1992-VIL-163-ITAT-

Equivalent Citation: ITD 044, 091,

Income Tax Appellate Tribunal MADRAS

Date: 28.08.1992

V.D. SWAMI & CO. LTD

Vs

DEPUTY COMMISSIONER OF INCOME-TAX.

BENCH

Member(s)  : T. N. C. RANGARAJAN., R. N. PURI.

JUDGMENT

Per Shri T.N.C. Rangarajan, Vice-President ---- These appeals relate to the computation of the income of the assessee for the assessment years 1985-86 and 1986-87.

2. For the assessment year 1985-86, the main point in dispute is with reference to the claim for deduction of bad debts amounting to Rs. 8,20,107. The assessee had been appointed by the Indian Petrochemicals Corporation Ltd. (hereinafter referred to as 'IPCL') as a distributor for its goods. While the assessee was entitled only to a commission on the sale of the goods on consignment basis, the assessee had the responsibility to stock the goods and deliver the same and also collect the proceeds and remit that to IPCL. In 1981 one Mr. B. Abdul Majid started to buy the goods and initially made payments on time. The assessee had an internal instruction to its staff that credit supply should not exceed Rs. 2 lakhs. However, in contravention of those instructions, the Sales Officer of the assessee named P. Gopal Rao allowed C. Selvaraj, Proprietor of Kohinoor Plastics and B. Abdul Majid, Proprietor of Oriental Plastics to purchase goods of the value of Rs. 8,20,107 in different names at a small figures on credit. Thereafter, when they defaulted, the assessee had to pay the value of the goods to IPCL according to the indemnity undertaken while pursuing remedies for recoveries from these persons. When confronted, these persons admitted that the transactions had been effected in contravention of the instructions given to the staff and promised to make good the amount. However, the cheques issued by them bounced. The assessee gave a criminal complaint on 25-3-1982 and thereafter a suit also was filed on 10-10-1984. In the meeting of the Board of Directors held on 28-6-1982, the Managing Director explained the situation and the Board decided to pursue the legal proceedings. However, in the meeting held on 30-7-1985 the Board approved the decision of the Managing Director to write off this amount. It is stated that this was on the basis of a detailed note showing that there was no possibility of recovering any amount from these persons. However, the actual note is not available as it is stated to have been untraceable due to lapse of time. The Assessing Officer was of the view that the debt could not be considered to have become bad since the suit was pending and in the alternative since the assessee was aware of the position in 1982 itself, there was no reason why it should have been written off in this year. He accordingly disallowed the deduction. On appeal, the CIT(Appeals) was also of the view that it cannot be allowed as a deduction merely because it was written off in this year when the loss had occurred in 1982.

3. In the further appeal before us it was contended on behalf of the assessee that the assessee had merely to believe that there was no chance of recovery in spite of having filed a suit and therefore, the assessee had to write off the amount in this year. It was pointed out that even if it is written off in the earlier year 1982, this being the first year in which taxable income was available, the deduction could in any way be given only in this year. On the other hand, it was contended on behalf of the revenue that this cannot be regarded as a bad debt but only a business loss which occurred in 1982 and could not, therefore, be allowed in this year. In the alternative, it was submitted that considering it a bad debt since the litigation was pending, the claim was premature.

4. We have considered the submissions of both sides on this issue and we have perused the relevant material on record, we find that though the genesis of the transaction could be granted as a business loss because the assessee had to pay the amount due on consignment basis to IPCL, such loss would be converted into a trade debt as soon as the purchasers agreed to reimburse the assessee. There is material on record to show that the assessee was negotiating with them and they had agreed to pay the amount and even issued cheques which however bounced. That was the reason why the assessee had to make a criminal complaint as well as filed a suit. Subsequently, the assessee found that there was no possibility of recovering the money and accordingly wrote off the amount in this year. The real question, therefore, is whether the decision of the assessee to write off the amount in this year could be regarded as an honest judgment on the material available. We find nothing on record to show that the decision was not a bona fide decision. The revenue pointed out the fact that the assessee had filed a suit only on 10-10-1984 and, therefore, it was too early for the assessee to have written off the debt on 31-3-1985. But as pointed out by the Bombay High Court in the case of Jethabhai Hirji and Jethabhai Ramdas v. CIT [1979] 120 ITR 792 the mere fact that legal proceedings continued does not necessarily lead to the conclusion that the write off was improper or lacked bona fides. The other point stressed by the revenue was that the assessee was having a tax advantage in writing off the debt this year. We do not see anything wrong with this because a prudent and commercial decision would also include as a relevant fact possibility of tax mitigation. It is after all a notorious fact that civil suits take decades to be decided and it may not be wise decision on the part of any one to await the outcome of the civil litigation for writing off a bad debt. On the other hand, the revenue has nothing to lose because as and when any amount is recovered, it will have to be shown as income and in the case of the assessee, which is a company, the tax rate being the same year after year, there would not be any loss to the revenue either. In the circumstances, it would unreasonable to charge the assessee of having written off the debt prematurely. We are, therefore, satisfied that there was no mala fides in writing off the bad debt and we accordingly allow the deduction of bad debt in computing the total income.

