rai Rani Aggarwal 547 9. Smt. Devki Rani 718 10. Shri Om Sarup--HUF 225 11. Shri Vijay Kumar 25 12. Shri Rattan Chand 25 13. Shri Satish Kumar 25 14. Shri Parveen Kumar 10 15. Smt. Bimla Vati 10 16. Smt. Usha Rani 25 17. Shri Chaman Lal 25 18. Shri Ramesh Chand 25 ---------------- Total 5,170 " ----------------- 3. On 23-8-1977, a firm was constituted evidenced by an instrument of the said date executed and drawn up on that date. The business of the partnership was to be carried on by the firm of Bakeman's Home Products. This partnership was constituted by six partners, i.e., (i) Charan Dass s/o Late Kundan Lal ; (ii) Ramlal s/o Charan Dass ; (iii) Mittar Sain Trustee ; (iv) Seth Sham Lal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e kg. Yaro base scale valued approximately at Rs. 20,000. (ii) In return of the use and exploitation of the above assets of the lessor, the lessee agreed to pay to the lessor a sum equivalent to 2 per cent of the value of the goods manufactured by the lessee during the period ending 30-6-1979 subject, however, to minimum of Rs. 6 lakhs for each of the periods from 1-9-1977 to 30-6-1978 and from 1-9-1978 to 30-6-1979. In addition to it, 3 per cent of the net sales affected by the party of the second part, i.e., lessee during each of these two periods was to be paid. Clause (4) provided the determination of value of the goods manufactured for working out the payment to the lessor. (iii) Since the lessor was carrying on the same business as was intended to be carried on by the lessee, clause (6) of the agreement provided that the lessee will have the option to purchase all the finished products if any, as may be in stock with the lessor as on 30-8-1977. It was also provided in this clause that the lessee could also purchase from the lessor all goods in process, raw materials, general stores, packing materials, etc., if any. The lessor also conceded that the lessee may sell the bis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ully deliver the possession of the said building, machinery and plant to the lessor without any hindrance and interruptions. 5. The assessee-firm, i.e., the lessee mentioned in this agreement filed the return of its income for the accounting period ending on 30-6-1978 relevant to the assessment year 1979-80 under appeal before us declaring loss of Rs. 6,58,290. The ITO noticed that a sum of Rs. 8,32,191 had been debited in its final accounts. He found that these payments were under the terms of the agreement referred to supra. He was of the opinion that the payment made by the assessee was excessive or unreasonable in terms of section 40A(2)(a) of the Income-tax Act, 1961 ('the Act'). He gave an opportunity to the assessee as to why a part thereof need not be disallowed to which the assessee submitted replies dated 17-11-1980 appearing at pages 14 to 18 and dated 26-11-1980 appearing at pages 18 to 19 of the assessee's paper book. The argument of the ITO was that the written down value of the assets leased out by the lessor to the lessee was not such as to justify the substantial payment mentioned in the agreement. For this, detailed reasons are given by the ITO in his order. Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... divided amongst the partners. 7. For the assessment year 1980-81, the assessee had filed a return declaring total income of Rs. 52,510 on 28-7-1980. After discussing the terms of the agreement on the lines discussed for the assessment year 1979-80 and after considering the claim under section 80J and the expenditure on publicity, etc., the ITO disallowed lease money to the extent of Rs. 2,50,000 ; rejected the claim for deduction under section 80J and disallowed Rs. 1,04,560 out of publicity and advertisement expenses considering the provisions of section 37(3A), 37(3B) and 37(3D). This assessment was completed on 26-11-1981. 8. These assessments were challenged in appeal before the Commissioner (Appeals), Chandigarh. The Commissioner (Appeals) confirmed the disallowance of payments made under the terms of the agreement respectively amounting to Rs. 1,12,191 and Rs. 2,50,000. He also upheld the ITO's action in not entertaining the claim under section 80J for each of the assessment years under appeal. However, the learned Commissioner (Appeals) held that section 37(3D) is applicable to the case of the assessee and the additions made by the ITO to the extent of Rs. 51,136 and Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taking, etc., the deduction is admissible irrespective of the fact that the asset with the aid and exploitation of which the profits are earned belongs to someone else. The allowance was admissible in view of the following judgments---Addl. CIT v. A. Mukherjee Co. (P.) Ltd. [1978] 113 ITR 718 (Cal.), Griffon Laboratories (P.) Ltd. v. CIT [1979] 119 ITR 145 (Cal.) and CIT v. Neo Pharma (P.) Ltd. [1982] 137 ITR 879 (Bom.). In view of the above judgments, it was contended that factually the assessee has manufactured goods, run an industrial undertaking and is as such entitled to deduction under section 80J. The authorities below erred in refusing his claim for the assessment years under appeal. 