1985 (6) TMI 62 - AT - Income Tax

Tribunal upholds Commissioner's decision on purchase tax, surcharge, section 80J & 32A deductions

Income-Tax Officer. Versus Poyilakkada Fisheries (P.) Limited.

The Tribunal dismissed the departmental appeal, upholding the Commissioner (Appeals) on all points. The assessee's claim for purchase tax and surcharge ... Method Of Accounting Issues Involved:1. Allowance of purchase tax and surcharge for the assessment year 1977-78.2. Deduction under section 80J of the Income-tax Act, 1961.3. Grant of investment allowance under section 32A.Issue 1: Allowance of Purchase Tax and Surcharge for the Assessment Year 1977-78The assessee, a private limited company involved in the business of catching, purchasing, processing, and exporting fish, had debited a sum of Rs. 12,01,787 as provision for purchase tax and surcharge, including Rs. 2,86,436 related to cashew kernels for the assessment year 1975-76. This claim was rejected for the year 1975-76 and renewed in 1977-78, arguing that the ITO had agreed to allow it when payment became obligatory. The ITO for 1977-78, referencing the Supreme Court decision in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363, held that the liability could only be allowed in the year it related to, thus disallowing it for 1977-78. The Commissioner (Appeals) disagreed, allowing the claim, which led to the present departmental appeal.The department's counsel argued that the claim, related to 1975-76, was not allowable in 1977-78, citing various judicial pronouncements supporting this stance. The assessee's counsel contended that the claim for 1975-76 was rejected, and the Supreme Court decision should be interpreted considering the assessee's accounting method. The assessee believed it was not liable for the purchase tax as an exporter, which justified not making a provision earlier.The Tribunal found the department's handling inconsistent, noting that the ITO initially held the expenditure allowable for 1977-78 but later reversed this stance. The Tribunal upheld the Commissioner's decision, emphasizing that the assessee's belief in non-liability was genuine, and the provision was made prudently upon receiving the demand notice. The claim was thus deemed proper for 1977-78.Issue 2: Deduction Under Section 80J of the Income-tax Act, 1961The assessee claimed deduction under section 80J on the capital employed in its business, which included catching fish, maintaining a cold storage, processing fish, and exporting them. The ITO allowed the deduction only for the cold storage or freezing plant, requesting a separate balance sheet for these assets, which the assessee did not furnish, leading to rejection of the claim.On appeal, the Commissioner (Appeals) accepted the claim, directing the ITO to determine the deduction on the basis that the assessee was running an industrial undertaking. The department challenged this order, arguing that the assessee's activities did not constitute 'manufacture' or 'production' as required by section 80J(4).The Tribunal examined the processes involved in the assessee's business, including catching, processing, and freezing fish, concluding that these activities constituted 'production'. The Tribunal noted that the processes transformed the raw fish into a commercially distinct product, thus satisfying the conditions for deduction under section 80J. Additionally, the Tribunal held that operating a cold storage plant, integral to the assessee's business, also qualified for the deduction.Issue 3: Grant of Investment Allowance Under Section 32AThe assessee was denied investment allowance under section 32A on the grounds that it was not an industrial undertaking manufacturing or producing an article. The Tribunal, referencing its discussions on section 80J, concluded that the assessee's activities did constitute production, thereby qualifying for the investment allowance under section 32A.Conclusion:The Tribunal dismissed the departmental appeal, upholding the Commissioner (Appeals) on all points. The assessee's claim for purchase tax and surcharge was allowed for the assessment year 1977-78. The deduction under section 80J was granted for the entire business, including the cold storage operations. The investment allowance under section 32A was also affirmed.