Krishak Bharati
Cooperative Ltd. Vs. Joint Commissioner of Income Tax, N.D. [2008] INSC 1790
(21 October 2008)
Judgment
IN THE SUPREME COURT
OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL No. 6244 OF 2008 (arising
out of SLP(C) No. 3802/07) Krishak Bharati Cooperative Ltd. ... Appellant
versus Joint Commissioner of Income Tax ... Respondent ORDER Leave granted.
In respect of
assessment year 1993-94, CIT(A) held that since the receipt of service charges
was not directly connected or linked with the manufacturing activity carried
out in the industrial undertaking of the assessee, the service charges received
by the assessee from the said activity of producing Heavy Water cannot be
considered as the profit derived from its industrial undertaking so as to
qualify for deduction under Section 80-I of the Income Tax Act, 1961 (for
short, "the 1961 Act"). For the said reasons, the CIT(A) disallowed
the assessee's claim for deduction under Section 80-I. This view of CIT(A) has
been affirmed by the judgment of the Tribunal as well as by the impugned
judgment of Delhi High Court dated 15.11.2006 in ITA Nos. 1252/06, 1253/06 and
1254/06.
Appellant is a
multi-state Cooperative Society engaged in the business of manufacturing urea
and ammonia at its Plant at Hazira. Appellant used to supply ammonia 2 gas
through pipe connections from its plant at Hazira directly to the Heavy Water
Plant ("HWP") of the Heavy Water Board ("HWB"). The HWB is
a Department of Atomic Energy.
The HWP was located
next to the appellant's plant. In fact, it is in the precinct of the
appellant's plant.
On 14.9.1994, an
agreement came to be executed between the appellant and HWB.
Under that agreement,
appellant was entitled to be reimbursed for the cost of ammonia manufactured by
it and supplied to the Board and in addition thereto it was also entitled to
receive service charges and incentives from HWB. In this case, there is no
dispute regarding cost reimbursements. The only dispute in this civil appeal is
whether the service charges received by the appellant could be viewed as
profits arising from the manufacturing activity of the appellant. As stated
above, all the three authorities have decided the matter against the appellant,
hence, this civil appeal.
As a preface, we may
state that Heavy Water is employed as a coolant in pressurized Heavy Water
Nuclear Reactors. Synthesis gas is produced at the Ammonia Plant of the
appellant. It contains deuterium. Synthesis gas containing deuterium is taken
to Heavy Water Plant, where deuterium is extracted in Extraction Towers and the
balance synthesis gas is returned to the Ammonia Plant of the appellant. This
is a brief process in the manufacturing of heavy water. At this stage, it may
be mentioned that the appellant's plant is known as Ammonia Plant from which
synthesis gas flows to HWP at Hazira owned by the Department of Atomic Energy
and which is known as Hazira Ammonia Extension Plant ("HAEP"). HAEP
is an extension of the Ammonia Plant. This aspect is important for deciding the
present civil appeal as it indicates the in severability between the two
plants.
According to the
Department, receipt of service charges by the appellant accrued to 3 the
appellant only out of its own industrial activity and, consequently receipt of
such service charges did not qualify as eligible profits under Section 80-I. It
is this position taken by the Department, which we are required to examine in
this case.
At the outset, it may
be stated that this case is a stand-alone case. It is a unique matter. Heavy
Water Plant is a national asset. In the changed scenario, when civil nuclear
installations are going to play an important part, particularly in the context
of electricity generation, one needs to examine the process in detail of
manufacture of Heavy Water.
Unfortunately, in
this case, the appellant herein failed to place before the Tribunal, which is
the highest fact finding authority under the Act, the relevant contracts and
other data (which we shall refer to presently). In fact, the appellant has
failed to produce the relevant contracts and the connected data before the
Tribunal. Therefore, we do not find fault with the impugned judgment. Normally,
we would have dismissed this civil appeal for lack of due diligence. However,
looking to the importance of the matter and in view of special features of the
contract, we have decided to entertain the civil appeal by grant of special
leave. In this case, appellant placed reliance only on agreement dated
14.9.1994 for Operation and Maintenance of Heavy Water Plant at Hazira. They
failed to produce the contract dated 5.8.1986 and 11.7.1990. Be that as it may,
we find the following salient features in the agreements between Heavy Water
Board and the appellant herein. They are as follows.
Heavy Water Plant was
constructed by the appellant for and on behalf of the Board.
Ownership of the HWP
vested during the assessment year 1993-94 in the Board. However, if one reads
the above three agreements, prima facie one finds that the HWP (Hazira Ammonia
Extension Plant) owned by the Board is an extension of the Ammonia Plant of the
appellant.