11. Opposing these submissions, the revenue contended that the orders of the authorities below were fully justified insofar as the disallowance of payments under the agreement are concerned because these were excessive or unreasonable considering the provisions of section 40A(2)(a). Insofar as the relief under section 80J is concerned, the orders of the Commissioner (Appeals) were supported with the further submission that in view of the judgment of the Madras High Court in the case of CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee not later than a fortnight after the goods were despatched and in default of payment the assessee was entitled to charge interest. The agent was also responsible for due fulfilment of all contracts made by the assessee and also for the consequences of breach of contract by any customer and all losses and damages arising therefrom to the assessee. The payments made under the said agreement in the said case were disallowed. The disallowance was confirmed by the AAC. However, the Tribunal upheld the claim of the assessee for payment of commission holding that the commission was expended for purposes of the assessee's business. The agreement was entered into bona fide and had been acted upon and the department had not impugned it as a sham. Upon a reference of the question : whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the commission was allowable as a business expenditure, the High Court answered the question in the negative, i.e., against the assessee. On appeal to the Supreme Court, it was held reversing the decision of the High Court that the Tribunal had given good reasons in support of its conclusion. The primary fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... better proposition. After careful perusal of the terms of the agreement we find that the lessor did not have anything which could be said as payment without commercial considerations. Even according to the ITO, the value of the assets in the market though negligible on the basis of the written down value would be substantial to the extent of Rs. 48 lakhs at the time when the agreement was entered into. The assessee in fact claims that the value of such a plant and machinery would be much higher and that in the terms of the agreement, the assessee saw commercial gains and no benefit of the type to the lessor that may be said to be given on extra commercial considerations. We have carefully perused clauses (3), (4), (7) and (8) to (13) of the agreement. It becomes clear that both the parties were trying to protect their respective commercial interests to the utmost. Thus, clause (6) provided that the lessee, being party of the second part will have the option to purchase all the 'finished goods' and 'in-process' products. It even got, under clause 7, the right to use the lessor's brand name if it so decided. It, of course, further secured the right under this clause to give any other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nable by applying the subjective standards of the ITO, because the highest Court of this land has laid down, as seen supra, that reasonableness of the expenditure has to be seen from businessman's point of view. 20. The payments made under the agreement duly reached the lessor and the lessor company has been assessed to tax on these sums in the assessment years 1978-79 and 1979-80. Thus, applying the principles laid down by the Supreme Court in the case of J.K. Woollen Manufacturers, we give a finding of fact that our conclusion on facts is that the payments envisaged under the agreement are real, that these have been incurred by the assessee-firm in the character of a trader and that these are wholly and exclusively laid out for the purpose of the business of the assessee. The agreement was a genuine document and acted upon by the parties. The payments are on facts of the case not excessive or unreasonable. 21, The ITO referred to clause (a) of sub-section (2) of section 40A, but he failed to appreciate the depth and expense of this section 40A(2) as a whole. He only saw part (a) of sub-section (2) which invested him with the powers to fiddle with the payments. He, however, fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plitting up or the reconstruction of a business already in existence are not satisfied'. The Commissioner (Appeals) in appeal held that 'the assessee has not set up a new industrial undertaking and is not entitled to the claim of Rs. 62,041 under section 80J'. Hence, this ground in each of the appeals by the assessee and the contentions by the rival parties before us. 24. Before we come to the claim of the assessee on merits, we must keep in focus the guidelines laid down by the Hon'ble Courts while dealing with such matters. In CIT v. Webbing Belting Factory Ltd. [1968] 68 ITR 186, the Supreme Court of India held that section 80J, which is intended to encourage the setting up of new industrial undertakings, must be construed liberally. Again in CIT v. Orient Paper Mills Ltd. [1974] 94 ITR 73 (Cal.), it was laid down that such liberal construction must be in a broad commercial sense from a common sense point of view. Keeping these guidelines in view we proceed to analyse and consider the claim of the assessee. 25. The authorities below were mainly influenced by the provisions of section 80J(4) in rejecting the claim for deduction made by the assessee-firm. However, we find th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITO to compute the deduction under section 80J in accordance with law taking into account our above observations and directions for each of the assessment years under appeal. Since the assessee succeeds on both the grounds in each of the appeals, the appeals of the assessee are allowed. Before we close, however, we would like to observe that the Madras High Court case of Universal Radiators (P.) Ltd. relied upon by the revenue turns on its own facts and in no way goes against the claim of the assessee and does not really say that only a lessor is entitled to relief under such circumstances. 27. Now coming to the appeals of the revenue, we find only one ground in each year relating to allowance of advertisement expenditure incurred by the assessee and allowed fully by the Commissioner (Appeals). The Commissioner (Appeals) held that section 37(3D) applies to the case of the assessee. Section 37(3D) was inserted by the Finance Act, 1978, with effect from 1-4-1979 and was omitted by the Finance (No. 2) Act, 1980, with effect from 1-4-1981. It was, thus, applicable to the assessment years 1979-80 and 1980-81 which are under appeal before us. it provided that in a case where an assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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