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TMI Blog2011 (10) TMI 610X X X X Extracts X X X X X X X X Extracts X X X X ..... e of entertainment. Ground No. 3 The CIT(A) erred in upholding the AC s contention that the Compensation received towards breach of contract from Bharat Vijay Chemicals amounting to ₹ 5,05,000 was taxable as a revenue receipt. The CIT(A) ought to have held that the said sum was a capital receipt and that the same was not chargeable to tax. Ground No. 4 The CIT(A) erred in upholding the AC s contention that the expenditure incurred on Production of TV films of ₹ 3,046,536, Production of Promotion films of ₹ 1 ,300,250 and Medical films of ₹ 892,759 are capital in nature. In any event the same are allowable under section 37(3) and, without prejudice if these contentions are rejected depreciation thereon ought to be allowed. Ground No. 5 The CIT(A) erred in holding that Lunch expenses etc. to personnel on outdoor duty of ₹ 5,76,143, 5% of total canteen expenses of ₹ 92,85,039 i.e. ₹ 4,64,252, Conference expenses of Rs.l,59,752 and Expenses on Annual General Meeting (AGM) of ₹ 6,991 are in the nature of entertainment expenses under section 37(2) of the Act. Ground No. 6 The CIT(A) erred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 3,66,42,316/- made and the subsequent payment of ₹ 3,70,71,012 there against. Additional Ground: The Assessing Officer ought to have excluded excise duty element from the figure of total turnover for the purpose of computing deduction u/s 80HHC of the Act. 2 Ground no.1 is regarding the disallowance of ₹ 90 lacs debited in the P L account on account of impending settlement with labours. 2.1 During the course of assessment proceedings, the Assessing Officer noticed that the assessee has debited a sum of ₹ 90 lacs being the provision on account of pending union settlement. The Assessing Officer further noted that as per note no.8, the liability was workout on the basis of union charter of demand and best possible estimates. The Assessing Officer questioned the allowability of the claim of the assessee and pointed out that the provision made by the assessee is not on the basis of any service condition or contractual obligation but on the basis of an impending settlement between the assessee and the union of workers. Therefore, the Assessing Officer was of the view that the liability for which the provision is made is contingent because it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mate of the assessee, in making the provision of the said liability, is most reasonable. Though, in the subsequent years, due to the VRS taken by some of the employees, the payment under the settlement was reduced and the excess of this provision was reversed. The ld senior counsel has submitted that the provision made by the assessee is not a malafide and unreasonable decision; but it was still an anticipated prudent commercial decision of the assessee to make the provision of the liability. The ld Sr counsel has submitted that, though that claim was allowed in the subsequent year; however, when the provision is a reasonable decision, based on the past experience and accounted for as prudent commercial practice, then, the disallowance of the same is not warranted solely on the ground that the claim was allowed in the subsequent year. He has relied upon the decision of the Hon ble jurisdictional High Court in the case of United reported in 181 ITR 347 as well as in the case of CIT v. United Motors (India) Ltd., reported in 250 ITR 89. 3.2 On the other hand, the ld DR has submitted that the earlier MoS dt 29.2.1988 w.e.f 1.7.1987 expired on 31.12.1990 and thereafter, the charter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision was not in pursuant to the MoS dt 29.2.1988. It is also not the case of the assessee that the negotiations between the assessee and the Union reached to a point where the liability could be ascertained for higher payment to the workers. No material is on record to show that during the year under consideration any tentative settlement between the assessee and the employee s Union arrived in pursuant to the negotiations. Since the final settlement arrived between the parties in Aug 1993; therefore, there may be a reason for the assessee to estimate the liability in pursuant to the impending settlement as a result of negotiations between the parties. But there is nothing on record to suggest that any such stage or development has occurred during the year under consideration on the basis of which a prudent commercial decision can be taken. We can t overlook the question that when there was a MoS dt 29.2.1988 and thereafter there was a fresh charter of demands of dt 7.1.1991 then, why the assessee had not made any provision either on the basis of MoS dt 29.2.1988 or on the basis of charter of demands dt 7.1.199. There was no significant development or event occurred during the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies. 7 We have considered the rival contention and perused the relevant material on record. We note that the issue before the Tribunal for the AY 1991-92 as recorded in para 45 as under: 45. Ground No.3(A), 3(B) and 3(c) raised by the Assessee reads as follows: 3A. On the facts and in the circumstances of the case, the CIT(A) erred n holding that an amount of ₹ 9,00,000/- was in the nature of entertainment expenditure included in sales conference, business meeting expenses and canteen expenses. 