2007 (9) TMI 295 - AT - Income Tax

Business Expenditure - Travelling expenditure - disallowance under rule 6D - HELD THAT - In the present case, it has nowhere been brought on record by the Assessing Officer 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 Assessing Officer was not justified and the ld. CIT(A) has rightly deleted the same. Ad hoc disallowance - Considering the facts of the assessee's case and the arguments of both the sides, we do not find any justification for 1 per cent disallowance on ad hoc basis out of the travelling expenditure incurred by the assessee. We, therefore, hold that the CIT(A) was justified in deleting such disallowance. Accordingly, the order of the CIT(A) on this point is sustained and ground No. 3 of the revenue's appeal is rejected. Entertainment expenses - disallowance u/s 37(2) - 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 Assessing Officer has worked out such disallowance at 25 per cent 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 per cent in case of each of the expenditure will meet the end of justice. We, therefore, direct the Assessing Officer to disallow only 10 per cent of expenditure incurred for lunch/refreshment and for payment of club and then work out the disallowance u/s 37(2). We hold and direct accordingly and accept the Ground No. 4 raised by the revenue for statistical purposes. Expenditure for sponsorship, prize money, etc. - 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 Assessing Officer has not given any cogent reason for disallowing such expenditure. Hon'ble Delhi High Court in the case of Delhi Cloth General Mills Co. 1999 (7) TMI 40 - DELHI HIGH COURT 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 our opinion, the CIT(A) has rightly deleted the disallowance of expenditure on sponsorship of the events made by the Assessing Officer. We uphold the order of the CIT(A) in this regard and reject ground No. 5 of the revenue appeal. Sales promotion expenses included under the head 'Advertisement expenditure' - HELD THAT - 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 Assessing Officer in disallowing 10 per cent 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. Expenditure on repairs to buildings - repairs to machinery - repairs to others - HELD THAT - 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. Thus, we are of the opinion that CIT(A) was justified in deleting the disallowance made by the Assessing Officer. Disallowance of expenditure - re-installation of a loga machine - 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. Damaged and destroyed stock of cigarettes - 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. Disallowance of contribution to Provident Fund/Pension Fund - After considering the arguments of both the sides, we deem it proper to restore the matter back to the file of the Assessing Officer for verification of actual date of payment in this regard and thereafter recalculate the disallowance u/s 43B/36(1)(va), if any, as per our observation above. Needless to mention that the Assessing Officer 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. Workmen and staff welfare expenses - 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. 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 Sons v. CIT. Thus, 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 Assessing Officer. We, therefore, uphold the order of ld. CIT(A) and reject the ground No. 11 raised by the revenue. Disallowance under the head 'Miscellaneous Expenses' - (a) Social responsibility (public relation) - It was not the case of the Assessing Officer 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 CIT(A) has rightly deleted the disallowance of expenditure on social responsibility made by the Assessing Officer We, therefore, uphold the order of the CIT(A) on this issue. (b) Souvenir advertisement - Assessing Officer 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. Co. Ltd. v. CIT 1991 (4) TMI 124 - BOMBAY HIGH COURT has held that the expenditure for advertisement in souvenir is not disallowable in view of CBDT Circular No. 200, which is binding on income-tax authorities in view of section 119 of the Act. In view of the above, we hold that the addition made by the Assessing Officer on this account was unwarranted and the CIT(A) has rightly deleted the same. Addition made u/s 40A(2)(a) - The Assessing Officer 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 per cent 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. Thus, we are unable to agree with the revenue that the Assessing Officer 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. Deduction u/s 80HHD - 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 u/s 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. 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 u/s 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 Assessing Officer has to compute the deduction u/s 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. In the result, the appeal filed by the revenue is partly allowed.

Summary

Issues Involved:
1. Deletion of addition of Rs. 38,64,109/- as value of stores written off.
2. Deletion of addition of Rs. 5,00,000/- on account of guest house expenses.
3. Deletion of addition of travelling expenses.
4. Deletion of addition of Rs. 67,59,104/- on account of entertainment expenses.
5. Deletion of addition of Rs. 1,45,48,331/- under the sub-head of payments to clubs.
6. Deletion of addition of Rs. 13,30,000/- claimed as advertisement expenses.
7. Deletion of addition of 'Repairs' expenses.
8. Deletion of addition of Rs. 1,77,05,366/- on account of contingent expenditure provision.
9. Deletion of addition of Rs. 55,00,000/- regarding capital or revenue nature of expenses.
10. Deletion of addition under section 43B, read with section 36(1)(va).
11. Deletion of addition of Rs. 2.5 crores under the head 'Other staff welfare business'.
12. Deletion of addition of miscellaneous expenses.
13. Onus of proof in deletion of addition.
14. Deletion of addition due to violation of arm's length principle.
15. Adoption of total turnover net of excise duty for section 80HHC deduction.
16. Allowance of deduction under section 80HHC as per assessee's computation.

