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TMI Blog2007 (4) TMI 725X X X X Extracts X X X X X X X X Extracts X X X X ..... s to deletion of disallowance of ₹ 1,02,62,333 being the expenditure on advertisement. The facts in brief are that the assessee had claimed advertisement expenses of ₹ 3,07,87,000. The Assessing Officer felt that this expenditure obtained for the assessee some element of enduring benefit with regard to enhancing its brand equity. This was contested by the assessee who relied on the judgment of the Supreme Court in case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1. The assessee's submission was not accepted and 1/3rd of this expenditure was disallowed as being of capital nature. Reliance was placed by the Assessing Officer on the decisions of the Apex Court in the following cases: (i) Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (ii) CIT v. Ashok Leyland Ltd. [1972] 86 ITR 549 (SC), (iii) Arvind Mills Ltd. v. CIT [1992] 197 ITR 422 (SC). 4. By the impugned order, the CIT(Appeals) allowed assessee's claim of entire expenditure on advertisement as revenue, in nature. Aggrieved by the order of the CIT(Appeals), the revenue is in further appeal before us. 5. We have considered the rival contentions, carefully gone thorough the orders of the authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a lease of certain lime stone query for a period of 20 years for certain half yearly rent and royalty. In addition to the rents and royalty, the assessee also agree to pay to the lesser annually a sum of ₹ 5,000 during the whole period of lease as a production fee and in consideration of that payment, the lesser undertook not to grant any person any lease, permit or license of lime stone in a group of query without a condition that no lime stone should be used for the manufacture of the cement. The assessee also agreed to pay ₹ 35,000 annually for 5 years as a further production fee and the lesser in consideration of that payment gave similar undertaking in respect of the whole district. The question was whether in computing the profit of the assessee, the sum of ₹ 5,000 and ₹ 35,000 paid to the lesser by the assessee could be deducted as revenue expenditure, the Hon'ble Supreme Court held that payment of ₹ 40,000 was capital expenditure since the payment was made by the assessee to the Government of Assam by way of protection money in consideration for which the Government of Assam undertook to allow exclusive rights to the assessee for prospectin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o produce the components as aforesaid. Since payment was made in respect of a right to produce and not with respect to day to day production, the Assessing Officer treated this expenditure as capital expenditure and added back the entire amount of 10,61,000 to the taxable income of the assessee. 8. By the impugned order, the CIT(Appeals) allowed the deduction of royalty by observing that quantum of payment was linked to the quantum of sales. Had there been no sales, there would have been no royalty to be paid. The revenue is in appeal before us against this decision of CIT(Appeals). 9. We have considered the rival contentions and also deliberated on the case laws cited by the lower authorities in their respective orders, as well as referred by the learned AR and DR during the course of hearing before us, in the context of factual matrix of the case. From the record, we found that agreement with the Japanese companies was signed in 1986, and at that time a lump sum amount of US$2,00,000 was paid. This amount was capitalized by the assessee company itself in the assessment year 1987-88. In the subsequent years, starting from 1989-90, when the assessee commenced production, ro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge the view at its sweet will, without any change of facts and circumstances during the year under consideration. 11. With regard to disallowance of bad-debts written by the assessee, the revenue grounds reads as under : (3) On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the addition of ₹ 41,26,603 and ₹ 37,50,495 made by the Assessing Officer on account of writing of irrecoverable advances to Shing Shung Textile Co. and Qualitron Components Ltd. respectively without appreciating the full facts as brought out by the Assessing Officer in the assessment order. Ground No. 4. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the addition of ₹ 45,54,907 made by the Assessing Officer on account of bad debt written off even though writing off was not bona fide. Ground No. 5. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in directing the Assessing Officer not to include the amount of excise duty in total turnover while calculating the quantum of deduction under section 80HHC. 12. With regard to disallowance of irrecoverable advances written off, the facts in bri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... self. Thus, the fads of assessee's case are distinguishable. 14. By the impugned order, CIT(Appeals) allowed the deduction of impugned amount of interest under section 36(1)(vii). 