M/S AVON CYCLES (P) LIMITED LUDHIANA vs. COMMISSIONER OF INCOME TAX (CENTRAL) LUDHIANA

PDF · subscribers
ITR/3839/1989HC Punjab & HaryanaPHHC01022575198922 December 2006Author: MR. JUSTICE ADARSH KUMAR GOEL,MR. JUSTICE RAJESH BINDAL3 pages
AI SummaryPartly Allowed

What did the High Court hold?

The High Court answered questions 1 and 2 in favour of the revenue and against the assessee. The Court noted that Clause (iiia) was added to Section 28 of the Income Tax Act, 1961, effective from April 1, 1967, making profits on the sale of import entitlements taxable as business income. Similarly, Clause (iiib) was added, treating cash assistance received by the Government against export as income. The Court relied on various Supreme Court and High Court judgments, including its own decision in ITR No.32 of 1991, which had already addressed similar issues in favour of the revenue. Therefore, the amounts of Rs. 67,21,118 from import entitlements and Rs. 79,88,849 from cash subsidy were held to be includible as business income. Regarding question 3, the Court answered it in favour of the revenue and against the assessee, in view of its judgment rendered on the same day in ITR Nos.26 to 29 of 1989 (The Commissioner of Income Tax, Patiala v. Shri Ved Parkash Aggarwal, Ludhiana). This implies that the lodging expenses of foreigners were held to be in the nature of entertainment and thus not deductible under Section 37(2) of the Act. The operative direction was to dispose of the references accordingly.

What were the facts?

This case involves two references (RA No. 25 and RA No. 49) made by the Income Tax Appellate Tribunal, Chandigarh Bench, to the High Court of Punjab and Haryana at Chandigarh. The references arise from the Tribunal's order dated January 28, 1987, concerning assessment year 1983-84. The assessee is M/s Avon Cycles (P) Limited, Ludhiana, and the respondent is the Commissioner of Income Tax (Central), Ludhiana. The core issues revolve around the taxability of income from the sale of import entitlements and cash subsidy, and the deductibility of lodging expenses for foreigners. The Assessing Officer treated the income from import entitlements and cash subsidy as taxable business income. The Assessing Officer also disallowed lodging expenses for foreigners, deeming them entertainment expenses under Section 37(2A), but the CIT(A) and the Tribunal upheld the assessee's claim for deduction, considering the expenses necessary for business.

What were the issues?

The High Court was asked to decide the following questions of law: 1. Whether, on the facts and in the circumstances of the case, the amount of Rs. 67,21,118 earned on the sale of import entitlements was to be included as the business income of the applicant? 2. Whether, on the facts and in the circumstances of the case, the amount of Rs. 79,88,849 received by way of cash subsidy (CCS) was to be included as the business income of the applicant? 3. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that lodging expenses of the foreigners in the Hotels are not in the nature of 'entertainment' and not hit by the provisions of Section 37(2) of the Income Tax Act? Assessee's contentions: For questions 1 and 2, the judgment does not explicitly record the assessee's arguments but implies they were against the inclusion of import entitlement sale proceeds and cash subsidy as business income. For question 3, the assessee contended that lodging expenses of foreigners were not entertainment expenses and were necessary for their business, thus deductible under Section 37(2A) of the Income Tax Act, 1961. The CIT(A) and Tribunal had upheld this view. Revenue's contentions: The revenue contended that the income from the sale of import entitlements and the cash subsidy were taxable business income. For question 3, the revenue argued that lodging expenses for foreigners constituted entertainment expenses and were not deductible under Section 37(2). Authorities/Precedents relied on: For questions 1 and 2, the High Court referred to Finance Act 1990, which added clauses (iiia) and (iiib) to Section 28 of the Act. It also cited judgments from the Delhi High Court (Aero Leather P.Limited v. UOI and others, (1992) 194 ITR 7), Supreme Court (Navnit lal C.Javeri v. KK Sen, (1965) 56 ITR 198, Navinchandra Mafatlal v. CIT (1954) 26 ITR 758, Lohia Machines Limited v. UOI, (1985) 152 ITR 308, Ujagar Prints v. UOI (1989) 179 ITR 317 and CIT v. P.J.Chemicals Limited, (1994) 210 ITR 830), and Rajasthan High Court (CIT v. Radha Madhav Gum Factory, (1996) 217 ITR 355) and Delhi High Court (CIT v. Smt.Maya J.Daryani, (1998) 231 ITR 554). The Court also referred to its own judgment in ITR No.32 of 1991 (The Commissioner of Income Tax (Central) Ludhiana v. M/s Hind Woollen & Hosiery Mills (P) Limited, Ludhiana, decided on 7.11.2006). For question 3, the Court referred to its judgment rendered on the same day in ITR Nos.26 to 29 of 1989 (The Commissioner of Income Tax, Patiala v. Shri Ved Parkash Aggarwal, Ludhiana).