7.1 From the above ground, it is clear that the issue was regarding the expenses in sales conference and business meeting expenditure and canteen expenses whereas in the year under consideration, the Assessing Officer disallowed the expenditure on account of gift articles. Therefore, it is apparent that the issue before us is not identical to the issue which was considered by the Tribunal in the assessee s own case for the AY 1991-92. 7.2 However, we further note that for the AY 1991-92 only ₹ 1,62,598/- was included and part of the whole issue as mentioned above, relating to the gift item. The Tribunal has adjudicated the said issue in para 53 as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In view of these findings of fact which are arrived at by the Tribunal, if we examine rule 6B, it becomes clear that rule 6B deals with expenditure on advertisement. Rule 6B(1) provides that the allowance in respect of expenditure on advertisement shall not, inter alia, in respect of articles intended for presentation, exceed the limits which are set out in that rule. Therefore, articles intended for presentation must be such articles which advertise the company's wares in some manner or the other. In the present case, the Tribunal has found as a fact that the presentation articles were not in the nature of advertisement. In view thereof, the Tribunal has rightly come to the conclusion that rule 6B is not attracted. We may also add that the assessment for the relevant year was nil assessment and the amount involved in the present petition is only ₹ 10,905. Hence, no useful purpose would be served by granting the rule, in any event. 7.5 The Hon ble High Court has held that the presentation articles were not in the nature of advertisement; therefore, the Tribunal has rightly come to the conclusion that Rule 6B is not attracted. 8 In the case in hand, the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on eating facilities by the assessee to its customers did not constitute entertainment expenditure within the meaning of section 37(2B) 8.3 The High Court in paras 9 to 10 has discussed the legislative history of the provision as well as the other decisions of the High Court. Finally, the High Court has concluded in paras 17 to 20 as under: 17 From the legislative history and the introduction of Explanation 2, we are of the opinion that the Legislature always intended that entertainment expenditure includes expenditure on provision of hospitality of every kind by the assessee. It was in order to resolve the ambiguity that Explanation 2 was added. The intention of the Legislature cannot be ascertained from any statement by way of Notes on Clauses of a Bill or brevet and as has been stated, the duty of the court is to find the natural meaning of the words in a statute in the context in which they are used. 18 It has always been considered permissible and even desirable for a court while interpreting a statute to take note of the history of the statute and the circumstances in which it was passed or the mischief at which it was directed. The reason is that the meaning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the kitchen run by the assessee and if the assessee failed to give this normal courtesy, it apprehended that the farmers might offer their produce to other competitors in the field of the assessee and the assessee would lose the goods. The Appellate Assistant Commissioner has also found that the expenditure was for serving ordinary meals to the employees as well as to the farmer customers and they were not such which entertained or amused the guests since the assessee provided meals as a bare necessity of the business. In that view of the matter, therefore, these references must be rejected and we answer the questions referred to us in the negative and against the Commissioner. . . . This conclusion of the Gujarat High Court on the finding of fact recorded by the Tribunal is consistent with the view we have taken and, therefore, we uphold the same for the reasons given by us which are sufficient to sustain the ultimate view. We may observe that the wide observations and the elaborate guidelines given in the Gujarat decision which are in excess of the broad test indicated by us and not necessary to support the conclusion, are unnecessary for the decision and, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000/- received towards breach of contact. 10.1 The assessee received a sum of ₹ 5,05,000/- towards the damage for breach of contract from Bharat Vijay Chemicals (BVC). It has been stated that the assessee entered into an agreement on 3.3.1988 with BVC for not to make use of the know-how for manufacturing n-tributy Phosphate for suppliers to any other party. When it was fond that after some time, BVC started supplying the aforesaid products to parties other than the assessee, the assessee filed a suit for damages against BVC and finally the dispute was resolved in accordance with the consent terms whereby the BVC paid a sum of ₹ 5,05,000/- to the assessee and the assessee allowed BVC to sell the said products in the open market. The Assessing Officer proposed to treat the said amount as income of the assessee. The assessee submitted before the Assessing Officer that this amount represents damages received for breach of contract and not in the normal course of carrying on the business activities is therefore, a capital receipt not liable to be taxed. The contention of the assessee did not find favour from the Assessing Officer, who has assessed the said amount as