A deduction u/s 37 is sustainable only if it is made for the purposes of the business or even incidental to the business: Delhi High Court

Matter: M/s Pragati Constructions Co. v. Dy.CIT, decided on 31 May, 2011

Assessment Year: 1989-90

Relevant Facts:

1. The assessee was was carrying on the business of construction, purchase and sale of flats. In a bid for construction of flats for the DDA, the assessee lent some money to a sister concern, Pragati Construction Co. Pvt. Ltd.(“PCL”) to the tune of Rs. 44,00,000. This money was forwarded to the DDA.

2. This money was forfeited by the DDA for non-payment of rest of the money and non construction of the flats. PCL adjusted Rs. 36,00,000 towards certain previous amounts due. A payment of Rs. 5,00,000 was effected by PCL to the assessee.

3. Finally, Rs. 31,00,000 was shown as outstanding amount in the assessees books after settlement and payment of certain amount by the DDA. The amount was written off as bad debts by the assessee on the receipt of a certain letter 14.12.1988 that it would not be able to return the money.

4. The AO held that the amount was never a debt but infact an advance, and therefore the same could not be written off u/s 36(1)(vii) of the Income Tax Act, 1961. The CIT(A) and Tribunal ruled in favour of the department

Question of law made under a reference:

1. Whether, on the facts and in the circumstances of the case the ITAT has erred in law in disallowing the loss of Rs 31.05 lakhs claimed by the assessee as a trading loss in its business of purchase and sale of flats?

Dismissing the appeal of the Assessee, the Hon’ble Court held that:

1. The condition, required to be fulfilled to sustain a deduction under Section 37 of the I.T. Act that the expense should be incurred for the purpose or should be incidental to the business of the assessee is not fulfilled in the instant case.

The decision is available here.

Amounts expended by an advocate for bypass surgery of his heart not allowable as expense: Delhi High Court

Matter: Shanti Bhushan v. CIT, ITR No. 230/1994, decided on 31.05.2011

Assessment Year: 1982-83

Relevant Facts:

1. The assessee filed a revised return in which he claimed expenses to the extent of Rs. 1,74,000/- for coronary surgery performed on him in Houston, USA.

2. The assessee claimed that the human heart is a plant and the expenses should be deducted as expenses u/s 31 of the Income Tax Act, 1961.

3. The AO rejected the claim of the assessee that the expenses are allowable u/s 31 or 37. The CIT (A) and the Tribunal rejected the claims of the assessee.

Question of law made under a reference:

1. Whether, on all facts and circumstances of the case, the expenses incurred by the assessee on coronary by-pass operation should have been allowed as a allowable deduction either under Section 31 or Section 37 of the I. T. Act, 1961?

Dismissing the appeal of the Assessee, the Hon’ble Court held that:

1. It is important that in order to claim deduction for expenses incurred in the repair of the plant that the same be reflected in the balance sheet of the assessee. The heart was not a part of the balance sheet.

2. A heart is not the ‘tool’ for an advocates business and therefore, it is not a plant u/s 31 of the Income Tax Act, 1961.

3. The amount used for the surgery is not used wholly and exclusively for the purposes of the business.

The decision is available here.

Delhi High Court: Coating of Titanium with oxides of noble metals is manufacture u/s 80-IA

M/s Titanor Components Ltd. v. CIT & Anr, on 4 February, 2011

ITA No. 24/1999

Assessment Year: 1994-95

Question/s before the Hon’ble Court:

(i). Whether coating with oxides of Noble Metals on Titanium Metal Electrode / Anode bringing about a change in its character and user for making it fit for use in the production of chlorine and caustic soda in an electrolytic process is "manufacture" or "production" of "article" or "thing" within the meaning of section 80-IA(2)(v) of the Income Tax Act, 1961?

(ii). Whether the conclusion, drawn by the Income Tax Appellate Tribunal that by coating electrode or titanium anodes the appellant was not "manufacturing" or "producing" an "article" or "thing" within the meaning of section 80IA(2) of the Income Tax Act, 1961, is erroneous being (a). Contrary to mandatory provision of section 80IA;

(b). Contrary to and inconsistent with the evidence on record?

Relevant facts: The assessee was required to coat the titanium substrates numbering 1212 at a total cost of Rs 6,42,84,480/-. The per square metre cost of coating titanium substrates was pegged at Rs 19,500/-. Importantly, the cost agreed to did not include excise duty which was required to be reimbursed by UHDE. Furthermore, the assessee was also obliged to dispatch the coated titanium substrates to another company, i.e., one Alpha Label India Ltd (hereinafter referred to as Alpha) alongwith necessary documentation, which included, the excise gate pass; so as to enable the said entity from claiming MODVAT credit in respect of the excise duty. Evidently, Alpha was required to undertake further fabrication work to manufacture "membrane cell elements". It is not disputed that the assessee executed the contract arrived at between itself and UHDE.

