1. The appeals in ITA No. 1101/Chandi/1996, asst, yr. 1993-94, have arisen against the order of the CIT(A), Patiala, dt. 19th July, 1996, for the asst. yr. 1993-94; ITA No. 1054/Chandi/1996; asst, yr. 1993-94, against the order of the CIT(A), Patiala, dt. 10th July, 1996, for the asst. yr. 1993-94; ITA No. 1106/Chandi/1997, asst. yr. 1994-95, against the order of the CIT(A), Patiala, dt. 4th Sept, 1997, for the asst. yr.
1994-95; ITA No. 1022/Chandi/1997, asst, yr. 1994-95, against the order of the CIT(A); Patiala, dt. 4th Sept., 1997, for the asst. yr. 1994-95, and appeal in ITA No. 653/Chandi/1999; asst. yr. 1994-95, against the order of the CIT(A), Patiala, dt. 31st May, 1999, for the asst. yr.
1994-95.
2. All these appeals were heard together and are being disposed of through this common order because most of the issues involved in the grounds of appeals taken by the parties are identical, for the sake of convenience.
3. In appeal ITA No. 1101/Chandi/1996; asst. yr. 1993-94, the Revenue has taken the following effective grounds : 1. On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the additions made on account of element of MOD'VAT amount in the closing stock by following appellate decisions in the previous years which have not been accepted by the Department.
2. The learned CIT(A) has further erred in allowing relief from disallowance from foreign travelling expenses by following the appellate decisions in the earlier years which have not been accepted by the Department.
3. The learned CIT(A) has also erred in deleting the addition of Rs. 27,46,076 made by the AO on account of interest free advances to its sister-concern, 4. The CIT(A) has further erred in deleting the addition of Rs, 86,66,744 made by the AO on account of interest on investments in subsidiary companies.
5. The learned CIT(A) has also erred in reducing the disallowance on account of entertainment expenses from Rs. 2,14,351 to Rs. 73,283.
6. The learned CIT(A) has further erred in deleting the addition on account of lease rent paid to sister-concern and also in holding that the provisions of Section 40A(2) are not applicable.
7. The learned CIT(A) has also erred in deleting the addition on account of sale of assets.
4. In appeal ITA No. 1054/Chandi/1996; asst. yr. 1993-94, the assessee has taken the following effective grounds : 1. (a) That there is no justification in rejecting ground No. 3 concerning disallowance of Rs. 80,213 out of foreign travelling expenses claimed by the appellant.
(b) The facts and circumstances of this ground of appeal are totally different as compared to the previous disallowance confirmed by the appellate authorities. The expenditure is fully covered by Rule 6D(1) of the IT Rules.
2. That the CIT(A) has erred in confirming the disallowance of lease money amounting to Rs. 8,73,600 paid to M/s Dynamic Cosmetics Ltd. for taking on lease computers, fax machines, etc., particularly when the payment has not been disputed by the IT Department and when the principle that under no provision of law under which such disallowance would be made has been accepted by the learned CIT(A).
It is further submitted that the principle laid down in the case of McDowell & Co. v. CTO is not applicable to the 5. In appeal ITA No. 1106/Chandi/1997, asst. yr. 1994-95, the Revenue has taken the following effective grounds : 1. On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the addition made on account of element of MODVAT amount in the closing stock by following the appellate decisions in the previous years which have not been accepted by the Department.
2. The learned CIT(A) has further erred in allowing relief from disallowance made from foreign travelling expenses by following the appellate decisions in the earlier years which have not been accepted by the Department.
3. The learned CIT(A) has also erred in deleting the addition of Rs. 20,80,752 out of interest made by the AO on account of interest-free advances made to its sister-concern.
4. The learned CIT(A) has further erred in deleting the addition of Rs. 95,14,207 out of interest made by the AO on account of interest on investments in subsidiary companies.
5. The learned CIT(A) has also erred in deleting the addition of Rs. 71,004 made by the AO by treating 75 per cent of expenditure debited under the head sales promotion expenses as entertainment expenses.
6. The learned CIT(A) has further erred in restoring the issue concerning the payment of lease amount of Rs. 15 lakhs for land, building and machinery to M/s ICL (Haryana) Ltd. back to the file of the AO for re-examination, 7. The learned CIT(A) has also erred in deleting the addition of Rs. 5,51,431 made by the AO on account of disallowance of guest-house expenses.
6. In appeal ITA No. 1022/Chandi/1997, asst. yr. 1994-95, the assessee has taken the following effective grounds : 1. (a) That there is no justification for disallowance of Rs. 73,740 out of foreign travelling expenses claimed by the appellant.
(b) That the total expenditure is fully covered by Rule 6D(1) of the Rules.
2. That the learned CIT(A) has erred in confirming the disallowance of lease money of Rs. 8,73,600 paid to Dynamic Cosmetics Ltd., particularly as the expenditure is not covered by Section 40 of the Act.
3. That there is no justification in setting aside ground No. 8 pertaining to disallowance of lease rent paid at Rs. 15 lakhs to ICL Steel (Haryana) Ltd. 7. In appeal ITA No. 653/Chandi/1999; asst. yr. 1994-95, the Revenue has taken the following effective ground : 1. On the facts and in circumstances of the case, the learned CIT(A) has erred in deleting the addition of Rs. 15 lakhs on account of lease rent paid to sister-concern.
8. First, we shall take up ground No. 1 of the appeals filed by the Revenue pertaining to the addition made on account of element of MODVAT in the, closing stock amounting to Rs, 83,65,860 for the asst. yr.
1993-94, and Rs. 1,38,16,451 for the asst. yr. 1994-95, in ITA No.1101/Chandi/1996 and ITA No. 1106/Chandi/1997, respectively. The relevant and. material facts for the disposal of this ground of appeals are that the AO made an addition of Rs. 83,65,860 in the asst. yr.
1993-94 and Rs. 1,38,16,451 in the asst. yr. 1994-95 on account of notional MODVAT added to the closing stock. On appeal, the GIT(A) deleted the impugned additions made by the AO on account of MODVAT element in the valuation of the closing stock on the reasons given in his earlier order passed in the case of this very assessee in the asst.
yr. 1992-93.
8.1 Before us,- in support of this ground of appeals, learned Departmental Representative for the Revenue simply placed reliance on the reasoning given in the order of the AO, whereas on the other hand, learned Authorised Representative for the assessee submitted that Tribunal, Chandigarh Bench, in ITA No. 200/Chandi/1996; asst. yr.
1992-93 in the case of this very assessee, by passing an order dt. 22nd Aug., 2002, decided this issue in favour of the assessee and against the Revenue, placing reliance on CIT v. Berger Paints (India) Ltd. (2002) 174 CTR (Cal) 269 : (2002) 254 ITR 503 (Cal) and CIT v. General Electric Co. of India Ltd. . In addition thereto, he submitted that this issue is now finally decided in favour of the assessee and against the Revenue by the decision of the apex Court delivered in the CIT v. Indo Nippon Chemicals Co. Ltd. , wherein the decision of the Bombay High Court in the case of CIT v. Indo Nippon Chemicals Co. Ltd. was 8.2 Respectfully following the decision of the apex Court delivered in the case of CIT v. Indo Nippon Chemicals Co. Ltd. (supra), and the decision of the Tribunal, Chandigarh Bench, dt. 22nd Aug., 2002 (supra), the issue involved in the ground of instant appeals of the Revenue is decided against the Revenue and in favour of the assessee and consequently, the respective orders of the CIT(A) in this regard for the asst. yrs. 1993-94 and 1994-95, are upheld and the ground No. 1 of the appeals in ITA No. ll0l/Chandi/1996, asst. yr. 1993-94 and ITA No. 1106/Chandi/1997, asst. yr. 1994-95, taken by the Revenue is rejected. 9. Now, we shall take up ground No. 2 of the appeals of the Revenue in ITA No. ll0l/Chandi/1996, asst. yr. 1993-94 and ITA No.1106/Chandi/1997, asst. yr. 1994-95 in ITA No. ll0l/Chandi/1996, asst.
yr. 1993-94 and ITA No. 1106/Chandi/1997, asst. yr, 1994-95, pertaining to the disallowance on foreign travelling expenses claimed by the assessee and ground No. 1 of the appeals filed by the assessee in ITA Nos. 1054/Chandi/1996, asst. yr. 1993-94 and 1022/Chandi/1997- asst.
yr. 1994-95, relating to the grievance of the assessee against the impugned disallowance sustained by the CIT(A).
9.1 The relevant and material facts for the disposal of this ground of appeals are that during the assessment year under consideration, the assessee spent an amount of Rs. 8,02,131 in the asst. yr. 1993-94 and Rs. 15,86,257 in the asst. yr. 1994-95 on foreign travelling. The AO disallowed 10 per cent of the total expenditure on foreign travelling treating the same to be of personal expenditure of directors, considering the past history of the assessee and thus made addition of Rs. 80,213 and Rs, 1,58,525 for the asst. yrs. 1993-94 and 1994-95, .
respectively, in the returned income of the assessee.
9.2 On appeal, the CIT(A) allowed a relief of Rs. 40,960 and Rs. 84,885 to the assessee for the asst. yrs. 1993-94 and 1994-95, respectively, by restricting the disallowance to only 10 per cent of the expenditure incurred on foreign travelling excluding the expenditure incurred on the purchase of air tickets.
9.3 Before us, learned Departmental Representative for the Revenue placed reliance on the reasoning given in the order of the AO, whereas, on the other hand, learned Authorised Representative for the assessee submitted that in ITA No. 806/Chandi/1994, asst. yr. 1991-92 and ITA No. 930/Chandi/1994, asst. yr. 1991-92, and in ITA No. 200/Chandi/1996, asst. yr. 1992-93, similar issue arising on identical facts before the Tribunal in the case of the assessee was decided by setting aside the orders of the tax authorities below and restoring the issue to the file of the AO with a direction to examine the same afresh in the light of Rule 6D(1) of IT Rules, 1962. He also submitted that in view of these decisions supra, the issue involved in this ground of appeals is also required to be set aside with the direction to the AO to decide the same afresh in the light of Rule 6D(1) of IT Rules.
9.4 Learned Departmental Representative for the Revenue was not able to controvert the above submissions of learned Authorised Representative for the assessee. Hence, respectfully following the decisions of the Tribunal, supra, the orders of the tax authorities below, in this regard, are set aside and the issue involved in this ground of appeal is restored to the file of the AO with directions to decide this issue afresh in the light of Rule 6D(1) of IT Rules, 1962. Accordingly, ground No. 2 of the appeals filed by the Revenue in ITA No, 1101/Chandi/1996, asst. yr. 1993-94 and ITA No. 1106/Chandi/1996, asst.
yr. 1994-95 and ground No. 1 of the appeals filed by the assessee in ITA No. 1054/Chandi/1996, asst. yr. 1993-94 and ITA No.1022/Chandi/1996, asst. yr. 1994-95 are allowed for statistical purposes.
