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TMI Blog1998 (1) TMI 514X X X X Extracts X X X X X X X X Extracts X X X X ..... lities is not pressed and hence the same is rejected as such. 4. The next ground relates to the disallowance of the provisions made for trade guarantees. To meet the claims of its consumers during warranty period, the assessee makes provision in its accounts for such contingencies. For the year under consideration, and for the subsequent year following was the position in the accounts : . Asst. yr. 1985-86 Asst. yr. 1986-87 . (Rs. in lacs) Opening provision . 209.15 . 237.00 Add : Provision during the year : 207.00 . 203.93 . Less : Excess provision written back 44.83 162.17 55.73 148.20 . . 371.32 . 385.20 Less : Expenses during the year : . . . . (a) against opening balance 88.73 . 107.15 . (b) during the year 45.59 134.32 49.00 156.15 . . 237.00 . 229.05 Out of the net provision of ₹ 162.17 as shown above the AO allowed deduction of ₹ 45.59 lacs as current year's expenses and disallowed the balance of ₹ 116.58 lacs. 5. The CIT(A), however, observed that there was a wide gap between the provision made and actual expenses incurred. According to him the provisions was in excess by 26.21 per cent. As a result of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actuals. On the other hand, in the instant case, the main ground on which the CIT(A) sustained part of the disallowance was the wide gap he noticed between the provision and the actuals, which, it appears was not the plea before the Tribunal in the appeal relating to asst. yrs. 1984-85. Thus, the basis premise on which Wanson's case (supra) stands is diametrically opposite to the actual fact in this case. Nonetheless there are stronger reasons to uphold the claim of the assessee. 9. Firstly, the CIT(A) agrees in principle that provision can be allowed as a deduction provided, there is a marginal difference between the estimates and actuals as held in Wanson's case (supra). The CIT(A) also admits that the assessee has been scientifically working out the anticipated liabilities to be provided under mercantile system of accounting based on past experience and no adhocism is involved. When such is the situation, we fail to understand as to why deduction should not be allowed. In this background the so-called wide gap no longer remains wide which would merit disallowance even partly. Moreover, it is not disputed that the accounting method ensures that such excesses are made goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was paid to the employees' federation directly at the rate of ₹ 200 per employee to be used for the welfare of the employees. In support of his plea the learned counsel relied on several decisions. However, his specific reference was to the decision in Sassoon J. David & Co. (P) Ltd. vs. CIT (1979) 10 CTR (SC) 383: (1979) 118 ITR 261(SC) and to the combined order of the Mumbai Bench of the Tribunal in the case of TELCO in ITA Nos. 6087/Bom/86 and 477/Bom/88 dt. 30th May, 1988. As regards the disallowance made under s. 40A(9), reliance was placed on the decision of the Hyderabad Bench of the Tribunal in Raasi Cement Ltd. vs. ITO (1993) 47 TTJ (Hyd) 254: (1993) 45 ITD 233(Hyd). 15. The learned Departmental Representative relied on the orders of the lower authorities and reiterated their stand regarding the provisions of s. 36(1)(ii). The disallowance made under s. 40A(9) was also stated to be justified on the ground that the said payment was not subjected to deduction of tax at source. 16. We have considered the rival contentions and the material on record. The agreements entered into between the management and employees' federation indicate that the impugned payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment is justifiable as a reasonable payment. To say that the second proviso to cl. (ii) of s. 36(1) of the Act has no application in respect of employees covered under the Bonus Act, and that bonus or commission paid to them in excess of, or otherwise than what is statutorily required (although reasonable when considered with reference to cls. (a) to (c) of the second proviso) is not deductible under s. 36, is to put an artificial construction upon a beneficial provision." Considering the above decision, it is also not proper for the CIT(A) to say that "It is merely an addition to the bonus paid along with the bonus in an ad hoc pro rata fashion because the workers insisted and the management agreed for higher payment due to higher profitability." Thus we do not have any hesitation to hold that the impugned payment was not a bonus under the Payment of Bonus Act. 18. The CIT(A) has also sought to refute the claim of the assessee on the ground that it has not fulfilled the three conditions mentioned in s. 36(1)(ii). In this connection, the decision of the Supreme Court in Shahzada Nand & Sons. vs. CIT 1977 CTR (SC) 246: (1977) 108 ITR 358(SC) is relevant and we r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding the disallowance of ₹ 27,57,729 paid to the employees as performance reward. We direct the allowance thereof. It may not be out of place to mention that in arriving at this conclusion, we have been amply guided by the decision of the Tribunal in Telco's case cited supra. 22. The next issue relates to the disallowance of ₹ 4,97,953 as capital expenditure incurred in connection with the issue of convertible debentures. During the year the assessee issued partly convertible debentures of ₹ 400 each, 1/4th of which was convertible into shares on expiry of two years. The total expenses incurred on this issue amounted to ₹ 19,91,812. Since 1/4th value of the debentures was to be converted into shares, the AO treated 1/4th of the total expenditure as capital in nature and disallowed a sum of ₹ 4,97,953. The CIT(A) confirmed the disallowance. 