The peculiar features
emerging from the above three agreements are that, synthesis gas flows 4
through the pipes of Ammonia Plant to HAEP. Similarly, synthesis gas which is
produced inside the Ammonia Plant and which contains deuterium is taken to the
HAEP where deuterium is extracted with the help of a solution and the balance
gas is once again returned to the Ammonia Plant of the appellant. This
indicates two things. Firstly, that HAEP cannot survive without the feeder
plant, namely, Ammonia Plant. Similarly, the Ammonia Plant cannot survive as
far as the manufacture of Heavy Water is concerned without HAEP because after
extraction of deuterium the balance quantity of synthesis gas is returned to
the Ammonia Plant (see page 22 of Vol. I of the Paper Book). This aspect needed
in-depth consideration by the Tribunal because the basic issue in this case is
whether receipt of service charges was or was not directly linked with the
manufacturing activity carried out in the industrial undertaking of the
appellant. If prima facie one finds that HAEP is an extension of the Ammonia
Plant of the appellant then the question which arose before the Tribunal for
determination was whether the above process constituted manufacturing activity
carried out in the industrial undertaking of the appellant. Another feature to
be noticed in this regard is that the Department of Atomic Energy entered into
an agreement with the appellant to set up HAEP in the premises of the
appellant's Ammonia Plant. Therefore, the entire scheme was based on the
principle of functional interdependence between the two plants. Moreover, the
contract shows that at a later date if the situation arises, the workers of the
Ammonia Plant engaged in producing synthesis gas would be taken over by the
Department of Atomic Energy (see clause 14.0). The most important aspect is
funding. If one reads the Agreement dated 14.9.1994, it appears prima facie
that the funding of operation and maintenance of HWP is by the Board to a very
large extent (see clause 2.0 of the said Agreement dated 14.9.1994).
Similarly, in the
matter of construction of HWP, the funding is by the Board. One more aspect 5
needs to be noticed. Under clause 10.0 of Agreement dated 14.9.1994, appellant
is required to render to the Board accounts of expenditure incurred every month
out of the funds placed at its disposal by the Board. Similarly, appellant is
required to give details of assets created and liabilities incurred to the Board.
Under clause 19.0, the Board absolves the appellant from any infringement of
patent in connection with operational maintenance of HWP. Further, the fees for
service charges is based on the quantity produced by the appellant as indicated
by clause 30.00. The most important aspect, in our view, is costing, pricing
and sharing of revenue between the parties, which was required to be examined
by the Tribunal. All these facts were relevant because in this case we are
concerned with the issue, namely, receipt of service charges was or was not
directly connected or linked with the manufacturing activity carried out in the
industrial undertaking of the appellant. The exact meaning of the manufacturing
carried out in the industrial undertaking of the appellant requires in-depth
examination of various aspects indicated hereinabove. Prima facie it appears
that, under the earlier dispensation, which prevailed at the relevant time, the
HAEP was an extended link of the Ammonia Plant and in that context, as stated
above, both the plants were interdependent on each other. This matter is also
of some importance. It concerns not only the interdependence of the plants but
it also gives rise to an important question of law as to the interpretation of
Section 80-I in the context of Heavy Water Plant and the Ammonia Plant,
particularly when it concerns synthesis gas flowing from Ammonia plant to the
HWP, extraction of deuterium from synthesis gas and return of the balance
synthesis gas to the Ammonia Plant. The diagram of the process is also given in
Agreement dated 14.9.1994 (see page 21 of volume I of the Paper Book). This
diagram indicates the process of manufacturing of Heavy Water.
Before concluding, we
may make it clear that the reasons given by us hereinabove 6 are tentative
observations made in the context of this case being a stand-alone case having
no prior precedents. We have made tentative observations only to support our
order remanding the case to the Tribunal. Therefore, we keep all contentions
from both sides expressly open.
As stated above, in
this civil appeal the appellant has failed to produce relevant data before the
authorities below. We permit the parties to do so. However, we direct the
appellant herein to pay cost of Rs. 25,000/- as cost condition precedent to the
hearing of the appeal by the Tribunal. The appellant herein to pay costs to the
Department within eight weeks.
Before concluding we
may clarify that the appellant do not wish to press the question regarding
machinery hire charges and interest paid on loans to employees having regard to
the amounts involved.
For the afore stated
reasons, we set aside the impugned judgment and remit the case back to the
Tribunal for reconsideration of the matter in accordance with law.
Subject to above,
this civil appeal stands disposed of with no order as to costs.
.................................J.
(S.H. Kapadia)
.................................J.
(B. Sudershan Reddy)
New
Delhi;
October
21, 2008.
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