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U.P.BHUMI SUDHAR NIGAM, BHUMITRA BHAWAN, LUCKNOW versus COMMISSIONER OF INCOME

High Court of Judicature at Allahabad

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U.P.Bhumi Sudhar Nigam, Bhumitra Bhawan, Lucknow v. Commissioner Of Income-Tax, Lucknow - INCOME TAX APPEAL No. 3 of 1999 [2004] RD-AH 1622 (3 December 2004)

 

This is an UNCERTIFIED copy for information/reference. For authentic copy please refer to certified copy only. In case of any mistake, please bring it to the notice of Joint Registrar(Copying).

HIGH COURT OF JUDICATURE OF ALLAHABAD

Reserved

Income Tax Appeal No. 3 of 1999

U.P.Bhumi Sudhar Nigam, Lucknow

vs.

Commissoner of Income Tax. Lucknow

WITH

Income Tax Appeal No. 4 of 1999

U.P.Bhumi Sudhar Nigam, Lucknow

vs.

Commissoner of Income Tax. Lucknow

Hon'ble R.K.Agrawal, J.

Hon'ble Prakash Krishna, J.

(Delivered by R.K.Agrawal, J.)

Both the appeals filed under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as the 'Act') by U.P. Bhumi Sudhar Nigam, Lucknow (hereinafter referred to as the 'Nigam') raise common substantial question of law.

Income Tax Appeal No. 3 of 1999 relates to the Assessment Year 1995-96 whereas Income Tax Appeal No.4 of 1999 relates to the Assessment Year 1994-95. In both the appeals the following substantial questions  of law with the difference in the figure of receipts have been raised:

(i) Whether the Tribunal was legally correct inholding that the appellant company is not the 'government and its income therefore, was not outside the provisions of Income-tax Act?

(ii) Whether on the due consideration of the true nature of receipts amounting to Rs. 47,23,315/- and the attendant facts and circumstances of the case, the Tribunal was legally correct in affirming taxability thereof, as income, in the case of assessee?

(iii) Whether there was any material for the Tribunal to come to the conclusion that interest received in relation to the funds which got deployed with Scheduled/Nationalised banks remained lying with the appellant Nigam, and there was no diversion of the same, at the very source, in favour of the State Government?

(iv) Whether the findings about the taxability of receipts amounting to Rs. 47,23,315/- are not vitiated in law as having been arrived at without giving due consideration of the relevant materials/information, particularly to the effect that-

(a) the amount in question stood credited in a separate account classified as 'Interest payable to Government';

(b) the State Government never gave up its claim for the said sum;

(c) the Nigam at its part had already taken effect steps for making over the said sum (as stood comprised in the over all credit balance under the head 'Interest payable to State Government' with such governance; and

(d) other relevant/attendant facts and circumstances of the case.

(v) Whether the Tribunal was legally correct in not accepting the alternative plea of the appellant, that it carried corresponding liability towards the State Government, which in any case was liable to be allowed, as a sequel to the substance of addition of Rs. 47,23,315/-?

(vi) Whether the Tribunal was legally correct in holding that theamount in question did not partake the character of grants-in-aid givenby the State Government, and the same was straight away taxable in the hands of the appellant?

In the Assessment Year 1995-96 the amount is Rs. 47,23,315 whereas in the Assessment Year 1994-95 the amount is Rs. 71,96,225/-.

Briefly stated the facts giving rise to the present appeals are as follows:

According to the appellant, the Nigam is a Company wholly owned by the Government of Uttar Pradesh. There was its various functionaries as shareholders which had come into existence for carrying out the following:

1. To undertake, assist, aid, finance, execute and promote measures for land development, conservation and imnprovement of soil and water resources such as:

(a) Reclamation of land including reclamation of saline and alkaline soils and ravine and gullied areas.

(b)Farm drainage, both surface and sub-surface.

(c)Prevention of mitigation of soil erosion.

(d) Protection of land against damage by floods or drought.

