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Eveready Industries India Ltd. vs Dy. Cit on 22 November, 2000

Calcutta High Court
Eveready Industries India Ltd. vs Dy. Cit on 22 November, 2000
Equivalent citations: 2001 78 ITD 175 Cal


ORDER

D. Manmohan, J.M.

As several common issues are involved in all these appeals, we propose to dispose of these appeals by a common order for the sake of convenience.

2. Deductibility of liability arising out of Bhopal accident.This issue is common in all the appeals other than ITA Nos. 108 and 2184 (Cal.) of 1993 and 1339 (Cal.) of 1997. Facts and circumstances leading to the dispute are as follows : Assessee-company derives income from manufacture and sale of batteries, chemicals, pesticides, etc. having its registered office at Calcutta and factories and branches located at several places in India. Union Carbide Corporation, USA is its parent company having majority shareholding. For the assessment year, 1985-86, the previous year of the assessee ended on 25-12-1984. However, for the assessment year 1989-90 onwards, due to introduction of uniform previous year, financial year became the previous year.

3. On the fateful night of 2-12-1984, there was an unprecedented occurrence in the companys pesticide plant at Bhopal. Methyl Isocyanate, a very poisonous gas, escaped from tank No. 610 into the atmosphere causing death of many local residents and injuring many others. The company had to shut down the factory immediately and thereafter the Government of Madhya Pradesh has not given permission to start the factory at Bhopal. Several suits were filed in India and USA courts against the assessee-company as well as the parent company. On 2-2-1985, an Ordinance was promulgated which was subsequently replaced by the Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985, in terms whereof the Central Government had the exclusive right to represent and act in place of several persons who had made or was entitled to make a claim arising out of the gas leak tragedy. The Central Government filed Suit No. 1113 of 1986 before the District Judge, Bhopal against the appellant-company claiming compensation. The Union of India was also impleaded as co-plaintiff in cases already filed by individual claimants. All cases pending before him were stayed by District Judge to enable Union of India to effectively prosecute its complaint filed before U.S. court. However, the Honble Supreme Court of India thought it fit to settle the issue once and for all. On 14-2-1989, the Honble Supreme Court passed an order which reads as under :

“Having given our careful consideration for these several days to the facts and circumstances of the case placed before us by the parties in these proceedings, including the pleadings of the parties, the mass of data placed before us, the material relating to the proceedings in the courts in the United States of America, the offers and counter-offers made between the parties at different stages during the various proceedings, as well as the complex issues of law and fact raised before us and the submissions made therein, and in particular the enormity of human suffering occasioned by the Bhopal Gas disaster and the pressing urgency to provide immediate and substantial relief to victims of the disaster, we are of opinion that the case is pre-eminently fit for an overall settlement between the parties covering all litigations, claims, rights and liabilities related to and arising out of the disaster and we hold it just, equitable and reasonable to pass the following order :

We order :

(1) The Union Carbide Corporation shall pay a sum of U.S. Dollars 470 millions (For hundred and seventy millions) to the Union of India in full settlement of all claims, rights and liabilities related to and arising out of the Bhopal Gas disaster.

(2) The aforesaid sum shall be paid by the Union Carbide Corporation to the Union of India on or before 31-3-1989.

(3) To enable the effectuation of the settlement, all civil proceedings, related to and arising out of the Bhopal Gas disaster shall hereby stand transferred to this court and shall stand concluded in terms of the settlement, and all criminal proceedings related to and arising out of the disaster shall stand quashed wherever these may be pending.

A memorandum of settlement shall be filed before us tomorrow setting forth all the details of the settlement to enable consequential directions, if any, to issue.

We may record that we are deeply indebted to learned counsel for the parties for the dedicated assistance and the sincere cooperation they have offered the court during the hearing of the case and for the manifest reasonableness they have shown in accepting the terms of settlement suggested by this court.”

4. As could be seen from the order, the compensation claim was settled by directing the Union Carbide Corporation, USA to pay a sum of U.S. Dollars 470 millions to the Union of India in full settlement of all claims arising out of Bhopal Gas disaster. However, on 15-2-1989, the Honble Supreme Court passed another order in conformity with the settlement reached by the parties whereby the following order was passed.

“Having heard learned counsel for the parties, and having taken into account the written memorandum filed by them, we make the following order further to our order dated 14-2-1989 which shall be read with and subject to this order :

1. Union Carbide India Ltd., which is already a party in numerous suits filed in the District Court at Bhopal, and which have been stayed by an order dated 31-12-1985 of the District Court, Bhopal, is joined as a necessary party in order to effectuate the terms and conditions of our order dated 14-2-1989 as supplemented by this order.

2. Pursuant to the order passed on 14-2-1989 the payment of the sum of US $ 470 Millions (Four hundred and seventy millions) directed by the court to be paid on or before 31-3-1989 will be made in the manner following :

(a) A sum of US $ 425 Millions (Four hundred and twenty five millions) shall be paid on or before 23-3-1989 by Union Carbide Corporation to the Union of India; less U.S. $ 5 millions already paid by the Union Carbide Corporation pursuant to the order dated 7-6-1985 of Judge Keenan in the court proceedings taken in the United States of America.

(b) Union Carbide India Ltd. will pay on or before 23-3-1989 to the Union of India the rupee equivalent of U.S. $ 45 Millions (Forty five millions) at the exchange rate prevailing at the date of payment.

(c) The aforesaid payments shall be made to the Union of India as claimant and for the benefit of all victims of Bhopal Gas Disaster under the Bhopal Gas Leak Disaster (Registration and Processing of Claims)Scheme, 1985, and not as fines, penalties, or punitive damages.

3. Upon full payment of the sum referred to in paragraph 2 above :

(a) The Union of India and the State of Madhya Pradesh shall take all steps which may in future become necessary in order to implement and give effect to this order including but not limited to ensuring that any suits, claims or civil or criminal complaints which may be filed in future against any Corporation, Company or person referred to in this settlement are defended by them and disposed of in terms of this order.

(b) Any such suits, claims or civil or criminal proceedings filed or to be filed before any court or authority are hereby enjoined and shall not be proceeded with before such court or authority except for dismissal or quashing in terms of this order.

4. Upon full payment in accordance with the courts directions :

(a) The undertaking given by Union Carbide Corporation pursuant to the order dated 30-11-1986 in the District Court, Bhopal shall stand discharged, and all orders passed in Suit No. 1113 of 1986 and/or in revision therefrom shall also stand discharged.

(b) Any action for contempt initiated against counsel or parties relating to this case and arising out of proceedings in the courts below shall be treated as dropped.

5. The amounts payable to the Union of India under these orders of the court shall be deposited to due credit of the Registrar of this court in a bank under directions to be taken from this court.

This order will be sufficient authority for the Registrar of the Supreme Court to have the amount transferred to his credit which is lying unutilized with the Indian Red Cross Society pursuant to the direction from the International Red Cross Society.

6. The terms of settlement filed by learned counsel for the parties today are taken on record and shall form part of our order and the record.

This case will be posted for reporting compliance on the first Tuesday of April, 1989.

Terms of settlement consequential to the directions and orders passed by this Honble Court :

1. The parties acknowledge that the order dated 14-2-1989 as supplemented by the order dated 15-2-1989 disposes of in its entirety all proceedings in Suit No. 1113 of 1986. This settlement shall finally dispose of all past, present and future claims, causes of action and civil and criminal proceedings (of any nature whatsoever wherever pending) by all Indian citizens and all public and private entities with respect to all past, present and future deaths, personal injuries, health effects, compensation, losses, damages and civil and criminal complaints of any nature whatsoever against UCC, Union Carbide India Limited, Union Carbide Eastern, and all of their subsidiaries and affiliates as well as each of their present and former directors, officers, employees, agents, representatives, attorneys, advocates and solicitors arising out of, relating to or connected with the Bhopal Gas Leak Disaster, including past, present and future claims, causes of action and proceedings against each other. All such claims and causes of action whether within or outside India of Indian citizens, public or private entities are hereby extinguished, including without limitation each of the claims filed or to be filed under the Bhopal Gas Leak Disaster (Registration and Processing of Claims) Scheme, 1985, and all such civil proceedings in India are hereby transferred to this court and are dismissed with prejudice, and all such criminal proceedings including contempt proceedings stand quashed and accused deemed to be acquitted.

2. Upon full payment in accordance with the courts directions the undertaking given by UCC pursuant to the order dated 30-11-1986, in the District Court, Bhopal stands discharged, and all orders passed in Suit No. 1113 of 1986 and/or in any revision therefrom also stand discharged.”

5. The material difference, as could be noticed between two that in the order dated 15-2-1989, Union Carbide India Ltd. was joined as a necessary party and a part of the total compensation was agreed to be met by Union Carbide India Ltd. Thus, by the order dated 15-2-1989, the assessee-company was made liable to pay to the Union of India rupee equivalent to U.S. $ 45 Millions at the exchange rate prevailing at the date of payment. It is not in dispute that the rupee equivalent is Rs. 68.99 crores. Though the assessee was a party to the settlement and deposited the money as directed by the court, the litigation did not end at that point, inasmuch as, constitutional validity of Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985 was challenged which was ultimately disposed of on 22-12-1989. The Supreme Court upheld the constitutionality of Act 21 of 1985.

6. In the meantime, review petitions were filed before the Honble Supreme Court which were finally disposed of on 3-10-1991 where by the previous order of the Honble Supreme Court was modified; the criminal cases pending against the company as well as directors were restored by the said order.

7. On 14-2-1994, while examining the question of medical surveillance of all those effected or likely to be effected by the accident, the Honble Supreme Court said to have made the following observations :

“(c) For a period of 8 years facilities for medical surveillance of the population of the Bhopal exposed to MIC should be provided by periodical medical check-up. For this purpose a hospital with at least 500 beds strength, with the best of equipment and facilities should be established. The facilities shall be provided free of cost to the victims at least for a period of 8 years from now. The State Government shall provide suitable land free of cost.

(e) On humanitarian consideration and in fulfilment of the offer made earlier, the UCC and UCIL should agree to bear the financial burden for the establishment and equipment of a hospital, and its operational expenses for a period of eight years.”

8. In pursuance of the directions of the Honble Supreme Court, assessee-company appears to have paid a sum of Rs. 7.50 crores towards construction of hospital in Bhopal.

9. Since the accident took place on 2nd/3-12-1984 which date falls in the accounting year relevant to the assessment year 1985-86 and there were several claims against the company in the District Court, the company filed revised return in the course of assessment proceedings for the assessment year 1985-86 and claimed deduction of Rs. 164.4 crores as liability for damages in respect of Bhopal Gas tragedy. As a matter of abundant caution, assessee-company also claimed deduction of liability in the assessment year 1989-90 on the ground that the Supreme Court passed orders in terms of settlement on 14/15-2-1989. Since the Constitution Bench of the Supreme Court of India upheld the validity of the Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985 by its judgment dated 22-12-1989, it was thought fit to repeat the claim in the return for the assessment year 1990-91 on the ground that the matter reached finality after Supreme Court upheld the validity of the Act. Further, since the Honble Supreme Court of India has finally disposed of the review petitions on 3-10-1991, on legal advice. UCIL claimed deduction of the liability in the assessment year 1992-93.

10. Since the liability referable to expenditure on construction of the hospital is connected and the quantification of the amount payable was only in fulfilment of the offer made earlier, it was thought fit to claim the liability of Rs. 7.5 crores in the assessment year 1992-93, though the order of the Supreme Court was passed on 14-2-1994. Though in the assessment year 1985-86, deduction was claimed to the tune of Rs. 164.4 crores, the claim was restricted to Rs. 68.99 crores at the appellate stage in the light of the final decision of the Supreme Court dated 15-2-1985.

11. While framing the assessment for the assessment year 1985-86, assessing officer examined the claim and arrived at the conclusion that (a) during the relevant previous year, the damages were not crystallised or quantified and, therefore, assessee is not entitled to claim any deduction; and (b) by the judgment dated 31-12-1985 of District Judge, Bhopal all the claims/suits pending before the courts were stayed. Union of India has filed suit against the Union Carbide Corporation (USA) and not against the assessee.

12. Aggrieved, the assessee-company contended before the Commissioner (Appeals) that the liability arose in the year of accident, though the quantification thereof is postponed and hence allowable as deduction even if no provision is made in the books. However, learned Commissioner (Appeals) was of the opinion that the compensation paid by the assessee was occasioned by the criminal negligence of the assessee-company and, therefore, not an admissible deduction while computing the profit of the company. He also relied upon the decision of House of Lords in Strong & Co. of Romsey Ltd. v. Woodi Field (1906) 5 TC 215 wherein Lord Chancellor observed that expenditure incurred by a trader in his capacity as an owner of the business cannot be treated as business expenditure and also gave an example of an injury caused to a man walking in the street by the fall of a window shutter of a grocery shop and observed that the loss arising thereby to the grocer ought not to be deducted. In the case before their Lordships, the facts were that a brewing company owned an inn and conducted business through its manager. A customer sleeping in the inn was injured by the fall of a chimney upon him and the company had to pay the cost and damage because the fall of the chimney was due to the negligence of the companys servants. Lord Chancellor observed that such payment is remotely connected with the trade. In other words, according to the Bench, expenditure in connected with something else quite as much as or even more than with the trade and/or not really incidental to the trade itself. While agreeing with the view of Lord Chancellor, Lord Davey expressed that the damages was not money expended “for the purpose of the trade”. These words, according to his Lordship, mean for the purpose of enabling a person to carry on and earn profits in the trade, etc. Mere disbursement in the course of, or arises out of, or is connected with, the trade or is made out of the profits of the trade is not enough. Learned Commissioner (Appeals) placed heavy reliance on the aforementioned decision to highlight that in the instant case majority of the gas victims were not employees of the company and, therefore, Workmens Compensation Act, 1923 is not applicable. Innocent people were effected by sheer negligence and incompetence of the Industrial undertaking which was beyond the imagination of the law-makers. In fact, a separate Act had to be framed to enable the gas victims to claim compensation which only shows the magnitude of the crime committed by the company. The Supreme Court of India has only decided the quantum of compensation to the gas victims; at any rate, the Honble court has not decided the issue whether the compensation paid by the assessee was its business expenditure arising out of in its character as a trader or owner of the factory. According to the learned Commissioner (Appeals), the liability to compensation has arisen to the assessee-company as owner of the factory and not in its character as a trader since the compensation paid is not incidental to the trade.

13. The return of the assessment year 1989-90 was processed under section 143(1)(a) of the Act without making any prima facie adjustment in respect of the claim of liability to the tune of Rs. 66,49,69,509 (Compensation payment of Rs. 68,99,19,509 minus Rs. 2,49,50,000 received from Insurance Company). Subsequently the assessing officer realised that the liability of the company has not become final in view of the fact that the constitutional validity of the Act was under challenge before the Supreme Court and pending by the end of the accounting year. In the proceeding under section 154, read with section 143(1)(a) of the Act, the assessing officer disallowed the claim of deduction on the ground that though the compensation amount was deposited with the Registrar of the Supreme Court on 24-2-1989, but it is not towards any accrued liability since the company has also treated it as deposit in its accounts.

14. Aggrieved, it was contended before the Commissioner (Appeals) that the compensation amount was paid as per the order passed by the Honble Supreme Court dated 15-2-1989 and the assessee having not disputed the liability any further, the liability accrued in the year under consideration and, at any rate, such debatable issues cannot be the subject matter of a prima facie adjustment under section 143(1)(a) of the Act. More so, it cannot be rectified in a proceeding under section 154 of the Act. The Commissioner (Appeals) accepted the submissions of the assessee and held that since two views are possible, it cannot be the subject matter of rectification under section 154 of the Act and, therefore, deleted the addition of Rs. 66,49,69,509.

15. Further aggrieved, revenue is in appeal before us. Supporting the decision of the learned Commissioner (Appeals), assessee filed cross objection contending, inter alia, that the liability, vis-a-vis the assessee-company, has been quantified and crystallised by the Supreme Courts order dated 14/15-2-1989; further litigation was not at the behest of the assessee-company and, at any rate, it could have only enhanced the liability already determined and thus the claimed liability cannot be said to have not accrued.

16. Subsequent to the order passed under section 154 of the Act, the assessing officer issued notice under sections 143(2) and 142(1) of the Act and proceeded to pass the assessment order under section 143(3) of the Act wherein the claim of Rs. 68.99 crores was disallowed on the ground that as per the Directors Report and the forwarding letter of the Taxation Manager of the Company, compensation payment has not become final and, therefore, the compensation has not become accrued. In the return filed, the assessee-company has taken into consideration the amount recovered from the Insurance Company i.e., Rs. 2,49,50,000 and only the net liability was claimed as deduction. However, the assessing officer was of the opinion that so far as the insurance claim is concerned, it is taxable in the year under consideration as admittedly, the amount was received from the Insurance Company and further observed that the liability to pay compensation has not accrued during the year.

17. Aggrieved, assessee appealed to the Commissioner (Appeals). For the reasons given by the predecessor Commissioner (Appeals) for the assessment year 1985-86, the disallowance made by the assessing officer for the assessment year 1989-90 was sustained by the Commissioner (Appeals). However, as regards the insurance amount received, assessing officer was directed to examine whether the amount was received against the public liability or against the plant and machinery and injury to employees. After considering all aspects of the matter and after giving an opportunity of being heard to the assessee, assessing officer was directed to pass a speaking order on the issue.

18. In the intimation under section 143(1)(a), for the assessment year 1990-91, assessing officer disallowed Rs. 66,49,69,509 referable to the compensation paid to Supreme Court in connection with Bhopal Gas Tragedy and in this regard mentioned in the adjustment sheet that the liability has not been finalised as the Supreme Court decision is under review.

19. A petition was filed under section 154 of the Act on the ground that the claim made by the assessee is not amenable to prima facie adjustment within the meaning of section 143(1)(a), Since the assessing officer has not disposed of this petition, assessee-company filed an appeal before the Commissioner (Appeals) as per the provisions of section 154(2)(b) of the Act. It was contended that the review was not sought by the assessee and the liability could only increase and not decrease and, therefore, so far as the claim made by the assessee is concerned, it was ascertained and finalised. However, the Commissioner (Appeals) was of the opinion that till the disposal of the review petition, liability has not come to a finality.

20. In the order passed under section 143(3) of the Act, for the assessment year 1990-91, assessing officer observed that the award or arbitration becomes final only in the year of decision of court or on admission. He further observed that the dispute with regard to the payment of compensation has not become final as on 31-3-1990 because the liability fixed by the Supreme Court was challenged by certain individuals and organisations before the Supreme Court with a prayer to review the settlement order passed by the Apex Court and the said review petitions were not decided prior to 31-3-1990. He, therefore, disallowed the claim made by the assessee in this year.

21. In appeal, learned Commissioner (Appeals) framed the following issues for his decision :

(a) Whether the payment was a liability of Union Carbide India Ltd. or is it a liability to be discharged by Union Carbide Corporation, USA;

(b) Whether the liability got finally determined by virtue of the orders of the Honble Supreme Court during the assessment year

(c) Whether the payments represent business expenditure deductible from the income of the assessee in the present assessment year, and

(d) Whether the expenditure incurred in settling the liability is capital or revenue expenditure.

22. While examining the first issue, learned Commissioner (Appeals) observed that the USA company was made a party by the Union of India and it is only in the order dated 15-2-1989, assessee-company was also joined as a necessary party to effectuate the terms and conditions of the order dated 14-2-1989. Parent company stood guarantee to Bank of America through which assessee-company took loan and circumstances show that the payment was made by USA Company.

23. As regards the second issue, he observed that the liability was not finally determined during the accounting period ended on 31-3-1990 because the review petitions were pending as on that date in the Supreme Court.

24. As regards third and fourth issues, he was of the opinion that the expenditure is of capital nature and in this regard relied on the following decisions :

1. Dalmia Dadri Cement Ltd. v. CIT (1969) 74 ITR 484 (Punj. & Har.).

2. Andrew Yule & Co. Ltd. v. CIT (1963) 49 ITR 57 (Cal).

3. Swadeshi Cotton Mills Co. Ltd. v. CIT (1975) 100 ITR 59 (All.) (FB).

4. CIT v. K.B.H.M.D.H. Bhiwandiwalla & Co. (1971) 79 ITR 467

25. In the year 1992-93, assessing officer originally disallowed the claim of Rs. 68.99 crores in section 143(1)(a) proceedings. Assessee filed a writ petition. Subsequently, by an order passed under section 154, the intimation was rectified and additional tax was withdrawn.

The return was then taken up for scrutiny and in the order passed under section 143(3), the claim of deduction of Rs. 68.99 crores and Rs, 7.5 crores was negatived and in this regard the assessing officer made the following observations :

(a) The main chemical for manufacture of pesticides was Methyl Isocyanate (MIC) which is manufactured in the same factory and stored in underground tanks. Investigation conducted by the CBI shows that MIC is reactive, toxic, volatile and flammable. It is a highly hazardous and lethal material by all means of contact. and is poisonous. On thermal decomposition, MIG would produce hydrogen cyanide, nitrogen oxide, carbon monoxide and/or carbon dioxide;

(b) The scientific team headed by Dr. Varadharajan has concluded that the factors which led to the toxic gas leakage causing its heavy toll existed in the unique properties of very high reacitivity, volatility and inhalation toxicity of MIC. The needless storage of large quantities of the material in very large size containers for inordinately long periods as well as insufficient caution in design, in choice of materials of construction and in provision of measuring and alarm instruments, together with the inadequate controls on systems of storage and on quality of stored materials as well as lack of necessary facilities for quick effective disposal of material exhibiting instability, led to the accident;

(c) Apart from these design defects, it has been found by the CBI that following further lapses were committed :

(i) Invariably storing MIC in the tanks which was much more than 50 per cent capacity of the tanks which had been prescribed.

(ii) Not taking any adequate remedial action to prevent back flow of solution from VGS into RVVH and PVH lines.

(iii) Not maintaining the temperature of the MIC tanks at the preferred temperature of Zero Degree Celsius but at ambient temperatures which were much higher.

(iv) Not taking any immediate remedial action when tank No. E 610 did not maintain pressure from 22-10-1984 onwards.

(v) When the gas escaped in such large quantities, not setting out an immediate alarm to warn the public and publicise the medical treatment that had to be given immediately.

26. The assessing officer further observed that considering the enormity of the problem and the fact that poor and indigent persons who are affected in the tragedy should be buffered against the laws delay, the District and Session Judge, Bhopal directed the Union Carbide Corporation to pay Rs. 350 crores as interim relief to the victims by his order in December, 1987. In 1988, the Madhya Pradesh High Court curtailed it to Rs. 250 crores by reclassifying it as interim damages. The Union Carbide Corporation filed an appeal before the Supreme Court and the Supreme Court gave its consent to the out of court settlement reached between the Government of India and the company in terms of which Union Carbide Corporation was directed to pay U.S. $ 470 millions and though the quantum of compensation was not disturbed, certain terms of the settlement were changed by the subsequent orders passed while disposing of the review petitions by which the criminal cases pending against the company and the directors were restored but the facts of the case shows the negligence of the company in running its factory in contravention of all sets of norms and under these circumstances, the assessing officer proceeded to consider the issue as to whether compensation is allowable as a trading liability, apart from considering the question as to whether the payment is allowable as deduction in the year under consideration. Since the quantification of the payment did not crystallise in this year and since the expenditure was held in the earlier year as not allowable, the assessing officer disallowed the claim of the assessee in this year also.

27. As regards the additional claim, regarding setting up of hospital in Bhopal, assessing officer observed that the quantification was done in 1994 by the Supreme Court only on humanitarian ground and, therefore, the expenditure cannot be treated as business expenditure.

28. Aggrieved, assessee challenged the order of the assessing officer before the Commissioner (Appeals). Learned Commissioner (Appeals) preferred to follow the decision of the Commissioner (Appeals) for the assessment year 1990-91 wherein it was held that the expenditure is of capital nature and, therefore, not eligible for deduction. He, therefore, confirmed the disallowance of Rs. 66.99 crores. For the same reasons, the expenditure on the setting up of the hospital was also disallowed.

29. Further aggrieved, assessee is in appeal against the orders of Commissioner (Appeals) for all the years under consideration whereas, against the order passed by the Commissioner (Appeals) deleting the addition made in section 143(1)(a)/154 proceeding for the assessment year 1989-90, the revenue is in appeal before us and the assessee-company filed cross objections supporting the order of the Commissioner (Appeals).

30. Learned senior counsel, appearing on behalf of the assessee-company, submitted that the claim made by the assessee was disallowed by the tax authorities and the findings in each year were inconsistent with that of the findings in other orders. Adverting our attention to the material papers, learned counsel submitted that the assessee followed mercantile system of accounting and hence the liability can be said to have accrued in the year of accident and, at any rate, in the previous year relevant to the assessment year 1989-90, the Supreme Court having passed the order in terms of settlement reached amongst the Government of India, Union Carbide Corporation, USA and Union Carbide India Ltd., the liability to pay compensation has become final and crystallised in the assessment year 1989-90. He further submitted that the review petitions filed by certain individuals and organisations were altogether on different grounds such as whether Government of India can act as an agent on behalf of other claimants/individuals, etc. But nevertheless, the review petitions would not have resulted in reduction of liability which was already accepted by the assessee-company. Learned counsel further submitted that even if the order dated 15-2-1989 is said to be not final, the claim should alternately be considered for deduction either in the assessment year 1990-91, in which year the constitutional validity of Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985 was upheld or in the year 1992-93, in which year the review petitions were disposed of. As regards the claim of Rs. 7.5 crores it was submitted that the direction of the Honble Supreme Court by order dated 14-2-1994 was merely consequent to the offer made before the Supreme Court in the course of making submissions in the review petition dated 3-10-1991 and, therefore, the expenditure is allowable in the year 1992-93.

