2001-VIL-362-MAD-DT

Equivalent Citation: [2002] 253 ITR 396, 123 TAXMANN 744

MADRAS HIGH COURT

Date: 12.04.2001

COMMISSIONER OF INCOME TAX

Vs

SUNDARAM INDUSTRIES LTD.

BENCH

Judge(s)  : R. JAYASIMHA BABU., K. GNANAPRAKASAM.

JUDGMENT

The judgment of the court was delivered by

R. JAYASIMHA BABU J. - Four questions have been referred by the Tribunal.

They concern a company, which is engaged in the activity of retreading tyres.

The assessment years are 1982-83 and 1983-84.

The first question is regarding the correctness of the Tribunal's view that the amounts which had earlier been shown in the assessee's book as sundry credit balances of the customers and written back in the profit and loss account of the assessee is not taxable as the assessee's income. Counsel for the Revenue relied on the decision of the Supreme Court in the case of CIT v. T. V. Sundaram Iyengar and Sons Ltd. [1996] 222 ITR 344, and submitted that the decision of the Tribunal runs counter to the law laid down by the Supreme

Court in that decision.

That decision was rendered by the apex court in the background of the facts as observed by the court:

"There is no dispute that the deposits in the case before us were received from trade parties who had not made any claim for repayment of the balance. The Income-tax Officer has pointed out that the amount had arisen as a result of trading transaction and had a character of income.... The Commissioner of Income-tax (Appeals) found that the assessee wrote back the amounts to its profit and loss account because the various trading parties did not claim these amounts for a long time. The amounts represented credit balances in the name of the trading parties and was taken to its profit and loss account. The Commissioner of Income-tax (Appeals) held that these amounts were not revenue receipts but were of capital nature".

The Commissioner had held that the provisions of section 41(1) of the Income-tax Act were not attracted in the facts of the case because: "the assessee's liability to pay back the amounts to its customers had not ceased". The Tribunal had agreed with the view of the Commissioner. The apex Court, after setting out those facts, observed:

"The amounts were not given and retained as security to be retained till the fulfilment of the contract. There is no finding to that effect. The deposits were taken in the course of the trade and adjustments were made against these deposits in the course of trade. The unclaimed surplus retained by the assessee will be its trade receipt. The assessee itself treated the amount as its trade receipt by bringing it to its profit and loss account."

Towards the end of the judgment, the court, after referring to the observations of Atkinson J. in the case of Jay's The jewellers Ltd. v. IRC [1947] 29 TC 274 (KB), observed:

"If a commonsense view of the matter is taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its profit and loss account. The moneys had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time-barred and the amount attained a totally different quality. It became a definite trade surplus. Atkinson J. pointed out that in Tattersall's case [1939] 7 ITR 316 (CA) no trading asset was created. Mere change of method of bookkeeping had taken place. But, where a new asset came into being automatically by operation of law, commonsense demanded that the amount should be entered in the profit and loss account for the year and be treated as taxable income. In other words, the principle appears to be that if an amount is received in the course of trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee's own money because of limitation or by any other statutory or contractual right. When such a thing happens, commonsense demands that the amount should be treated as income of the assessee.

In the present case, the money was received by the assessee in the course of carrying on his business. Although it was treated as deposit and was of capital nature at the point of time it was received, by efflux of time the money has become the assessee's own money. What remains after adjustment of the deposits has not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its profit and loss account. There is no explanation from the assessee why the surplus money was taken to its profit and loss account even if it was somebody else's money. In fact, as Atkinson J. pointed out that what the assessee did was the commonsense way of dealing with the amounts".

The court answered the question raised by the Department, viz., "whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in deleting the addition made by the Income-tax Officer representing unclaimed sundry credit balances written back to the profit and loss account by the assessee during the previous year relevant for the assessment year under consideration", in favour of the Revenue.

The question referred to us in this case is almost on identical terms. The first question reads thus:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the sundry credit balances of the customers written back in the profit and loss account were not taxable as income?"

The similarity in the questions framed is not a matter of surprise, as the assessee here is an associate company of the company which was a party to the decision of the Supreme Court in the case of CIT v. T. V. Sundaram Iyengar and Sons Ltd. [1996] 222 ITR 344.

That decision of the apex court was rendered by a Bench of three learned judges of the court.