10. Now, we shall take up ground No. 3 of the appeals filed by the Revenue in ITA No. 110l/Chandi/1996, asst. yr. 1993-94 and ITA No.1106/Chandi/1996, asst. yr. 1994-95 pertaining to the disallowance of interest made by the AO amounting to Rs. 27,46,076 and Rs. 20,80,752 for the asst, yrs. 1993-94 and 1994-95, respectively, out of interest-free advances given by the assessee to subsidiary companies and associated companies.
10.1 The CIT(A) deleted the additions made by the AO by relying on the various orders passed by his predecessor in the asst. yrs. 1991-92 and 1992-93 who in turn also placed reliance on the orders of the Tribunal, Chandigarh Bench, in the case of this very assessee in the asst. yrs.
1985-86, 1986-87, 1987-88 and 1988-89.
10.2 Before us, learned Departmental Representative for the Revenue simply placed reliance on the reasoning given in the order of the AO, whereas, on the other hand, learned Authorised Representative for the assessee submitted that this very issue arising in this ground of appeals also came up for consideration before the Tribunal in ITA No.8Q6/Chandi/1994 and ITA No. 930/Chandi/1994, asst. yr. 1991-92 and ITA No. 200/Chandi/1996, asst. yr. 1992-93 and the Tribunal decided this issue in favour of the assessee and against the Revenue by following the decision of the Madras High Court in in the case of CIT v. Hotel Savera and the decision of the MP High Court in the case of D & H Secheron Electric (P) Ltd. v.CIT.10.3 Learned Departmental Representative for the Revenue was not able to controvert the above submissions made by the learned Authorised Representative for the assessee.
10.4 Hence, respectfully following the decisions of the Tribunal, supra, the issue involved in ground No. 3 of the appeals filed by the Revenue in ITA No, 1101/Chandi/1996, asst. yr. 1993-94 and ITA No.1106/Chandi/1996, asst. yr. 1994-95 is decided against the Revenue and in favour of the assessee and consequently, the orders of, the CIT(A), in this regard, for the asst. yrs, 1993-94 and 1994-95 are confirmed and the ground No. 3 of the appeals in ITA No. 1106/Chandi/1996, asst.
yr. 1993-94 and ITA No. 1106/Chandi/1996, asst. yr. 1994-95, is rejected.
11. Now, we shall take up ground No. 4 of the appeal in ITA No.1101/Chandi/1996, asst. yr. 1993-94 and ITA No. 1106/Chandi/1997, asst.
yr. 1994-95 pertaining to the issue whether the interest earned (sic-incurred) on investment made by the assessee in purchasing shares of subsidiary companies is an allowable deduction or not.
11.1 In ITA No. 1101 of 1996, asst. yr. 1993-94, the assessee earned interest income amounting to Rs. 86,66,744 and in ITA No. 1106 of 1997, asst. yr. 1994-95, the assessee earned income of Rs. 95,14,207 on the investments made in purchase of shares of subsidiary companies and the same were disallowed by the AO while processing the return, on the reasons that the investment in shares of the subsidiary companies has been made by the assessee and the subsidiary companies have further used this investment to give loans to various companies. The said credit companies are also the subsidiary companies of the assessee-company. The said subsidiary companies have further invested the amounts in M/s Haryana Telecom Ltd., which is again a subsidiary company of the assessee. According to the AO, the amount invested has found its way to M/s Haryana Telecom Ltd. and the amount invested in M/s ICL Towers Ltd has given loan to M/s Haryana Telecom Ltd. The subsidiary companies have declared losses. Further, according to the AO, the assessee had invested, in these subsidiary companies out of the borrowed funds with the object of reducing its own tax liability and the same has not been invested by the assessee out of its own surpluses because had the assessee invested the money out of its own surpluses, there was no need for the assessee to raise loan amounting to more than Rs. 80 crores from the banks, etc. Hence, the AO, relying on the decision of the apex Court in the case of McDowell & Co. v. CTO (supra), made the abovementioned disallowance.
11.2 The CIT(A) deleted the disallowance by making the following observations in ITA No. 1101 of 1996, asst. yr. 1993-94 and placing reliance on the same reasoning, deleted the disallowance made by the AO for the asst. yr. 1995-96 in ITA No. 1106 of 1997, asst yr. 1994-95 : I have considered the above arguments and am of the opinion that factually it has not been proved by the appellant that the funds invested were not out of borrowed capital. However, the AO has also not been able to state the nexus between the borrowed capital and investment made in subsidiary companies. However, even if there was an element of capital borrowed on interest, the decision of the Supreme Court in the case of CIT v. Rajinder Prasad Moody would apply and one cannot escape the ratio of this decision as it had been held that there need not be any income to allow a deduction of interest on capital borrowed for investment in shares. The Supreme Court's decision relied upon by the AO was on a different footing and concerns the various methods of tax planning employed by the assessee. The Supreme Court's decision relied upon by the appellant covers this issue squarely and the appellant would have to be allowed relief on this issue. Hence, the appellant would be entitled to relief of Rs. 86,66,744.
11.3 Before us, learned Departmental Representative for the Revenue, relying on the reasoning given in the opening lines of para 6.2 of the order of CIT(A), submitted that in his order, the CIT(A) observed that, "factually it has not been proved by the assessee that the funds invested were not out of borrowed capital". The assessee has not challenged this finding of the CIT(A) as he has neither filed appeal against this finding nor has challenged the same by filing the cross-objection which means that the assessee has accepted this finding of the CIT(A). Learned Departmental Representative for. the Revenue further contended that the burden was also upon the assessee to prove that it has not invested the amount out of the borrowed capital which it has failed to discharge, so the AO was not required to prove the nexus between the borrowed capital and the investment in shares. In support of his contention, learned departmental Representative for the Revenue has placed reliance on following citations: (i) Decision of the Orissa High Court in the case of Indian Metals & Ferro Alloys Ltd. v. CIT (1992) 193 ITR 344 (Ori), wherein their Lordships, in a case where the assessee made a claim of deduction in terms of Section 36 of the IT Act, 1961, for the purpose of computation of income referred to in Section 28 of the IT Act, observed that the assessee has to place materials in support of his claim of entitlement to the deduction. Section 36(1)(iii) relates to the amount of interest paid on capital borrowed for the purposes of the business, profession or vocation. The assessee has to satisfy the assessing authority that he is entitled to obtain deduction in accordance with the taxing statute and thereafter in that case, their Lordships held : The assessee was required to show that the amounts invested in or advanced to the subsidiary company came out of the assessee's own funds. The Tribunal with reference to the factual aspects came to hold that the money utilised was from the borrowed funds. Strong reliance had been placed on the accepted position that the assessee earned profit of more than Rs. 70 lakhs during the year, which was much more than the investment and advance. The substance of this argument could have been countenanced had the assessee placed materials to show that it had generated surplus in excess of the investments and advances, prior to such investment and advance. No material was placed in this regard by the assessee. Therefore, the Tribunal was justified in holding that the assessee was not entitled to deduction of interest in respect of investments in and advances made to the subsidiary company.
(ii) Decision of the Allahabad High Court in the case of CIT v. H.R. Sugar Factory (P) Ltd. , wherein their Lordships The assessee, a private limited company, carried on the business of manufacture of sugar, held the shares in the name of the directors of the company. The assessee borrowed money from the banks and was also advancing loans to its directors. The ITO held that the difference between the interest paid to the banks and interest recovered from the directors could not be said to have been incurred on the capital borrowed for purposes of the business and disallowed the difference between the interest paid to the banks, their Lordships held : That the assessee was not a finance company. It was engaged in the manufacture of sugar. No business purpose was served by the advances to its directors. The amount of interest payable in each year on account of the loans to the directors was very large and this fact could not be glossed over by saying that the amount was not substantial in each of the relevant years. The company might have borrowed large amounts for the purpose of its business every year but that did not explain the huge advances to the directors/shareholders. Had this money not been advanced to the directors, it would have been available to the assessee for its business purposes and to that extent it might not have been necessary to borrow from the bank. Therefore, the ITO was right in disallowing the difference between the interest paid to the banks and interest recovered from the directors under Section 36(1)(iii) of the IT Act, 1961.
(iii) Decision of the Allahabad High Court in the case of Triveni Engineering Works Ltd. v. CIT , wherein their That the assessee had not been able to prove that the disputed part of the amount taken as loan from the banks was used for business purposes or that the advance to the other concern had been made for the purposes of business. The disallowance of part of the interest under Section 36(1)(iii) of the IT Act, 1961, was justified.
(iv) Decision of the Madras High Court in the case of CIT v. Sujani Textile (P) Ltd. wherein their Lordships observing Where the assessee-company made a claim for deduction of interest paid by it on the amount borrowed by it, was rejected by the ITO on the ground that the money had not been borrowed by the company for the purpose of its business, the Tribunal also held that the amount borrowed had been utilised by the assessee for non-business purposes, viz., for investment in shares and consequently borrowings cannot be said to be for the purposes of the company. Held: That in view of the finding of the Tribunal that the amounts borrowed by the company had been utilised for non-business purposes, viz,, for investment in shares, the interest paid on the capital borrowed could not be allowed as a deduction under Section 36(1)(iii). In view of the question of allowance under Section 57(iii) not having been argued before the Tribunal, even though there was a passing observation that the interest may be allowed under the head 'Other sources', the question of considering the allowability of the interest under Section 57(iii) could not be said to be comprehended in question referred to the High Court. Even assuming that the decision of allowability of interest under Section 57(iii) could be considered to be one fact of the question referred to the High Court, the assessee could not have the benefit of the said section because for an application of that section, there must be possibility of the income coming from the investment, though factually no such income need have arisen in the year in question and, in the instant case, in view of the resolution of the board of directors waiving interest on the advances and amounts due from the estate, there was no question of any receipt of income from that source against which the interest on the borrowed funds could be set off. Consequently, the interest paid by the company on its borrowed funds could not be allowed as a deduction, either under Section 36(1)(iii) or under Section 57(iii).
11.4 Lastly, the learned Departmental Representative for the Revenue placing reliance on the detailed reasoning given in the order of the AO, submitted that since the CIT(A) has not given a clear finding in his order regarding the nexus between the borrowed capital and the investment made in subsidiary companies, the CIT(A) was not justified in deleting the disallowance made by the AO when the AO in his order has clearly analysed that in case the amounts had been invested by the assessee from its own surplus, there was no need for the assessee to raise loans amounting to more than Rs. 18 crores from the banks, etc., and in that case the interest liability of the assessee would have been reduced. Thus, the AO was fully justified in disallowing interest @ 1.8 per cent under Section 36(1)(iii) of the Act.
