1986-VIL-68-ITAT-DEL

Equivalent Citation: ITD 019, 102,

Income Tax Appellate Tribunal DELHI

Date: 14.03.1986

JK. SYNTHETICS LTD.

Vs

INCOME TAX OFFICER.

BENCH

Member(s)  : G. KRISHNAMURTHY., S. P. KAPUR.

JUDGMENT

Per Shri Ch. G. Krishnamurthy, Senior Vice President --- 1 to 7. [These paras are not reproduced here as they involve minor issues.]

8. In the next ground No. 5 objection was taken to the disallowance of legal expenses of Rs. 1,19,388, which sum was disallowed by the authorities below by applying the provisions of section 80VV of the Income-tax Act, 1961 ('the Act'). A total sum of Rs. 1,81,588 was incurred by the assessee under this head out of which the sum of Rs. 1,76,588 was disallowed by the ITO by applying the provisions of section 80VV. The details of this sum were furnished by the ITO and they are also given to us in the paper book from pages 136 to 142. On appeal before the Commissioner (Appeals) two major contentions were raised. One was that this sum disallowed included retainers fee paid of Rs. 56,500 and that should not have been disallowed as it was not an amount paid with reference to any particular proceeding before any income-tax authorities or a Tribunal or a Court. Secondly the prohibition contained in section 80VV was with reference to 'per proceeding' and not with reference to 'all proceedings'. If the amount paid per proceeding is Rs. 5,000 or less, that should be allowed and the amount paid must not be aggregated so as to apply the ceiling of Rs. 5,000 mentioned therein. The Commissioner (Appeals) accepted the first proposition but disallowed the latter and on this basis reduced the disallowance to Rs. 1,19,388. Now the contention before us is as per Shri Unni the language of section 80VV must be so interpreted as to advance the purpose of legislation and not to defeat it, that Legislature never desired that genuine expenditure incurred for the purpose of business should be disallowed although certain limits were prescribed under the Act and that those limits provided for under section 80VV must be construed in the practical sense. So construed, he argued that whenever a complication in income-tax matters arise either before an ITO or before a first appellate authority or a second appellate authority or a High Court different persons would be engaged and different amounts of fees might have to be paid, each being a distinct proceeding before a distinct authority. The aggregate disallowance referred to in section 80VV must be read as confining to the payment made before each authority and that there is no warrant to interpret section 80VV that the fee paid for all proceedings before all authorities must be aggregated so that if the aggregate happened to be in excess of Rs. 5,000 the excess could be disallowed. This is neither just nor the legislative intent. He. therefore, argued that the Commissioner (Appeals) was wrong in aggregating all the proceedings for the purpose of finding out the excess referred to in section 80VV. A large industrial house like the present one will naturally encounter several problems with reference to settlement of its income-tax liabilities depending upon the complexity and enormity of the problem, eminent counsels may have to be engaged. Sometimes the proceedings for several years may be taken up by an appropriate authority in one year and the fees paid may be in excess of the aggregate referred to in section 80VV though it related to several years and if on the interpretation placed by the Commissioner (Appeals) on section 80VV the entire amount is to be disallowed then it will spell disaster in the sense that the expenditure incurred in a particular year for a particular purpose will get disallowed, which could never be the intention of the Legislature. He, therefore, argued that an interpretation must be placed upon section 80VV which would permit the allowance of expenditure per proceeding before each authority or all proceedings before each authority and not in the manner suggested by the Commissioner (Appeals). This was opposed tooth and nail by the other side. Shri Sridharan appearing for the revenue contended that the most important words in section 80VV are 'any expenditure incurred by him in the previous year' in the main section and 'in any case' in the aggregate used in the proviso. Simply, he stated, the section 80VV means any expenditure incurred by an assessee in the previous year if it exceeds in the aggregate in any case the sum stated therein, namely, Rs. 5,000, the excess shall not be allowed as a deduction. This broad wording, which has got the widest amplitude would cover all proceedings before all authorities the parameters being the expenditure incurred in a previous year not exceeding in the aggregate of Rs. 5,000. If, therefore, an assessee incurs any expenditure in the previous year before any income-tax authority or the Tribunal or any Court relating to the determination of any liability under this Act by way of tax, penalty or interest, no deduction in any case shall be allowed in excess of the aggregate of Rs. 5,000. This wording of the section does neither suggest nor permit nor bear the interpretation sought to be placed upon it, namely, that the aggregate must be confined to the per proceeding or all proceedings before each authority referred to therein. This interpretation would be rewriting the section and not interpretation of the section. He, therefore, suggested that the Commissioner (Appeals)'s interpretation must be accepted as the correct and proper one. Section 80VV, which is contested, was inserted by the Taxation Laws (Amendment) Act, 1975 with effect from 1-4-1976 and is in the following terms (even though they underwent a change with which we are not concerned in this appeal):

