9911796707
TMI Blog1998 (5) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... mum salary allowable to seven directors would work out to Rs. 7,14,000, as per provisions of s. 40A(5). He, therefore, proposed to disallow the excess amount of Rs. 4,28,923 and confronted the assessee. The assessee submitted that reimbursement of medical expenses could not be taken as a perquisite in the hands of the assessee-company for the purpose of disallowance under s. 40A(5). AO, however, rejected the plea and observed that reimbursement of medical expenses was to be taxed as part of salary only if the amount paid out exceeded Rs. 5,000. He also observed that reimbursement of such expenses like operation fee, hospitalisation charges and cost of medicines are excluded from taxable income without any ceiling if the expenditure is incurred on medical treatment in a hospital approved by the Government. He further observed that Shri Om Prakash Munjal had been suffering from retention of urine. He referred to the resolution passed by the Board of Directors on 10th Sept., 1985, that Shri Munjal should undergo operation and medical treatment in USA and the expenditure for his medical expenses including to and fro and stay of Shri Munjal and his wife would be incurred and borne by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of an employee and not in the case of assessment of a company. He submitted that the said expenditure was allowable even under s. 36. He referred to the provisions of s. 40A(5)(a), second proviso, and pointed out that contribution to provident fund, superannuation fund, leave travel allowance and passage money, were outside the purview of the said provision. Learned counsel relied on the cases reported in T.T. (P) Ltd. vs. ITO (1979) 8 CTR (Kar) 298 : (1980) 121 ITR 551 (Kar), CIT vs. Avon Cycles (P) Ltd. (1980) 18 CTR (P H) 231 : (1980) 126 ITR 448 (P H) and CIT vs. Avon Cycles (P) Ltd. (1983) 144 ITR (St) 14. Learned CIT(A) considered the submissions and the case law cited. She held that the decision cited were distinguishable on facts. She observed that in (1980) 18 CTR (P H) 231 : (1980) 126 ITR 448 (P H), issue of commission paid to the firm acting as a sole selling agent was involved. She observed that Hon'ble Punjab Haryana High Court have held that payment by the company or firm did not amount to direct or indirect remuneration and fee to the director and relatives of the director and that the payment could not be disallowed under s. 40(c). She referred to the Board's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... j Pahwa Bros. Tribunal decision dt. 30th Sept., 1994 in ITA No. 1264/1989 asst. yr. 1986-87 wherein it was held that such medical expenditure could certainly be treated as part of salary, as held by Hon'ble Calcutta High Court in the case of I.E.L. Ltd. and Hon'ble Delhi High Court in the case Instalment Supply (P) Ltd. vs. CIT (1984) 41 CTR (Del) 334 : (1984) 149 ITR 457 (Del), but AO had made the disallowance under s. 40A(5) by treating the aforesaid expenditure as perquisite and not as salary, therefore, disallowance could not be upheld. The Tribunal rejected the Revenue's appeal on the issue. 2.3. On a query from the Bench, as to whether it was a case of reimbursement of medical expenses in the case of Shri O.P. Munjal, as the company had purchased the air tickets, etc., learned counsel submitted that foreign exchange was released by the RBI and handed over to Shri Munjal and in the ultimate analysis the expenditure worked out to reimbursement and that it will fall outside the purview of the provisions of s. 40A(5). He referred to the details of expenses mentioned at p. 17 of the paper-book. He submitted that the said details include, apart from salary, bonus, leave wages ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expended wholly and exclusively for the purposes of the business of the assessee. 2.4. Learned Departmental Representative Shri Rakesh Goyal relied on orders of the tax authorities and submitted that only payments in cash were excluded from the purview of s. 40A(5). He also submitted that the director Shri O.P. Munjal was having a substantial interest in the company and the provision of s. 37 could not be invoked on the ground of commercial expediency as such expediency was not there. He further submitted that even medical expenses have to be included within the ceiling of Rs. 1,02,000, as mentioned in s. 40A(5). He submitted that the decision in (1997) 137 CTR (P H) 606 : (1996) 221 ITR 308 (P H) deals with cash reimbursement and that the said decision was distinguishable vis-a-vis decision of Hon'ble Supreme Court in (1996) 132 CTR (SC) 248 : (1996) 219 ITR 644 (SC). He, therefore, urged that the disallowance should be confirmed. 