Which sections of the Income-tax Act were involved?

Section 28,Section 37(2),Section 37(2A)

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
ITR Nos.38 and 39 of 1989 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITR Nos. 38 and 39 of 1989 Date of decision:22.12.2006 M/s Avon Cycles (P) Limited, Ludhiana ....Petitioner versus The Commissioner of Income Tax (Central) Ludhiana ....Respondent CORAM: HON'BLE MR. JUSTICE ADARSH KUMAR GOEL HON'BLE MR. JUSTICE RAJESH BINDAL Present: Mr. SK Garg Narwana, Advocate, for the revenue. Mr. Akshay Bhan, Advocate, for the assessee.

JUDGMENT: Following questions of law have been referred for the opinion of this Court by the Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh (for short, 'the Tribunal) arising out of its order dated 28.1.1987 in ITA No.962/chandi/86, for the assessment year 1983-84 :- Questions in RA No.25 “1. Whether, on facts and in the circumstances of the case, the amount of Rs.67,21,118/- earned on the sale of import entitlements was to be included as the business income of the applicant?

2.

Whether, on facts and in the circumstances of the case, the amount of Rs.79,88,849/- received by way of cash subsidy (CCS) was to be included as the business income of the applicant?” Question in RA No.49 “Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that lodging expenses of the foreigners in the Hotels are not in the nature of 'entertainment' and not hit by the provisions of Section 37(2) of the Income Tax Act?” The assessee received income from sale of import entitlements and also received cash subsidy. The Assessing officer held the amount of income earned on sale of import entitlements to be taxable. It was also held that the cash subsidy received by the assessee was also taxable. The assessee made a clim for deduction of expenses of foreigners which was disallowed by the Assessing Officer under section 37 (2A) of the Income Tax Act, 1961 (for short, 'the Act') on the ground that the same was in the nature of entertainment. The claim of the assessee was, however, upheld by the CIT(A). The Tribunal upheld the finding of the CIT (A) and held that expenditure was necessary for the business of the assessee.

We have heard learned counsel for the parties and perused the findings recorded. We proceed to answer the questions referred as under. Re:Q.Nos.1 and 2 in RA No.25 We find that vide Finance Act 1990, Clause (iiia) has been added to Section 28 of the Act w.e.f 1.4.1967 to the effect that profit on sale of import entitlements was income under the head “Profits and gains of business or profession”. The said provision has been upheld by the Delhi High Court in Aero Leather P.Limited v. UOI and others, (1992) 194 ITR 7, following judgments of the Hon'ble Supreme Court in Navnit lal C.Javeri v. KK Sen, (1965) 56 ITR 198, Navinchandra Mafatlal v. CIT (1954) 26 ITR 758, Lohia Machines Limited v. UOI, (1985) 152 ITR 308, Ujagar Prints v. UOI (1989) 179 ITR 317 and CIT v. P.J.Chemicals Limited, (1994) 210 ITR 830. Similarly, Clause (iiib) was added to section 28 by the same amendment to the effect that cash assistance received by the Government against export was income. The Rajasthan High Court in CIT v. Radha Madhav Gum Factory, (1996) 217 ITR 355 and the Delhi high Court in CIT v. Smt.Maya J.Daryani, (1998) 231 ITR 554, after referring to the said amendment held that cash assistance for export has to be treated as income. Referring to the above judgments, this Court examined the question in ITR No.32 of 1991, The Commissioner of Income Tax (Central) Ludhiana v. M/s Hind Woollen & Hosiery Mills (P) Limited, Ludhiana, decided on 7.11.2006 and answered the question in favour of the revenue and against the assessee.

Accordingly, the questions referred are answered in favour of the revenue and against the assessee. Re:Q.No.1 in RA No.49 In view of our judgment rendered today in ITR Nos.26 to 29 of 1989 (The Commissioner of Income Tax, Patiala v. Shri Ved Parkash Aggarwal, Ludhiana), the question referred is answered in favour of the revenue and against the assessee. Reference is disposed of accordingly. (Adarsh Kumar Goel) Judge December 22, 2006

(Rajesh Bindal) 'gs' Judge

More judgments on Section 28

All 1,686 judgments and leading authorities on Section 28 →

Recent GST High Court judgments

Search GST case law →