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The Commissioner of Income Tax v/s M/S. Travancore Titanium Products Ltd.

    I.T.A. Nos.262, 994, 1031, 1034, 1055, 1057, 1105, 1106, 1129, 1138 & 1555 of 2009

    Decided On, 09 September 2009

    At, High Court of Kerala

    By, THE HONOURABLE MR. JUSTICE C.N. RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K. MOHANAN

    For the Petitioners : P.K.R. Menon, Sr. Counsel, Goi (Taxes). For the Respondent: No Appearance.



Judgment Text

Ramachandran Nair, J.


These appeals are filed by the Revenue against common order of the Tribunal pertaining to the income tax assessments of the respondent company for the years 1991-92 to 1997-98 and 1999 -2000 to 2002 - 2003. The respondent is a State Government undertaking with 80% of the shares held by the Kerala Government. The respondent company located in Trivandrum is engaged in manufacture and sale of titanium dioxide. Being a government company it is under the control of the Government and its Board of Directors is also constituted with the government nominees including Government Secretaries. The company is located in the extensive land leased from the Government on a paltry lease rent. Besides this, the Government is rendering a lot of services and incentives by way of reduction of sales tax for marketing the products of the company whenever there is slump in the market. In consideration of the services rendered by the Government, the State Government issued Government Order, i.e. G.O.(MS)48/88/ID dated 25.3.88 directing the respondent company to pay service charges at the rate of Rs.1000/- per tonne for the titanium dioxide produced and sold by the respondent with effect from 1.4.87. The company started remitting service charges claiming deduction of the same in the income tax returns filed for the relevant assessment years. Even though the claim was allowed by assessing officer from 1988-89 to 1990-91, while completing the assessment year 1991-92 and subsequent assessment years, the assessing officer disallowed the claim of deduction of service charges paid by respondent holding that it is not a business expenditure allowable under section 37(1) of the Income Tax Act. However, in appeal filed against the assessment for the years 1991-92 to 1995-96, different Benches of the Tribunal took divergent views and the matter came in reference before this Court. This Court vide judgment, reported in Commissioner of Income Tax v. Travancore Titanium Products Ltd. ([2004] 265 ITR 526) remitted the case to the assessing officer stating that the matter should be decided after considering the government orders and the basis for the demand of service charge. Even though in the revised assessment proceedings the Principal Secretary to Government and Department of Industries and the Managing Director furnished various proceedings received from the Government regarding services rendered by the government officials and sacrifices made by the Government for the benefit of the successful running of the company, the assessing officer turned down the claim by holding that the claim is not allowable under section 37(1) of the Income Tax Act. Against the revised order issued by the assessing officer declining to allow the deduction, the assessee filed another appeal along with appeals against the regular assessments for subsequent years before the first appellate authority who allowed the claim. On second appeals filed by the department, the Tribunal confirmed the orders of the first appellate authority and dismissed the appeals. It is against these orders the Revenue has filed these eleven appeals.


2. We have heard Senior Counsel Sri P.K.R.Menon appearing for the appellant and have gone through the orders of the Tribunal and that of the lower authorities.


3. The first contention raised by the appellant is that the Tribunal has not strictly followed the observations of the Division Bench in the judgment referred above whereby the matter was remanded to the assessing officer. According to the counsel, based on the earlier judgment of this Court, the claim could be allowed only if the respondent proves the exact service rendered by the Government which justifies the payment of service charges by it to the Government. The High court, no doubt, referred to a Full Bench decision of this Court in Ram Bahadur Thakur Ltd. v. C.I.T.(KER.)(F.B) [2003] 261 ITR 390) and directed the assessing officer to follow the guidelines laid down therein while considering the respondent's claim for deduction under section 37(1) of the IT Act. According to the counsel for the Revenue, the service charges paid by the respondent company do not fall within the para metres laid down by the Full Bench in the above case. However, we do not think neither the first appellate authority nor the Tribunal has deviated from the directions contained in the judgment of this Court, in as much as they have considered in detail the nature of the services, sacrifices and incentives provided by the State Government to the respondent company based on documents produced and considered the claim with reference to the statutory provision which is extracted in para 19 of the order. For easy reference, section 37 (1) is extracted herein:


"37(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession".


Explanation.- For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure."


(2) { ****}


(2B) Notwithstanding anything contained in sub- section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party".