2.5 We have carefully considered the submissions made by both the parties and have also perused the orders of the tax authorities. We have also seen the cash law relied upon by both the parties. It is observed that AO has included all the expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,000 on medical treatment already undergone". It is further mentioned that Shri Munjal was advised rest by the doctors for 5-6 months and that he had decided to take complete rest for the said period. The chairman of the Board apprised the members that Shri Munjal was mainly managing the marketing department and that there was no managing director or whole-time director appointed since the year 1980. He further stressed on the usefulness and necessity to the assessee-company of the services of Shri Munjal and proposed that in the interest of the company the Board should insist upon him to undergo operation and ensure best treatment available anywhere in the world. The company thus decided to incur all the expenditure necessary for medical treatment including to and fro travelling expenses, stay expenses incurred in India and abroad including that of his wife. A resolution to this effect was thus passed on 10th Sept., 1985. It is clear from the said resolution that Shri Munjal was not prepared to bear the expenses for his treatment abroad and that the company thought it necessary in the interest of business to meet the expenses on his treatment abroad for the heart ailment. In view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explain as to why the difference between cost price and FOB value amounting to Rs. 10,26,767 be not added to the valuation of closing stock. The assessee, vide letter dt. 14th Jan., 1991 submitted that the system of valuation of goods in transit for export was same as in the last year, i.e., lower of the cost price or FOB value. The assessee emphasised that the goods to be exported were jointly under the trade-mark of foreign buyers and the assessee could not sell those goods in India and that if such goods were sold, they would fetch only the scrap value. The assessee pointed out that any variation in closing stock would not affect the tax liability since any addition made in the year under consideration would be set off against income of next year because the rate of taxation in the case of companies was maximum in both the years. The assessee also submitted that export incentives would become due after goods leave Indian shore. AO, however, did not accept the plea of the assessee and ultimately made an addition of Rs. 10,17,767. AO also relied on the case CIT vs. British Paint India Ltd. (1991) 91 CTR (SC) 108 : (1991) 188 ITR 44 (SC). 3.1. On first appeal, CIT(A) referred t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , wherein it was held that while valuing closing stock of fettilizer at market rate, the assessee was not required to include subsidy announced by Governments price support to which the assessee was entitled and which was actually received during the next year and was taxed in that year. 3.3. Learned Departmental Representative relied heavily on orders of tax authorities. He also submitted that FOB value was not correctly taken by the assessee and that the goods had a ready market in India. He further submitted that the decision in (1965) 56 ITR 360 (Mad), relied upon by learned counsel, is on different facts as in the said case the foreign market price was 'nil' as there was no demand. 3.4. We have carefully considered the rival submissions and have perused orders of the tax authorities and the other papers, to which our attention was invited during the course of hearing. We have also gone through the case law relied upon by learned counsel. It is observed that the assessee had shown value of closing stock in respect of the goods lying for export at port at FOB value, which is claimed to be the market value of goods for foreign buyers. The tax authorities have taken the cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be paid on this loan unless dividend was paid by that company. For further reasons given in the assessment order, AO concluded that the plea of the assessee that it had got huge interest-free funds was misleading. He referred to the advance of Rs. 1 crore to M/s Majestic Auto Ltd. and the rate of interest charged at 10 per cent from M/s Munjal Castings. He also mentioned that the assessee had made huge advances to S/Sh. O.P. Munjal, Brijmohan Lal Munjal, Satyanand Munjal, Vijay Kumar Munjal, Ashish Kumar Munjal and Suresh Chander Munjal and that the interest at 10 per cent only had been charged from those persons. He also observed that the assessee was paying interest at more than 18 per cent to the bank, apart from bank charges but was charging interest at 10 per cent from the above-mentioned persons and not charging any interest from M/s Hero Fibres Ltd. He, therefore, held that interest paid by the assessee to bank and others and on fixed deposits was not for the purposes of business and deduction of interest of Rs. 20,53,120 could not be allowed in full. He computed the deduction allowable on account of personal expenses at Rs. 4,14,110 and disallowed the