(h) Water Management including conservation irrigation, use of sprinkers gated pipes and water harvesting.

2. To carry on the business of farmers, graziers, planters, contractors for the construction of works and any other operations or business which may seem calculated directly or indirectly to develop the land for agricultural purposes or purposes akin to agriculture.

3. The company is thus formed as a Company for promoting rural development through land reclamation activities in the State of Uttar Pradesh  being useful object of general public utility and intends to apply its profits, if any or other income in promoting its objects and to prohibit distribution of any dividends to its members."

as its main objects as contained in the memorandum of association of the Nigam. The Government of U.P. had been giving grant-in-aid to the Nigam for implementation of various specific projects. According to the appellant the grants were with the stipulations that the sum so provided by the state Government should be placed in personal ledger account with the treasury and in case the funds are placed with commercial Banks in any form, then the interest earned on such funds shall belong to the Government itself. The state Government has been issuing instruction/notification from time to time in order to regulate the said stipulations. During the Assessment Years 1994-95 and 1995-96 the Nigam had received a sum of Rs. 71,96,225/- and Rs. 47,23,315/- respectively towards the interest accrued/received on fixed deposits made by it. Before the Assessing Officer it was contended on behalf of the Nigam that interest on F.D.Rs., which had not been shown in the income of the Nigam but in the foot note of the balance sheet that it is income of the State Government, is not the income earned by the Nigam but it belonged to the State Government and, therefore on the principle of diversion of income by over-riding title the the Nigam claimed that it was not its income.  The Deputy Commissioner of Income Tax, Special Range, III, Lucknow while framing the assessment order in each of the two years did not accept the plea of the Nigam and held it to be its income and accordingly imposed tax thereon. Feeling aggrieved  the Nigam preferred separate appeals before the Commissioner of Income Tax, (Appeals) Lucknow who has held that the interest accrued to the Nigam on funds kept in Banks and interest payable is revenue receipt. He upheld the action of the Assessing Officer in treating the interest payable as taxable receipt. Feeling aggrieved the Nigam preferred separate appeals before the Income Tax Appellate Tribunal, Allahabad. The Tribunal by its common order has dismissed the appeals.

We have heard Sri S.K.Garg, learned counsel for the appellant and Sri A.N.Mahajan, learned standing counsel for the Revenue.

At the outset it may be mentioned that the learned counsel counsel for the appellant did not advance any argument on the question whether the Tribunal was legally correct in holding that the appellant-Nigam is not Government and its income, therefore, was not outside the provisions of the Income Tax.

Learned counsel for the appellant submitted that the amount of interest accrued/received by the Nigam on fixed deposits which it had taken in respect of the amount of grant received from the State Government did not reach the Nigam as by over-riding title it was diverted to the State Government and it was really the income of the State Government, thus, it was not liable to tax at the hands of the Nigam. He further submitted that the State Government had issued order dated 7th March, 1979 in which it had directed that all the State Government undertakings/corporations/boards should keep the amount of grant in the personal ledger account (PLA) in the treasury and those amounts which had already been invested in the fixed deposits in the commercial Bank be withdrawn and kept in the treasury.  Another Government Order was issued on 3rd April, 1980 in which the State Government had stated that if in any special circumstances the amount of grant had not been kept in the personal ledger account in the treasury and had been invested in the fixed deposit account, the amount of interest earned thereon should not be treated as income of the Nigam/Undertaking but should be added in the grant. In other words the interest would not be the income of the Nigam/Undertaking but shall form part of the grant given by the state Government. Similar view was reiterated by the State Government in its order dated 4th December, 1993. According to the appellant in view of the aforementioned Government Orders the Nigam has not been treating the amount of interest accrued/received on fixed deposits/receipts from the commercial Bank as its income and that is why its was not showing in the profit and loss account and a note was made in the balance sheet/ profit and loss account that the said amount belonged to the State Government. He next submitted that the amount of interest did not belong or accrue to the appellant and in the present case the concept of real income should be employed. He further submitted that the Board of Directors of the Nigam had passed a resolution on 23rd March, 1998 in which out of the amount of interest accrued/received on fixed deposits in respect of the grant made by the State Government, it was resolved that Rs. 350 lacs be converted in the share capital. He further submitted that in respect of the Assessment Year 1981-82 the Tribunal itself had held that the interest accrued on the fixed deposits was diverted by overriding title to the Government of Uttar Pradesh. Learned counsel for the appellant raised an alternate plea that in case the amount in question is treated to be the income of the Nigam there was a corresponding liability towards the State Government upon the Nigam to make over the amount of such interest and, therefore, amount in question ought to have been deducted while computing income of the Nigam which is following the mercantile system of accounting.