11.5 On the other hand, learned Authorised Representative for the assessee, submitted that the observations of the CIT(A) made in the opening lines of para 6.2 were factually incorrect and appear to be a mistake on the part of the CIT(A) because in the next few lines of the para, the CIT(A) has himself observed that the AO has not proved the nexus between the investments made in the shares of subsidiary companies and the borrowed capital, while deleting the disallowance.
Hence, both these observations of the CIT(A) do not appear to be consistent and further the citations relied upon by the learned Departmental Representative for the Revenue simply state that the burden is upon the assessee to prove that the investments made by the assessee are not out of the borrowed funds but once the assessee produces the entire material before the AO to prove its contention, then the burden shifts upon the Department to prove that there was a nexus between the borrowed capital and the investment, whereas, on the other hand, in the entire order, the AO has not given any finding that the investments in shares were made by the assessee out of the borrowed capital, The AO simply went on assumption that in case the assessee had surpluses, there was no need for the assessee to take loans and the AO presumed that the investments made by the assessee were from the borrowed capital. The AO, however, has not been able to prove from the record that the investments in shares by the assessee were made out of the borrowed capital.
11.6 Learned Authorised Representative for the assessee, in order to prove that the assessee has not made the investments out of the borrowed funds, drew our attention towards the balance sheet appearing in the annual report for 1992-93 placed at p. 80 of the paper book indicating that the share capital and .reserves at surplus totalling to Rs. 32,53,70,535 were available with the assessee on 31st March, 1993, and the secured loans and unsecured loans totalling to Rs. 18,36,21,430, thus leaving the balance share capital and reserves and surplus at Rs. 14,17,49,105. Again, if we look at the investments made by the assessee upto 31st March, 1993, we would find that the investments were to the tune of Rs. 5,52,10,475. From these figures, it is evident that for investing this amount, the assessee already had surplus fund for the investment in the purchase of shares of subsidiary companies. Learned Authorised Representative for the assessee further contended that if we further look into the balance sheet, we would find that the total secured loans and unsecured loans upto the period ending 31st March, 1992, were to the tune of Rs. 20,56,92,985, whereas upto the period ending 31st March, 1993, these were only to the tune of Rs. 18,36,21,430, indicating that in the accounting year relevant to the asst. yr. 1993-94 under question, the assessee has not raised any fresh loans, so the question of making investment in the share capital of the subsidiary companies in the accounting year relevant to the asst. yr.
1993-94 from the borrowed funds does not arise. Hence, learned Authorised Representative for the assessee contended that even if we analyse the factual aspect of the matter, we find that the assessee has not invested any amount from the borrowed funds in the purchase of shares of subsidiary companies. So, the ratio of the decisions relied upon by the learned Departmental Representative for the Revenue do not apply to the facts of the instant case of the assessee.
11.7 Learned Authorised Representative for the assessee further contended that the AO was not justified in making any disallowance when in the asst. yrs. 1990-91 and 1991-92 no such disallowances were made in respect of the interest paid on the borrowed capital. He further, contended that the assessee is entitled to run its business the way it likes and the Department cannot ask the assessee whether or not to make investment in the share capital of the subsidiary company when from the memorandum and articles of the company in the objects of the company, the company is authorised to make investment in the shares. Even from the computation in the asst. yr, 1992-93, it is clear that this claim for the investment in shares made by the assesses has been allowed by the Department to the assessee. Thus, the learned Authorised Representative for the assessee contended that the CIT(A) was fully justified in deleting the disallowance in his well reasoned and well discussed order. In support of his contention, learned Authorised Representative for the assessee placed reliance on the following citations: (i) Decision of the Calcutta High Court in the case of Raja Baldeodas Birla Santatikosh v. CIT (1991) WO ITR 578 (Cal). In this case, learned Authorised Representative for the assessee relied on the observations of their Lordships wherein defining the general principle of income-tax, they observed that : The ITO cannot dictate to an assessee as to how he should carry on his business and that the IT Department cannot claim to be a sleeping partner of the assessee entitled to question the validity of his action.
(ii) 173 ITR 473 (sic) Learned Authorised Representative for the assessee has referred to this citation in order to convass that mere avoidance by the assessee cannot be the basis for making the addition/deletion of the disallowance. He referred to the following relevant portion of the decision of the apex Court in the above case: Where the true effect of construction of deeds is clear, the appeal to discourage the avoidance is not a relevant consideration.
(iii) Decision of the Gujarat High Court in the case of Banyan & Berry v. CIT . The learned Authorised Representative for the assessee has placed reliance on this citation on the finding of the High Court relating to the issue as to how the ratio of any decision is to be understood and in conveying that it has to be understood in the context it has been made to convey that the case of McDowell & Co. Ltd. (supra) does not apply to the facts and issue involved in the instant ground of appeal of the Revenue.
The relevant portion of the decision of the High Court is reproduced below: that on the factual aspect, the Court was considering a case where in a going business a liability to pay duty which was legally of the assessee and which on such payment was to become part of the cost of the commodity sold by it and to become part of its selling price to the buyer, was, as a result of arrangement between the seller and buyer split into two, namely, duty so far paid separately directly to the tax authorities and the balance so paid to the seller; the arrangement was existing solely for the purpose of not paying the tax and it was not a transaction in reality of receiving a lower price than the one on which it was marketing, The Court nowhere said that every action, or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespect of the legitimacy or genuineness of the act. The principle enunciated in the above case not affected the freedom of the citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection within the framework of law, unless the same falls in the category of a colourable device.
11.8 We have considered the rival submissions of both the parties, perused the records and carefully gone through the orders of the tax authorities below and the case cited by both the parties.
11.9 First, on examining the balance sheet and the figures referred to by the learned Authorised Representative for the assessee, it is evident that in order to make investment in share capital of subsidiary companies, the assessee in the accounting year relevant to asst. yr.
1993-94 under question had sufficient funds and surpluses for making investment in the share capital of subsidiary companies even if the borrowed funds are not taken into consideration for making such investment. It is also clear that in the year under consideration, the assessee had not borrowed any fresh funds and so there was no question of making investment by the assessee from the fresh borrowed funds in the year under consideration. On the contrary, the AO has not given any finding from the record to show that there was any nexus between the investments and the borrowed capital.
11.10 Even in the case of Indian Metals & Feno Alloys Ltd, (supra), relied upon by the learned Departmental Representative for the Revenue, their Lordships of the Orissa High Court were of the opinion that in case the assessee is able to place material on record to show that it had generated surpluses in excess of the investment prior to such investments in advance, the assessee was entitled to deduction of interest in respect of investments made in the subsidiary companies.
11.11 In the instant case of the assessee, it is also important to mention that even the investments made in share capital of the subsidiary companies by the assessee could not be called the investments for non-business purpose because in the memorandum and the articles of the company, one of the objects the assessee-company mentioned is "investments in shares of other companies by the assessee". The assessee has also claimed that no such disallowances in the past have been made by the Department in the asst. yrs. 1990-91 and 1991-92, and the claim of the assessee in the asst. yr. 1992-93 has also not been disallowed by the Department. This fact was not controverted by the learned Departmental Representative for the Revenue but the learned Departmental Representative for the assessee simply contended that each assessment year is an independent assessment year and the principle of res judicata does not apply in the income-tax proceedings. This argument of the learned Departmental Representative for the Revenue does not have any force because the principle of res judicata does not apply in the income-tax proceedings and it has been consistently held in the judicial pronouncements that the Department should not deviate from its earlier findings on the same issue unless the Department is able to differentiate from the facts to show the reason for arriving at a different conclusion in the subsequent assessment year. In adopting this view, we are supported by the following observations of the Third Member made in the headnote at pp.
108-109 in the case of Smt. Godavari Devi Sehgal v. ITO (1992) 43 TTJ (Del) 181 : (1992) 198 TTR 108 (Del)(AT): The rule of res judicata or estoppel is a rule of evidence and it is well known that in tax matters, ordinarily these principles do not apply particularly against a statute. Nevertheless, it is well recognised that the Departmental adjudications are done by a hierarchy of officers. If a matter has once been adjudicated and decided upon the merits, it is not possible to reopen or re-adjudicate it except on the grounds of appearance of fresh evidence. If no fresh evidence comes to light on investigation, the AO is not entitled to reopen the same question on mere grounds of suspicion or change of opinion. This is based on the principles of natural justice and expediency.
We would further like to add that to the facts of the instant case of the assessee on the issue of investment made in shares of subsidiary companies, the ratio of McDowell's case (supra), does not apply because, in the instant case, the assessee has simply made the investments in share capital of the subsidiary companies as per objects of the company and also because these investments have been made from the surpluses of its own and not out of any borrowed funds. Hence, we are of the considered view that in the existing facts and circumstances of the case, the CIT(A) has rightly deleted the impugned disallowance made by the AO in ITA No. 1101 of 1996, asst. yr. 1993-94. Since the facts in the instant case of the assessee in ITA No. 1101 of 1996 are admitted to be identical on the issue and facts involved in ITA No.1106 of 1997, asst. yr. 1994-95, so following the reasoning given hereinabove on this issue in ITA No. 1101 of 1996, asst. yr. 1993-94, we held that the CTT(A). has rightly deleted the impugned disallowance made by the AO in ITA No. 1106 of 1996, asst. yr, 1993-94. Accordingly, the orders of the CIT(A) in this regard in ITA No. 1101 of 199.6, asst.
yr, 1993-94 and ITA No. 1106 of 1997, asst. yr. 1994-95 are upheld and ground No. 4 of both the appeals is rejected. 12. Now, we shall take up ground No. 5 of the appeals filed by the Revenue in ITA No.1101/Chandi/1996, asst. yr. 1993-94 and ITA. No. 1106/Chandi/1996, asst. yr. 1994-95 pertaining to disallowance on account of entertainment expenses claimed by the assessee.
12.1 The relevant and material facts for the disposal of this ground of appeals are that in the asst. yr. 1993-94 the assessee has debited a sum of Rs. 8,35,753 under the head 'Sales promotion expenses' and out of this, the assessee has treated expenses amounting to Rs. 5,08,846 as entertainment expenses. The AO disallowed a sum of Rs. 3,61,980 and further noticed that since the assessee has already surrendered Rs. 2,49,423, so he restricted the disallowance under Section 37(2) to Rs. 1,12,557, whereas, on appeal, the CIT(A) by passing a detailed order, reduced the disallowance on account of entertainment expenses from Rs. 2,14,351 to Rs. 73,283, and allowed a relief of Rs. 41,068 to the assessee. In the asst. yr. 1994-95, the AO noticed that the assessee has debited a sum of Rs. 5,68,046 under the head 'Sales promotion expenses' and out of this, the assessee has treated the expenses of Rs, 2,84,023 as entertainment expenses being 50 per cent of the sales promotion expenses. The AO further noticed from the details filed by the assessee that the assessee has itself debited a sum of Rs. 94,564 as entertainment expenses and so in this view of the matter, he was of the opinion that 75 per cent of the sales promotion expenses are to be treated as entertainment expenses against 50 per cent treated by the assessee and accordingly by working out the same, as detailed in the order of the AO, he disallowed a sum of Rs. 2,55,298 under Section 37(2) of the, IT Act. Whereas on appeal, following his earlier order, the CIT(A) deleted the addition of Rs. 71,004 made by the AO in the asst. yr. 1994-95.