balance amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce amount of Rs. 65 lakhs was advanced out of cash credit account and the closing balance, after encashment of cheque of Rs. 30 lakhs on 23rd Feb., 1987 was credited. She also observed that an amount of Rs. 15 lakhs was advanced on 10th March, 1987, and the opening balance in bank on that date was debit of Rs. 1.44 crores but at the end of the day overdraft was reduced to Rs. 1.24 crore. She further observed that an amount of Rs. 28 lakhs was advanced on 25th Feb., 1987, and opening balance on that date was credit of Rs. 37.63 lakhs. With reference to advance made to M/s Hero Fibres Ltd., CIT(A) held that it was a contractual obligation. She also observed that advances were made in earlier years and not in this year and no such addition was made in earlier years. She also observed that once M/s Hero Fibres Ltd. was sold, the assessee recovered interest from buyer of the company and had shown the same as its income in later years. With reference to advances to directors, CIT(A) observed that the said advances had been made from own funds of the company and on the relevant dates there was a credit balance and 10 per cent interest had been charged from the parties. She observed that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal and wholly for the purposes of business. Learned counsel next referred to the decision of the Tribunal dt. 16th Aug., 1994 in ITA No. 1198/89 asst. yr. 1986-87) in the case of Highway Cycle Inds. Ltd., wherein similar view had been taken and the issue decided in favour of the assessee. He also referred to the decision of the Tribunal dt. 18th Jan., 1994 in ITA No. 215/89 (asst. yr. 1985-86), wherein the issue of disallowance of Rs. 2,17,314 on account of advances to the parties was considered. In the said case, the assessee had advanced moneys to certain persons but did not charge any interest. The assessee had claimed that the money had been paid to Dr. Surinder P.S. Pruthi and Sh. S. Banerjee for carrying on certain business projects by the two experts. AO rejected the plea and made an addition @ 15 per cent per annum. The Tribunal observed that the assessee had overdraft account in bank but that alone would not be sufficient to prove that the advances made to Dr. Pruthi and Shri Banerjee were out of the borrowed funds. It further observed that unless there was nexus between the borrowings and advances, it will not be appropriate to disallow any part of interest paid by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of M/s Majestic Auto Ltd. to the extent of Rs. 36,587, we have perused details placed at p. 115 of the paper-book, whereby learned counsel has tried to make out a case that if at all disallowance of only Rs. 14,414 was required. It is observed that whereas the date mentioned by CIT(A) in her order at p. 14 with reference to advance of Rs. 28 lakhs is 25th Feb., 1987, and opening balance on that date has been mentioned as credit of Rs. 37.63 lakhs, the amount of advance mentioned in calculation sheet placed at p. 115 in Rs. 20 lakhs as on 25th May, 1987, when there was a debit balance of Rs. 3,96,203, which ultimately was converted into credit balance on 4th June, 1987 at Rs. 8,54,653, where on the assessee has calculated interest at 16 per cent for ten days amounting to Rs. 1,737. We feel that it will be just and fair to restore the issue of addition of Rs. 36,587 to the file of AO for verification of the factual position only in this respect, after allowing the assessee a reasonable opportunity of being heard. In case the position mentioned is found to be correct, AO may allow appropriate relief to the assessee, otherwise disallowance of Rs. 36,587 would stand. 5. Ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee's main object was to identify new sources of plant and machinery as well as to equip itself with modern technology and that the same would have benefited the assessee because it was also manufacturing bicycles. It was, therefore, urged that no disallowance was called for. The assessee relied on the decisions reported in Ambica Mills Ltd. vs. CIT (1964) 54 ITR 167 (Guj) and Addl. CIT vs. Motipur Sugar Factory (P) Ltd. (1982) 128 ITR 84 (Pat). Learned CIT(A) considered the submissions and observed that Shri Mahesh Munjal was neither director nor employee of the company. She also observed that Mahesh Munjal was director of Gujarat Cycles Ltd. and the expenditure incurred on his visit cannot be met by the assessee. She, therefore, sustained the disallowance of Rs. 42,271. With reference to disallowance of Rs. 80,000, CIT(A) observed relying on the cases of Hindustan Milkfood Mfrs. Ltd. vs. CIT (1989) 80 CTR (P H) 81 : (1989) 179 ITR 302 (P H) and India Cement Co. vs. CIT (1966) 60 ITR 52 (SC) that the assessee had visited Tanzania and Zambia with good intention for considering the viability of taking over certain companies. She held that the expenditure was allowable and it did no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purposes and in connection with running business. (iv) CIT vs. Woodcraft Products Ltd. (1993) 111 CTR (Cal) 149 : (1996) 217 ITR 862 (Cal) wherein it was held that travel expenses incurred in connection with expansion of business which ended in failure were revenue expenses and allowable under s. 37. He, therefore, urged that disallowance of Rs. 42,271 be deleted. 