"80VV. In computing the total income of an assessee, there shall be allowed by way of deduction any expenditure incurred by him in the previous year in respect of any proceedings before any income-tax authority or the Appellate Tribunal or any Court relating to the determination of any liability under this Act, by way of tax, penalty or interest:

Provided that no deduction under this section shall, in any case, exceed in the aggregate five thousand rupees."

This section seeks to put a limit on the allowance of expenditure in respect of expenses incurred in connection with proceedings under the Act before any income-tax authority or the Tribunal or any Court relating to the determination of any liability under the Act by way of tax, penalty or interest. The controversy arose by the words used in the proviso. The innocuous looking proviso uses the expression 'in any case'. Shri Unni argues that this expression 'in any case' must be interpreted to mean in each proceeding whereas Shri Sridharan contends that this expression 'in any case' be interpreted as in any case. There is no warrant for the view that in any case must be read as in each proceeding. Shri Unni's point is that the word 'case' is equivalent to proceeding used in the main section whereas Shri Sridharan's case is that 'in any case' means 'in any circumstances' meaning thereby that in all circumstances the aggregate should not exceed Rs. 5,000 in respect of this expenditure. The expression 'case' as a noun means 'instances' or 'actual state of affairs'. It will also include 'position, circumstances in which one is plight'. In legal parlance case may mean 'cause, suit, for trial, statement of facts in cause sub-judice, drawn up for higher Court's consideration'. A cause that has been decided and may be cited like a leading case. It may also mean a sum of argument on one side like that is our case or make out one's case. Joined with the proposition 'in' it means 'in the event that'. 'In any case' is defined in the dictionary as 'whatever the fact is' or 'whatever may happen'. Now the meaning ascribed to it as a noun all by itself would not be of any use to us because the entire expression 'in any case' has to be understood which means whatever the fact is or whatever may happen. Substituting this meaning of the expression in the proviso to section 80VV it means that 'provided that no deduction under this section shall, whatever the fact is or whatever may happen, exceed in the aggregate five thousand rupees.' Read in this manner it becomes quite clear that the aggregate of Rs. 5,000 referred to in section 80VV refers to total expenditure incurred by an assessee in a previous year which are the implicit outer limits build into the section whatever may be the number of proceedings that might take place in a previous year. The Legislature's intent appears to be to limit the expenditure to be allowed under this head taking the previous year as a unit or a proceeding as a unit. If a proceeding as a unit is taken, supposing there are ten proceedings in a previous year before an ITO or an appellate authority or a Court, the total amount allowable in the aggregate would be Rs. 5,000. That kind of interpretation in our considered view would defeat the very purpose of the legislation. The Legislature wanted to put a limit on the allowance of this expenditure and that was the reason why section 80VV was enacted. There is also some history behind the enactment of this section. Before the section came on the statute book except under the authority of the Supreme Court no allowance for expenditure incurred for appellate proceedings for settling tax matters was being allowed as an expenditure incurred as for the purpose of business. After the advent of the Supreme Court decision in CIT v. Birla Cotton Spg. & Wvg. Mills Ltd. [1971] 82 ITR 166 there was no limit for the allowance of this expenditure and it appeared as if any amount could be claimed as expenditure for this purpose provided the expenditure was incurred in a year for the determination of the tax liability. The Legislature desired that there should be a limit on the allowance of this expenditure. That was why section 80VV was enacted with a view to limit the expenditure to Rs. 5,000 in a year. That was why section 80VV opened by saying that in computing the total income of an assessee there shall be allowed by way of deduction any expenditure incurred by him in the previous year in respect of any proceeding..., i.e., the expenditure must be incurred, the limit being within the previous year. So any expenditure incurred in the previous year in respect of any proceeding will have to be allowed by way of deduction under the main section. The proviso quantified the limit of expenditure by saying that such expenditure shall in any case would not exceed Rs. 5,000. Thus, the expression 'in any case' does not in our opinion mean 'in any proceeding' but in the context it means 'in no case'. The word 'any' also means used in a negative expression 'no' in which case it means in no case. We are, therefore, of the opinion that the expenditure to be allowed under this section is not limited to a particular proceeding but to all the proceedings put together in a particular previous year. Considering in this way, we are of the view that the disallowance of the expenditure cannot be said to be improper. It is not the case of the assessee before us that any portion of this expenditure of Rs. 1,19,388 was not in respect of proceedings before the income-tax authorities, to whatever year they might relate and the undenied fact is that that was the expenditure incurred in this year. We, therefore, agree with the view expressed by the Commissioner (Appeals) and confirm this disallowance.

