JUDGMENT
G. Sivarajan, J.
1. IT Ref. 20/1998 and ITA Nos. 13, 39, 70, 77, 84 and 166 of 2000 are at the instance of the Revenue and ITA No. 69/1999, IT Ref. No. 135/1999, ITA Nos. 180 & 183/2000, ITA No. 173/2001 & ITA Nos. 143, 151 & 161 of 2002 are by the assessees.
2. Since the question involved in ail these cases relates to the eligibility for deduction of the service charges paid by the respective assessees-Government owned companies-to the Government as per certain Government orders under Section 37 of the IT Act, 1961 (for short ‘the Act’), though four different assessees are the respondents, we are disposing of all these cases by this common judgment, Conflicting views have been expressed by different Benches (Members different) of the Tribunal, Cochin Bench. Hence IT references/IT appeals by the assessees and the Revenue on the same question.
3. The Travancore Titanium Products Ltd. is involved in IT Ref. No. 20 of 1998, ITA No. 13/2000, ITA No. 84/2001, ITA No. 151/2002 and ITA No. 161/2002. The assessment years concerned are 1991-92, 1992-93, 1993-94, 1994-95 and 1995-96, respectively. M/s Kerala Agro Machinery Corporation Ltd. is involved in ITA No. 70/2000 and the assessment year is 1991-92. The Travancore Cochin Chemicals Ltd. is involved in ITA No. 39 & 77/2000, 166/2000 & 173/2001. The assessment years concerned are 1992-93, 1993-94, 1992-93 and 1994-95, respectively. The Kerala State Industrial Products Trading Corporation Ltd. is involved in IT Ref. No. 135/1999, ITA Nos. 69/1999, 180/2000, 183/2000 and 143/2002. The assessment years concerned are 1991-92, 1992-93, 1993-94, 1994-95 and 1995-96, respectively.
4. IT Ref. No. 20 of 1998 is the leading case where the Travancore Titanium Products Ltd. Thiruvananthapuram, is involved. The Tribunal, Cochin Bench, under Section 256(1) of the Act has referred the following two questions of law for decision by this Court at the instance of the Revenue ;
“1. Whether, on the facts and in the circumstances of the case, the assessee being a company owned by the ‘Government of Kerala’ is entitled to claim deduction of the amount paid to the Government of Kerala for the services rendered to the assessee by the Government ?
2. Whether, on the facts and in the circumstances of the case, the assessee is entitled to claim deduction of Rs. 6,72,429, the employer’s contribution to the provident fund in the asst. yr. 1991-92 ?”
5. The counsel appearing for the parties submitted that the second question
referred is covered by the judgment dt. 16th Nov., 2002, in ITA No. 68 of 1999,
against the assessees and in favour of the Revenue. In the light of the said
judgment we answer the second question in favour of the Revenue and against
the assesses.
6. The first question referred relates to the deducibility of the service charges paid by the assessee-companies to the Government of Kerala under Section 37 of the IT Act. This is the question which arises for consideration in all the other cases also.
7. The assessees concerned in all the cases are Government-owned companies
and the Government has got a major shareholding in the said companies. The
Government as per different executive orders demanded service charges from
the assessee-companies based on certain percentage of productions. In the
assessments for the concerned assessment years the assessee-companies
claimed deduction of the service charges paid to the Government under Section 37 of
the IT Act. The AO rejected the said claim, as according to him, the service
charges represented nothing but part of the day-to-day functioning and
statutory responsibility of the Government and that such services had been
rendered for other public sector undertakings as well. In other words, according
to the AO, no special services are rendered by the Government to the assessee-
companies for demanding amounts by way of service charges. The AO
accordingly took the view that the service charges could not be allowed- as
expenditure laid out wholly and exclusively for the purpose of the business. In
appeal by the assessee the CIT(A) dismissed the appeal and confirmed the
order of the AO. In further appeal by the assessee the Tribunal observed that
the payment had been made pursuant to the order passed by the Government
on 7th Dec., 1991, and that the Government had spelt out the services rendered
by it to the company and the service charges had been paid for the services
actually rendered by the Government and so the payment was for the purpose
of the business. The Tribunal also noted that such payments were allowed in
the prior years also as business expenditure. The Department, being aggrieved
by the order of the Tribunal, has sought reference of the first question specified
above and the same was referred.
