Case Law Details

Case Name : Joint Commissioner Of Income Tax Vs I.T.C. Ltd. (ITAT Kolkata - Special Bench)
Appeal Number : 2008 112 ITD 57 Kol : 2008 299 ITR 341 Kol
Date of Judgement/Order : 07/09/2007
Related Assessment Year :
Courts : All ITAT (4788) ITAT Kolkata (348)
The view that section 43B is a general provision which merely bars deduction of specified sums, unless they are actually paid and whereas provisions of section 36(1)(va) specifically deal with deduction in respect of payment of employees’ contribution to provident fund and other funds; therefore, the provisions of section 36(1)(va), being special provisions enacted to deal with specific matter would prevail over the general provisions of section 43B has been upheld.
 Income Tax Appellate Tribunal – Kolkata
Special Bench
Joint Commissioner Of Income Tax 
vs
I.T.C. Ltd. 
Dated- 7 September, 2007
Equivalent citations: 2008 112 ITD 57 Kol, 2008 299 ITR 341 Kol
Bench: G Agarwal, V Kz, D Tyagi, J Kishore

ORDER

1. This Special Bench has been constituted under Section 255(3) of the Income Tax Act, 1961 by the Hon’ble President, I.T.A.T. in the case of M/s. I.T.C. Ltd. vide I.T.A. No. 1541 (Cal)/2000 for assessment year 1997-98 to consider the following questions:

(1) That on the facts and in the circumstances of the case, the Hon’ble CIT(A) has erred in deleting addition of Rs. 38,64,1091-debited to year’s revenue account as value of stores written off by holding that it is for the A.O. to prove that consumable stores had either not been used or individually costed less than Rs. 5,0001-ignoring, in the process, the findings in assessment that claim could not be established on record.

(2) That, on the facts and in the circumstances of the case, the Hon’ble CIT(A) has erred in deleting addition of Rs. 5,00,000/- on account of building, furniture, fixture & fittings thereby contravening enunciation by the jurisdictional High Court to the defect that prohibition against guest house expenses stipulated in Section 37(4) is absolute.

(3) That, on the facts and in the circumstances of the case, the Hon’ble CIT(A) has erred in deleting addition of traveling expenses disregarding the specific finding that assessee could no discharge the statutory onus of providing that the entire amount debited as expenses represented revenue expenditure laid out wholly and exclusively for purposes of business.

(4) That, on the facts and in the circumstances of the case, the Hon’ble CIT(A) has erred in deleting addition of Rs. 67,59,104/-without requiring the expenses to controvert the finding that the amount represented outgoings in the form of entertainment expenses.

(5) That, on the facts and in the circumstances of the case, the Hon’ble CIT(A) has erred in deleting the addition of Rs. 1,45,48,331/- under the sub-head of payments to clubs disregarding the finding that no part of the expenditure could be shown to have any direct and intelligible nexus with business of the company as such.

(6) That on the facts and in the circumstances of the case, the Hon’ble CIT(A) has erred in deleting addition of Rs. 13,30,000/-claimed as advertisement expenses when clearly the expenditure in question did not qualify to be treated as admissible revenue expenses of the company’s business.

(7) That, on the facts and in the circumstances of the case, the Hon’ble CIT(A) has erred in deleting addition of ‘Repairs’ when the order of assessment showed that material evidence to establish the claim had been omitted to be made available for A.O.’s scrutiny.

(8) That, on the facts and in the circumstances of the case, the CIT(A) has erred in deleting addition of Rs. 1,77,05,366/- basing his analysis on method of accounting thereby ignoring the fact that the provision represented purely contingent expenditure.

 (9) That on the facts and in the circumstances of the case, the CIT(A) has erred in deleting addition of Rs. 55,00,000/- by ascertaining capital or revenue nature of the expenses solely with reference to composition of the amount rather than the purpose each component of the expenditure was expected to serve.

(10) That the ld. CIT(A) erred in law and on facts in summarily deleting addition Under Section 43B read with Section 36(1)(Va) without appreciating that the statutory disallowance is essentially to be based on facts and that unlike the governmental liabilities of other nature covered by Section 43B, option to claim deduction in the year of payment is not available under the law in regard to contribution to employees’ provident & pension funds.

(11) That, on the facts and in the circumstances of the case, the Hon’ble CIT(A) has erred in deleting the addition disallowances of Rs. 2.5 crores under the head other staff welfare business by holding that the although the assessee could not furnish details of such expenses before the assessing officer in course of assessment in deleting addition of Rs. 30,00,000/- on account of expenditure on fuel soft coke for staff and mill workers by holding the same as in nature of employees welfare expenses incurred on the basis of an agreement with workers in gross disregard to Rule 46A of the Income Tax Rules, 1962 as the assessee did not disclose the fact of the agreement with workers in course of assessment procedure & in deleting addition of Rs. 4,00,000/- on account of school fees scholarship and educational tour expenses by holding that the expenditure were incidental to assessee’s business.

(12) That the ld. CIT(A) erred in law and on facts in deleting addition of miscellaneous expenses ignoring the trite law that a decision in regard to a different year can not be taken as an authority on facts.

(13) That on the facts and in the circumstances of the case, the CIT(A) has erred in deleting addition by holding that the onus of proof is, not on the assessee, but on the A.O.

(14) That on the facts and in the circumstances of the case, the CIT(A) has erred in deleting addition applicable without appreciating that arm’s length principle had been clearly shown to have been violated.

(15) Ld. CIT(A) erred in law and on facts in directing adoption of total turnover net of excise duty for purposes of computation of admissible amount of deduction Under Section 80HHC which directly contradicts the law.

(16) That, on the facts and in the circumstances of the case, the Hon’ble CIT(A) has erred in directing the A.O. top allow deduction Under Section 80HHC of the Income Tax Act, 1961 as per computation made by the assessee’s auditor without pointing out any defect in the computation made by assessing officer.

2. At the outset, the ld. Departmental Representative for the Revenue submitted that most of the additions in this case have been deleted by the ld. CIT(A) following the decision of ITAT for the assessment year 1994-95. He stated that the facts of 1994-95 are not identical to the facts of issues raised by the Revenue in this case. In 1994-95, the Hon’ble ITAT while upholding the order of ld. CIT(A) has basically observed that the Special Auditor 142(2A) was appointed by the Revenue and such Special Auditor in his audit report has not commented anything adverse, which could support the observation of A.O. while making the additions in case of assessment year 1994-95. Ld. D.R. submitted that since no special audit was got done by the Revenue for the year under consideration, the decision of ITAT for assessment year 1994-95 could not be relied for supporting the order of ld. CIT(A) for the year under consideration. He stated that the ld. CIT(A) should have adjudicated the matters on merit and should not have followed simply the order of ITAT for assessment year 1994-95.

3 The ld. Departmental Representative for the Revenue arguing the first ground raised by the Revenue, has submitted that the A.O. has dealt with the above ground at page no.35 of his order, wherein he has given a specific reason for disallowing the above claim. It has been contended by the ld. D.R. that the assessee in this case could not submit any evidence and documents asked for by the A.O. It has been pointed out by the ld. D.R. that though the A.O. has asked for details and evidences as per direction of this Tribunal while setting aside the matter to the file of assessee, and in its reply the assessee has relied upon the documents and evidences filed before the ld. CIT(A). Ld. D.R. pleaded that the assessee has not discharged its burden to prove the genuineness of the claim made by it. It has been submitted by the ld. D.R. that though the assessee has debited the entire value of such obsolete consumable stores, at the same time no re-sale value of such obsolete goods or stores has been shown by the assessee, which is highly surprising. She has submitted that even this Tribunal while adjudicating the Ground No. 17 in case of 1994-95 had held that there should be some re-sale value of such items declared by the assessee. It has been submitted by the ld. D.R. that the ld. CIT(A) while deleting the addition made by the A.O., has only followed the decision of this Tribunal for the assessment year 1994-95, wherein Tribunal upheld the order of ld. CIT(A) on the ground that no adverse comment was passed by the special auditor. Ld. D.R. contended that in these circumstances the order of this Tribunal for assessment year 1994-95 should not be simply followed for deciding the grounds raised by revenue in this vear.

4. The ld. D.R. has thereafter drawn the attention of this Bench on the details in respect of items of consumable stores which were written off by the asscsscc and has submitted that from the perusal of such details available at annexure-3 to Enclosure B of the paper book No. D, it is evident that such written off obsolete consumable stores includes 1246 metric ton of coal, which is highly improbable of becoming obsolete. It has, therefore, been contended by the ld. D.R. that since the assessee has not cooperated with the A.O. in providing details and evidences in support of the claim made, the A.O. has no option but to make disallowance, which has been deleted by the ld. CIT(A) in a casual manner without disposing the same on merit and, therefore, such order of ld. CIT(A) is liable to be reversed.

5. In his rival submission, the ld. Senior Counsel Shri R.N. Bajoria appearing for and on behalf of the assessee has assailed the above submission of the ld. D.R. and has first pointed out that this Tribunal while restoring the matter back to the file of A.O. has basically done so to give an opportunity to the A.O. to examine the evidence and documents filed by the assessee before the ld. CIT(A). However, the A.O. after such setting aside has asked for voluminous documents, which is not possible humanly. Shri Bajoria in support of his above contention has drawn the attention of this Special Bench on the letter of A.O,. which is available at page No. 204 of the paper book, wherein the A.O. asked for the details in support of such obsolete consumer stores written off. It has been submitted by Shri Bajoria that the direction of this Tribunal should have been followed by the A.O. in a constructive manner as the restoration of issues were made by this Tribunal for the verification of evidence and documents filed by the assessee before the ld. CIT(A) and it was not made with an intention to provide an opportunity to the A.O. to make fresh assessment in regard to such claim of the assessee. It has been submitted by Shri Bajoria that the assessee-company is having a turnover of more than 6,000 crores and writing off 38,00,000/- of consumer stores, which has become obsolete, is general phenomena in the line of the business of the assessee. Shri Bajoria has also pointed out that so far as the obsolesce of coal is concerned such coal was wet having no value and even otherwise whenever such obsolete items were sold through auction, the assessee used to show the same under the head ‘miscellaneous income’.

6. Shri Bajoria has thereafter submitted that the facts of the present case are exactly similar to the facts of assessment year 1994-95 as the nature of business of assessee remains same and, therefore, the ld. CIT(A) has rightly followed the decision of this Tribunal in the assessment year 1994-95 and such order of ld. CIT(A) is liable to be upheld. The ld. D.R. in his rejoinder has once again reiterated that the A.O. is well competent to ask for the details from the assessee in respect of claim made by it and the assessee was duty bound to prove the genuineness of the claim made by it and since the assessee adopted the method of non-cooperation by not filing the details called for, the action of A.O. was well within the ambit of law.

7. We have carefully considered the arguments of both the sides and perused the material placed before us. The assessee has written off the consumable stores amounting to Rs. 38 lacs, the details of which furnished before the A.O. and kept at Annexure-3 of Enclosure B of the paper book No. II of the assessee are as under:

ITC Limited Assessment year -1997/98 Stores Written Off mount (Rs.) Stores & spares for MK-5 (Revenue 436003 Stores & Spares for Cigarette machine) Stores & Spares for MK 5-8-5 ” 522662 Stores & Spares for MK-8 ” 45923 Stores & Spares for PA7RO” 6767 Stores & Spares for MAX 111″ 17299 Stores & Spares forM2 PACKER” 295448 Stores & Spares for MKL- DUPLEX” 2889 Stores & Spares for BANG WRAPEPR” 98055 Bearings 201584 V-Belts 9056 Misc. Spares 63480 F & C on spares 73878 Coal 1246.872 MTS. 1976893 Package & Printing Division Munger- 114172 Cost of Silicon Carbide Total 3864109

8. The assessee has not furnished any evidence to prove that the above consumable stores have become obsolete during the year under consideration. At the same time, considering the volume of the assessee’s business wherein the assessee’s turnover exceeded Rs. 6000 crores, the possibility of some consumable stores becoming obsolete cannot be ruled out. Further, the obsolete stores would also have some realizable value. In the case of the assessee the items written off included 1246 M.T. of coal. Even if the coal is dust or rejected, it has some realizable value. The ld. counsel for the assessee has claimed that whenever consumable stores are sold, the amount realized are credited as other income in the assessee’s books of account. However, the learned counsel for the assessee could not point out whether any amount on the realization of 1246 M.T. of coal and other consumable items written off in the year under consideration was shown as misc. income on its realization in this year or any of the subsequent years. Considering the totality of these facts and the arguments of both the sides, in our opinion, it would meet the ends of justice if the disallowance is sustained at 25% of the consumable stores written off by the assessee. We hold and direct accordingly.

9. So far as the ground No 2 raised by the Revenue is concerned, at the outset it was an agreed position between the parties that the above issue has to be decided in favour of the Revenue and against the assessee by virtue of the order of the Hon’ble Supreme Court in the case of Britannia Industries v. CIT reported in 278 ITR 546. In the said case, their Lordships held as under:

The only question which we are called upon to consider in the instant case is whether the expression “premises and buildings” referred to in Sections 30 and 32 and used for the purposes of the business or profession would include within its scope and ambit the expression “residential accommodation including any accommodation in the nature of guesthouse” used in Sub-Sections (3), (4) and (5) of Section 37 of the Act. While the two expressions can be similarly interpreted, a distinction has been sought to be introduced for the purposes of Section 37 by specifying the nature of building to be a guest-house. In our view, the intention of the Legislature appears to be clear and unambiguous and was intended to exclude the expenses towards rents, repairs and also maintenance of premises/accommodation used for the purposes of a guest-house of the nature indicated in subsection (4) of Section 37. When the language of a statute is clear and unambiguous, the courts are to interpret the same in its literal sense and not to give it a meaning which would cause violence to the provisions of the statute. If the Legislature had intended that deduction would be allowable in respect of all types of buildings/accommodations used for the purposes of business or profession, then it would not have felt the need to amend the provisions of Section 37 so as to make a definite distinction with regard to buildings used as guest-houses as defined in subsection (5) of Section 37 and the provisions of Sections 31 and 32 would have been sufficient for the said purpose. The decisions cited by Dr. Pal contemplate situations where specific provision had been made in Sections 30 to 36 of the Act and it was felt that what had been specifically provided therein could not be excluded under Section 37. The clarification introduced by way of Sub-section (5) to Section 37 was also not considered in the said case.

As mentioned in the decision of the Calcutta High Court in the case of Biswanath Tea Co. Ltd. [2003] 264 ITR 166.

any other interpretation would negate the very purpose of Sub-section (4) of Section 37.

It is another matter that at a subsequent point of time, the Legislature felt it necessary to omit the said provisions, but they were in the statute book at the relevant point of time. The rigours of the same, in our view, cannot be avoided in the instant case.

10. We respectfully following the same decide the issue in favour of Revenue and against the assessee and accordingly allow the Ground No. 2raised by the Revenue.