In support of his various plea, the learned counsel for the appellant has relied upon the following decisions:

1. Commissoner of Income Tax v. Sitaldas Tirathdas, (1961) 41 ITR  367 (SC);

2. Kedarnath Jute Manufacturing Company Ltd. vs. Commissoner of Income Tax (1971) 82 ITR 363 (SC);

3. Moti Lal Chhadami Lal Jain vs. Commissoner of Income Tax (1991) 190 ITR 1 (SC);

4. Additional Commissoner of Income Tax vs. United Motor Transport Service Association (1991) 190 ITR 13 (Alld);

5. Commissoner of Income Tax vs. Pandavapura Sahakara Sakkara Kharkane Ltd. (1992) 198 ITR 690 (Kar.);

6. Commissoner of Income Tax vs. Shiv Prakash Janak Raj & Co. Pvt. Ltd. (1996) 222 ITR 583 (SC);

7. Godhra Electricity Company Ltd. vs. Commissoner of Income Tax (1997) 225 ITR 746 (SC);

8. National Handloom Development Corporation Ltd. vs. Deputy Commissoner of Income Tax (2004) 266 ITR 647 (Alld.);

9. Jit and Pal X-Ray Pvt. Ltd. vs. Commissoner of Income Tax (2004) 267 ITR 370 (Alld.).

10. S Sahakari Sakhar Karkhana Ltd. vs. Commissoner of Income Tax (2004) 270 ITR 1 (SC);

Learned standing counsel on the other hand submitted that Nigam had invested the amount of grant-in-aid in the commercial Bank in its own name and further the interest which had accrued on the said fixed deposits did belong  to the Nigam. The Government Orders issued in this behalf did not change the position, it was an opinion expressed by the State Government regarding ownership of the income and its treatment. The Nigam had not acted strictly in conformity with the said Government Orders and had been keeping the amount received from the State Government in the commercial Banks and not in the Treasury which itself shows that the said orders had no binding force and further it is not diversion of income by overriding title but a case of application of money after it has been earned.  He has relied upon a decision of Apex Court in the case of State Bank of Travancore vs. Commissoner of Income Tax, Kerala (1986) 158 ITR 102 (SC).

We have given careful consideration and are of the view that so far as the alternate plea is concerned in paragraph no. 3.23 of the order under appeal, the Tribunal has specifically mentioned that the learned counsel for the assessee had not addressed them on this ground and nothing has been said by them on the claim of deduction. As the appellant had not pressed its alternative plea before the Tribunal for which specific finding has been recorded by the Tribunal. we are not permitting the learned counsel for the appellant  to raise this plea before us. The learned counsel, however, submitted that in the grounds of appeal such a plea was specifically raised and in fact he had argued the same before the Tribunal. Be that as it may, we are taking the facts recorded by the Tribunal on this aspect as final unless it is rectified by the Tribunal in the appropriate proceedings. We are supported in the view which we have taken by the  decision of the Apex Court in the case of  State of Maharashtra vs. R.S.Nayak (AIR 1982 SC 1249).