5. to 8. [These paras are not reproduced here as they involve minor issues.]

9. The second issue is whether the expenditure incurred for purchase of computer was eligible for investment allowance under section 32A. The Assessing Officer was of the view that the computer must be regarded as an office appliance as defined under the Explanation to the Eleventh Schedule and hence it was not eligible for investment allowance. The CIT(Appeals) agreed with him by noting that the computer was admittedly installed in the head office and stores information in respect of the business activities of the assessee and could not therefore be exclusively used in any industrial undertaking of the assessee.

10. Before us it was contended on behalf of the assessee that the computer was used for preparation of work schedule for the erection contracts of the assessee which had been accepted as an industrial activity. It was submitted that even though it might have also been used for salary statement etc., it was in essence utilised as a management information system with regard to the industrial activity of the assessee. It was submitted that such other use of the computer will not stand in the way of its main use in the industrial activity. On the other hand, it was contended on behalf of the revenue that the computer, as long as it is not directly used in the manufacture of an article could not be regarded as a plant eligible for investment allowance but only as an office appliance, is denied such an allowance by the section itself.

11. We have considered the submissions on this issue. Section 32A states that plant and machinery owned by the assessee and is wholly used for the purpose of the business of the assessee shall be eligible for investment allowance. But the proviso states that no deduction shall be allowed in respect of any machinery or plant installed in any office premises and any office appliance. The other condition is that the plant should be used in the business of construction. manufacture or production of any article. The Explanation to item 22 which is office machines in the Eleventh Schedule, says that the expression " office machines and apparatus " includes all machines and apparatus used in offices for doing office work, data processing and transmission and reception of messages. In the circumstances, it is difficult to say that the computer purchased by the assessee is not an office machine since it has been used for data processing. It is to be noted that Eleventh Schedule itself refers to section 32A. Moreover, even if it is regarded as a machinery or plant, it was to be denied the allowance if it is installed in the office premises. Since the computer was admittedly installed in the office premises, the assessee cannot claim investment allowance on this computer.

12. The next item for this assessment year relates to the computation of relief admissible to the assessee under section 80HHC. The assessee has a branch at Calcutta which was exclusively engaged in the export of goods. The assessee had computed a profit in that export business at Rs. 6,92,486 on a turnover of Rs. 28,30,930. The assessee claimed 50 per cent of that profit as deduction under section 80HHC and created a reserve for that amount for fulfilling the condition in that regard. The Assessing Officer was of the view that the branch could not be regarded as an independent business of the assessee and, therefore, the deduction would be available only as a proportion of the total turnover of the assessee which was Rs. 194.27 lakhs. Accordingly, he reduced the relief claimed to Rs. 1,47,393. This was confirmed on appeal. In the further appeal before us it was contended on behalf of the assessee that since the branch of the assessee was exclusively engaged in export trade and the profit of that branch was known, the deduction should be allowed under sub-section (3)(a) of section 80HHC and not under sub-section (3)(b). On the other hand, the contention of the revenue was that the business referred to in those sub-sections must be regarded as the total business of the assessee and not the business of a branch. Reference was made to the cases under section 72 where the tests of unity of control, inter-dependence etc. were applied to find out whether a business is one or many and it was submitted that the total business of the assessee must be considered to be one and the Calcutta business could not be regarded as a separate business for the purpose of section 80HHC.

