* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA 987/2007
C.I.T ..... Appellant
Through: Ms. Prem Lata Bansal with
Mr. M.P. Gupta, Mr. Sanjeev
Rajpal & Ms. Anshul Sharma,
Advs.
versus
D.C.M. LTD. ..... Respondents
Through: Mr.S.K. Aggarwal, Adv.
.
CORAM:
HON'BLE MR. JUSTICE VIKRAMAJIT SEN
HON'BLE MR. JUSTICE RAJIV SHAKDHER
ORDER
% 13.1.2009
We have heard arguments of learned counsel for the parties
in some detail.
On behalf of the Revenue Ms. Prem Lata Bansal presses that
several questions of law arise which warrant a consideration of the
present Appeal. The Revenue in its Appeal has thus proposed the
following questions of law:-
(i) Whether ITAT was correct in law in allowing
deduction of Rs 8,71,20,781/- to the assessee being
retrenchment compensation paid by the assessee to
the employees of DCM? Unit situated at Bara Hindu
Rao on its closure on 01.04.1989?
(ii) Whether ITAT was correct in law in allowing the
deduction of retrenchment compensation, which was
incurred by the assessee not for the purposes of
carrying on of the business but on the closure of its
business on 01.04.1989?
(iii) Whether ITAT was correct in law in allowing
deduction of Rs 1,86,69,703/- to the assessee being
interest paid on money borrowed for the purposes of
making payment of retrenchment compensation and
PF to the employees of DCM Unit on its closure?
(iv) Whether ITAT was correct in law in allowing a sum of
Rs 3,57,700/- to the assessee being legal expenses
incurred on account of closure of DCM Unit?
(v) Whether expenditure incurred by the assessee on
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interest and legal expenses is the revenue
expenditure or capital in nature?
(vi) Whether ITAT was correct in law in allowing
deduction of Rs 1,80,20,261/- to the assessee being
the loss suffered by the DCM Employees Provident
Fund Trust on sale of securities and not the loss
suffered by the assessee itself?
(vii) Whether ITAT was correct in law in allowing the
deduction of Rs 1.80 crores to the assessee even
though the loss was not incidental to carrying on of
the business of the assessee but was incurred on
closure of DCM Unit?
(viii) Whether ITAT was correct in law in holding that the
profit earned by the assessee on sale of building at
16, Barakhamba Road was to be assessed under the
head “Capital Gain” and not under the head “Income
from Business”?
(ix) Whether order passed by ITAT is perverse in law and
on facts?
The learned counsel for the Revenue Ms Prem Lata Bansal in
the course of her submission has conceded before us that as
regards the first five questions the outcome of the appeal depends
completely, and that with regard to questions (vi) and (vii) partially,
upon the view that this Court would take with respect to the
conclusion arrived at by the Tribunal that the business of the
assessee had not closed down. In support of her submissions she
adverted to the Assessment Order.
We find that not only the Commissioner of Income Tax
Appeals [hereinafter referred to as in short as „CIT(A)‟] but also the
Tribunal has considered the matter in some detail and returned a
finding of fact in paragraph 85 and 86 of the impugned judgment.
Briefly, the Tribunal has held that it is not disputed that the
Assessee had several businesses like manufacturing of textile,
vanaspati, chemicals, rayon tyre cord, PVC, sugar, fertilizers,
cement etc. It also noted that the fact that in so far as the business
of textile was concerned it has four manufacturing units, out of
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which , one unit i.e. DCM mills unit located in Delhi had to be
closed down as according to the Master Plan of Delhi in was located
in non-conforming area. Admittedly, the other three units which
were involved in manufacturing of textile continued to carry on
business. The Assessee had claimed deduction of expenses
pertaining to the DCM Mill Unit on account of retrenchment
compensation paid to employees amounting to Rs 8,71,20,781/-;
interest amounting to Rs 1,86,69,703/- on monies borrowed for the
purposes of making payment of Retrenchment compensation and
Provident Fund to the employees; and a sum of Rs 3,57,700/-
expended towards Legal expenses.
As noticed above, the answer to this question turned on
whether closure of the DCM mill unit would amount to closure of
business as contended by the Revenue. As found by the Tribunal
there was no closure of business since DCM mill unit was only a
part of the textile manufacturing operations, which continued even
after the closure of the DCM Mill Unit as the assessee continued in
the business of manufacture of textile in the three remaining units.
In arriving at this conclusion the Tribunal looked at various aspects
of the matter as is evident from a bare reading of findings recorded
in paragraph 85 and 86 of the impugned judgment. It is specifically
noted that the assessee prepared a consolidated Profit & Loss
account and Balance Sheet of all its manufacturing units taken
together; the control and management of the assessee was
centralized in the Head Office, and also, the fact that all important
policy decisions were taken at the head Office. The Tribunal also
noted the fact that the Head Office provided funds required for
ITA 987/2007 Page 3 of 7
various units and that there were common marketing facilities for
all textile units. The Tribunal upon application of the tests laid
down by the Supreme Court in the case of CIT vs Prithvi
Insurance Co; (1967) 63 ITR 638 and Produce Exchange
Corporation Ltd vs CIT; 77 ITR 739 (SC), came to the
conclusion that there was inter-connection, inter-lacing and unity of
control and management, common decision making mechanism and
use of common funds in respect of all four units. It repelled the
arguments of the Revenue, which was, once again pressed before us
for consideration that, the DCM mill unit was a separate business
and hence with the closure of the DCM mill unit assessee ought not
be allowed deduction of the aforementioned expenses, based on the
fact that in respect of the DCM mill unit the assessee maintained
separate Books of Accounts and engaged separate workers.
