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TMI Blog1984 (3) TMI 112X X X X Extracts X X X X X X X X Extracts X X X X ..... der the head 'Advertisement'. The payments have been proved having been made by account payee cheques and properly entered in the accounts. The bill issued by the committee in respect of the payments has been produced before the authorities and the vouchers were also available. The mere fact that the assessee was not in a position to produce the souvenirs could not be a reason for disallowing the expenditure. Advertisement under aegis of an all India body has substantial business advantages from the point of view of advertisement itself. That apart, according to the learned counsel, the payment was to a politically active body not by way of donation but for encouragement of the assessee's activities. From the point of view of commercial expediency also the expenditure was allowable. Orders of the Tribunal allowing such expenditure have been produced to support the assessee's case. 4. For the department stress is laid on the orders of the authorities below. It is pointed out that the fact of the payment for advertisement purposes has not been proved by the assessee. At the original stage vouchers were also not available. The souvenirs were not produced to indicate the purpose for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 35(2)(iv) of the Income-tax Act, 1961 ('the Act') by section 7(2) of the Finance Act, 1980. It is pointed out by the learned counsel for the assessee that this very amendment is challenged before the Supreme Court. 7. After hearing the learned counsel for the department, we direct that the matter be sent back to the ITO for fresh decision in the light of the Supreme Court's interpretation of the amendment. 8. Expenditure on shareholders' visit to the factory : The ITO disallowed a sum of Rs. 88,663 comprised of six items such as hire charges of buses, furniture, expenditure on food and provisions, etc., incurred on account of the shareholders of the assessee-company visiting the factory. The disallowance was made on the ground that this was in the nature of entertainment expenses. The addition was upheld by the Commissioner (Appeals). 9. The learned counsel for the assessee has pointed out that the visits of the shareholders to the factory were arranged with a view to acquaint and inform the shareholders about the business of the assessee and the manner of its working. It encourages alertness on the part of the shareholders to the assessee's business and also in encour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the difference between the shortage and excess. He also sustained a sum of Rs. 20,000 on account of shortage in textile pulps and tyre cord pulp. 13. The learned counsel for the assessee pointed out that a continuous inventory system is maintained which was periodically checked by the internal auditors. There were as many as 30,000 items comprised in the inventory. The shortage has to be seen against the huge turnover. Even here while there was shortage in respect of some items there was excess in respect of this---which tended to show that the shortage or excess was not a real one but could even be the result of mistakes in entries or mistakes in identity of the items. An overall view of the business has to be taken. 14. For the department stress is laid on the orders of the authorities below, especially the ITO's order and the IAC's directions. It is specifically pointed out that a fact of the shortage was detected by internal audit party of the company. According to the learned counsel, this itself justified the addition. Even though the turnover is large, elaborate accounts being kept or capable of being kept by the company, there should be no shortages at all. 15. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso during leave period. On the basis of the above report, the ITO made a disallowance of Rs. 30,000. This was upheld by the Commissioner (Appeals). 17. Before us the learned counsel for the assessee has pointed out that the internal auditors themselves had expressed administrative doubt about the nature of the user of the motor cars. In the first place they have also not specifically pointed out to any such user outside the city limit or noted that they are not for business. Even if the administrative procedure did not warrant the user of the motor cars outside the city limits, so long as they were utilised by the officials and the expenditure was incurred by the assessee for its business that would be proper expenditure. In fact, disallowance under section 40A(5) of the Act has been made in respect of specific individuals, there was no justification for another disallowance on a general ground. 18. For the department it is pointed out that the burden is on the assessee to prove that the expenditure incurred is for the purpose of the business. The observation of the internal auditors that the cars have been used by officials while on leave, etc., lends support to the inference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee has a large turnover. It is required to meet the expenses of its own staff on work at these places. It is certainly more advantageous to the company to house the staff in its own guest houses rather than then spend heavily on hotels, etc. On principle, therefore, the expenses claimed have to be allowed. The disallowance of Rs. 10,000 is sustained on estimate because under the law the expenditure incurred on account of outsiders has to be disallowed. 23. Stock exchange listing fees : The ITO disallowed a sum of Rs. 6,000, Rs. 3,000 each listing fees for the Bombay Stock Exchange and Ahmedabad Stock Exchange. According to the ITO, this was not incurred for the assessee's business. The disallowance made by the ITO was upheld by the Commissioner (Appeals) who treated it as in the nature of capital expenditure and even otherwise not allowable under section 37(1). 