UNITED PHOSPHORUS LTD. vs. ADDITIONAL COMMISSIONER OF INCOME TAX

Facts

The assessee, United Phosphorus Ltd., filed its return of income for Assessment Year 1992-93 declaring a total income of Rs. 7,92,12,058/-. The Assessing Officer (AO) assessed the income at Rs. 9,80,48,251/-. The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who allowed the appeal in part. The assessee then appealed to the Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench-C. The ITAT, by its order dated 03.11.2004 in ITA No. 2970/Ahd/1997, allowed the assessee's appeal in part for statistical purposes. The present appeal is filed by the assessee challenging the ITAT's order.

Held

The High Court decided the questions of law as follows: Question (i): The High Court answered this question in favour of the assessee and against the Revenue. It relied on the Supreme Court's decision in Commissioner of Income tax v. Excel Industries Ltd., which held that Section 28(iv) would not apply where only hypothetical income has accrued, not real business income. The High Court noted that this issue was covered by its own previous decision in Tax Appeal No. 344 of 2002. Question (ii): The High Court answered this question in favour of the assessee and against the Revenue. It relied on its own decision in Tax Appeal No. 344 of 2002, which in turn referred to the Supreme Court's ruling in Deputy Commissioner of Income-tax v. Sun Pharmaceuticals Ind. Ltd. This ruling established that lease rent paid for obtaining a facility to carry on business profitably, without a change in capital structure, is allowable as revenue expenditure. Question (iii): The High Court held that this question did not survive for consideration, as it was consequential to the decision on question (ii). Since question (ii) was answered in favour of the assessee, question (iii) became redundant. Question (iv): The High Court answered this question in favour of the assessee and against the Revenue. It relied on its decision in Liberty India vs. CIT, which held that incentive profits like DEPB/Duty drawback are ancillary profits and do not fall within the expression "profits derived from industrial undertaking" for the purpose of deduction under Section 80-IB (and by implication, Section 80I). Operative directions: The appeal was allowed to the extent of answering questions (i), (ii), and (iv) in favour of the assessee. No order as to costs.

Key Issues

The High Court had to decide the following questions of law: 1. Whether the ITAT was right in holding that income from Advance License Benefit Receivable is taxable in the year under consideration, even if it accrued in subsequent years, under Section 28(iv) of the Income Tax Act, 1961? 2. Whether the ITAT was right in holding that premium paid for leasehold land is not revenue expenditure and not allowable as such? 3. Whether the ITAT was right in holding that premium of leasehold land cannot be allowed on a proportionate basis spread over the lease period, contrary to the Supreme Court's decision in Madras Industrial Investment Corporation Limited vs. CIT? 4. Whether the ITAT was right in not holding that income from Advance License Benefit Receivable is derived from an industrial undertaking and thus eligible for deduction under Sections 80I and 80IA of the Act? Assessee's contentions: The assessee argued that questions (i) and (ii) are covered by the High Court's decision in Tax Appeal No. 344 of 2002, which relied on the Supreme Court's ruling in CIT v. Excel Industries Ltd. for question (i) and the High Court's decision in DCIT v. Sun Pharmaceuticals Ind. Ltd. for question (ii). The assessee also contended that question (iii) would not survive if question (ii) was answered in its favour. For question (iv), the assessee relied on the High Court's decision in Liberty India vs. CIT, arguing that incentive profits like DEPB/Duty drawback are ancillary and not derived from the eligible business for deduction under Sections 80I/80IA. Revenue's contentions: The Revenue did not dispute the assessee's submissions regarding questions (i) and (ii) based on the cited precedents.