The assessing officer was evidently of the view that the deduction under Section 80IA of the I.T. Act was not available to the assessee as the "process" whereby, the titanium substrates were coated by the assessee did not constitute "manufacture" within the meaning of the said provision.

Upholding the appeal of the assessee, the Hon’ble Tribunal held that:

Para 12.1: “It is trite law that only that process is recognized as constituting manufacture which results in emergence of a distinct article on being subjected to either treatment, or labour or even manipulation.”

Para 12.2: “But for the purposes of imposition of excise duty it is not enough that manufacture takes place, it should result in production of an article which is marketable though not necessarily marketed.”

Para 13: “As in the Central Excise and Salt Act, 1944, in the I.T. Act there is no definition of the word manufacture. The expression industrial undertaking, however, has been defined inter alia in the explanation to Section 33B of the I.T. Act as any undertaking which is mainly engaged in the manufacture or processing of goods. The Tribunal in this case has, returned a finding to the effect that the assessee has been treated as an industrial undertaking by the relevant authorities. However, after accepting that the assessee is an industrial undertaking; (and there being no dispute that the only activity in which the assessee is engaged in is: coating titanium substrates with noble metal oxides) the Tribunal, curiously, went on to say that what was produced was not a distinct article ignoring the evidence on record.”

Para 14.1: “In our view the Tribunal had to employ the test of fitness in ascertaining whether the process employed by the assessee rendered the free issue material supplied to it (whether referred to as titanium substrates or a titanium metal anode), fit for use in the industry.”

The decision is available here.

Bombay High Court: Deduction u/s 80HHC available at the gross total income and not at profits reduced by section 80-IA(1) but not to exceed 100%.

Associated Capsules Private Limited, Mumbai v. DCIT decided on 10 Jan 2011

Assessment Year: 2003-04

Substantial question of law before the Hon’ble Court: Whether the Tribunal was justified in holding that Section 80IA(9) of the Income Tax Act, 1961 mandates that the amount of profits allowed as deduction under Section 80IA(1) of the Act has to be reduced from the profits of the business of the undertaking while computing deduction under any other provisions under heading ‘C’ in Chapter VIA of the Income Tax Act, 1961?

Relevant facts: The assessee is in the business of manufacture of Empty Hard Gelatin Capsules and PVDC Capsules. For the above business, the assessee has four industrial undertakings at Kandivali, Mumbai and two industrial units at Pune. Out of the above industrial undertakings / units, one undertaking at Kandivali, Mumbai and one unit at Pune are eligible for deduction under Section 80IA and Section 80HHC of the Income Tax Act, 1961. The assessee claimed deduction under Section 80IA at 30 per cent of the profits and gains derived from the business and deduction under Section 80HHC at 50 per cent of the profits derived from the export of goods or merchandise determined on the basis of the formula set out in Section 80HHC of the Act.

Allowing the appeal of the assessee, the Hon’ble Court held that:

(para 39): In the result, we hold that Section 80IA(9) does not affect the computability of deduction under various provisions under heading ‘C’ of Chapter VIA, but it affects the allowability of deductions computed under various provisions under heading ‘C’ of Chapter VIA, so that the aggregate deduction under Section 80IA and other provisions under heading ‘C’ of Chapter VIA do not exceed 100% of the profits of the business of the assessee…Thus, the object of Section 80IA(9) being not to curtail the deductions computable under various provisions under heading ‘C’ of Chapter, it is reasonable to hold that Section 80IA(9) affects allowability of deduction and not computation of deduction. To illustrate, if Rs.100/is the profits of the business of the undertaking, Rs.30/is the profits allowed as deduction under Section 80IA(1) and the deduction computed as per Section 80HHC is Rs.80/, then, in view of Section 80IA(9), the deduction under Section 80HHC would be restricted to Rs.70/, so that the aggregate deduction does not exceed the profits of the business.

The judgment available here.

4. Ajanta Pharma v. CIT on 9th September, 2010

Question of Law: “Whether for determining the "book profits" in terms of Section 115JB, the net profits as shown in the P&L Account have to be reduced by the amount of profits eligible for deduction under Section 80HHC or by the amount of deduction under Section 80HHC?”

The Hon’ble Court held at para 10 that:

"If the dichotomy between "eligibility" of profit and "deductibility" of profit is not kept in mind then Section 115JB will cease to be a self-contained code. In Section 115JB, as in Section 115JA, it has been clearly stated that the relief will be computed under Section 80HHC(3)/(3A), subject to the conditions under sub-clauses (4) and (4A) of that Section. The conditions are only that the relief should be certified by the Chartered Accountant. Such condition is not a qualifying condition but it is a compliance condition. Therefore, one cannot rely upon the last sentence in clause (iv) of Explanation to Section 115JB (subject to the conditions specified in sub-clauses (4) and (4A) of that Section) to obliterate the difference between "eligibility" and "deductibility" of profits as contended on behalf of the Department.”

The decision can be accessed here.