24. After hearing the learned counsels for both sides, we see no reason to sustain this disallowance. Apart from the fact that the listing in the stock exchanges may give certain incidental advantages to the company as an entity and also to the shareholders, listing in the stock exchange is a matter of good advertis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -- 6,49,673 ------------ Rounded to Total 6,49,670 ------------ The assessee for the purpose of its manufacture was to have a regular supply of coal which in turn required obtaining actual handling services for the procurement of coal, procurement of railway wagons for the regular and steady supply including transportation from the coal depot to the feeding point in the factory. The assessee entered into a contract with Associated Labour Corpn., Ahmedabad for a period 1-6-1974 to 31-5-1975. After expiry of the above contract another contract was entered into with Bharat Agencies, Bombay, for a period of two years beginning from 23-7-1975. The ITO found that the contracts provided for charging of penalty, recovery of demurrage charges and recoupment of losses on account of the default of the contractors. The report of the internal auditors of the company have criticised the performance of the first contract and also referred to the company's failure to take penal action for the default of the contractors, waiver of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee at its discretion. To have continuity of supply of fuel and also have such supply at the optimum advantage level, the assessee had to maintain the best relations with the supplier. Invoking of penalty clauses and cutting off of one source of supply would not have enabled the assessee to get an equally efficacious alternative supply which only would have enabled it to continue its business. Apart from this, this work would have led to disputes with the suppliers taking the matter to Court either for specific performance or for award of demurrages. The loss, the assessee's business would have suffered from these, would have far outweighed the payment of any extra amount for fuel or non-enforcement of any penalty clause. The expenditure on coal and fuel charges incurred by the company came to nearly Rs. 6 crores. Even if the assessee enforced the penalty clauses, the recovery could have been only at best 1 per cent. This would be effective only if the other side did not contest the claim and no legal outside impediment arose and no legal charges were to be incurred. The further question of regular supply of fuel by a contractor was also there. According to the learned couns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding to the ITO, the details of services rendered by the brokers were not produced. The goods were sold in fact directly by the assessee. As against the disallowance made by the ITO of Rs. 6,04,869 in the draft assessment orders, the IAC restricted the disallowance to Rs. 2,29,102. The brokerage was paid partly under the Rules of the Bombay Yarn Merchants Association and Exchange Ltd. and partly due to the trade practice which prescribed specific payment of brokerage at stipulated rates. According to the rules of the market and the trade practice, the assessee had to sell its goods through the brokers and incur the stipulated brokerage. The IAC reduced the disallowance made by the ITO on the ground that the expenditure was incurred in the course of the business. The Commissioner (Appeals) accepted the assessee's claim and deleted the addition. 34. The learned counsel for the department has contested the decision relying mainly on the order of the ITO and the observations of the IAC with regard to the draft assessment order. 35. The matter is covered by the order of the Tribunal dated 28-6-1980 for the assessment years 1973-74 to 1975-76 in the assessee's own case. Following tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade out before the Commissioner (Appeals), we see no reason to interfere with his order. There is no dispute about the fact that the assessee has incurred expenditure to this extent. In the actual carrying on of the business it may be necessary to depart from established norms theoretically prescribed in order to run the business. It is not always possible to make purchases only from parties specified or also from only the lowest bidders. The exigencies of the business, the requirement for supplies at any particular time and other circumstances may necessitate making purchases which are not strictly in accordance with the prescribed theoretical norms. There is no allegation that the purchases were made not in the ordinary course of the assessee's business. There is also no dispute about the goods having been purchased or the payments having been genuinely made. The mere fact that certain guidelines with regard to the purchases were deviated from should not be a reason for coming to the conclusion that the expenditure was not incurred for the purposes of the business. The addition made by the ITO is moreover a notional addition having no real relation to the expenditure incurred. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conferences, etc., and for other purposes of promotion of sales. Following the decision of the Commissioner (Appeals) in the earlier year in the assessee's own case and the decision of the Bombay High Court in the case of CIT v. Shah Nanji Nagsi [1979] 116 ITR 292, the Commissioner (Appeals) deleted the addition. 44. In contesting this deletion the learned counsel for the department has referred to the law in this regard. The amended Act directly justified the disallowance made by the ITO. 45. Having heard the assessee's learned counsel, we remit the matter to the ITO for considering the nature of the expenditure for the purpose of allowance in the light of the amended provisions. 46. Loss on purchase of shares : The assessee-company advanced a sum of Rs. 23,100 to the association of Manmade Fibre Industry by way of subscription. The assessee was a unit member of the association. As per the arrangement of the members with the association each member was to advance loans to the association without interest for the proper conduct of the association's activities. Subsequently, it would appear that on account of supervening circumstances the amount was written off by the associat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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