31. By adverting our attention to the order dated 14/15-2-1989 passed by the Honble Supreme Court, learned counsel submitted that the compensation amount is not towards penalty, fee or fine; the court merely settled all the civil disputes pending against the assessee-company and its parent company by awarding damages. Emphasizing the terms of the order “not as fine, penalty or punitive damage”, learned counsel submitted that the tax authorities were not justified in treating it as a compensation for the criminal negligence on the part of the assessee-company. Learned counsel also submitted that while disposing of the appeal for the assessment year 1990-91, Commissioner (Appeals) realised that the compensation is not against criminal negligence of the assessee-company and, therefore, he sought to consider the issue on the limited ground i.e., whether the expenditure is capital or revenue in nature. Adverting our attention to the appellate order for the assessment year 1985-86, learned counsel submitted that the Commissioner (Appeals) treated the expenditure as not incidental to the business, by placing reliance on the observations of Lord Chancellor in the case of Strong & Co. of Romsey Ltd. (supra) page 215 whereas, the said observations were not accepted by the House of Lords in the later decisions and even the Honble Supreme Court of India has not accepted the principle laid down by the Lord Loreburn, i.e., in the aforecited case. To explain the position succinctly, learned counsel has taken us through the decision of the Honble Supreme Court in the case of Indian Aluminium Co. Ltd. v. CIT (1972) 84 ITR 735. The Apex Court held that when a person has a dual capacity, of a trader-cum-owner, as long as the expenditure is in his capacity of trader, it has to be allowed as deduction. Learned counsel, therefore, submitted that the decision in the case of Strong & Co. on which the tax authorities have placed heave reliance, is no longer good law as held by the Apex Court and further submitted that the expenditure in the instant case is wholly and exclusively incurred for the purpose of business, inasmuch as, the factory was constructed and run by the assessee-company to manufacture and sell fertilizers and in order to carry on such business, it is necessary to maintain sufficient stock of chemicals, etc.; Explaining further it was submitted that varieties of poisonous material is used as raw material in order to manufacture pesticides and in this regard numerous statutory regulations were complied with by the assessee and clearance obtained from the Government of India from time to time, and maintained the factory as per norms in order to face the regular checks by the concerned departments. All these indicate that the business carried on by the assessee was in the normal course as is expected of but, unfortunately, disaster was possibly due to water entering into the gas chamber and the consequent chemical reaction resulting in escapement of poisonous gas into the atmosphere which happened in spite of best possible care taken by the assessee and, therefore, the accident and resultant expenditure are inherent and was in the normal course of business, allowable as business expenditure. He has also taken us through the material papers to submit that at the time of erection of the plant and machinery, best possible design available in the world was taken and the best possible training available at that point of time was imparted so as to run the factory smoothly. Larsen and Toubro was given the work of fabrication; American Company supplied the design and imparted training; in spite of all precautions the mishap occurred. Considering the facts and circumstances, it cannot be said that it is due to negligence on the part of the assessee-company and much less can it be attributed to criminal negligence on the part of the company/employees of the assessee-company. Learned counsel submitted that only when damages payable are punitive in nature, the expenditure incurred thereon suffers disallowance, whereas, in the instant case, the Supreme Court order dated 14/15-2-1989 and the subsequent orders make it clear that the damages were connected to the civil liabilities arising out of the accident and this can be further seen from the fact that the criminal complaints filed against the company and its directors were not included in the settlement.

32. Regarding the issue that the assessee did not pay the damages and hence the claim is not allowable, learned counsel submitted that the American Company merely stood as guarantor to facilitate the assessee to obtain the loan and the loan was, in fact, repaid by the assessee-company in the subsequent years, as could be seen from the Annual Reports of the company for the years 1988-89 and 1989-90.

33. Learned counsel further submitted that the obligation to pay, the amount arose on account of the settlement reached during the accounting year relevant to the assessment year 1989-90 and the payment was merely in discharge of such obligation, to compensate the loss of lives, etc., but it does not enhance any prestige of the assessee so as to consider the expenditure as capital in nature. The case law relied upon by the Commissioner in this regard was distinguished on facts. Learned counsel also cited the following decisions to contend that damages cannot be presumed to be punitive without sufficient material in support thereof :

(a) Ramchandar Shivnarayan v. CIT (1978) 111 ITR 263 (SC).

(b) Prakash Cotton Mills (P) Ltd. v. CIT (1993) 201 ITR 684 (SC).

(c) Swadeshi Cotton Mills Co. Ltd. v. CIT (1998) 233 ITR 199 (SC).

As regards the year of accrual of liability, it was submitted that the case of the assessee is strong in two years i.e., it can either be considered in the assessment year 1989-90 or 1992-93. As regards prime facie adjustments made under section 143(1)(a) of the Act, learned counsel relied upon the decision of the Honble Calcutta High Court in the case of Modern Fibotex India Ltd. v. Deputy CIT (1995) 212 ITR 496 and also cited several decisions of the Honble Bombay High Court.

34. On the other hand, learned counsel, appearing on behalf of the revenue, submitted that the claimants are, by and large, outsiders i.e., the claim is not either by the employees of the company or by any trader connected to the assessee-company and, therefore, the payment is not directly or indirectly connected to the business of the assessee. Learned counsel further submitted that the payment was made to the Government of India and not to the claimants which is also a significant factor in order to appreciate as to whether the expenditure is connected to the business or not. Highlighting as to how the negligence of the assessee-company in maintaining the tank resulted in the accident killing thousands of innocent people, the learned counsel submitted that the expenditure incurred by the assessee is not in its capacity as trader and the decision in the case of Strong & Co. applies to the facts and circumstances of this case on all fours. Learned counsel has taken us through the relevant observations of the Commissioner (Appeals) to contend that the assessee-company has not maintained the factory in proper condition as per the report of Dr. Varadrajan & CBI and, therefore, the compensation is on account of criminal negligence of the assessee-company. It was further submitted that the Government of India has proceeded only against the USA company and the first order passed by the Honble Supreme Court dated 14-2-1989 also indicates that the compensation is payable by the parent company of the assessee whereas, to effectuate the terms and conditions of that order the assessee-company was joined as necessary party in the order dated 15-2-1989 wherein a part of the total compensation was directed to be paid by the assessee-company. Such circumstances would highlight the fact that the compensation is payable by USA company and, therefore, cannot be treated as expenditure by the assessee-company wholly and exclusively connected to its business. Explaining the reasons for using the words not as fine, penalty or punitive damage passed in the order issued by the Supreme Court, learned departmental counsel submitted that the dominant reason was to ensure that the individual victims of Bhopal gas tragedy should receive the compensation and but for the specific expression not as fine, penalty or punitive damage, there is likelihood of the compensation not reaching the individual, inasmuch as, amount paid by way of fines and penalties, under law, goes to the Crown. He, therefore, submitted that the background of settlement shows that the compensation is connected to the criminal negligence of the assessee-company though stated to be not in the nature of fine, penalty, etc. Learned counsel further submitted that immediately after the accident, the unit was closed and hence there was no business in the unit during the period when the compensation amount was payable and, therefore, the expenditure incurred by the assessee is not allowable as deduction against the income of the assessee from other units. Referring to the decision of the Honble Supreme Court in the case of Indian Aluminium Co. Ltd. (supra) and the other decisions relied upon by the assessees counsel, it was submitted that all the cases are distinguishable as none of the cases refers to the accident and that too of such a magnitude. He also submits that the assessee-company did not debit the expenditure to the profit & loss account as it was advised that the liability does not attain finality till the review petition is disposed of. Therefore, he contends that the claim of deduction was rightly not entertained by the tax authorities in the assessment year prior to 1992-93.

35. As regards the taxability of insurance amount, it was submitted by the departmental counsel that the same is taxable on the date of receipt. It was further submitted that the amount payable by the assessee was not crystallised by the said date so as to adjust it against compensation payable, apart from the fact that the alleged liability towards payment of compensation is not incidental to the carrying on of the business. In support of the submission, learned counsel relied upon Kangas commentary at page 1164. Vol. I, 7th Edition and also relied upon the decisions in K.B.H.M.D.H. Bhiwandiwalla & Co. case (supra) and Maddi Venkataraman & Co. (P) Ltd. v. CIT (1998) 229 ITR 534 (SC).

36. Joining the issue, learned counsel, appearing on behalf of the assessee, submitted that the suits were, in fact, filed against the assessee-company also which were later stayed and hence, it is not correct to state that no claim was made against the assessee at any point of time. Adverting our attention to the relevant material papers, learned counsel submitted that compensation to the tune of Rs. 164 crores was demanded in the suits filed against the assessee in various courts. Meeting the submissions of the learned departmental counsel that the compensation amount was not paid to the claimants directly but to the government, it was submitted that it was in the larger interests of the claimants but that would not make any difference, inasmuch as, payment is indirectly to the claimants through the government machinery. He also submitted that the factory of the assessee-company worked for three shifts i.e., 24 hours and hence, the cause of accident in the late hours do not make any difference, inasmuch as, the accident was in course of carrying on of the business and, therefore, incidental to the trade. He further emphasized that the enormity of the damages caused to the public at large by this accident has no significance in so far as the liability of the expenditure is concerned, inasmuch as, the allowability of an expenditure is dependent on the principle as to whether accident occurred in the normal course of business. In other words, it has to be seen as to whether such risk is inherent in the normal course. Placing reliance on the decision of the Honble Supreme Court in the case Ramchandar Shivnarayan (supra), learned counsel submitted that direct and proximate link is not necessary in order to allow an expenditure so long as the accident and the consequent damages are connected to the business. The decision of the Honble Bombay High Court in the case of K.B.H.M.D.H. Bhiwandiwalla & Co. (supra), has no application to the case on hand, inasmuch as, the case relied upon by the learned Departmental Representative related to litigation expenses and the facts were entirely distinguishable.

37. Meeting the issue raised by the learned counsel as regards the fact that the unit was closed and the business was discontinued, it was submitted by the learned counsel, appearing on behalf of the assessee, that the disallowance was not made on that ground and, at any rate, the business of the assessee continued though the unit was closed down and, therefore, the expenditure is allowable against the profits earned by the assessee-company.

38. We have carefully considered the rival submissions and perused the record. The facts were already recorded in the preceding paragraphs and, therefore, it is not necessary to repeat the facts and circumstances leading to the disaster and the consequent claim for damages which ended in compromise/settlement. On the afore-mentioned facts and circumstances, the issues that arise for our consideration are :

(a) (i) whether the compensation payable by the assessee is an expenditure in the course of carrying on the business in its capacity as a trader-cum-owner;

(ii) Whether the damages payable by the assessee are not punitive in nature;

(b) if so, whether the expenditure is revenue or capital in nature;

(c) if the expenditure is allowable as deduction, in which year the liability was crystallised and allowable.

(d) whether expenditure of a closed unit is allowable against the income earned by assessee-company from other units; and

(c) whether disallowance made in proceedings under section 143(3)/154 is proper.

39. Let us address on the first and the main issue i.e., whether the compensation amount payable by the assessee-company is wholly and exclusively incurred for the purpose of business and not punitive. As could be seen from the language of section 37(1), expenditure not being in the nature of capital expenditure, laid out or expended wholly and exclusively for the purpose of business is allowable as deduction. In the case of Indian Aluminium Co. Ltd. (supra) their Lordships observed at page 739 as under :

The language seems to be simple enough but it has engendered judicial conflict not only in India but also in England. Eminent judges have striven to formulate correct tests to determine whether an expenditure has been laid out or expended wholly and exclusively for the purposes of business or not, but no one has been able to find a test in the application of which differences of opinion do not arise. It seems to us, therefore, essential that, in each case, the courts must always keep in mind the language of the section. (Emphasis, here italicised in print, supplied)

40. As has been observed by the Honble Supreme Court, there is no single test of universal application in order to appreciate whether the expenditure was expended wholly and exclusively for the purpose of business. It is, therefore, necessary to go into the peculiar facts of the instant case so as to appreciate whether the expenditure incurred by the assessee was for the purpose of business. On a careful consideration of the facts and circumstances of the case, we are of the opinion that the expenditure was not incurred for the purpose of business and, therefore, not allowable as deduction under section 37(1) of the Act for the following reasons :

41. In the assessment order for the assessment year 1992-93, the assessing officer mentioned that as per the CBI (a) the storage of the poisonous gas was much more than 50 per cent capacity of the tank which has been prescribed; (b) adequate remedial action to prevent back flow of solution from VGS into RVVH and PVH lines was not taken; and (c) that the temperature of MIC tanks at the preferred temperature of Zero Degree Celsius was not maintained but at ambient temperatures which were much higher, apart from not taking immediate remedial action when tank No. E. 610 did not maintain pressure from 22-10-1984 onwards. Admittedly, assessee-company has dealt with poisonous chemicals/materials/gas. The nature of the material used in manufacture of pesticides is highly hazardous to the human lives and the disaster that took place on 2/3-12-1984, which killed thousands of innocent citizens, apart from permanently disabling many others and effecting the next generation, such as children in the womb, etc. is an accident, unique of its kind and is proof enough to explain the highly hazardous nature of material used by the assessee-company. The disaster, in fact, shook the international conscience as it was the first of its kind in the industrial world. In the interests of safety of the public at large, rigid regulations were prescribed which are expected to be adhered to by such industry-greater the chances of damage of high magnitude by leakage of the material used, greater should be the care that should be taken by strictly abiding by the regulations imposed upon it. The accident, with which we are concerned, cannot be equated to the normal accident that takes place in the course of carrying on of the business, inasmuch as, the assessee, who is dealing with such poisonous material of highly hazardous nature, should take all precautions in storing the material, etc., and even a slightest deviation from the rigorous regulations imposed upon it would amount to breach of public policy and, therefore, the compensation payable on that count cannot be considered as expenditure incidental to the normal trading activity. It will be useful here to refer to the decision of the Honble Madras High Court in the case of M.S.P. Senthikumara Nadar & Sons v. CIT (1957) 32 ITR 138 (Mad), wherein their Lordships observed at pages 151, 158 and 159 as under :

At page 151 of the report

“What Lord Davey observed in the same case has been applied as consistently by courts in India as in England. Lord Davey said :

“. . . for the purposes of the trade. These words are used in other rules and appear to me to mean for the purpose of enabling a person to carry on and earn profits in the trade, etc. I think the disbursements permitted are such as are made for that purpose.

It is not enough that the disbursement is made in the course of or arises out of, or is connected with, the trade, or is made out of the profits of the trade. It must be made for the purposes of earning the profits.”

The application of these principles has led to the position which may be taken as well settled now, that payments of penalties for infraction of law fall outside the scope of permissible deductions. The penalty in any such case is imposed as a punishment on the offender as a responsible person owing obedience to the law. Its nature severs it from the expenses of trade. It is not incurred by him in his character of trader.”

Page 158 of the report

“As we said, these cases were all virtually decided on the application of the tests laid down in Strong v. Woodi Field. It is not enough if the loss sustained or expenditure incurred is in some sense connected with the trade, for it may be only remotely connected with the trade, or it may be connected with something else quite as much or even more than with the trade. Only such losses can be deducted as are connected in the sense that they are really incidental to the trade itself. It is not enough that the disbursement is made in the course of, or arises out of, or is connected with, the trade or is made out of the profits of the trade. It must be made for the purposes of earning the profit.”

Page 159 of the report

“It is true the Act itself did not in express terms prohibit sale within India of coffee sold by the Board for export. That what was broken by the assessee was a term of the contract and not an express provision of law does not, in the circumstances of this case, make any real difference to the principle to be applied. It was in exercise of the statutory duties imposed on the Board to regulate and control sales of coffee produced in India, in the interests of the national economy of the country, that the Board, through the instrumentality of a contract, virtually laid an embargo on sale within India of coffee that had been sold at a concessional rate for the specified purpose of export. It was that the assessee transgressed when it deliberately and without any apparent excuse sold the coffee within India What it had to pay was no doubt called liquidated damages. But the payment was really akin to a penalty for committing an Act opposed to public policy, a policy that underlay the Act, which the Act left to the India Coffee Board to enforce. The assessee could and should have carried on its business in coffee in conformity with the obligations imposed upon it, no doubt, by a contract, but under the authority of the Coffee Market Expansion Act and in furtherance of the policy of control that underlay that Act. It could have carried on the business without infraction of its obligations. That should have been its normal course of conducting its business.

Could it be claimed by the assessee, in the circumstances of this case, that what it did by selling the coffee within India was incidental to the trade itself that it carried on. Its business was among other things to buy and sell coffee. Purchases and sales of coffee were regulated by the Act and by the India Coffee Board under the provisions of that Act.

It was subject to that statutory control that the assessee had to carry on its business. Transgression of that control was not a normal incident of that business, though it was in one sense connected with its business. If it had not been a dealer in coffee it could not have been in a position to buy coffee for export; and if it had not bought coffee for export it would not have been in a position to sell that coffee within India. But that connection is not enough to sustain the claim, that what the assessee had to pay the India Coffee Board was inextricably mixed up with its normal line of business. The breach of its contractual obligation to the Board was not in the normal course of business, and the liability the assessee had to discharge for such a breach was not incidental to the trade itself that it carried on.”

At pages 159 and 160 of the Report

“From what we have said above it should be clear that it was not a case of a payment of damages for a mere breach of contract with nothing more. It was not of course a case of penalty paid under the terms of a statute for contravention of any specific statutory provision. In the circumstances of this case, the liquidated damages claimed and paid was, however, more akin to a penalty then the damages suffered for breach of contract in the course of normal trading activities, whether or not that breach of a contract was also dishonest . . . In our opinion it is the principle laid down in Yon Glehns case that should be extended and applied to negative the claim of the assessee in this case.” (Emphasis, here italicised in print, supplied)

42. The remarks of Lord Davey in the case of Strong & Co. of Romsey, Ltd. (supra) were relied upon by the court of Appeal in the case of IRC v. Alexander Von Glehn & Co. Ltd. (1920) 12 TC 232 by Lord Sterndale and, in turn, the principle laid down by Lord Sterndale was relied upon by the Honble Supreme Court in the case of Maddi Venkataraman & Co. (P) Ltd. (supra). To make the matter more explicit, we extract some of the observations of the Honble Supreme Court at pages 542, 544 and 546 :

Page 542 of the report

“Lord Sterndale has, however, held that the payments for infraction of law could not be called to be for the purpose of the trade. Relying upon the remarks of Lord Davey in the case of Strong and Co. of Romsey Ltd v. Woodi Field (1906) 5 TC 215 (HL), it was held that the disbursements permitted as deductions must be for the purpose of the trade. It was not enough that the disbursement was made in the course of, or arose out of or was connected with, the trade, or was made out of the profits of the trade.”

Page 544 of the report

“As Lord Sterndale held, it was not enough that the disbursement was made in the course of or arose out of or was connected with the trade or was made out of the profits of the trade. Only if it could be shown that it was spent for the purpose of the trade can the deduction be permitted unless, the entire trade was unlawful.”

Page 546 of the report

“As was laid down by Lord Sterndale in the case of IRC v. Alexander Von Glehn and Co. Ltd. (1920) 12 TC 232 (CA), it was not enough that the disbursement was made in the course of trade. It must be for the purpose of the trade.”

43. Thus, it could be seen that the comments of Lord Davey in his speech in Strong & Co. of Romsey Ltd.s case (supra) were relied upon by the Honble Supreme Court in the latest decision. It is also relevant note that in the case of Indian Aluminium Co. Ltd. (supra) it was observed at pages 737 and 740 that the test applied by Lord Davey is different from the test applied by Lord Chancellor. Only the test applied by Lord Chancellor was not followed by Honble Supreme Court. In other words, the test applied by Lord Davey is not disapprove. The Honble Madras High Court (supra) also relied upon the test laid down by Lord Davey. Thus it could be seen that the decision of the Honble, Madras High Court is in line with the decision of the Honble Supreme Court in the case of Maddi Venkataraman & Co. (P.) Ltd. (supra).

44. Reverting to the decision of the Honble Madras High Court, the principle that emerges from the observations of their Lordships was that merely because an expenditure is remotely connected-with the trade or merely because the disbursement was made in the course, or arises out of, or is connected with the trade, or is made out of profits of the trade, it is not an allowable deduction under section 37(1) of the Act in the absence of proving that the expenditure was incurred for the purpose of earning the profits which, in turn, means that the expenditure should have been incurred in the normal course of conducting its business i.e., in conformity with the obligations imposed upon the assessee and should not be opposed to public policy or against the interest of national economy or against the interests of innocent citizens of the country.

45. In the case before us, circumstances show that the disaster was due to the negligent maintenance of the factory as could be inferred from the report of Dr. Varadrajan regarding the design defect and the report of the CBI regarding further lapses. Such maintenance can certainly be said to be in breach of strict regulations and, therefore, opposed to public policy having effected thousands of innocent citizens. Such an expenditure, in our opinion, does not fall in the category of expenditure incurred for the purpose of business or trade, inasmuch as, exposing citizens of a city to poisonous gases which affect them severely and consequent payment of damages is not a normal incident of business carried on by any assessee and, therefore, such expenditure is not deductible against the profits earned by the assessee.

For the same reasons, the expenditure incurred by the assessee-company of Rs. 7.5 crores is also not allowable as deduction. It is not a voluntary payment, as rightly pointed out by the learned counsel of the assessee. At the same time, it cannot be said that the expenditure was incurred for the purpose of business. The liability to pay arose because of the unprecedented disaster.

46. The plea of the assessee that the compensation is not payable as fine or penalty is mainly based on the terms of settlement. A careful perusal of the Apex Court order dated 14/15-2-1989 shows that in pursuance of the compensation payable, all civil and criminal proceedings are to be dropped. Thus the Honble Court, while quantifying the compensation payable, is not oblivious of the fact that criminal negligence on the part of the company was a factor leading to disaster. Inspite of it, since the settlement was to give immediate relief to the victims, the words not as fine, penalty. . .” were added so as to make sure that the intended purpose is achieved as, otherwise, amount of fine or penalty shall be appropriated by the government in which event the victims of Bhopal gas tragedy will not be benefited. Thus, the anxiety of the Honble court to make sure that the compensation amount reached the victims and not appropriated by government is reflected in the use of the words “not as fine. . .” and nothing more. The Honble Supreme Courts observation “in particular the enormity of human suffering occasioned by the Bhopal gas disaster and the pressing urgency to provide immediate and substantial relief to victims of the disaster, we are of opinion that the case is pre-eminently fit for an overall settlement” also cushions our conclusion. Thus the subsequent order of the Supreme Court dated 3-10-1991 restoring the criminal cases against the company and its directors do not make any difference. The words “not as fine. . .” existed even in the first order of the Supreme Court. Thus there is no conclusive finding of the Supreme Court to the effect that the compensation is not for criminal negligence on the part of the company. To quote in this context, the observations of Justice Holmes of U.S. Supreme Court.” A word is not a crystal, transparent and unchanged; it is the skin of a living thought and may vary greatly in colour and content according to the circumstances and the time in which it is used.”

47(a) For the sake of argument, if it is considered that the expenditure is incurred in the normal course of business, the subsidiary question that arises for our consideration is whether an expenditure relatable to a closed down unit is allowable as deduction against the profit of the assessee-company? In our opinion, the answer to the above question would be in the negative. Assessee-company carried on several distinct and independent businesses. Bhopal plant is one such unit which manufactures pesticides. Admittedly, the Bhopal Unit was ordered to be closed down soon after the disaster. The annual report of the year ended 25-12-1984 indicates that the Madhya Pradesh Government made it clear that the plant will not be allowed to resume operations and has not renewed the licence of the factory which expired on 31-12-1984. The Board of Directors had finally decided to close the unit permanently effective from 11-7-1985. Thus, the business of that unit was closed by the time the liability to pay compensation accrued. Even as per the companys stand, based on legal advise, the liability did not accrue prior to the assessment year 1989-90. In the case of L.M. Chhabda & Sons v. CIT (1967) 65 ITR 638 the Apex Court observed that expenditure of a closed business cannot be allowed against income earned by assessee from other distinct and independent businesses. In our opinion, the principle applies on all fours to the facts and circumstances of the case on hand. Since facts necessary for disposal of this issue are already on record, in the interests of substantial justice, we have taken up this issue for our consideration.

47(b) As regards the year of accrual of liability, it may be useful to extract the relevant portion of annual report of 1988-89 :

“UCC and UCIL deposited with the Registrar of the Supreme Court of India on 24-2-1989, the amounts specified in the Supreme Court Orders in accordance with the directions of the court. Meanwhile, certain individuals and organisations representing the gas victims filed two review petitions and some writ petitions before the Supreme Court challenging the constitutionality of the Bhopal Act as also the manner in which the settlement was ordered and the adequacy of the settlement amount and prayers have been made for setting aside the settlement. Following this, the Supreme Court referred the question of constitutionality of the Bhopal Act to a Constitution Bench of the Supreme Court presided over by Honble Mr. Justice Sabyasachi Mukherjee. With this background, when the matter came up on 4-4-1989 for compliance report, the Honble court did not pass any order on the compliance report and held the same in abeyance till all pending issues connected with the settlement orders had been decided.

Subsequently, the Bench presided over by Honble Mr. Justice Sabyasachi Mukherjee held several hearings on the question of the validity of the Bhopal Act and after hearing the counsels for the petitioners and the Union of India and other parties, has reserved its judgment. By another order dated 2-5-1989, the Bench presided over by the Honble Chief Justice has ordered that the review petitions will be listed after judgment has been delivered on the validity of the Bhopal Act by the full Bench presided over by the Honble Mr. Justice Sabyasachi Mukherjee, and the pending writ petitions will also be listed along with the review petitions. Thus, it will be seen that despite the Supreme Court Orders dated 14 & 15-2-1989, directing an overall settlement of the Bhopal Litigation, matters are still pending.

In these circumstances, the company has been advised by its legal counsel that the liability to pay compensation in terms of the settlement as recorded in the orders of the Supreme Court has not become a determinate or ascertained one and cannot be treated as having accrued till all the issues connected with the settlement orders have been finally disposed of. Accordingly, based on legal advice, the company has decided that the said amount of US $45 million (equivalent to Rs. 68.99 crores) paid into the Supreme Court of India be not charged to the Profit and Loss Account for the accounting period ended 31-3-1989, but be held in suspense and treated as a deposit to be carried forward and necessary, adjustment in this regard be made after this matter is finally decided by the Supreme Court and all pending, proceedings are over.”

We endorse the view of the directors. Till the disposal of the review petitions, the liability cannot be said to have accrued. On 3-10-1991, the review petitions were finally disposed. Thus the liability to pay compensation accrued in the previous year relevant to the assessment year 1992-93.

47(c). Considering the complex nature of facts, circumstances and the legal position in deciding the above issues; we are of the considered view that the assessing officer went wrong in considering the claim of the assessee-company in proceedings under section 143(1)/154 of the Act as the issue falls outside the purview of prima facie adjustment. The disallowance made in those proceedings are, therefore, deleted.

48. This disposes of Ground No. 1 in ITA No. 1752 (Cal) of 1990; Ground No. 4 in ITA No. 1818 (Cal.) of 1996; Ground No. 3 in ITA No. 1340 (Cal.) of 1993; Ground No. 12 in ITA No. 1341 (Cal.) of 1993; Ground No. 7 in ITA No. 2183 (Cal.) of 1993; and ITA No. 3255 (Cal.) of 1992 and C.O. No. 91 (Cal.) of 1993 arising out of ITA No. 3255 (Cal.) of 1992.