12.2 Learned Departmental Representative for the Revenue simply placed reliance on the reasoning given in the order of the AO, whereas, learned Authorised Representative for the assessee, submitted that this issue based on identical facts, as involved in the instant appeals filed by the Revenue, also came up for consideration before the Tribunal, Chandigarh Bench, and the Bench in its consolidated order in ITA No. 806/Chandi/1994 and ITA No. 930/Chandi/1994, asst. yr. 1991-92, decided this issue by setting aside the orders of the tax authorities below and restored the issue to the file of the AO for reconciling the figures and to disallow 50 per cent of the same by treating it as entertainment expenses, and also directed the AO that while doing so, he will allow credit of the amount included by the assessee in the computation of income as entertainment expenses.
12.3 Learned Departmental Representative for the Revenue was not able to controvert the above submissions of the learned Authorised Representative for the assessee. Hence, respectfully following the decision of the Tribunal, supra, the orders of the tax authorities below are set aside and the issue is restored to the file of the AO to reconcile the figures by disallowing 50 per cent of the same by treating to be the entertainment expenses and while doing so, the AO should allow credit to the amount included by the assessee in computation of income as entertainment expenses. Accordingly, ground No. 5 of the appeals filed by the Revenue for the asst. yrs. 1993-94 and 1994-95 in ITA No. 1101 of 1996 and 1106 of 1996 is allowed for statistical purposes.
13. In ground Nos. 6 and 7 of ITA No. 1101/1996, asst. yr. 1993-94, the Revenue is aggrieved, because the CIT(A) has deleted the addition of Rs. 10,95,000 on account of lease rent paid to M/s ICLS in asst. yr.
1993-94. In ground No. 6 of IT A No. 1106/1997, asst. yr. 1994-95, the Revenue is aggrieved because the CIT(A) instead of sustaining the addition of Rs. 15 lakhs paid on account of lease rent by the assessee to ICLS Ltd., has restored back the issue to the file of the AO for reexamination and in ground No. 3 of ITA No. 1022/1997, asst. yr.
1994-95, the assessee is aggrieved because instead of deleting the impugned addition on account payment of lease rent of ICLS, the CIT(A) has restored the issue to the file of AO for reexamination. In ground No. 1 of ITA No. 653/1999, asst. yr. 1994-95, the Revenue is aggrieved because of the deletion of addition ,of Rs, 15 lakhs by the CIT(A) which was made by the AO relating to the payment of lease rent of Rs. 15 lakhs paid by the assessee to its sister-concern, M/s ICL Steel Haryana Ltd. In ground No. 2 of ITA No. 1054/1996, asst. yr. 1993-94 and ground No. 2 of ITA No. 1022/1997, asst. yr. 1994-95, the assessee is aggrieved because the CIT(A) has confirmed the disallowance of Rs. 8,73,600 made by the AO relating to lease rent paid to M/s Dynamic Cosmetics Ltd. by the assessee.
13.1 Now, we shall deal with ground Nos. 6 and 7 of ITA No. 1101/1996, asst. yr. 1993-94. The relevant and material facts for the disposal of these grounds are that in asst. yr. 1993-94, the assessee had paid lease rent amounting to Rs, 10,95,000 to M/s ICL Steel Haryana Ltd. (hereinafter called ICL Steel), sister-concern of the assessee on account of land and building @ Rs. 1,25,000 per month and on account of plant and machinery @ Rs. 25,000 per month from 1st April, 1992 to 9th Nov., 1993, when the same assets were sold to M/s ICLS Ltd. on 10th Oct., 1991, for a consideration of Rs. 45,35,491. After selling, the assessee took the same premises on lease from ICLS Ltd. from the same date. The AO noticed that interest-free loan of Rs. 50 lakhs was also advanced by the assessee to ICLS Ltd. in November, 1991, i.e., a few days after receiving the same consideration from the sister-concern. He further noticed that in this manner, these properties owned by the assessee at Kila Zaffaragarh and sold to M/s ICLS Ltd. on 10th Oct., 1991, for Rs. 45,35,491, were immediately taken back on lease at a rent of 1,50,000 per month and the same consideration itself had been returned by the assessee as interest-free loan a few days thereafter.
The AO was of the opinion that had the assessee not entered into all these transactions, there was no need to pay lease rent and the assessee did not appear to have received any benefit from the sale of the properties as sale consideration itself was returned to the purchaser as interest-free loan. The assessee explained before the AO that it was running two units, one at Kila Zaffaragarh and the other in Jind. The unit in Jind was incurring huge losses and, therefore, the management had taken a decision to dispose of this unit to avoid losses. Further, according to the assessee, efforts were made to sell the unit but no buyer was available and hence it was decided to run this unit separately and accordingly, it was sold to ICL Steel Haryana Ltd. Since the assessee had certain orders to fulfil the unit was taken on lease on the same date. As far as loan giveri to M/s ICL Steelis concerned, it was returned in March, 1993, and sale was made to stop permanent losses being incurred by the assessee. The AO did not accept these arguments of the assessee but further analysed that no benefit had been derived by the assessee by the sale of this unit because the same money was itself returned by the assessee as interest-free loan and rather further liability had been incurred by the assessee by paying lease rent. The AO was further of the opinion that this was only an arrangement made by the assessee to reduce the tax liability and thus relied on the decision of apex Court in the case of McDowell & Co.
Ltd. v. CTO (supra) and disallowed a sum of Rs. 10,95,000 on account of lease rent paid to M/s ICL Steel Haryana Ltd. 13.2 On appeal before the CIT(A), the assessee reiterated the submissions which it made before the AO in respect of disallowance of lease rent paid to M/s ICL Steel Haryana Ltd. He also contended that this loan (sic-rent) was allowable under Section 37(1) of IT Act and once the assessee was able to establish the commercial exploitation, the AO could not make disallowance under Section 40A(2) of IT Act. The CIT(A), after considering the submissions of the assessee, was of the opinion that as far as disallowance of the lease money paid to ICLS Ltd. was concerned, action of the AO could not be upheld as he made this disallowance purely by passing a judgment that this was not a wise decision on the part of the assessee because the AO inferred that this payment of lease money was only to reduce the tax liability of the assessee but has not considered the issue of losses raised by the assessee before him because losses suffered by the assessee were in excess of lease money and also because this money had been received back from M/s ICLS Ltd. by the assessee subsequently and hence the CIT(A) came to the conclusion that on the facts of this case, disallowance made by the AO was not justified and accordingly he deleted the disallowance of Rs. 10,95,000.
13.3 Firstly, we shall deal with the disallowance of expenditure of Rs. 10,95,000 claimed by the assessee with regard to payment of lease rent to M/s ICLS pertaining to the asst. yr, 1993-94. In support of this disallowance made by the AO and against the deletion of this disallowance by the CIT(A), learned Departmental Representative for the Revenue placed reliance on the facts and observations made in the order of the AO and contended that in this case the assessee had taken on lease the premises from M/s ICLS during the period from 1st April, 1992 to 9th Nov., 1992, and the same were sold by the assessee to M/s ICLS on 10th Oct., 1991, for a consideration of Rs. 45,35,491. The assessee has taken the land and building on lease @ Rs. 1,25,000 per month and the machinery and plant @ Rs, 25,000 per month. Further, the assessee has. advanced interest-free loan of Rs. 50 lakhs to M/s ICLS in November, 1991, i.e., a few days after the receipt of the sale consideration of these properties from that party. Learned Departmental Representative for the Revenue contended that the assessee in its explanation before the AO has submitted that it was having two units, one at Rajpura and the other in Distt. Jind in his steel division and unfortunately the unit at ,Jind was incurring huge losses. Thus, the company management took a decision to dispose of this unit to avoid losses. They made efforts to sell this unit but no other buyer was available. Hence, they decided to run this unit separately and sold the same to M/s ICLS on 10th Oct., 1991. Other contention raised by the assessee before the AO was that as the assessee had some orders in hand and the goods has to be supplied to the customers, so this unit was taken on lease on the same date. Another explanation made before the AO by the assessee was that the interest-free loan of Rs. 50 lakhs was advanced to M/s ICLS for getting its business running and the same was returned in March, 1993, and lastly, that this unit was sold to reduce the permanent losses and to save the business of the assessee-company.
Learned Departmental Representative for the Revenue referring to the following observations of the apex Court made in the case of McDowell & Co. v. CTO (supra) : The planning may be legitimate provided it is within the framework of the law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.
There is behind taxation laws as much moral sanction as it is behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less a moral plane than honest payment of taxation. The proper way to construe a taxing statute while considering a device to avoid tax is not to ask whether the provisions should be construed by the statute but whether the transaction is a device to avoid tax and whether the transaction is such that the judicial process may accord its approval to it. It is neither 'fair nor desirable to expect the legislature to intervene and take care of every device and scheme to avoid taxation. It is upto the Court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and to expose the devices for what they really are land to refuse to give judicial benediction.
Submitted that in these facts and circumstances of the assessee, the AO has rightly applied the ratio of this decision to the facts of the instant case of the assessee. He further contended that in this case it is important to note that though the assessee received a sale consideration of Rs. 45,35,451 on 10th Oct., 1991, from M/s ICLS but a few days thereafter it advanced interest-free loan of Rs. 50 lakhs (which) would not justify the claim of the assessee that the loan was advanced to M/s ICLS so that its business runs smoothly because M/s ICLS did not run any business in the year under consideration and the assessee has taken these premises and machinery on lease for the period from 1st April, 1992 to 9th Nov., 1992. Learned Departmental Representative for the Revenue contended that from this transaction, it is apparent that the assessee did not enjoy the benefit of utilising sale proceeds for the purpose of its business. He further contended that from the way this transaction has taken place and expenditure incurred by the assessee, it is clear that this arrangement was made by the assessee simply to reduce the tax liability and this expenditure was incurred for the non-business purpose and hence the AO has rightly disallowed the same. Even if there is no dispute about the agreement having been taken place between the assessee and M/s ICLS in respect of the lease money, and even if the AO has not disputed the payment of this lease money but since the assessee has used this transaction as device to avoid tax, so the AO has rightly disallowed the expenditure claimed by the assessee by applying the ratio of the decision of the apex Court. In addition thereto, he submitted that as the transaction was not bona fide, so the AO has rightly disallowed the claim of the assessee under Section 37 of the Act.
