GUJARAT NARMADA VALLY FERTILISERS COMPANY LTD. V. DEPUTY COMMISSIONER OF INCOME TAX

TAXAP/1113/2006

AI Insights

The case involves Gujarat Narmada Valley Fertilisers Ltd. (appellant) challenging the order of the Income Tax Appellate Tribunal, which had partly allowed the revenue's appeal regarding the withdrawal of investment allowance and depreciation for the assessment year 1993-94. The High Court examined whether the Tribunal was correct in law to allow the withdrawal of these benefits based on the cessation of some liabilities, which were claimed to be taxable under Section 41(1) of the Income Tax Act. The court found that the conditions for such withdrawal were not met and referenced decisions from the Supreme Court to support its conclusions.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 753714 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 23-12-2014
• Assessment Year: misc
• Other Referred Cases: Nectar Beverages P. Ltd. v. Deputy Commissioner of Income Tax (Assessment), Micorp Global P. Ltd. v. Commissioner of Income Tax
• Laws Referred To: Income Tax Act
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: K M PARIKH
• Assessee Lawyers: SWATI SOPARKAR
• Keywords: Depreciation; Income Tax; Investment allowance; Taxable income; Statistical Appeal
• Section: 143(3); 41(1); 155(4A)

Judgement Text

"O/TAXAP/1113/2006 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 1113 of 2006 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER =========================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ GUJARAT NARMADA VALLY FERTILISERS LTD.....Appellant(s) Versus DEPUTY COMMISSIONER OF INCOME TAX....Opponent(s) ================================================================ Appearance: MRS SWATI SOPARKAR, ADVOCATE for the Appellant(s) No. 1 MR KM PARIKH, ADVOCATE for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER Date : 23/12/2014 Page 1 of 13 O/TAXAP/1113/2006 JUDGMENT ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) 1. By way of this appeal, the appellant- assessee has challenged the judgment and order passed by the Income Tax Appellate Tribunal, Ahmadabad [ for short “the Tribunal”] in ITA No. 1130/Ahd/1998, whereby the appeal preferred by the revenue was partly allowed for statistical purposes. 2. The facts of this case are that the assessee had filed its return of income on 31.12.1993 for the Assessment Year 1993-94, declared total loss of Rs.5,09,96,806/-. The return was processed and thereafter the Assessing Officer passed order under Section 143(3) of the Income Tax Act. Against the order of the Assessing Officer, the assessee had filed an appeal before the Commissioner of Income Tax (Appeals). The CIT(A) partly allowed the said appeal for statistical purposes. 2.1. Being Aggrieved and dissatisfied with the order of the CIT(A), the revenue has filed an appeal before the Income Tax Appellate Tribunal, Ahmedabad. The Tribunal vide impugned order partly allowed the said appeal for statistical purposes. Hence, this appeal is filed at the Page 2 of 13 O/TAXAP/1113/2006 JUDGMENT instance of the assessee. 3. While admitting this appeal on 27.02.2007, the Court had formulated the following substantial questions of law:- (1) Whether in the facts and circumstances of the case the Income Tax Appellant Tribunal was right in law in holding that investment allowance granted in A.Y. 1983-84 and adjusted in A.Y. 1990-91 can be withdrawn in the year under consideration merely on cessation of some liabilities which is said to be taxable u/S 41(1) of the Act ? (2) Whether, in the facts and circumstances of the case the Income Tax Appellant Tribunal was right in law in holding that depreciation granted earlier can be withdrawn and taxed as income u/s 41(1) of the Act ? (3) Whether, in the facts and circumstances of the case the Income Tax Appellant Tribunal was right in law in enhancing the income of the appellant ? Page 3 of 13 O/TAXAP/1113/2006 JUDGMENT 4. Learned senior advocate Mr. Soparkar appearing for the appellant-assessee has drawn our attention to Section 155(4A) of the Income Tax Act and contended that the none of the conditions as enumerated in the aforesaid section have been fulfilled by the revenue. Therefore, he urged that withdrawal of benefits under Section 41(A) of the Act is required to be reversed. 