in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee is not a compensation for breach of contract but it was for allowing the BVC to manufacture and sell the products to the other parties. In the case of Amar Dye Chemical Ltd (supra) the damage was received by the assessee against illegal use of technical know-how. It was made available by the employees, who left the services of the assessee. Therefore, when the case is in hand, the compensation received for allowing the BVC to use the technical know-how and sale of the products to the other parties and not for ratifying the past breach of contract. In any case, from the consent terms dated 25.6.1991; it could not be inferred that the assessee has transferred the technical know-how. Even otherwise, it is not the claim of the assessee that the assessee has transferred the technical know-how to BVC, Thus, it was only allowing the use of the technical know-how by BVC for manufacturing of the goods and to sell to the other parties. Therefore, the amount received by the assessee is nothing but in the nature of revenue and has been rightly assessed as income of the assessee. 13 The Hon ble Supreme Court has also taken a similar view in the case of Rai Bahadur Jairam Valji in par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... require these films and TV spots to be changed frequently in order to keep adapting to current developments and advertisements of competitors. He has further submitted that these films sports are also pulled out after some time as they tend to lose appeal and effect on consumers and medical fertility repeated viewing. Thus, the ld Sr counsel for the assessee has submitted that these TV films and spots do not have any enduring benefit/life. 15.1 Alternatively, it has been submitted that the entire expenditure on advertisement and publicity is allowable u/s 37(3) irrespective of its nature whether it is of capital or revenue. Further, it has been urged that in any case, the depreciation at the prevailing rate of plant machinery on the expenditure treated as capital in nature shall be allowed. He has relied upon various decisions and mainly the decision of the jurisdictional High Court in the case of CIT v. Geoffrey Manners and Co. Ltd. reported in 315 ITR 134 (Bom). He has further pointed out that a similar issue was decided by the Tribunal for the Assessment Year 1996-97, which has been confirmed by the Jurisdictional High Court as the appeal filed by the revenue has been dismi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 5% of the canteen expenses and food subsidy amounting to ₹ 4,64,252/- as hospitality in nature covered by Explanation to sec. 37(2). 18.2 Similarly, the Assessing Officer has also disallowed conference expense and expenses on AGM of ₹ 1,59,752/- and ₹ 6,991/- respectively by holding that the same are in the nature of entertainment. 18.3 On appeal, the CIT(A) confirmed the action of the Assessing Officer. 19 We have heard the ld Sr counsel as well as the ld DR and considered the relevant material on record. The ld Sr counsel has pointed out that similar issue has been adjudicated by the Tribunal in assessee s own case for Assessment Year 1991-92 and therefore, the expenses on lunch and canteen may be decided on similar lines. 19.1 Regarding the expenses on conference and AGM, the ld Sr counsel has submitted that these are incurred for the purpose of business of the assessee. 19.2 The ld DR relied upon the orders of the lower authorities and submitted that as per the Explanation to sec. 37(2), the expenses incurred on hospitality by way of provision on food and beverage and whatever other manner are treated as entertainment expense. He has further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not maintained complete records regarding the expenditure incurred under this head to employees and outsiders and has also taken note of the past history of the Assessee s case. We are of the view that an adhoc disallowance of ₹ 1,00,000/- on this count would be just and fair. 21 Therefore, following the earlier order of the Tribunal in the case of the assessee for Assessment Year 1991-92, we allow the expenses of conference and AGM. 21.1 As regard the lunch and canteen expenses, the Tribunal has disallowed the ad-hoc expenses of ₹ 1 lac out of the total ₹ 2,20,000/- disallowed by the CIT(A). Accordingly, following the same ratio/analogy, we disallow ₹ 2 lacs each against ₹ 5,76,143/- on account of lunch expenses and ₹ 4,64,252/- on account of canteen expenses. To sum-up, a total disallowance of these two items would be ₹ 4 lacs. 22 Ground no.6 is regarding sales tax, trade discount and margins money not to be included in the total turnover for the purpose of deduction u/s 80HHC. 22.1 The Assessing Officer noted that the assessee has shown sales exclusive of sales tax, trade discount and cash discount etc. The Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Having considered the rival contention and relevant material on record, we note that the assessee has recorded sales in the P L Account by excluding the sale tax, trade discount and margins. First we take up the question whether sales tax would form part of the total turnover for the purpose of deduction u/s 80HHC in view of the decisions of the Hon ble Supreme Court in the case of Lakshmi Machine Works (supra), the sales tax and excise duty shall not form part of the turnover as per sec. 80HHC(3). 