13.4 On the other hand, learned Authorised Representative for the assessee referring to pp. 2 to 19 of the paper book submitted that in asst. yr. 1992-93, as no addition has been made by the AO, so in asst.
yr. 1993-94, under consideration before this Bench, the AO was not justified in making the addition for the amount of the lease rent paid to M/s ICLS. In support of his this plea, learned Authorised Representative for the assessee relied upon the decision of the Gujarat High Court in the case of Taraben Ramanbhai Pate] v. ITO , in which their Lordships held : That unless there is change of circumstances, the authorities will not depart from previous decisions at their sweetwill in the absence of material circumstances or reasons for such departure.
Similarly, in the case of Sardar Kehar Singh v. CIT , decided by Rajasthan High Court, their Lordships held : A decision reached in an earlier year should not be reopened in a subsequent year as there should be a finality and certainty to all litigations including those arising under the IT Act. It is pertinent to note that the rule of res judicata does not apply to tax proceedings but judicial propriety requires consistency unless there are fresh facts and circumstances requiring reconsideration and departure from an earlier decision.
Lastly, their Lordships of Rajasthan High Court in the case of CIT v.National Bearing Co. Ltd. (1994) 208 ITR 872 (Raj), also took similar view and the same view was also taken by their Lordships of Gauhati High Court in their decision in the case of Dhansimm Aggarwal v. CIT (1996) 130 CTR (Gau) 559 : (1995) 81 Taximan 1 (Gau).
Further, in support of his contention that CIT(A) has rightly deleted the addition, he referred to para 8,2 of the order of the CIT(A) wherein the CIT(A) has observed that these disallowances have been made by the AO purely on his judgment that there was no wise decision on the part of the assessee to enter into these transactions and on the further observations that though the losses incurred by the assessee were in excess of the lease money but the same were not considered by the AO while inferring that this payment of lease money by the assessee was only to reduce the tax liability by the assessee and lastly, that the sale money was returned because it had been received back from M/s ICLS subsequently and that there was no provision of law under which this disallowance can be made.
13.5 Countering the arguments advanced by the learned Authorised Representative for the assessee, learned Departmental Representative for the Revenue submitted that as in the asst, yr. 1992-93, this issue has not been discussed in detail while allowing the claim of the assessee pertaining to the lease rent because the assessment was framed under Section 143(1) and not under Section 143(3), and so the principle of res judicata does not apply to the instant issue involved in this ground of appeal because the facts of each case have to be appreciated separately and since in the instant case, no adjudication was made by the AO on this issue in the asst. yr. 1992-93, the AO was not wrong in making the disallowance in the assessment year under consideration, i.e., 1993-94, He also submitted that the facts of each case have to be appreciated separately while making the addition or disallowance. In support of his contention, he placed reliance on the following : (i) Decision of the Karnataka High Court in the case of Karnataka Forest Plantations Corporation Ltd. v. CIT (1986) 53 CTR (Kar) 308 : (1986) 156 ITR 275 (Kar), wherein their Lordships held : That every assessment year was a separate and distinct proceeding and its validity or invalidity did not depend upon the validity or the invalidity of the proceedings for the previous or subsequent years. Even assuming that the petitioner had not challenged similar assessments for the previous and subsequent years, that did not in any way affect the challenge made by it for the assessment years in dispute.
(ii) Decision of the Delhi High Court in the case of Sohan Singh v. CIT , wherein their Lordships held : That the fact that the other officer assessing the firm had granted registration to the firm and made assessments by way of precaution or protection, did not stand in the way of reassessment of the assessee on what was found to be in truth and reality, his income.
Even if the other officer had come to the conclusion that the firm was genuine and had completed an (regular) assessment on it as a registered firm, that could not stop the officer assessing the assessee, a different officer, from reaching a conclusion on the facts before him that the income of the firm was really the income of the assessee. There could be no estoppel of one authority or officer consequent on conclusions of the facts arrived at by another officer.
14. We have considered the rival submissions of both the parties, perused the records and carefully gone through the orders of the tax authorities below, the admitted facts in this case are that (i) that land and building and plant and machinery in question were sold to its sister-concern, M/s ICLS Ltd., on 10th Oct., 1991, for a consideration of Rs. 45,35,451 by the assessee; (ii) that a few days after receiving the sale consideration, i.e., in November, 1991, the assessee advanced an interest free loan of Rs. 50 lakhs to M/s ICLS Ltd.; (iii) that thereafter the assessee took the same premises from ICLS Ltd. at a lease rent of Rs. 10,95,000 for the period 1st April, 1992 to 9th Nov., 1992 (@ Rs. 1.50 lakhs (c) Rs. 1.25 lakhs per month for the land and building and @ Rs. 25,000 per month for plant and machinery); and (iv) that no addition was made by the AO in asst. yr. 1992-93 on account of lease rent while framing the assessment under Section 143(1).
15. We have taken into consideration the admitted facts as well as the pleas of the assessee for considering the allowability of lease rent claimed by the assesses as business expenditure under the relevant provisions of Section 37(1) of IT Act. Under Section 37(1) any expenditure laid out or expended wholly and exclusively for the purposes of business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of the business or profession. 'True test of an expenditure laid out wholly and exclusively for the purpose of trade or business is that it is incurred by the assessee as incidental to its trade for the purpose of keeping the trade going and making it pay and not in any other capacity than that of a trader. CTT v. Delhi Safe Deposit Co. Ltd, and Malwa Vanaspati & Chemical Co. Ltd. v. CIT .
Lordships explained as to how this test is to be applied by observing "that the manner applied the test to ask the question : Has the expense been incurred with the sole object of furthering the trade or business interest of the assessee, unallowed or unmixed with any other consideration If the expense is found to bear an element other than the trade or business interest of the assessee, the expenditure is not allowable one," In this very order, their Lordships of Bombay High Court while explaining allowability of this expenditure, issued following guidelines : "To arrive at the conclusion that the expenditure was dictated solely by the business consideration one has to consider the nature of the business, the way it is conducted and any likelihood of the business being adversely affected or its interest being promoted by the refusal or the incurring of the expenditure, as the case may be. When the assessee places all the facts and circumstances before the Revenue authorities, the latter must examine the same and must make up their minds as to whether expenditure was necessitated or justified by commercial expediency." their Lordships held "that the expenditure incurred must be for commercial expediency." while explaining the term "commercial expediency" .their Lordships held "that the term of 'commercial expediency' is not a term of art. It means everything that serves to promote commerce and includes every means suitable to that end".In Jaipur Electro (P) Ltd. v. CIT Lordships observed "there can hardly be any dispute to the proposition that the businessman is the best judge to determine the business expediency and, therefore, when he claimed to have incurred, certain expenditure for business expediency, his version should ordinarily be accepted." Again their Lordships, in this very decision, while considering this principle, laid emphasise on the role of assessing authority and the Tribunal. Considering the role of assessing authority, their Lordships observed "this principle, however, does not debar the assessing authority to enquire and investigate as to whether such expenditure was actually incurred by the businessman and whether the same was incurred wholly and exclusively for business consideration. The doctrine 'that the businessman is the best judge of the business expediency' does not affect the right and duty of the assessing authority to know whether, it was incurred for the business purpose and not for other extraneous considerations". Similarly, while considering the role of Tribunal, their Lordships observed "further it is open to the Tribunal to come to a conclusion either that the allowed payment is not real or that it is not incurred by the assessee in the character of a trader or it is not laid out wholly and exclusively for the purpose of business of the assessee and to disallow it.In Workmen, Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. , their Lordships emphasising on duty of Court while considering to allow an expenditure claimed by the assessee observed, "it is the duty of the Court in every case where ingenuity is expanded to avoid taxing and welfare legislation, to get behind smoked screen and discover the true state of affairs. The Court is not to be satisfied with form and leave well alone the substance of transaction.
Avoidance of welfare legislation is as common as avoidance of taxation and the approach in considering the problems arising out of such avoidance has necessarily to be the same". These observations were made by their Lordships in this case while placing reliance on their earlier decisions delivered in the case of CIT v. Shri Meenakshi Mills Ltd. and McDowell & Co. Ltd. (supra).
21. From the ratio of abovementioned decisions, it is evident that the' question as to whether the item of expenditure is. wholly and exclusively laid out for the purpose or not, has to be decided by the Tribunal on the facts of each case. The necessary condition being that it must be laid out or expended wholly or exclusively for the purpose of assessee's business. It further means that in each case it is a question of fact as to whether the amount claimed by the assessee, is a deductible allowance under Section 37(1) of IT Act. In case the Tribunal, being highest fact finding authority, comes to the conclusion on the basis of evidence that the amount was not wholly and exclusively expended for the assessee's business but for ulterior motives or with a view to avoid tax liability, without any genuine purpose or reason in good faith or apparently it appears for a positive factor, but, in reality the expenditure is for obnoxious purposes, then the Tribunal may not allow the expenditure claimed by the assessee as deduction under Section 37(1) of IT Act.
22. Now, following the guidelines as laid down in the citations, we proceed to dispose of the issue relating to deduction of expenditure of Rs. 10,95,000 claimed by the assessee as payment of lease rent to M/s ICLS Ltd., sister-concern of the assessee.
23. First plea of the assessee that as on this very ground, no addition has been made in asst. yr. 1992-93 and so, the AO is not justified in making addition in asst. yr. 1993-94, has no force, firstly, because this issue is discussed on merits in asst. yr, 1993-94 involved in the instant ground of appeals by the AO which was never discussed and adjudicated by the AO while framing assessment in asst. yr. 1992-93 because in that assessment year the AO has simply framed the assessment under Section 143(1) of IT Act and not under Section 143(3) of IT Act, so, the addition made in asst. yr. 1992-93 does not debar the AO in making addition in asst. yr. 1993-94 in view of the conclusions of the facts arrived at by the AO in asst. yr. 1993-94 under question because even in the citations relied upon by both the parties, the ratio of the decisions is that on considering certain facts and material circumstances of the case and after recording proper reasons, the assessing authority could depart from its previous view taken in the earlier assessment year.