5.3. Learned Departmental Representative relied heavily on order of AO and his subsequent arguments were reiteration of line of argument taken by AO to make the disallowance. Learned Departmental Representative stressed that Gujarat Cycles Co. was a sister-concern and that CIT(A) has rightly sustained the disallowance of Rs. 42,271. He pointed out that the decision reported in (1989) 179 ITR 302 was distinguishable on facts and CIT(A) erred in allowing expenditure of Rs. 80,000 to the assessee. He submitted that in this case the existing company was incurring expenditure for taking over of companies in foreign countries and that expenditure could be capitalised in the case of taking over of the companies in Tanzania/Zambia. 5.4. We have carefully considered the submissions made by both the parties and have als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed in past also. He pointed out that there was no such disallowance for asst. yr. 1982-83. He also pointed out that the assessee had gone to the Settlement Commission in relation to asst. yrs. 1984-85 to 1987-88 on this issue also, in addition to other issues. Learned counsel, however, relied on the following decisions for the proposition that expenditure incurred on wives which has been allowed in case of foreign buyers should also be allowed for the year under consideration and that mere fact that in this case tour within India is involved should not make any difference. (i) Glaxo Laboratories (India) Ltd. vs. ITO (1986) 26 TTJ (Bom) 214 (SB) : (1986) 18 ITD 226 (Bom)(SB) wherein it was held that foreign travel expenses of the wife of the chairman of the board of directors of the assessee-company were allowable as business expenditure. In the process, the Tribunal held that "in the modern age, and more so in the western countries, the senior executives are, as a matter of social custom, accompanied by their wives when they visit, though for business purposes, has necessarily some social aspects also. Under these circumstances, the impugned expenditure was an allowable expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of Rs. 29,465 in the case of Shri Satyanand Munjal, Rs. 33,851 of Shri Brijmohan Lal Munjal, Rs. 5,287 of Shri S.K. Roy, Rs. 89,856 in the case of Shri Ashish Kumar Munjal. There was no information regarding expenses at the residence of Shri Ashish Kumar Munjal. AO disallowed an amount of 10 per cent in the case of first three directors and an amount of Rs. 20,000 in the case of Shri O.P. Munjal on the ground that he should have been getting information from outside in respect of his illness. He disallowed an amount of Rs. 2,000 on estimate basis in the case of Shri Ashish Kumar Munjal. Total disallowance worked out to Rs. 28,859. 7.1. On first appeal, learned CIT(A) held that it would be just and fair to disallow 10 per cent of the expenses even in respect of Shri O.P. Munjal. She, therefore, reduced the disallowance accordingly. 7.2. Learned counsel contended that there could be no disallowance in the case of limited company on account of use of telephone on the ground of the expenditure being for non-business purposes. He relied on the decision in the case of Asstt. CIT vs. Oswal Woollen Mills Ltd. (1995) 51 TTJ (Chd) 152, wherein it was held that in the case of publ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in respect of visits of export dealers. He asked the assessee to explain as to why expenses may not be disallowed. The assessee submitted that an amount of Rs. 45,025 has already been added back in statement of taxable income under the head 'entertainment expenses' and rest of the expenses are allowable. The assessee also pointed out that the dealers visit's expenses were also held allowable by Bombay High Court. The assessee argued that the articles presented were the business expenses. AO, however, turned down the plea of the assessee. He held that total expenses incurred on providing facilities to the dealers were covered by the definition given in s. 37(2A). He, therefore, made an addition of Rs. 45,806 by observing that the assessee had already added back the amount of Rs. 45,025. 8.1. On first appeal, the assessee submitted that out of total expenses of Rs. 90,831, expenses on lodging and boarding have already been added back by the assessee himself and that out of remaining expenditure an amount of Rs. 17,853 had been incurred on rail/air fare and an amount of Rs. 13,544 had been incurred on conveyance. He submitted that such expenses were not covered under s. 37(2A). T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alers were in the nature of entertainment and could be allowed within the limits laid down in law. He referred to the decision of Hon'ble Kerala High Court in the case of CIT vs. Alleppey Co. Ltd. (1994) 116 CTR (Ker) 15 : (1994) 207 ITR 598 (Ker), wherein it was held that the expenditure incurred in presenting curios to foreign buyers was in the nature of entertainment expenditure. 