49. Re. : ITA No. 1752 (Cal.) of 1990

Ground No. 2 (as per abbreviated grounds of appeal) reads as under :

“The Commissioner (Appeals) erred in confirming the action of the DCIT in respect of rejecting your appellants claim for deduction of pre-transfer maintenance shut down expenses amounting to Rs. 38,50,000 incurred in respect of Chembur Plant.”

50. Facts in brief are as under. Assessee-company entered into an agreement dated 27-3-1984 with the Reliance Textile Industries for sale of their Chemicals and Plastics Unit at Chembur. As per clause 22 of the agreement, assessee-company shall undertake the pre-transfer maintenance shut-down of the unit and the purchaser agreed to contribute Rs. 38.50 lakhs towards expenditure to be incurred by the seller. Clause 22 of the said agreement reads as under :

“22. After the date of this Agreement and till the Transfer Date, the Seller shall operate the Chemicals and Plastics Unit prudently and in a business like manner and not undertake any new financial liability or commitment without the consent of the Purchaser. The Seller shall also maintain and preserve the assets to be transferred with proper and due care and precaution so as not to adversely affect the title or value thereof in any manner, except normal wear and tear accepted. The Seller and the Purchaser have agreed that the Seller shall undertake a Pre-transfer Maintenance shut-down of the said Chemicals and Plastics Unit about 2-3-1984 and the Purchaser shall contribute a sum of Rs. 38.50 lakhs (Rupees Thirty-eight lakhs and fifty thousand only) towards expenses to be incurred by the Seller for the Pre-transfer Maintenance Shut down and the start-up expenses for the said unit. This payment shall be made by the Purchaser to the Seller on the Transfer date. The Purchaser shall be entitled to depute observers, (technical or financial) to the Chemicals and Plastics Unit after the date hereof and the Seller shall furnish all information and documents to them as may be necessary for implementing this Agreement.”

51. This pre-transfer expenditure was not debited to the profit & loss account but debited to suspense account in the assessees books. However, it was claimed as deduction in the return as normal maintenance expenditure of the plant mainly on the ground that the sale did not ultimately materialise and the normal maintenance expenditure was, even otherwise, to be incurred by the assessee. However, in the opinion of the assessing officer, the expenditure incurred by the assessee was not towards normal maintenance of the plant and as the agreement shows, it was a pre-transfer maintenance which was incurred with the hope of an attractive price from the purchaser and but for the non-materialisation of the deal, the expenditure would have been reimbursed by the purchaser. Thus, the claim of the assessee was rejected.

52. Aggrieved, assessee-company challenged the order of the assessing officer on the ground that all chemical plants are shut down for annual maintenance in the normal course and, therefore, the fact that the assessee entered into an agreement for sale of the plant did not make any difference to the nature of the expenditure incurred by the assessee, particularly when the agreement did not materialise and the assessee had run the factory after the normal maintenance. The explanation of the assessee did not appeal to the Commissioner (Appeals). Analysing the clauses in the agreement, learned Commissioner (Appeals) observed that the expenditure was incurred by the assessee-company to make it updated and also repaired the plants to boost-up its sale price and, therefore, it is an expenditure in the nature of cost of improvement of capital assets, particularly when the assessee-company had no intention to run the plant of its own. In this regard he further observed that the intention of the company was to overhaul the existing plant and receive higher consideration than it could usually fetch and, therefore, the repairing cost has increased the cost of the plant. Thus, the addition was confirmed.

53. Further aggrieved, assessee is in appeal before us. learned counsel of the assessee submitted that it is the normal practice to shut-down the Chemical and Plastics Unit every year for annual maintenance and such expenditure do not deserve to be treated as capital expenditure.

He further submitted that the agreement with Reliance Textiles did not convert the nature of expenditure-from revenue to capital in nature. He further submitted that the observation of the Commissioner (Appeals) that the expenditure was incurred to make the plant and machinery updated, is not factually correct and, therefore, the treatment of the expenditure as cost of improvement of the assets, is not in accordance with law. Learned counsel has taken us through the agreement (pages 17 to 40 of the paper book, Vol. No. 2) to impress upon us that the expenditure is not towards improvement of the plant and machinery. Learned counsel further submitted that the actual expenditure incurred by the assessee was much more but over and above Rs. 38.50 lakh was allowed as revenue expenditure by the assessing officer. It is also the submission of the learned counsel that after the shut-down, the sale having not materialised, the assessee-company had taken full advantage of the shut-down maintenance by it subsequent operation of the plant which continued in their ownership. It was also brought to our notice that only in the accounting year, relevant to the assessment year 1990-91, the unit could be sold to Oswal Agro and, therefore, the assessee enjoyed the benefit of annual maintenance carried out in March, 1984 in the subsequent period when the factory was operated by the assessee-company. It was, therefore, submitted that the expenditure is allowable as deduction against the profits of the assessee-company.

54. On the other hand, learned Departmental Representative submitted that as per the agreement (clause 5), assessee-company is a trustee on behalf of the purchaser and, therefore, the expenditure incurred by the company cannot be said to be revenue expenditure as it was mainly intended for the purpose of sale. He thus supported the orders of the tax authorities. It was also submitted that if the expenditure was not reimbursed, then in the year in which the agreement is not materialised, the assessee can claim deduction but not in the year under consideration.

55. We have carefully considered the rival submission and perused the records. It is not in dispute that the agreement did not materialise and the assessee has not received any reimbursement from Reliance Textile Industries Ltd. A careful perusal of the agreement shows that the expenditure incurred by the assessee is only towards maintenance of the factory and not towards updating the plant. Considering the facts and circumstances of the case, we are, therefore, of the opinion that the expenditure is revenue in nature and allowable as deduction. The assessing officer is directed accordingly.

56. Ground No. 3 (as per abbreviated grounds of appeal) reads as under :

“The Commissioner (Appeals) erred in confirming the DCITs action of considering the following items of expenditure as falling under the heads of expenditure mentioned in section 37(3A) :

A.

 

Running and maintenance of motor cars

Rs.

 

(i)

Estimated expenditure on insurance and taxes on motor cars depreciation as well as expenditure on salaries, bonus, etc. of drivers

3,75,000

 

(ii)

Expenditure on motor cars relating to scientific research and claimed under section 35.

1,09,850

 

(iii)

Repairs expenditure on motor cars

6,71,810

B.

 

Payment made to hotels :

11,56,660

 
 

Expenditure on payment to hotels relating to scientific research

46,416

C.

 

Advertisement, publicity and sale promotion :

 

 

(i)

Free samples

72,599

 

(ii)

Dealers convention

84,803

 

(iii)

Statutory advertisements

4,294

 

(iv)

Advertisements for sale of scrap, tender, etc.

50,537

 
 
 

2,12,233.”

Reg : Running & maintenance of motor cars and payment to hotel

57. Learned counsel for the assessee submitted that except the payment of salaries and bonus, all other expenditure, such as, depreciation, insurance, taxes and repairs on motor-cars, is not disallowable under section 37(3A) of the Act as the said expenditure is allowable under sections 30 to 32 of the Act. In other words, the claim of the assessee is that section 37(3A) is attracted only in respect of such expenditure which is otherwise allowable under section 37(1) of the Act and in this regard he relied upon the decision of the Honble Calcutta High Court in the case of CIT v. Tungabhadra Industries Ltd. (1994) 207 ITR 553. He also relied upon the decision in the case of CIT v. Orient Papers & Industries Ltd. (1995) 214 ITR 473 (Cal). On the other hand, learned Departmental Representative submitted that the decision of the Honble Calcutta High Court is not accepted by the revenue and thus relied upon the orders of the tax authorities.

58. We have carefully considered the rival submissions. Section 37(3A)/37(3B) restricts the quantum of expenditure allowable if the expenditure is in connection with the running and maintenance of motor-cars. According to the tax authorities, the expenditure in the form of insurance, taxes, depreciation and repairs is necessary for running and maintenance of the motor-cars and, therefore, such expenditure is hit by section 37(3A) for, a specific clause overrides all other general provisions. However, we find that the issue is squarely covered by the decision of the Honble Calcutta High Court in the case in Tungabhadra Industries Ltd. (supra) wherein, their Lordships held that only such expenditure which is allowable only under section 37(1) can be subject to disallowance under section 37(3A) but all other expenditure which is allowable under sections 30 to 36 of the Act do not fall under section 37(1) and, therefore, cannot be considered for disallowance under section 37(3A). In the instant case, bifurcation of the expenditure is not available on record. We, therefore, direct the assessing officer to recompute the disallowance by applying the decision of the Honble Calcutta High Court (supra). In other words, expenditure, such as depreciation, which is allowable under section 32; repairs and insurance which is allowable under section 31, etc. should be excluded for the purpose of computing the disallowable portion under section 37(3A).

59. The next issue is with regard to the expenditure on motor-cars relating to scientific research. According to the learned counsel, the expenditure incurred on scientific research is allowable under section 35 of the Act and, therefore, the provision of section 37(3A) does not apply. By respectfully following the decision of the Calcutta High Court (supra), we accept the plea of the assessee and direct the assessing officer to exclude the expenditure, incurred on motor-cars, relating to scientific research for the purpose of working out disallowance under section 37(3A) of the Act.

60. As regards the expenditure on payment to hotels relating to scientific research, the same logic applies. It is not disputed that the expenditure is otherwise allowable under section 35 of the Act. Such being the case, section 37(3A) is not attracted for the reason that the expenditure does not fall under the residuary clause i.e., section 37(1) of the Act. By respectfully following the judgment of the Honble Calcutta High Court, we allow the claim of the assessee-company.

Re : Advertisement, publicity and sales promotion expenses

61. The claim of the assessees counsel is that (a) the expenditure on dealers convention do not fall to be considered as expenditure on advertisement, publicity and sales promotion within the meaning of section 37(3A)/(3B) of the Act; and (b) cost of free samples do not fall for consideration under section 37(3B) and advertisement for sale of scrap, etc. is not an advertisement in connection with products of the assessee-company and, therefore, it is not advertisement within the meaning of section 37(3B).

62. On the other hand, learned counsel, appearing on behalf of the revenue, supported the order of the first appellate authority by reiterating the submissions made before us while arguing the case for the assessment year 1984-85 in ITA No. 2686 (Cal.) of 1989. Incidentally, it may be noted that the Commissioner (Appeals) rejected the claim of the assessee by following his own order in respect of the assessment year 1984-85 against which assessee filed an appeal which is numbered as ITA No. 2686 (Cal.) of 1989. We have disposed of that appeal by our order dated 12-11-1998 wherein the disallowance referable to the expenditure incurred on free samples was confirmed by us vide para 3(a) of our order. We, therefore, confirm the disallowance of Rs. 72,599.

63. As regards the dealers convention and conferences, we have considered this issue in para 3(b) of our aforesaid order and allowed the claim of the assessee for the following reasons :

“Merely because there is remote element of increase in sales, by the added knowledge gained by the dealers in the conferences, the expenditure cannot be termed as sales promotion expenditure or expenditure towards advertisement.”

The claim of the assessee is allowed accordingly.

64. As regards statutory advertisement and advertisement for sale of scrap, tender, etc., the claim of the assessee-company is that the expenditure is not in connection with the sale of its products as the expenditure is either in connection with the statutory advertisement or in connection with advertisements for sale of scrap, etc. The factual position in this regard is not disputed by the revenue before us. Such being the case, we are of the opinion that such expenditure do not fall within the meaning of “advertisement, publicity and sales promotion” and, therefore, outside the purview of section 37(3A)/(3B) of the Act. We, therefore, direct the assessing officer to exclude the sum of Rs. 54,831 while re-calculating the disallowance under section 37(3A) of the Act.

65. Vide Ground No. 4, assessee contends that depreciation amounting to Rs. 20,125 and Rs. 60,213 on building used as guest-house is not disallowable under the provision of section 37(4) of the Act, inasmuch as, depreciation is otherwise allowable under section 32 of the Act. At the time of hearing, learned counsel fairly conceded that the issue is covered against the assessee-company and in favour of the revenue by the plain language of section 37(4) of the Act and also by the decision of the Honble Jurisdictional High Court in the case of CIT v. Upper Ganges Sugar Mills Ltd. (1994) 206 ITR 2151. By respectfully following the decision of the Honble Calcutta High Court (supra), the ground raised by the assessee is rejected.

66. Ground No. 5 (as per abbreviated grounds of appeal) reads as under :

“The Commissioner (Appeals) erred in confirming the addition in respect of excise duty written back of Rs. 35,13,542 under section 41(1) of the Act.”

67. The facts in brief are that the assessee-company manufactured zinc calots at its Madras factory. These calots are made out of rough rolled zinc. Assessee paid excise duty on rough rolled zinc for the period 1972 to 1979. However, at a later stage, the assessee-company claimed that excise duty is not leviable at that stage. In the meantime, the Appellate Collector, Calcutta, under similar facts and circumstances held that rough rolled zinc is not exigible to excise duty. Therefore, the Single Judge of the Madras High Court directed the Excise Authorities of Madras to act in accordance with the view taken by the Appellate Collector, Calcutta. The Excise Department has appealed against these directions before the Division Bench of the Madras High Court which is still pending. In the meantime, the assessee-company filed a writ petition for direction to refund the excise duty which is also pending. In the accounts for the previous year relevant to the assessment year 1985-86 the assessee-company credited the amount of anticipated refund in its books. assessing officer, therefore, held that the amount credited in the books is taxable under section 41(1) as there is cessation of liability. The Commissioner (Appeals) confirmed the order of the assessing officer for reasons given by him in his order for the assessment year 1984-85 mainly on the ground that once it was written back by the assessee, that is sufficient proof of cessation of liability.

68. Further aggrieved, assessee is in appeal before us. learned counsel appearing on behalf of the assessee, submitted that an identical issue was argued in the appeal filed for the assessment years 1982-83 and 1984-85 (I.T.A. Nos. 968 (Cal.) of 1986 and 2686 (Cal.) of 1989) respectively and further submitted that since the question of refund has not finally been decided, there is no cessation of liability and thus adopted the same submissions made before us in the earlier occasions.

69. On the other hand, learned counsel, appearing on behalf of the revenue, relied upon the following decisions, though he admitted that the facts and circumstances in the instant case are identical to the facts of the assessment years 1982-83 and 1984-85

(a) CIT v. Bharat Iron & Steel Industries (1993) 199 ITR 67 (Guj.) (FB),

(b) CIT v. Govind Sugar Mills Ltd. (1993) 199 ITR 775 (Cal.),

(c) CIT v. Ashoke Marketing Ltd. (1993) 199 ITR 619 (Cal.),

(d) CIT v. Jiajee Rao Cotton Mills Ltd. (1997) 227 ITR 860 (Cal.),

(e) CIT v. General Industries Society Ltd. (1994) 207 ITR 169 (Cal.),

(f) CIT v. Indian Smelting & Refining Co. Ltd. (1998) 230 ITR 194 (Bom.),

(g) Standard Mills Co. Ltd. v. CIT (1998) 229 ITR 366 (Bom.),

(h) CIT v. Agarpara Co. Ltd. (1986) 158 ITR 78 (Cal.),

(i) CIT v. Ravindra C. Gajiwala (1993) 204 ITR 157 at 161 (Guj.),

(j) Mysore Thermo Electric (P.) Ltd. v. CIT (1996) 221 ITR 504 (Karn).

70. The submission of the learned departmental counsel is that on the assessees own admission (by crediting in profit & loss account with the anticipated refund), refundable amount is taxable under section 41(1) of the Act which can again be claimed as deduction if and when liability.” arises.

71. Joining the issue, learned counsel, appearing on behalf of the assessee, submitted that no refund is received as yet and this position itself shows that the liability did not cease in the previous year relevant to the assessment year 1985-86.

72. We have carefully considered the rival submissions and perused the record. This issue was considered by us elaborately in the orders passed in ITA Nos. 968 (Cal.) of 1986 and 2686 (Cal.) of 1989, both dated 12-11-1998. For the elaborate reasons given by us in the said orders, we hold that there is no cessation of liability within the meaning of section 41 (1) of the Act in the year under consideration.

73. It may be relevant here to list out the relevant dates to highlight this position. On 16-9-1973, the Assistant Collector of Central Excise held that rough rolled zinc was chargeable to central excise duty which order was upheld by the Appellate Collector on 4-3-1974. On 5-9-1975, Government of India rejected the assessees revision application. In 1976, assessee filed a writ petition before the Madras High Court challenging the aforesaid order. The writ petition was disposed by an order dated 16-4-1979 wherein it was stated that the decision rendered by the Appellate authority, Calcutta should be applied to this case also. Till that decision is rendered, the department is directed not to enforce the levy against the assessee-company and, in turn, assessee was asked to furnish bank guarantee equivalent to the amount due to the department. In May, 1979, assessee claimed for refund of duty paid upto April, 1979. On 20-10-1981, the Appellate Collector, Calcutta held that rough rolled zinc was not chargeable to excise duty. On 17-4-1982, a show-cause notice was issued by the Government of India alleging that the aforesaid order was not proper, legal and correct. Against the show-cause notice, assessee filed a writ petition before the Calcutta High Court. In 1985 assessee-company filed a writ petition bearing No. 11119 of 1985 before the Madras High Court praying for a direction to the Central Excise Authority to refund the sum collected by way of excise duty on rough rolled zinc during the period October, 1972 to April, 1979. As the things stood thus, the government filed an application before the Madras High Court seeking modification of the order dated 16-4-1979 which was dismissed on 30-4-1983. The governments appeal against the said order before the Division Bench was also dismissed on 16-9-1990. On 7-12-1995, the writ petition filed before the Madras High Court was disposed of with direction to the Excise Authority, Madras to consider the refund claim of the assessee in accordance with the amended provisions of section 11B of the Central Excise Act, 1944.

However, the matter is still pending before the Assistant Collector. Thus it could be seen that the amount paid in 1970 was not refunded even after 25 years. Even if it is reckoned from the year in which the anticipated refund is credited in the assessees books, it is more than 14 years and the assessee is yet to receive the refund.

74. Since the learned counsel, appearing on behalf of the revenue, has cited several decisions before us, it may be necessary to briefly explain as to how the case law cited by the learned departmental counsel are distinguishable on facts.

75. In Bharat Iron & Steel Industries case (supra), the facts are that excise authorities issued show-cause notice under section 36(2) on 23-12-1974. On 8-8-1975, i.e., pending the revisional proceedings, the excise duty collected was refunded to the assessee. The revisional proceedings were dropped on 30-4-1976. While considering the question as to when there was remission of liability within the meaning of section 41(2) of the Income Tax Act, the court held that the finality reached only on the date when the revisional proceedings were dropped and not on the date when the amount was refunded to the assessee. This case supports the stand of the assessee-company rather than the contention of the revenue. It may be noted here that the decision of the Honble Gujarat High Court was applied by the Kerala High Court recently in the case of Travancore Chemicals & Mfg. Co. Ltd. v. CIT (1998) 101 Taxman 639 wherein Their Lordships observed that the word obtained in section 41(1) cannot be given a meaning capable of being obtained and thus held that merely because the Apex Court decided the matter whereby the assessee was entitled to refund is not sufficient to tax tile amount likely to be refunded. Only in the year of actual refund, the amount is taxable under section 41(1) of the Act.

76. Govind Sugar Mills Ltd.s case (supra) : In this case, the question is with regard to the deduction of liability under section 37 and not with regard to cessation of liability under section 41(1) of the Act. We further find that the Honble court decided the reference application on the peculiar facts of that case and their Lordships made it clear that the decision is not on legal principles.

77. Ashoke Marketing Ltd.s case (supra) : In this case, the sale-tax liability was fastened upon the assessee by ex parte order of the CTO which was set aside by the Asst. CTO by his order dated 4-4-1973. The Income Tax Officer sought to tax the amount refundable under section 41(1) of the Act which was resisted on the ground that there was a definite possibility of revival of demand. The Honble court held that the order of the Asst. CTO had become final and, therefore, there was cessation of liability. The case cited by the counsel, appearing on behalf of the assessee i.e., Rameshwar Prasad Kishan Gopal v. V.K. Arora, Income Tax Officer (1983) 141 ITR 763 (All.) was distinguished by the Calcutta High Court on the ground that in the said case appeals by Special Leave before the Supreme Court were filed by the Central Government and State of Uttar Pradesh and, therefore no finality was reached so as to attract section 41(1) of the Act, whereas, in the case before the Calcutta High Court, the appellate order has become final. We may observe herein that in the facts of the assessees case also there was no finality before the end of the accounting year under consideration.

78. Standard Mills Co. Ltd.s case (supra) : In these cases also, deduction claimed under section 37 of the Act was considered. In other words, the Honble court was not concerned with the application of provisions of section 41(1) of the Act.

79. General Industries Society Ltd.s case (supra) : In this case the Honble court was concerned with the case of a time-barred debt which cannot be enforced in a court of law and, therefore, held that because of unenforceability of debt, there is cessation of liability. Suffice it to say that in the case before us, the question of refund is heavily contested and the fact that the refund was not granted till date is proof enough in that regard.

80. Agarpara Co. Ltd.s case (supra) : In this case, the unclaimed bonus was written back in the accounts. While considering the question as to whether unclaimed bonus is taxable under section 41(1) of the Act, the court held that the Tribunal should have investigated whether the unclaimed bonus represented the excess of the requirement for payment of bonus to the employees and the reasons why the bonus had not been claimed by the employees. The court further observed that the conduct of the debtor and the creditor has to be examined and it can also be inferred from the surrounding circumstances as to whether there has been any cessation or remission of liability of the assessee. A perusal of the judgment shows that the decision if the Honble High Court was mainly based on the facts existed therein.

81. Jiajee Rao Cotton Mills Ltd.s case (supra) : In this case, application of section 41(1) of the Act with regard to the unpaid wages and bonus of earlier years written back to Profit & Loss Account in the subsequent year was under challenge. Assessees counsel conceded before the Honble court that it is covered by decision in the General Industries Society Ltd.s case (supra). As there is no discussion in the instant case, it is difficult to apply the ratio of the said decision to the case before us.

82. Ravindra C. Gajiwalas case (supra) : In this case, some of the creditors allowed remission of trading liability which was brought to tax under section 41(1) of the Act. The contention of the assessee that remission was given in the same year in which the liability was incurred and so the provisions of section 41(1) would have no application, was accepted by the Tribunal. The Honble High Court held that the amount can be considered for the purpose of taxing the income under section 28 of the Act. We fail to appreciate how this decision applies to the facts and circumstances of the assessees case.

83. Ground No. 6 (as per abbreviated grounds of appeal) reads as under :

“The Commissioner (Appeals) erred in confirming the addition made by the DCIT of Rs. 31,51,000 to the closing stock.”

At the time of hearing, learned senior counsel, appearing on behalf of the assessee-company, did not press this ground. We, therefore, confirm the order of the Commissioner (Appeals) on this issue.

84. Ground No. 7 (as per abbreviated grounds of appeal) reads as under :

“The Commissioner (Appeals) erred in confirming the DCITs action in disallowing Rs. 10,048 under section 37(2A) of the Act as Entertainment Expenditure.”

85. It is the case of the assessee-company that the expenditure in allowable under section 35 of the Act and, therefore, section 37(2A) has no application. In other words, section 37(2A) is attracted only when an expenditure is claimed under section 37(1) of the Act. In this regard learned counsel of the assessee relied upon the decision of the Honble Calcutta High Court in the case of Tungabhadra Industries Ltd. (supra). Identical issue was considered by us in para 59 above. For the reasons stated therein, we direct the assessing officer to exclude the expenditure for computing disallowance under section 37(2A) of the Act.

86. Ground No. 8 (as per abbreviated grounds of appeal) reads as under :

“The Commissioner (Appeals) erred in confirming the DCITs action for recomputing the deduction allowable under section 80HHC of the Act at Rs. 4,68,250 as against Rs. 7,65,078 claimed by your Appellant.”

87. This ground relates to the claim under section 80HHC in respect of (a) amount received on Exports to Nepal; and (b) incremental turnover of certain exports, although there was a shortfall in the overall turnover, of the exports by the assessee in this year.

88. Identical issue was considered by us in ITA No. 2686 (Cal.) of 1981 dated 12-11-1998. Vide para 5 of our order we held that the assessee-company had not earned convertible foreign exchange on export to Nepal and, therefore, it cannot be taken as a part of the eligible turnover for the purpose of deduction under section 80HHC of the Act. With regard to the deduction allowable on the incremental turnover, the decision of the Honble Calcutta High Court in the case of CIT v. Indian Products Ltd. (1994) 207 ITR 647 (Cal) was followed wherein it was field that aggregate export turnover of goods and merchandise should be taken into consideration. Learned senior counsel, appearing on behalf of the assessee-company conceded that the assessees case is covered by the aforesaid decision. We, therefore, uphold the order of the Commissioner (Appeals).

89. Ground No. 9 (as per abbreviated grounds of appeal) reads under :

“The Commissioner (Appeals) erred in confirming the action of the DCIT adding back Rs. 1,97,559 being loss arising out of exchange fluctuation.”

At the time of hearing, learned counsel, appearing on behalf of the assessee-company did not press this ground. We, therefore, uphold the order of the Commissioner (Appeals),

90. Vide Ground No. 10, assessee-company contends that the Commissioner (Appeals) erred in confirming the DCITs action for levy of interest under section 139(8) of the Act. Interest under section 139(8) was charged from 1-7-1985 to 30-11-1985 @) 15 per cent on Rs. 203,76,722. It was contended before the first appellate authority that the return of income could not be prepared till the annual accounts and tax audit report were ready and since the assessee has a reasonable cause, the assessing officer ought to have waived the interest. The Commissioner (Appeals), however, observed that this is a consequential ground. Assessing officer was, therefore, directed to recalculate the interest while giving effect to his order.

91. Further aggrieved, assessee-company is in appeal before us. The main submission of the learned counsel, appearing on behalf of the assessee is that the assessing officer passed a non-speaking order and, therefore, liable to be quashed. In this regard, he adverted attention to page, 16 of the assessment order. He has also taken us through Ground Nos. 15 and 16 of the grounds of appeal filed before the Commissioner (Appeals). Placing reliance on the following two decisions, learned counsel requested for a direction to the assessing officer for waiver of interest on the ground that there was a reasonable cause for the delay in filing the return as the disaster took place on 2nd/3-12-1984 whereas, the accounting year of the assessee for the assessment year 1985-86 ended on 25-12-1984 :

(a) CIT v. Prabhat Zarda Factory (1996) 221 ITR 791 (Pat.).

(b) CIT v. New Swadeshi Mills of Ahmedabad Ltd. (1984) 147 ITR 163 at page 179 (Cal.).

92. On the other hand, learned counsel, appearing on behalf of the revenue, submitted that the assessee has no right of appeal against levy of interest under section 139(8) of the Act and thus relied upon the orders of tax authorities.