4.1. Insofar as the question No.2 is concerned, he submitted that the same is concluded by the Apex Court in the case of Nectar Beverages P. Ltd. v. Deputy Commissioner of Income Tax (Assessment), reported in [2009] 314 ITR 314 in favour of the assessee and against the revenue. 4.2. Insofar as third and last question is concerned, he submitted that if question Nos. 1 and 2 are concluded in favour of the assessee, the third question of law will become academic. However, for question No.3 he has relied on the decision of the Apex Court in the case of Micorp Global P. Ltd. v. Commissioner of Income Tax reported in [2009] 309 ITR 434. 5. On the other hand, learned advocate for the respondent-revenue has supported the impugned order of the Tribunal and submitted that the Page 4 of 13 O/TAXAP/1113/2006 JUDGMENT Tribunal after appreciating the material on record has passed the impugned order, therefore, there is no germane reason to interfere with the impugned order of the Tribunal. He, therefore, urged to dismiss this appeal. 6. We have heard learned advocates appearing for the parties and perused the material on record. Before dealing with the contentions, it would be relevant to reproduce Section 155(4A) of the Income Tax Act, which reads as under:- “155(4A) Where an allowance by way of investment allowance has been made wholly or partly to an assessee in respect of a ship or an aircraft or any machinery or plant in any assessment year under section 32A and subsequently - (a) at any time before the expiry of eight years from the ends of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed, the ship, aircraft, machinery or plant is sold or otherwise transferred by the assessee to any person other than the Government, a local authority, a corporation established by a Central, State or Provincial Act or a “Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956), or in connection with any amalgamation or succession referred to in sub-section (6) or sub-section (7) of section 32A ; or Page 5 of 13 O/TAXAP/1113/2006 JUDGMENT (b) at any time before the expiry of ten years from the end of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed, the assessee does not utilize the amount credited to the reserve account under sub-Section (4) of section 32A for the purpose of acquiring a new ship or a new aircraft or a new machinery or plant (othter than machinery or plant of the nature referred to in clauses (a), (b) and (d) of the provision to sub-section (1) of section 32A for the purpose of the business of the undertaking;’ or (c) at any time before the expiry of ten years referred to in clause (b) the assessee utilises the amount credited to the reserve account under sub-section (4) of section 32A (I) for distribution by way of dividends or profits; or for remittance outside India as profits or for the creation of any asset outside India; or (iii)for any other purpose which is not a purpose of the business of the undertaking the investment allowance originally allowed shall be deemed to have been wrongly allowed, and the Assessing Officer may notwithstanding any contained in this Act, recompute the total income of the assessee for the relevant previous year and make the necessary amendment,; and the provisions of section 154 shall, so far as may be apply thereto, the period of four years specified in sub-section (7) of that section being Page 6 of 13 O/TAXAP/1113/2006 JUDGMENT reckoned;- (i) in a case referred to in caluse (a), from the end of the previous year in which the sale or the other transfer took place (ii) in a case referred to in clause (b), from the ends of the ten years referred to in that clause; (iii) in a case referred to in clause (c ), from the ends of the previous year in which the amount was utilised. Explanation:- For the purposes of clause (b), “new ship” or “new aircraft” or “new machinery or plant” shall have the same meaning as in the (explanation below sub section (2) of section 32A.” 7. On plain reading of section 155(4A) of the Income Tax Act, we find substance in the contention of learned senior advocate for the appellant-assessee that the conditions which have been enumerated in clause 4A of Section 155 of the Income Tax Act are not fulfilled by the revenue. Therefore, in our considered opinion the question No.1 raised in this appeal is required to be answered in favour of the assessee and against the revenue. Accordingly, we