Issue-wise Detailed Analysis:

1. Deletion of addition of Rs. 38,64,109/- as value of stores written off:
The Tribunal observed that the Assessing Officer disallowed the claim because the assessee failed to provide evidence that the consumable stores had become obsolete. However, considering the business volume, the Tribunal found it plausible that some stores could become obsolete. It directed to sustain the disallowance at 25% of the consumable stores written off.

2. Deletion of addition of Rs. 5,00,000/- on account of guest house expenses:
The Tribunal followed the Supreme Court's decision in Britannia Industries Ltd. v. CIT, which held that expenses towards guest houses are not allowable under sections 30 and 32, as section 37(4) explicitly prohibits such deductions. The Tribunal decided the issue in favor of the revenue.

3. Deletion of addition of travelling expenses:
The Tribunal noted that the assessee had provided details and evidence for the travelling expenses. The disallowance of Rs. 49,38,196/- for non-employees was deleted, as these expenses were incurred for auditors, consultants, and non-Executive Directors, which were necessary for the business. The ad hoc disallowance of 1% was also deleted as there was no evidence supporting personal or pleasure trips.

4. Deletion of addition of Rs. 67,59,104/- on account of entertainment expenses:
The Tribunal found that the assessee had already disallowed Rs. 75,04,824/- and the further disallowance by the Assessing Officer was not justified. The Tribunal directed to disallow only 10% of the expenses for lunch/refreshment and club payments, reducing the additional disallowance.

5. Deletion of addition of Rs. 1,45,48,331/- under the sub-head of payments to clubs:
The Tribunal upheld the CIT(A)'s decision, noting that the expenses on sponsorship and prize money were incidental to the business and aimed at promoting the company's products and creating public awareness.

6. Deletion of addition of Rs. 13,30,000/- claimed as advertisement expenses:
The Tribunal found that the Assessing Officer's disallowance of 10% was based on presumption without evidence. The Tribunal upheld the CIT(A)'s decision, recognizing the expenses as necessary for promoting the company's products.

7. Deletion of addition of 'Repairs' expenses:
The Tribunal upheld the deletion of Rs. 92,75,000/- for repairs to company flats, noting that these expenses were necessary for maintaining assets used by Directors and employees. The Tribunal also upheld the deletion of Rs. 55,00,000/- for re-installation of machinery, as it was for efficient utilization and did not result in asset addition.

8. Deletion of addition of Rs. 1,77,05,366/- on account of contingent expenditure provision:
The Tribunal upheld the CIT(A)'s decision, noting that the provision for damaged stock was based on the mercantile system of accounting and consistent with past practice. The provision was not contingent but based on expected damaged stock.

9. Deletion of addition of Rs. 55,00,000/- regarding capital or revenue nature of expenses:
The Tribunal upheld the CIT(A)'s decision, noting that the expenses for re-installation of machinery were for efficient utilization and did not result in asset addition, thus not capital in nature.

10. Deletion of addition under section 43B, read with section 36(1)(va):
The Tribunal directed the Assessing Officer to verify the actual payment dates and recalculate the disallowance, if any, as per the provisions of section 43B and section 36(1)(va).

11. Deletion of addition of Rs. 2.5 crores under the head 'Other staff welfare business':
The Tribunal upheld the CIT(A)'s decision, recognizing the expenses as necessary for maintaining healthy and cordial relations with staff and workers, which in turn benefited the business.

12. Deletion of addition of miscellaneous expenses:
The Tribunal upheld the CIT(A)'s decision, recognizing the expenses as incidental to the business and necessary for maintaining the company's corporate image and goodwill.

13. Onus of proof in deletion of addition:
The Tribunal upheld the CIT(A)'s decision, noting that the onus was on the revenue to prove that the borrowed funds were used for advancing interest-free loans to subsidiaries. The assessee had sufficient own funds to make such advances.

14. Deletion of addition due to violation of arm's length principle:
The Tribunal upheld the CIT(A)'s decision, noting that the purchases from subsidiaries were at market rates and necessary for the business. The disallowance under section 40A(2)(a) was not justified.

15. Adoption of total turnover net of excise duty for section 80HHC deduction:
The Tribunal followed the Supreme Court's decision in CIT v. Lakshmi Machine Works, which held that excise duty and sales tax do not form part of total turnover for section 80HHC computation. The Tribunal decided the issue in favor of the assessee.

16. Allowance of deduction under section 80HHC as per assessee's computation:
The Tribunal directed the Assessing Officer to compute the deduction under section 80HHD by considering the profits and receipts of all approved hotels, excluding other business activities. The deduction should be based on the proportion of foreign exchange receipts to total receipts of the approved hotels.

Conclusion:
The Tribunal provided a detailed analysis of each issue, upholding the CIT(A)'s decisions in most cases, recognizing the expenses as necessary for the business and consistent with past practices. The Tribunal directed the Assessing Officer to verify and recalculate certain disallowances as per legal provisions. The judgment emphasized the importance of evidence and consistency in accounting practices.