93. We have carefully considered the rival submissions. In the instant case, the contention of the assessee is that the assessing officer did not apply his mind before charging interest under section 139(8) of the Act and the words “charge interest under section 139(8)” at the end of the order show that the task of charging the interest was left to someone else implying thereby that the assessing officer has not applied his mind to the question as to whether it is a fit case for levy of interest.

The learned counsel, appearing on behalf of the assessee-company submitted that due to the disaster on 2nd/3-12-1984, the activities of the company went out of gear resulting in the delay in preparing Annual Audit reports. The audit report was obtained only on 26-12-1985 and the return could be filed on 30-12-1985. But these factors appeared to have not been taken into account while charging the interest. At any rate, from the cryptic order passed by the assessing officer, nothing could be inferred. Since the assessee challenges the very levy itself, in the light of the decision of the Honble Supreme Court in the case of Central Provinces Manganese Ore Co. Ltd. v. CIT (1986) 160 ITR 961, appeal is maintainable on this issue. By respectfully following the decision of the Honble Calcutta High Court in the case of New Swadeshi Mills of Ahmedabad Ltd. (supra) and in the interests of justice, we set aside this issue to the file of the assessing officer who is directed to pass a speaking order.

Re : I. TA. No. 1341 (Cal) of 1993 :

94. Ground No. 1 (as per abridged grounds of appeal) reads as under :

“The Commissioner (Appeals) hereinafter referred to as the Commissioner (Appeals) erred in upholding the DCITs stand of disallowing the following items as entertainment expenses under section 37(2A) of the Act

 
 

Rs.

(a)

Pertaining to scientific research

3,935

(b)

On shareholders meeting

30,115

(c)

On staff members (away from place of work)

5,94,271

(d)

Payments to clubs

52,48-5

 
 

6,80,806.”

95. As regards the expenditure claimed to be relatable to scientific research, we hold that disallowance under section 37(2A) is not proper and for the reasons mentioned in para 59 above, we set aside the disallowance of Rs. 3,935.

96. As regards expenditure on shareholders meeting, it was contended before the tax authorities that this is an expenditure on refreshment and beverages incurred on shareholders/employees at the Annual General Meeting. Since the expenditure was on account of expenditure on shareholders meeting, the disallowance was sustained by the Commissioner (Appeals) by relying upon the judgment of the Karnataka High Court in the case of CIT v. Mysore Mineral Ltd. (1986) 162 ITR 562 (Karn). Explanation to section 37(2A) exempts from disallowance the expenditure incurred on employees. Learned counsel relied upon the following decisions lo submit that it is not entertainment expenditure and in the alternative, to allow a portion of the expenditure referable to the expenditure incurred on employees :

(a) CIT v. Mysore Minerals Ltd. (supra)

(b) CIT v. Expo Machinery Ltd. (1991) 190 ITR 576 (Del)

(c) CIT v. Andhra Sugars Ltd. (1997) 225 ITR 118 (AP)

(d) CIT v. Tirrihannah Co. Ltd. (1992) 195 ITR 393 (Cal.)

(e) Addl. CIT v. Bangalore Turf Club Ltd. (1980) 126 ITR 430 (Karn).

On the other hand, learned departmental counsel relied upon the following decisions :

(a) CIT v. Polisetty Somasundaram (P) Ltd. (1997) 225 ITR 123 (AP)

(b) Madras Race Club v. CIT (1994) 210 ITR 680 (Mad.)

(c) CIT v. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC)

(d) CIT v. Central Distillery & Breweries Ltd. (1993) 202 ITR 45 (Del)

(e) CIT v. Tamilnadu Mercantile Bank Ltd. (1998) 232 ITR 454 (Mad.).

97. We have heard the rival submissions. The decision of the Honble Calcutta High Court (supra) is distinguishable on facts; the question therein was whether distribution of tea packets to shareholders is expenditure within the meaning of section 37(2A) of the Act. The court held that on distribution of packets no price was charged and hence there cannot be any tax on notional receipt. It is well settled now that any expenditure on coffee and beverages, except oil employees, is hit by, section 37(2A) of the Act. To our mind, shareholders are not employees of a company. In this regard we follow the decision of the Karnataka High Court (supra). Since the case of the assessee-company is that part of the expenditure is also incurred on employees of the assessee-company at the Annual General Meeting, we estimate such expenditure at Rs. 10,000 and the balance addition of Rs. 20,115 is hereby sustained.

98. As regards payment of subscription to the clubs, learned counsel for the assessee relied upon the decision of the Honble Bombay High Court in the case of Otis Elevator Co. (India) Ltd. v. CIT (1992) 195 ITR 682. On the other hand, learned departmental counsel relied upon the order of the first appellate authority.

99. We have carefully considered the rival submissions. Section 37(2A) applicable only when the expenditure incurred by the assessee-company is in the nature of entertainment expenditure. The case of the assessee-company is that the subscriptions to the clubs, paid on behalf of the employees, do not fall within the meaning of the term entertainment expenditure. However, the Commissioner (Appeals) recorded that the assessing officer has not discussed the matter in detail and, therefore, set aside the issue to the file of the assessing officer with a direction to examine as to whether there is any nexus between the club membership of its employees and the carrying on of the business. In our opinion, such examination is not called for. Undisputedly, the expenditure is incurred by the assessee-company in its capacity as a businessman in the interests of business, i.e., to encourage the employees to interact with the people in the interests of business. Even Otherwise, such expenditure, at best, can be considered as a perquisite to the employees in which event also, the question of application of section 37(2A) does not arise. By relying upon the decision of the Honble Bombay High Court (supra), we set aside the disallowance of Rs. 52,485.

100. The other type of expenditure is classified as expenditure on staff members when they were away from their regular place of work. Neither the assessing officer nor the Commissioner (Appeals) discussed this issue in detail. The case of the learned counsel, appearing on behalf of the assessee, is that whichever place the employees visit in discharge of their duty, such place becomes the place of their work and, therefore, the expenditure incurred on food and beverages would be out of the purview of section 37(2A) of the Act.

101. We find force in the submissions of the learned counsel for the assessee. In the Explanation to sub-section (2A) of section 37, the expenditure incurred on employees is taken out of the sweep of the expression entertainment expenditure. The words “but does not include expenditure on food or beverages provided by the assessee to his employees in office, factory or other place of their work” indicate that expenditure incurred on the employees at the place of their work is not hit by section 37(2A) of the Act. In the instant case, the claim of the assessee that the expenditure was incurred in their temporary place of work was not shown by the revenue to be incorrect. Such being the case, we hold that the expenditure incurred on staff members in hotels, etc. is not covered by, the provisions of section 37(2A) of the Act. In coming to this conclusion, we respectfully follow the decision of the Delhi High Court in the case Expo Machinery Ltd. (supra).

It appears that part of the claim also pertains to the expenditure incurred on the staff members while they were on picnic. Such expenditure, in our opinion, is allowable as deduction in the light of the decision of the Bombay Bench of the Tribunal in the case Ponds India Ltd. v. Deputy CIT (1997) 59 TTJ 560.

102. Ground No. 2 (as per abridged version of grounds of appeal) reads as under :

“The Commissioner (Appeals) erred in confirming the disallowance of the following travelling expenses under section 37(3) of the Act read with rule 61) of the Income Tax Rules :

 
 

Rs.

(a)

Pertaining to scientific research

15,721

(b)

Ad hoc disallowance for expenses other than expenses on hotel bills

10,00,000.”

103. As regards expenditure pertaining to scientific research, for the reasons stated in para 59 above, we hold that section 37(3), read with rule 61) has no application.

104. As regards the ad hoc disallowance for expenses other than expenses on hotel bills, the assessing officer noted that in the Tax Audit Report, for the purpose of calculating disallowance under rule 6D, the company has only taken into account the hotel bills and excluded other expenses. Despite specific requests, details of officer expenses were not given. Therefore, on estimate basis, Rs. 10 lakh was added under rule 6D. Before the Commissioner (Appeals) it was submitted that the company can give full details head-wise to the assessing officer so that before making disallowance full details may be considered. Under these circumstances, learned Commissioner (Appeals) directed the assessing officer to examine the matter afresh and also directed the assessee to give full details to the assessing officer.

105. Before us, learned counsel relied upon the following two decisions of the Calcutta High Court to submit that local conveyance, miscellaneous expenses, etc. are not covered by rule 6D of the Income Tax Rules :

(a) Union Carbide India Ltd. v. CIT (1994) 72 Taxman 63 (Cal.)

(b) CIT v. Vidyut Metallics Ltd. (1993) 203 ITR 779 (Cal.).

106. We have heard the rival submissions. In the case of Vidyut Metallics Ltd. (supra), the Honble court held that the restriction under rule, 6D is only for the expenditure on stay and does not cover other expenditure incurred. Identical issue was considered by us in ITA No. 968 (Cal.) of 1986 dated 12-11-1998. By following the decision of the Honble Calcutta High Court and also the order passed by us for the assessment year 1982-83 (cited supra), we hereby delete the disallowance of Rs. 10 lakh.

107. Vide Ground No. 3, assessee-company contends that the expenditure incurred on the guest-house is not disallowable under section 37(4) of the Act. Identical issue was considered by us in the case of the assessee in ITA No. 2686 (Cal.) of 1989 dated 12-11-1998, ITA No. 1880 (Cal) of 1991 dated 15-10-1998 and ITA No. 1245 (Cal.) of 1994 dated 15-10-1998. For the reasons stated therein, we uphold the action of the Commissioner (Appeals) on this issue.

108. Ground No. 4 (as per abridged version of grounds of appeal) reads as under :

“The Commissioner (Appeals) erred in confirming the action of the DCIT in disallowing the contribution towards UCIL Senior Managers Children Welfare Fund of Rs. 52,780 in view of the Central Board of Direct Taxes Circular No. 387, dated 6-7-1984.”

109. The facts in brief are that the assessee-company contributed a sum of Rs. 52,780 towards UCIL Senior Managers Children Fund. Assessing Officer disallowed the expenditure under section 40A(9) of the Act. Before the Commissioner (Appeals) it was contended that the contribution is riot meant to Managers but their children relied upon the decision in the case of CIT v. M.N. Nadkarni (1986) 161 ITR 544 (Bom.) which was not accepted by the Commissioner (Appeals). For the reasons given by him in his order for the assessment year 1987-88, the disallowance was confirmed.

110. Aggrieved, assessee is in appeal before us. The case of the assessee-company, is that section 40A(9) of the Act applies only when the fund is for, the welfare of the employees themselves. Learned counsel relied upon the order of the Bombay Bench of the Tribunal in ITA No. 6323 (Bom) of 1985 dated 29-5-1991 and the following two reported decision :

(a) Rassi Cement Ltd. v. Income Tax Officer (1993) 145 ITD 233 (Hyd.)

(b) India Pistons Repco Ltd. v. IAC (1988) 116 ITD 413 (Mad.).

111. On the other hand, learned departmental counsel submitted that the contribution was not made by virtue of any obligation under any law, the language of section 40A(9) is, therefore, clearly attracted.

112. We have carefully considered the rival submissions. Before recording the facts giving rise to the dispute, it may be useful to extract section 40A(9) of the Act :

“No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act, 1860 (21 of 1860), or other institution for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under clause (iv) or clause (v) of sub-section (1) of section 36, or-as required by or under any other law for the time being in force.”

113. The case of the assessee-company is that expenditure incurred on the employees is hit by section 40A(9) of the Act and not the expenditure incurred on the children of the employees. We are unable to appreciate this line of argument. Section 40A(9) is concerned with any sum paid by the assessee as employer. In other words, it is the sum paid as employer which is attracted under section 40A(9) and to whose benefit the funds are utilised is riot material. In the instant case, the contribution was made to the Senior Managers Children Welfare Fund not with and charitable object or with a view to help the children in general but only because the assessee-company, as employer, is interested in the children of the Senior Managers of the assessee-company. Thus, the sum paid by the assessee-company is because of its position as an employer though the ultimate direct beneficiary is not the employee. The case law cited by the learned counsel, appearing on behalf of the assessee, are distinguishable on facts. It is no doubt true that the object with which section 40A(9) was introduced in the statute book has to be kept in mind before considering the question. But it is for the assessee to show that the exception provided in section 40A(9) is present in the instant case. In other words, it has to be shown that the contribution made by the assessee is required by or under an law for the time being in force. In the case of India Pistons Repco Ltd. (supra), the Tribunal observed that the Death Relief Fund set up by the assessee was based on an agreement dated 2-9-1977 between the Management and the Workers and the Memorandum of agreement was made under section 18(1) of the Industrial Disputes Act and, therefore, the amount payable to the Fund was treated as liability under that law and thus held that the payment falls within the exception provided in section 40A(9) of the Act. In fact, the decision of the Tribunal in the case of Sree Saraswathi Mills Ltd. (IT Appeal No. 1367 (Mad.) of 1985, dated 4-11-1987) was distinguished by the Tribunal on the ground that in the said case there was no settlement but it was only a voluntary creation of a fund by the employees, implying thereby that if there is no settlement and if the amount is not payable under any law, then the same is hit by section 40A(9) of the Act.

114. In the case of Rassi Cement Ltd. (supra), the Hyderabad Bench of the Tribunal passed its judgment basing on the agreement entered into between the assessee-company and the trustees constituting Rassi Cement Employees Welfare Fund Scheme. In ITA No. 6232 (Bom.) of 1985, the Tribunal decided the issue in favour of the assessee in a cryptic order by not assigning any reason as to how such payments are outside the purview of section 40A(9) of the Act.

115. Reverting to the facts of the instant case, we find that the assessing officer has not given any reason for disallowance. Before the Commissioner (Appeals), it was merely contended by the assessee-company that the payment is made for the welfare of the children of the employees and not to the employees directly. In other words, it is not the case of the assessee that the contribution was based on an agreement between the assessee-company and its workers or it was based on a settlement reached tinder the Income Tax Act or any other law in force at that point of time. The Commissioner (Appeals), therefore, held that the expenditure deserves to be considered tinder section 40A(9) of the Act for the purpose of disallowance. In the absence of any further material before us to show that the assessee-company is under an obligation under law to contribute to the Children Welfare Fund, we are unable to appreciate the submission of the learned counsel of the assessee and, therefore, uphold the submission of the learned departmental counsel. We, therefore, confirm the order of the Commissioner (Appeals) on this issue.

116. Ground No. 5 (as per abridged version of grounds of appeal) reads as under :

“The Commissioner (Appeals) erred in confirming the add back of the following losses out of exchange rate fluctuation

 
 

Rs.

(a)

Exchange loss on forward cover for raw materials/sales

3,40,299

(b)

Exchange loss on repayment of Gold Box Loan

27,04,690

(c)

Exchange loss on TI Anode Loan

20,96,110

(d)

Exchange loss on J.K Foreign Exchange Loan

8,76,287

 
 

60,17,386.”

117. At the time of hearing, learned senior counsel, appearing on behalf of the assessee-company, stated that the issues arising out of (b), (c) and (d) in Ground No. 5 are not pressed. We, therefore, uphold the order of the Commissioner (Appeals) in so far as those issues are concerned.

118. The facts in regard to (a), in brief, are that the assessee claimed exchange loss on forward cover for raw materials/sales to the tune of Rs. 3,40,299 which was disallowed by the assessing officer on the ground that under section 43A of the Income Tax Act, such loss is not

119. Aggrieved, it was contended before the Commissioner (Appeals) that it is a revenue loss allowable on accrual basis as per the method of account inconsistently followed by the assessee. However, the Commissioner (Appeals) observed that loss on forward cover can be considered only on actual remittance. and thus rejected the claim of the assessee-company.

120. Further aggrieved, assessee is in appeal before us. While the submissions made before the first appellate authority, learned counsel further submitted that actual remittance had, in fact, taken place in this year only. On the other hand, learned counsel, appearing on behalf of the revenue, contended that fluctuation loss on forward cover is not allowable on accrual basis. In reply to the submissions made by the counsel of the assessee, it was submitted that if the actual remittances took place in this year, there is no objection for allowing the claim of the assessee in the year under consideration.

121. We have considered the rival submissions. While upholding the action of the revenue on the ground that such loss is not allowable on accrual basis, in the interests of justice, we set aside the issue to the file of the assessing officer who is directed to examine as to whether actual remittance was made in this year and if so he is directed to reconsider the claim in accordance with law.

122. Ground No. 6 (as per abridged version of grounds of appeal) reads as under :

“The Commissioner (Appeals) erred in taxing that part of the expenditure amounting to Rs. 23,89,626 on repairs of Chembur Plant which was incurred after agreement for sale but not reimbursed on any expenditure which is in connection with the transfer of the Chembur Plant.”

123. While disallowing the repairing expenditure of Rs. 23,89,626, the assessing officer observed that the plant of the company was closed since March, 1987 and air agreement was signed on 12-10-1988 between the assessee-company and Oswal Agro Mills Ltd. for the transfer of Chembur plant and in terms of the agreement, the assessee-company was to keep the plant and machinery under good condition and also to make safety upgradation recommended by Expert Committee till the transfer actually takes place; therefore, the expenditure incurred b the assessee-company on maintenance and repairs is not towards an business activity and hence riot allowable as deduction. assessing officer, was, thus, of the opinion that the expenditure was in connection with the transfer of assets.

124. Aggrieved, it was submitted before Commissioner (Appeals) that the agreement was entered on 12-10-1988 and the expenditure on repairs after that agreement (from December, 1988) was recovered from the purchaser to the extent of Rs. 8,73,881 and offered for taxation. Therefore, the repairing expenditure claimed by the assessee as deduction is wrongly taken as expenditure incurred after the agreement. In this regard it was also shown that the accounting period of the assessee for this year is from 26-12-1987 to 31-3-1989. Since the assessing officer has not considered the claim made by the assessee-company in its proper perspective, the Commissioner (Appeals) directed him to examine all relevant details after giving the assessee-company an opportunity to explain the nature of expenditure and also directed to examine whether the expenditure incurred after the agreement for sale was duly reimbursed and offered for taxation. It was made clear that the assessing officer would bring to tax only that part of the expenditure which was incurred after the agreement for sale but not reimbursed or any expenditure which is in connection with the transfer of the Chembur plant.

125. Learned counsel, appearing on behalf of the assessee-company, objected to the observations of the Commissioner (Appeals) whereas, the departmental counsel relied upon the order of the Commissioner (Appeals).

126. We have carefully considered the rival submissions. The case of the assessee is that the expenditure incurred to keep the machinery in good condition upto the transfer of the unit is wholly and exclusively for the purpose of business and, therefore, allowable as revenue expenditure. We find force in the submission of the assessee. To the extent the expenditure is reimbursed by the purchaser, it is not allowable as revenue expenditure. If the expenditure results in upgradation of the machinery which, in turn, enhance the value of the plant or machinery, in our opinion, such expenditure would partake the character of capital expenditure. All other expenditure, to keep the plant and machinery in good condition, is to be treated as revenue expenditure. Subject to this observation, we uphold the order of first appellate authority.

127. Ground No. 7 (as per abridged version of grounds of appeal) reads as under :

“The Commissioner (Appeals) erred in confirming the action of the DCAT of adding Rs. 93,000 to your Appellants income by disallowing as prior period expenses comprising :

(i)

Consultation charges for checking air pollution not provided for due to

clerical omission

29,000

(ii)

Miscellaneous provision

64,000

 
 

93,000.”

128. The precise issue is that prior years expenditure was claimed in the year under consideration on the ground that due to clerical mistake, etc. bills received during this year-were taken as expenditure of the year under consideration. However, the assessing officer disallowed the claim on the ground that the assessee was following mercantile system of accounting.

129. In appeal, the Commissioner (Appeals) observed that in so far as the bills received in this year are concerned, the crystallisation of liability takes place in the year of receipt of the bills and, therefore, directed the assessing officer to examine this issue and allow appropriate relief to the assessee.

130. Further aggrieved, assessee is in appeal before us. It is the contention of the assessee-company that the direction given by the first appellate authority would only cover those cases where the bills were received in this year but do not cover the claims made in this year due to clerical commission and, therefore, sought for a suitable direction to the assessing officer to consider the claim in the appropriate year. On the other hand, learned departmental counsel submitted that prior years expenditure was not allowable in the year under consideration and thus supported the order of the assessing officer.

131. We have carefully considered the rival submissions. Since the assessee is following mercantile system of accounting, the expenditure relatable to the prior years cannot be allowed as deduction in the year under consideration. In the absence of facts before us to indicate as to in which year the liability accrued, it is not possible for us to give suitable direction to the assessing officer to allow the expenditure in the relevant year of accrual of liability. We, therefore, uphold the order of the first appellate authority.

132. Vide ground No. 8, assessee-company contends that the Commissioner (Appeals) erred in holding that the layout charges on storm water drain of Rs. 7,677 is capital in nature. Learned counsel submitted that the layout charges are for replacement of the storm water drain and, therefore, the expenditure is deductible. However, we find that the Commissioner (Appeals) held the issue against the assessee for lack of evidence to prove that the charges are in connection with replacement of storm water drain. In other words, the case of the revenue is that the expenditure was incurred on laying new water drain and, therefore, capital in nature. Even before us, no material was furnished to show that a storm water drain already existed and the expenditure is for replacement of the existing drain. Such being the case, we uphold the order of the Commissioner (Appeals).

133. Ground No. 9 (as per abridged grounds of appeal) reads as under :

“The Commissioner (Appeals) erred in confirming the action of the DCIT in rejecting your Appellants claim for deduction of provision made during the year on account of specific debts considered irrecoverable amounting to Rs. 14,10,444 having failed to appreciate that the same is allowable under section 37 of the Act or alternatively under section 28 of the Act.”

134. The facts giving rise to the dispute are as under :

Rs. 14,10,444 was debited to profit & loss account towards provision for doubtful debts and credited to the bad debts reserve account. It is the case of the assessing officer that in the absence of writing off in the individual accounts, the assessee cannot be said to have written off tile debts in accounts and, therefore, disallowed the claim.

135. Aggrieved it was submitted before the Commissioner (Appeals) that the debit in the profit & loss account and credit to the bad debts reserve account is sufficient compliance with the provisions of section 36(2) of the Act. However, the Commissioner (Appeals) observed that the conditions specified under section 36(2) of the Income Tax Act were not fulfilled by debiting the profit & loss account towards provision for bad debts.

136. Before us, learned counsel submitted that the issue is squarely covered by the decision of the Honble High Court in the assessees case for the assessment year 1979-80 (I.T. Ref. No. 268 of 1986 dated 30-1-1992, Calcutta).

137. We have heard the learned departmental counsel in this regard and carefully perused the record. We find that the facts before the Honble Calcutta High Court are identical to the facts of the instant case. Before the Honble Court, the facts are that the assessee-company debited in its profit & loss account and credited the provision for doubtful debts account. The tax authorities were of the opinion that the debts claimed as bad had not been written off in the books of the assessee in terms of the provisions of section 36(2) of the Income Tax Act. However, the Tribunal observed that, according to the principle of accountancy, the writing off denotes the charging of the amount in the profit & loss account and once the amount is charged in the profit & loss account it vanishes from the books of the assessee and an adjustment entry may appear under another head. Therefore, the Tribunal held that by debiting the profit & loss account assessee had written off the debts in its books of account. The Honble High Court upheld the order of the Tribunal and in this regard observed as under :

“In the present case, the sundry debtors account has been credited with the aforesaid sum. By reducing the sundry debtors account in respect of the aforesaid amount the assessee has clearly demonstrated its intention not to great (sic) the said bad debt as an asset and provided for the said amount by crediting the amount with the account Provision for Doubtful Debt and debiting the Profit and Loss Account under the heading Provision for Doubtful Debts. . . . It has been claimed on behalf of the assessee that it has written off the amount in his books of account. This manner of accounting is in consonance with well established accounting practice.”

138. An identical issue was also considered by us while disposing of the appeal in ITA No. 2759 (Cal.) of 1989 dated 15-10-1998 and vide para 8 of our order, we decided the issue with the following observations :

“In our opinion, in the light of the decision of the Honble Calcutta High Court (cited supra), the action of the assessee in debiting profit & loss account would satisfy the requirements under section 36(2) of the Act vis-a-vis the condition of write off in the account. However, it appears, oil a perusal of the assessment order, that the dispute is also with regard to the question as to whether the debts have really become bad and irrecoverable. In the absence of any, finding of the Commissioner (Appeals) on this issue and in the interests of justice, we set aside the matter to the file of the assessing officer who is directed to reconsider the matter in accordance with law.”

139. In the instant case also, the tax authorities mainly proceeded on the footing that in order to write off a debt, the individual account of the debtor has to be squared up and ignored the other issues i.e., whether the debt has really become bad, etc. Consistent with our earlier order, we set aside the issue to the file of the assessing officer who is directed to reconsider the matter in accordance with law. Needless to observe that the assessing officer would also bear in mind the change in the provision of law with effect from 1-4-1989. In other words, the year in which the debt has become bad need not be looked into.

140. Ground No. 10 (as per abridged grounds of appeal) reads as under :

“The Commissioner (Appeals) erred in confirming the DCITs action of not allowing the Appellants claim for deduction of Rs. 3,54,308 on assets to the extent of Capital Investment subsidy received.”

141. Assessee-company received Rs. 15 lakhs as capital investment subsidy during the previous year relevant to the assessment year 1987-88. The same was deducted from the total cost of plant and machinery and proportionate depreciation was granted by the assessing officer. It was contended before the Commissioner (Appeals) that the capital investment subsidy should not be reduced from the cost of plant and machinery for computing depreciation. While disposing of the appeal for the assessment year 1987-88, the Commissioner (Appeals) considered the matter in great detail. In the circumstances of the case, the assessee was directed to produce the terms of the subsidy given by the State Government and the assessing officer was directed to examine the same and decide the issue in the light of the decision of the Calcutta High Court in the case of CIT v. Dewas Synthetics (P) Ltd. (1991) 188 ITR 16. A similar direction was given in this year also.

142. Aggrieved, assessee is in appeal before us. Learned counsel for the assessee submitted that the issue is squarely covered by the decision of the Supreme Court in the case of CIT v. P.J. Chemicals & Ltd. (1994) 210 ITR 830. He further submitted that in the subsequent years, Commissioner (Appeals) allowed the claim of the assessee. On the other hand, learned departmental counsel submitted that the nature of the subsidy has to be examined before applying the decision of the Honble Supreme Court.

143. Aggrieved, considered the rival submissions and in the interests of justice, we direct the assessee-company to furnish a copy of the aforesaid scheme before the assessing officer for his examination and the assessing officer is directed to reconsider the issue in accordance with law and in line with the decision of the Honble Supreme Court (supra).