Learned counsel for the respondent-assessee, however, contended that a later judgment of the Supreme Court, though rendered by a two-judge Bench, should govern this case. The decision relied on is in the case of CIT v. Sugauli Sugar Works (P.) Ltd. [1999] 236 ITR 518. It may be noticed at the outset that that judgment, unfortunately does not refer to the decision rendered by the larger Bench in the case of CIT v. T. V. Sundaram Iyengar and Sons Ltd. [1996] 222 ITR 344 (SC). In that case, the assessee therein, had in the assessment year 1965-66, transferred certain amounts out of the suspense account running from 1946-47 to 1948-49 to the capital reserve account. The Income-tax Officer had found that part of the amount so transferred was with reference to the deposits and advances which had been paid back and included the balance under section 41 of the Act in the total income of the assessee. The Tribunal, however, accepted the assessee's contention that it is a unilateral entry in the accounts and would not bring the matter within the scope of section 41(1) of the Act. The High Court agreed with the Tribunal, and the decision of the High Court was upheld by the apex court. It was observed by the court that the mere fact that the assessee has made an entry of transfer in his accounts unilaterally will not enable the Department to say that section 41 (1) of the Act would apply, as the sine qua non for the application of section 41 of the Act was that the assessee should have obtained a benefit by virtue of remission or cessation of the trading liability.

We are now confronted with two rulings of the apex court which are apparently contradictory. In this situation, we must prefer the one rendered by a larger Bench. It has been held by the Supreme Court that decisions of larger Benches bind even Benches of smaller strength within the Supreme Court. Moreover, the decision rendered in the earlier case by the three-judge Bench was with reference to a question which is almost identical to the one we are required to consider. The court held therein that when the assessee itself had treated the money as its own money, and taken the amounts to its profit and loss account, and there is no explanation from the assessee as to why it did so, if it was somebody else's money, commonsense demands that the amount should be treated as income of the assessee. The facts of this case being practically identical to the facts of the case of T. V. Sundaram Iyengar and Sons Ltd. [1996] 222 ITR 344 (SC) and that decision having been rendered by a larger Bench, we are bound by that judgment. We answer the question referred to us in favour of the Revenue, and against the assessee.

The second question is as to whether the Tribunal was right in law in allowing relief under sections 32A, 80J and 80HH for the income from tyre retreading unit, treating it as industrial undertaking. This court has already held in the case of CIT v. Madurai Pandian Engineering Corporation Ltd. [1999] 239 ITR 375 that retreading did not amount to the production of a new article entitling the assessee to the relief under sections 80J and 80HH of the Income-tax Act. In so holding, this court followed the decision of the Supreme Court in the case of Cheriyan (P. C.) v. Mst. Barfi Devi [1980] AIR 1980 SC 86. That decision squarely applies to the facts of this case. We answer the second question in favour of the Revenue, and against the assessee.

The third question referred to us is as to whether the Tribunal was right in law in holding that the assessee was entitled to deduction under section 80HH of the Act in respect of miscellaneous income and interest on deposits treating them as receipts derived from industrial undertaking. This court in the case of Fenner (India) Ltd. v. CIT (No. 2) [2000] 241 ITR 803, has held that scrap materials which had a saleable value, and which were a by-product of the manufacture of other rubber articles, when sold and resulted in an income to the assessee had a direct nexus with the industrial undertaking, and that the profit from the sale of scrap materials was eligible for deduction under section 80HH of the Act. In the light of that judgment, we must hold that in respect of the miscellaneous income earned from the sale of scrap, the assessee was entitled to the benefit of section 80HH of the Act. In so far as interests on deposits are concerned, such interest cannot be regarded as income derived from the industrial undertaking, and it has already been so held by this court in the case of CIT v. Pandian Chemicals Ltd. [1998] 233 ITR 497. We, therefore, answer the second part of that question regarding interest on deposits by holding that such interest is not interest derived from the industrial undertaking, and does not qualify for deduction under section 80HH of the Act.

The last question referred to us is as to whether the Tribunal was right in law in holding that the cost of the building under construction was also to be included for the purpose of working out the capital employed while deter mining the deduction under section 80J of the Act. This question is required to be answered in favour of the assessee in the light of the decision of this court in a case to which the assessee itself was a party, viz., CIT v. Sundaram Indus tries Ltd. [1999] 240 ITR 335, wherein, a similar question was answered in favour of the assessee. That question is answered in favour of the assessee. Parties to bear the respective costs.

 

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