11. Brief facts relating to the Ground No. 3 are that the assessee has made a total claim of Rs. 40.91 crores under travelling expenditure and in tax audit report, a disallowance under Rule 6D stood at Rs. 64,56,704/-, the A.O. observed that out of total travelling expenses a sum of Rs. 7,18,72,457/- only has been taken into consideration by the auditors to quantify disallowance under Rule 6D. The A.O. has, therefore, observed that the balance travelling expenditure of Rs. 33.74 crores has not been considered for working out the disallowance under Rule 6D. He has further held that details of travelling expenses reveal that a sum of Rs. 58,30,454/- has been incurred in connection with travelling undertaken by person other than employee of the assessee and the disallowance on this account under Rule 6D has been worked out at Rs. 8,92,258/- and, therefore, the balance traveling expenditure for other person to the extent of Rs. 49,38,196/- has also not been incurred by the employees or executives of the assessee and, therefore, the same is liable to be disallowed. The A.O. has thereafter seen from the details of balance travelling expenditure that the assessee has not filed the details and purpose of foreign visit made by the Officer of the Company and the details regarding Indian travel has also not been filed. He has accordingly considering the possibility of personal and pleasure trips disallowed 1 % of the claim of Rs. 33.72 crores over and above the disallowance of Rs. 49,38,196/- claimed by the assessee on account of traveling expenditure by person other than employees of the assessee.

12. In appeal, the ld. CIT(A) has deleted the addition made by the A.O. on account of travelling expenditure incurred by the assessee on person other than employees and the ad hoc estimate disallowance of Rs. 33,72,275/- holding that the assessee has itself shown Rs. 8,92,258/- as disallowable under Rule 6D and the fact that the A.O. has not questioned the basis of calculation. The CIT(A) has also considered the earlier order of his predecessor for the assessment year 1994-95 while deleting the additions of Rs. 49,38,196/- and Rs. 33,72,275/-.

13. The Revenue being aggrieved with such order of ld. CIT(A) has now come in appeal before us vide Ground No. 3 as mentioned hereinabove.

14. The ld. Departmental Representative for the Revenue has assailed the order of ld. CIT(A) and has contended that so far as the disallowance of Rs. 49,38,196/- is concerned, the same was rightly made by the A.O. as these expenditures were incurred by the persons other than employee of the assessee-Company and, therefore, by no stretch of imagination could be held as incurred for the purpose of business and could not be allowed as such expenditures do not satisfy the conditions for its admissibility as mentioned in Section 37(1) of the Act. The ld. Sr. D.R. extending her argument has pleaded that the ld. CIT(A) has deleted such addition only by stating that the A.O. has not assigned any palpable reason for such disallowance. However, it is also a fact that the assessee has not been able to offer any reasonable explanation for incurring such expenditure for other than employees. She has also objected to the action of ld. CIT(A) in deleting addition of Rs. 33,72,275/- and has submitted that since the assessee has not submitted details of foreign travel and Indian travel, the A.O. has no option but to make the impugned disallowance, which has been deleted by the ld. CIT(A) only by following the earlier appellate order of the CIT(A) and the order of Hon’ble ITAT for the assessment year 1994-95. She has relied on the following judgments in support of her contention:

(1) Goodyear India Ltd. v. Commissioner of Income Tax 246 ITR 116 (Delhi) (2) Commissioner Of Income-Tax v. Premier Breweries Limited 279 ITR 51 (Kerala) (3) Ram Bahadur Thakur Ltd. v. Commissioner of Income Tax 261 ITR 390 (Kerala) It has, therefore, been prayed by the ld. D.R. that since the ld. CIT(A) while deleting the addition has not adjudicated upon the observation of A.O. while making the disallowance and, therefore, the order of ld. CIT(A) should be set aside and that of A.O. be restored.

15. In his rival submission, the ld. Sr. counsel for the assessee Shri R.N. Bajoria has defended the order of ld. CTT(A) in deleting the two folds disallowance by the A.O. He has first argued on the disallowance of traveling expenditure by non-employee and has submitted that the assessee had duly explained the nature and reason of such traveling expenditures on non-employees which were basically incurred by the auditors, retainers, consultants and non-Executive Directors, details of which were furnished along with the Tax Audit Report and the assessee itself offered Rs. 8.92 lakhs being the amount spent in excess of Rule 6D. Shri Bajoria has submitted that the Annexure to the Tax Audit Report clearly reflected the fact that the tax auditor had verified the amount of disallowance and there was no scope for further a disallowance under the said Rule and in these circumstances, the ld. CIT(A) was wholly justified in deleting the disallowance. It has been pointed out by Shri Bajoria that even otherwise the assessee-company has got various factories, godowns and stock points at various locations of the country and therefore it is necessary for the auditor, consultant and retainers to verify the documents and such verification is not possible without traveling to these places and, therefore, the action of A.O. in disallowing a sum of Rs. 49.38 lakhs was highly unjustified which has rightly been deleted by the ld. CIT(A).

16. Defending the action of ld. CIT(A) in deleting traveling expenses of Rs. 33.72 lakhs, Shri R.N. Bajoria has stated that the tax auditor has quantified the amount of traveling expenditure incurred by the employees in excess of Rule 6D and the same has been offered to tax. It has been submitted by the ld. counsel that the assessee in this case has duly submitted all the relevant documents and evidences, which clearly indicated that such expenditure was not incurred for personal and pleasure trips, which could enable the A.O. to make ad hoc disallowance. He has relied on the following judgments in support of his contention that since books of accounts being audited in accordance with the provisions of Income Tax Act and has been accepted as true and correct, there is no justification to make any ad hoc or lumpsum disallowance:

(i) ACIT v. Perfect Project Ltd. 253 ITR page 16 (AT Portion) (Calcutta Bench)

(ii) Sayaji Iron And Engg. Co. v. Commissioner of Income Tax 253 ITR 749 (Guj.)

(iii) Dinesh Mills Ltd. v. Commissioner of Income Tax 254 ITR 673 (Guj.)

(iv) Nidhipati Singhania v. Assistant Commissioner Of Income-Tax 39 ITD 293 (ITAT, Allahabad).

It has, therefore, been contended that observing the past order and considering the facts and circumstances involved in the case, the ld. CIT(A) was justified in deleting two folds of disallowance made by the A.O. and such order of ld. CIT(A) should be upheld.

17. We have given our careful consideration to the rival submissions made before us and have perused the orders of tax authorities. We have also considered the paper book filed by the ld. counsel for the assessee and the case laws relied upon. In this case, the A.O. has made two folds disallowance under the head traveling expenditure. The first disallowance out of traveling expenditure is on account of expenditure incurred by the assessee to the tune of Rs. 59.3 lakhs towards traveling of non-employees out of which Rs. 8.92 lakhs has already been offered by the assessee under Rule 6D and the A.O. has made the disallowance of the balance of Rs. 49.38 lakhs holding that he was not convinced with the commercial expediency of the traveling undertaken by the non-employees of the assessee-company. We after perusing the Annexure of Tax Audit Report and other evidence and document on record find that such traveling expenditures were undertaken by the auditors, retainers, consultants and non-Executive Directors of the Company, such fact has clearly been shown in the Tax Audit Report furnished by the assessee. The auditors have duly verified such traveling expenditures by non-employees and has thereafter quantified the sum of Rs. 8.92 lakhs disallowable under Rule 6D of the Act. So far as the justification of balance Rs. 49.30 lakhs for the business of assessee is concerned, it is also an undisputed fact that the assessee-company has various factories, godowns and stock point apart from branches and offices at various locations of the country and it is duty of auditors and other consultants to verify the documents and books of accounts in the order to give a conclusive and authentic report to the management. Apart from above, the criteria for allowability of travelling expenditure is that whether the expenditure was incurred for the purpose of business or not. If the expenditure is incurred for the purpose of business, it is immaterial whether the expenditure was incurred by the employee of the assessee-company or non-employee of the assessee-company. When the assessee engages an outside agency, viz. Auditor, Consultant, Advisor, etc. and the travelling is undertaken by them for the purpose of the business of the assessee-company, the expenditure incurred by them in such travelling has to be borne by the assessee-company and it would be an allowable expenditure being incurred for the purpose of business of the assessee-company. In the present case, it has nowhere been brought on record by the A.O. that the expenditure was not incurred for the purpose of the business of the assessee-company. The sole basis for disallowance of the expenditure was that the expenditure was incurred by the persons other than employees of the assessee-company. In our opinion, the disallowance made by the A.O. was not justified and the ld. C.I.T.(A) has rightly deleted the same.

18. Coming to the adhoc disallowance of Rs. 33.72 lakhs by the A.O., we find that the tax auditor has quantified the amount of traveling expenditure incurred by the assessee-company in excess of Rule 6D and has offered the same for tax. Though the assessee has submitted details of such expenditure, the A.O. has disallowed 1% of such expenditure holding that personal and pleasure trips could not be ruled out. However, such observation of A.O. is not supported by any evidence on record. The ld. D.R. though has relied on several decisions, but facts of such decisions are not identical to the facts of this case.

19. In the case of Goodyear India Ltd. v. CIT (supra) relied upon by the Ld. Departmental Representative, the assessee failed to furnish the details of certain expenditure and also failed to produce the vouchers and other evidence in support of the genuineness of such expenditure. On the above facts, their Lordships of Delhi High Court has upheld the estimated disallowance out of those expenditure. However, in the case under consideration before us, the assessee has produced the details asked for by the revenue authorities relating to the travelling expenditure. Therefore, the facts of me assessee’s case are different than the facts in the case of Goodyear India Ltd. (supra).

20. In the case of Premier Breweries Ltd. (supra), their Lordships of Kerala High Court held that the burden is upon the assessee to prove that the expenditure is incurred for the purpose of business. In the said case, the assessee has claimed the deduction for payment in respect of liaison work and corporate management charges. It was found by the A.O. that the Corporation has already banned the liaisoning work and the assessee could not produce the evidence with regard to rendering of any service towards corporate management. In view of the above facts, the Hon’ble Kerala High Court upheld the disallowance with regard to the payment for liaisioning work and corporate management charges. There is no dispute with regard to the legal proposition laid down by their Lordships of Kerala High Court that the onus is upon the asscsscc to prove that the expenditure was incurred for the purpose of business. However, in the case under consideration before us, the assessee has already proved that the expenditure was incurred for the purpose of business. Even the A.O. himself has allowed 99% of the expenditure incurred by the assessee-company towards travelling. He only made the adhoc disallowance of 1 % out of travelling expenditure on estimate basis. Therefore, in our opinion, this decision of Hon’ble Kerala High Court does not support the stand of the revenue.

21. In the case of Ram Bahadur Thakur Ltd. v. CIT (supra), again their Lordships of Kerala High court has reiterated that the burden is upon the assessee to prove that the foreign tour of the Director was for the purpose of business. Since in that case the facts were not properly examined either by the A.O. or by the appellate authorities, on facts the matter was remanded to the Tribunal to dispose of the appeal afresh.

 22. From these facts it is evident that the facts of the assessee’s case are different than the facts of the cases relied upon by the Ld. Departmental Representative. Considering the facts of the assessee’s case and the arguments of both the sides, we do not find any justification for 1% disallowance on adhoc basis out of the travelling expenditure incurred by the assessee. We, therefore, hold that the C.I.T.(A) was justified in deleting such disallowance. Accordingly, the order of the C.I.T.(A) on this point is sustained and ground No. 3 of the revenue’s appeal is rejected.

23. Brief facts relating to the Ground No. 4 are that the assessee-company has claimed entertainment expenses to the tune of Rs. 1,50,19,648/- which was considered by the assessee for working out the disallowance under Section 37(2) in the computation of income. The disallowance worked out by the assessee stood at Rs. 75,04,824/-. The A.O. has observed that the assessee-company has made payment to club amounting to Rs. 2,18,12,229/- out of which Rs. 33,68,772/- represents payment made to clubs for different purposes. The A.O. has thereafter on the scrutiny of accounts has found that the payment has been made in connection with entertainment against which the assessee claimed that the same were incurred during various business conferences and meetings held in the clubs. The A.O. has further observed that the details of workmen and staff welfare expenditure of Rs. 22.04 crores reveals that same includes Rs. 4.06 crores as expenses towards lunch and refreshment, for which the assessee has claimed that the same has been incurred against canteen expenses relating to workmen and staff. The A.O. has however observed that since no documentary evidence in support of the claim has been filed and the possibility of outsiders being entertained with lunch/ refreshment could not be ruled out. He has disallowed 25% of such expenditure i.e. Rs. 1,01,50,000/-. On the same analogy, he has also disallowed 25% of the entertainment expenditure of Rs. 1,50,19,648/- and of Rs. 33,68,772/- being payment made to clubs and thereby making total disallowance under Section 37(2) at Rs. 1,42,64,210/- against disallowance offered by the assessee at Rs. 75,04,824/- and thereby making a further disallowance of Rs. 67,59,386/-.

24. In appeal, the ld. CIT(A) has deleted the addition following the order of his predecessor for the assessment year 1994-95. In appeal before us the ld. Departmental representative for the Revenue has assailed such order of ld. CIT(A) and has contended that the ld. CIT(A) while deleting the addition has not taken into consideration the observation of A.O. and has deleted the same only by relying on the decision of his predecessor for the assessment year 1994-95, which was influenced by the special audit report. It has been contended by the ld. D.R. that since the assessee had not discharged its onus to justify the working out of disallowance under Section 37(2) by placing relevant evidence on record, the action of A.O. in making a further disallowance was correct and the same was made after duly appreciating the evidence, facts and circumstances of the case. She has once again relied on the same decision as relied by her while arguing Ground No. 3 above.

25. In his rival submission, the ld. counsel for the assessee has heavily defended the order of the ld. CIT(A) and has contended that all the details were provided to the A.O. and the assessee after taking into consideration all the facts and evidence on record has itself disallowed a sum of Rs. 75,04,824/- and, therefore, a further disallowance of Rs. 67,59,386/- by the A.O. on ad hoc and presumptive basis was not at all correct and was rightly deleted by the ld. CIT(A) following the order of his predecessor for the assessment year 1994-95 as the facts and circumstances of assessment year 1994-95 were exact and similar to the facts of the case during the year under consideration and, therefore, it has been contended that the order of ld. CIT(A) be upheld.

26. We have given our careful consideration to the rival submissions made before us and have perused the orders of tax authorities. We have also considered the paper book filed by the ld. counsel for the assessee and the case laws relied upon. The A.O. in this case has made a further disallowance of Rs. 67,59,386/- over and above disallowance made by assessee at Rs. 75,04,824/-. The disallowance by the assessee has been made by taking into consideration the entertainment expenditure of Rs. 1,50,19,648/- whereas the A.O. has further considered the 25% on the amount spent by the assessee company towards payment to clubs at Rs. 33.69 lakhs and 25% of lunch expenditure at Rs. 1,01,50,000/- as entertainment expenditure for the purpose of disallowance under Section 37(2).