8. It is interesting to note that though this order of the Tribunal rendered in the case of the Travancore Titanium Products Ltd. Thiruvananthapuram, was followed by subsequent Benches of the Tribunal in the case of the very same assessee and in respect of certain other assessees also, another Bench of the Tribunal in the case of the assessee itself for the asst. yrs. 1994-95 and 1995-96 has taken a different view. The Tribunal has noted that another Bench of the Tribunal in ITA No. 894/Coch/1994 by order, dt. 14th March, 1995, had accepted the assessee’s contention and directed the AO to allow the service charges paid by the assessee to the Government as deduction. The Tribunal, however, noting the submission of the counsel for the Department that the claim for deduction of service charges need to be considered from year to year independently as a question of fact and also noting that the very same Tribunal in ITA No. 175/Coch/1997 by order dt. 28th Aug., 2001, in the case of Travancore Cochin Chemicals Ltd. had taken a different view from the one taken in ITA No. 894/Coch/1994, the Tribunal took a diametrically opposite view in the case of the assessee. This view is seen followed by the Tribunal in ITA No. 175/Coch/1997 in the case of Travancore Cochin Chemicals Ltd, also.
9. In IT Ref. No. 135 of 1999 another Bench of the Tribunal considered the very same question in a slightly different context and had distinguished the decision of the Tribunal in ITA No. 894/Coch/1994 which is the subject-matter of IT Ref. No. 20/1998. On the whole, we find that different Benches of the Cochin Bench of the Tribunal have taken different views in the matter of grant of deduction of service charges paid by the assessee-companies to the Government in similar circumstances. It is interesting to note that these conflicting views have been expressed by the Benches of, co-ordinate jurisdiction after noting the decisions contra. We note here that this practice of ignoring the binding decisions of Benches of co-ordinate jurisdiction has been deprecated by the Supreme Court in a number of cases. In a case where a Bench of co-ordinate jurisdiction is unable to agree with the decision of another Bench of co-ordinate jurisdiction appropriate procedure to be followed is to write to the President of the Tribunal, who in turn will place the matter before a larger Bench for decision. In the instant case the Benches of co-ordinate jurisdiction by simply stating that each assessment year is independent and the matter has to be decided in the light of the facts and circumstances of each case, has independently considered the matter ignoring the binding decision rendered by the co-ordinate Bench. In this case Cochin Bench of the Tribunal considering of Sri G. Santhanam, AM. and Smt. P.K. Amini, JM, based on a Government letter referred to in p. 35 of the paper book, has held that the service charges paid by the assessee-companies to the Government is a permissible deduction. The said letter shows that the liability to pay service charges is a recurring liability of the assessee-companies based on Government orders. When the Tribunal has decided the issue based on the said Government letter, without anything more, it applies to subsequent years also and the Tribunal was not justified in distinguishing the earlier decision of the Tribunal stating that each year is independent and the service rendered in each year has to be independently considered. Probably the decision of the Tribunal rendered in the earlier case may be wrong; nonetheless a Bench of co-ordinate jurisdiction has ordinarily to follow it, unless it doubts the correctness of the said decision and refers the matter to the President of the Tribunal. Conflicting views have been expressed by different Benches of the Tribunal in instant cases only because they did not choose to observe the settled procedure to be followed in such cases. The resultant position is that judicial propriety and discipline have been followed by the Tribunal in these cases.
10. In this regard, the Tribunal will do well to bear in mind the principles laid down by the Supreme Court. The Supreme Court in Sub-Inspector Rooplal and Anr. v. Lt. Governor (2000) 1 SCC 644 considered the situation where a coordinate Bench of the Central Administrative Tribunal had in effect overruled an earlier judgment of another co-ordinate Bench of the same Tribunal. It was observed as follows :
“At the outset, we must express our serious dissatisfaction in regard to the manner in which a co-ordinate Bench of the Tribunal has overruled, in effect, an earlier judgment of another co-ordinate Bench of the same Tribunal. This is opposed to all principles of judicial discipline. If at all, the subsequent Bench of the Tribunal was of the opinion that the earlier view taken by the co-ordinate Bench of the same Tribunal was incorrect, it ought to have referred the matter to a larger Bench so that the difference of opinion between the two co-ordinate Benches on the same point could have been avoided. It is not as if the latter Bench was unaware of the judgment of the earlier Bench but knowingly it proceeded to disagree with the said judgment against all known rules of precedents. Precedents which enunciate rules of law form the foundation of administration of justice under our system. This is a fundamental principle which every presiding officer of a judicial forum ought to know, for consistency in interpretation of law alone can lead to public confidence in our judicial system. This Court has laid down time and against that precedent law must be followed by all concerned; deviation from the same should be only on a procedure known to law. A subordinate Court is bound by the enunciation of law made by the superior Courts. A co-ordinate Bench of a Court cannot pronounce judgment contrary to declaration of law made by another Bench. It can only refer it to a larger Bench if it disagrees with the earlier pronouncement”.