24. Now, coming to the other plea taken by the assessee that it gave interest-free loan of Rs. 50 lakhs to IGLS Ltd. from whom it received a sum of Rs. 45,35,451 as sale price of the assets, so that business of M/s IGLS Ltd. gets running smoothly, also does not seem to have any force, because in that, case the assessee could have simply advanced the interest-free loan to M/s ICLS Ltd. instead of entering into this transaction of selling the land, building and machinery to IGLS Ltd. and then taking back the same on lease at a monthly rent of Rs. 1.50 lakhs. Had this transaction been genuine and genuinely entered wholly and exclusively for the purpose of business either of the assessee or of ICLS Ltd., there was no need of entering into such type of sale, lease agreement and then in advancing interest-free loan to M/s ICLS Ltd., and more so, when no business activity was carried out by ICLS Ltd. after the purchase and lease, of these assets during the asst. yr, 1993-94.
25. Another explanation given by the assessee for taking premises and" machinery on lease from M/s ICLS Ltd. when the same was sold by the assessee to M/s ICLS Ltd. was that the assessee had some orders in hand and the goods had to be supplied to the customers, so, for manufacturing the goods from raw material, the, assessee took on lease the building and machinery from M/s ICLS Ltd. But, we again find that in asst. yr. 1993-94, there is no such evidence brought to our notice as to how much raw material was manufactured by the assessee during the asst: yr. 1993-94 and what material was left behind though the assessee claims to have done manufacturing in the asst. yr. 1993-94. On the contrary, learned Departmental Representative for the Revenue has argued that no manufacturing was done by the assessee in the asst. yr.
1993-94.
26. Now, coming to the issue of commercial exploitation and commercial expediency, from the facts it appears that by this transaction of sale of assets and taking the same assets back on least at a monthly rent of Rs. 1.5 lakhs, and also out of sale proceeds advancement of loan of Rs. 50 lakhs by the assessee to the buyer, M/s ICLS Ltd., the assessee apparently does not seem to have gained anything, what to talk of reducing its own losses. On the contrary, by this transaction the assessee's sister-concern, without doing any business from the assets purchased from the assesses, earned monthly rent of Rs, 1,5 lakhs and an interest-free loan of Rs. 50 lakhs and at the same time, the assessee got the benefit of diverting its profits to its sister-concern. Learned CIT(A) in his order has failed in considering all the abovementioned aspects and also failed in his duty in properly appreciating the facts and thereafter in analysing the same whether this entire transaction was genuine or ingenuine but he simply seems to be carried away by the plea of the assessee that this entire transaction has been entered by the assessee with ICLS Ltd. with a view to reduce its losses. He also failed in his duty by not considering the entire facts to see whether this simple looking transaction was entered into by the assessee with its sister-concern for the interest of its business or merely for other extraneous considerations. So, the order of CIT(A) in deleting the impugned addition, merely on the reasoning that the AO cannot pass a judgment as to how the expenditure is to be incurred by the assessee and also on the reasoning that since losses suffered by the assessee were not excess of lease money and hence the assessee was able to establish the commercial exploitation, is devoid of any merits. Thus, we find that the CIT(A) has not considered the other aspects while allowing the relief under Section 37 as laid down in the decision (supra) mentioned hereinabove as well as for the reasons as discussed by us hereinabove in this order.
27. Hence, on considering the facts and circumstances of the case, we are unable to agree with the submissions of learned Authorised Representative for the assessee. The question as to whether an item of expenditure is wholly and exclusively laid out for the purpose of the business or not, has to be decided on the facts of each case, the necessary condition being that it must be laid down or expended wholly or exclusively for the purpose of assessee's business. The true test of expenditure being wholly or exclusively for the purpose of assessee's business -is that it is incurred by the assessee as incidental to his trade for the purpose of getting the trade going and by making it pay and in any capacity as a trader. The word 'business' used in Section 37(1) in association with expression for the purpose of is a word of one commutation. In the context of taxing statute, the word 'business' would signify continued commercial activity which is carried on with the end view of making and earning profits. Therefore, under Section 37(1) of IT Act, connection has to be established between expenditure incurred and the activity undertaken by the assessee with such object which is wanting in the present case of the assessee.
28. Accordingly, order of CIT(A) in deleting the addition of Rs. 10,95,000 is reversed and order of AO in making addition for asst. yr.
1993-94 is restored. Ground No. 6 taken by Revenue in ITA No. 1101 is allowed.
29. Now, we shall take up ground No. 6 of ITA No. 1106/97, asst. yr.
1994-95 and ground No. 3 of ITA No. 1022/1997, asst. yr. 1994-95, together pertaining to the grievance of the Revenue as well as the assesses against the restoration of issue of disallowance of lease rent payment of Rs, 15 lakhs, by the AO for reconsideration.
29.1 The relevant and material facts for the disposal of this issue are that the assets sold to ICLS Ltd. in asst. yr. 1992-93 were again taken back on lease by the assessee from 1st April, 1992 to 9th Nov., 1992, The assessee again took the same assets on lease from ICLS Ltd, for the period 1st April, 1993 to 31st March, 1994, i.e., for the whole year relevant to asst. yr. 1994-95 at annual lease of Rs. 15 lakhs. Relying on his order passed in asst. yr. 1993-94, the AO disallowed this lease rent of Rs. 15 lakhs claimed by the assessee. However, according to the CIT(A), in asst. yr. 1994-95, learned Authorised Representative for the assessee could not give any details of the commercial exploitation of the land, building and machinery of the assessee. He further observed that though there was no harm in taking land, building and machinery on lease by the assessee, but the assessee should be able to show that there was commercial exploitation of these assets and that lease money had wholly and exclusively been paid by the assessee for the business purpose. He was further of the opinion that since this matter has not been examined in depth by the AO, he restored back this issue to the file of AO to re-examine at his level whether there was any commercial exploitation of these assets by the assessee-company and whether the payment of lease was made by the assessee wholly and exclusively for the business purpose.
29.2 Aggrieved with the order of the CIT(A), now both the parties are in appeal before us by taking the abovementioned grounds in their respective appeals. The undisputed facts for the disposal of this issue are that the assessee again took on lease the same land, building and machinery from ICLS Ltd. for the period 1st April, 1993 to 31st March, 1994. Even during the asst. yr. 1994-95 under question, the AO disallowed the total lease rent amounting to Rs. 15 lakhs paid for this period, on the reasoning that as the facts and circumstances for the year under question were also the same as accepted for the previous asst. yr. 1993-94, so, on the same basis, he disallowed the lease rent amounting to Rs. 15 lakhs during the asst. yr. 1994-95 under consideration.
29.3 Learned CIT(A) was of the opinion that for claiming deduction of lease rent under Section 37(1), the assessee was required to give details of the commercial exploitation of land, building and machinery, and also the assessee was required to show that it has paid lease rent exclusively for the business purposes, and since the assessee has not been able to show the same and also these aspects have not been examined in depth by the AO, so, the CIT(A) restored this issue back to the file of the AO for re-examination at his level in order to ascertain the aspects whether there was any commercial exploitation of these assets by the assessee or whether the assessee has made this payment wholly and exclusively for the purpose of business. With this order of the CIT(A) the assessee as well as, the Revenue are aggrieved and have taken respective grounds in their respective appeals,. Against this order of CIT(A), in ground No. 6 of ITA No. 1106/1997; asst. yr.
1994-95 and ground No. 3 of ITA No. 1022/1997, asst. yr. 1994-95; both the parties have neither seriously opposed the order of restoration of this issue to the file of AO by the CIT(A) nor have given any convincing reasoning against the passing of this order by the CIT(A).
Whereas, on the other hand, on going through the orders of tax authorities below and perusing the records, we are of the opinion that in this case, since the issue of commercial exploitation of the assets and the issue of payment of lease rent being made wholly and exclusively for the business purpose was neither explained by the assessee nor was examined by the AO, so, the CIT(A), in our opinion, has rightly restored the issue to the file of AO for reexamination on this aspect. Hence, the well reasoned order of the CIT(A), in this regard, does not call for any interference from our side and accordingly, the same is upheld on this issue to this extent and ground No. 6 of ITA No. 1106/1997 (appeal of the Revenue) and ground No. 3 of ITA No. 1022/1997 (appeal of the assessee) having no merits are rejected.
30. Now we shall deal with ground No. 1 of ITA No. 653/1999, asst. yr.
1994-95, relating to disallowance of Rs. 15 lakhs made by the AO on account of payment of lease rent claimed by the assessee which was deleted by the CIT(A) in appeal.
30.1 The relevant and material facts for the disposal of this ground of appeal are that the issue of disallowance of Rs. 15 lakhs on account of payment of lease rent paid to ICLS, a sister-concern of the assessee, was restored back by the CIT(A) vide his order dt. 29th March, 1997, to the file of the AO for reexamination at his level for ascertaining whether there was any commercial exploitation of the assets by the assessee-company which were taken on lease from ICLS and whether the rent was paid wholly and exclusively for business purpose by the assessee. The AO, after re-examination of the matter, again made disallowance of Rs. 15 lakhs by passing the detailed order.
30.2 Before the CIT(A), the assessee has argued that there is no provision under the IT Act to disallow the bona fide expenditure. The only provision which can apply for disallowance of the expenditure is under Section 40A(2) in case the expenditure is found to be unreasonable or excessive. This disallowance under Section 40A(2) of the Act can also be made if the directors of the assessee-company and lessor company are common and have substantial interest in the lessor company. Since this expenditure does not fall under any of these categories of Section 40A(2), the same cannot be disallowed under Section 40A(2). He further contended that as this expenditure is allowable under Section 37(1) of the Act and the section does not allow the AO to determine the excessive or unreasonableness of the expenditure, so, the same cannot be disallowed even under this section.
He also contended that the only condition laid down under Section 37(1) was that the expenditure should be wholly and exclusively for business purposes and this expression "wholly and exclusively" does not mean necessarily, because ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his business or not. Such an expenditure may be incurred voluntarily or without any necessity and it is incurred for promoting the business or to earn profits, so, the assessee can claim deduction under Section 37(1) even though there was no compelling necessity to incur such expenditure. In support thereof, a number of citations were relied upon by the learned Authorised Representative for the assessee which are referred to in the order of the CIT(A). The assessee also contended before the CIT(A) that the assessee-company carried on business of manufacturing during the previous year 1992-93 relevant to the asst.
yr. 1993-94 for completing pending orders. Lease rent on plant and machinery was paid during the year under consideration as the assessee was holding more than Rs. one crore worth of finished products, work-in-process and other stocks as on 31st March, 1993. The stock was not easily saleable in the market and the assessee in anticipation that if they could get some orders whereby work-in-progress could be completed and material sold, took the plant and machinery on lease.