144. Ground No. 11 (as per abridged version of grounds of appeal) reads as under :

“The Commissioner (Appeals) erred in confirming the DCITs action of not considering the following as profit of business/profession eligible for deduction under section 32AB of the Income Tax Act

Income from interest

55,07,774

Dividend Income

54,13,415

 

1,09,21,189”

145. The case of the assessee is that the income from interest and dividend income (Rs. 55,07,774 and Rs. 54,13,415 respectively) be included as profit of business/profession eligible for deduction under section 32AB of the Act. Profit of business or profession has to be, computed in accordance with the requirements of Parts II and III of Schedule VI to the Companies Act, 1956. Parts II and III of Schedule VI do not contemplate bifurcation of income amongst different heads of income and, therefore, the figure of profit to be considered for the purpose of section 32AB(3) would be as per the audited accounts of the assessee-company. It was thus claimed that interest and dividend income forms part of business income. Assessing officer as well as the Commissioner (Appeals) were of opinion that income from dividend and interest is taxable under the Income Tax Act under the head Income from other sources. Since distinct head is provided for taxing such income, the Commissioner (Appeals) was of the opinion that the income falling under that distinct head cannot be brought under section 28 and in this regard relied upon the decision of the Honble Supreme Court in the case of Nalinikant Ambalal Mody v. S.A.L. Narayan Row, CIT (1966) 61 ITR 428. He further observed that section 32AB(1)(ii) states that the claim allowable is equal to 20 per cent of the profits of eligible business. The term eligible business has been defined in section 32AB(2) to mean business other than that of construction, manufacture or production of articles specified in the list in the Eleventh Schedule and, therefore, interest and dividend income does not fall within the purview of the term eligible business. According to Commissioner (Appeals), section 32AB(3) only gives the method of computation of eligible business and, therefore, there is no question of going through the Sixth Schedule of the Companies Act, as the income from interest and dividend cannot be said to be income from an eligible business.

146. Aggrieved by the action of the tax authorities, assessee is in appeal before us. Learned counsel, appearing on behalf of the assessee-company submitted that the issue is squarely covered by the decision of the Cochin Bench of the Tribunal in the following cases :

(a) Apollo Tyres Ltd. v. Deputy CIT (1992) 43 ITD 464 (Cochin) at pp. 490, 495 and 496;

(b) Indian Transformers Ltd. v. Deputy CIT (1995) 52 TTJ (Coch.) 654.

147. On the other hand, the departmental counsel submitted that the assessee is entitled to relief under section 32AB of the Act on the business income as understood under the Income Tax Act and as a separate head is provided for taxing dividend income and interest income, such income does not form part of profits and gains of business or profession and thus supported the orders of the taxing authorities.

148. We have carefully considered the rival submissions. In the case of Indian Transformers Ltd. (supra), the Appellate Tribunal observed at page 658 as under :

“As far as sub-clause (ii) is concerned, a question arises whether the Profits of eligible business means, profits chargeable under. the head Profits and gains of eligible business or The profits and gains of eligible business as found in the accounts. The revenue opts for the former view while the assessee opts for the latter view. We are in agreement with the assessees point of view, in view of the clear-cut language employed in sub-clause (ii) of sub-section (1) of section 32AB. The expression used is profits of eligible business. Eligible business has been defined in sub-section (2) and it is not disputed that the assessees business is an eligible business. Sub-section (3) defines or explains the computation of profits of eligible business or profession. It is based on the amount of profits computed in accordance with the requirements of Part II and Part III of the Sixth Schedule to the Companies Act, 1956, subject to certain specified adjustments. Thus, the profits of the eligible business are not to be computed in accordance with the provisions of Income Tax Act but are to be computed in accordance with the requirements of the Sixth Schedule to the Companies Act, 1956. In other words, if in the published accounts of the company, certain income which are assessable under the head, Other sources are also found forming part of profits of the company, irrespective of the head of income under which a particular receipt is to be assessed, such receipts are to form part of the profits of eligible business as per the accounts in accordance with Part II and Part III of the Schedule VI of the Companies Act, 1956.”

149. No contrary decision was placed before us by the departmental counsel. We, therefore, respectfully follow the decision of the Tribunal (supra) to hold that interest and dividend income having been show in the audited accounts as profits in Part II and Part III of Schedule VI of the Companies Act, such income forms part of the profit of eligible business. The assessing officer is hereby directed to allow the claim of the assessee-company.

150. Ground No. 12 (as per abridged version of grounds of appeal) reads as under :

“The Commissioner (Appeals) erred in holding that the liability for payment of compensation to the victims of the Bhopal gas disaster per order of the Supreme Court dated 14 & 15-2-1989 amounting to approximately Rs. 69 Crores was not incidental to the trade of your Appellants and disallowing the same.”

151. We have already considered this issue in paragraphs 2 to 48 above.

152. The assessee raised an additional ground before us which reads as under :

“For that the assessing officer should be directed to allow the expenses relating to this assessment year which according to the department contention are not allowable in the subsequent year as claimed by the Appellant.”

153. This ground is very vague and does not specify the exact grievance and the amount in dispute, etc. Even if we presume that this additional ground is connected to Ground No. 7, as already indicated in our order in the earlier paragraph, it is not possible for us to direct the assessing officer, in the absence of any specific evidence to show that the claim pertains to a particular assessment year. No specific argument was advanced by the counsel in this regard. As the ground is vague and lacks any supporting material, we rejected identical additional ground raised in the order passed by us in ITA No. 1245 (Cal.) of 1994 dated 1510-1998. We, therefore, reject the additional ground raised in the present appeal.

R e. : I TA. No. 1818 (Cal) of 1996 :

154. This appeal pertains to the assessment year 1990-91. Facts pertaining to Ground No. 1 are as under. Expenditure of Rs. 36,039 incurred by the assessee on shareholders meeting was disallowed by the assessing officer under section 37(2A) of the Act. It was submitted before the Commissioner (Appeals) that the Annual General Meeting is a statutory, obligation and, therefore, the expenditure incurred on providing refreshments and beverages to shareholders as well as employees of the assessee-company cannot be considered as entertainment. It was alternately submitted that the expenditure incurred on the employees should at least be allowed as it falls outside the purview of section 37(2A) by virtue of Explanation 2. However, the claim of the assessee was rejected by the Commissioner (Appeals) by relying upon the decision of the Kerala High Court in the case of Mysore Minerals Ltd. (supra) and held that there is no case for bifurcating the expenditure on the ground that some employees may also have consumed refreshments on such occasion. Following his predecessors appellate orders for the assessment years 1987-88 and 1989-90, the disallowance was sustained.

155. We have heard the rival submissions in this regard. We have considered an identical issue in paragraphs 96 and 97 of this order. For the same reasons, we estimate the expenditure incurred on employees at Rs. 10,000 and the balance of Rs. 26,039 is hereby sustained as being hit by section 37(2A) of the Act.

156. Vide Ground No. 2, assessee-company challenges the disallowance made by the assessing officer under section 37(4) of the Act on the ground that expenditure such as rent, rates, taxes, etc. on the guesthouse are allowable under sections 30 to 36 of the Act and, therefore, is outside the purview of section 37(4) of the Act. In other words, the claim of the assessee-company is that only such expenditure which is otherwise allowable under section 37(1) of the Act requires to be considered for disallowance under section 37(4).

157. We have considered this issue in paragraph 107 of this order. For the same reason, we uphold the order of the Commissioner (Appeals) and sustain the disallowance made by the assessing officer under section 37(4) of the Act.

158. Vide Ground No. 3 assessee contends that the Commissioner (Appeals) erred in confirming the disallowance made by the DCIT by invoking section 40A(9) of the deduction claimed for the contribution to UCIL Senior Managers Children Welfare Fund of Rs. 35,000 and UCIL Senior Staff Executives Childrens Fund of Rs. 1,15,000.

159. Identical issue was considered by us while disposing of the appeal in ITA No. 1341 (Cal.) of 1993. In the light of the detailed discussion and reasons given by us in paragraphs 108 to 115, we uphold the order of the Commissioner (Appeals) on this issue.

160. Ground No. 4 pertains to the deduction claimed in respect of the amount paid as compensation to the victims of the Bhopal gas disaster. This issue was considered by us in this order vide paragraphs 2 to 48. For the reasons stated hereinabove, we reject this ground.

161. The assessee raised an additional ground which reads as under :

“For that the assessing officer should be directed to allow the expenses relating to this assessment year which according to the departments contention are not allowable in the subsequent year as clamed by the appellant.”

162. This ground is vague as in the earlier years. For the reasons stated by us while disposing of a similar ground for the assessment year 1989-90, we reject the additional ground raised by the assessee.

Re. : I.T.A. No. 2183 (Cal) of 1993 :

163. This appeal filed by the assessee-company is directed against the order of the Commissioner (Appeals)-XI, Calcutta. Prima facie adjustments made in the intimation under section 143(1)(a) and the additional tax levied under section 143(1A) of the Act are challenged before us. In particular, the following adjustments were challenged.

(a) Loss of Rs. 12,30,028 on foreign exchange transactions disallowed. Learned counsel submits that the Commissioner (Appeals) remanded the issue to the file of the assessing officer and the assessing officer, in allowed the claim of the assessee in regular assessment. It is apparent from the facts that the issue is beyond the purview of prima facie adjustment under section 143(1)(a) of the Act.

(b) Disallowance of Rs. 4,23,091 under section 37(4).The case of the assessee is that section 37(4) opens with a non obstante clause “notwithstanding anything contained in sub-section (1) or sub-section (3)” which implies that only expenditure which fall under section 37(1) or under section 37(3) would attract the provision of section 37(4) of the Act whereas, the expenditure incurred in the instant case, such as depreciation on guest-house, rents, rates, taxes and repairs are allowed under sections 30 to 32 of the Act.

In other words, the expenditure incurred by the assessee do not fall under section 37(1) of the Act and consequently fall outside the purview of section 37(4). In this regard he relied upon the decision of the Honble Bombay, High Court in the cases of CIT v. Chase Bright Steel Ltd. (1989) 177 ITR 124, Century Spg. & Mfg. v. CIT (1991) 189 ITR 660 and of the Honble Calcutta High Court in the case of Tungabhadra Industries Ltd. (supra). Learned counsel further submits that there is no Supreme Court decision on this point as yet and considering the fact that there are divergent views on this issue, the claim made by the assessee ought not to have been considered and disallowed in the proceedings under section 143(1)(a) of the Act and in this regard relied upon the judgment of the Honble Calcutta High Court in the case Modern Fibotex India Ltd. (supra).

(b) (i) On the other hand, learned departmental counsel submits that section 37(4) is clear in its terms by which any expenditure incurred on the guest-house is hit by that section. He thus supported the orders of the tax authorities.

(b) (ii) We have carefully considered the rival submissions. In so far as depreciation on guest-house building or of any asset used in a guest-house is concerned, section 37(4) leaves no manner of doubt or debate in stating that depreciation is subject to the ceiling prescribed under section 37(4) of the Act. We, therefore, hold that prima facie adjustments made by the assessing officer, vis-a-vis the claim of depreciation is in order. However, with regard to the other expenditure, considering the divergent views on this issue, we are of the opinion that the assessing officer is in error in disallowing the claim in the proceedings under section 143(1)(a) of the Act.

(c) Payment to clubs of Rs. 1,27,863.The case of the assessee is that the above-referred amount is spent on subscription only and therefore, does not fall within the expression entertainment expenditure. In the order passed by the Commissioner (Appeals) against the regular assessment order, the disallowance made by the assessing officer was set aside by following the decision of the Appellate Tribunal in the case of Siemens India Ltd. (sic). It goes to show that the question of disallowance is not free from debate or dispute and in the light of the decision of the Honble Calcutta High Court in the case of Modern Fibotex India Ltd. (supra) we set aside the disallowance.

(d) Disallowance under section 40A(9) of the Act of Rs. 1,50,000 Contributions towards UCIL Senior Managers Children Welfare Fund and UCIL Service Staff Executives Children Fund were disallowed by the assessing officer. Learned counsel of the assessee submitted that the expenditure was incurred for the purpose of business and in the light of the decision of the Appellate Tribunal in the cases of Rassi Cement Ltd. (supra) and Indian Pistons Repco Ltd. (supra), the question as to whether the expenditure is hit by the provisions of section 40A(9) of the Act or not can be decided on a long drawn process of reasoning and since the decision on this issue is not free from debate or dispute, the assessing officer is not justified in disallowing the claim in the garb of prima facie adjustment under section 143(1)(a) of the Act. On the other hand, learned Departmental counsel relied upon the orders of the tax authorities.

(d) (i) We have carefully considered the rival submissions. In order to consider as to whether the impugned expenditure is hit by the provisions of section 40A(9) of the Act, it is necessary for, the assessing officer to call for further material to appreciate as to whether such payment is made in terms of contract with the employees or otherwise. In the light of the decisions of the Tribunal (supra), elaborate consideration of the facts and circumstances is expected of on the part of the assessing officer before applying the provisions of section 40A(9) of the Act and, therefore, such issue, as it is cannot be the subject-matter of consideration in the proceedings under section 143(1)(a) of the Act.

(e) Provisions for ex-gratia payment of Rs. 56,65,122-It was contended before the Commissioner (Appeals) that ex-gratia payment to employees, even if it is in excess of the ceiling prescribed under the Payment of Bonus Act, is not disallowable as proviso to section 36(ii) has been deleted with effect from 1-4-1989. Commissioner (Appeals) accordingly directed the assessing officer to mention the provision of the Act for making the disallowance.

(e) (i) Aggrieved, assessee is in appeal before us. Learned counsel for the assessee submitted that against the order passed by the assessing officer under section 143(3) of the Act, assessee-company filed an appeal challenging the disallowance and upon considering the fact that the proviso to section 36(1)(ii) of the Act was deleted with effect from 1-4-1989, the Commissioner (Appeals) held that the payments, if any, in excess of the ceiling prescribed under the Payment of Bonus Act, are not disallowable and, therefore, deleted. The issue, therefore, becomes academic and, at any rate, the decision of the Commissioner (Appeals) in the proceedings under section 143(3) is proof enough to show that the decision on this issue is debatable and, therefore, falls outside the scope of prima facie adjustment under section 143(1)(a) of the Act.

(f) Net compensation towards Bhopal gas tragedy.Net compensation towards Bhopal gas tragedy disallowed by the assessing officer on the ground that liability to pay compensation has not been finalised before the end of the accounting year in view of the fact that the review petitions were pending before the Supreme Court.

(i) We have considered this issue elaborately in the earlier paragraphs. The issue as to whether the liability is deductible as business expenditure and if so, in which year, is highly debatable. We, therefore, hold that the issue is outside the scope of prima facie adjustment.

Re. : ITA No. 1340 (Cal) of 1997 :

164. This appeal pertains to the assessment year 1992-93. Ground No. 1 pertains to the disallowance made by the assessing officer under-section 37(2A) of the Act. Facts in brief are that the assessee treated expenditure of Rs. 6,08,927 (being 50 per cent of Rs. 12,17,854) as entertainment expenditure on the ground that the remaining 50 per cent was incurred on employees who were assigned the duty of taking care of the customers and business associates. The assessing officer rejected the claim of assessee and considered total expenditure under section 37(2A) of the Act. In appeal, the order of the assessing officer was upheld by the Commissioner (Appeals). In addition to that the assessing officer made the following further disallowances :

(a)

Shareholders meeting expenses

Rs. 28,950

(b)

Payment to clubs

Rs. 4,36,360.

165. While the payment to clubs was allowed by the Commissioner (Appeals), the other part of the disallowance was confirmed. Aggrieved by the order of Commissioner (Appeals), assessee-company is in appeal before us.

166. We have carefully considered the rival submissions. As regards the expenditure on shareholders meeting, we estimate the expenditure incurred on the employees of the assessee-company at Rs. 10,000 as was estimated by us in the other years. Thus, we sustain the balance addition of Rs. 18,950.

167. As regards the disallowance of Rs. 6,08,927 (50 per cent of Rs. 12,17,854), the case of the assessee is that the expenditure was incurred on the employees. This claim was not supported by any documentary evidence, as stated by the assessing officer. We further find that there is no specific finding on this issue by the Commissioner (Appeals) though it was submitted before him that the expenditure was incurred on employees who were assigned the duty of taking care of the customers and business associates. In the interests of justice, we set aside this issue to the file of the assessing officer with a direction to the assessee-company to furnish reasonable evidence to prove that approximately 50 per cent of the total expenditure was incurred on the employees who are assigned the duty of taking care of the customers and business associates and on furnishing reasonable evidence, the assessing officer may decide the issue in accordance with law and in line with the observations made by us in paragraphs 100 and 101 of our order.

168. Ground No. 2 pertains to the disallowance made by the DCIT under section 40A(9) referable to the voluntary contributions made by the assessee-company towards Senior Managers Children Welfare Fund and Senior Staff Executive Childrens Fund. We have considered an identical issue elsewhere in this order. For the reasons stated by us in paragraphs 112 to 115 of our order, we are unable to appreciate the submissions of learned counsel of the assessee and we, therefore, uphold the order of the Commissioner (Appeals).

169. Vide Ground No. 3, assessee-company contends that the compensation amount of Rs. 66,49,69,504 paid to the victims of the Bhopal gas disaster and a further amount of Rs. 7,50,00,000 payable for establishment of an hospital are deductible as revenue expenditure. The case of the assessee is that the payment for establishment of hospital is also a part of the settlement and partakes the character of compensation. The learned counsel for the assessee further submitted that payment of such huge amount cannot be termed as voluntary contribution. In short, it is the submission of learned counsel that there is no charity involved in making the payment as it was paid consequent to the direction of the Honble Supreme Court and the payment having been made in the interests of business, the same is allowable as deduction. On the other hand, learned departmental counsel submits that hospital establishment expenditure is not part of the settlement and hence it can only be considered as voluntary donation-and, therefore, not allowable as revenue expenditure incurred for the purpose of business.

170. We have carefully considered the rival submissions. Liability towards payment of compensation and the further amount of Rs. 7,50,00,000 for establishment of a hospital was considered by us from paras 2 to 48 of our order. For the reasons stated therein, we uphold the order of the Commissioner (Appeals) on this issue.

171. This leaves us with the following additional ground raised before us :

“1. On the facts and in the circumstances of the case, the Commissioner (Appals) should have allowed an additional deduction of Rs. 10,74,734 on account of Bonus and Special Compensation actually paid.

2. For that the assessing officer should be directed to allow the expenses relating to this assessment year which according to the departments contention are not allowable in the subsequent year as claimed by the Appellant.”

172. The learned counsel submitted that the payment was made before, due date.

173. We have heard the learned departmental counsel and also perused the record. It appears that in the return filed by the assessee, the claim with regard to the deduction of Rs. 10,74,734 was not made. Before the Commissioner (Appeals) it was urged vide Ground No. 10 that the assessee is entitled to deduction though it is not provided for in the books during the year. As could be seen from the order of the Commissioner (Appeals), the submission of the assessee was noted in paragraph 21 of his order but no finding was given on that issue as could be seen from paragraphs 22 and 23. Under section 43B of the Act the payment made towards bonus is allowable as deduction subject to the condition that the actual payment should be made on or before the due date for filing the return of income. In the interests of justice, we therefore, set aside this issue to the file of the assessing officer who is directed to verify the claim of the assessee and if the payment is made before the due date for filing the return, the same may be allowed as deduction.

Re. : ITA No. 108 (Cal) of 1993 :

174. Ground No. 1 pertains to the disallowance of Rs. 2,42,307 made by the assessing officer under section 40A(9). We have considered all identical issue in paragraphs 112 to 115 of our order. For the reasons stated therein, we reject the contention of the assessee-company.

175. Vide Ground No. 2, assessee-company contends that the disallowance made by the assessing officer under section 37(2A) of the Act is not in accordance with law. The following expenditure was treated as entertainment expenditure under section 37(2A) of the Act :

 
 

Rs.

(a)

Tea, snacks, etc. supplied to business associates.

3,00,000

(b)

Expenditure on food, beverages, etc. at guest-house, residences and restaurants and during staff picnics

2,61,064

(c)

Refreshment and beverages to shareholders during Annual General Meetings

171.695

(d)

Expenditure on shareholders visits to the plant of the company.

14,070

176. We have considered identical issues elsewhere in our order. For the reasons stated therein, we hold that the expenditure incurred, in the business associates and on the shareholders on their visit to factory and Annual General Meetings is hit by section 37(2A) of the Act. However, the expenditure incurred on the staff at guest-house, etc., while they were at work, is allowable as expenditure. In out-opinion, such expenditure is saved by the Explanation 2 to section 37(2A) of the Act, inasmuch, the places of visit of the employees in discharge of their official duties becomes their place of work.

177. Similarly, expenditure on the staff picnic is allowable it, the light of the decision of the Tribunal in the case of Ponds India Ltd. (supra).

178. As regards the shareholders meeting, we estimate the expenditure incurred on the employees at Rs. 10,000 and the balance disallowance is confirmed. Assessing Officer is directed accordingly.

179. Ground No. 3 pertains to the disallowance of Rs. 10,58,558 being loss arising out of exchange fluctuation relating to the remittance of the instalments of loans taken in foreign currency. At the time of hearing, learned senior counsel, appearing on behalf of the assessee, did not press this ground. Accordingly, the order of the Commissioner (Appeals) is upheld.

180. Vide Ground No. 4, the disallowance made under section 37(4) of the Act was contested. Identical issue was considered in detail elsewhere in out. order. For the reasons stated therein, we reject the of the assessee and affirm the order of the Commissioner (Appeals) on this issue.

181. Vide Ground No. 5, it was contended that the investment subsidy should not be reduced from actual cost of fixed assets while computing depreciation. It was contended before the tax authorities that the subsidy was granted for setting up of industry in backward areas and riot for, specific purpose of meeting a portion of the cost of the assets and also submitted that a percentage of fixed capital cost taken as the has is of determining the subsidy was only a measure adopted under the scheme, to quantify the subsidy. Since the terms of the Subsidy Scheme were not furnished before the Commissioner (Appeals), the claim of the assessee was not accepted outright. By placing reliance on the decision of the Honble Calcutta High Court in the case of Dewas Synthetics (P) Ltd. (supra), the matter was remanded to the assessing officer with direction to the assessee to produce the terms of the subsidy.

182. Further aggrieved, assessee-company is in appeal. At the time of hearing, learned counsel submitted that the issue is squarely covered by the decision of the Honble Supreme Court in the case of P.J. Chemicals Ltd. (supra) and further submitted that in the next year the Commissioner (Appeals) allowed a similar claim.

183. Similar claim was considered by us elsewhere in our order. In the interests of justice, we uphold the order of the Commissioner (Appeals) with a further direction to the assessing officer to consider the claim of the assessee-company in the light of the decision of the Honble Supreme Court.

184. Ground No. 6 pertains to the claim of allowance under section 32AB of the Act. At the time of hearing, learned senior counsel, appearing on behalf of the assessee, submitted that the Commissioner (Appeals) remanded the matter to the file of the assessing officer to examine the claim of the assessee keeping in view various arguments advanced at the first appellate stage. Since the matter is remanded for re-consideration, learned counsel did not raise any serious objection to the procedure adopted by the Commissioner (Appeals). We, therefore, uphold the order of the Commissioner (Appeals) on this issue.

185. Vide Ground No. 7, assessee contends that the expenditure on safety upgradation and rehabilitation be treated as current repairs and allowed as revenue expenditure. The Commissioner (Appeals) remanded the matter to the file of the assessing officer with the following direction :

“I have considered the submissions. It is clear from the foregoing that the assessment order has been passed without considering whether the item of expenditure are of capital nature or revenue nature as the details of expenditure of Rs. 89,31,683 given above shows mostly the corroded pipes insulation, cables etc. Some of the items may also be of capital nature as for example motors included in the amount of Rs. 6,96,253 and condensors included in the item of expenditure of Rs. 8,50,897 at Serial Numbers 4 and 5 of six items comprised at Rs. 89,39,683 and those may be legitimately disallowable as capital expenditure.

However, a status report has been prepared by the appellant for each and every item of activity comprised in the safety upgradation and the accounting treatment given to date i.e., whether capitalised or placed under the head revenue expenditure. That being so the assessing officer will examine the status report of the items and come to a conclusion as to whether any item can be said to fall under the head capital which has been claimed to be revenue. While doing so the assessing officer will give an opportunity to the appellant to produce all relevant details and after examining these details and the arguments of the appellant the assessing officer will pass an appropriate order accordingly.” (Emphasis, here italicised in print, supplied)

186. Learned counsel, appearing on behalf of the assessee-company submitted that the matter having been remanded to the file of the assessing officer, assessees grievance need not necessarily be decided at this stage. In other words, he has no objection for the matter being examined by the assessing officer. However, certain observation may also be of capital nature is objected to on the ground that there is every possibility that the assessing officer would be influenced by the observations of the Commissioner (Appeals). It was, therefore, submitted that the Tribunal should direct the assessing officer to consider the matter afresh without being influenced by such observations.

187. On the other hand, learned departmental counsel submitted that the matter is left open and mere observation of the Commissioner (Appeals) would not in any way prejudice the case of the assessee-company and further submitted that by deleting these observations, the assessee should not be benefited in any manner.

188. We have carefully considered the rival submissions. Suffice it to say that the assessing officer, while considering the matter, should keep in mind the observations of the Commissioner (Appeals) but, at the same time, should not be influenced by the same. Subject to this, we uphold the order of the Commissioner (Appeals) on this issue.

189. Vide Ground No. 8, assessee-company contends that the interest income is liable to be taxed on cash basis which is the method consistently followed by the assessee and accepted by the department in the past. Commissioner (Appeals) directed the assessing officer to examine the contention of the assessee and pass a speaking order on this matter. learned counsel, appearing on behalf of the assessee-company, submitted that in the order of assessment passed for the assessment year 1985-86, the assessing officer accepted the method followed by the assessee and, therefore, seeks similar relief for the assessment year under consideration. On the other hand, learned departmental counsel submitted that the matter is restored to the file of the assessing officer and, therefore, the assessee cannot have any grievance.

190. We have considered the rival submissions. The order of the Commissioner (Appeals) restoring the matter to the file of the assessing officer for re-examination is fair and does not call for any interference,. We may add that while re-examining the matter, the order passed by the assessing officer for the assessment year 1985-86 and the reasons given therein while accepting the method followed by the assessee should be borne in mind. It is settled law that though res judicata is not applicable in the income-tax proceedings, the rule of consistency does apply-See CIT v. Corpn. Ltd. (1985) 156 ITR 835 (MP) at 850.