The Supreme Court further observed as follows :
“We are indeed sorry to note the attitude of the Tribunal in this case which, after noticing the earlier judgment of a co-ordinate Bench and after noticing the judgment of this Court, has still thought it fit to proceed to take a view totally contrary to the view taken in the earlier judgment thereby creating a judicial uncertainty in regard to the declaration of law involved in this case. Because of this approach of the latter Bench of the Tribunal in this case, a lot of valuable time of the Court is wasted and the parties to this case have been put to considerable hardship.”
This was again reiterated by the Supreme Court in District Manager, APSRTC, Vijayawada v. K. Sivaji and Ors. (2001) 2 SCC 135 by observing that judicial discipline required that the Judge either followed the earlier decision or referred the matter to a larger Bench and that sitting singly the learned Judge could not have taken a different view on the specious ground that the decision was based on facts. Again in Dr. Vijay Laxmi Sadho v. Jagadish (2001) 2 SCC 247 yet another 3 Judges Bench of the Supreme Court considered this question. It was observed as follows :
“As the learned Single Judge was not in agreement with the view expressed in Devilal case it would have been proper, to maintain judicial discipline, to refer the matter to a larger Bench rather than to take a different view. We note it with regret and distress that the said course was not followed. It is well-settled that if a Bench of co-ordinate jurisdiction disagrees with another Bench of coordinate jurisdiction whether on the basis of “different arguments” or otherwise, on a question of law, it is appropriate that the matter be referred to a larger Bench for resolution of the issue rather than to leave two conflicting judgments to operate, creating confusion. It is not proper to sacrifice certainty of law. Judicial decorum, no less than legal propriety forms the basis of judicial procedure and it must be respected at all costs.”
Similar views have been expressed by the Supreme Court in Gopabandhu Biswal v. Krishna Chandramohanty and Ors. (1998) 4 SCC 447 para 16 at p. 455, Usha Kumar v. State of Bihar and Ors. (1998) 2 SCC 44 para 3 and State of A.P. v. V.C. Subbarayudu (1998) 2 SCC 516 para 10. It is unnecessary to multiply with other decisions.
11. In the case of Travancore Titanium Products Ltd., Thiruvananthapuram, it claimed deduction of the service charges paid to the Government of Kerala based on an executive order issued by the Government. The AO has already noted that the services for which service charges paid are nothing but part of the day-to-day functioning and responsibility of the Government and that such services had been rendered for other public sector undertakings as well. According to the AO, the service charges could not be allowed as expenditure laid out wholly and exclusively for the purpose of the business of the assessee. The first appellate authority further observed that the mere fact that the Government had demanded service charges and the assessee had paid service charges will not clothe it with the nature of an expenditure wholly and exclusively laid out for the purpose of the business. The Tribunal, it must be noted, has observed that the payment had been made pursuant to the order passed by the Government on 7th Dec., 1991, and that the Government order had spelt out the services rendered by it to the company and service charges had been paid for the services actually rendered by the Government and so the payment was for the purpose of business. The Tribunal also noted that in the prior years such payment had been allowed as business expenditure. It is also-seen from the order of the Tribunal that they have largely relied on a letter received from the Secretary to Government addressed to the Dy. CIT (Asst.), Spl. Range, Kawadiar, Thiruvananthapuram. The said communication in fact refers to four Government orders, the earliest of which is G.O. (MS) No. 48/88/ID dt. 25th March, 1988, and from the communication it further appears that subsequent Government orders of 2nd Feb., 1989, 5th Jan., 1990, and the Government letter No. 47291/H3/91/ID dt. 7th Dec., 1991, are all details of enhancement of the service charges initially provided. Excepting the fact that the Tribunal has considered only the content of the Government letter no effort has been made by the Tribunal to find out the basis on which service charges are levied which probably can be ascertained only from the earliest Government order dt. 25th March, 1988, and from the circumstances which led to the issue of the said Government order. We find from the first appellate authority’s order that the said authority had considered the matter a little more elaborately, however; without proper reference to the various Government orders referred to in the letter dt. 21st June, 1994 extracted in the Tribunal’s order.