After hearing the learned counsel for the parties we find that the Nigam had been depositing the amount of grant received by it from the Government of Uttar Pradesh in the commercial Banks notwithstanding the Government Orders dated 7th March, 1979 and 3rd April, 1980. It has been enjoying income from interest for the last more than 15 years and it has not bothered to pay amount of interest to the State Government except making a provision in its books of account towards liability for payment of interest to the State Government.  The State Government has also not bothered to treat the interest accrued/received by the Nigam on the amount of grants invested in fixed deposit with commercial Bank as its income. Once the corpus of capital is floated and is handed over to the Nigam on day to day basis then the State Government has no control over the corpus of the Nigam.  The Government order dated 3rd April, 1980 contains general direction for being carried out by the Corporation of the Government. It does not specifically regulate the working of the Nigam. Similar is the position with regard to the Government Order dated 4th December, 1993. The amount of interest does not appear the characteristic of grant-in-aid as this amount has not been sanctioned by the State Government as grant-in-aid nor there is any decision or order of the Government to consider the amount in question as grant-in-aid given to the Nigam. It may be mentioned here that in a case of diversion of income by overriding title the person in whose favour the income is to be diverted should be aware about the exact amount of such income which it has earned. In the present case there is no material brought on record to prove that the State Government was at any point of time aware about the interest income received/accrued by the Nigam for which it can lay any claim. These Government Orders appears to have been issued just to take out the interest income earned by the Nigam from the taxation under the Income Tax Act.

In the case of  Sitaldas Tirathdas, (supra) the Apex Court has set out the classic statement of the true principle of diversion of income as follows :-

"Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which by the nature of the obligation to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation (self-imposed and gratuitous) after such income reaches thee, the same consequence, in law, does not follow.  It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable."

In the case of Moti Lal Chhadami Lal Jain (supra)  the Apex Court has held that the existence of a mere obligation is not sufficient to constitute diversion of income. It has held as follows:-

"In the above passage, it is clear that the expressions "reaches the assessee" and "has been received" have been used not in the sense of the income being received in cash by one persons or another. What the passage emphasizes is the nature of the obligation by reason of which the income becomes payable to a person other than the one entitled to it. Where the obligation flow out of an antecedent and independent title in the former (such as, for example, the rights of dependants to maintenance or of coparceners on partition, or rights under a statutory provision or an obligation imposed by a third party and the like), it effectively slices away a part of the corpus of the right of the latter to receive the entire income and so it would be a case of diversion. On the other hand,, where the obligation is self-imposed or gratuitous (as here), it is only a case of an application of income."

In the case of Commissioner of Income Tax v. Sunil J. Kinariwala, (2003) 259 ITR 10, the Apex Court, after referring to the decisions of the Privy Council in the case of Raja Bejoy Singh Dudhuria v. Commissioner of Income Tax, (1933) 1 ITR 135 (PC) and Mullick (P.C.) v. Commissioner of Income Tax, (1938) 6 ITR 206 (PC); of the Apex Court in the case of Commissioner of Income Tax v. Sitaldas Tirathdas (supra); K.A.Ramachar v. Commissioner of Income Tax, (1961) 42 ITR 25 (SC); Moti Lal Chhadami Lal Jain v. Commissioner of Income Tax (supra); Commissioner of Income Tax v. Bagyalakshmi and Co., (1965) 55 ITR 660 (SC) and Murlidhar Himatsingka v. Commissioner of Income Tax, (1966) 62 ITR 323 (SC), has held that if a third person becomes entitled to receive an amount under an obligation of an assessee even before he could a claim to receive it as his income, there would be a diversion of income by overriding title but when after receipt of the income by the assessee, the same is passed on to a third person in discharge of the obligation of the assessee, it will be a case of application of income by the assessee and not of diversion of income by overriding title.