In view of the findings of fact returned by the Tribunal by
applying the test laid down by the Supreme Court in the case of
Prithvi Insurance Co. (supra) and Produce Exchange
Corporation (supra) no fault can be found with the reasoning of
the Tribunal.
Similarly, with respect to the proposed questions (vi) and (vii)
it was contended on behalf of the Revenue that the deduction of
sum of Rs 1,80,20,261/- could not have been allowed, in view of the
fact that the Assessee had claimed the deduction on account of
monies paid by the assessee to its employees working in DCM mill
unit to overcome the loss suffered by the DCM Employees Provident
Fund Trust (hereinafter to referred to in short as the „Trust‟) on sale
of Securities. Learned counsel for the Revenue, Ms Prem Lata
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Bansal in support of her contentions relied upon the provisions of
Section 10(25) of the Income Tax Act, 1961 (hereinafter referred to
in short as the „Act‟). It was contended that the deduction claimed
by the Assessee could not be allowed in view of the provisions of
Section 14A of the Act which provides that only that expenditure
can be allowed as deduction which is incurred by the assessee in
relation to income which forms part of the total income under the
Act. Since the income from securities was exempt under Section
10(25) of the Act and was not included in computing the total
income of the assessee, the expenditure incurred could not be
claimed as deduction by the assessee. She further contended that
the deduction could also not be claimed as it was an expense
connected to the closure of DCM mill unit which was a separate and
distinct business from that of the other 3 units.
According to us, both the submission made on behalf of the
Revenue are untenable. With respect to the second submission we
may only note that having concurred with the view of the Tribunal
that there was no closure of the business this submission is rejected
and hence need not detain us any further. As regards her other
submission it would be important to note the following undisputed
facts recorded by the Tribunal:
(i) The services of the employees of the DCM mill unit having
been terminated the provident fund dues had to be paid to them.
The assessee had its own provident fund scheme known as DCM
Employees Provident Fund Trust which was recognized under the
Employees Provident Fund Act, 1952 (hereinafter called as „EPF
Act‟). The Trust was required to declare the same rate of interest
ITA 987/2007 Page 5 of 7
for their members as was declared by the Central Government
under the EPF Scheme, 1952. Furthermore, the grant of exemption
was also predicated on a condition that if the Board of Trustees
were unable to pay the rate of interest, at the rate declared by the
Central Government, for any reason, then, deficiency on that
account had to be made good by the employer i.e. assessee. It is in
this background that on termination of services of its employees
when the Provident Fund dues were required to be paid, the trust
approached the Regional Provident Fund Commissioner (in short
„RPF Commissioner‟) to obtain approval for sale of government
securities, in order to make payment to the employees. The RPF
Commissioner by a letter dated 19.04.1989 granted the said
permission with a caveat that in the event of any deficiency on sale
of securities the burden would have to be borne by the Assessee, in
order to ensure that the employees would get the rate of interest
equivalent to the rate paid by the Central Government.
Undoubtedly there was a loss on sale of security. The Assessee in
order to ensure that the employees, in accordance with the
approval granted by the RPF Commissioner, would be paid a rate of
interest equivalent to that paid by the Central Government,
incurred an expenditure of Rs 1,80,20,261/-.
A bare reading of the aforementioned undisputed facts would
show that this was an expense incurred by the Assessee towards its
employees. The loss on sale of securities was only a trigger based
on which these expenses had to be incurred by the assessee. In
view of this the provisions of Section 14A of the Act, according to
us, have no applicability whatsoever. We find no fault with
ITA 987/2007 Page 6 of 7
impugned judgment even of this issue.
As regards question no. (viii) it was urged by the Revenue that
the Tribunal erred in holding that the profit earned by the assessee
on sale of portion of the property situated at 16, Barakhamba Road,
New Delhi was assessable under the head “Capital Gains” and not
under the head “Income from Business”. In this regard, it is
relevant to note that the property was held for several years in the
Capital Account, that is, since 1967 and was shown in the balance
sheet of the assessee as a “capital asset”. The decision in G.
Venkataswami Naidu -vs- CIT, (1959) 35 ITR 594 was applied to
come to the conclusion that the sale of the property would result in
capital accretion and not as profits from trade when such properties
are sold. The Tribunal held that the decision to sell the property
was necessitated to improve the cash flow of the Assessee. Finally,
the decision of the CIT(A) holding that the income of the sale of the
10th Floor in the same building in the subsequent year 1991-1992
was Capital Gains has been accepted by the Revenue. We find no
error in the reasoning of the Tribunal even with respect to this
issue.
We find no perversity in the impugned judgment. No
substantial question of law arises for consideration of this Court. In
the result the appeal is dismissed.
VIKRAMAJIT SEN, J.
RAJIV SHAKDHER, J.
JANUARY 13, 2009
tp/da
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