9 to 11. [These paras are not reproduced here as they involve minor issues.]

12. The next dispute relates to the disallowance of excise duty on polymer chips of Rs. 35,80,083. This is the duty levied by the excise authorities relating to the manufacture of polymer chips during the period 1-7-1967 to 30-6-1968. The ITO did not allow this claim on the ground that this liability did not relate to the accounting year or arise. In further appeal the Commissioner (Appeals) confirmed the disallowance. The further facts that are necessary to appreciate this controversy are : The assessee-company received a demand notice from the excise authorities sometime in 1967 under which the authorities demanded a sum of Rs. 66,34,138 relating to the period from 1-7-1967 to 30-6-1968. For the assessment year 1967-68 the demand worked out to Rs. 30,54,054 which was duly provided for in the accounts. It was also allowed as a deduction in that year. The balance amount of Rs. 35,80,084 was provided for in the profit and loss appropriation account for the year ending 30-6-1969. Since the provision was made in the appropriation account, naturally no deduction could have been claimed in the profit and loss account. Subsequently, this demand was reduced by the Central Excise authorities by Rs. 10,40,695 which was duly taken credit by the assessee in the profit and loss appropriation account. This happened in the assessment year 1972-73. The assessee-company simultaneously contested the levy of excise duty on polymer chips by filing a writ petition in the Punjab and Haryana High Court. The Punjab and Haryana High Court decided the matter sometime in August 1970 in favour of the assessee. The department then filed a special leave petition before the Supreme Court which was admitted. As a consequence of the order passed by the Punjab and Haryana High Court, the entire demand raise on the assessee got quashed. We are not given the order passed by the Punjab and Haryana High Court but we are told so. After the judgment of the Punjab and Haryana High Court, the assessee returned the demand notice to the excise authorities. Sometime in July, 1975 the assessee-company wrote to the excise authorities about the state of the demand as to whether it existed or cancelled. The excise authorities informed the assessee that the demand continued to exist and was not wiped out at all because of perhaps the admission of the special leave petition in the Supreme Court. After the receipt of this from the Central Excise authorities the assessee-company claimed that this amount was allowable as a deduction in computing the income for the assessment year 1976-77 under appeal on the ground that the letter of the Central Excise authorities informing the assessee that the liability continued to subsist amounted to creation of the liability to pay the excise duty and that creation took place in the assessment year under appeal. The Commissioner (Appeals) considered that the letter written by the Central Excise Authorities informing the assessee that the demand was still outstanding did not amount to creation of demand in the accounting year. For this reason, he confirmed the disallowance made by the ITO. It is against this order that the present appeal was filed by the assessee contending that the assessee is entitled to the deduction of this sum. We have thought over the matter very carefully particularly in the light of the decision of the Allahabad High Court in the case of J.K. Synthetics Ltd. v. O.S. Bajpai, ITO [1976] 105 ITR 864, which was a case relied upon by Shri Unni as supporting his view which happened to be the assessee's own case. The learned counsel for the assessee Shri Unni while clarifying the position as to why a letter was written on 3-5-1975 and was that not abrupt, pointed out that the decision of the Allahabad High Court in the assessee's own case was delivered on 17-7-1975 holding that a demand continues to subsist if an appeal is filed against the judgment of the Judge and it was that decision that prompted the assessee by providing the necessary legal information to write to the Central Excise authorities about the existence of the demand. What he wanted to convey is the Allahabad High Court in this judgment clarified that even though a single Judge of a High Court cancels a demand holding it to be ultra vires and if a letters patent appeal has been preferred and is pending, that appeal destroys the finality of the decision of the single Judge which amounted to continuing the liability. The High Court also pointed out in that judgment that apart from the fact that an appeal was filed against the decision of the single Judge, the excise department was still raising demands against the company for the excise duty in spite of the decision, which meant according to Shri Unni that if demand was raised by the excise department even after the decision of the High Court was given, the demand continues to subsist and in this case the letter written by the Central Excise Superintendent had the effect of reviving the demand and since the revival had taken place in the accounting year under appeal, it must be held to be a liability allowable under the Act. It is here we are unable to walk along with him. It is no doubt true that the Punjab and Haryana High Court had decided the writ petition in favour of the assessee. It is also true that a special leave petition was filed by the department in the Supreme Court and it was admitted but the effect of admission of the special leave petition will not create the demand. Here unlike in the case before the Allahabad High Court the Central Excise authorities only informed the assessee that the demand was still outstanding. That does not mean that the liability to pay the excise duty arose or was created in the accounting year by that letter. The demand that was raised in the assessment year 