26.1. The A.O. while disallowing 25% of expenditure incurred towards lunch and refreshment has given a specific observation that the assessee has not been able to submit evidence in support of his contention that these were exclusively used by the employee and other staff of the assessee-company. The A.O. has given similar observation in case of expenditure incurred towards club payment. Since the assessee has not been able to submit any details or evidence in support of its contention that these expenditures were wholly and exclusively incurred for the employees and staff of the assessee-company and possibility of outsiders being entertained with lunch/ refreshment and at Club cannot be ruled out, in our considered opinion, some disallowance is called for. The A.O. has worked out such disallowance at 25 % of payment to clubs and expenditure for lunch and refreshment, which is in our opinion on higher side, In our considered opinion, disallowance of 10% in case of each of the expenditure will meet the end of justice. We, therefore, direct the A.O. to disallow only 10% of expenditure incurred for lunch/ refreshment and for payment of club and then work out the disallowance under Section 37(2). We hold and direct accordingly and accept the Ground No. 4 raised by the Revenue for statistical purposes.

27. Now we take up the Ground No. 5 raised by the Revenue. Brief facts are that the A.O. while computing the total income observed that the payment to clubs by the assessee-company includes the expenditure of Rs. 1,45,48,331/- for sponsorship, prize money, etc., which are not incidental to the business and has accordingly disallowed the same. In appeal, the ld. CIT(A) has deleted the addition following the earlier appellate order for the assessment year 1994-95.

28. In appeal before us, the ld. Departmental Representative for the Revenue has relied heavily on the order of A.O.

29. In his rival submission, the ld. counsel for the assessee has relied heavily on the order of ld. CIT(A) and has further submitted that the details in regard to sponsorship expenditure were submitted before the A.O. and the A.O. without discussing the same has disallowed such expenditures in a casual manner. It has been submitted by the ld. counsel that these expenditure are being incurred on account of sponsorship of games mainly hoardings displayed at the time of games, capitation fees to various sponsors and prize money etc. The ld. counsel has submitted that the A.O. has made the disallowance on mere suspicion and conjecture and without discussing the nature of expenditure incurred by the assessee. It has been submitted that the advertisements through sponsorship of events are incidental to the business of assessee to promote its product and create public awareness for the product of the company and, therefore, these expenditures are incidental to the business and have been incurred to promote the product of the company and, therefore, are allowable expenditure. In support of his contention, ld. counsel has relied on the following case laws:

(1) CIT v. Delhi Cloth & General Mills Co. 240 ITR page 9 (Delhi) (2) ACIT v. Hindusthan Marketing & Advertising Co. Ltd. 49 TTJ 96 (3) G.D. Pharmaceuticals Ltd. v. DCIT 61 ITD 275 (ITAT, Cal.).

It has, therefore, been prayed that the advertisement expenses incurred in connection with sponsorship of events are allowable as revenue expenditure and, therefore, the order of ld. CIT(A) in this regard should be upheld.

30. We have given our careful consideration to the rival submissions made before us and have penised the orders of tax authorities. We have also considered the paper book filed by the ld. counsel for the assessee and the case laws relied upon. In this case, the A.O. has disallowed the expenditure observing that these are not incidental to the business of the assessee. However, there is no discussion about the nature of expenditure by the A.O., whereas the assessee has submitted details in respect of expenditure incurred by it for sponsorship of events. Now-a-days it is common to sponsor some sports or events to advertise the products of the company or the company’s corporate image itself. It is not in dispute that the assessee had also incurred the expenditure by sponsorship of events/sports for the purpose of advertising its product/corporate image. Such expenditure is the revenue expenditure incurred for the purpose of business. The A.O. has not given any cogent reason for disallowing such expenditure. Hon’ble Delhi High Court in the case of Delhi Cloth & General Mills Co. (supra) has upheld the order of the Tribunal allowing the expenditure on Football tournament incurred by the assessee. No contrary decision is referred to by the Revenue. In view of the above, considering the facts of the case and the arguments of both the sides, in your opinion, the C.I.T.(A) has rightly deleted the disallowance of expenditure on sponsorship of the events made by the A.O. We uphold the order of the C.IT.(A) in this regard and reject ground No. 5 of the Revenue appeal.

31. Brief facts relating to Ground No. 6 are that the assessee-company has claimed a sum of Rs. 1.33 crores as sales promotion expenses included under the head “advertisement expenditure”. On being asked, the assessee submitted that the expenditure was incurred in connection with sponsorship on various events in order to promote its different cigarette brands. However, the A.O. has observed that the assessee failed to offer satisfactory explanation along with documentary evidence as to how the different promotional expenses were fully incidental to the genuine business needs of the assessee. He has thereafter inferred that atleast 10% of the expenditure incurred by the assessee should be considered for not being incidental to the assessee’s genuine business needs and has accordingly disallowed a sum of Rs. 13,30,000/-.

32. In appeal, the ld. CIT(A) has followed the decision of his predecessor for the assessment year 1994-95 and has deleted the addition.

33. In appeal before us, the ld. Departmental Representative for the Revenue has submitted that the assessee in this case has not been able to place on record necessity of such expenditure and, therefore, in these circumstances, the A.O. was very reasonable in disallowing 10% of such expenditure, which should have been upheld by the ld. CIT(A). The ld. D.R. has once again reiterated her submission that the decision of this Tribunal in upholding the deletion made by the ld. CIT(A) in case of 1994-95 cannot be relied in the year under consideration as the decision of 1994-95 of this Tribunal was basically rendered considering the fact that special audit was conducted in that year, wherein no special audit has been made for the year under consideration. The ld. D.R. in support of her contention has relied on the same decisions relied by her while making Ground No. 3 above.

34. In his rival submission, ld. Senior counsel Shri R.N. Bajoria has defended the order of ld. CIT(A) and has submitted that the action of A.O. in disallowing 10% of such expenditure is totally irrational, illogical and is based on presumption. It has been argued by Shri Bajoria that since the A.O. has himself accepted that 90% of such expenditure was genuine, the action of A.O. in doubting and disallowing 10% of expenditure is totally unwarranted and is based on misappreciation of the facts involved in this case. He has further contended that in all past years, such expenditures have been allowed and this is not a case of Revenue that the expenditure incurred by the assessee has benefited to a third party other than the business needs of the assessee and, therefore, in the circumstances, the action of ld. CIT(A) in deleting the addition by following the order of his predecessor for the assessment year 1994-95 is liable to be upheld.

35. We have given our careful consideration to the rival submissions made before us and have perused the orders of tax authorities. We have also considered the paper book filed by the ld. Sr. counsel for the assessee and the case laws relied upon. In this case, the A.O. has made the addition on the basis of presumption that atleast 10% of such expenditure must have been incurred other than business needs of the assessee. However, while disallowing 10% of expenditure, the A.O. has not brought any material evidence on record to justify the disallowance that such expenditure has resulted benefit to a third party or has not been made by the assessee for its genuine business needs. The assessee has submitted the details of expenditure relating to sponsorship for organizing various events for the promotion of different brands of cigarettes manufactured by it. We also find that the assessee has showed the expenditure of Rs. 172.60 crores on account of advertisement expenses which includes Rs. 133 lakhs as sales promotion expenses as evident from the details of advertisement expenses available at page 62 of the paper book. We find that the assessee-company has made an expenditure on the sponsorship of various events like golf, polo, football, cricket, racing, badminton, etc. for the purpose of advertisement of its product. We have also noted down the fact that the Department has not disputed the identical expenditures in any of the previous year and the auditors have also not pointed out that any such expenses was not related or incidental to the business needs of the assessee and, therefore, in our considered opinion, the action of A.O. in disallowing 10% of such expenditures without bringing any material evidence on record was not justified and the ld. CIT(A) has rightly deleted the addition. We, therefore, uphold the order of ld. CIT(A) in this regard and reject the ground raised by the Revenue.

36. Brief facts relating to ground Nos. 7 and 9 by the revenue are that the assessee has incurred an expenditure of Rs. 12.32 crores on account of repairs to buildings, Rs. 17.29 crores on repairs to machinery and Rs. 13.37 crores on account of repairs to others. The A.O. from the perusal of details of such expenditures has observed that the repairs to buildings include expenditure of Rs. 1.28 crores for repairs to Company flats, whereas repairs to others include expenditure of Rs. 2.43 crores making a total expenditure for repairs to Rs. 3.71 crores. The A.O. has further noticed that these Company flats are exclusively used by the Directors and the higher executives of the assessee-company as their residence and, therefore, personal element in the expenditure incurred in connection with residential flats could not be ruled out and has accordingly disallowed l/4th of such claim amounting to Rs. 92,75,000/-.

37. The A.O. has further observed that machinery repairs expenditure include charges of Rs. 55 lakhs for reinstallation of Loga machine at the Bangalore factory, which was brought from Saharanpore factory of the assessee. The A.O. has treated such expenditure in connection with installation of machinery as capital expenditure in view of the decision of the Hon’ble Supreme Court in the case of Sitalpur Sugar Works Ltd. reported in 49 ITR 160 and the decision of the Hon’ble Mumbai High Court in the case of Otis Elevators India Ltd. reported in 51 ITR 443. He has accordingly made the disallowance.

38. In appeal, the ld. CIT(A) has deleted the addition following the decision of his predecessor for the assessment year 1994-95 in the case of disallowance of Rs. 92,75,000/- and has also deleted the addition of Rs. 55,00,000/- for re-installation of the machinery holding that re-installation of the machinery cannot be held as capital expenditure. The ld. CIT(A) has observed that the decision of Sitalpur Sugar Works Ltd. relied by the A.O. is not applicable in the present case as the above decision relating to shifting of the entire factory from one place to another, whereas in the present case, the existing machine has been transferred from one factory to another for its efficient utilization.

39. The Revenue is aggrieved with such order of ld. CIT(A) and has now come in appeal before us by raising Grounds No. 7 and 9 of its appeal.

40. In appeal before us, the ld. Departmental Representative for the Revenue has relied on the order of A.O. and has made the same submission that the decision of the ld. CIT(A) and the ITAT on the same issue for the assessment year 1994-95 cannot be relied upon as the decision was rendered by taking into consideration the special audit.

41. In his rival submission, the ld. counsel for the assessee has relied heavily on the order of ld. CIT(A). It has been contended by Shri Bajoria that so far as the disallowance of Rs. 92,75,000/- is concerned, such disallowance was rightly deleted by the ld. CIT(A) as the repairs of company flats used for Directors and Senior Executives is a common feature and even otherwise any expenditure on such company flats resulting into benefit to the executives are considered in the hands of executives while determining the value of perquisites and in these circumstances, the action of A./O. was not correct and the ld. CIT(A) was justified in deleting such addition.

42. Shri Bajoria has also defended the order of ld. CIT(A) in deleting the addition of Rs. 55,00,000/- and has pointed out that the service charges paid to the French Co., who had supplied the machines, is not meant for shifting of entire factory and, therefore, the decision of Sitalpur Sugar by the Hon’ble Supreme Court was not applicable as rightly held by the ld. CIT(A) while deleting the addition. It has, therefore, been submitted by Shri Bajoria that the order of ld. CIT(A) was correct in holding that re-installation of plant and machinery could not be held as capital expenditure and such order of ld. CIT(A) is liable to be upheld.

43. We have given our careful consideration to the rival submissions made before us and have perused the orders of tax authorities. We have also considered the paper book filed by the ld. counsel for the assessee and the case laws relied upon. So far as the disallowance of Rs. 92,75,000/- is concerned, the A.O. in this case has accepted the repair expenditures to the extent of 75 % incurred by the assessee on the flats of Company and disallowed 25% of such expenditure observing that personal element in the expenditure incurred in connection with residential flats cannot be ruled out. The flats were owned by the assessee-company and were utilised by the Directors or employees of the assessee company for their residence. The expenditure incurred on the maintenance of the assets (flats) owned by the assessee-company cannot be said to be the personal expenditure merely because these assets have been utilised by the Directors/ Senior Executives for their residence. When a residential accommodation is provided to the Directors/Executives of a company, the expenditure incurred thereon would be an allowable expenditure in the hands of that company. It would be perquisite in the hands of the Directors/Executives. The assessee is a company and any benefit and facility provided to the Directors/Executives even for their personal benefit cannot be said to be personal expenditure of the assessee-company because the company and the employees are two different entities. Such facility, benefit or amenities would be perquisites in the hands of the employees. But so far as the company is concerned, it would be allowable as business expenditure because those facilities or benefits have been provided to the employees to retain their services for the purpose of business of the company. Furthermore, providing such facility to the employees is necessary to attract/retain the skilled and experienced human resources. In view of above, we are of the opinion that C.I.T.(A) was justified in deleting the disallowance of Rs. 92,75,000/- made by the A.O.

44. Coming to the disallowance of expenditure of Rs. 55,00,000/- for re-installation of a loga machine, we find that such re-installation expenditures were incurred in connection with shifting of machinery from Saharanpur and installing the same at Bangalore unit of the assessee. The A.O. has disallowed such shifting and re-installation expenses of such machinery treating the same as capital expenditure and by relying on the decision of the Hon’ble Supreme Court in the case of Sitalpur Sugar Works Ltd. (supra). However, the ratio of decision of the Hon’ble Supreme Court in the case of Sitalpur Sugar Works Ltd. (supra) are not applicable to the facts of the present case as in the case of Sitalpur Sugar Works Ltd., the expenditures were incurred for shifting of entire factory. Whereas in the present case, the machinery from Saharanpur have been shifted to Bangalore unit and substituting is made for efficient utilization of the machinery apart from the fact that shifting of such machinery from one unit to another for its efficient use has not resulted into any addition in the assets of the assessee-company and, therefore, in our considered opinion, such expenditure cannot be treated as capital expenditure and in these circumstances, the ld. CIT(A) has rightly deleted the addition. Accordingly, we uphold the order of ld. CIT(A) on this ground and reject the Ground Nos. 7 and 9 raised by the Revenue.

45. Brief facts relating to the Ground No. 8 by the Revenue are that the assessee-Company has created a provision of Rs. 2,37,67,318/- on account of damaged and destroyed stock of cigarettes and debited the same to the Profit & Loss A/c. On being asked, it was submitted by the assessee before the A.O. that it is a policy of the Company to destroy the damaged cigarettes from time to time after all formalities for getting approval in connection therewith are completed. Sometimes necessary approvals are not formerly obtained at the end of the year and as a result thereof and in order to keep conformity with the principle of mercantile system of accounting, a provision is created for the unapproved portion of the damaged cigarettes which is reversed at the beginning of the next financial year and subsequently throughout the year, all approved damaged stocks are written off. It was pointed out that even in the immediately preceding financial year, a provision of Rs. 60,61,952/- was created for damaged stock and the same was reversed at the beginning of the financial year. The A.O., however, not convinced with the explanation by the assessee, has not allowed such provision and after giving credits of Rs. 60,61,952/-, which was created by the assessee during the year under consideration, has disallowed a sum of Rs. 1,77,05,366/- under this head. In appeal, the ld. CIT(A) has deleted the addition holding that the necessary provision was made in the books in accordance with the mercantile system of accounting and, therefore, the addition is uncalled for. The Revenue is aggrieved with such order of ld. CIT(A) and has now come in appeal before us.