8.4. We have carefully considered the submissions made by both the parties in the light of the case law relied upon by them and have also perused orders of the tax authorities. It is observed that the assessee has himself added back the amount incurred on boarding and lodging and that AO has disallowed the remaining amount of Rs. 45,806. We feel that the contention made by learned counsel has force in the light of the aforesaid decision of the Tribunal and the jurisdictional High Court's decision. Accordingly disallowance of Rs. 45,806 is deleted. 9. Ground No. 8 relating to disallowance of bonus allocable surplus set on, was not pressed by the learned counsel for the assessee. This ground is accordingly rejected. 10. Ground No. 9 by the assessee relates to deduction under s. 32AB of the Act. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred to the provisions of s. 32AB(3) and observed that where no separate accounts are maintained, separate income is to be determined. She also observed that the said provisions clearly show that income from other sources and income from non-eligible business was to be excluded. The assessee, however, submitted that out of Rs. 29,48,590 excluded by AO, an amount of Rs. 11,28,930 under the head 'overhead recovered' was an internal adjustment entry and that the expenditure incurred on behalf of others was recovered and that the said recovery is in any case off-set against the expenditure of the assessee and such expenditure was reduced to that extent. The assessee also pointed out that salary, house rent, conveyance allowance, etc., was recovered from Hero Sahibabad—a unit of the assessee-company. Similar submissions were made by the assessee, which have been reproduced at p. 31 of the CIT(A)'s order. The stress of the argument of the assessee was that nature of most of the receipts was business income. CIT(A) considered the submissions and held that overhead recovery charges recovered from Munjal Sales Corporation, as rent for use of office were not business income and that rest of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le business. He also referred to decision of the Tribunal (Delhi Bench) (TM) reported as Asstt. CIT vs. Northern India Theatres (P) Ltd. (1995) 52 TTJ (Del) 156 (TM) : (1996) 56 ITD 42 (Del) (TM) and submitted that the said decision has also been considered in the aforesaid order, in addition to decision reported as CIT vs. Sudarshan Plywood Ltd. (1995) 80 Taxman 326. He further referred to the decision of the Tribunal (Ahmedabad Bench) reported as Dy. CIT vs. New Commercial Mills (1994) 48 TTJ (Ahd) 662, wherein it has been held that royalty received from exploitation of trade-mark is business income. In view of the foregoing, learned counsel submitted that interest income and royalty should be included in computation of income eligible for deduction under s. 32AB. 10.3. Learned Departmental Representative though relied on orders of the tax authorities was fair enough to state that the issue is covered by the decisions of the Tribunal. 10.4. We have carefully considered the rival submissions on this issue and have perused orders of the tax authorities. We have also seen the case law relied upon by learned counsel. It is observed that royalty income as shown by the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluded bed-sheet, dry fruit, pant pieces, HMT watches, etc., and that gifts had been made to dealers and none of these carried the trademark of the assessee. The assessee, therefore, urged that the expenditure was not in the nature of advertisement. The assessee pointed out that most of the gifts had been made to dealers for the purpose of sales made by them and some of the gifts were made on the occasions of Diwali in order to keep good relations. CIT(A) considered the submissions and held that dry fruits, sweets and gifts given at the occasion of Diwali should be allowed as it is in line with the business trend and was not in the nature of advertisement expenditure. She held that other gifts were covered by the provisions of s. 28(iv) and would be taxable in the hands of the recipients and in case the assessee gives names and addresses of the dealers, the same should be allowed and intimation may be sent to the ITOs assessing those dealers. 12.2. Learned counsel submitted that gifts were given to dealers on the basis of sales made by them as also on the occasion of Diwali and that gifts did not carry any trademark of the assessee. Learned counsel referred to the decision of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