1967-68 or earlier or afterwards continues to exist. This is not to say that the demand was raised for the first time. In the case before the Allahabad High Court the excise department had been claiming excise duty from the assessee on polymer chips and the company had been making provision for the payment of the duty every year since 1964-65. The claim for the deduction of the amount by the assessee was consistently disallowed by the ITO but was allowed on appeal by the AAC as a result of which a total sum of Rs. 2.87 crores was allowed to the assessee as deduction in the assessment years 1964-65 to 1971-72. On a similar basis the assessee-company made a provision of Rs. 2.08 crores in respect of its liability for excise duty for the previous year in question, namely, the current liability. Again we emphasise that the provision made was for the current liability though based upon the previous calculations. The assessee-company filed a writ petition in the Delhi High Court challenging the levy to excise duty on polymer chips. This petition was allowed by a single Judge on 28-8-1970. Basing upon this judgment, the ITO disallowed the claim in respect of the current liability and also treated the sum of Rs. 2.87 crores allowed in the past as income under section 41(1) of the Act. With regard to the application of section 41(1) the question arose before the High Court whether in those circumstances it could be said that the liability of the assessee to pay excise duty ceased to exist because for section 41(1) to apply the basic requirement of law is that there must be a cessation of liability. The High Court held that since an appeal against the single Judge judgment was filed and as there was a possibility of an appeal to the Supreme Court later and as the excise department was still raising demands, it could not be said that there was a cessation of liability so as to attract the provisions of section 41(1). The High Court said that in those circumstances the liability did not cease to exist. When it came to the question of disallowance of current liability, the High Court found that the demand for current liability was raised on different notifications and held that since the assessee was following mercantile system of accounting, it can legitimately claim deduction in respect of a business liability even if such liability was not quantified or paid or that such liability was being disputed. Following the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 the High Court held that the assessee was entitled to claim deduction for the current liability for which provision was made in the accounts. But the position here is not the same as obtaining for that year before the High Court. Here the question is whether the liability that related to the assessment year 1967-68 ceased to exist with the judgment of the Punjab and Haryana High Court declaring the levy to be unlawful and whether that liability got revived when the Superintendent of Central Excise informed the assessee that the liability was outstanding. If we apply the principle laid down by the Allahabad High Court in the assessee's case, we cannot say that the liability ceased to exist even though there is a judgment by the High Court in its favour because a special leave petition was filed in the Supreme Court, which destroyed the finality of the judgment. Once the finality of the judgment was detached, the liability continues to exist. If the liability continues to exist, it becomes an outstanding liability to be discharged. That outstanding liability related to the assessment year 1967-68 or whatever that assessment year is, cannot become the liability of the year under appeal all because the Superintendent of the Central Excise gave a clarification. The clarificatory letter given by the Superintendent of the Central Excise cannot, therefore, have the effect of creating the liability or reviving the liability. The liability continues to exist. Therefore, the decision of the Allahabad High Court in the assessee's own case may not be of much assistance to the assessee if as a result of the Punjab and Haryana High Court judgment the liability to pay the excise duty got cancelled, then no liability, exists. If no liability exists, then a clarificatory letter given by the Central Excise Superintendent that the liability is shown as outstanding in their books, cannot also be construed as creating a liability for the first time. Thus, looked at from any angle, we find it difficult to agree that the letter given by the Central Excise authorities created the liability in the year under appeal. The liability to pay the sum got crystallised only after the judgment of the Supreme Court. If the Supreme Court upholds the view taken by the Punjab and Haryana High Court, then no liability exists and then the question of paying any amount will not arise and, therefore, the question of liability, if the Supreme Court reverses the judgment of the Punjab and Haryana High Court, then the liability (sic.) gets crystallised in that year. Therefore, in the meantime the position would be that this sum represents the liability raised by the Central Excise Authorities and related to the assessment year 1967-68 or 1968-69, as the case may be, but certainly not to the year under appeal. Nor can this liability be said to be a current liability as in the case before the Allahabad High Court referred to above so as to apply the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. to say that the liability attached to the transactions of the year and under the mercantile system of accounting that liability could be said to be the liability of the year under appeal. We are, therefore, of the considered view that the assessee is not entitled to claim the benefit of the deduction of this sum and the view of the Commissioner (Appeals) cannot be said to be incorrect.