46. In appeal before us, the ld. Departmental Representative for the Revenue has assailed such order of ld. CIT(A) and has contended that the provision made by the assessee-Company is absolutely contingent in nature as not ascertainable, which is evident from the fact that the assessee is itself reversing the entry on the very first day of the next financial year. It has been contended by the ld. D.R. for the Revenue that the entry made by the assessee on account of such provision is certainly a case of deviation/ departure from the established accounting principles and such claim of the assessee is based merely on book entry and, therefore, the provision on account of damaged stock cannot be allowed. In support of her argument, she has relied on the decision of the Hon’ble Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT 116 ITR Page-1.

47. In his rival submission, the ld. senior counsel for the assessee, Shri R.N. Bajoria has relied heavily on the decision of the ld. CIT(A) and has pointed out that the identical issue arose before Tribunal in assessee’s own case for the assessment years 1988-89 and 1989-90 in I.T.A. Nos. 3485 & 3486/Cal./1992, order dated 12.05.2000, wherein this Tribunal vide para-10 of the order held that when the assessee is following mercantile system of accounting, then the assessee is entitled for liability accrued towards giving the credit to the dealers for such damaged cigarettes. It has been submitted by Shri Bajoria that this is not a case of Revenue that the assessee is either claiming double deduction or of such provision made by the assessee has resulted into any diversion of tax to the immediately following year. It has been submitted that the assessee is following such system of making provision since long and, therefore, the action of A.O. in making disallowance without considering the merit of the provision by the assessee was highly unjustified and in these circumstances, the ld. CIT(A) was correct in reversing such action of A.O. It has, therefore, been pleaded that the order of ld. CIT(A) be upheld.

48. We have given our careful consideration to the rival submissions made before us and have perused the orders of tax authorities. We have also considered the paper book filed by the ld. senior counsel for the assessee and the case law relied upon. From the perusal of material available on record, it appears that the A.O. has disallowed the claim of the assessee on the basis of cash system of accounting, but the assessee is claiming the same on mercantile system of accounting. In this case, there is no dispute regarding the value of damaged cigarettes and the actual dispute is regarding the year in which it has to allowed, the Department has basically deferred the assessee’s claim for deduction in respect to the credit to be given to the dealers on return of damaged stocks by one year, whereas the assessee has claimed the same in the year in which it was sold. We have noted down the fact that it is an undisputed fact that the assessee consistently follows the mercantile system of accounting and, therefore, it has the liability towards giving the credit to the dealers for damaged cigarettes and such liability of the assessee cannot be held as contingent liability. We have also taken into consideration the fact that such provision for damaged stocks has been made by the assessee considering the quantum of sales made by it to the dealers and, therefore, the action of assessee in making provisions for such damaged stocks on the basis of its past experience cannot be held either bogus or contingent in nature keeping in view the fact that the assessee has not made double claim in cases of damaged stocks as evident from the accounting entry passed by it by reversing such provision in the immediately following year.

49. Coming to the case law relied by the ld. D.R. for the Revenue in the case of Sutlej Cotton Mills Ltd. (supra), wherein the Hon’ble Supreme Court has held as under:

It is now well settled that the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee may, by making entries which are not in conformity with the proper principles of accountancy, conceal profit or show loss and the entries made by him cannot, therefore, be regarded as conclusive one way or the other. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted ion profit or loss to the assessee.

Considering the facts involved in the present case, the above ratio laid down by the Hon’ble Apex Court rather supports the claim of the assessee as the assessee is following such system of making provision since long and the value and quantity claimed by the assessee has also not been proved as false by the revenue except deferring such claim by one year and since in the present case, the assessee has not concealed any particulars regarding such damaged stocks and such provision has been made at the end of year which is based on the expected damaged stocks on the sales made by it during the year under consideration. Such action of assessee cannot be held either bogus or illegal in nature keeping in view the fact that the assessee itself reversed such entry in the immediately following year and avails the deduction only which is being claimed by the dealers.

50. We also find that in identical conditions, this Tribunal in assessee’s own case for the assessment year 1988-89 and 1989-90 in I.T.A. Nos. 3485 & 3486/Cal./1992 (supra) at para 10 held as under:

We are fully satisfied that when the assessee is following the mercantile system of accounting then the assessee is entitled for the liability accrued towards giving the credit to the dealers for such damaged cigarettes. Such provision of credit liability is duly reflected in Profit & Loss Account which were also audited. Therefore, we set aside the orders of the authorities below and allow the claim of the assessee with respect to the provisions made for the said sum during the assessment years under consideration.

We, therefore, considering the facts and circumstances involved in the case and in the light of above discussion and respectfully following the earlier order of this Tribunal in assessee’s own case, do not see any reason to interfere with the order of ld. CTT(A) in reversing the action of A.O. and, therefore, uphold the same and reject the Ground No. 8 raised by the Revenue.

51. Ground No. 10 raised by the Revenue relates to disallowance of contribution to Provident Fund/ Pension Fund amounting to Rs. 74,06,687/- made by the A.O. observing that such amounts were paid beyond the due date as prescribed in relevant act and, therefore, contribution is to be disallowed in view of the Section 2(24)(x) read with Section 36(1)(va) of the Act. The ld. CIT(A) in appeal has deleted such addition observing that the amounts were paid within the due dates as evident from the audit report and, therefore, the disallowance made by the A.O. was uncalled for.

52. In appeal, the ld. Departmental Representative for the Revenue has assailed the order of ld. CIT(A) and has submitted that the auditors of the assessee have themselves certified that the amounts debited to the Profit & Loss A/c. in connection with provision for P.F./Pension fund were unpaid till 31.03.1997 and were only paid on or before 30.09. 1997. It has been contended by the ld. D.R. that so far as the employees’ contribution to P.F. is concerned, due date for payments with the appropriate authority has to be read as mentioned in Section 36(1)(va) and not as per Section 43B. She has pleaded that employer’s contribution are also to be paid on or before the due date prescribed in P.F./Pension Act and if the assessee fails to pay the same before the due date as prescribed in this Act, the same will be disallowed as held by the Hon’ble Madras High Court in a recent judgment in the case of CIT v. Synergy Financial Exchange Ltd. reported in 288 ITR 366.

53. In his rival submission, the ld. senior counsel Shri R.N. Bajoria has relied heavily on the order of ld. CIT(A) and has drawn attention to this Bench on the details of payment of Provident/Pension Fund, Gratuity Fund and ESI, which are available at page 93 of the paper book and has pointed out that none of the payment were made beyond the due date (including grace period) as prescribed in those Act and, therefore, there was no question of any disallowance either under Section 43B(b) or under Section 36(1)(va) read with Section 2(24)(10) of the Act. However, he was unable to state that whether such details of payments, which are available at page 93 of the paper book, were produced before the A.O. for verification or not.

54. We have heard both the parties and have taken into consideration the orders of tax authorities. We have also considered the paper book filed by the ld. senior counsel for the assessee. So far as the employer’s contribution towards P.F./Pension fund are concerned, these are being dealt under Clause (b) of Section 43B which reads as under:

43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of

(b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees.

 The assessment year in question before us is 1997-98 during which the second proviso to Section 43B during the relevant period read as under:

Provided further that no deduction shall, in respect of any sum referred to in Clause (b), be allowed unless such sum has actually been paid in cash or by issue of a cheque or draft or by any other mode on or before the due date as defined in the Explanation below Clause (va) of Sub-section (I) of Section 36, and where such payment has been made otherwise than in cash, the sum has been realized within fifteen days from the due date.

The above second proviso has been omitted by the Finance Act, 2003 with effect from 1.04.2004 and the Special Bench, Chennai in the case of Kwality Food Products reported in 100 ITD 198 has held that such amendment by the Finance Act, 2003 is retrospective in nature. However, the Hon’ble Chennai High Court in the case of CIT v. Synergy Financial Exchange Ltd. (supra) has held that deletion of second proviso would not have any retrospective effect. Hon’ble Gauhati High Court in case of George William Sons reported in 284 ITR 619 has held that such amendment to second proviso to Section 43B is retrospective in nature and therefore this will be applicable to earlier year also. Since there are two decisions one in favour of assessee and another against the assessee, in our considered opinion the view favourable to assessee should be taken as held by Hon’ble Supreme Court in case of CIT v. Vegetable Products Ltd. reported in 88 ITR 192. We therefore, respectfully following the same hold that employer’s contribution are to be allowed, if paid, on or before the due date of filing of return as prescribed in the Income Tax Act.

55. Coming to the employees’ contribution, we find that it is governed by Section 2(24)(x) read with Section 36(1)(va) and not by Section 43B of the I.T. Act. By virtue of Section 2(24)(x), which reads as under, the employees’ contribution shall be included in the total income of the assessee:

2(24) “income” includes–

(x) any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees’ State Insurance Act, 1948 (34 of 1948), or any other fund for the welfare of such employees;

As per Section 36(1)(va), the assessee will get the deduction for the payment of the employees’ contribution made on or before the due date. This section reads as under:

(va) any sum received by the assessee from any of his employees to which the provisions of sub-Clause (x) of Clause (24) of Section 2 apply, if such sum is credited by the assessee to the employee’s account in the relevant fund or funds on or before the due date.

Explanation.–For the purposes of this clause, “due date” means the date by which the assessee is required as an employer to credit an employee’s contribution to the employee’s account in the relevant fund under any Act, rule, order or notification issued thereunder or under any standing order, award, contract of service or otherwise;

55.1. From the combined reading of Sections 2(24)(x) and 36(1)(va), the position emerges that any contribution made by the employees to any Provident Fund, Superannuation Fund, Employees’ State Insurance Fund or any other fund for the welfare of such employees received by the assessee from his employees shall be deemed to be income of the assessee of the relevant year. However, the assessee will get the deduction therefor Under Section 36(1)(va) only if he deposits the sum received from employees before the due date specified under the Act, Rule, Order or Notification governing the funds mentioned above. Thus the provision of Section 43B, which is applicable in respect of employer’s contribution, is quite different than the provision of Section 36(1)(va) which is applicable in respect of employees’ contribution. So far as the employer’s contribution is concerned, as per proviso to Section 43B, the deduction is permissible if the payment is made on or before the due date for filing of the return as specified under Section 139(1) of the I.T. Act. But in respect of the employees’ contribution, the deduction would be permissible only if the payment is made before the due date as provided in the respective Act, Rule, Order or Notification governing such fund, i.e. Provident Fund, Superannuation Fund, Employees’ State Insurance Fund or any other similar fund for the welfare of the employees. We may mention that the payment made within the grace period permissible under the Act, Rule, Order or Notification of the respective fund would be considered to be payment made within the due date as per Explanation to Section 36(1)(va). By providing the grace period, the competent authority governing the relevant fund permits the employers to make the deposits within such extended time as covered by grace period. Therefore, the payment made within the grace period would be considered to be payment made within due date under the respective Act, Rule, Order or Notification within the meaning of Explanation to Section 36(1)(va).

56. Coming to the facts of the present case, we find that it has been contended by the learned counsel that all the payments either in respect of employer’s contribution or in respect of employees’ contribution have been made on or before the due date including the grace period. However, it has been contended by the Ld. Departmental Representative that such details were not furnished before the A.O. and it would require verification at the end of the A.O. whether the payment was actually made within due date, as claimed by the assessee. After considering the arguments of both the sides, we deem it proper to restore the matter back to the file of the A.O. for verification of actual date of payment in this regard and thereafter recalculate the disallowance Under Section 43B/36(1)(va), if any, as per our observation above. Needless to mention that the A.O. will allow adequate opportunity of being heard to the assessee. Accordingly, ground No. 10 of the Revenue’s appeal is deemed to be allowed for statistical purposes.

57. Ground No. 11 by the Revenue relates to the deletion of addition of workmen and staff welfare expenses of Rs. 2.5 crores.

58. The assessee in this case has claimed the expenditure of Rs. 22.04 crores under the head “workmen and staff welfare expenses”. The A.O. while perusing the details observed that these claims included the following expenses:

  Sl. No. Nature of expenditure                                 Amount
1.      Fuel /soft coke for staff and mill workers          Rs. 30,00,000/-
2.      Management     staff     social/     sports         Rs. 1,55,00,000/-
        activities
3.      Workers' social and sports activities.              Rs. 41,00,000/-
4.      Cultural/ retiring gifts, long time service awards  Rs. 20,00,000/-
5.      School fees/ scholarship and educational tours.     Rs. 4,00,000/-

The A.O. has disallowed the above expenditures observing that the assessee has not been able to explain as to how these expenditures were incidental to the assessee’s genuine business needs. In appeal, such disallowance made by the A.O. was deleted by the ld. CIT(A) observing that these expenditures related to the genuine business needs of the assessee and the A.O. has not been able to bring any material evidence on record to show that the expenditures were either not actually incurred or these were not incurred in connection with the genuine business needs of the assessee. The ld. CIT(A) further observed that the identical disallowances were deleted by his predecessor for the assessment year 1994-95. The Revenue has disputed such deletion of addition by the ld. CIT(A) and has now come in appeal before us.

59. In appeal before us, the ld. Departmental Representative for the Revenue has assailed the order of ld. CIT(A) and has submitted that the assessee was not under any contract/ obligation to incur such expenditures for the employees. She has submitted that the expenditures on employees’ social/sports activities were not incidental to the assessee’s genuine business needs and, therefore, rightly disallowed by the A.O.

60. In his rival submission, the ld. senior counsel for the assessee Shri R.N. Bajoria has assailed the above submission of the ld. Departmental Representative for the Revenue and has pleaded that the agreement with the workers were duly filed before the A.O., a copy of which is also available at Annexure-19 of the paper book. It has been contended by the ld. counsel that the cultural/social activities by the employees, tour and traveling are incidental to every business to keep the morality of the workers high for achieving the targeted goals. It has been submitted that the books of accounts of the assessee are audited and there is no justification to make an ad hoc or lump sum disallowance without bringing any material facts on record. He has stated that all the expenses were incurred for the welfare of employees and for organizing the sports and cultural activities, which are meant for the purpose of maintaining a healthy and cordial relation with them. The ld. senior counsel has also relied on the latest decision of the Hon’ble Special Bench, Chandigarh in the case of Punjab State Industrial Development Corporation Ltd. v. DCIT reported in 102 ITD page-1, wherein it was held that when the expenditure has been incurred by the assessee purely on commercial consideration, the same has to be allowed. It has, therefore, been pleaded that the order of ld. CIT(A) be upheld.