However, no order was received by the company and as such they were forced to sell the closing stock of the finished products, work-in-progress and scrap, etc. Similarly, the assessee-company was forced to pay the lease rent for the land and building as the material worth more than Rs. one crore was lying at the premises and the same could not be to shifted to some other premises. That the premises were also required for using it as office premises for taking fresh deposits and for making payments to the old depositors as the assessee-company is receiving fixed deposits at much lesser rate of interest than the rate of interest prevailing in the market, this part of business cannot be carried on by the assessee in a small room located at some other place as the depositors would not come unless they had surety of the company being in existence. The land and building was taken on lease from M/s ICLS because the stock worth Rs. one crore was lying with the assessee on which interest to be paid at market rate would have been more than Rs. 15 lakhs, i.e., the lease rent paid to M/s ICLS, The lease amount of Rs. 15 lakhs can in no way be termed as excessive or unreasonable. In view of these facts, according to the assessee, the amount of closing stock and machinery lying at the premises and the business of sale of closing stock and obtaining of fixed deposits having been carried on, the small amount of lease paid at Rs. 15 lakhs for safeguarding the closing stock and machinery of more than Rs. 2 crores is fully allowable and is for commercial exploitation of the assets. Further, the ICLS is independently assessed and the rate of tax was higher in its hand's. The CIT(A) after considering these submissions of the assessee, deleted the addition of Rs. 15 lakhs by making following observations in his order: I have carefully considered the facts of the case and the rival submissions. The AO during the course of the hearing pointed out that in the balance sheet of ICL Steel Haryana Ltd., it is stated that the company became a partner of the firm namely, Superior Investment Co, vide partnership deed dt. 1st April, 1994. In this firm, Shri Devinder Singh. and Smt. Sita Chaudhary have 5 per cent share each and ICL Industries Punjab Ltd., the appellant, has 20 per cent shares. He thus pointed out that both the companies, i.e., ICL Industries Punjab Ltd. and the lessor M/s ICL Steel Haryana Ltd. belong to the same group and the whole exercise is a colourable device to avoid taxes by diverting its income and the decision of the Hon'ble Supreme Court in Mcdowell & Co. Ltd. v. CTO applies squarely to the facts of the case of the appellant. He also pointed out that ICL Steel Haryana Ltd. had only declared taxable profits of Rs. 96,780 on which the taxes worked out to Rs. 55,469 whereas in case the entire sum of Rs. 15 lakhs was charged to tax in the hands of the appellant, the tax effect is much more than as the appellant has been assessed on a total taxable income of Rs. 5,73,90,674. The brief facts of the case are that the appellant-company sold a part of its plant and machinery and the entire land and building located at Jind to M/s ICL Steel Haryana Ltd., during the accounting period relevant to the at 1992-93, Immediately thereafter, the appellant-company took on lease, the plant and machinery as well as the land and building. The reasons advanced before my learned predecessor were that the appellant had substantial orders, stock in trade in the shape of processed goods, semi-processed goods and raw material and scrap lying at the premises, and since they were to complete the pending orders the factory premises were taken on lease from 1st April, 1992 to 9th Nov., 1992. On these facts, my learned predecessor allowed the lease money as allowable expenditure under Section 37(1) as commercial exploitation of the land and building and machinery had taken place during the accounting period relevant to asst. yr. 1993-94. However, the appellant again took on lease the same assets w.e.f. 1st April, 1993, for the whole year. The appellant did not carry out any manufacturing activity during this period but they sold off steel wire to the tune of Rs. 10,98,992, scrap Rs. 10,99,996 and processed stock Rs. 44,86,955 totalling in all to Rs. 65,95,943. The arguments advanced before the AO and before me are that the appellant was anticipating that they would get fresh orders and would be able to process the semi-finished goods and the raw material and sell the same at a profit. However, since no fresh orders came to them they have no option but to sell the stock lying in the factory premises and they did sell it to the tune of Rs. 65,95,943. In addition, the appellant also had substantial deposits in the shape of fixed deposits which as on 1st April, 1993, were to the tune of Rs. 56,63,000 and which went to Rs. 72,13,000 as on 31st March, 1994.
Thus, increase in the fixed deposits at reasonable rate of interest would not have taken place in case the appellant was not in occupation of the factory building. The appellant's argument that since a huge amount of raw material, scrap and semi-finished goods was lying at the factory premises and the appellant had also plant and machinery worth about Rs. 1 crore which would have cost a lot of money to shift and the shifting of the operations would also have effected the business of raising fixed deposits from the public and, therefore, it was commercially expedient for them to continue to lease the plant and machinery and the factory premises during the accounting period relevant to the assessment year and in view of the case cited at , i.e., Sassoon J. David & Co. (P) Ltd. v. CIT and the apex Court decision reported as 64 ITR 381 (sic) and J.K. Woollen Manufacturers v. CIT , CIT v. decision of Sanjeevi & Co. v. CIT (1966) 62 ITR 156 (Mad) and Raja Ram Kumar. Bhaigava v. CIT , the expenditure is an allowable expenditure under Section 37(1) of IT Act, and the addition made cannot be sustained and is deleted. As regards the application of Section 40A(2) of IT Act, no case is made out as the common director Smt. Sita Chaudhary, did not have shareholding exceeding 20 per cent to attract the provisions of this section in Clause (b) of Section 40A(2) of the Act, The AO's observations regarding the subsequent partnership in firm, Superior Investment Company, also does not hold good as this partnership came into being vide partnership deed dt. 1st April, 1994, whereas the appellant's accounting period for the asst. yr. 1994-95 closed on 31st March, 1994. In view of the above discussion, the disallowance of Rs. 15 lakhs on account of lease rent paid to M/s ICL Steel Haryana Ltd. is not sustainable and is deleted. The appellant gets relief of Rs. 15 lakhs.
30.3 Before us, Departmental Representative for the Revenue submitted that in this case the assessee has taken on lease the assets from ICL Steel Haryana Ltd. for the period of one year during the asst. yr.
1994-95 because, according to the assessee, it was to complete the orders of the customers pending with the assessee but the assessee has itself admitted that no manufacturing was done during the asst. yr.
1994-95 which clearly indicates that the direct purpose for which the assets were taken on lease by the assessee, was not fulfilled which further means that the assessee failed in establishing that the assets were taken on lease for commercial exploitation or for commercial expediency. In support thereof he has placed reliance on Meatties Ltd. v. CIT (1968) 68 ITR 79 (Del) and Ciba Dyes Ltd. v. CIT . Further, in order to support his contention that in case no manufacturing was done by the assessee then the assessee failed in establishing the commercial expediency or commercial exploitation of the assets, Departmental Representative for the Revenue relied on Malwa Vanaspati & Chemical Co. Ltd. v. CIT . Departmental Representative further submitted that in this case the assessee has failed in establishing that it has paid the lease money to the assessee (sic-ICLS) wholly and exclusively for business purpose and also contended that, in fact this transaction was nothing but a paper transaction simply entered into, by the assessee by using colourable device because, in fact, by this transaction, the assessee has not gained anything and, on the contrary, it has suffered by making payment of lease rent of Rs. 15 lakhs during the asst. yr. 1994-95. In support thereof he has placed reliance on Mcdowell & Co. Ltd. v. CTO , (supra) and CIT v. S. Kannan . In addition thereto, Departmental Representative for the Revenue placed reliance on the reasoning given in that order of AO and submitted that the CIT(A) without properly discussing the order of AO has wrongly deleted the impugned addition of Rs. 15 lakhs. On the other hand, learned Authorised Representative for the assessee reiterated the submissions which he made before the CIT(A) and submitted that whether the assessee has taken on lease the assets from ICLS Ltd. wholly and exclusively for the purpose of its business depends on facts of each case and in case we go through the order of CIT(A), it becomes clear that the assessee has paid the lease money to ICLS wholly and exclusively for its business purpose because the assessee has sold the steel division to reduce its losses.
30.4 Learned Authorised Representative for the assessee in support of the contention that the CIT(A) has rightly deleted the impugned addition of Rs. 15 lakhs has placed reliance on the detailed reasoning given in the order of CIT(A).
30.5 We have considered the rival submissions of both the parties, perused the records and carefully gone through the orders of the tax authorities below and also took into consideration the cases referred to by both the parties. In the case of Siddho Mal & Sons v. CIT , their Lordships held that the word 'wholly' in Section 10(2)(xv) refers to the quantum of expenditure but word 'exclusively' refers to the motive, objective and purpose of the expenditure. In the case of Ciba Dyes Ltd. v. CIT (supra), their Lordships held, "Before an assessee can become entitled to an allowance under Section 10(2)(xv) he must satisfy the Department of the purpose for which the amount is spent. Although the Department is not entitled to go into the reasonability of the expense, the Department is entitled to be satisfied as to the commercial necessity for expending the amount". In the case of Meattles Ltd. v. CIT (supra) their Lordships held--"In order to ascertain whether the expenditure has been incurred wholly or exclusively for the purpose of the assessee's business one must look to the direct concern and direct purpose for which the money is laid out and not to the remoter on indirect result which may possibly flow from or motivate the expenditure". In the case of CIT v.S. Krishna Rao their Lordships at p. 665 held--"The test to find out whether a particular expenditure is wholly or partly justified or exclusively incurred for the purpose of business is not to see whether it was necessary nor would it be proper to see whether any other person similarly situated would have thought it reasonable to incur expenditure to that extent. The true test is to find out whether the businessman when he expended the money was acting reasonably in the interest of his own business uninfluenced by any irrelevant and extraneous considerations". In the case of Malwa Vanaspati & Chemicals Co, Ltd. v. CIT (supra), their Lordships at p, 659 observed "The question as to whether an item of expenditure is wholly and exclusively laid out for the purpose of business or not has to be decided on the facts of each case, the necessary condition being that it must be laid out or expended wholly or exclusively for the purpose of the assessee's business. The true test of an expenditure laid out wholly and exclusively for the purpose of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any capacity other than as a trader. Section 37(1) of IT Act being a residual provision, it cannot be taken aid of, unless and until it is established that none of the provisions of Sections. 30 to 36 are applicable to a given case.
The scope of Section 37(1) is essentially wider. The word 'business' used in Section 37(1) in association with the expression "for the purpose of is a word of wide connotation. In the context of taxing statute, the word 'business' would signify an organised and continuous course of commercial activity which is carried on with the end in view of making and earning profits". In the case of Mysore Kirloskar Ltd. v.CIT their Lordships at p. 837 observed. "Under Section 37(1), if the expenditure has been incurred by the assessee voluntarily even without necessity, but if it is for promoting business, deduction would be permissible" and at p. 838 held--"That the word "for the purpose of the business' used in Section 37(1) should not be limited to the meaning of 'earning profit alone'. Business expediency or commercial expediency might require providing facilities like schools, hospitals etc. for the employees or their children or for the children of the ex-employees. Any expenditure laid out or expended for their benefit, if it satisfied the other requirements, must be allowed as a deduction under Section 37(1) of IT Act. The fact that somebody other than the assessee was also benefited or incidentally took advantage of the provision made, should not come in the way of the expenditure being allowed as a deduction under Section 37(1) of the Act. Nevertheless, it is an expenditure allowable as deduction under the Act," 31. With these guidelines laid down in these citations and also on the basis of guidelines as discussed by us while deciding the allowability of the lease rent of Rs, 10,95,000, claimed by the assessee in ground Nos. 6 and 7 of ITA No. 1101/1997, we now proceed to dispose of the issue involved in this ground of appeal relating to allowability of lease rent of Rs. 15 lakhs claimed by the assessee in asst. yr.
