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TMI Blog2005 (7) TMI 299X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance of provision for non-moving stock, is in two parts. The first part relates to the provision of Rs. 50.66 crores which is the total amount claimed, and second part relates to the provision of Rs. 211.24 lakhs. Both the provisions relate to the non-moving stock. The learned counsel for the assessee has argued only the disallowance of the provision of Rs. 211.24 lakhs. Our attention was drawn to page Nos. 3 and 4 of the paper book which relates to this provision. Page No. 3 is the extract from the Sch. 18 to the balance sheet as on 31st March, 1992. The total provision made in respect of non-moving stock with reference to the various centres is shown therein. Page NO.4 contains a brief note regarding the procedure followed by the assessee for charging of non-moving stores. The plea of the assessee is that the provision is made after following a well established procedure. It would be better to reproduce the note which is as below: "Procedure for charging off surplus stores (non-moving stores) A non-moving material refers to a material for which no issue has taken place during the preceding financial year. For the purpose of taking action to liquidate the non-moving ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly by the statutory auditors but also by the C&AG. In these circumstances, the bona fides of the procedure or genuineness of the claim cannot be doubted. Even on merits, when the stock of materials is actually found to be dead stock from which nothing can be realised because of the total absence of any demand therefor, its value falls drastically. This has been taken note of by the committee formed for recommending whether any item represents dead stock. We are, therefore, of the view that the assessee's claim requires to be accepted. Accordingly, we direct the AO to allow deduction in respect of provision of Rs. 211.24 lakhs. The disallowance of the balance of the claim is upheld and the ground is partly allowed. 8. Ground NO. 2 relates to disallowance of entertainment expenditure of Rs. 51.88 lakhs. The details of the claim are given at p. 6 of the paper book. The exact amount is Rs. 51,87,674. The IT authorities have allowed 10 per cent of the entertainment expenses as attributable to staff. The plea before us is this is too low. We find force in the plea. We accordingly direct the AO to allow 30 per cent of the entertainment expenditure as relatable to staff. The ground is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the expenditure in question. Therefore, by way of clarification in the note to the tax audit report, the auditors have clarified that the expenditure relates to the clubs which are run and maintained for and by the employees of the assessee-company. In the note, it has also been stated that the company has been giving complete break-up of the expenditure to the IT authorities. This is supported by the letter dt. 4th March, 1996 written by the assessee to the CIT(A). The nature of the activities carried on in the clubs at different centres such as Bhopal, Bangalore, Trichy, Hardwar, etc., has been given in this letter. At p. 32, the break-up of the expenditure of Rs. 14,87,000 has been given from which it is seen that the major expenditure relates to Bhopal (Rs. 14,50,000). The break-up for the expenditure of Bhopal at p. 33 of the paper book shows the salient features of expenditure in addition to what has been stated above. They are: (i) Payment has been made to sport clubs as matching grant based on subscription plus electricity charges. (ii) Payment to others are made on the basis of the recommendation of heads of the Departments. (iii) These institutions are managed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rders of the Departmental authorities and cited judgment of the Hon'ble Supreme Court in the case of CIT VS. United General Trust Ltd. (1994) 116 CTR (SC) 194 : (1993) 200 ITR 488 (SC) and submitted that the ratio of the judgment would apply. After hearing both sides and after going through the orders of the Departmental authorities and in the light of the judgment cited above, we are of the view that they were justified in estimating some expenditure as having been incurred by the assessee in earning the dividend and tax-free interest. The amount apportioned is also reasonable. We accordingly, confirm their action and dismiss the ground. 14. Ground NO.8 is directed against the disallowance of Rs. 4.76,57.787 by invoking s. 40A(9) of the Act. The amount represents payment made by the assessee to the Central Schools (Kendriya Vidyala), BHEL Schools and other educational institutions. The assessee contended before the IT authorities that the aforesaid section is not applicable to the payments, which according to it were allowable under s. 37(1) of the IT Act. The contention did not find favour with the IT authorities and hence, the present ground. 