61. We have given our careful consideration to the rival submissions made before us and have perused the orders of tax authorities. We have also considered the paper book filed by the ld. senior counsel for the assessee and the case laws relied upon. The assessee in this case has claimed these expenditures for organizing employees social and sports activities, cultural/retiring gifts, long time service awards, school fees/scholarship and educational tours expenses. The A.O. has disallowed these expenditures holding that same are not incidental to the business needs of the assessee. However, this is also not a case of revenue that the expenditures were either not incurred or if incurred then were incurred for other than business purpose or for acquiring any assets. From the details of such expenditures, it is evident that these expenditures were incurred for the purpose of maintaining healthy and cordial relationship with the staff and workers of the assessee-company, which in turn result in earning high profit and efficiency of the resources. The reimbursement of fuel/soft coke for staff and mill workers has also been made as per contractual agreement with the staff and hence, purely incidental to the business.

62. We, therefore, on the basis of aforesaid facts and documents placed on record, are of the opinion that such expenditures were necessary for commercial expediency and, therefore, are to be allowed as held by the Hon’ble Supreme Court in its landmark decision in the case of Shahzada Nand and Sons v. CIT reported in 108 ITR 358, which has been followed by the Hon’ble Special Bench, Chandigarh in the case of Punjab State Industrial Development Corporation Ltd. (supra), for the facility of reference the relevant portion of the Hon’ble Apex Court is reproduced as under:

Commercial expediency must be tested in the context of current socio-economic thinking-commercial expediency must be judged not in the light of the 19th century laissez faire doctrine which regarded man as an – economic being concerned only to protect and advance his self-interest but in the context of current socio-economic thinking which places the general interest of the community above the personal interest of the individual and believes that a business or undertaking is the product of the combined efforts of the employer and the employees and where there is sufficiently large profit, after providing for the salary or remuneration of the employer and the employees and other prior charges such as interest on capital, depreciation, reserves, etc. apart of it should in all fairness go to the employees We, therefore, considering the facts and circumstances and relying on the above discussion, are of the opinion that the expenditures incurred by the’ assessee were necessary for commercial expediency and hence were incidental to the business needs and in these circumstances, the ld. CIT(A) was justified in deleting the addition made by the A.O. We, therefore, uphold the order of ld. CIT(A) and reject the ground No. 11 raised by the Revenue.

63. Ground No. 12 raised by the Revenue relates to the disallowance of Rs. 7,67,40,000/- under the head “Miscellaneous Expenses”, which was comprised of the following:

  (a) Social responsibility (public relation)       Rs. 2,26,00,000/-
(b) Souvenir advertisement                        Rs. 5,00,000/-
(c) Garden expenses                               Rs. 52,00,000/-
(d) Residential expenses                          Rs. 28,90,000/-
(e) Sponsorship expenses                          Rs. 21,00,000/-
(f) Research and development                      Rs. 7,00,000/-.
(g) Tobacco Cultivation expenses                  Rs. 32,00,000/-
(h) Machine shifting expenses                     Rs. 41,00,000/-
(i) Salaries for Hotel Searock, Mumbai            Rs. 2,46,00,000/-
(j) Music CC TV Charges (Hotels)                  Rs. 10,00,000/-
(k) Guest Compensation charges                    Rs. 1,00,000/-
(1) Brokerage and commission                      Rs. 1,00,000/-
(m) Visitors expenses                             Rs. 16,00,000/-
(n) Sundries                                      Rs. 80,50,000/-

The A.O. has disallowed the above expenditure holding that either the above expenditures were not incidental to business or assessee did not produce any documents or evidences in support of the expenditures incurred by it. The A.O. in respect of the expenditures incurred as mentioned in A, B, C, E, J & M has observed that these expenditures are not related and incidental to the business of the assessee, whereas he has disallowed 10% of residential maintenance expenses on the ground that personal expenses cannot be ruled out. Regarding expenditures as mentioned in F, G, K, L & N, the A.O. has disallowed the expenditures observing that relevant evidences were not filed before him by the assessee. The A.O. has also disallowed the machine shifting expenses considering the same as capital expenditure and has also disallowed salaries paid for Hotel Searock, Mumbai observing that the same cannot be allowed as the said Hotel was not at all operational during the year under consideration.

64. In appeal, the ld. CIT(A) has deleted the addition observing that the A.O. has not made any effort to establish that either the expenses were not incurred or if incurred these were not related to genuine requirement of the business of the assessee and disallowances have been made on mere surmises and conjectures. The ld. CIT(A) has held that these expenses were incidental to the genuine needs of the assessee’s business and identical additions made in earlier years have been deleted by his predecessors. The CIT(A) thereafter following the ratio laid down by the Hon’ble Supreme Court in the case of Dhakeswari Cotton Mills Ltd. v. CIT reported in 26 ITR 775 has deleted the addition made by the A.O.

65. The Revenue is aggrieved with such order of ld. CIT(A) and has now come in appeal before us.

66. Smt. Pallavi Agarwal, ld. Departmental Representative for the Revenue has relied heavily on the observation of A.O. while disallowing the above expenditures. It has been contended by her that either the assessee did not furnish the details asked for by the A.O. or the claims made by the assessee were not allowable as these were not incidental to the genuine business needs of the assessee. It has been pleaded by the ld. D.R. that since the assessee has not produced relevant details asked by the A.O. and has also not been able to explain the necessity of such expenditure for its business, the A.O. in these circumstances, had no option but to make the above disallowances. It has, therefore, been pleaded by her that the order of A.O. be restored by setting aside the order of ld. CIT(A).

67. In his rival submission, Senior Advocate Shri R.N. Bajoria, ld. counsel for the assessee has relied heavily on the order of ld. CIT(A) and has pleaded that all these expenditures were incidental to the business of the assessee. He has submitted that the expenditures in respect of social responsibility were made for maintenance of traffic island, road-side railings etc. which enhances the goodwill of the Company and as such is an allowable expenditure. Arguing on advertisement expenses, the ld. senior counsel has submitted that the advertisements in souvenirs are allowable as revenue expenditure in view of the Circular No. 200 dated 28.06.1976 issued by the CBDT. Shri Bajoria has pointed out that the garden expenses were incurred for garden maintenance in the factory and office premises, which is purely business expenditure. Pleading for residential expenses, Shri Bajoria has stated that maintenance of residential complex at various units for providing security, electricity, water, repair & maintenance are purely incidental to the business and even otherwise, these expenses constitute perquisites in the hands of the employees and, therefore, no question arises in considering the same in the hands of the assessee. Shri Bajoria has then pleaded that the sponsorship expenses for organizing various social and cultural events to promote its product and for creating public awareness are allowable expenditure in view of the decision of the Hon’ble jurisdictional High Court in the case of G.D. Pharmaceuticals Ltd. (supra).

68. Shri Bajoria has thereafter submitted that the other expenditures also such as research & development expenses, tobacco cultivation expenses, machine shifting expenses, music CC TV charges provided in the Guest room in the Hotel, guest compensation, brokerage and commission and other miscellaneous expenditures are incidental to the business activity of the assessee and the A.O. should have allowed the same. Arguing on salaries for Hotel Searock, Shri Bajoria has submitted that the A.O. had disallowed such salaries paid to Hotel Searock’s staff without checking that the hotel was operating during the year under consideration and which is evident from the expenditure tax paid by the Hotel.

69. Concluding his argument, Shri Bajoria has submitted that the entire order of A.O. in making disallowance under this head is without referring to any evidence or any material evidence on record and the A.O. has made addition on the basis of pure guess and surmises which are not legally sustainable and, therefore, these have rightly been deleted by the ld. CIT(A). It has, therefore, been pleaded that the order of ld. CIT(A) be upheld.

70. We have considered the rival submissions of the parties and perused the material placed before us. As stated in para-63 above, the A.O. disallowed total sum of Rs. 7,67,40,000/- under the head “Miscellaneous Expenses”, which comprised of several expenses claimed by the assessee as business expenditure.

(a) Social responsibility (public relation) – Rs. 2,26,00,000/-:

70.1. The A.O. disallowed the expenditure alleging that the same was not incidental to the assessee’s business. It has been explained by the assessee’s learned counsel that to maintain the goodwill of the company, the assessee had incurred this expenditure for the maintenance of traffic island, road-side railings, public toilets etc. We find substantial force in the arguments of the learned counsel. Now-a-days it is a common incidence that the company sponsors and takes responsibility towards beautification of the city to maintain its corporate image which ultimately help the company to advertise its products. Such expenditure is of revenue nature incurred for the purpose of its business. By incurring expenditure on some social obligation, the assessee ultimately was able to advertise its products at public places and this type of expenditure has definitely relevance with the company’s business policy and incidental to the business to promote its product and create public awareness for the product of the company. The A.O. did not dispute the genuineness of expenditure incurred by the assessee. He has not given any cogent reason for disallowing this expenditure, except making general observation that it was not incidental to the assessee’s genuine business needs. It was also not the case of the A.O. that the assessee could not furnish relevant details/evidence in support of incurring such expenditure. In view of the above, considering the facts of the case and the arguments of both the sides, in our opinion, the C.I.T.(A) has rightly deleted the disallowance of expenditure on social responsibility made by the A.O. We, therefore, uphold the order of the C.I.T.(A) on this issue.

(b) Souvenir advertisement – Rs. 5,00,000/-

70.2. Here also the A.O. disallowed the expenditure holding that souvenir advertisements were basically donation in nature. In ground No. 6 of this Revenue’s appeal, the department agitated deletion of addition on account of advertisement expenses. For the detailed discussion made above in paragraph-31 to 35 of this order, we find no reason to interfere with the order of the C.I.T.(A) on this issue. Apart from that, we find by virtue of Circular No. 200 dated 28.6.1979 of C.B.D.T., the claim in respect of expenditure on advertisements in souvenirs is to be allowed if there is evidence that the expenditure has been actually incurred. The A.O. in this case did not raise any question about non-furnishing of evidence in support of the claim. The Hon’ble Bombay High Court in the case of Century Spg. & Mfg. Cp. Ltd. v. CIT 189 ITR 660 has held that the expenditure for advertisement in souvenir is not disallowable in view of CBDT Circular No. 200 dated 28.6.1979, which is binding on I.T. authorities in view of Section 119 of the Act. In view of the above, we hold that the addition made by the A.O. on this account was unwarranted and the C.I.T.(A) has rightly deleted the same.

(c) Garden expenses – Rs .52,00.000/-

70.3. The A.O. treated the expenditure as inadmissible as according to him the garden expenses have no connection with the assessee’s business. As explained by the assessee, garden expenses were incurred for maintenance of garden in the factory and office premises, which are purely business expenditure. It is a common factor that business houses and even small establishment put efforts to keep their working place attractive with a view to exhibit their image acceptable to their employees and public at large, which also helps the company to maintain its corporate image. For beautification of the business premises, gardening is the first choice. Therefore, it cannot be said that these expenses are not related to assessee’s business. In view of the above, we are of the opinion that the C.I.T.(A) has rightly deleted the addition in absence of any contrary material being brought on record by the A.O.

(d) Residential expenses – Rs. 28.90.000/-

70.4. The assessee incurred expenditure on security, water, sewage, electricity, etc. for its residential complex at various units. The A.O. on the ground that personal element in the expenditure cannot be ruled out disallowed on estimate 10% of the said expenditure which came to Rs. 2.89 crores. The residential complex owned by the assessee-company at its different units were utilised by its Directors or employees for their residence. The expenditure incurred on the security, water supply, electricity, etc. in connection with those accommodation cannot be said to be the personal expenditure merely because these residential accommodations have been used for personal need of the Director/employees of the assessee-company. It would be in that case perquisite in the hands of the Directors/Executives. The assessee is a company and any benefit and facility provided to the Directors/Executives even for their personal benefit cannot be said to be personal expenditure of the assessee-company because the company and the employees are two different entities. Such facility, benefit or amenities would be perquisites in the hands of the employees. But so far as the company is concerned, it would be allowable as business expenditure. Further, we have already dealt with similar issue raised in grounds No. 7 & 9 of this appeal in paragraphs-36 to 44 above and we have for the reasons stated therein deleted the partial disallowance of expenditure made by the A.O. In view of the above, we hold that the A.O. was not justified in making partial disallowance of 10% of the expenditure incurred on residential expenses and the C.I.T.(A) has thus rightly deleted such disallowance, which we uphold.

(e) Sponsorship expenses – Rs. 21,00,000/-

70.5. The assessee incurred expenditure and claimed deduction of Rs. 21 crores in connection with various social and cultural events organised by it to promote its product and for creating public awareness as allowable expenditure. The A.O. disallowed the same observing that the assessee failed to establish as to how this expenditure was genuinely incidental to its business needs. However, there is no discussion about the nature of expenditure by the A.O., whereas the assessee has submitted details in respect of the same. While adjudicating ground No. 5 in paragraphs 27 to 30 above, we have held that now-a days it is common to sponsor some sports or events to advertise the products of the company or the corporate image itself. Such expenditure is revenue in nature and hence allowable. This finding of ours gets support from the decisions of Hon’ble Delhi High Court in the case of Delhi Cloth & General Mills Co. (supra). In view of the above, in our opinion, the C.I.T.(A) has rightly deleted the disallowance of expenditure on sponsorship of social and cultural events. We, therefore, uphold his order on this issue.

(f) Research and development – Rs. 7,00,000/-

70.6. The A.O. found that the assessee claimed this expenditure to have been incurred in connection with research work at Bangalore and Rajahmundry. He disallowed the same holding that the assessee could not furnish evidence in support of the research work conducted by the assessee. We have heard the parties and perused the material placed before us. It is not disputed that the assessee-company was having research units at Bangalore and Rajahmundry where research and development work is carried out. The allegation of the A.O. that the assessee could not establish that research work was being carried out in those research centres, in our considered opinion, is vague. When it is not disputed that the assessee has been maintaining two research units in two different places, then the natural conclusion in the absence of any evidence to contrary should have been that work for which these units are run must have been carried out. Therefore, when the existence of the research units are not disputed, the expenditure incurred thereupon cannot be said to be inadmissible as non-business expenditure. In view of the above, we uphold the deletion of addition of Rs. 7,00,000/- and sustain the order of the C.I.T.(A) on this issue.

(g) Tobacco Cultivation expenses – Rs. 32,00,000/-

70.7. According to the assessee, this expenditure had been incurred by its leaf tobacco division for promotion of tobacco cultivation. The A.O. observed that the expenditure was in the nature of aid given to the local tobacco farmers. In absence of evidence regarding the help rendered, the A.O. disallowed the claim. According to the assessee, this expenditure was incidental to the business activity of the assessee and the A.O. should have allowed the same. From the observation of the A.O. it is evident that he did not dispute the expenses incurred but he disputed the nature of expenses as aid to the farmers. For manufacturing cigarettes the assessee required tobacco leaf. Therefore, if any expenditure is incurred for promotion of tobacco leaf cultivation by the farmers, the same was related to the assessee’s business of production of cigarettes. In view of the above, we are of the opinion that the C.I.T.(A) has rightly deleted the disallowance of Rs. 32 lakhs on this account, which we uphold.