hold that the tribunal was not right in law in holding that investment allowance granted in A.Y. 1983-84 and adjusted in A.Y. 1990-91 can be withdrawn in the year under consideration. Page 7 of 13 O/TAXAP/1113/2006 JUDGMENT 8. Insofar as question No.2 is concerned, it appears from the record that the Tribunal has decided the appeal solely on the basis of the decision of the Bombay High Court in the case of Nectar Beverages (P) Ltd. v. Deputy Commissioner of Income Tax, 267 ITR 385. However, the said decision of the Bombay High Court has been reversed by the Apex Court in the case of Nectar Beverages (P) Ltd. v. Deputy Commissioner of Income Tax, reported in [2009] 314 ITR 314. In Paragraph Nos. 10 to 14 of the said decision, the Apex Court has held as under:- “10. At the outset, it may be noted that, by the above Finance Act, the first proviso to Section 32(1)(ii) stood deleted w.e.f. 1.4.1996. Consequently, bottles, crates and cylinders whose individual cost did not exceed Rs. 5,000/-also came to be included in the block of assets. 11. Before us, in this batch of civil appeals, we have four Civil Appeals (Civil Appeals arising out of S.L.P. (C) Nos. 8002/09 and 3064/09, Civil Appeal Nos. 356-357/06 and 5858/06) which fall in the period after 1.4.1996. The Lead Matter in this category is M/s Goa Bottling Company Pvt. Ltd. v. Asstt. Commissioner of Income Tax (Civil Appeal Nos. 356-357/06 ). That lead matter is for assessment year 1998-99. M/s Goa Bottling Company Pvt. Ltd. is a company registered under the Companies Act, 1956 and is in the business of manufacture and sale of soft drinks. For the Page 8 of 13 O/TAXAP/1113/2006 JUDGMENT purposes of its business, it bought bottles and crates whose cost per unit did not exceed Rs. 5,000/-. During the year ending 31.3.1998, the company received a sum of Rs. 6,89,91,901 on sale of scrap bottles and crates. The sale proceeds were segregated in two parts: (a) in respect of bottles and crates purchased prior to 31.03.1995; and (b) those purchased after 1.4.1995. 12. In the Return of income filed, the sale proceeds relating to bottles and crates purchased after 1.4.1995 were taken into consideration for the purpose of computation of short term capital gains under Section 50 whereas the sale proceeds relating to bottles and crates purchased prior to 31.3.1995 was not offered for short term capital gains on the ground that the assets stood depreciated at 100% under the proviso to Section 32(1)(ii) and hence did not form part of the block of assets. 13. For reasons given hereinabove, we are of the view that bottles and crates purchased prior to 31.3.1995 did not form part of the block of assets, hence, profits on sale of such assets were not taxable as a balancing charge, neither under Section 41(1) nor under Section 50. In respect of bottles and crates purchased after 1.4.1995, on account of deletion of proviso to Section 31(1)(ii) (vide Finance Act, 1995) such bottles and crates formed part of block of assets and consequently such assets purchased after 1.4.1995, in this case, became exigible to capital gains tax under Section 50. Page 9 of 13 O/TAXAP/1113/2006 JUDGMENT 14. Before concluding, it may be pointed out that, in the case of Nector Beverages Pvt. Ltd., assessee has earmarked the sale proceeds from bottles and crates as \"miscellaneous income\" and not as \"profit on sale of assets\" whereas, in the case of other assessees, including Industrial Oxygen Co. Ltd. (now known as Inox Air Products Ltd.), the said sale proceeds have been earmarked specifically under the Heading \"Profits from sale of assets\". To this limited extent only, we remit the case(s) of Nectar Beverages Pvt. Ltd. [Civil Appeal Nos. 5291/04, 5293/04 and 359-360/06] to the A.O. to go through the computation submitted by Nectar Beverages Pvt. Ltd. and find out whether earmarking \"profits from sale of assets\" as \"miscellaneous income\" has resulted in the understatement of net profits at the pre-Section 28 stage and taxable profits at post-Section 28 stage. In all other cases, sale proceeds have been earmarked as \"profits on sale of assets\" and in those cases, therefore, there is no question of verification by the Assessing Officer. 