INCOME TAX OFFICER Vs. MINERALS AND METALS TRADING CORPN OF INDIA LTD
INCOME TAX APPELLATE TRIBUNAL
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R.L. Segel, Judicial Member -
(1.) THIS appeal is by the revenue. The assessee to the appeal is Minerals & Metals Trading Corporationn. of India Ltd., New Delhi (MMTC), a company incorporated under the Companies Act. The year of assessment involved is 1977-78 for which the previous year ended on 31-3-1977.
(2.) Grounds (ii) and (iii) raised by the revenue are in the following terms :
On the facts and in the circumstances of the case, the Commissioner (Appeals) erred in-
(ii) allowing a reduction of Rs. 8,76,215 out of the disallowance made by the Income-tax Officer in respect of the assessee's claim for deduction of Rs. 10,51,000 being the contribution towards an approved granting to be administered by the LTC, in spite of the fact that the provisions of Secton 40A(7) were not complied with ; and
(iii) directing that the depreciation on 'pay loaders' which is not an item of each moving machinery should be allowed at 30 per cent as against 10 per cent allowed by the Income-tax Officer.
At the hearing it was an admitted position that the factual position regarding these two grounds is similar to that in the appeal of the assessee for the assessment year 1976-77 bearing IT Appeal No. 569 (Delhi) of 1980 decided by us today. The arguments canvassed in this behalf are also on the same lines as were canvassed before the Tribunal in the aforesaid appeal. For the reasons stated therein, with which we agree, we uphold the order of the Commissioner (Appeals) on the points involved in the above two grounds of appeal.
The ITO, in the course of assessment proceedings of the assessee for the year under consideration, noticed that in Schedule 12, the foot-note to purchase account reads Rs. 8.65 crores transferred to Central Government/Government Companies out of net surplus. He further noticed that the said amount of Rs. 8.65 crores was composed of the following : (i) Rs. 5.43 crores paid to Coal India Ltd. and (ii) Rs. 3.22 crores paid to the Central Government. The ITO, following his assessment order in the case of the assessee for the earlier year agreed with the assessee that the aforesaid amount of Rs. 5.43 crores paid to Coal India Ltd. was not taxable as its income. Insofar as the other amount of Rs. 3.22 crores is concerned, the ITO noticed that the payment was made by the assessee-corporation to the Central Government out of net surplus on its trading in stainless steel. He went into the facts brought on record by the assessee in respect of the transfer of the aforesaid amount and addressed himself on the question as to whether the said payment was a diversion of income by overriding title as claimed by the corporation or whether it was merely an application of the profits which accrued to the assessee-corporation. For deciding this question, he went into the ratios of the various decisions mentioned at pages 7 to 10 of his order as also the commentary of Palkhivala in his treatise The Law & Practice of Income-tax and on the ratio of those decisions came to the conclusion that the payment in question by the assessee to the Central Government was nothing but merely an application of the profits which accrued to the assessee-corporation and that the present case was not a case of diversion of income by overriding title as claimed by the assessee. He, accordingly, added the sum of Rs. 3,22,27,078 to the total income of the assessee.
(3.) AGGRIEVED by the said addition, the assessee brought the matter by way of appeal before the Commissioner (Appeals), who has deleted the above addition, by observing as under :
No doubt Government is the only shareholder of the assessee-corporation and is solely entitled to any dividends declared by the assessee out of its profits. If the shareholders of a company decide that a certain share of the profits realised by the company shall be straightaway credited to them-assuming that such a procedure is admissible under the company law-the share of the profits which the company parts with as a result could be considered as distribution of profits to the shareholders, amounting to an application of the income of the company after it is earned. The position here is somewhat different. The Govt., apart from being the sold shareholder in the assessee-corporation, has its own functions to discharge as Government. The regulation of the national economy to ensure that there is no reckless profitering by private parties on articles in short supply and mopping up such profits for public purposes is a Government function. If Government decided to fix the price of stainless steel imported by the assessee it did so, not in its capacity as a shareholder of the assessee-corporation, but in discharge of its other responsibilities. If it was also decided that any surplus realised on the sale of stainless steel items over and above the landed cost and service charges should be directly credited to the Consolidated Fund of India, the decision was taken in the exercise of the eminent domain of the Govt. for the national interest : it will be noticed that the surplus so credited to the Consolidated Fund of India was used by the Government for distribution of subsidies to encourage exports resulting in the earning of valuable foreign exchange for the country. The assessee-corporation had no choice but to part with such surplus in obedience to the orders of the Govt. and the payment was a necessary condition under which it had to carry on its business. The payment has, therefore, to be considered as expenditure laid out for the purpose of the assessee's business which has to be allowed as a deduction. Further, the deduction can be regarded as a kind of cess levied on the assessee to be used for developing the country's foreign trade and regarded in that manner, it has to be allowed. It cannot be considered an application of income for the simple reason that it has to be paid whether the net result of the assessee's business operations yields a profit or not. In other words, like sales tax, interest on borrowings of other expenses, which have to be incurred irrespective of whether the assessee earns income or not, the payment in question cannot be considered an application of income. The claim based on diversion by overriding title has also merit because the Pricing Committee decides on the selling price before the goods arrive and before the actual landed cost is known for certain and when doing so, it directs that the surplus overlanded cost and service charges shall be paid to the Government. In a sense, therefore, it can be said that the liability to pay out the surplus came into existence before the sales are effected and formed a prior charge on the sale price itself. It is not necessary to discuss this point further because I have held earlier that the payment of the surplus to the Consolidated Fund of India amounts to a kind of cess paid for the benefit of the trade as a whole and as a condition of the business carried on by the assessee and as such should be allowed as business expenditure.;
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