13. [This para is not reproduced here as it involves minor issue.]

14. In the next ground No. 11 the levy of interest under section 216 of the Act Rs. 6,76,500 was contested. The relevant facts are : the ITO issued a demand notice under section 210 of the Act on 5-6-1975 demanding a tax of Rs. 660.68 lakhs. On 11-6-1975 the assessee filed an estimate estimating the tax liability at Rs. 223.50 lakhs and paid the first and second instalments in accordance with that estimate. On 15-12-1975 the assessee filed another estimate of advance tax, this time estimating the tax liability at Rs. 449 lakhs and paid the tax thereon. Thus, a total tax of Rs. 449 lakhs was paid by way of advance tax as against Rs. 660.68 lakhs demanded. The ITO charged interest under section 216 on the ground that the assessee had underestimated the advance tax payable by it and thereby reduced the amount payable in the first and second instalments. The assessee in appeal before the Commissioner (Appeals) raised two grounds : one was that the assessee was entitled to an opportunity from the ITO before interest under section 216 was levied and as no such opportunity was given, the levy was opposed to the principles of natural justice. The second was that there must be material before the ITO to establish that the estimate of advance tax made by the assessee was untrue. Since no such material was disclosed or even referred to following the judgment of the Allahabad High Court in the case of CIT v. Elgin Mills Co. Ltd. [1980] 123 ITR 712, the levy of interest was bad. The Commissioner (Appeals) found against the assessee on both these counts. He found that the opportunity was given to the assessee and, therefore, that point was not available to the assessee. On the second issue even though the basis for the estimate was furnished before the Commissioner (Appeals) to show how the assessee estimated the advance tax liability, and how on that basis it could be said that the estimate was untrue, the Commissioner (Appeals) said that the assessee should have maintained some internal record to show how the income liable to advance tax was determined and since that internal record was not produced before him would hold that the estimate filed by the assessee was not a bona fide one. In the appeal filed against this order, the learned counsel for the assessee submitted that the Commissioner (Appeals) misread at the judgment of the Allahabad High Court and wrongly placed the onus on the assessee and even so the figures furnished by the assessee were not shown by any authority to be wrong or false. Without finding any defect in the basis furnished by the assessee to reject the contention of the assessee is absolutely uncalled for and unjust. Whatever internal record that the assessee has maintained was produced before the authorities. Without establishing that the assessee has got some more internal record, it is not open to the Commissioner (Appeals) to imagine the existence of some internal record and then say that that was not produced. The learned departmental representative opposed these contentions. But in our view the learned counsel's points are valid and full of substance. The assessee submitted the basis for the estimate of advance tax, which was quoted in extenso by the Commissioner (Appeals) in his order. That chart showed the actual production up to May 1975, the estimated production during the next part of the year and the actuals of production. This chart shows that the assessee did make an effort to arrive at the income for the purpose of advance tax on a rational basis. One would expect that the Commissioner (Appeals) being the first appellate authority would go into these figures to find out whether they are correct, false or made up to cover up the deficiency. This was not done at all. On the other hand, the Commissioner (Appeals) says that the assessee must have maintained some internal record without showing that one was