25.1 In the case in hand, the assessee has not booked the sales turnover in the P L account. Thus, for the purpose of sec. 80HHC, the amount of sales tax is neither to be added nor to be included from the total turnover. As regards traded discount and margins is concerned, undisputedly, the sale turnover has been shown by the assessee net of trade discount and margins. It is to be noted that the invoice raised by the assessee is for the net amount and therefore, the amount of trade discount and margins cannot be added to the turnover. In view of the facts and circumstances, we decide this part of the issue in favour of the assessee. 26 Ground no.7 is regarding the disallowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditions as provided u/s 32 are fulfilled. 28.2 As regards the decision of the Jurisdictional High Court in the case of Bralco Metal Industries Pvt. Ltd. (supra), the issue in the said case was the expenditure on the foreign visit of the Managing Director of the assessee in connection with the project of plant machinery; whereas in the case in hand, the expenditure was incurred by the assessee on the persons, who visited for assisting the setting up the project. Therefore, the facts are distinguishable and the case relied upon by the assessee would not help the case of the assessee. 29 Ground no.8 is regarding disallowance u/s 37(2) regarding hotel expenses and air fare. 29.1 The assessee has shown the expense of ₹ 3,46,614/- on account of hotel and expense of ₹ 3,71,534/- on account of air fare in respect of the visits of the foreign persons. The Assessing Officer treated the said expense as entertainment by applying the provisions of sec. 37(2A) of the I T Act. Accordingly, the entire expenditure of ₹ 7,18,148/- was held as in the nature of entertainment and hospitality to the foreign visitors and subjected to the limit specified u/s 37(2A) of the I T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure. An order of the Bombay Bench of the Tribunal in the case of R H Windsor India Ltd vs ITO was relied upon the CIT(A), finding that the facts of the present case are nearly similar, held that the expenditure cannot be treated as entertainment expenditure. The revenue is in appeal. In view of the finding recorded by the CIT(A) that the foreign victors came to India for purposes of attending the board meetings, general discussion, finance, reporting etc. It is considered that the expenditure represented predominantly business expenditure. This decision of the CIT(A) is accordingly upheld and the ground is dismissed. 31.1 Therefore, following the order of the Tribunal for the AY 83-84, we decide the issue in favour of the assessee and against the assessee. 32 Ground no.9 is regarding disallowance of excess provision. 32.1 The assessee made the provision for the expenses which were found by the Assessing Officer in excess to the actual expense. The whole of the excess provision are as under: i) Bank charges ₹ 1,35,175/- ii) Dies and Chemical dvn. ₹ 5,30,276/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed an amount of ₹ 2,52,152/- u/s 43B in respect of sales tax, which was collected from the customers and remain unpaid upto the due date of filing of return of income. 35.2 On appeal, the CIT(A) considered the submissions of the assessee that the assessee has offered a sum of ₹ 1,84,026/- out of the total disallowance made of ₹ 2,52,152/- for tax for the Assessment Year 1993-94 and therefore, the said amount should be reduced from the disallowance. However, the CIT(A) was of the view that the fact of offering any part of the income in the subsequent year is of no consequence as regards the disallowance of sales tax u/s 43B for the Assessment Year under consideration and accordingly, no direction was passed by the CIT(A). 36 We have heard the ld Sr Counsel for the assessee and the ld DR and considered the relevant material on record. There is no dispute that the assessee did not pay the sales tax collected from the customers to the tune of ₹ 2,52,152/- and hence, the provisions of sec. 43B are applicable. Accordingly, we do not find any illegality in the orders of the lower authorities. If the assessee has offered any income part of this disallowance fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in conformity with the accounting practice of showing the discount in the discount on debentures account which is written off over the period of the debentures. The appellant is, therefore, entitled to deduct a sum of ₹ 12,500 out of the discount of ₹ 3,00,000 in the relevant assessment year. The balance expenditure of ₹ 2,87,500 cannot be deducted in the assessment year in question. Question No. 2 (as reframed), therefore, which is the subject-matter of appeal before us, is answered in the negative in so far as it relates to the deduction of ₹ 2,87,500 in the assessment year in question though for reasons entirely different from those given by the High Court. The second part of the reframed question is answered in the affirmative. But only a proportionate part of the discount can be deducted in the assessment year in question as set out earlier. The appeal is disposed of accordingly and the judgment of the High Court is set aside. There will be no order as to costs in the circumstances of the case. 39.1 Accordingly, following the decision of the Hon ble Supreme Court in the case of Madras Industrial Investment Corpn Ltd (supra), we allow propor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble Kerala High Court in the case of The South Indian Bank Ltd (supra) has held that the actual expense for earning dividend income has to be determined and deduction u/s 80M should be granted only on the net dividend income in term of sec 80AA. 42 In the latest decision, the Hon ble jurisdictional High Court in the case of Godrej Boyce Mfg P Ltd vs ACIT reported in 328 ITR 81; though the issue before the jurisdictional High Court was in relation to disallowance u/s 14A; however, the ratio laid down for apportionment of the expenses is very much relevant as primary question is dividend income. Accordingly, the issue is set aside to the record of the Assessing Officer to consider and decide the same in accordance with law after allowing reasonable opportunity of being heard to the assessee. 