(h) Machine shifting expenses – Rs. 41,00,000/-

70.8. The assessee incurred expenses of Rs. 41 lakhs for shifting of cigarette business machinery from one factory to another. It was explained by the assessee’s learned counsel that this represented the expenses of freight, insurance etc. incurred by the factories in connection with the movement of the idle machinery for their efficient utilisation and hence the same is allowable under the provisions of the I.T. Act. We have heard the parties and perused the material placed before us. The jurisdictional High Court in the case of CIT v. Karanpura Dev. Co. Ltd. 144 I.T.R. 538 has held that shifting of machinery from one factory premises to another factory premises did not result in any enduring benefit to the assessee and the expenditure cannot be treated as capital in nature. The assessee has also filed a copy of order of I.T.A.T., Kolkata Benches in the case of the assessee for assessment year 1991-92 in I.T.A. No. 157 (Cal)/1996, order dated 30.4.2001, which is placed at pages 49 to 67 of the paper book. In that order, the Tribunal on pages-13 & 14 (pages 61 to 63 of the P/B) after detailed discussions and deliberations upheld the order of the C.I.T.(A) in deleting the addition made on this account by the A.O. Facts and circumstances being identical, we respectfully following the decision of Hon’ble jurisdictional High Court in the case of Karanpura Dev. Co. Ltd. (supra) and the said order of the Tribunal do not find any reason to differ with the deletion of disallowance made by the C.I.T.(A) on this issue. We uphold the same.

(i) Salaries for Hotel Searlck, Mumbai – Rs. 2,46,00,000/-

70.9. During the year under appeal, the assessee incurred expenditure on salaries for Hotel Searock, Mumbai and claimed the same as deduction. The A.O. treated the said expenditure as inadmissible observing that the hotel suffered huge damages due to a bomb blast in earlier year. Repairs of this hotel were still in progress during the relevant accounting year and hence the said hotel was not at all operational, The learned counsel submitted that the A.O. disallowed the expenditure without checking with the assessee whether the hotel was operating: Referring to pages 100 to 110 of the paper book, the learned counsel submitted that these documents will prove that the hotel was operating and the hotel was also paying expenditure tax in respect of sales of this hotel. Therefore, the disallowance was unjustified. We have heard the parties and perused the material placed before us. The assessee’s accounts are audited. On page-100 of the paper book, the assessee has submitted the details of sales/income of the hotel for the year ended 31.3.1997, relevant to assessment year under appeal, which is duly certified by the Auditor. This page reflects the total sales/income of Rs. 11,94,142/-. Pages 101 to 103 of the paper book are copies of Return of Expenditure and statement of chargeable expenditure. Pages-104 to 110 show break-up of month-wise chargeable expenditure, expenditure tax collected and deposited to Govt. On perusal of these documents, it is clearly established that the assessee’s hotel at Mumbai was in running and in operational condition during the assessment year under appeal. Therefore, the A.O.’s observation that the hotel was under repair and non-operational during the year is not based on any evidence on record. In view of the above, we are of the opinion that the expenditure incurred by the assessee on salaries for Hotel Searock, Mumbai was genuine and hence allowable. We, therefore, uphold the order of the C.I.T.(A) in deleting such disallowance made by the A.O. We direct accordingly.

(j) Music CC TV Charges (Hotels) – Rs. l0,00,000/-

(k) Guest Compensation Charges – Rs. 1.00,000/-

70.10. The assessee claimed the said expenditure incurred in its running hotel business. The A.O. found the claim of the assessee to be non-incidental in nature and hence disallowed the same. The C.I.T.(A) allowed the claim of the assessee. The assessee’s learned counsel submitted that the A.O. mistakenly disallowed these expenses on the assumption that it is not incidental to the assessee’s business. The assessee is engaged in hotel business and such expenditure was incurred in hotel in the normal course. Music and colour T.V. are provided in all the rooms in the hotel and expenses were incurred for smooth operation of these electronic equipments. In regard to guest compensation charges, it was submitted that compensation to hotel guests is occasionally paid for routine issues like quality of food etc. It was further submitted that the above expenses were very small and an insignificant fraction of the turnover. Therefore, disallowances made by the A.O. were unjustified.

We have heard the rival contentions of the parties and perused the material placed before us. So far expenditure claimed under the head ‘Music CC TV Charges (Hotels)’ is concerned, providing of these articles in the rooms of the hotel, in our considered opinion, would be capital in nature. Therefore, the claim of the assessee for allowance of this expenditure as business expenditure cannot be accepted. We, therefore, reverse the order of the C.I.T.(A) and sustain the addition of Rs. 10,00,000/- in this regard. At the same time, however, we direct the A.O. to allow depreciation on such Music CC & TV as per law.

In regard to expenditure on guest compensation charges, we find substantial force, on the facts and in the circumstances of the case, in the submission of the assessee’s learned counsel. In view of the above, we do not find any reason to interfere with the order of the C.I.T.(A) on this issue. The deletion of addition of Rs. 1,00,000/- on this account is, therefore, upheld. We direct accordingly.

(l) Brokerage & Commission Rs. 1,00,000/-

(m) Visitors’ expenses – Rs. 16,00,000/-

70.11. The A.O. disallowed expenditure on brokerage & commission of Rs. l,00,000/-in absence of relevant confirmation. In regard to visitors’ expenses, the A.O. alleged that commercial expediency of this expenditure could not be established by the assessee. The learned counsel submitted that brokerage & commission cover brokerage paid to agents for obtaining houses for employees to be provided by the assessee. The visitors’ expenses cover expenses incurred in connection with visit of various VIPs to the assessee’s offices/units. It was also pointed out that expenditure on entertainment had already been offered for tax in pursuance of the Tax Audit Report and hence there cannot be double disallowance. It was further submitted that these expenses were routinely incurred at various offices/locations and the same being incidental to business is allowable expenditure. We find that during the year under appeal, the assessee had incurred expenditure of Rs. l lakh on payment of commission & brokerage for searching out accommodation for the employees to be provided by the assessee. Considering the smallness of the expenditure and the fact that providing accommodation to the employees by the assessee is not questioned, the related expenditure thereon cannot be disallowed. In view of the above, we uphold the order of the C.I.T.(A) on this issue in deleting the disallowance of Rs. 1,00,000/-. In regard to visitors’ expenses of Rs. 16 lakhs, the assessee being a big industrial house, being one of the highest tax payers in the State of West Bengal, is visited by several VIPs and other business personalities and as a matter of natural courtesy, the assessee has to incur some expenditure on those visitors to maintain its goodwill and reputation in the business field. This is related to its running of the business. The A.O. did not dispute incurring of the said expenditure. His only stand was that of lack of commercial expediency, which in our opinion is not correct. We, therefore, find no reason to uphold the said disallowance, which is deleted.

(n) Sundries – Rs. 80,50.000/-

70.12 The A.O. for want of verification of details duly supported by evidences disallowed to the extent of l/10th of the total expenditure claimed under this head of Rs. 8.05 crores, which came to Rs. 80,50,000/-, which was deleted by the C.I.T.(A). The assessee’s learned counsel submitted similar expenditure has been allowed in past years by the C.I.T.(A) and also by the Tribunal in the assessee’s own case for assessment years 1988-89 and 1989-90. We find that the assessee has not been able to produce the bifurcation of such expenditure either before the revenue or even before us. In these circumstances, the C.I.T.(A) was not justified in deleting the addition entirely and hence some disallowance under this head is called for. Though the A.O. has made a disallowance of Rs. 80,50,000/-, i.e. 10% of total sundry expenses at Rs. 8.05 crores, but such disallowance is also on higher side considering the volume of turnover of the assessee. We, therefore, restrict the disallowance to 5% . The disallowance is thus sustained at Rs. 40,25,000/- and the assessee will get relief of Rs. 40,25,000/-. We direct accordingly.

71. Now we take up the Ground No. 13 raised by the Revenue. At the time of hearing, the Revenue has sought to modify the Ground No. 13 and has filed the modified ground of appeal which reads as under:

That on the facts and circumstances of the case the Hon’ble CIT(A) has erred in deleting addition by the Assessing Officer of Rs. 4.78 crores on account of advancing interest free loans to subsidiaries.

72. The ld. counsel for the assessee had no objection to the modification of Ground No. 13 by the assessee. Accordingly, we consider and take up modified Ground No. 13 for adjudication.

73. Brief facts relating to this ground are that the A.O. has disallowed the interest of Rs. 4,78,20,000/- by calculating notional interest at the rate of 18% per annum on loans to subsidiaries observing that interest free advances were made to the subsidiaries out of borrowed funds. In appeal before the ld. CIT(A), it was submitted by the assessee that the loans to the subsidiaries were given out of the assessee’s own fund and the A.O. has simply notionally disallowed interest on such loans on the ground that interest was also disallowed in earlier years. It was submitted before the ld. CIT(A) that the identical disallowance was deleted by this Tribunal in assessment years 1988-89 and 1989-90. The ld. CIT(A) after considering the submission of the assessee and following the decision of this Tribunal has deleted the addition made by the A.O.

74. In appeal before us, the ld. D.R. for the Revenue has assailed the order of ld. CIT(A) and has submitted that the ld. CIT(A) while deleting the addition has merely followed the earlier decision of this Tribunal for the assessment year 1988-89. It has been pleaded that the Tribunal while allowing relief to the assessee has basically observed that the onus was upon the Department to prove that the borrowed funds were utilised for advancing interest free loans to its subsidiaries. Ld. D.R. has stated that such observation of Tribunal does not hold good in view of the latest decision of the Hon’ble Punjab & Hariyana High Court in the case of CIT v. Abhishek Industries Ltd. reported in 286 ITR page 1 and the decision of the Third Member (Chennai Tribunal) in the case of Kumara Giri v. DCIT reported in 100 ITD page 57. It has, therefore, been submitted that the order of A .0. be restored.

75. In his rival submission, the ld. counsel for the assessee has heavily defended the order of ld. CIT(A) and has pointed out that the ld. CIT(A) has deleted the addition following the earlier decision of this Tribunal in assessee’s own case and such order of Tribunal was based on the various decisions of the Hon’ble Calcutta High Court. It has been pointed out by Shri Bajoria that the Hon’ble Calcutta High Court in a recent judgment in the case of CIT. v. Britannia Industries Ltd. reported in 280 ITR 525 has also decided the similar issue in favour of the assessee. Ld. counsel has pleaded that the assessee company has sufficient own fund to advance the same to its sister concern and has stated that the profit of the company during the year itself is in hundred crores where the loans to subsidiaries are even less than 50 crores.

76. It has also been stated by Shri Bajoria that the decision of the Hon’ble Punjab & Hariyana High Court in the case of Abhishek Industries Ltd. relied by the ld. D.R. does not hold good in case of the assessee, as the Hon’ble Punjah & Hariyana High Court in its order has disagreed with the decision of the Hon’ble Calcutta High Court in the case of Britannia Industries Ltd. It has been submitted that since the jurisdictional High Court has decided the case in favour of assessee and the facts and circumstances of the case are identical as were involved in the case of Britannia Industries Ltd. (supra), the order of the ld. CIT(A) in deleting the addition made by the A.O. should be upheld.

77. We have given our careful consideration to the rival submissions made before us and have perused the orders of tax authorities. In this case, the assessee-company has made following interest-free loans to its wholly subsidiary companies

(i) M/s. Sumit Investments Ltd. – Rs. 19.3 crores

(ii) M/s. Pinnacle Investments Ltd. Rs. 15.0 crores

(iii) M/s. Sage Investments Ltd. – Rs. 11.0 crores.

The A.O. has disallowed notional interest by calculating 18% per annum on such loans to subsidiaries observing that the borrowed funds were utilised to advance interest-free loans to the sister concern. The observation of A.O. is based on the facts that such advances were made out of cash credit account maintained by the Bank. The assessee has pleaded that it had sufficient own fund to make interest free loans to its subsidiaries and has also submitted that such advancement of interest-free loans to the subsidiaries is a regular feature in case of assessee-company and this Tribunal after considering the various judgments of the Hon’ble Calcuta High Court has decided the issue in favour of assessee.

78. The ld. Departmental Representative for the Revenue in support of his contention has relied on the judgment of the Hon’ble Punjab & Hariyana High Court in the case of Abhishek Industries Ltd. (supra) and the decision of the Hon’ble ITAT, Third Member Court in the case of Kumara Giri (supra). However, the decision of the Hon’ble Punjab & Hariyana High Court in the case of Abhishek Industries Ltd. (supra) is not applicable to the present case as while deciding the issue the Hon’ble Punjab & Hariyana High Court has disagreed with the decision of the Hon’ble jurisdictional High Court in the case of Britannia Industries Ltd., whereas the Hon’ble Calcutta High Court in almost identical facts in case of Britannia Industries Ltd. decided the issue in favour of assessee by holding as under:

From the above discussion, we find in relation to each assessment years involved in this appeal that the recipient of interest-free loan was not a firm of relatives; the advance was made for the purpose of business within the meaning of Section 36(1)(iii); that there was regular course of business between the assessee and the firm; and that the advances were made to MCAP in the regular course of business; such advances were made in the course of business for commercial expedience and for the purpose of business; the findings arrived at by the learned Tribunal were not perverse; the entire expenditure w4as made from the mixed account; therefore, there would a presumption that the amount was made out of the own fund of the assessee and not from the borrowed capital; that there were sufficient funds and that the advances were made from the mixed account. Therefore, the Commissioner (Appeals) and the learned Tribunal both were right in presuming that the advance was made out from the assessee ‘s own fund eligible for the benefit of Section 36(1)(iii).

79. Apart from the above judgment, we find that the Hon’ble Supreme Court in a recent judgment in the case of S.A! Builders Ltd. v. CIT reported in 288 ITR page 1 has held as under:

To consider whether one should allow deduction under Section 36(1)(iii) of interest paid by the assessee on amounts borrowed by it for advancing to a sister concern, the authorities and the courts should examine the purpose for which the assessee advanced the money and what the sister concern did with the money. That the borrowed amount is not utilized by the assessee in its own business but had been advanced as interest free loan to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits.

Once it is established that there was nexus between the expenditure and purpose of the business (which need not necessarily be the business of the assessee itself) the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman.

80. In the present case, admittedly advance were made to sister concern out of cash credit account with the Bank but the A.O. in this case has not made a case that these advances were not made in the course of business for commercial expediency and for the purpose of business whereas the assessee is making such interest free advance to its sister concern since long during the regular course of business. The assessee has also disclosed a profit of more than hundred crores, which justify the claim of the assessee to have made advance out of own fund and, therefore, the other case law relied by ld. D.R. in case of Kumaragiri Textiles Ltd. (supra) also does not support the action of A.O. as in that case, the assessee failed to establish that it had sufficient own fund to advance interest free loan to sister concern.