maintained and since that internal record was not produced before him, he would not believe these figures. This in our opinion is not rational. Firstly the Commissioner (Appeals) should have pointed out mistakes in these figures and secondly, the requirement of law is that there must be material before the ITO to show that the estimate filed by the assessee was mala fide. To establish the mala fides of the assessee no attempt seems to have been made except expressing a disbelief of the assessee's contention. This, in our opinion, does not satisfy the requirement of law of establishing the mala fides of the assessee. Unless the bona fides of the assessee are shown to be mala fide, the mala fide intention of the assessee cannot be said to have been established. We are, therefore, of the opinion that the Commissioner (Appeals) is not proper in insisting on the production of imaginary internal record and then deny the assessee the relief due under the Act. The Commissioner (Appeals) observed that because in the draft assessment order, the ITO directed to issue penalty notice under section 273(1) and 273(c) of the Act, that amounted to giving of opportunity to the assessee and there was no violation of principles of natural justice. We are unable to agree with this either because before a decision is reached to issue a penalty notice, opportunity must be given. Assuming that this is an opportunity, there is nothing to show when the draft assessment order was given and when it was finalised and what happened in between. This direction to issue penalty notice, in our opinion, does not amount to giving the reasonable opportunity required under the law. We are, therefore, of the opinion that the levy of interest under section 216 requires, therefore, to be relooked into. We, therefore, think that in the interests of justice, the matter should be sent back to the ITO to give proper opportunity to the assessee to explain the charge levelled against it and then to decide the issue afresh keeping in view the decision of the Allahabad High Court in the case of Elgin Mills Co. Ltd. where the Allahabad High Court observed that levy of interest under section 216 is not automatic and that it is discretionary and that the ITO must consider whether the estimate filed by the assessee was in fact as underestimate. This exercise must be gone into with regard to the figures furnished by the assessee.

15. The last ground in the assessee's appeal relates to as to what should be the rate of depreciation on machinery and plant in the case of manufacture of cement. This ground was raised by way of additional ground. This was not raised either before the ITO or the Commissioner (Appeals). There was some debate before us as to whether this ground could be admitted. In our opinion since the allowance of depreciation on cement machinery was already there before the ITO and what was being urged before us was only the enlargement of the claim, we see no reason why it should not be admitted. We also find that for the assessment year 1975-76 a similar point was raised before the Tribunal and it was admitted by it and the matter was sent back to the ITO for adjudication. The point urged before us on behalf of the assessee was that the machinery used in cement division come in contract with corrosive chemicals and, therefore, the rate of depreciation should be higher than 10 per cent allowed by the ITO. It is precisely to examine this point, the Tribunal for the assessment year 1975-76 sent the matter back to the ITO. Since we found force in the point raised by the assessee by way of additional ground, we admit the additional ground and send the case back to the ITO to examine this issue in the light of the observations made by the Tribunal respecting the assessment year 1975-76 in IT Appeal No. 439 of 1980 dated 21-4-1984.

16. In the result, the appeal is allowed in part.

 

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