13. We have considered the submissions of both sides and we have perused the provisions of section 80HHC. That section provides for the deduction of an amount not exceeding 50 per cent of the profits derived by the assessee from the export of specified goods. Sub-section (3) reads as follows :----

" 80HHC(3) for the purposes of sub-section (1), profits derived from the export of goods or merchandise out of India shall be,---

(a) in a case where the business carried on by the assessee consists exclusively of the export out of India of the goods or merchandise to which this section applies, the profits of the business as computed under the head " Profits and gains of business or profession " ;

(b) in a case where the business carried on by the assessee does not consist exclusively of the export out of India of the goods or merchandise to which this section applies, the amount which bears to the profits of the business (as computed under the head 'Profits and gains of business or profession') the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. "

The case of the assessee is that the business of the Calcutta branch consisted exclusively of export out of India and therefore that should be regarded as business unit failing within the scope of sub-section (a). The case of the revenue is that the business carried on by the assessee is the entire business of the company, the Calcutta unit being only a branch and, therefore, sub-section (b) should be applied. In order to understand the purpose of this provision, we may refer to the speech of the Finance Minister. In his Budget Speech for 1985-86 (152 ITR St. 76 at 82) the Finance Minister said :

" It is necessary to provide our exporters with requisite resources for modernisation, technological upgradation, product development and other activities with a view to raising their efficiency and productivity not only in the export sector but also in the economy as a whole. In view of these considerations, I propose to replace the tax concession under section 80HHC of the Income-tax Act by a new provision. Under the new provision, exporters will be entitled to a deduction of an amount, not exceeding 50 per cent of their export profits, carried to a reserve account to be utilised for the purposes of their business. "

Obviously, the intention was to give a boost to exports and the relief was to be 50 per cent of the export profits. On a purposive construction of this section, it would appear that sub-section (a) would apply where the export profit is easily identifiable. If such identification is not possible, then sub-section (b) enables the grant of proportionate relief. In other words, the relief is to be made under sub-section (a) and only when it is not possible the relief is to be given under sub-section (b). Contrary to this purpose, the authorities below have invoked sub-section (b) for the purpose of reducing the relief available even though the export profit is ascertainable in respect of the export business of the assessee. It was pointed out on behalf of the revenue that in other sections, such as 80J there was a reference to the industrial undertaking which identified a unit of the composite business of the assessee as being independently eligible for relief and in the absence of such an identification of a business unit for relief under section 80HHC, it was only the composite business that should be considered as being referred by the expression " business carried on by the assessee " in this section. It was also pointed out that the same expression " business carried on " appears in section 72 where definite tests are available to identify a separate business and if those tests are applied a branch business cannot be regarded as a separate business. We are unable to accept this contention of the revenue because the meaning of an expression has to be understood in the context in which the expression appears even though it may be the same. For the purpose of section 72 the meaning would be the entire business carried on by the assessee since it is concerned with the carry forward of a loss incurred in the business which can be allowed to be set off only if the same business is continued in the subsequent year. But in the context of section 80HHC the intention is to identify the export profit and we must therefore consider the unit which carries on such export activity to be the business in respect of which the profit is to be computed in accordance with the provisions of the Act. In fact, a reference to other sections such as 80J would even support the view that just as an industrial undertaking is independently considered for computation of the profit therefrom for relief under that section, the export business is to be identified as a separate unit for the purpose of section 80HHC also as it is only a method of ascertaining the profits of that particular business to which a relief is to be given. These sections are welfare measures intended to be carried out in full and not to be curtailed by restrictive construction. We are satisfied that the assessee falls within the scope of sub-section (3)(a) because the turnover and profit is easily ascertainable and consequently it is not the case where recourse had to be made under sub-section (3)(b) for the purpose of granting relief.

14. The revenue pointed out that the computation of the profit by the assessee has not taken into account any proportion of the over-head expenditure incurred in the head office and therefore the relief may have to be recomputed. This is a point which has not been taken at the earlier stages and, therefore, there is nothing on record to find out whether when there was a separate staff for the export business and except for the existence of a Head office, its contribution to the export activity is unknown. We, therefore, leave it to the Assessing Officer to verify the computation before granting the allowance under sub-section (3)(a) of section 80HHC.

15. to 18. [These paras are not reproduced here as they involve minor issues.

 

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