43 Ground no.13 is regarding non adjudication of the additional ground filed by the assessee before the CIT(A) vide letter dated 24.9.1997. 44 We have heard the ld Sr counsel for the assessee and the ld DR and considered the relevant material on record. The assessee alleged that this issue was raised before the CIT(A) as additional ground vide letter dated 24.9.1997. However, the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt disallowed by the appellant itself u/r 6D and also the amount of ₹ 1,67,768/- which has been disallowed as capital expenditure. iii)(a) On the facts and in the circumstances of the case and in law, the ld CIT(A) has erred in directing the Assessing Officer to reduce R. 1,67,768/- out of total disallowance of ₹ 7,18,148/- made u/s 37(2A) without referring to para 22 of the assessment order wherein due credit was given to the assessee while calculating disallowance out of travel expenses. iv) On the facts and in the circumstances of the case and in law, the ld CIT(A) has erred in deleting the addition made @ 10% on foreign travel expenses amounting to ₹ 77,38,628/- minus ₹ 1,67,768/- being capital expenditure in MCP project. v) On the facts and in the circumstances of the case and in law, the ld CIT(A) has erred in deleting an amount of ₹ 41,15,484/- which was added to the closing stock on account of unutilised Modvat credit vi) On the facts and in the circumstances of the case and in law, the ld CIT(A) has erred in directing the Assessing Officer to compute and allow deduction u/s 80Iand 80HH on the same basis as claimed and dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided expenditure wholly and exclusively let out for the purpose of business. The Assessee had made the disallowance on its own by taking into consideration the above principles. The dispute, as rightly pointed out by learned counsel for the assessee, is not as to whether disallowance has to be computed on a per trip basis or per day basis. In the circumstances, we are of the view that the learned CIT(A) was right in deleting the addition made by the Assessing Officer. We therefore confirm the order of learned CIT(A) and dismiss ground No. 1 raised by the revenue. 52.1 Accordingly, following the order of the Tribunal in assessee s own case for Assessment Year 1991-92, we decide this issue against revenue and in favour of the assessee. 53 Ground no.3 is regarding disallowance made by the Assessing Officer u/s 37(2A) r.w.r 6D. 54 The grievance of the revenue is that the CIT(A) directed the Assessing Officer to reduce the disallowance made at ₹ 1,67,768/- on the ground that the assessee itself has disallowed the said amount, which has been disallowed as capital expenditure by the Assessing Officer without referring to para 27 of the assessment order whereby, the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ag Rs, 50,912/- Participating in Regional Leadership Workshop Divisional Managers Meeting. 7 Shri S S Patel ₹ 42,649/- Organizational HRD issues Management development 8 Mr R C Hartland ₹ 64,729/- Pending projects business plan 9 Shri S G Kale ₹ 61,860/- Tinopal CBS-X Project. 10 Mr A K Bahl Mr J M Smith - Travel not undertaken 11 Mr F Quadros - Travel not undertaken 12 Dr H A Monteiro `Rs.76,055/- Latest developments in various business segments and their repercussion on Indian Business. 13 Dr A B Vaidya - Exchange released by RBI was subject to repatriation of the exchange production of FIRC in due course which was done. 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. In view of the above, there is no merit in Ground No. 3 raised by the revenue and the same is dismissed. 50.1 Accordingly, we decide this issue against the revenue and in favour of the assessee. 60 Ground no.6 is regarding allowing deduction u/s 80I and 80HH. 61 We have heard the ld DR and the ld Sr counsel for the assessee and considered the relevant material on record. At the outset, we note that this issue is now covered by the latest decision of the Hon ble jurisdictional High Court in the case of Associated Capsules P. Ltd. v. Deputy Commissioner of Income-tax, reported in 332 ITR 42 (Bom). Accordingly, the Assessing Officer is directed to compute deduction in view of the decision of the Hon ble jurisdictional High Court (supra) 61.2 Accordingly, we decide this issue against the revenue and in favour of the assessee. 62 Ground no.7 is regarding restricting the disallowance to 2% of the dividend income. 63 This issue is common in both the appeals of the assessee as well as the Revenue. We have already considered and decided this issue. Accordingly, we set aside this issue to the file of the Assessing Officer in terms of similar grounds. CROSS OBJECTI ..... X X X X Extracts X X X X X X X X Extracts X X X X
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