12. The Tribunal of course has referred to the legal principles in the matter of grant of deduction under Section 37 of the Act particularly that laid down in Travancore Titanium Products Ltd. v. CIT (1966) 60 ITR 277 (SC) and also the principles discussed by Justice S. Ranganathan, in Sampath Iyengar’s Law of Income-tax, 8th, Edn., Volume 2, p. 2106 at para. 39 as also the decision of the Supreme Court in Sassoon J. David & Co. Ltd: v. CIT (1979) 118 ITR 261 (SC).
13. According to us, before applying the legal principles laid down by the Supreme Court mentioned in the aforesaid cases the Tribunal ought to have ascertained the factual circumstances under which the Government had imposed the levy of service charges in the case of only a few Government-owned companies which are the parties involved in these batch of cases. It is not properly discernible from the letter received from the Government as to the circumstances under which the Government had chosen to levy this service charges on these companies alone. As could be seen from the assessment orders the service charges so collected are very substantial amounts.
14. The learned senior Central Government standing counsel has submitted that the Government is a major shareholder in all these companies and as such it is also an owner of the Government companies concerned. In the absence of materials to show that the Government had rendered special services to these Government companies otherwise than in their capacity as the owner of the company any amount received by whatever name called will only be a diversion of income by the owner which is not liable to be deducted under the provisions of Section 37 of the Act. Of course the counsel appearing for the assessee-companies submitted that it is not in the capacity of the owner of the companies that the Government had demanded this service charges from these companies, but they have demanded the said amount for which they had rendered special services to the companies by deputing Government employees who are unconnected with the business of the Government companies and by incurring other expenses for the efficient management, production, etc., of the business of the company. Here, it must be noted that the Tribunal did not consider the matter in these perspectives. Probably it is for the reason that the Departmental Representatives, who appeared before the Tribunal did not present the matter in the manner in which it was presented by the senior counsel appearing for the Revenue before us. However, having regard to the fact that the State Government is a major shareholder in the Government companies with which we are concerned in these cases certainly it is one of the relevant matters to be borne in mind while considering the question of deduction of the service charges paid by these companies to the Government. According to us, since what is demanded under the Government order is service charges certainly it is necessary to find out services rendered by the Government to the assessee. Though the communication dt. 21st June, 1994, extracted in the Tribunal’s orders refer to some of the services it does not disclose all the details and circumstances for the levy of the service charges. In fact that authorised representative of the companies were making submissions based on their imagination and ingenuities without properly ascertaining as to what exactly are the services rendered by the Government. In these circumstances, we are of the view that these factual details with regard to the actual services rendered by the Government have to be considered for deciding the eligibility for deduction of the service charges. We are not saying that the service charges which are demanded in the Government orders cannot be allowed as a deduction under Section 37. But there must be basis for the demand of the service charges made in the Government orders. The basis has to be found out either from the Government orders or from the discussion, deliberation, correspondence and other things arising between the assesses-companies with the Government itself. Certainly it is open to the assessees to obtain those details and produce the same in the form of affidavits.
15. We notice that the only thing which the Tribunal in the order dt. 14th March, 1995, in ITA No. 894/Coch/1994 failed to consider is the basic factual details regarding the services rendered by the Government to the Government companies, viz., Travancore Titanimum Products Ltd. In other respects the Tribunal noted that the AO was granting deduction of the service charges paid to the Government in the earlier years and that since the payment was effected pursuant to the Government orders it has to be allowed in the subsequent years also. We find that another Bench (Sri K.P.T. Thangal and Sri M.M. Cherian) of the Tribunal has followed the order passed in ITA No. 894/C/1994 in the case of the assessee for the years 1992-93 and 1993-94 which are the subject-matter of ITA Nos. 13/2000 and 84/2001. However, when it came to be asst. yrs. 1994-95 and 1995-96 which are the subject-matter of ITA Nos. 161/2002 and 151/2002, respectively, another Bench of the Tribunal consisting of Sri K.P.T. Thangal and Dr. O.K. Narayanan took a different view, of course adverting to the earlier order of the Tribunal in the case of the assessee for the year 1991-92 (894/C/1994) pointing out that each assessment year is independent and the matter has to be considered in the light of the facts and circumstances of that year. According to us, the Bench consisting of Sri K.P.T. Thangal and Dr. O.K. Narayanan were not justified in taking a different view after having noted that the decision in ITA No. 894/C/1994 was rendered based on the Government order which is applicable for all the years under consideration. The appropriate course, according to us, for that Bench was to refer the matter to the President for being considered by a larger Bench.