We, therefore, considering the facts and circumstances of the case, are of the opinion that the revenue in this case has failed to make a case that borrowed funds were utilised for advancing interest free loan to sister concern whereas the assessee company has duly exhibited as to the availability of own fund to enable it to make interest free advance to its sister concern during the course of its normal business. The facts of this case are identical to the facts of the case of Britannia Industries Ltd. (supra), which has been decided in favour of assessee by the Hon’ble jurisdictional High Court. We, therefore, do not see any reason to interfere with such order of ld. CIT(A) in deleting the addition and accordingly uphold the same and reject ground No. 13 of revenue.

81. The Revenue has modified the Ground No. 14 which reads as under:

On the facts and in the circumstances of the case, the ld. CAT {A) has erred in deleting the addition of Rs. 13,28,09,673/- made Under Section 40A(2)(a) of the Income Tax Act, 1961 without appreciating that Arms Length Principle had been violated in this transaction.

82. The ld. senior counsel for the assessee has not pressed any serious objection on such modified Ground No. 14 and after hearing both the parties such application for modification of Ground No. 14 is accepted.

83. Brief facts relating to this ground are that the assessee-company has made substantial purchases of tobacco from its fully owned subsidiaries viz. M/s. All India Tobacco Co. Ltd. (in short AITC) and M/s. Flan Lnterprises Ltd. (in short LFL). The assessee purchased tobacco of 87,07,939 kgs. valued at Rs. 60,20,23,738/- from M/s. AITC and tobacco of 29,62,211 kgs. valued at Rs. 20,41,64,531/- from ELL. The A.O. observed that purchases of tobacco from outside dealers during the month of April, 96 to March ,97 is as under:

  Month         Quantity (Kg.)    Value (Rs.)     Rate/Kg. (Rs.)
April, 1996   8,32,600          4,38,23,562/-   52.63
May,1996      16,60,600         8,47,74,205/-   51.05
June,1996     11,03,200         5,27,99,683/-   47.86
July,1996     8,01,000          10,17,13,309/-  126.98
Aug., 1996    2,71,800          1,69,73,082/-   62.45
Sept., 1996   47,145            28,11,473/-     59.63
Oct.,1996       -                   -             -
Nov., 1996      -                   -             -
Dec, 1996       -                   -             -
Jan., 1997      -                   -             -
Feb., 1997    2,14,080          1,51,98,760/-   71.00
March, 1997   6,87,008          6,02,20,358/-   87.66
              56,17,433         48,00,27,741/-

Whereas purchases from M/s. AITC during the month of September, 1996 and January, 1997 are as under:
  Month             Quantity (Kgs.)       Value(Rs.)      Rate/Kg.(Rs.)
September, 96     12,87,104/-           9,07,32,370/-   70.49
January, 1997     74,20,835             51,12,91,368/-  68.90

84. The A.O. observed that M/s. EEL had opening stock of raw material valued at Rs. 62.52 per kg. and noticed that the purchases from M/s. EEL were made in May, 1996 at Rs. 68.92 per kg. comparing to purchase from outsiders of such tobacco at Rs. 51.05 per kg. The A.O. has accordingly observed that the assessee-company has purchased tobacco from its subsidiaries at a higher rate than the prevailing rate in the market during the relevant period and has worked out the excess payment to its subsidiaries at Rs. 13,28,09,673/- and has disallowed the same by invoking the provision of Section 40A(2)(a) of the Act. In appeal, the ld. CIT(A) has deleted such addition following the decision of his predecessor in case of assessment year 1994-95 and has held that there is no tax evasion by the assessee-Company and there were bonafide transactions with the subsidiaries which do not attract the provisions of Section 40A(2).

85. In appeal before us, the ld. D.R. Shri Raja Ram Shah has assailed the order of ld. CIT(A) and has submitted that the facts of the present case are different than decided by the ld. CIT(A) in case of 1994-95 and upheld by the Hon’ble Tribunal. It has been submitted that the A.O. in earlier years has held such transactions with subsidiaries as sham transaction, whereas in the present case, the A.O. has not considered the transactions with subsidiaries as sham transaction but has disallowed the payment by invoking the provisions of Section 40A(2)(a). The ld. D.R. has further stated that in assessment year 1994-95, the assessee-Company had also made sales to its subsidiary Companies, whereas no sale to its subsidiaries has been made in this year by the assessee- company and, therefore, the facts of the present case are altogether different than the facts involved in case of assessment year 1994-95. The ld. D.R. has thereafter relied on the observation of A.O. while disallowing the payment made to subsidiaries and has contended that from the perusal of observation of A.O., it is evident that the assessee-company has paid excess amount on the purchases made from its subsidiaries. It has been stated that from the facts and figures mentioned by the A.O. in assessment order, it is apparent that the assessee-Company paid higher amount for the purchases of raw materials from its subsidiaries, whereas raw materials at cheaper rate were available with outsider sellers. The ld. D.R. has pointed out that since the A.O. in this case has established that excess payments were made by the assessee to its subsidiaries against purchase of material, it was the onus of the assessee to establish the reasonableness of such payment. Since the assessee failed to explain the reason for such excess payments to its subsidiaries, the A.O. has rightly made the disallowance. In support of his plea, the ld. D.R. has relied on the following decisions:

(i) Khan Carpets v. CIT 262 ITR 325 (Allahabad);

(ii) Nirma Industries Ltd. v. ACIT 95 ITD Page 199 (Ahmedabad-Special Bench)

86. In his rival submission, ld. senior counsel for the assessee Shri Bajoria has assailed the above submission of the ld. D.R. and has submitted that the assessee in this case has not made any attempt to furnish any inaccurate particulars before the A.O. and even the auditor in audit report has mentioned such transaction with subsidiaries. Shri Bajoria has submitted that the assessee-company purchases two types of tobaccos i.e. raw tobacco and old & matured tobacco. Raw tobaccos are generally purchased from outsiders through auction, whereas old and matured tobaccos are generally purchased from subsidiaries. It has been submitted that raw tobaccos purchased are first processed and are stored for at least six months to achieve best results. The assessee-company has to incur large holding cost in form of storage and interest charges for holding such tobaccos for six months. The ld. Sr. counsel submits that in another way, the cost of raw tobaccos becomes costlier after six months, since these become old and matured tobaccos. The ld. counsel has pleaded that these subsidiaries are holding the tobaccos for more than six months and the assessee-company has purchased matured tobaccos from its subsidiaries at the prevailing rate of such matured tobacco in the market.

87. The ld. senior counsel further submits that the ld. D.R. is not correct in defending the order of A.O. contending that the facts of the earlier year are not similar to the facts of the present case. He has submitted that in the assessment year 1991-92, gross profit margins of subsidiary companies were ranging from 2.5% to 4.47%, whereas in the year under consideration such margin is only nearly 1%. The ld. A.R. further submitted that the Revenue has not found any infirmity while completing the assessment of these subsidiaries. Concluding his argument, Shri Bajoria has submitted that since purchase from subsidiary company has been made in the interest of the assessee’s business, no disallowance under Section 40A(2)(b) was to be made and the ld. CIT(A) was correct in reversing such order of A.O.

88. Parties were heard and records were perused. Section 40A(2)(a) reads as under:

Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in Clause (b) of this sub-section, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.

89. A plain reading of provisions contained in Section 40A(2)(a) makes it clear that it would be applicable if the following conditions are satisfied:

(i) where the assessee incurs any expenditure;

(ii) the payment for such expenditure is to be made to any person referred to in Clause (b) of this sub-section;

(iii) the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facility for which the payment is made.

90. All the above conditions must be satisfied so as to apply the provisions of Section 40A(2)(a). So far as the facts of the case under consideration before us are that there is no dispute that the assessee has incurred the expenditure and the payment has been made to a person referred to in Clause (b). The only dispute is whether the payment for such expenditure is excessive or unreasonable having regard to the fair market value of the goods. In this regard, we agree with the submission of the ld. D.R. that whether the payment is excessive or unreasonable is to be examined in each year and merely because in the preceding year the addition was deleted by the ITAT would not be sufficient to delete the addition in subsequent year, because the payment may be reasonable in one year and it may be unreasonable or excessive in other year. But now the question remains whether in the year under consideration the A.O. had enough material to form the opinion that the payment made for the purchase of tobacco from sister concern is excessive or unreasonable having regard to the fair market value of such goods. As per the chart given by the A.O. himself at page 25 of the assessment order, which is also reproduced by us in our order, the purchase of tobacco from outside varies from Rs. 47.86 per kg. to Rs. 126.98 per kg. Thus there was huge variation in the rates of purchases of tobacco from outside dealers. The A.O. has not disputed or doubted the genuineness of the above rates of tobacco purchased from outside dealers. Thus it is an established fact accepted by the Revenue itself that the rates of tobacco vary considering the quality of the tobacco. It has been explained by the ld. counsel that the tobacco purchased from the sister concern is of better quality because sister concern after purchasing the tobacco process it and keeps it in the stock for a longer period so that it can mature. From the finding of the A.O. in page 26 of the assessment order, it is evident that the sister concern namely M/s. EEL had a opening stock of the tobacco of 40,12,938 kgs. valued at Rs. 25.09 crores. Thus the sister concern had carried the huge stock of the tobacco so that the same can mature. The tobacco has been sold to the assessee as per requirement of the assessee. The purchase of the tobacco from sister concern namely AITC was @ Rs. 70.49kgs. in September, 1996 and Rs. 68.90 per kg. in January, 1997. The highest rate of purchase from outside was in July, 1996 which was Rs. 126.98 per kg. Thus the purchase from the sister concern was at lower rate than the highest rate of purchase from outside. However, if we compare the purchase rate of the same month, i.e. September, 1996 in which purchase from outside was Rs. 59.63 per Kg. while it was Rs. 70.49 per kg. from sister concern. The purchase rate from sister concern is little higher than the purchase rate from outside. However, it has been explained by the ld. counsel that the purchase from the sister concern was of the matured tobacco which was kept in the stock for quite a long period by the sister concern. This fact has not been denied or rebutted by the Assessing Officer. On the other hand, in the case of other sister concern M/s. EEL, the A.O. himself has recorded the finding that the sister concern carried the huge stock of tobacco for quite a long period. The other purchase from the sister concern namely M/s. AITC was in January, 1997, which was @ Rs. 68.90 per kg. In January, 1997, there was no purchase from outside but the nearest purchase from outside was in February, 1997, which was at rate of Rs. 71/- per kg., which is higher than the purchase from sister concern. Similarly, the purchase from sister concern namely M/s. EEL was at the rate of Rs. 68.92 per kg. The A.O. himself has recorded the finding that M/s. EEL had brought forward the opening stock which was at the rate of 62.52 per kg. which was sold to the assessee at the rate of 68.92 per kg. The sister concern has incurred the expenditure by way of godown charges and interest, etc. in keeping huge stock of tobacco and, therefore, the gross margin of approximately 10% charged by the sister concern to meet the cost of expenditure for carrying of stock and also for the profit for the services rendered by them cannot be said to be excessive or unreasonable. In view of the above factual position, we are unable to agree with the Revenue that the A.O. had a sufficient material to form an opinion that the payment to the sister concern for purchase of tobacco was unreasonable or excessive having regard to the fair market value of tobacco. Accordingly we uphold the order of the ld. CIT(A) in this regard and reject the ground raised by the Revenue.

91. Now we take up Ground No. 15 raised by the Revenue. Ground, No. 15 raised by the Revenue is squarely covered in favour of assessee by the recent decision of the Hon’ble Supreme Court in the case of CIT v. Lakshmi Machine Works reported in 290 ITR 667, wherein your Lordship held as under:

The object of the Legislature in enacting Section 80HHC of the Act was to confer a benefit on profits accruing with reference to export turnover. Therefore, “turnover” was the requirement, commission, rent, interest, etc. did not involve any turnover. Therefore, 90 per cent of such commission, interest, etc. was excluded from the profits derived from the export. Therefore, even without the clarification such items did not form part of the formula in Section 80HHC(3) for the simple reason that they did not emanate from the “export turnover”, much less any turnover. Even if the assessee was an exclusive dealer in exports, the said commission was not includible as it did not spring from the “turnover”, just as interest, commission, etc. did not emanate from the “turnover”, so also excise duty and sales tax did not emanate from such turnover. Since excise duty and sale tax did not involve any such turnover, such taxes had to be excluded. Commission, interest, rent, etc. do yield profits, but they do not partake of the character of turnover and, therefore, they were not includible in the “total turnover”. The above discussion shows that income from rent, commission, etc. cannot be considered as part of business profits and, therefore, they cannot be held as part of the turnover also. In fact, in Civil Appeal No. 4409 of 2005, the above proposition has been accepted by the Assessing Officer, if so, then excise duty and sales tax also cannot form part of the “total turnover” under Section 80HHC(3), otherwise the formula becomes unworkable. In our view, sales tax and excise duty also do not have any element of “turnover”, which is the position even in the case of rent, commission, interest, etc. It is important to bear in mind that excise duty and sales tax are indirect taxes. They are recovered by the assessee on behalf of the Government. Therefore, if they are made relatable to exports, the formula under Section 80HHC would become unworkable.

Respectfully following the decision of the Hon’ble Supreme Court in the case of CIT. v. Lakshmi Machine Works (supra), we decide the issue in favour of assessee and against the Revenue and accordingly reject the ground No. 15 raised by the Revenue.

92. Ground No. 16 relates to deduction under Section 80HHD of the Act. Brief facts relating to this issue are that the assessee-company apart from other activities also run and manage a chain of hotels known as “Welcome Group of Hotels”. The assessee-company has claimed a deduction of Rs. 30,39,30,662/- under Section 80HHD of the Act as per auditor’s report in Form No. 10CCAD. The assessee-company has computed the deduction under Section 80HHD on hotel-wise basis. The A.O. has, however, recomputed the computation on pro-rata basis and has computed such deduction in the proportion as hotel foreign exchange receipts bear to the total turnover from all the activities of the assessee. The A.O. has accordingly worked out deduction under Section 80HHD at Rs. 7,22,78,182/- against deduction claimed by the assessee at Rs. 30,39,30,662/- resulting in reduction of the allowance by Rs. 23,16,52,480/-. The ld. CIT(A) in appeal has accepted the claim of the assessee for deduction under Section 80HHD at Rs. 30,39,30,662/- following his decision for the assessment year 1994-95. The revenue has disputed such order of ld. CIT(A) and has raised the Ground No. 16 against such order of ld. CIT(A).

