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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 ..... ar expenditure under 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amendment of section 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 als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he addition 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd also 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 inferen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee 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 advertisemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sp; recovered from the contracter 5,93,683 (c) Demurrage charges remaining to be recovered from the contractor. 21,700 (d) Difference of demurrage charges not recovered from the contractor 1,690 ------------ 6,49,673 &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iling a suit, etc. This not having been done, even as a matter of fact, the right of the assessee could not be established. 30. In contesting the order of the Commissioner (Appeals), the learned counsel for the department has pointed out that the assessee had a complete right to recover these amounts. The mere fact that the claim was not made and the amounts were not recovered would not make the amount an allowable deduction. The assessee has to exercise its rights under the contracts entered into by it. If such rights were not exercised any expenditure incurred being reimburseable could not be treated as actually incurred. Referring in particular, to the purchase of furnace oil, it is pointed out that the assessee was entitled to make this recovery. The fact that it did not recover the amount would not be sufficient to allow it. 31. For the assessee it is pointed out that the penalty clauses are of a deterrent nature to be used sparingly and in order to ensure smooth handling of the coal for the factory, the assessee would not have enforced these clauses. In order to ensure continuity of the supply day-to-day and also get the services of experienced coal handling contractors, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee it works out to even less than 1 per cent. The turnover of the assessee is nearly Rs. 50 crores. Looking to the substantial profit earned by the assessee, the question to be asked is whether it was necessary or advisable for it to press its claims under the contract. Enforcement of the claim may not result in a full recovery in the first place or even any recovery. It may result in incurring legal expenditure not reimburseable. The consequent difference of opinion with the contractors may obstruct the assessee's business leading to resultant losses. Taking all these facts into account, it would not be proper to come to an unambiguous conclusion that the assessee has not acted as a prudent businessman with regard to this matter. The opinion of the internal auditors like that of any auditor would be the mere hind-sight and based on this it would not be proper to come to a conclusion that the assessee should have involved himself in endless litigation for enforcing apparently every right under the law he could enforce. In business matters as elsewhere discretion is always the better part of valour and merely because the assessee decided in favour of not fighting out a question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be reported and approved by the committee of directors of the company. It would appear that the assessee made certain purchases from non-registered dealers and this fact was not reported to the committee of the directors. Orders were also placed with the second lowest bidders instead of the lowest bidders. Quotations received late were also some times accepted. The internal auditors of the company had made reference to some of such purchases. On the analysis of such purchases not strictly conforming to the guidelines laid down by the company, the ITO disallowed the purchase prices by adopting certain percentages such as 10 per cent of purchases from registered dealers and 5 per cent on purchases from the second lowest bidders. The disallowance of Rs. 2,47,750 was made on this basis. The ITO rejected the explanation of the assessee that the normal procedure for purchase had to be deviated from in order to meet immediate requirements of the business. The Commissioner (Appeals) deleted the addition. 37. Before us the learned counsel for the department has pointed out that it was obligatory on the assessee as a company to conform to the guidelines laid down by itself. No justific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... That the amount has been spent is not in dispute. The expenditure was incurred to protect the management and make the running of the business proper. As this would have substantially affected the assessee's business, the assessee had to take the necessary legal steps and incurred the expenditure. The amount cannot be disallowed on this score. Even though the service was rendered in an earlier year, the bills in respect of the professional services were received by the company in the previous year relevant to the assessment year under appeal. This has been verified by the Commissioner (Appeals). After hearing the parties, we, therefore, decide to confirm the order of the Commissioner (Appeals) on this point. 41. Shortage in inventory : In the assessee's appeal disallowance on account of shortage was contested and we have held that no addition on this score is justified. As the facts stated in that connection would indicate, the Commissioner (Appeals) adjusted the excess in some of the items against the shortage. The department has challenged this adjustment. Our decision in the assessee's appeal on this point would cover the present dispute also. Hence, this ground is rejected. 42 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure incurred for the business. 49. Interest on superannuation fund : For the late payment of superannuation contribution to the LIC, the assessee had paid interest of Rs. 3,950 which was claimed as deduction. The ITO rejected the claim, but the Commissioner (Appeals) directed allowance of the same. This is objected to in the departmental appeal. The disallowance was made on the ground that this interest had characteristics of a penal interest which in the light of judicial decisions was not allowable. 50. After hearing the parties, we agree with the Commissioner (Appeals) that in paying the interest the assessee had committed no wrong or infraction of the law. The interest was just a normal incidence in carrying on the business where the assessee secured the continuance of the policies which would have lapsed if the payment had not been made. 51. Reimbursement of medical expenses : The ITO took into account the reimbursement of medical expenses totalling up to Rs. 691 for the purpose of applying the provisions of section 40A(5). The Commissioner (Appeals) deleted the addition. 52. We find that this is in conformity with the decision of the Special Bench of the Tribunal in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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