191. Vide Ground No. 9, assessee contends that the Commissioner (Appeals) erred in treating Rs. 48,479 as income from other sources being the amount realised on redemption of 6.25 per cent debenture of Rs. 5,000 each issued by I.C.I.C.I. The debentures were redeemed at full value i.e., Rs. 4,30,000 whereas, the cost of acquisition of these debentures was Rs. 3,81,521. The resultant difference was brought to tax by the assessing officer-.

192. Before the Commissioner (Appeals) it was submitted that the surplus on redemption of debentures should not be taxed under the head Capital gains as there was no transfer involved. Commissioner (Appeals) accepted the claim the assessee. However., he was of the opinion that the sum of Rs. 48,479 is taxable as income from other sources. Assessing officer was directed to examine the issue from this angle.

193. Aggrieved by the direction of the Commissioner (Appeals), assessee is in appeal before us. Learned counsel, appearing on behalf of the assessee-company, has brought to our notice the decision of the Honble Supreme Court in the case of Anarkali Sarabhai v. CIT (1997) 224 ITR 422 and reiterated the submissions made before the tax authorities.

194. We have heard the learned departmental counsel, carefully, considered the rival submissions and perused the decision of the Honble Supreme Court. Since the matter has already been set aside to the file of the assessing officer, we hereby direct him to examine the case in the light of the decision of the Honble Supreme Court (supra).

195. This leaves us with the additional grounds raised by the assessee company. The additional grounds read as under :

“Without prejudice to the ground of appeal No. 1 to the Income Tax Appellate Tribunal for the assessment year 1986-87, the addition of customs duty of Rs. 2,45,73,45 relating to opening stock be deleted.

And

For that the assessing officer should be directed to allow the expenses relating to this assessment year which according to the departments contention are not allowable in the subsequent year as claimed by the Appellant.”

196. Learned counsel submitted that the value of opening stock cannot be different from the value of closing stock of earlier year and for this purpose he requested the Bench for a direction to the assessing officer.

197. We have carefully perused the record. The additional ground annexed to the abridged ground reads as under :

“Without prejudice to Ground of appeal No. 1 to the Income Tax Appellate Tribunal preferred by your appellants for the assessment year 1986-87, your appellants submit that the addition of Rs. 2,45,73,456 representing custom duty paid during the prior previous years i.e., 1983, 1984 and 1985, relating to opening stock for the previous year, be deleted since such custom duty was not allowed on payment basis under section 43B of the Act in the preceding assessment year 1986-87 per order of the DCIT under section 143(3) read with section 263 of the Act dated 25-2-1993.

The DCIT be directed to delete the double addition of Rs. 2,45,73,456, once in assessment year 1986-87 and again in assessment year 1987-88.

Your appellants crave leave to add to alter or amend any of the aforesaid grounds of appeal as they may be advised from time to time.”

198. A careful perusal of the order of the Commissioner (Appeals) as well as the detailed ground indicate that the case of the assessee is that non-allowance of deduction because of section 43B of the Act makes the difference in the value of closing stock or opening stock of the assessee. It is also claimed that there is double addition of Rs. 2,45,73,456 once in the assessment year 1986-87 and again in the current year. We fail to appreciate as to how section 43B has any relevance to the value of closing stock. We find from the record that in the assessment year 1986-87, method of accounting followed by the assessee vis-a-vis the valuation of closing stock was not accepted by the assessing officer and the order of the assessing officer was confirmed by, the Appellate Tribunal. The said method followed by the assessee was consistently rejected by the revenue authorities and, in fact, before us the assessee has not contested the issue in the other years. Such being the case, the method of accounting followed by the assessee cannot be pressed for acceptance. From the submission of the assessees counsel before us, we find that the claim is limited to the issue that the value of closing stock adopted in respect of earlier year should be taken as the value of opening stock in the year under consideration and in this regard placed reliance on the decision of the Honble Supreme Court in the case of Mahendra Mills Ltd. v. P.B. Desai, AAC (1975) 99 ITR 135 and highlighted that the additional ground had to be raised by the assessee consequent to the revision of the assessment order passed for the assessment year 1986-87. It is well-settled that the value of closing stock of the earlier year should be adopted as the value of opening stock. We, therefore, direct the assessing officer accordingly.

199. The second additional ground is rejected for the reasons given by us while disposing of identical issue in other assessment year.

Re. : ITA No. 1339 (Cal) of 1997 :

200. Vide Ground No. 1 assessee challenges the disallowance made by the assessing officer under section 37(2A) of the Act. In the return filed for the assessment year 1991-92, assessee offered to tax under section 37(2A) of the Act Rs. 4,71,350 being 50 per cent of the total expenditure of Rs. 9,42,701. According to the assessee, the balance amount is attributable to the expenditure incurred on the employees of the company who are assigned the duty to accompany the customers and business associates. It is the case of the assessee that on such visits, the places where the employees visited the customers and business associates become their places of work within the meaning of Explanation 2 to section 37(2A) of the Act. However, the assessing officer disallowed the claim of the assessee. He further disallowed a sum of Rs. 1,77,139 referable to the expenditure incurred on shareholders meetings (Rs. 27,139); payments to employees recreation club (Rs. 1,30,321); and payment to clubs (Rs. 19,663). Commissioner (Appeals), however, allowed the claims of the assessee with regard to the payment to employees recreation club and payment to clubs. The other addition was confirmed for the reasons given in the previous years by appellate authorities. Further aggrieved, assessee is in appeal before us.

201. We have carefully considered the rival submissions and perused the record. Identical issue was considered by us while disposing of the appeal for the assessment year 1992-93 (Ground No. 1 in ITA No. 1340 (Cal.) of 1993). For the reasons given therein, the assessing officer in directed to re-examine the aforesaid disallowance of Rs. 4,71,351 in accordance with law and in line with the observation made by us in paragraphs 100 and 101 of our order.

202. In so far as the expenditure incurred on shareholders meetings is concerned, we hold that expenditure of Rs. 10,000, on estimate, be considered as expenditure incurred on the employees of the assessee-company and the balance disallowance of Rs. 17,139 is hereby sustained.

203. Vide Ground No. 2, assessee-company contends that the Commissioner (Appeals) erred in confirming the disallowance made by the DCIT under section 40A(9) of the claim of voluntary contributions of Rs. 32,000 and Rs. 76,000 towards UCIT Senior Managers Children Welfare Fund and UCIL Senior Staff Executive Childrens Fund respectively Identical issue was considered by us in paragraphs 112 to 115 of our order. For the reasons stated therein, we reject the claim of the assessee and uphold the order of the Commissioner (Appeals).

204. This leaves us with the additional ground which reads as under :

“For that the assessing officer should be directed to allow the expenses relating to this assessment year which according to the departments contention are not allowable in the subsequent year as claimed by the Appellant.”

205. We have considered identical issue while disposing of appeals. For the reasons stated therein, we reject the additional ground as being vague.

Re. : I.T.A. No. 2184 (Cal) of 1993

206. In this appeal, the assessee challenges the prima facie adjustment made by the assessing officer in the intimation under section 143(1))(a) of the Act. The case of the assessee is that additional tax of Rs. 12,925 levied under section 143(1A) of the Act is liable to be deleted as the disallowance made in 143(1)(a) proceedings is not in accordance with law. Without prejudice to the above claim, it was also claimed that the disallowance of Rs. 1,39,394 under section 37(4) is contrary to law. Interest charged under section 234C amounting to Rs. 5,85,000 is challenged on the ground that there was no tax payable as per the return of income and, therefore, at no point of time there can be shortfall for payment of advance-tax attracting the provision of section 234C of the Act. According to the Commissioner (Appeals), disallowance referable to the claim of depreciation on the guest-house and other assets used in the guest-house is in order in view of the plain language of section 37(4) of the Act. Consequently, additional tax of Rs. 12,82-5 levied was also confirmed. As regards the charging of interest under section 234C, Commissioner (Appeals) observed that interest is mandatory under the scheme and, therefore, no appeal lies against the same.

207. Further aggrieved, assessee is in appeal before us. Learned counsel submits that in the light of the decisions of the Honble Bombay High Court, in Chase Bright Steel Ltd. (supra) and Century, Spg. & Mfg. Co. Ltd. (supra), the question as to whether the claim of depreciation is hit by section 37(4) is a debatable issue and, therefore, falls outside the purview of section 143(1)(a) of the Act. He also placed reliance on the decision of the Honble Calcutta High Court in Modern Fibotex India Ltd.s case (supra). As regards the interest charged under section 234C of the Act, learned counsel submitted that the very jurisdiction of the assessing officer to levy interest is challenged in the instant case and, therefore, the assessee has a right of appeal and further sublimated that whether interest can be charged in the form of a prime facie adjustment is a moot question. Learned counsel also submitted that against the regular assessment order passed under section 143(3) of the Act, assessee, preferred an appeal and the learned Commissioner (Appeals) deleted the interest charged under section 234C of the Act upon which the department has not preferred an appeal and, therefore, the issue in the proceeding under section 143(1)(a) should be decided in favour of the assessee. On the other hand, learned departmental counsel relied upon the provisions of section 37(4) of the Act with regard to the disallowance of guest-house expenses. As regards the interest, learned counsel merely submitted that it is consequential and thus supported the orders of tax authorities.

208. We have carefully considered the rival submissions. As regards depreciation on guest-house and other assets used in the guest-house is concerned, section 37(4) is clear in its term. We have considered identical issue while disposing of the appeal in I.T.A. No. 2183 (Cal.) of 1993. For the reasons stated therein, we uphold the order of the Commissioner (Appeals). In the result, the disallowance under section 37(4) and the additional tax levied thereon is hereby confirmed. However, as regards charging of interest under section 234C of the Act, 1.ve find that the Commissioner (Appeals) allowed the claim of the assessee while disposing of appeal against the order passed under section 143(3) of the Act. It is not the case of the revenue that the order of the Commissioner (Appeals) is challenged in further appeal. Considering the facts and circumstances of the case, we hold that the interest is not chargeable in the proceedings under section 143(1)(a) of the Act.

209. In the result, all the appeals are disposed of as indicated above.

210. Per P.J. Goradia, V.P.I have gone through the order proposed by my learned Brother. I hold a different view and, therefore, after discussions, this dissenting order is passed.

211. In para 38 of the order of my learned Brother, certain issues are framed. I will express my views as under.

212. With regard to the first issue regarding compensation pa able vide (a)(i) & (ii), the same relates to deduction of a sum of Rs. 68,99,19,509 which had to be paid by the assessee on account of compensation to the victims of the Bhopal Gas Tragedy. The claim for the deduction has been disallowed by the tax authorities on the grounds that the compensation was paid for an act of criminal negligence, the expenditure was not incurred in the course of carrying on of the business in the capacity of a trader but as an owner of the property, the disputes had not been finalized in the assessment years concerned and it was capital in nature.

213. Certain basic undisputed facts are as follows Since 1969 the assessee has been engaged in the business of manufacturing pesticides at its factory at Bhopal. The pesticides are used for support and preservation of agriculture. For manufacture of such pesticides, MIC (hereinafter referred to as the Methyl Isocyanate) has to be used. The same was duly obtained by requisite licence under different legislations for its manufacturing business. Union Carbide Corporation (UCC), U.S.A., is a leading firm having the technology and skill for manufacturing of such pesticides. UCC held majority of the shares in the assessee. Agreements were entered into with UCC with the approval of the Central Government and in terms of such agreements, UCC was to design the plant required for manufacture of the pesticides and to supply technology for its manufacture. UCC was also to train at its plant in U.S.A. the technical staff of the assessee for operation of such plant. In the Paper Book filed by the assessee, an agreement entered into with the UCC concerning the manufacture or fabrication and installation of the capital plant, machinery and equipment, has been filed (Volume 1, page 53). Under. Article 4 of the said agreement, UCC warranted that the design packages was the best manufacturing information presently available from UCC and the drawings and design instructions in the design package shall be sufficiently detailed and complete. Another agreement was also entered into with the UCC for technical services which appears on page 67 of the Paper Book. This agreement recites that UCC was engaged in U.S.A. in the manufacture of certain carbonate pesticides and certain intermediate products useful in the manufacture of such carbonate pesticides and possesses the considerable knowledge, expertise and experience with respect to the facilities for the manufacture of carbonate pesticides by the reaction of MIC with hydroxy compounds. UCC regularly employs research staff and maintains extensive research laboratories and other facilities for research and it had trained and experienced personnel available to impart training and instruction in U.S.A. in further stated that prior approval of the Government had been obtained for its execution. On page 88 of the said Paper Book, the list of the personnel who were deputed for start of the plant of MIC Unit is given. Similar other details are given about the personnel who were trained at the facility of UCC at U.S.A. with their technical qualifications, etc. Details regarding the management, set-up and the personnel who are responsible for the different sections of plant at Bhopal arc also submitted together with their technical qualifications, experience and particulars of previous employments, posts held from time to time, etc. The case of the assessee with reference to the above documents is that it had taken all reasonable and proper steps that were feasible for the purpose of securing the best possible plant and the best technical know-how for its installation and operation. It employed competent and well-qualified persons who were also trained abroad for operation of the plant. According to the assessee, there was nothing more which could reasonably be expected to be done by the assessee on this score. The assessee further emphasized that its business of manufacturing and dealing in pesticides which involve handling of MIC and other poisonous substances, carried inherent risk of the fallout of any accident that may take place. In order to determine whether a particular loss is in the course of, or incidental to, the carrying on of business, it is necessary, to determine the nature of the business involved and in that context the issue has to be decided after appropriate appreciation of the relevant factors. What is necessary for the assessee to show is that it was conducting its business in a proper and reasonable manner with proper technical personnel. If in spite thereof, some accident do take place due to human error or lapse, the loss suffered on account of such accident has to be treated as one in the course of carrying on of the business and/or incidental thereto. The accident took place in the working of the plant and storage of the raw material for manufacture of pesticides. It cannot be described to be one in the capacity as owner of the property. It was in the course of and in relation to the manufacturing activities themselves.

213.1 The litigation relating to the claim for compensation was initially only against UCC, USA. Thereafter, because of the subsequent developments, ultimately the matter was settled in the Supreme Court of India. The accident took place in the previous year relevant to the assessment year 1985-86 and the assessee claimed deduction in that year. On 15-2-1989, relevant to the assessment year 1989-90, the Supreme Court passed an order settling the claims of those affected by the accident. The UCC was required to pay a sum of U.S. Dollar 425 million. The assessee was for the first time also made a necessary party to the said proceedings and the court directed the assessee also to pay equivalent of U.S. Dollar 45 million, that is to say, Rs. 68.99 crores by way of damages. In the order, the court clarified that the said payments were not to be treated as of penal nature. These facts establish that the assessee had taken all reasonable safeguards while conducting its said business in the matter of procurement of the plant, employment of the technical personnel, the personnel employed for operation of the plant, etc. and that the compensation which was directed to be paid in terms of the order of the Supreme Court was not by way of any penalty or fine or of a penal character, as has been specifically provided in the order itself. The assessee had to pay-the said sum in the course of its carrying on of the business on account of the loss and/or injury suffered by the people as a result of the accident which took place. It cannot be said that the accident which took place was on account of any act of negligence on the part of the assessee, nor can it be said that there was any motive or in design which could lead to the accident. It is, no doubt, true that a great tragedy had occurred in the operation of the said plant but the issue, however, is as to the compensation which the assessee had to pay for the loss suffered on account of such accident. The amounts paid are admittedly, not by, way of fine or penalty or as compensation for committing of any offence. The accident took place at factory at Bhopal at the time when the plant was in operation. The learned counsel for the revenue was also fair enough to state that on the materials on record, it could not be said that there was any criminal negligence, but he emphasized that there, was certainly a negligence and that is why the Unit was closed by the order of the Madhya Pradesh Government. The business has to be carried on with the aid of workers and employees and if any accident takes place even due to any error or lapse on the part of the workers and employees, the assessee has to pay compensation and such expenditure would be arising in the course of, and/or incidental to, the business.

214. The next issue which arises as stated in (b), is whether the expenditure is of capital nature or not. In my view, it is difficult to appreciate how the payment of the said compensation can be treated as capital expenditure. In fact, my learned Brother has also not expressed different view on this aspect and, therefore, we both have agreed that the expenditure is riot capital in nature.

215. With regard to the issue regarding the year in which the deduction is allowable, as raised in (c), I am of the opinion that the deduction should be allowed only in the assessment year 1989-90. The Supreme Court passed an order on 15-2-1989 relevant to the assessment year 1989-90 and in this year the amount was also paid. The deduction claimed is for damages and although the cause of action giving rise to such damages might have occurred in the year of accident, still whether the assessee was liable to pay any sum on account of such accident, and if so, to what extent, was only decided by the said order of the Supreme Court finally settling the disputes. Therefore, the claim in the other assessment years i.e., 1990-91 and 1992-93, cannot be allowed.

216. With regard to the issue raised in (d) as to whether the expenditure of a closed unit is allowable against the income earned by the assessee-company from other units, I may state that no arguments were addressed by the parties at the time of the hearing, but now the same has cropped up. In none of the assessment years involved where the claim was made by the assessee for deduction of the said sum, it was rejected, but not on any such ground. The tax authorities never disallowed the claim on the ground that the business itself had closed down and the loss relating to closed business could not be allowed. This issue never arose and, as a matter of fact, no arguments thereon were advanced. However, from the evidence on record like Balance Sheet and the various assessment orders themselves, it is evident that the assessee was a company engaged in several business activities in several divisions and all its said businesses constituted one and the same business. The assessment orders clearly indicate that there is interlacing of common funds and common management in respect of such business activities. In none of these assessment orders, separate computation has been made in respect of the various activities separately as independent and distinct. business. Substantial income has been assessed in several assessment years even after the closure of the Bhopal Plant in 1984 which arose from other activities. The nature of the various activities has been stated in the assessment order itself for assessment year 1985-86 which states that the assessee is a company deriving income from manufacture and sale of batteries, chemicals, pesticides, flash light cases plastics and commercial harvesting of shrims, lobster, etc. Further, the assessee is having its registered office at Calcutta and factories and branches located at Calcutta, Bombay and various other stations, as stated in the impugned assessment order. Therefore, the question of disallowing the claim for deduction on the ground that it related to a closed business cannot arise. The tax authorities being fully conscious of the aforesaid factual aspects, never rejected the claim for deduction on any such ground, although numerous other possible grounds which could be taken, had been considered while examining the claim for deduction. Therefore, in my view, the assessees claim is allowable.

217. With regard to the issue raised in (c), I agree with my learned Brother.

218. Regarding the deductibility of the amount of Rs. 7.5 crores the assessees claim has to be accepted. The learned Judicial Member made the disallowance on the basis of the reasons recorded for rejecting the claim of the assessee for deduction of Rs. 68.99 crores. I would not agree that this payment of Rs. 7.5 crores was in any way totally voluntary payment. My learned Brother has also stated that the liability arose because of the unprecedented disaster. In my view, the same is allowable.

219. With rest of the order passed by my learned Brother, I agree.

Reference Under section 255(4) of the Income Tax Act, 1961

Because of the difference between the Members, we forward the case to the Honble President. Following 3 questions are referred for the opinion of the Third Member :

1. Whether, on the facts and in the circumstances of the case, the compensation amount of Rs. 68,99,19,509 paid by the assessee-company, and Rs. 7.5 crores spent by it is allowable as expenditure incidental to the carrying on of the business ?

2. Whether, on the facts and in the circumstances of the case, the said two sums can be disallowed while computing the income of the assessee for the reason that the expenditure pertained to the closed unit of the assessees industrial undertaking ?

3. On the facts and in the circumstances of the case, what is the correct year of accrual of liability of the above two sums-whether assessment year 1989-90 or assessment year 1992-93 ?

2. The Honble President is requested to nominate the Third Member.

ORDER

Garg, R.P.

On a difference between the members the President, Income Tax Appellate Tribunal referred the following questions for my opinion as third member :

“1. Whether, on the facts and in the circumstances of the case, the compensation amount of Rs. 68,99,19,509 paid by the assessee-company and Rs. 7.5 crores spent by it is allowable as expenditure incidental to the carrying on of the business ?

2. Whether, on the facts and in the circumstances of the case, the said two sums can be disallowed while computing the income of the assessee for the reason that the expenditure pertained to the closed unit of tile assessees industrial undertaking ?

3. On the facts and in the circumstances of the case what is the correct year of accrual of liability of the two sums-whether assessment year 1989-90 or assessment year 1992-93 ?”

2. The impugned liability has arisen on account of an unprecedented occurrence in the pesticide plant of the assessee at Bhopal. Methyl Isocyanate, a very poisonous gas, escaped from tank No. 610 into the atmosphere causing death of many local residents and injuring many others. This made the assessee liable for payment of damages and also penal consequences. Various suits were filed against the assessee in the District Court of Bhopal. Initially interim relief of damages was awarded against the assessee-company, for a sum of Rs. 350 crores order dated 17-12-1987 which was reduced to Rs. 250 crores by the High Court of Madhya Pradesh. This was besides various criminal proceeding instituted against the company and Directors. Similar suits were filed against the holding company Union Carbide Corporation (UCC) in U.S.A. in the court of Judge John F. Keenan and a Sum of 5 million U.S. Dollar was awarded as an interim relief. Looking to the gravity of the situation, pendency of the claims at various stages, the complex issues of law and facts and in particular the enormity of human suffering occasioned by the Bhopal Gas disaster and the pressing urgency to provide immediate and substantial relief to the victim of the disaster, both the executives and judiciary as well as legislature were anxious to settle the issue as expeditiously as possible. Originally an ordinance to process the claim arising out of the disaster was promulgated on 2-2-1985. It was subsequently replaced by the legislature by an Act named Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985 with the following objects :

“An Act to confer certain powers on the Central Government to secure that claims arising out of, or connected with, the Bhopal gas leak disaster are dealt with speedily, effectively, equitably and to the best advantage of the claimants and for matters incidental thereto.”

This Act has given power to the Central Government to settle the issues not for its own benefit but only with a view to settle the clams in the best advantage of the claimants. The Central Government has been given the exclusive right to represent and act in place of every person who has made, or is entitled to make, a claim for all purposes connected with such claim in the same manner and to the same effect as such person. The words “claim” and “claimant” are defined therein-“claimant” to mean a person entitled to make a claim and “claim” to mean a claim arising out of or connected with the disaster, for compensation or damages for any loss of life or personal injury which has been, or is likely to be, suffered; a claim arising out of, or connected with, the disaster, for any damage to property which has been, or is likely to be sustained; a claim for expenses incurred or required to be incurred for containing the disaster or mitigating or otherwise coping with the effects of the disaster; and any other claim including any claim by way of loss of business or employment arising out of, or connected with, the disaster. The Central Government is only to act as a conduit pipe and to represent all the scattered gas victims in Bhopal, which was otherwise impossible for the litigants to fight in the courts of the proceedings. From the records, we find that Union Carbide (USA) has taken a plea before the District Court, Bhopal that they had nothing to do with the Indian company and that they were a different legal entity and that they never exercised any control and they were not liable to any suit. But that contention seems to have not been pressed probably in view of the fact that Union Carbide was charge-sheeted by saying that MIC gas was stored and it had to be stored and handled in stainless steel which was not done. On the charge-sheet it was stated that a scientific team headed by Dr. Varadrajan had concluded that the factors which had led to the toxic gas leakage causing its heavy toll existed in the unique properties of very high reactivity, volatility and inhalation toxicity of MIC; that needless storage of large quantities of the material in very large size containers for inordinately long periods as well as insufficient caution in design, in provision of measuring and alarm instruments, together with the inadequate controls on system of storage and on quality of stored materials as well as lack of necessary facilities for quick, effective disposal of material exhibiting instability led to the accident. As per the charge sheet, the MIC was stored in a negligent manner and the local administration was not informed, inter alia, of the dangerous effect of the exposure of Mfg. or the gases produced by its reaction and the medical steps to be taken immediately. It was further stated apart from the design defects the UCC did not take any adequate remedial action to prevent back flow of solution from VGS into RVVH and PVN lines and that there were various other acts of criminal negligence alleged. Probably in these circumstances, Union Carbide took major portion of the liability upon itself and out of 470 million U.S. Dollar, the liability passed on to the assessee was only 45 million U.S. Dollar. But as stated in paragraph 3 of the order of the Supreme Court in Charan Lal Sahu v. Union of India AIR 1990 SC 1480, the exact reasons and circumstances for such leakage have not been ascertained or clearly established.

3. Consequent upon filing of suits for compensation of the individuals claimants and by the Central Government under the ordinance promulgated on 2-2-1985 which was subsequently replaced by the Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985, the Supreme Court thought it pre-eminently fit to settle the issue once for all and passed an order on 14-2-1989 directing the assessees parent company, the Union Carbide Corporation, USA to pay a sum of US $ 470 millions to the Union of India in full settlement of all claims, rights and liabilities related to and arising out of the Bhopal gas disaster to be paid on or before 31-3-1989. By this order the court, to enable the effectuation of the settlement, ordered that all similar proceedings related to and arising out of Bhopal Gas Disaster to stand transferred to the Supreme Court and concluded the same in terms of the settlement, and all criminal proceedings related to and arising out of the disaster to stand quashed wherever these may be pending. A memorandum of settlement was required to be filed, setting forth all the details of the settlement to enable consequential directions, if any, to issue. In conformity with the settlement reached by the parties the court passed another order on 15-2-1989 making its earlier order subject to this order : It reads as :

“1. Union Carbide India Limited, which is already a party in numerous suits filed in the District Court at Bhopal, and which have been stayed by an order dated 31-12-1985 of the District Court, Bhopal, is joined as a necessary party in order to effectuate the terms and conditions of our order dated 14-2-1989 as supplemented by this order.

2. Pursuant to the order passed on 14-2-1989 the payment of the sum of US $ 470 millions (four hundred and seventy millions) directed by the court to be paid on or before 31-3-1989 be made in the manner following :

(a) A sum of US $ 425 millions (four hundred and twenty five millions) shall be paid on or before 23-3-1989 by Union Carbide Corporation to the Union of India; less US $ 5 millions already paid by the Union Carbide Corporation pursuant to the order dated 7-6-1985 of judge Keenan and in the court proceedings taken in the United States of America.

(b) Union Carbide India Ltd. will pay on or before 23-3-1989 to the Union of India the rupee equivalent of US $ 45 millions (forty five millions) at the exchange rate prevailing at the date of payment.

(c) The aforesaid payments shall be made to the Union of India as claimant and for the benefit of all victims of Bhopal Gas disaster under the Bhopal Gas Leak Disaster (Registration and Processing of Claims) Scheme, 1985 and not as fines, penalties or punitive damages.