15. We have considered the rival contentions and gone through the orders of the authorities below. In the instant case, the principal of ₹ 1.50 crores is not the amount in issue. This amount could be recovered by the assessee and, therefore, the question of writing off this amount did not arise, what has been written of is the interest thereon. The interest is a revenue receipt. It has been taxed as such in the earlier years. No recovery was possible since the debtor had become sick and was before the BIFR. As the assessee had actually written of this amount and the whole of the amount had suffered tax in earlier years. We do not find any infirmity in the orders of the CIT(Appeals) that the writing off of this amount is in accordance with the provisions of section 36(1)(vii ) of the Act. Otherwise also, the amount of advance was given in normal course of business, interest thereon offered as revenue receipt on accrual basis, non-recovery/receipt of interest in subsequent year amounts to bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods. As the goods were not actually supplied, it was not only reasonable but also legal rights of the assessee for getting the amount of advance return. We also found that M/s. Qualitron went into liquidation and its ability to repay the amount was almost non-existence. Under these circumstances, the assessee by taking prudent business decision to give up hopes of recovery, therefore, written of the amount as bad debts. Under these facts and circumstances, we do not find any infirmity in the orders of the CIT(Appeals) for deleting the disallowance of bad debts as claimed by the assessee. 19. With regard to short receipt of duty draw-back, we found that the assessee was entitled to receive duty draw back from the Government on exports made by it during earlier years. The assessee company accordingly treated the receivable amount as income under section 28(iii)( c). However, subsequently, the government reduced amount of duty draw back payable to the assessee and accordingly, paid lesser amount to the assessee. It is this short amount of ₹ 5,91,999 which has been written off in the books. Similarly, in respect of special import licenses and DEPB, the facts are that the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive as they had represented to the assessee company that they had incurred the expenditure on certain advertisement and other items. But as the amount of claim made by these parties did not relate to the year under consideration, the amount was treated in the nature of bad debts and were written off as bad debts, with regard to the amount outstanding to CSD canteen, it was pointed out to the Assessing Officer that the assessee had appointed an agent in Jammu Kashmir by the name of Salora Velley Vision. The assessee had received orders for the supply of television sets to CSD canteen from its agent Salora Valley Vision. The agent used to collect the amount, who in turn used to remit the amount to the company. The said agent collected the amount from CSD canteen but did not remit the amount to the company and as the agent could not be traced the amount was written off as bad debt. The CSD canteen had informed the assessee company that the amount were paid to their agent Salora Valley Vision and therefore, they refused to pay the amount. The Assessing Officer objected to the writing of amount receivable from the Army. He, therefore, disallowed the same. 22. By the impugned order, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer for his comments. The CIT(Appeals) recorded a finding that alleged amount of ₹ 12,72,922 due from 9 parties represented sale of TV sets and components in earlier years the full amount was accounted for as income on accrual basis, the cheques received from these parties were dishonoured and payments were made in parts. After taking all efforts, the assessee written off on the last date of the accounting year. We have considered the rival contentions. As all the conditions prescribed for allowing bad debts under section 36(1)(vii) have been satisfied and necessary finding to this effect has also been recorded by the CIT(Appeals), we do not find any reason to interfere in his order for deleting the disallowance of ₹ 12,72,922. 27. With regard to the allowance of loss claimed on embezzlement, the CIT(Appeals) found that the TV sets sold by the staff of Jaipur Branch was not accounted in the books of account and some of the cash were also embezzled by them. He, therefore, allowed the loss on embezzlement as revenue loss. 28. We have considered the rival contentions and found from the record that during the course of audit, the embezzlement was discovered, an FIR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carefully gone thorough the details of expenses claimed in the books of account. We found that bills with regard to these expenses were received by the assessee after the books of the company were closed, the same could not be claimed as expenditure during the relevant previous year. We found that looking to the nature of the expenditure so incurred which were crystalized during the year, there is no reason for disallowing the expenditure, genuineness of which has not been doubted and the bills for which were received by the assessee only during the year under consideration. We, therefore, reverse the order of the CIT(Appeals) and direct to allow the sum of ₹ 2,61,410. 