93. In appeal before us, the ld. Senior Departmental Representative for the Revenue Dr. Raja Ram Shah has assailed the order of ld. CIT(A) in allowing the claim of the assessee under Section 80HHD. It has been submitted by the ld. D.R. that the deduction claimed by the assessee on the basis of hotel-wise is not at all correct and has pleaded that deduction under Section 80HHD has to be computed taking into consideration subsection (3) of such section, which says that profit derived from services provided to foreign tourists shall be the amount which bears to the profit of business (as computed under the head “profits and gains of the business or profession”). The same proportion as the receipt bears to the total receipt of the business carried on by the assessee. It has been emphasized by Dr. Raja Ram Shah that the interpretation of legislature while enacting Section 80HHD was very clear and was meant for allowing deduction in respect of profit on the receipt from foreign tourists proportionately taking the total receipts of the business carried on by the assessee. It has been argued by the ld. D.R. that there was no intention for allowing unit-wise deduction under Section 80HHD and the word “a hotel” used in Sub-section (1) of Section 80HHD is simply a syntextually expression but relate to the entire business activity of the assessee including in running of a hotel business. The ld. D.R., however, could not state the reason for considering the entire receipts from all other activities carried on by the assessee for working out deduction under Section 80HHD by the A.O. He has, therefore, also argued on alternative plea from the side of revenue and has pleaded that at least receipt of the entire hotel business should be considered while computing deduction under Section 801 HID. The ld. D.R. in support of his above contention has relied on the decision of ITAT, Cochin Bench in the case of Hotel & Allied Traders Pvt. Ltd. v. DCIT reported in 83 ITD page 85. He submitted that it has been held by the ITAT, Cochin Bench that hotel business of the assessee should be taken as a whole and not in a part. It has, therefore, been pleaded that the order of A.O. be restored by setting aside the order of ld. CIT(A).

94. In his rival submission, the ld. senior counsel for the assessee has relied heavily on the order of ld. CIT(A) and has pleaded that the assessee-company has rightly computed the deduction under Section 80HHD by computing the deduction for each hotel separately and these have fully been verified and certified by the auditors in the line with the practice followed by the assessee in earlier year also. It has been contended that the above method of computation has duly been accepted by the ld. CIT(A) in assessment year 1994-95 and such order of ld. CIT(A) has been upheld by this Tribunal.

95. The ld. counsel has thereafter stated that Section 80HHD is intended to promote foreign exchange earnings for the country and Sub-section (1) to Section 80HHD clearly allows deduction to an assessee engaged in the business of a hotel approved by the prescribed authority. The ld. counsel has emphasized on the words “business of a hotel” and has stated that the same is meant for deduction in respect of each approved hotel and, therefore, deduction under Section 80HHD is to be computed for each hotel separately. The ld. senior counsel Shri Bajoria has stated that if profit and turnover of totally unrelated business, like tobacco, paper, printing and packaging are taken than the computation under Section 80HHD will result into a incongruous and unrealistic result without any rational relationship to the profit derived by a hotel from serving foreign tourists. It has been stated that Sub-section (2) lays down that Section 80HHD applies only to services provided to foreign tourists and the receipts in relation to which are received from convertible foreign exchange. It has been stated that the words “services provided to foreign tourists” clearly indicate that receipts with reference to services provided by the hotel and has nothing to do with other activities of the assessee and, therefore, other activities i.e. profit and turnover of other business except approved hotel business are to be excluded for the computation of deduction under Section 80HHD.

Shri Bajoria has further submitted that computation for deduction Under Section 80HHD is to be computed by taking of profit and receipts of hotel-wise and not by taking the profit and turnover of all the approved hotels. It has been submitted that if the computation for deduction Under Section 80HHD are made by taking profit and turnover of all the approved hotels than the hotels running in loss will jeopardize the prospects of good hotel, which is not the intention of the legislature while enacting Section 80HHD. It has, therefore, been pleaded by the ld. senior counsel that the computation in respect of deduction under Section 80HHD has rightly been claimed by the assessee and, therefore, the order of ld. CIT(A) be upheld.

We have given our careful consideration to the rival submissions made before us and have perused the orders of tax authorities. We have also considered the relevant material available on record. Section 80HHD during the assessment year 1997-98 reads as under:

80HHD. (I) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of a hotel or of a tour operator, approved by the prescribed authority in this behalf or of a travel agent, there shall, in accordance with and subject to the provisions of this section, be allowed,….

(a) fifty per cent of the profits derived by him from services provided to foreign tourists; and

(b) so much of the amount out of the remaining profits referred to in Clause (a) as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account to be utilized for the purposes of the business of the assessee in the manner laid down in Sub-section (4) The relevant sub-Section 2, 2A and (3) read as under:

(2) This section applies only to services provided to foreign tourists the receipts in relation to which are received [in, or brought into, India by the assessee in convertible foreign exchange within a period of six months from the end of the previous year or, [within such further period as the competent authority may allow in this behalf].

[Explanation [1] – For the purposes of this sub-section, any payment received by an assessee, engaged in the business of a hotel or of a tour operator or of a travel agent, in Indian currency obtained by conversion of foreign exchange brought into India through an authorized dealer, [from another hotelier, tour operator or travel agent, as the case may be,] on behalf of a foreign tourist or group of foreign tourists, shall be deemed to have been received by the assessee in convertible foreign exchange if the person making the payment furnishes to the assessee a certificate specified in subsection (2A).

[Explanation 2. – For the purposes of this sub-section, the expression ‘competent authority’ means the Reserve Bank of India or such other authority as is authorized under any law for the time being in force for regulating payments and dealings in foreign exchange).

(2A)- Every person making payment to an assessee referred to in the Explanation [1] to Sub-section (2) out of Indian currency obtained by conversion of foreign exchange received from or on behalf of a foreign tourist or a group of foreign tourists shall furnish to that assessee a certificate in the prescribed form indicating the amount received in foreign exchange, its conversion into Indian currency and such other particulars as may be prescribed.

[(3) – For the purposes of Sub-section (J), profits derived from services provided to foreign tourists shall be the amount which bears to the profits of the business (as computed under the head “profits and gains of business or profession”) the same proportion as the receipts specified in Sub-section (2) [as reduced by any payment, referred to in Sub-section (2A), made by the assessee] bear to the total receipts of the business carried on by the assessee].

98. From the plain reading of the above Section 80HHD, the assessee should fulfill the following conditions to be entitled to deduction prescribed in the above Section:

(i) the assessee should be an Indian Company or a person resident in India; (ii) the assessee should be engaged in the business of a Motel or a tour operator approved by the prescribed authority in this behalf; or

(iii) the assessee should be a travel agent. If the assessee fulfills the above conditions, he is entitled to 50% of the profit derived by him from the services provided to the foreign tourists. Sub-section (3) prescribes the procedure to compute the profit derived from services provided to foreign tourists. As per this sub-section, such profit is to be worked out as per the following formula:

Profits of the business (as computed under the head “profits and gains of business or profession) multiplied by the receipts in convertible foreign exchange on account of services provided to foreign tourists divided by total receipts of the business carried on by the assessee.

99. There is no dispute that the assessee has fulfilled the conditions prescribed under sub-section(1) of Section 80HHD so as to be eligible for deduction in this section. The dispute is with regard to the computation of the profit derived from the services provided to the foreign tourists. As per assessee, the computation as per formula given in subsection (3) of Section 80HHD is to be made in respect of each approved Hotel separately. While as per Revenue, the computation is to be made considering the total receipts of all the Hotels as well as all other businesses of the assessee and also the profits of all the Hotels and other businesses run by the assessee. From the plain reading of Section 80HHD(1), we find that the assessee, who is engaged in the business of a Hotel or of a tour operator is entitled to deduction under Section 80HHD. Now the question is the alphabet “a” used before the word Hotel and tour operator is to be interpreted as “one” or it is only an Article used before the Noun i.e. Hotel. In our opinion, the alphabet “a” is used here only as an Article and cannot be interpreted as “one”. If the alphabet ‘a’ used before the word Hotel is interpreted as “one”, the result would be that an assessee who is running one Hotel or an assessee who is operating one tour would only be entitled to deduction under Section 80HHD and not the persons who are running more than one Hotel or a tour operator who is operating more than one tour would not be entitled. It cannot be the intention of the legislature. Therefore, we are of the considered opinion that the alphabet “a” used before the word Hotel cannot be interpreted as one.

100. Now the next question is what is the meaning of the word “the profits of the business” as used in Sub-section (3) of Section 80HHD, whether the profit of all the businesses is to be considered or the profit of the Hotel business is to be considered and whether the profit of each Hotel is to be considered separately. In our opinion, meaning of the word “the profit of the business” used in Sub-section (3) means “the business” referred in Sub-section (1), i.e. the business of a Hotel, which is approved by the prescribed authority in this behalf. Therefore, the profit of the business other than the business referred in Sub-section (1) has to be excluded while computing the profit derived from services provided to the foreign tourists under Sub-section (3). It would not be out of place to mention here that the assessee is engaged in several business activities like manufacturing and sale of cigarettes, paper, packaging material, etc. All these businesses are separate and independent than the Hotel business of the assessee. The inclusion of profit of these businesses would distort the correct determination of the profit derived from the services rendered to foreign tourists. In the case of assessee itself in the year under consideration by including the profits and receipts of other businesses, the deduction under Section 80HHD is worked out lesser than the deduction claimed by the assessee. But in the subsequent year, when the profit from the other businesses is more, the deduction under Section 80HHD works out to more than what is claimed by the assessee and Revenue itself has computed the deduction under Section 80HHD considering the Hotel business alone. However, we are also unable to agree with the contention of the ld. counsel that the deduction is to be computed separately in respect of each Hotel. Section 80HHD(1) refers to the business of a Hotel. The business of a Hotel which is approved by the prescribed authority has to be considered as a whole being the business which is entitled for deduction under Section 80HHD(1). Therefore, we hold that the deduction under Sub-section (3) of Section 80HHD has to be computed by taking the profits of the Hotel business approved by the prescribed authority. To clarify, if the assessee had ten Hotels and seven Hotels are approved for the purpose of Section 80HHD(1) and three Hotels are not approved then the profit of all these seven Hotels would amount to the profits of the business of the Hotel approved for the purpose of Section 80HHD(1). Therefore, the A.O. has to compute the deduction under Section 80HHD(3) by taking the profits of all the Hotels approved by the prescribed authority. The same is to be multiplied by the receipts in convertible foreign exchange for the services provided to foreign tourists by all these Hotels and is to be divided by the total receipts of all the approved Hotels. We hold accordingly.

101. The assessee has also raised an additional ground during the course of hearing which reads as under:

That on the facts and circumstances of the case, the Hon’ble CIT(A) has erred in deleting addition of Rs. 12.53 crores under the head “advertisement expenses’ made by the assessing officer comprising of expenditure incurred in connection with sponsorship, cinema, films, etc. and fabrication jobs.

102. The ld. senior counsel for the assessee has not pressed any serious objection and, therefore, after hearing both the parties, application for admission of the additional ground is accepted.

103. Brief facts relating to this additional ground are that the assessee-company has made a total claim of Rs. 172.60 crores, out of which Rs. 52.79 crores were incurred in connection with sponsorship of various sports events, like golf, polo, football, etc. The A.O. has presumed that at least 10% of such expenditures was not commercially expedient to the business of the assessee and has disallowed the same. He has also disallowed Rs. 5.74 crores incurred by the assessee for advertisement in cinema, film, video, etc. holding that these are non-incidental to the business of assessee. The A.O. apart from the above two disallowances has also made a disallowance of 10% in connection with fabrication job of Rs. 15,05,65,278/- and thereby making the total addition under the head “advertisement” at Rs. 12.53 crores. In appeal, the ld. CIT(A) has deleted the addition following his decision in earlier assessment year decided in favour of assessee.

104. In appeal, the ld. Departmental Representative for the Revenue has assailed the order of ld. CIT(A) and has relied on the order of A.O. The ld. D.R. has submitted that disallowance on account of notional income from dismantling fabrication materials out of fabrication expenses for Rs. 1.51 crores has rightly been made by the A.O. The ld. D.R. has submitted that even this Tribunal while deciding the case for assessment year 1994-95 has upheld the contention of the Revenue that notional income of 10% being salvage value of dismantled fabrication materials cannot be ruled out. The ld. D.R. while arguing for deletion of other expenses by CIT(A) has simply relied on the order of A.O.

105. In his rival submission, the ld. senior counsel for the assessee has heavily defended the order of ld. CIT(A) and has submitted that sponsorship expenses and expenditures on cinema and video have been incurred solely and exclusively for the business of the assessee and these expenditures have been incurred for promoting the product of the business and for creating public awareness. Arguing on fabrication expenses, it has been submitted by the ld. counsel that the assessee is crediting the salvage value of such dismantled fabrication materials as and when disposed by the assessee and such receipts from sale of salvage value are credited under the head “miscellaneous income” at the time of realization and, therefore, no question arises for considering any notional income out of such fabrication charges. It has, therefore, been prayed that the order of ld. CIT(A) be upheld.

106. We have given our careful consideration to the rival submissions made before us and have perused the orders of tax authorities. The A.O. has made disallowance under this head mainly on three expenditures, viz.

  (i) expenses for sponsorship for sports -                     Rs. 5.28 crores
(ii) Cinema, Film, Video expenditure -                        Rs. 5.74 crores
(iii) Salvage value of dismantled fabrication material -      Rs. 1.51 crores.

The A.O. has accepted the genuineness of such expenditures in case of sponsorship and video and cinema expenses to the extent of 90% and has disallowed 10% of such expenditures presuming that it might have been incurred for other than business needs. However, such observation of A.O. is not supported by any material evidence on record. Whereas while deciding Ground No. 12 i.e. regarding disallowance of miscellaneous expenditure, we have already held that advertisements through sponsorship events and through cinema and videos are incidental to the business of the assessee as these are incurred to promote its products and create public awareness of the activities of the Company and these expenditures are purely and exclusively meant for the business needs of the assessee as also held by this Tribunal in the case of G.D. Pharmaceuticals Ltd. (supra). We, therefore, do not find any infirmity in the order of ld. CIT(A) in deleting the addition in respect of sponsorship expenses and expenses incurred on cinema and video and, therefore, uphold the same and reject the objection raised by the Revenue.

107. The ld. D.R. has also disputed the order of ld. CIT(A) in deleting the addition of Rs. 1.51 crores made by the A.O. considering notional income available to the assessee from dismantling of fabrication materials. We have noted down the fact that the assessee has claimed that income available to it out of such salvage value of fabrication material is being credited under the head “miscellaneous income” and such contention of ld. counsel has not been rebutted by the ld. D.R. before us. We, therefore, in these circumstances are of the opinion that the addition made by the A.O. in respect of notional income available to the assessee from dismantled fabrication material is not correct as the same will tantamount to double addition keeping in view the fact that the assessee is itself crediting such income available to it as soon as it realises the income from the sale of salvage material.

108. We, therefore, in view of the above facts, do not see any reason to interfere with the order of ld. CIT(A) in this regard and uphold the same and reject the additional ground raised by the Revenue. In the result, the appeal filed by the Revenue is partly allowed.

This order is pronounced in the Open Court on 07.09.2007.

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Category : Income Tax (26778)
Type : Judiciary (10934)
Tags : ITAT Judgments (4970) section 43B (83)

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