In the case of State Bank of Travancore (supra) the Apex Court has laid down the following propositions:

"(1) It is the income which has really accrued or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation. (2) The concept of real income would apply where there has been a surrender of income which in theory may have accrued but in the reality of the situation, no income had resulted because the income did not really accrue. (3) Where a debt has become bad, deduction in compliance with the provisions of the Act should be claimed and allowed. (4) Where the Act applies, the concept of real income should not be so read as to defeat the provisions of the Act. (5) If there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee. The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not. (7) Mere improbability of recovery, where the conduct of the assessee is unequivocal, cannot be treated as evidence of the fact that income has not been resulted or accrued to the assessee. After debiting the debtor's account and not reversing that entry-- but taking the interest merely in suspense account cannot be such evidence to show that no real income has accrued to the assessee or been treated as such by the assessee. (8) The concept of real income is certainly applicable in judging whether there has been income or not but, in every case, it must be applied with care and within well-recognised limits.  

We were invited to abandon legal fundamentalism. With a problem like the present one, it is better to adhere to the basic fundamentals of the law with clarity and consistency than to be carried away by common cliches. The concept of real income certainly is a well-accepted one and must be applied in appropriate cases but with circumspection and must not be called in aid to defeat the fundamental principle of law of income tax as developed."

In the case of Shiv Prakash Janak Raj & Co. Pvt. Ltd. ((supra) the Apex Court has approved the view taken by this Court in the case of State Bank of Travancore (supra) that if there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee and the concept of real income certainly is a well-accepted one and must be applied in appropriate cases but with circumspection and must not be called in aid to defeat the fundamental principle of law of income tax as developed.

In the case of Pandavapura Sahakara Sakkare Kharkane Ltd. (supra) the Karnataka High Court has held that there was stipulation that one-third of the price charged for selling of molasses as fixed by the Government of India under the Molasses Control Order should be transferred to the fund called 'Molasses Storage Fund' which could be utilised only according to the instructions issued by the Government from time to time. The amount, thus, transferred has to be kept separately from other business funds in a separate bank account and it was not possible to withdraw the same without the prior approval of the Excise Department. The right of the fund got diverted from the hands of the assessee by virtue of the Molasses Control Order and, therefore, it could not be included in the income of the assessee as the amount in question got diverted at the source itself by virtue of the statutory application.

In the case of S.Sahakari Sakhar Karkhana Ltd. (supra) the Apex Court has held that the assessee merely acted as an agent in collecting the amounts towards the Chief Minister' Relief Fund, Late Y.B.Chavan Memorial Fund and Hutment Fund and remitting the same to the Government or to the trustees in truth and in substance, the money collected by the assessee was not reaching the assessee as part of its income but the collection was made for and on behalf of the person to whom it is payable. It had no manner of right or title over the same money, therefore these receipts should not treated as income of the assessee.

In the case of Jit and Pal X-Ray Pvt.Ltd. (supra) this Court has held that the fundamental principle is that an application of income is an allocation of one's own income after it accrues or has arisen, although such application may be under a contract or obligation, whereas diversion of income is that which diverts away or deflects before it accrues or reaches the assessee and it is received by him only for the benefit of the person who is entitled to the income under an overriding charge or title. There is a distinction between the obligation to spend money in a particular manner attached to an income, and a similar obligation attaching to the source of the income. If the obligation is on the source of the income it is a case of diversion of income by overriding title, but if the obligation is to spend the money in a particular manner it is only an application of the income.

In the case of Godhra Electricity Co.Ltd. (supra) the Apex Court has held that income-tax is a levy on income. No doubt, the Income Tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about the hypothetical income which does not materialise.

In the case of National Handloom Development Corporation Ltd. (supra) this Court has held that a basic concept in income-tax law is that the assessee must have received or have acquired a right to receive the income before it can be taxed. There must be a debt owed to him by somebody, if the amount is to be taxed on mercantile (accrual) basis. Unless a debt has been created in favour of the assessee by somebody it cannot be said that the income has accrued to him or he has a right to receive the income. When one refers to the right of an assessee to receive an amount so as to make it taxable, it necessarily means a right enforceable under law. If the claim is not legally enforceable the assessee cannot be said to be vested with a right to claim the amount.