3. Upon full payment of the sum referred to in paragraph 2 above :

(a) The Union of India and the State of Madhya Pradesh shall take all steps which may in future become necessary in order to implement and give effect to this order including but not limited to ensuring that any suits, claims or civil or criminal complaints which may be filed in future against any corporation, company or person referred to in this settlement are defended by them and disposed of in terms of this order.

(b) Any such suits, claims or civil or criminal proceedings filed or to be filed before any court or authority are hereby enjoined and shall not be proceeded with before such court or authority except for dismissal or quashing in terms of this order.

4. Upon full payment in accordance with the courts directions :

(a) The undertaking given by Union Carbide Corporation pursuant to the order dated 30-11-1986 in the District Court, Bhopal shall stand discharged, and all orders passed in suit no. 1113 of 1986 and/or in revision therefrom shall also stand discharged.

(b) Any action for contempt initiated against counsel or parties relating to this case and arising out of proceedings in the courts below shall be treated as dropped.”

Though assessee was already a party in various suits filed in the District Court, Bhopal, it was in this order that the assessee was joined as a necessary party in the proceedings before the Supreme Court, and in terms of settlement filed, a part of the total compensation amounting to US $ 45 millions being the equivalent amount of Rs. 68.99 crore was directed to be paid by the assessee-company. The constitutional validity of the Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985 was challenged which was ultimately upheld by the Supreme Court on 22-12-1989 in the case of Charan Lal Sahu (supra). Certain review petitions were thereafter filed which were disposed of by the Supreme Court on 3-10-1991 modifying its earlier order by restoring the criminal cases pending against the assessee and its directors. Again on 14-2-1994 the Supreme Court directed to establish a hospital for periodical medical check up for a period of eight years and for this purpose the assessee-company paid a sum of Rs. 7.50 crore for construction of a hospital in Bhopal.

4. A claim for deduction for a sum of Rs. 164.4 crore was made in assessment proceedings for the assessment year 1985-86 because the incident look place in that year and a similar deduction was claimed in the assessment year 1989-90 on the ground that the Supreme Court passed the order on 15-2-1989. The claim was repeated in assessment year 1,990-91 on the ground that matter reached finality after the Supreme Court upheld the validity of the Act and finally it was also claimed in assessment year 1992-93 as well on the legal advice that the Supreme Court finally disposed of the review petition on 3-10-1991. In none of the years the assessees claim was accepted as admissible by either of the revenue authorities. At the Income Tax Appellate Tribunal stage the two members differed in their opinion and their difference was on the aforesaid three points, to resolve which I am nominated as a third member. Though the assessee made claim in four years but as per the questions framed I am to decide in which of the two assessment years i.e., 1989-90 and 1992-93, the liability for the two amounts of Rs. 68,99,19,509 and Rs. 7.5 crore has accrued.

5. Based on the report of a scientists team headed by Dr. Varadrajan narrating that the factors which leading the toxic gas leakage causing its heavy toll existed in the unique properties of very high reactivity, volatility and inhalation toxicity of MIC and the finding of investigations conducted by CBI that certain lapses which were alleged to have been committed, the Judicial Member observed that the disaster was due to the negligent maintenance of the factory which could certainly be said to be in breach of strict regulations and, therefore, opposed to public policy having affected thousands of innocent citizens. Such an expenditure, in his opinion, did not fall in the category of expenditure incurred for the purposes of business or trade inasmuch as exposing citizens of the city to poisonous gases which affected them severely and consequent payment of damages is not a normal incident of business carried on by any assessee and, therefore, such expenditure is not deductible against the profits earned by the assessee. For-the same reasons he held that the expenditure incurred by the assessee of Rs. 7.5 crore was not an allowable deduction; that it was not a voluntary payment and that the liability to pay arose because of the unprecedented disaster. The Judicial Member further observed that there was no conclusive finding of the Supreme Court to the effect that the compensation was not for criminal negligence on the part of the company. According to him the use of the words “not as fine, penalty . . . . .” was to make sure that the compensation amount reached the victims and not appropriated by the government and nothing more. Proceeding on the assumption that the expenditure was incurred in the normal course of business the Judicial Member further observed, posing a question as to whether an expenditure relating to a closed down unit is an allowable deduction, answered the question in negative. He held that Bhopal plant units manufacturing pesticide, was one of the several distinct and independent businesses carried on by the assessee and that the licence of the factory was not renewed after 31-12-1984 and the unit was permanently closed effective from 11-7-1985. He therefore held that the expenditure was in respect of the closed business and therefore, cannot be allowed against income earned by the assessee from other distinct and independent businesses. Referring to the Annual Report of 1988-89 the Judicial Member endorsed the views of the directors that until the disposal of the review petitions the liability did not accrue and since the review petitions were finally disposed of on 3-10-1991 the liability to pay compensation accrued in the previous year relevant to the assessment year 1992-93.

6. The then Vice-President struck a different note. According to him the assessee has been in the business of manufacturing pesticides since 1969; that for manufacture of such pesticides, MIC was to be used, that the same was duly obtained by requisite licence under different legislations; that UCC is a leading concern having the technology and skill of manufacturing of such pesticides; that agreements were entered into with them with approval of the Central Government in terms thereof, UCC designed the plant and supplied technology and warranted the design package as the best manufacturing information presently available from UCC and the drawings and designs instructions in the design package sufficiently detailed and complete, that another agreement with UCC for technical services recited that UCC was engaged in USA in the manufacture of certain carbonate pesticides and certain intermediate products useful in the manufacture of such carbonate pesticides; that UCC possessed the considerable knowledge, expertise and experience for the manufacture of carbonate pesticides by the reaction of MIC with hydroxyl compounds and that UCC regularly employed research staff and maintained extensive research laboratories and other facilities for research and it had trained and experienced person available to impart training and inspections in USA; that prior approval of the government had been obtained for its execution; that a detailed list of the personnel who were deputed for start of the plant of MIC unit and about the personnel who were trained at the factory of UCC at USA with their technical qualifications and regarding management set up and personnel who were responsible for different sections of the plant at Bhopal was also submitted together with their previous employment, posts held. He therefore concluded that the assessee had taken all reasonable and proper steps that were feasible for the purpose of securing the best possible plant and the best technical know-how for its installation and operation; that the assessee was conducting its business in a proper and reasonable manner with proper technical personnel and if in spite thereof, some accident do take place due to human error or lapse, the loss suffered oil account of such accident has to be treated as one in the course of carrying on of the business and/or incidental thereto.

7. He further held that the accident took place in the working of the plant and storage of raw material for manufacture of the pesticides and that it could not be described to be one in the capacity as owner of the property and that it was in the course of and in relation to the manufacturing activities themselves and the compensation which was directed to be paid in terms of the order of the Supreme Court was not by way of any penalty or fine or of penal nature as has been specifically stated in the order itself; and that the said accident was not on account of any act of negligence on the part of the assessee nor was there any motive or ill design which could lead to the accident.

8. As the Supreme Court has passed the order fixing the liability on the assessee on 15-2-1989 the deduction, in the opinion of the then Vice President has to be allowed only in assessment year 1989-90 in which year the amount was also paid. The deduction claimed was for damage and although the cause of action giving rise to such damages might have occurred in the year of accident, still whether the assessee was liable to pay any sum on account of such accident, and if so, what extent, was only decided by the said order of the Supreme Court finally settling the disputes and therefore the claim in other assessment years, i.e., 1990-91 and 1992-93 cannot be allowed.

9. The issue of the disallowance on the ground that the unit was closed, the then Vice-President stated that no arguments were addressed by the parties at the time of hearing, that in none of the assessment years the claim was rejected on this ground. From the evidence on record like balance sheet and various assessment orders themselves, he held on merits, that the assessee was a company engaged in several business activities in several divisions and all its said businesses constitute one and the same business, that the assessment orders clearly indicate that there was interlacing of common funds and common management in respect of such business activities, that in none of these assessment orders, separate computations have been made in respect of the various activities separately as independent and distinct businesses; that the nature of various activities demonstrated in assessment order itself for assessment year 1985-86 stated that the assessee was a company deriving income from various activities or ventures like, manufactures and sale of batteries, chemicals, pesticides, flash light cases, plastics and commercial harvesting of shrimps, lobsters etc. that the assessee was having its registered office at Calcutta and factories and branches located at Calcutta, Bombay and various other stations and therefore the question of disallowing the claim for deduction on the ground that related to the close business, in his opinion, cannot arise; that the lax authorities being fully conscious of the aforesaid factual aspects never rejected the claim on any such ground. He therefore held it is a case of same business and therefore the assessees claim was allowable.

10. I have heard the learned counsel of the assessee Shri R.N. Bajoria and the learned standing counsel Sri M.P. Agarwal and considered their rival submissions. Let me take up the second question first as the arguments were advanced first on this point of difference. The learned counsel of the assessee submitted that this question was raised by the Bench for the first time and decided in absence of full facts; the facts on record were insufficient to consider the same. Supporting the order of the then Vice-President, the counsels argument is that the assessee is one engaged in the several businesses of manufacture and sale of batteries, chemicals, pesticides, flash fight cases, plastics and commercial harvesting of shrimps, lobster, etc. Though it had factories and branches located at Calcutta, Mumbai, Bhopal and other various stations, it has a common management with a registered office at Calcutta. Common funds were being utilized in various ventures of activities and, therefore, it is a case of one and the same business. Thus there was a complete inter-connection and inter-lacing amongst different lines of activities of business carried on by the assessee and, therefore, the loss arising out of the Bhopal Gas Disaster is to be considered as arising out of ill the course of the business carried on by the assessee. The revenues case, on the other hand, is based on the finding of the learned Judicial Member, viz., the loss has arisen with regard to its factory at Bhopal manufacturing pesticides, which was closed in the year of the occurrence of the disaster itself and that business was closed permanently from 11-7-1985. The business of Bhopal unit was closed by the time the liability to pay compensation accrued. In this connection, reference to the decision of the Supreme Court in the case of L.M. Chhabda & Sons (supra) was made wherein it was observed that expenditure of a closed business cannot be allowed against income earned by assessee from other distinct and independent businesses.

11. In the present case, the assessee claimed the deduction for compensation, but no objection as aforesaid, was raised by the revenue on the allowability of the same on the ground that the Bhopal business was distinct and separate business. Even the Commissioner (Appeals) has also not given any finding to this effect. It came on surface for the first time during the course of hearing before the Tribunal when a doubt was raised about the allowability of the claim and in my opinion without going into the facts of the case and examining the issue whether it was the case of same business or not, it cannot be concluded that the liability, related to the closed business of the assessee in 1984-85 which was distinct and separate business and, therefore, it cannot be allowed in subsequent years. In my opinion, the disallowance on the assumption of fact that the Bhopal business was distinct and separate without going into the facts and dealing with the theory of the same business cannot be supported in law. Even in view of the Supreme Court decision in the case of L.M. Chhabda & sons (supra), the question whether different ventures carried on by the assessee are parts of the same business must depend on the facts and circumstances of the case. In a later decision of Supreme Court in Waterfall Estates Ltd. v. CIT (1996) 219 ITR 563, it was observed : “We do not think it necessary to deal with the facts of each of the decisions for the aforesaid reason and also because the said question is essentially a question of fact. No single test can be devised as universal and conclusive. The question has to be decided on a consideration of all the relevant facts and circumstances.

Some facts may tend one way and some other the other way. All overall view has to be taken and a conclusion arrived at.”

12. There seems to be no doubt about the proposition as canvassed by the learned standing counsel that the liability of an expenditure call be allowed only of a business carried on by the assessee during the year under consideration in the light of the decisions CIT v. Lahore Electric Supply Co. Ltd. (1966) 60 ITR 1 (SC); L.M. Chhabda & Sons (supra); Vijaya Laxmi Sugar Mills Ltd. v. CIT (1991) 191 ITR 641 (SC); Binani Printers (P.) Ltd. v. CIT(1983) 143 ITR 338 (Cal.); Ritz Continental Hotels Ltd. v. CIT (1978) 114 ITR 554 (Cal.); Associated Cement Co. Ltd. v. CIT (1997) 221 ITR 215 (Bom.); Chinai & Co. (P.) Ltd. v. CIT (1994) 206 ITR 616 (Bom.); CIT v. Mahadoo Prosad Shyamsunder (1993) 203 ITR 168 (Cal.); Khandelwal Industries (P.) Ltd. v. CIT (1993) 203 ITR 925 (Bom.) and the Commentary of Kanga & Palkhivala, Eighth Edition, page-482 wherein the decision reported as early as in South Indian Industrial Ltd. v. CIT (1935) 3 ITR 11 (Mad.) was considered. But there are several decisions of the Supreme Court and various High Courts and also of the Tribunal wherein the expenditure related to a closed business or loss relating thereto was held allowable against the business income of other business on the basis of the principle of same business. On that basis, if the business of the assessee at Bhopal was part of the integrated business carried on by the assessee. I do not find any reason how the expenditure could be disallowed on the ground that the Bhopal unit with regard to which the compensation was paid, was closed in 1984-85. I agree with the then Vice-Presidents finding that it was demonstrated also in the assessment order for assessment 1985-86 that the assessee was a company deriving income manufacture and sale of batteries, chemicals, pesticides etc. with it common management place being the registered office at Calcutta and, therefore, it could be a case of same and integrated business with a complete inter-connection and inter-lacing between the different lilies of activities carried on by the assessee in the light of the following decision wherein the various businesses carried on by the assessee considered to be same and integrated business :

(i) Life Insurance and General Insurance business irrespective of the different mode of computation of business income under the Income Tax Act in CIT v. Prithvi Insurance Co. Ltd. (1967) 63 ITR 632 (SC);

(ii) Cloth business and other business in general section in Hooghly Trust (P.) Ltd. v. CIT (1969) 73 ITR 685 (SC);

(iii) Share business and business in diverse commodities in Produce Exchange Corpn. Ltd. v. CIT (1970) 77 ITR 739 (SC)

(iv) Import business closed in 1953-54 and export business started in 1954-55 in BR Ltd. v. YP Gupta, CIT (1978) 113 ITR 647 (SC) :

(v) Diverse commodities like sugar, vanaspati, soap, etc. and _special alloy ware and blades in CIT v. Modi Industries Ltd. (No.-3) (1993) 200 ITR 341 (Delhi);

(vi) Fertilizer and Cement in the case of IAC v. Coromandal Ltd. (1989) 29 ITD 455 (Hyd.);

(vii) Agro Chemical/soda ash and fertiliser business under process of construction in the case of Tata Chemicals Ltd. v. Deputy CIT (2000) 72 ITD 1 (Mum);

(viii) Diverse business in textile, fibre on different places and cement/sponge iron at other places in Grasim Industries Ltd. v. Deputy CIT (1999) 64 TTJ (Mum.) 357, etc.

From all these decisions, the following principles are emerging :

(i) The nature of two lines of business is not relevant;

(ii) The fact that one business can be conveniently closed down without affecting the other business is a strong indication that both the businesses are distinct and separate, but no decisive inference can be drawn from that;

(iii) The decisive test is the unity or control which is indicated by interlacing, interdependence and interconnections between the business and the term “one into the other” which should be shown to exist by reason of the common management, common administration, common fund and common place of business,

13. In the present case, as aforesaid, there is no finding given by the assessing officer on this aspect in either of the orders for assessment years 1985-86, 1989-90, 1990-91 and 1992-93, nor any such case made out or a plea considered by the Commissioner (Appeals) in any of these years and as pointed out by the then Vice-President, no arguments were even advanced by the parties at the time of hearing and there being no sufficient material on record to disallow the claim of the assessee for the first time at the appellate stage and, therefore, the disallowance or this ground, in my opinion, cannot be justified. On the contrary, whatever material is there on record, the inference as drawn by the then Vice-President on the basis of the Balance Sheet and various assessment orders themselves, could be taken to be the better view, the company was engaged in several business activities in several divisions and all it said businesses constitute one and same business, there indications in the assessment orders of interlacing of common funds and common management in respect of such business activities.

14. Now coming back to the first point of difference, i.e., whether the compensation paid by the assessee is an allowable expenditure incidental to carrying on the business of the assessee. The assessee is engaged in the manufacturing of pesticide and the main chemical for manufacture of pesticides being Methyl Isocyanate (MIC), was manufactured by the assessee and stored in the underground tanks. It is to be noted that MIC is highly reactive, toxic, volatile and flammable. It is highly hazardous and lethal material by all means of contact and is poisonous.

15. Dr. Varadharajans report also demonstrates that it has very high reactivity, volatility and inhalation toxicity of MIC, which led to the toxic gas leakage causing a heavy toll, existed in the unique properties. Dr. Varadharajan stated that the needless storage of large quantities of the material in very large size containers for inordinately long periods as well as insufficient caution in design, in choice of materials ot construction and in provision of measuring and alarm instruments, together with the inadequate controls on systems of storage and on quality of stored materials as well as lack of necessary facilities for quick effective disposal of material exhibiting instability, led to tile accident. Similarly, the CBI pointed out certain lapses of the assessee, viz.

(i) Invariably storing MIC in the tanks, which were, much more than 50 per cent capacity of the tanks, which had been prescribed;

(ii) Not taking any adequate remedial action to prevent back flow of solution from VGS into RVVH and PVH lines;

(iii) Not maintaining the temperature of the MIC tanks at the preferred temperature of zero degrees celsius but at ambient temperatures, which were much higher;

(iv) Not taking any immediate remedial action when tank No. E 610 did not maintain pressure from 22-10-1984 onwards;

(v) When the gas escaped in such large quantities, not setting out an immediate alarm to warn the public and publicise the, treatment that had to be given immediately.

16. By these two reports, it is claimed by the revenue that there negligence of the assessee in maintaining the factory; that it was a liability not for the purpose of the trade or business but arose as an owner; that it was also a penal liability because the assessee maintained the factory in breach of strict regulations and, therefore, oppose to public policy. But the question arises what then ? The of the employees working in the factory. It was in course of carrying on the business. The nature of the business was like that such incident or accident could happen and are bound to happen because of the mishandling or lapses or errors that may result in making the unit of the business liable for injuries suffered by the victims who are always innocent and poor. These victims may, be the workers or the people in the nearby vicinity. Any such liability arising of whatever magnitude would, in my opinion, is a trade liability arising in the course of the business. It is true that mis happening was of such an magnitude that the had taken the shape of a disaster taking away the lives of thousands of people in Bhopal and making many other people injured and permanently incapable, but so long as the happening or mishappening, incident or accident was in the course of the operation of the business, it could not be termed to be a criminal liability or a liability for criminal negligence disentitling the assessee for claim of the expenditure. The assessee is a subsidiary of a very big multinational company stated to be of repute and no case has been made out that it indulged in doing criminal activities for making or earning profit or carrying on the business. Agreements for installing the plant were entered into with the approval of the Central Government and in terms of such agreements, the U.S. holding company was to design the plant required for manufacture of the pesticides and to supply technology for its manufacture. It was also to train at its plant in U.S.A. the technical staff of the assessee for operation of such plant. As per terms of the said agreement, U.S. holding company warranted that the design packages was the best manufacturing information presently available from them and the drawings and design instructions in the design package shall be sufficiently detailed and complete. It is also on record that the U.S. holding company was engaged in the manufacture of certain carbonate pesticides and certain intermediate products useful in the manufacture of such carbonate pesticides and possesses the considerable knowledge, expertise and experience with respect to the facilities for the manufacture of carbonate pesticides by the reaction of MFC with hydroxyl compounds. It regularly employed research staff and Maintained extensive research laboratories and other facilities for research and it had trained and experienced personnel available to impart training and instruction in U.S.A. A list of personnel who were deputed for start of the plant of MIC Unit and the personnel who were trained at the facility of U.S. holding company with their technical qualifications, etc. along with the details of the management, set-up and the personnel who were responsible for the different section of Plant at Bhopal with their technical qualifications, experience and particulars of previous employments, posts held from time to time are on record. In these circumstances, as observed by the then Vice-President, the assessee had taken all reasonable and proper steps that were feasible for the purpose of securing the best possible plant and the best technical know-how for its installation and operation thereof. No such allegation has been made at any stage of the proceedings that the assessee had not employed competent and well-qualified persons and that the assessee could have done more on this score in taking due precautions. As stated above, the operation of manufacturing pesticides involved handling of MFC and other poisonous substance, which carried inherent risk of fallout of any accident that may take place. Nothing has been brought on record to show that the assessee was not conducting its business in a proper and reasonable manner and if in spite thereof some accident took place due to human error or lapse, the loss suffered on account of such accident has to be treated as one in the course of carrying on of the business and/or incidental thereto. The accident took place in the working of the plant and storage of the raw material for manufacture of pesticides.

17. The assessee is a limited company and has been carrying on the business of manufacturing of pesticides. That necessitated the installation of the plant for manufacture of Methyl Isocyanate (MFC) which is the main chemical for manufacturing pesticides. MIC so manufactured was to be stored in the underground tanks, which due to the lapses of the servants of the assessee escaped in the form of gas in large quantity from tank No. E-610, which was found to have not maintained required pressure and temperature. In these circumstances, in my opinion, the compensation that the assessee had to pay arose in the course of carrying on its business and is incidental thereto, though the assessee might have been negligent in that happening giving rise to compensation. Its servants might not have taken due and proper care in maintaining the plant. The following passage from decision of the Exchequer Court of Canada in the case of Imperial Oil Co. Ltd. v. Minister of National Revenue (1948) 1 DIR 305, discussed in the case of Anamalai Timber Trust Ltd. v. CIT (1963) 47 ITR 814 (Ker.) at pages 823-824 is worth quoted :

“It is necessary to look behind the payment and enquire whether the liability which made if necessary-and it makes no difference whether such liability was contractual or delictual was incurred as part of the operation by which the taxpayer earned his income. Where income is earned from certain operations, as it was by the appellant from its marine operations, all the expenses wholly, exclusively and necessarily incidental to such operations must be deducted as the total cost thereof in order that the amount of the profits or gains from such operations that are to be assessed may be computed. Such cost includes not only all the ordinary operations costs but also all moneys paid in discharge of the liabilities normally incurred in the operations. When the nature of the operations is such that the risk of negligence on the part of the taxpayers servants in the course of their duties or employment in really incidental to such operations, as was the fact in the present case, with its consequential liability to pay damages and costs, then the amount of such damages and costs is properly included as one of the items of the total cost of such operations. It may, therefore, properly be described as a disbursement or expense that is wholly, exclusively and necessarily laid out as part of the process of earning the income from such operations.”

18. In Anamalai Timber Trust Ltd.s case (supra), the Kerala High Court was dealing with the compensation paid by the assessee for the in July caused by the elephant employed by it in carrying the logs. It was held allowable by observing that there is no difference in principle between the liability being contractual or delictual even though the liability in that case was part of the operation by which the assessee earned its income. Considering the nature of business carried on by the assessee, the risk of negligence such as the one attributed to the assessees servants while acting in the course of their employment is held clearly incidental to such business and the consequential liability to pay damages for such negligence is also incidental to business. A reference to the following passage of Lord Chancellor of the decision by the House of Lords in Strong & Company of Romsey Ltd.s case (supra) was also made at page 821 of the reports :

“I think only such losses can be deducted as are connected with it in the sense that they are really incidental to the trade itself. They cannot be deducted if they are mainly incidental to some other vocation, or fall on then trader in some character other than that of trader. The nature of the trade is to be considered. To give an illustration, losses sustained by a railway company in compensating passengers for accident in travelling might be deducted. On the other hand, if a man kept a grocers shop, for keeping which a house is necessary, and one of the window shutters fell upon and injured a man walking in the street, the loss arising thereby to the grocer ought not to be deducted. Many cases might be put near the line, and no degree of ingenuity can frame a formula so precise and comprehensive as to solve at sight all the cases that may arise. In the present case, I think that the loss sustained by the appellants was not really incidental to their trade a, inn-keepers, and fell upon them in their character not of traders but o! householders.”

Much reliance has been placed on this decision in disallowing the claim of the assessee and in holding that the liability for compensation on the assessee was not in the capacity of a trader but as the owner of the factory, the owner of the tank from which the gas escaped injuring thousands of people in Bhopal. In this quoted passage itself it is stated that losses sustained by the Railway Company in compensating the passengers for accident in travelling might be deducted. But a doubt has been raised on the deduction for the loss arising to the grocer who had kept a grocers shop for keeping which a house was necessary and one of the window shutters fell upon and injured a man walking in the street. It is also evident from the above passage that no degree of ingenuity can frame a formula so precise and comprehensive as to solve at sight all the cases that may arise.

19. Let us examine it from this angle first. The assessee was the owner of the storage tanks. At the same time, the factory as well as the storage tanks were used for the purpose of the business and in such circumstances, it may at best could be said that it was a liability both as owner as well as a trader and in view of the trend of the decision of the Supreme Court in the case of Indian Aluminium Co. Ltd. (supra) while dealing with the allowability of the wealth-tax in the case of a trading company, the majority view was that when a person has a dual capacity, of a trader-cum-owner, and he pays tax in respect of property which is used for the purpose of trade, the payment must be taken to be in the capacity of a trader according to ordinary commercial principles. Their Lordships referring to the earlier decision in the case of Travancore Titanium v. CIT (1966) 60 ITR 277 (SC) qualified the test of that case “to be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business, between the expenditure and the character of the assessee as a trader, and not as owner of assets, even if they are assets of the business” by stating that if the expenditure is laid out by the assessee as owner-com-trader and the expenditure is really incidental to the carrying on of his business, it must be treated to have been laid out by him as a trader and as incidental to his business. In this view of the latter trend propounded by the majority decision of the Supreme Court aforesaid, much reliance cannot be placed on the concept laid down by the House of Lords in the case of Strong & Co. of Romsey Ltd. (supra).

20. It is true that the assessee is the owner of the factory and of the. tanks from which the gas escaped. But that was a business asset, a property of the business without which it would not have been possible for the assessee to carry on the business effectively. The liability for compensation is not by owning that factory or the storage underground tanks but because the gas stored therein escaped which was necessary raw material for the manufacture of the pesticides and an operation essential for carrying out the manufacturing activity of pesticides. Therefore, it cannot be said that the liability for compensation was essentially fastened upon the assessee as an owner. It, in my opinion, has arisen in its capacity as a manufacturer, as a businessman.

21. Reliance is placed on the Madras High Court decision in the case of M.S.P. Senthikumara Nadar & Sons (supra). In that case damages were paid for the sale of coffee within India in violation of the embargo imposed by Coffee Board which was considered to be opposed to the public policy. It was held that transgression was deliberate and without apparent excuse. No such case has been made out in the present appeal. No finding is there that the assessee allowed the gas to escape deliberately. No volition was there in any of the actions of the company. It was just an accident or at best a negligent inaction of the employee of the assessee to take proper care. The revenue from this decision therefore, can solicit no help.