The only question to be considered is whether service charges paid by the respondent company to the State Government is eligible for deduction under section 37(1) of the Act as held by the first appellate authority in the appeal filed against revised assessment which is confirmed by the Tribunal. As pointed out by the Division Bench in the earlier judgment, we have to consider the exact nature and scope of services, sacrifices and incentive provided by the Government justifying the payment of service charges by the respondent company to the State Government. However, before proceeding to consider the issue in detail, we are constrained to take a little different view from the one taken by the earlier Division Bench of this Court while remanding the case. The court has forgotten the fact that respondent company is a fully owned Government company under the Government of Kerala with 80 per cent shares held by the Government. Being a company under the control of the Government, it is bound to comply with all the Government Orders and the Board of Directors itself is constituted with the Government Secretaries and other nominees as members. The Department does not raise a dispute that the claim of the company is not bona fide or that the company has not made payment of service charges to the Government in terms of the Government Order. Therefore, the claim of deduction has to be considered with reference to the peculiar circumstances of the company which has no discretion in regard to the payment of the service charges to the Government as it is bound to comply with the Government Orders. So much so, we are of the view that the parameters applicable in the case of a private company that too with respect to the claim for business expenditure, are exactly not applicable in the case of public sector company whether it is under the control of the State Government or Central Government. In fact, many public sector companies are not formed just to make profit alone but are supposed to achieve larger objectives for the Society and the State. Section 37(1) is the residuary provision provided under the Income Tax Act enabling assessee engaged in business to claim all expenditure laid out or expended wholly and exclusively for the purposes of the business. By making payment of service charge, the respondent company has discharged only the obligation under Government Orders. It cannot carry on business by violating Government Orders and remain as a defaulter to the Government. Therefore, on the face of it, payment of service charge to the Government is a business expenditure and it is paid every year and the payment is mandatory for carrying on business. The expenditure so incurred by the company is not hit by the negative clauses in section 37 which are in the nature of capital or personal expenditure of assessee. Besides this, the payment is also not prohibited by law and so much so it is not hit by the explanation contained in section 37(1). Therefore the payment is a bona fide expenditure incurred by the company for carrying on business which is not prohibited by law.


4. The next question to be considered is whether the department's case that the Government does not render service justifying payment of service charges by the company is tenable or not. From the details submitted by the Secretary, Department of industries, and the affidavit filed by the Managing Director of the company, it is clear that the service charges demanded is not only for services rendered by the Government but mainly for the sacrifices and incentives provided by the State to the company. Even though the Tribunal has extracted the entire details in its order, we do not think it necessary to repeat the whole of it. However, we proceed to consider some of the services rendered by the Government to the company. In the first place, all policy decisions of the company are taken by the Government. For instance, when the company was closed on alleged pollution, the State Government intervened and meetings were held to find out solutions to the problem and appointed a committee to inquire into the pollution problems and the company was started after several months based on enquiry report submitted by the Committee and after the company took remedial measures pursuant to the Government Order. All liabilities are settled at Ministry level and the company's problems are sorted out through the Government intervention. Government appointed a Special Officer for ensuring raw materials supply to the government company from another company at moderate cost. The Board of Directors of the respondent company is constituted with Secretaries to the Government and Government servants and they are not entitled to additional remuneration which is a saving for the company. Above all, the company is located in about 51 acres of land very close to Trivandrun town and, under the Government norms, lease rent payable is 10 per cent of the market value. However, in this case, Government has charged only paltry sum of Rs.20547/- per year. In the affidavit filed by the Managing Director, the new lease rental payable at normal rate to the State Government during the years 1992-93 to 2001-2002 by taking the land value at moderate rate of Rs.12,000/- per cent would have been Rs.30,49,230/- per year. There can be no doubt that the Government has made major sacrifices by retaining the lease rental on a paltry sum of Rs.20547/- per year. In fact, if lease rentals were increased by the Government instead of demanding and recovering service charges from the company, the department could not have raised objection against the payment of lease rental as a claim not allowable under the Act.


5. Another incentive given by the Government is in the form of sacrifices to its revenue by way of reduction or exemption for sales tax when the company finds it difficult to market the products. In f

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act, the Tribunal has worked out the sacrifices made by the Government at crores of rupees. Further, we notice from the Tribunal's order that in respect of other companies under the control of the Government, the Government is charging various charges for their services in some cases based on turnover income and in certain cases based on quantity produced. On the whole, we find from the Tribunal's order that the successful management of the company is mainly on account of the control and patronage from the Government. Therefore, the demand of payment of service charge is essentially a business expenditure allowable under section 37(1) of the Act. The remaining question is only the amount of service charges paid each year by the company. It may not be possible to exactly identify and value the services rendered by the Government every year and the incentives provided every year also may be varying. However, so long as the company made payment for all these years pursuant to Government orders, there is no justification for disallowing the amount in computation of the income. However, it will be open to the Central Board to take up the matter with the State Government so that service charges can be fixed by the Government on a rational basis. We dismiss the appeals but with the above observation.
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