9. In view of the above, we are of the considered opinion that the question No.2 raised in this appeal is required to be answered in favour of the assessee and against the revenue. Accordingly, we hold that the Tribunal was not right in law in holding that depreciation granted earlier can be withdrawn and taxed as income u/s 41(1) of the Act. Page 10 of 13 O/TAXAP/1113/2006 JUDGMENT 10. Insofar as question No.3 is concerned, in view of the decision of the Apex Court in the case of Micorp Global P. Ltd. v. Commissioner of Income Tax (supra), the same is also required to be answered in favour of the assessee. The Apex Court in paragraph Nos. 11 and 12 of the said decision has held as under:- “11. We do not find any merit in the above arguments. In this case, we are concerned with the nature of transaction dated 15.3.1991. The question to be asked is whether the assessee has proved the transaction dated 15.3.1991. The question of \"appropriation\" of the bottles to a particular contract is different from the concept relating to the nature of the transaction. In this case, the tell-tale circumstance against the assessee was that sub-lease is dated 8.3.1991. It is between M/s Aravali Leasing (lessee) and M/s Unikol Bottlers (sub-lessee). This sub-lease precedes the lease dated 15.3.1991 between the assessee (lessor) and M/s Aravali Leasing (lessee). As rightly questioned by the AO as to how M/s Aravali Leasing (lessee) could have entered into a sub- lease in favour of M/s Unikol bottlers on 8.3.1991 when it had not acquired leasehold rights till 15.3.1991 from the assessee as the lessor. Moreover, there is nothing in the alleged lease deed dated 15.3.1991 indicating commencement of the lease from a prior date. There is nothing in the so-called lease dated 15.3.1991 as to the arrangement between the parties prior to 15.3.1991. There is nothing in the so- called lease dated 15.3.1991 indicating Page 11 of 13 O/TAXAP/1113/2006 JUDGMENT any prior practice as submitted on behalf of assessee. On the contrary, the so-called lease dated 15.3.1991 recites that it shall commence only from 15.3.1991. Moreover, under the sub-lease between M/s Aravali Leasing and M/s Unikol Bottlers it is stated that M/s Aravali Leasing is the absolute owner of the bottles. Lastly, the so-called lease dated 15.3.1991 stipulated that the lessee, M/s Aravali Leasing, shall have no right, title or interest to create a sub-lease without the permission of the lessor. No such permission has been produced. For the aforestated reasons, we find no infirmity in the concurrent findings of fact recorded by the authorities below. We accordingly hold that transaction dated 15.3.1991 is not proved. Therefore, the AO was right in disallowing depreciation amounting to Rs. 30,17,122/-. 12. Before concluding, we may mention that an alternative submission was advanced on behalf of the assessee in the context of the second transaction that, if the said transaction was a financial arrangement, as held by the Department, even then the assessee could be taxed only on Interest embedded in the amount of lease rentals received from the lessee, M/s Aravali Leasing. In this connection, it was submitted that the assessee had earned total income of Rs. 6,33,596/- over a period of 36 months commencing from 15.3.1991 to 14.3.1994. Therefore, the matter should be remitted for recalculation. We do not find any merit in this argument for the simple reason that the concurrent finding shows that transaction dated 15.3.1991 is a sham. The finding shows that the transaction had not been proved Page 12 of 13 O/TAXAP/1113/2006 JUDGMENT by the assessee. In the circumstances, there is no question of the matter being remitted, as prayed for. Consequently, the AO was right in coming to the conclusion that transaction dated 15.3.1991 was not proved and that the assessee was not entitled to claim depreciation of Rs. 30,17,122/- in respect of the second transaction. 11. In view of the above, we are of the considered opinion that the question No.3 raised in this appeal is also required to be answered in favour of the assessee and against the revenue. Therefore, we hold that the Tribunal was not right in law in enhancing the income of the appellant. 12. For the foregoing reasons, the present appeal is allowed. The order of the Tribunal is quashed and set aside. Accordingly, the questions of law raised in this appeal are answered in favour of the assessee and against the revenue. (K.S.JHAVERI, J.) (K.J.THAKER, J) pawan Page 13 of 13 "