16. Coming to the case of the Travancore Cochin Chemicals Ltd. also this is what happended. The same is the case with M/s Travancore Cochin Chemicals Ltd., Udyogamandal, also where the Bench consisting of Shri K.P.T. Thangal and Sri M.M. Cherian decided the issue relying on the decision of the Tribunal in ITA No. 894/C/1994 in the case of Travancore Titanium Products Ltd. (ITA 39/2000, 77/2000 & 166/2000). However, another Bench of the Tribunal consisting of Sri K.P.T. Thangal and Dr. O.K. Narayanan has taken a different view in the case of the very same assessee for the asst. yr. 1994-95. This is also after noting that the appeals filed for the earlier years were allowed by the Tribunal following the decision in ITA No. 894/C/1994. This also, according to us, was not the proper procedure to be adopted by the Tribunal.
17. We find that the Tribunal in the case of the Kerala State Industrial Products Trading Corporation Ltd., Trivandrum, which is the subject-matter of IT Ref. No. 135 of 1999, ITA Nos. 166/2000, 180/2000, 183/2000 and in ITA 143/2002 though by different Benches have held that the assessee is not entitled to deduction of service charges paid to the Government distinguishing the decision of the Tribunal in ITA 894/C/1994, as according to them, no service whatsoever has been rendered by the Government justifying the demand other than procuring sole-selling agency of the products of Travancore Titanium Products Ltd. The Tribunal did not follow the decision of the earlier Bench of the Tribunal in ITA No. 894/C/1994 though the executive order under which the Government had demanded service charges are almost on similar footing. This is the position with regard to the Kerala Agro Machinery Corporation Ltd. which is the subject-matter of ITA 70/2000. In this case the Bench consisting of Sri. K.P.T. Thangal and Shri. Jaidev followed the decision of the Tribunal in ITA 894/C/1994 and allowed the claim of the assessee.
18. From the above it would appear that the decision in all the cases turned on
the constitution of the Bench though the factual situation, viz., the payment
was made on the basis of the executive order issued by the State was almost
similar.
19. As we have already noted earlier, none of these Benches had made an earnest effort nor the parties assisted the Tribunal in finding out the actual basis on which the Government had demanded the service charges from the Government companies. The fact that there is a Government order demanding the service charges and these companies had paid the service charges so demanded is not in dispute. The dispute is only as to whether these amounts were eligible for deduction under Section 37 of the Act. The correct principles governing the deduction under Section 37 of the Act have been noted by the Tribunal in ITA 894/C/1994. A- Full Bench of this Court also had occasion to consider the parameters regarding the grant of deduction under Section 37 of the Act in Ram Bahadur Thakur Ltd v. CIT (IT Ref. 16/1999 judgment dt. 31st Jan., 2003) (2003 (1) KLT 687]. We notice that different Benches of the Tribunal have taken different views. In these circumstances, we are of the view that a detailed consideration of the basic facts leading to the demand of service charges by the Government from these companies have to be ascertained for a satisfactory adjudication of the eligibility for deduction of the same under Section 37 of the Act. Since neither the AO nor the two appellate authorities had seen the Government orders particularly the earliest Government order dt. 25th March, 1988, referred to in the letter extracted in the Tribunal’s order in ITA 894/C/1994, we are of the view that the AO must be directed to consider the matter afresh with reference to these Government orders and the circumstances under which those Government orders happened to be issued.
20. In this view of the matter we set aside the orders of the AO and the two
appellate authorities on the question of deduction of service charges under Section 37 of the Act in all these cases and remit the matter to the AO for
consideration in accordance with law and in the light of the observations made
hereinabove and the assessees are directed to produce all relevant and
supporting documents before the AO. The AO must necessarily peruse the
earliest Government orders. In fact the assessee in ITA 151/2002 has produced
the relevant Government orders as Annexures, A & B series arising out of the
order of the Tribunal in ITA 63/C/1998 for the asst. yr. 1994-95. The assessee
will also obtain all the details and documents leading to the issue of the
Government order dt. 25th March, 1988, from the Government and make it
available before the AO.
21. It is open to the assessee to file statements in support of their claim along with supporting documents. It is also open to the AO after considering the statement and the documents to issue a notice containing the materials gathered by the AO independently and also with regard to the area where there is dispute between the parties so that the assessee can satisfactorily explain the same.
The above IT references and IT appeals are disposed of as above.