15. The learned counsel for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... registered provident fund, an approved superannuation fund and an approved gratuity fund are deducted in computing his taxable profits. Expenditure actually incurred on the welfare of employees is also allowed as deduction. Instances have come to notice where certain employers have created irrecoverable trusts, ostensibly for the welfare of employees, and transferred to such trusts substantial amounts by way of contribution. Some of these trusts have been set up as discretionary trusts with absolute discretion to the trustees to utilise the trust property in such manner as they may think fit for the benefit of the employees without any scheme or safeguards for the proper disbursement of these funds. Investment of trust funds has also been left to the complete discretion of the trustees. Such trusts are, therefore, intended to be used as a vehicle for tax avoidance by claiming deduction in respect of such contributions, which may even flow back to the employer in the form of deposits or investment in shares, etc. 16.2 With a view to discouraging creation of such trusts, funds, companies, AOP, societies, etc., the Finance Act has provided that no deduction shall be allowed in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to look into the object of the section. If the assessee's case is caught within the plain language of the section, the disallowance has to be sustained without looking into extraneous considerations such as the object of the section, the purpose of the expenditure and so on. He, therefore, contended that the disallowance should be sustained. 19. We have carefully considered the rival submission. There is no dispute about the fact that the expenditure was incurred by the assessee for the purpose of running the schools, established for the children of its employees. It is common ground that no fund as such has been created by the assessee into which the contributions are made on a regular basis. It is clear that the amount spent by the assessee on various schools were spent with the basic idea of subsiding the cost of education of the children of the employees of the assessee. The assessee was interested in the children of the employees getting proper education and training in standard schools. It is thus purely a staff welfare measure. 20. So far as s. 40A(9) is concerned, having regard to the speech of the Hon'ble Finance Minister and the judgments of the Kerala and Bomba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id to have accrued to the assessee. It is also worth-noting from the brief note given at p. 73 of the paper book that the method followed by the assessee for long has been accepted by the Department. We, therefore, agree with the assessee's stand to delete the addition. 23. Ground No. 11 is directed against the disallowance of deduction under s. 80G of the Act. A perusal of the receipts issued by the donee institutions shows that they do not contain any details regarding the approval granted to them under s. 80G. Therefore, the claim for deduction is held rightly rejected. The ground is dismissed. 24. Ground No. 12 is directed against the directions issued by the CIT(A) in para 16 of his order relating to deduction under s. 80-I in respect of turret casting project at Hardwar. The CIT(A) has directed the AO to re-examine the calculation for allocating proportionate profit after taking into account the entire expenditure as well as the entire income of each project. After hearing both the sides, we see no reason to interfere. We confirm the directions of the CIT(A) and dismiss the ground. 25. Ground No. 13 is directed against the disallowance of Rs. 8,15,64,200 being the amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hs in 1991-92 (previous year Rs. 9,720 lakhs) on account of (a) normal creeping depreciation on Indian rupees 12,903 lakhs; (previous year Rs. 9,720 lakhs); (b) adjustments in the value of Indian rupee vis-a-vis foreign currencies on 1st and 3rd July, 1991, Rs. 16.476 lakhs and (c) introduction of partial convertibility of Indian rupee w.e.f. 29th Feb., 1992, Rs. 10,953 lakhs. Whereas creeping depreciation of Indian rupee is regarded as normal and, therefore, fully charged to 1991-92 account, impact of devaluation and partial convertibility of rupee has been treated as extraordinary items. Normal exchange variation of Rs. 12,930 lakhs has been fully charged to P&L a/c in 1991-92 according to past practice. Out of extraordinary items, totalling to Rs. 27,429 lakhs, Rs. 613 lakhs relating to loans utilised for purchase of equipment has been capitalised and depreciation has been charged over the residual life of the asset and remaining amount of Rs. 26,816 lakhs has been deferred over the repayment period of loans in the ratio of loan balance outstanding in the beginning of the year. Accordingly, Rs. 4,716lakhs has been charged to 1991-92 accounts." 