23. After hearing the parties we are of the view that the disallowance is not justified. By incurring the expenditure, presently the assessee has raised a loan and not capital. In the case of Brooke Bond India Ltd. vs. CIT in (1997) 140 CTR (SC) 598: (1997) 225 ITR 798(SC), the Supreme Court held the expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... house, are allowable or not. The issue is squarely covered in assessee's favour by the Tribunal's order dt. 12th Feb., 1997 in ITA Nos. 5582 & 5908/Bom/89 for asst. yr. 1984-85. We follow the same and uphold the claim of the assessee. 27. The next ground pertains to the addition of ₹ 6.00 lacs made under s. 40A(5) of the Act. In its return of income, the assessee had made a disallowance of ₹ 5,50,000 on estimated basis under the said provision. In the tax audit report, the disallowance was worked out at ₹ 5,81,306. Before the AO, it was confirmed by the assessee that expenses on soft furnishing repairs and maintenance of premises owned/hired by the assessee-company, depreciation on company owned flats and depreciation on other assets provided to the employees have not been considered. The AO estimated such expenses and coupled with the expenses of ₹ 1,79,686 incurred on subscription to clubs to be of ₹ 8.00 lacs and disallowed the same. The CIT(A) considered the disallowance to be excessive and restricted it to ₹ 6.00 lacs. 28. It is fairly conceded by the learned counsel that the issue has been decided against the assessee by the Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dt. 10th March, 1981 with Research Cottrell Inc. USA, the assessee had received from the latter technical know-how, drawings, designs, etc. for manufacture of scrubbers with mint eliminator. The AO observed that as the agreement did not contain any restrictive clause on the manufacture of products after the expiry of the agreement, it gave an enduring advantage to the assessee and hence the sum of ₹ 5,70 lacs payable for the transfer of know how was capital expenditure. The deduction thereof was accordingly disallowed. The CIT(A) confirmed the addition. The learned counsel has relied on the order of the Tribunal dt. 24th Nov., 1976 in ITA Nos. 2917 & 2722/Bom/1974-75 in the assessee's own case, whereas the learned Departmental Representative has relied on the orders of the lower authorities. 35. We have duly considered the material on record and the order of the Tribunal cited supra. It is a fact that the assessee is engaged, inter alia, in the business of manufacturing pollution control equipments. In order to upgrade its technology in these products, it has been its continuous endeavour to get the requisite know-how. This was one such endeavour for which it entered in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed is the business of marketing and distribution of pharmaceutical products. In the search of new products, the assessee funded two research products in the field of genetic engineering for which TRDDC was assigned the task and the impugned amount was reimbursed to it. The assessee claimed deduction thereof under s. 35(1)(i) of the Act. Since the assessee was, in this line of activity, marketing the products manufactured by others, and was not manufacturing its own products, the AO was of the view that the impugned sum cannot be said to have been laid out on scientific research related to the assessee's business. The deduction was accordingly disallowed. The CIT(A) concurred with the view of the AO and confirmed the disallowance. 41. The submission of the learned counsel was to the effect that it was enough if the expenditure was for assessee's business. It was not necessary that the assessee should be in manufacturing activity in order to be eligible to claim the deduction. Reliance was placed on the decision of the Bombay High Court in CIT vs. National Rayons Corpn. Ltd. (1982) 26 CTR (Bom) 234: (1983) 140 ITR 143(Bom). The learned Departmental Representative supported t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the earlier order of the Tribunal whereas the learned Departmental Representative has relied on the decision in CIT vs. Laxmi Rattan Cotton Mills Co. Ltd. (1974) 97 ITR 285(All). 46. On similar facts, the same issue was decided by the Tribunal in the assessee's case in ITA No. 9220/Bom/96 dt. 10th Sept., 1997. Following the decisions in CIT s. Kadri Mills (Coimbatore) Ltd. 1977 CTR (Mad) 51: (1977) 106 ITR 846(Mad), CIT vs. Brij Lal Lohia & Mahabir Prosad Khemka (1980) 18 CTR (Cal) 163: (1980) 124 ITR 485(Cal) and B.V. Aswathaiah & Bros. vs. ITO (1986) 52 CTR (Kar) 49: (1985) 155 ITR 422(Kar), the interest so levied was deleted. We follow the earlier order and cancel the interest for this year also. 47. Ground No. 16(b) relates to the levy of interest under s. 217(1A). In the course of assessment proceedings the AO levied interest under s. 217(1A) of the Act. The CIT(A) treated the same as consequential in nature and did not give any further directions. The learned counsel submitted that nil estimate was filed by the assessee and further relied on the decisions in Patel Aluminium (P) Ltd. vs. Miss K.M. Tawadia, ITO (1986) 51 CTR (Bom) 322: (1987) 165 ITR 99(Bom) and Director ..... X X X X Extracts X X X X X X X X Extracts X X X X
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