33. Ground taken by the revenue with regard to computation of total turnover for calculating deduction under section 80HHC reads as under: On the facts and in the circumstances of the case, the Ld. CIT(A) erred in directing the Assessing Officer not to include the amount of excise duty in total turnover while calculating the quantum of deduction under section 80HHC. 34. This grievance of the revenue relates to computation of total turn over while working out deduction under section 80-HHC of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the exports sales made by the company, it made a profit of ₹ 4,59,000 due to foreign exchange rate fluctuation. In addition, it also suffered loss of ₹ 1,92,000 on exchange rate variation in respect of working capital loan taken abroad for US$9,75,000. The net effect was a loss of ₹ 53,99,000 which was charged to revenue account. The Assessing Officer has treated the net amount as a capital loss and accordingly disallowed the same. 39. By the impugned order, the CIT(Appeals) held foreign exchange loss attributable to import of raw materials amounting to ₹ 56,66,000 was revenue in nature. The CIT(Appeals) found that loss of ₹ 1,92,000 was attributable to repayment of working capital, since the higher amount was required to be paid on account of principal sum due and not on account of interest, he, therefore, held that it was a capital loss and cannot be allowed. 40. We have considered the rival contentions. As per our considered view, the loss suffered on account of import of raw material was clearly a revenue loss in view of the decision of the Hon'ble Supreme Court in case of Satluj Cotton Mills Ltd. v. CIT [1979] 116 ITR 1. We, therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion was quite reasonable. He further observed that reason for Increase defective sets during the year was due to the fact that quality check exercise of inventory was conducted, wherein it was found that number of defective sets were much larger than expected. 44. We have considered the rival contentions and found from the record that in the earlier years the physical inventory taken for the purposes of valuation of closing stock was done by simply counting the number of sets available on the last day of the accounting period. However, in this particular year, for the first time, a quality audit of inventory was also conducted whereby it was revealed that the number of defective sets was in fact much larger than expected. It is not the case that all these defective sets were produced only during this year. They were lying in stock and were carried forward from the previous years and remained unsold. They were counted as good sets and valued as such. To that extent, the closing stock of earlier years got inflated and tax was paid by the company on an artificially higher income. This exercise was only by way of correction and to find out the actual position of saleable goods. Eff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce period already allowed by it, then such payments should not be counted as defaults even for the purpose of counting the number of defaults. 49. Stroud's judicial Dictionary (3rd edition) states in connection with Days of Grace that a right of action does not accrues until after the expiration of the whole of the last days of grace, Venkataramaiya's law lexicon with legal maxims says as follow : The days of grace, strictly so called are clearly days before the expiry of which there is no right of action for the party giving the days of grace. Meaning thereby if any employer makes such payments within such period of grace, not only is he not liable to pay any damage in accordance with employee's provident fund scheme and the relevant Act, but by virtue of circular dated 29-4-1967 as stated above, he will also not be treated to be in default. Hence, the five days period of grace after 15th for the succeeding month to be considered merely as an extension of the 15 days all consequences of making payment within 15 days should be considered to made the payment within due date. The explanation to clause (va) of section 36(1) again define due date rather i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herein even the retrospective amendment under section 43-B with regard to deletion of second proviso to section 43-B was considered in detail. Hon'ble Madras High Court have also considered the decision of Hon'ble Rajasthan High Court in case of CIT v. Udaipur Distillery Co. Ltd. [2005] 274 ITR 429, Hon'ble Calcutta High Court in case of CIT v. Sudero Services (P.) Ltd. [2004] 268 ITR 505, Halmira Estates Tea (P.) Ltd. v. CIT [2004] 268 ITR 498, Hon'ble Kerala High Court in case of CIT v. Standard Tile Clay Works (P.) Ltd. [2004] 265 ITR 525, Hon'ble Madras High Court in case of CIT v. Madras Radiators Pressing Ltd. [2003] 129 Taxman 709 were discussed in detail and after relying on the decisions of Sedco Forex International Drill Inc. v. CIT [2005] 279 ITR 310 (SC), wherein it was held that unless there is an amendment which is clarificatory or declaratory in nature, for the removal of doubts, the same cannot be read into the main provision with effect from the time when the main proviso came into force. But, in the instant case, there is no material available to hold that the impugned deletion is either clarificatory or declaratory or intended for the remo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the reorganization of the staff and redrawing of line of responsibility which amounts to an internal improvement in the working method. There is no element of capital expenditure involved. There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied bl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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