In the case of Kedarnath Jute Mfg. Co.Ltd. (supra)the Apex Court has held that whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights; nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter.

The decision of this Court in the case of United Motor Transport Service Association (supra) relied upon by the learned counsel for the appellant is not applicable in the present case inasmuch as it related to case of depreciation under Section 10(2)(vi) of the Income tax Act, 1922. This Court has held that the depreciation is admissible only where the assessee is the owner of the asset in question.

From the aforesaid cases the following principle emerges:

(i) If a third person becomes entitled to receive an amount under an obligation of an assessee even before he could a claim to receive it as his income, there would be a diversion of income by overriding title but when after receipt of the income by the assessee, the same is passed on to a third person in discharge of the obligation of the assessee, it will be a case of application of income by the assessee and not of diversion of income by overriding title.

(ii) If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about the hypothetical income which does not materialise.

(iii) The existence or absence of entries in his books of account cannot be decisive or conclusive in the matter.

(iv) The concept of real income must be applied in appropriate cases but with circumspection and must not be called in aid to defeat the fundamental principle of law of income tax as developed.

It is not in dispute that the Nigam had invested the amount of grant received by it in fixed deposits with commercial Bank on which interest had accrued. The appellant has not placed on record the specific orders by which the Government of Uttar Pradesh had given the grant and whether such orders contained any such stipulation that the amount of interest which may accrue if the grant is invested/kept in commercial banks, shall  be the income of the Government of Uttar Pradesh and shall be added to the grant earned. In the absence of any such material having been placed on record it is not possible to hold that the interest did not belong to the Nigam. By the Government Order dated 7th March, 1979 the State Government Undertakings/Corporations/ Boards were directed to deposit the amount of grant in the personal ledger account in the Treasury and in future also they were required to deposit the amount in the Treasury and all amounts which have been deposited in the commercial Bank should be withdrawn and deposited in the personal ledger account  of the Treasury. In the order dated 3rd April, 1980 the State Government had expressed its opinion that if  in any special circumstances the amount of grant is not deposited  in the personal ledger account in the treasury and the same is invested in the fixed deposit account, then the  amount of interest should be added to the Government grant/loan and should not be shown in the profit and loss account of the Undertaking/Corporation. In the order dated dated 4th December, 1993 the State Government has reiterated its earlier direction/opinion and directed that instruction regarding deposit of the amount in the personal ledger account of the Treasury should be strictly followed. From a perusal of the aforementioned Government Orders we are of the considered opinion that it is only a direction issued by the Government of Uttar Pradesh to the Nigams and Undertakings and the contention that the amount of interest did not accrue to the Nigam and it belong to the State Government is not correct. The State Government has only expressed its opinion regarding the treatment of the amount of  interest and, therefore, these Government Orders can not come to the rescue of the appellant. Moreover, we find that the Nigam has not at all complied with the direction contained in the aforementioned Government Orders regarding deposit of amount received from the State government in the PLA account in the Treasury. These orders are therefore in the nature of advisory orders only.

Applying the principle laid down in the aforesaid cases to the facts of the present case, we find that no material has been placed on record  to show that there was any stipulation that the interest earned on such grant/aid if kept in fixed deposit in commercial Bank would not accrue to the appellant but to the State Government. In fact the orders issued by the State Government were for treating the amount of interest. By treating it as a further grant, in fact is an application of money after it has been earned by the appellant and, therefore, the Tribunal was justified in holding that the interest, in fact, was taxable at the hands of the appellant. We are also of the considered opinion that the theory of real income is not applicable to the facts of the present case inasmuch as the interest has accrued to the appellant which it had retained for years together and only later on it has decided to convert a part of the amount of accumulated interest and not whole of it towards its share capital.

In view of the foregoing discussions we do not find any merit in these appeal which are hereby dismissed. However, the parties shall bear their own costs.

December  3,2004

MZ.


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