27. It is submitted that this no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ills has clearly held that the liability on account of fluctuations in the foreign exchange rates is a real liability and not merely contingent. If the assessee were to remit the amount on the last day of the accounting year, the day on which the liability in terms of money is reckoned, it would have to pay the additional amount. Thus, the liability is an ascertained liability and not contingent in any way. The contention that it can be allowed only when it is actually remitted overlooks the position in law that the income from business must be computed in accordance with the method of accounting regularly followed by the assessee. It is apparent that the assessee is following the mercantile method of accounting and in such a case, any ascertained liability arising out of revenue items has to be allowed as deduction. 31. The third objection is that the loans are all on capital account and if so, any increase in the indebtedness cannot be allowed. Reliance for this submission is placed on the judgment of the Hon'ble Calcutta High Court in the case of CIT VS. International Combustion (I) (P) Ltd. (1982) 29 CTR (Cal) 35 : (1982) 137 ITR 184 (Cal) and Bestobell (India) Ltd. VS. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s need not be looked into by the IT authorities again since admittedly they were taken for acquiring raw materials. A perusal of para 21 of the order of the CIT(A) shows that so far as the amount of Rs. 268.16 crores is concerned, there is reference in the assessment order at p. 33 to note 10 attached to the statement of taxable income that the loans were taken for the purpose of making payment for import of raw materials/components. Actually, out of the total liability of Rs. 274.29 crores, part of which was on account of devaluation of Indian rupee in July, 1991 and part on account of convertibility of the rupee w.e.f. February, 1992, a sum of Rs. 6.13 crores represented liability on account of capital items. The balance of Rs. 268.16 crores represents purchase of raw materials. With regard to the claim of Rs. 145.85 crores what we find from p. 28 of the assessment order is that only Rs. 126.06 crores represents purchase of raw material and components. Therefore, the assessee's claim is allowed only to the extent of Rs. 126.06 crores out of Rs. 145.85 crores. As regards Rs. 268.16 crores, the entire amount is allowable since it represents additional liability in respect of lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd our attention was not drawn to any details in this behalf. Though it may be true that the assessee had no choice in the matter except following the directions of the C&AG, it should be able to give details of the claim which is the minimum requirement. In the absence of any details either before the IT authorities or before us, the disallowance appears to us, to be justified. We sustain the same and dismiss the ground. 36(a) Ground No. 17 relates to the computation of deduction under s. 80HHC. The dispute, as was explained before us, is in respect of two areas only. The first issue is whether the CIT(A) was right in sustaining the disallowance of a part of the claim, on the ground that the approval of the CIT, in respect of the inward remittance of Rs. 19,54,95,086 was not obtained, is correct. This amount was not brought into India during the relevant year of account. There was no approval or permission from the CIT concerned for bringing the remittance into India after the year of the account. In such circumstances, we confirm the decision of the CIT(A). (b) The second issue is against the decision of the Departmental authorities to increase the figure of total turnover by R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proviso in cl. (ba) to the Explanation, it is further provided that the expression "total turnover" shall have effect so as to exclude s. 28(iiia), (iiib) and (iiic) which refer to, inter alia, profits on sale of a licence granted under the Import (Control) Order, cash assistance, duty drawback, etc. This exclusion also shows that the legislature clearly intended to exclude all receipts which have no nexus with sale proceeds from export activity. Hence, total turnover cannot include reassortment charges, labour charges, commission, interest, rent or receipts of similar nature. Therefore, total turnover will not include receipts like labour charges, reassortment charges, etc." Having regard to the aforesaid judgment and respectfully following the same, we direct the AO to exclude the above receipts of interest from the total turnover. (3) Rs. 85,84,97,250- The detail of this amount are contained in p. 46 of the printed accounts at Sch. 13 thereof. The following are the items concerned: Rs. in thousand Oxygen/Acetylene sales 629 Scrap sales 4,39,554 Dividend-Gross (TDS Rs. 58,399 thousand) 2,36,194 Vehicle hire charges 1,244 Sale/consumption of surplus stores ch ..... X X X X Extracts X X X X X X X X Extracts X X X X
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