22. In Hazi Ajij and Abdul Shakoor Bros. v. CIT (1961) 41 ITR 350 (SC), the fine paid for importing certain goods in contravention of law and in lieu of confiscation of goods was held to be not allowable as deduction because the payment was of infraction of law which is not a normal incident of a business but as penalty for an act of infraction of public policy underlying the concerned statute. In the present case, it was compensation for loss incurred by negligence and not for any infraction of law or public policy.

23. Strong & Co. of Romsey Ltd.s case (supra) and latter decision relied upon that in Alexander Von Glehn & Co. Ltd.s case (supra) were referred to by the Supreme Court in Maddi Venkataraman & Co. (P.) Ltd.s case (supra). But all these cases were of defiance committed by the assessee in following the law and/or regulations, which were based on public policy. Volition in committing the offence was present in all these cases. In the case of Maddi Venkataraman & Co. (P) Ltd. (supra), the assessee contravened the provisions of the Foreign Exchange (Regulation) Act to cut down its losses or to make larger profits while carrying on the business. Supreme Court observed that it was only to be expected that proceedings would be taken against the assessee for violation of that Act. The expenditure incurred was for evading the provisions of the Act. It was a case of the penalty levied for such evasion that was held not be allowed as deduction. Moreover, it would be against public policy to allow the benefit of deduction under one statute for and, expenditure incurred in violation of the provisions of another statute or any penalty imposed under another statute. If the deductions claimed by the assessee were allowed, the penal provisions of the Foreign Exchange (Regulation) Act would become meaningless. In that context, the Supreme Court observed that it has also to be borne in mind that evasion of law cannot be a trade pursuit. The facts in that case were that the assessee had accumulated 29.2 tonnes of sub-standard quality tobacco which it could not export over the last 3 years. Since the accumulated stock of tobacco was of the sub-standard quality, it could not be sold at the floor price fixed by the Government of India for such tobacco. The assessee had no alternative but to sell the tobacco at a discount of 20 per cent to a Singapore party. On paper, however, the full sale price was paid by the Singapore party, but in reality 20 per cent of the price paid by the party was remitted back to him through one S. In pursuance of an agreement the tobacco was sold and the full floor price was received by the assessee from the Singapore party and the assessee paid a sum of Rs. 2,88,000 to S who remitted the equivalent amount in Singapore currency to the Singapore party. The assessees contention was that it had no alternative but to enter into such a transaction with a view to dispose of the said unsold stock of inferior quality of tobacco. But their Lordships of the Supreme Court held that this cannot be a justification for contravention of law. In that context it was observed that the expenditure may not be allowable deduction merely because it was remotely connected with trade or made in course of or arising out of or connected with the trade or made out of the profits of the trade. It has to be for the purpose of trade without infraction of law. There are three decisions of Supreme Court wherein damages paid were allowed, because there was no infraction of law and the loss arose out of or in the course of trade. These are (i) Prakash Cotton Mills (P) Ltd. CIT (1993) 201 ITR 684 (SC); (ii) Swadeshi Cotton Mills Co. Ltd. v. CIT (1998) 233 ITR 199 (SC); and (iii) CIT v. Ahmedabad Cotton Mfg. Co. Ltd. (1994) 205 ITR 163 (SC).

24. In Prakash Cotton Mills (P.) Ltd.s case (supra), the dispute was the allowability of interest paid for late payment of sales-tax under the Bombay Sales Tax Act, 1959 and the damages under the Employees State Insurance Act, 1948 for delayed payment of the contribution and the court held that the payments were composite in nature. In so far as it related to the compensation for late payment, it was field to be all allowable deduction and the balance amount which was penal in nature was held not allowable as it was meant to penalise the defaulter employers as also a warning to employers in general not to commit a breach. The compensation payment by the assessee in the case under consideration was for a tortuous liability arising out of negligence of the employees of the assessee to compensate to the loss of life and property, personal injury and for expenses for containing the disaster or mitigating or otherwise coping with the effects of the disaster or any other claim (including any claim by way of loss of business of employment) arising out of, or connected with the disaster. It is thus cannot be a penalty or fine or an impost akin. to penalty and being compensatory payment arising out of carrying on the business is an allowable deduction.

25. In Ahmedabad Cotton Mfg. Co. Ltd.s case (supra), the assessee could not produce or pack the minimum quantity of specified type of cloth as required by the Textile Commissioner in directions issued under the Cotton Textiles (Control) Order, 1948 and had paid the amount under section 21C(1)(a) and as penalty under the bond was held in reality not as penalty or akin to penalty imposed by way of punishment for breach or infraction of the law or the statutory scheme but was field as a payment in exercise of option conferred upon him by the very law or the scheme. In the present case also, the compensation was not as a punishment for breach of law but as compensation for the loss to the victims. The decisions of MS.P. Senthikumara Nadar & Sons (supra) and Hazi Ajij & Abdul Shakoor Bros. (supra) were considered and distinguished in this case by the Supreme Court.

26. In Swadeshi Cotton Mills Co. Ltd.s case (supra), penalty, for the default in making the payment of Central Sales Tax was held not allowable as it was paid not for the delayed payment but for contravention of provisions of law, however, following the decision in the case of Prakash Cotton Mills Co. Ltd. (supra), damages paid for late payment of provident fund was held compensation payment both for delayed payment and infraction of law and, therefore, the question was remitted back.

27. The words “not as fines, penalties, or punitive damages” in Paragraph 2(c) of the order of the Supreme Court dated 15-2-1989 is claimed to have not been used to exclude the compensation from within its meaning but only to ensure that the amount of compensation was not appropriated by the Central Government to the detriment of the claimant. In my opinion, that is not the correct reading of the judgment. Firstly, as aforesaid, the Central Government was made a party and given only a right to represent the victims. The claim was to be settled by the Central Government for and on behalf of the victims and the claimants and it was not for its own benefit. Secondly, the terms of flit, Supreme Court order are clear enough that the compensation awarded was to be paid to the Union of India as claimant and for the benefit of all the victims of Bhopal gas disaster and not as fines, penalties or punitive damages. This, in my opinion, is a clear mandate that no part of the compensation was or could be treated as fine, penalty or punitive damages.

28. The compensation was awarded by the Supreme Court through the Central Government of India appointed as representative of the claimants under the Bhopal Gas Leak Disaster (Processing of Clams) Act, 1985. The Act was passed in recognition of the right of the sovereign to act as parens patriae to effectively safeguard the right of the victims who were in general poor, illiterate and helpless and is constitutionally valid. As observed by the Supreme Court in Charanlal Sahus case (supra), there was no curtailment of any criminal liability of anyone. The Act also does not in any way circumscribe the liability of the Union of India or the State of Madhya Pradesh or the Chief Minister of that State in case they were liable as joint tort feasors with the UCC or UCIL. As stated in paragraph 144 of the report, Justice Ranganathan for himself and for Justice A.M. Ahmadi observed”The Act talks only of the civil liability of, and the proceedings against the UCC or UCIL, or others for damages caused by the gas leak. It has nothing to say about the criminal liability of any of the parties involved. Clearly, therefore, the part of the settlement comprising a term requiring the withdrawal of the criminal prosecutions launched is outside the purview of the Act. The validity of the Act cannot, therefore, be impugned on the ground that it permitsand should not have permittedthe withdrawal of criminal proceedings against the delinquents.” That seems to be the precise reason for restoring the criminal cases pending against the assessee and its Directors by the Supreme Court vide order dated 3-10-1991. In paragraph 90 of the said judgment, Their Lordships further observed as under :

“The Act does not in any way except to the extent indicated in the relevant provisions of the Act circumscribe or abridge the extent of the victims so far as the liability of the delinquents are concerned. Whatever are the rights of the victims and whatever claims arise out of the gas leak disaster for compensation, personal injury, loss of life and propel suffered or likely to be sustained or expenses to be incurred or any other loss are covered by the Act and the Central Government by operation of section 3 of the Act has been given the exclusive right to represent the victims in their place and stead. By the Act, the extent of liability is not in any way abridged and, therefore, if in case of any industrial disaster like the Bhopal Gas Leak Disaster, there is right in victims to recover damages or compensation on the basis of absolute liability, then the same is not in any manner abridged or curtailed.”

29. Even the Chief Justice Mr. Sabyasachi Mukherji in paragraph-89 of his separate order in the case of Charan Lal Sahu (supra) observed that the Act does not in any way circumscribe the liability of the UCC, UCIL or even the Government of India or the Government of Madhya Pradesh if they were jointly or severally liable. This Act also does not deal with criminal liability of any of the parties concerned. On an appropriate reading of the relevant provisions of the Act, it is apparent that the criminal liability arising out of Bhopal Gas Leak Disaster is not the subject matter of this Act and cannot be said to have been in any way affected abridged or modified by the virtue of the said Act.

30. Let us examine the nature of the liability of the assessee for damages in little greater detail. The right of the victims in such a case is to recover damages or compensation on the basis of absolute liability. It was propounded over 130 years ago by the House of Lords in the case of Rylands v. Eletcher (1868) 3 ILR 330 that where the owner of the land, without wilfulness or negligence, uses his land in the ordinary manner of its use, though mischief should thereby be occasioned to his neighbour, he will not be liable in damages. But if he brings upon his land anything which would not naturally come upon it, and which is in itself dangerous, and may become mischievous if not kept under proper control, though in so doing he may act without personal wilfulness or negligence, he will be liable in damages for any mischief thereby occasioned. In this case A was lessee of certain mines. B was the owner of a mill standing on the land adjoining that under which the mines were worked. B desired to construct a reservoir and employed competent persons, such as engineers and a contractor to construct it. A had worked his mines upto a spot where there were certain old passages of disused mines; these passages were connected with vertical shafts which communicated with the land above and the earth of the surrounding land. No care had been taken by the engineer or the contractor to block up these shafts and shortly after water had been introduced into the reservoir it broke through some of the shafts, flowed through the old passage and flooded As mine. In this background of the fact, it was held that A was entitled to recover the damages from B in respect of the injury. This rule, it was observed by the Supreme Court in the case of M.C. Mehta v. Union of India AIR 1987 SC 1086, applies only to non-natural user of the land and does not apply to things naturally on the land or where the escape is due to an act of God and an act of a stranger or the default of the person injured or where the things which escape are present by the consent of the person injured or in certain cases where there is a statutory authority. Thereafter considerable case law has developed in England as to what is natural and what is non-natural use of land and what are precisely the circumstances in which this rule may be displaced. However, their Lordships of the Supreme Court in the case of M.C. Mehta (supra) did not think it necessary to consider those decisions, because in a modern industrial society with highly developed scientific knowledge and technology where hazardous or inherently dangerous industries are necessary to carry a part of the developmental programme. This rule evolved in the 19th Century at a time when all these developments of science and technology had not taken place cannot afford any guidance in evolving any standard of liability consistent with the constitutional norms and the needs of the present day economy and social structure. According to Their Lordships, the law has to grow in order to satisfy the needs of the fast changing society and keep abreast with the economic developments taking place in the country. As new situations arise the law has to be evolved in order to meet the challenge of such new situations. Law cannot afford to remain static. A new principle of liability which English Courts have not done was ventured by the Supreme Court to deal with an unusual situation which has arisen and which is likely to arise in future on account of hazardous or inherently dangerous industries which are concomitant to an industrial economy. The new principle was laid down in the following words :

“We are of the view that an enterprise which is engaged in a hazardous or inherently dangerous industry which poses a potential threat to the health and safety of the persons working in the factory and residing in the surrounding areas owes an absolute and non-delegable duty to the community to ensure that no harm results to anyone on account of hazardous or inherently dangerous nature of the activity which it has undertaken. The enterprise must be held to be under an obligation to provide that the hazardous or inherently dangerous activity in which it is engaged must be conducted with the highest standards of safety and if any harm results on account of such activity, the enterprise must be absolutely liable to compensate for such harm and it should be no answer to the enterprise to say that it had taken all reasonable care and that the harm occurred without any negligence on its part. Since the persons harmed on account of the hazardous or inherently dangerous activity carried on by the enterprise would not be in a position to isolate the process of operation from the hazardous preparation of substance or any other related element that caused the harm the enterprise must be held strictly liable for causing such harm as a part of the social cost for carrying on the hazardous or inherently dangerous activity. If the enterprise is permitted to carry on an hazardous or inherently dangerous activity for its profit, the law must presume that such permission is conditional on the enterprise absorbing the cost of any accident arising on account of such hazardous or inherently dangerous activity as an appropriate item of its overheads. Such hazardous or inherently dangerous activity for private profit can be tolerated only on condition that the enterprise engaged in such hazardous or inherently dangerous activity indemnifies all those who suffer on account of the carrying on of such hazardous or inherently, dangerous activity regardless of whether it is carried on carefully or not. This principle is also sustainable on the ground that the enterprise alone has the resource to discover and guard against hazards or dangers and to provide warning against potential hazards. We would therefore, hold that where an enterprise is engaged in a hazardous or inherently dangerous activity and harm results to anyone on account of an accident in the operation of such hazardous or inherently dangerous activity resulting for example, in escape of toxic gas the enterprise is strictly and absolutely liable to compensate all those who are affected by the accident and such liability is not subject to any of the exceptions which operate vis-a-vis the tortuous principle of strict liability under the rule in Rylands v. Eletcher (supra).”

31. The liability in the present case arising out of Bhopal Gas Leak Disaster was determined by the Supreme Court taking into consideration the principles laid down by the Supreme Court in its earlier judgment in the case of M.C. Mehta (supra). What is the extent of actual damages payable and how would the quantum of damages be computed is explained by the Supreme Court in its order dated 3-5-1989 and summarised in paragraph-92 of the order in the case of Charan Lal Sahu (supra) in the following words :

“This court had reiterated that it had proceeded on certain prime facia undisputed figures of death and substantially compensating personal injury. This court has referred to the fact that the High Court had proceeded on the broader principle in M.C. Mehtas case (supra) and on the basis of the capacity of the enterprise because the compensation must have deterrent effect. On that basis the High Court had proceeded to estimate the damages on the basis of Rs. 2 lakhs for each case of death and of total permanent disability, Rs. 1 lakh for each case of partial permanent disability and Rs. 40,000 for each case of temporary partial disability. In this connection, the controversy as to what would have the damages if the action had proceeded, as another matter. Normally, in measuring civil liability, the law has attached more importance to the principle of compensation that than of punishment. Penal redress, however, involves both compensation to the person injured and punishment as deterrence. These problems were highlighted by the House of Lords in England in Rookes v. Barnard 1964 AC 1129, which indicate the difference between aggravated and exemplary damages. Salmond on the Law of Torts, 15th Edition at p. 30 emphasises that the function of damages is compensation rather than punishment, but punishment cannot always be ignored. There are views which are against exemplary damages on the ground that these infringe in principle the object of law of torts, namely, compensation and not punishment and these tend to impose something equivalent to find the criminal law without the safeguards by the criminal law. In Rookes case (supra), the House of Lords in England recognised three classes of cases in which the award of exemplary damages was considered to be justifiable. Awards must not only it is said, compensate the parties but also deter the wrong doers and others from similar conduct in future. The question of awarding exemplary or deterrent damages is said to have often confused civil and criminal functions of law. Though it is considered by many that it is a legitimate encroachment of punishment in the realm of civil liability, as it operates as a restraint on the transgression of law which is for the ultimate benefit of the society. Perhaps, in this case, had the action proceeded, one would have realised that the fall out of this gas disaster might have been formulation of a concept of damages, blending both civil and criminal liabilities. There are, how even serious difficulties in evolving such an actual concept of punitive damages in respect of a civil action which can be integrated and enforced by the judicial process. It would have raised serious problems of pleading, proof and discovery, and interesting and challenging as the task might have been, it is still very uncertain how far decision based on such a concept would have been a decision according to due process of law acceptable by international standards. There were difficulties ill that attempt. But as the provisions stand these considerations do not make the Act constitutionally invalid. These are matters on the validity of settlement. The Act as such does not abridge or curtail damage or liability whatever that might be. So the challenge to the Act on the ground that there has been curtailment or deprivation of the rights of the victims which is unreasonable in the situation is unwarranted and cannot be sustained.”

At para-79 of the order, the court observed that the learned Attorney General further stated that the amount of $ 470 million which is secured as a result of the memorandum of settlement and the said orders of this court would be meant exclusively for the benefit of the victims who have suffered on account of the Bhopal Gas Leak Disaster. The government of India would not sock any reimbursement on account ot the expenditure incurred suo motu for relief and rehabilitation of the Bhopal victims nor-will the government or its instrumentality make any claim on its own arising from this disaster. It is, therefore, abundantly clear that the compensation awarded by the Supreme Court was to compensate the parties for the injuries they suffered and in no was granted by way of penalty, fine or punitive damages and it was so made clear-in the order of the Supreme Court dated 14/15-2-1989.

32. In paragraph-3 of the order in the case of Charan Lal Sahu the Supreme Court noted that Methyl Isocyanate (MIC), a highly toxic gas, is an ingredient in the production of both Sevin and Temik (the pesticides). On the night of the tragedy, MFC leaked from the plant in substantial quantities and the exact reasons for and circumstances of such leakage have not yet been ascertained or clearly established. Thus on the date of the announcement of the judgment dated 22-11-1989 it was not established that the assessee had done any wrong, wilfully or with any malice or mens rea or guilty mind, nor-was it established that it was a case of criminal negligence attributable to the company.

33. In the case of M.C. Mehta (supra), the Supreme Court has discussed the procedure as to how a chemical and fertilizer manufacturing unit is to be installed. It discussed the procedure in paragraphs-20 to 28 of the order as below :

“20. In order to assess the functional role allocated to private corporation engaged in the manufacture of chemicals and fertilizers, we need to examine the Industrial policy of the government and see the public interest importance given by the state to the activity carried on by such private corporation.

21. Under the Industrial Policy Resolution, 1956 industries were classified into three categories having regard to the part which the state would play in each of them. The first category was to be the exclusive responsibility of the state. The second category, comprised those industries which would be progressively state owned and in which the state would therefore generally take the initiative in establishing new undertakings but in which private enterprise would be expected to supplement the effort of the state by promoting and developing undertakings either on its own or with state participation. The third category would include all the remaining industries and their future development would generally be left to the initiative and enterprise of the private sector. Schedule B to the resolution enumerated the industries.

22. Appendix I to the Industrial Policy Resolution, 1948 dealing with the problem of state participation in industry and the conditions in which private enterprise should be allowed to operate stated that there can be no doubt that the state must play a progressively active role in the development of industries. However under the present conditions, the mechanism and resources of the state may not permit it to function forthwith in Industry as widely as may be desirable. The policy declared that for some time to come, the state could contribute more quickly to the increase of national wealth by expanding its present acclivities wherever it is already operating and by concentrating on new units of production in other fields.

23. On these conditions the government decided that the manufacture of arms and ammunition, the production and control of atomic energy and the ownership and management of railway transport would be the exclusive monopoly of the Central Government. The establishment of new undertakings in Coal, Iron and Steel, Aircraft manufacture, ship building, manufacture of telephone telegraph and wireless apparatus and mineral oil were to be the exclusive responsibility of the State except where in national interest the state itself finds it necessary to secure the cooperation of private enterprise subject to control of the Central Government.

24. The policy resolution also made mention of certain basic industries of importance the planning and regulation of which by the Central Government was found necessary in national interest. Among the eighteen industries so mentioned as requiring such Central control, heavy chemicals and fertilizers stood included.

25. In order to carry out the objective of the Policy Resolutions the Industries (Development and Regulation) Act of 1951 was enacted which, according to its objects and reasons, brought under central control the development and regulation of a member of important industries the activities of which affect the country as a whole and the development of which must be governed by economic factors of all India import. Section 2 of the Act declares that it is expedient in the public interest that the union should take under its control the industries specified in the First Schedule. Chemicals and Fertilisers find a place in the First Schedule as Items 19 and 18 respectively.

26. If an analysis of the declarations in the Policy Resolutions arid the Act is undertaken we find that the activity of producing chemicals and fertilisers is deemed by the state to be an industry of vital public interest, whose public import necessitates that the activity should be ultimately carried out by the state itself, though in the interim period with state support and under State control, private corporations may also to permitted to supplement the state effort.”

This was a case where the chemical and fertilizer industry was established by Shriram and the entire procedure was applicable to assessees industry and were complied with for establishing the factory of chemical and fertilizer at Bhopal. It was thus subject to various cheeks and control of the government procedures and, therefore, to hold assessee guilty of wilful or gross negligence of strict regulations would not be warranted.

34. In view of the aforesaid, I cannot subscribe to the view canvassed by the learned standing counsel of the revenue that it was a case of negligence of the assessee for which the compensation was awarded as a punishment and not to compensate the victims of Bhopal gas tragedy. In my opinion, the claim for liability for payment of compensation has arisen to the assessee in course of its carrying on the business and was not in the capacity of or only as an owner, nor was it in the nature of or akin to the fine, penalty or punitive damages. The damages given by the assessee were to compensate the injuries suffered by the victims, and the loss of lives and property. Consequently, in my opinion, it was an allowable expenditure incidental to and incurred for the purposes of carrying on the business of the assessee.

35. As regards the third point of difference, the main reliance of the Judicial Member is on the directors report of the assessee-company for holding that till the disposal of the review petition on 31-10-1991, the liability could not be said to have accrued and thus it accrued only in the previous year relevant to the assessment year 1992-93. It is true that the liability was determined by the Supreme Court by its order dated 14/15-2-1989 but since certain individuals and/or organisations/associations filed review petitions and also writ petitions challenging the validity of the Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985 under which determination was made by the Supreme Court by impleading the Central Government as a party for and on behalf ot the claimants and since the matter was referred to the Constitutional Bench and the review petitions were admitted by virtue of which the compliance of the order dated 14/15-2-1989 was kept in abeyance till all pending issues connected with the settlement order were decided, it cannot be said that the liability has accured prior to the decision oil review petitions Chronological events of the facts as stated in the directors report are :

“Subsequently, the Bench presided over by Honble Mr. Justice, Sabyasachi Mukherjee held several hearings on the question of the validity of the Bhopal Act and after hearing the counsels for the petitioners and the Union of India and other parties, has reserved its judgment. By another order dated 2-5-1989, the Bench presided over the Honble Chief Justice has ordered that the review petitions will be listed after judgment has been delivered on the validity of the Bhopal Act by the full Bench presided over by the Honble Mr. Justice Sabyasachi Mukherjee and the pending writ petitions will also be listed along with the review petitions. Thus, it will be seen that despite the Supreme Court Orders dated 14 & 15-2-1989, directing an overall settlement of the Bhopal Litigation, matters are still pending.”

36. Under these circumstances, in my opinion pendency of review/writ petition postpones the accrual of liability to the date of the final order thereon which was passed only on 3-10-1991 and that this date falls in the previous year 1991-92 relevant to assessment year 1992-93 the liability is to be allowed in this year and not in the assessment year 1989-90 when the first order of the Supreme Court dated 14/15-2-1989 was passed. This order was disputed by way of review petition which were admitted for consideration by the Supreme Court.

37. The learned counsel of the assessee relying upon the Supreme Court decision in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 361 (SC) and in the case of Sutlej Cotton Mills Ltd. v. CIT (1979) 116 ITR 1 (SC) submitted that the liability did not cease by the mere challenge of the Bhopal Act and the review petitions were filed which were pending for consideration. The review petition/writ petitions were not by the assessee but by the associations. Therefore, the liability, so far as the assessee was concerned, accrued on 14/15-2-1989 when the Supreme Court passed the order. I do not find much force in this argument. If that be so the liability has to be taken to have accrued as early as in 1984 when the incident took place. In my opinion, a liability must be claimed either in the year in which the cause of action has arisen, on the basis of the Supreme Court decision in the case of Kedarnath Jute Mfg. Co. Ltd. (supra), that in this case arose on 2-12-1984 when the incident took place and that falls in assessment year 1985-86; or in the case of a dispute raised therefore, it can be claimed in the year of final award or judgment by the court on the strength of the decision of the Supreme Court in the case of CIT v. Swadeshi Cotton & Flour Mills (P) Ltd. (1964) 53 ITR 134 (SC). The final settlement of liabilities in this case, in my opinion, was when the order reached finality on dismissal of review petitions on 3-10-1991 after the validity was approved by the Supreme Court on 22-12-1989 and compliance report considered. The above view gets support from the following decisions :

(1) CIT v. St. George Motors (1986) 161 ITR 444 (Ker.);

(2) CIT v. Deora PU Cabncon Mfg. Co. (P.) Ltd. (1985) 152 ITR 654 (MP);

(3) CIT v. East India Corpn. Ltd. (1986) 159 ITR 712 (Mad.).

38. On this point of difference, I am in agreement with the findings of the Judicial Member that allowance has to be made in the assessment year 1992-93 and this view further gets support from the decision of the Calcutta High Court in the case of Shalimar Chemical Works (P.) Ltd. v. CIT (1987) 167 ITR 13 wherein liability was held to arise when question of validity of the Statute was decided by the court. Similarly, in the case of CIT v. T.S. Srinivasa Iyer (1984) 146 ITR 526 (Mad.), the liability was held to be allowed when the Supreme Court finally decided the matter though it related to earlier year.

39. The case shall now be posted before the Divisional Bench for passing order in conformity with the majority opinion.

ORDER

Pramod Kumar, A.M.

On a difference of opinion between the members constituting this bench when these appeals originally came up for hearing, following questions were referred for the opinion of Third Member under section 255(4) of the Income Tax Act :

“1. Whether, on the facts and in the circumstances of the case, compensation amount of Rs. 68,99,19,509 paid by the assessee company and Rs. 7.5 crores spent by it is allowable as expenditure incidental the carrying on of the business ?

2. Whether, on the facts and in the circumstances of the case, the said two sums can be disallowed while computing the income of the assessee for the reason that the expenditure pertained to the closed unit of assessees industrial undertaking ?

3. On the facts and in the circumstances of the case, what is the correct year of accrual of liability of two sums-whether assessment year 1989-90 or assessment year 1992-93?”

2. Learned Third Member, concurred with the learned Vice President/Accountant Member on question numbers 1 and 2 who held the view that the compensation payment of Rs. 68,99,19,509 and expenditure of Rs. 7.5 crores constituted allowable expenditure, in computing business income of the assessee-company. With regard to question No. 3, however, learned Third Member concurred with the Judicial Member who held the view that the correct year of accrual of liability is 1992-93.

3. In accordance with the majority view, therefore, the compensation payment of Rs. 68,99,19,509 and payment of Rs. 7,50,00,000 towards construction of hospital in Bhopal are held to be allowable as deductions, from computation of income, for the assessment year 1992-93.

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