1994-95. The unccntroverted facts in this case are that the assessee has sold assets in question to M/s ICLS Ltd. in asst. yr. 1992-93 and took the same on lease in asst. yrs. 1992-93, 1993-94 and 1994-95. The twin object in the mind of the assessee for entering into this transaction was first to reduce the losses, as on account of this unit, the assessee has suffered huge losses, the assessee sold this unit to M/s ICLS, a sister-concern of the assessee, secondly, because the assessee had to complete the pending orders of the customers, it had to do manufacturing from the raw material lying with the assessee as well as process the semi-finished goods and sell the same at profit, so, the assessee took the assets on lease from ICLS. However, the assessee has admitted before us that in asst. yr. 1994-95, it has not carried out any manufacturing activity.
32. Now, even in asst. yr. 1994-95, pleas of the assessee before the tax authorities below as well as before us, for taking on lease these assets in asst. yr. 1994-95 at a total amount of Rs. 15 lakhs for commercial exploitation of the assets and that the payment of the lease amount being wholly and exclusively made for business purpose, were that the assessee has closing stock of finished goods, work-in-progress and other stocks as on 31st. March, 1993 worth Rs. one crore which were not easily saleable in the market. So, the assessee in anticipation, that if it could get some orders, work-in-process could be completed and raw material sold, took the plant and machinery on lease. The assessee did not carry out any manufacturing activity during the asst.
yr. 1994-95 but had sold out the closing stock for a total sum of Rs. 65,95,943. That the assessee had substantial deposits in the shape of fixed deposit as on 1st April, 1993, to the tune of Rs. 56,63,000 which went upto Rs. 72,13,000 as on 31st March, 1991, and this increase in the fixed deposits at a reasonable rate of interest would not have taken place in case the assessee was not in occupation of office premises. Lastly, that the market rate of interest, on the closing stock of Rs. one crore was much higher than the lease rent of Rs. 15 lakhs paid by the assessee to ICLS Haryana Ltd. 33. Before proceeding further, we would like to mention from the order of AO that out of total sales of Rs. 51,19,66,997, the sales at LCN site was shown at Rs. 65,95,943 which comes to only at 1.28 per cent of the total sales of the assessee-company. Further, on 31st March, 1994, the total deposits were shown by the assessee-company at Rs. 72,13,000 against the pending balance of Rs. 56,63,000. Now, with these facts and pleas taken by the assessee, in our mind, and also keeping in view the guidelines laid down in the citations, we propose to dispose of the issue involved in this ground of appeal relating to the allowability of lease rent of Rs. 15 lakhs claimed by the assessee under Section 37(1) of IT Act. In the existing facts and circumstances of the case, we proceed to decide whether the assessee is able to show the commercial exploitation of the assets taken on lease and whether the assessee is able to show that it paid lease rent wholly and exclusively for the purpose of its business. 34. In this case, it is surprising that the assessee continuously took on lease the assets from asst yrs. 1992-93 to 1994-95 in order to complete the pending orders of the customers so that manufactured goods could be sold at a profit but during all these assessment years the assessee could neither complete the manufacturing of the goods from the raw material available with it nor could place any evidence on record as to what was the quantity of raw material available with the assessee in the beginning of asst. yr. 1992-93 and further, failed in placing any evidence on record as to how much approximate time the assessee would have taken in completing the manufacture of the goods from that raw material. There is also no such evidence before us as to how much space the assessee would require for accommodating the closing stock lying with the assessee in asst. yrs.
1992-93, 1993-94 and 1994-95. The assessee also placed no such evidence before us, on the basis of ,which time required for shifting raw material could have been judged. There is also no such evidence before us to judge the amount required by the assessee for shifting raw material from site which was only 1.28 per cent value of the total stock sold by the assessee during the asst. yr. 1994-95. We also do not understand as to why M/s ICLS, from the assets purchased by it, could not carry out manufacturing from the raw material available with the assessee which could have also been sold to ICLS by the assessee for carrying out the manufacturing of goods by ICLS. We also do not understand the necessity of the assessee for taking on lease the assets from ICLS. In fact, the assessee did not carry out any manufacturing in the asst. yr. 1994-95 and ultimately the assessee had to sell unfinished goods and the stock of raw material at the end of asst. yr.
1994-95. In these facts, we do not agree with the plea of the assessee that in case the assessee had not taken the assets on lease and had shifted its office, it would not have received the excess deposits in 1994-95 because it is not possible that the depositors had not come to know about the sale of assets till asst. yr. 1994-95 when the same were, in fact, sold by the assessee in asst. yr. 1992-93. Moreover, there is no such evidence on record to show that the depositors were merely making deposits because of smaller units being with the assessee and not because of the magnitude of the business carried out by the assessee, as is evident from the sales made by the assessee during the year under consideration, which were to the extent of Rs. 51,19,66,997 whereas closing stock lying at LCN site sold during the asst. yr.
1994-95 was only to Rs. 59,943 which was just 1.28 per cent of the total sales.
35. We are further of the opinion that the AO, in fact, has adhered to the guidelines as discussed by us hereinabove while disposing of the issue of allowability of lease rent of Rs. 10,95,000 under Section 37(1) of IT Act and also the guidelines as laid down in the citations mentioned hereinabove while considering point of commercial exploitation of assets by the assessee and by us while considering whether the lease rent was paid wholly and exclusively for the purpose of business by the assessee while disposing of ground No. 6 of ITA No.1101/1997, asst. yr. 1993-94 and thereafter rightly came to the conclusion that in this transaction neither the assessee is able to clearly show that there is commercial exploitation of the assets nor was he able to show that he paid lease rent wholly and exclusively for the business purpose. On the contrary, the CIT(A) while deleting the impugned disallowance did not carefully and, properly consider these aspects in his order. We are further of the opinion that, in fact, the pleas of the assessee relating to taking back the assets on lease for manufacturing unfinished goods and completing the pending orders, is not tenable because during asst. yr. 1994-95 under consideration, the assessee did not do any manufacturing and ultimately sold the unfinished and unmanufactured stock in asst. yr. 1994-95. It means that the assessee failed in establishing the commercial exploitation of assets by the assessee. Further, in our opinion, as the assessee ultimately sold the unfinished stock which could' have been done much earlier in asst. yr. 1992-93 and even by taking back the assets on lease for a shorter duration in order to enable it to sell out the unmanufactured stock, of course, without shifting the same from site.
The assessee's plea that because of taking back the assets of lease, there was substantial increase in the deposits with the assessee, is just an afterthought to cover up the ingenuine paper transaction with its sister-concern by the assessee because for that purpose a small office was sufficient enough for carrying out this activity without taking whole land and building and machinery on lease rent at Rs. 15 lakhs. We are further of the opinion that even general notice of change of address was sufficient enough to inform the depositors and the same would have served the purpose of the assessee for which it had taken the entire land, building and machinery on lease.
36. We are conscious of the fact that the expenditure is to be allowed if it satisfies the test, of commercial expediency and the same has to be judged from the point of view of the assessee but such point of view has to be prudent and reasonable point of view which is free from an apparent taint of excessiveness, collusiveness or colourable discretion. But, if the attendant circumstances of the transaction indicates, the ulterior motive behind the expenditure and even on the face of it, it appears that by this transaction, the assessee was unduly benefiting the other persons then such transactions are required to be carefully looked into by the concerned authorities for arriving at the conclusion whether the expenditure has been incurred wholly and exclusively for the purpose of the business. Hence, once the transaction entered into by the assessee with its sister-concern, appears to be merely a paper transaction then in order to ascertain the genuineness of the transaction, we have to carefully examine all the facts in detail in order to arrive at the conclusion whether such transaction is genuine or not; for that purpose the motive, objective and purpose of expenditure is required to be examined by us.
37. Having analysed these facts in details as above and on the basis of conclusions drawn by us hereinabove, we are of the opinion that in the existing facts and circumstances of the case, the assessee has failed in establishing the commercial exploitation of assets as well as the fact that it paid the lease money wholly and exclusively for the business purpose and hence we hold that the CIT(A) in his order has wrongly deleted the impugned addition of Rs. 15 lakhs. Accordingly, the order of CIT(A) in this regard is reversed and the order of AO in this regard, is restored. In this view of the matter, ground No. 1 of ITA No. 653/1999 taken by the Revenue is allowed.
38. Now, we shall deal with ground No. 2 of ITA No. 1054/1996, asst.
yr. 1993-94 and ground No. 2 of ITA No. 1022/1997, asst. yr. 1994-95; relating to the issue of disallowance of Rs. 8,73,600 pertaining to the lease rent paid to Dynamic Cosmetics Ltd. by the assessee, 38.1 The relevant and material facts for the disposal of this ground are-that the assessee during these assessment years has agreed to pay lease rent amounting to Rs. 10,53,600 to M/s Dynamic Cosmetics, a subsidiary concern of the assessee, for taking on lease computers, fax machines, etc. during the asst. yrs. 1993-94 and 1994-95. The AO observed that from the 'balance sheet of M/s Dynamic Cosmetics Ltd. total value of the computers available with that company was worth Rs, 6,38,695 as on 31st March, 1993, and the total value of the fax machines available with the assessee as on 31st March, 1993, was Rs. 69,300, and the assessee had paid lease rent on computers @ Rs. 82,800 per month, i.e., 9,53,600 for whole year and other lease rent of Rs. 5,000 per month for fax machine i.e., Rs. 60,000 in one year. The AO further noted that lease rent paid by the assessee during the year was much more than the cost of the computers and fax machines as Dynamic Cosmetics Ltd. had declared a loss of Rs. 89,986 for the asst. yr.
1993-94 and hence there was no tax to be paid by this concern but has reduced tax liability of the assessee. The assessee submitted before the AO that rent paid for computers and fax machines included service charges but this was not accepted by the AO and he held that the lease rent cannot exceed 25 per cent of the cost of the asset. Hence, the excess lease rent was held by the AO for non-business purposes given to the subsidiary company of the assessee and accordingly, he only allowed the lease rent at Rs. 1,80,000 and disallowed the balance lease rent amounting to Rs. 8,73,600. On the same basis the AO made disallowance of Rs. 8,73,600 in asst, yr. 1994-95. Aggrieved with the order of AO the assessee filed an appeal before the CIT(A) and submitted before him that the AO cannot question the reasonableness of the lease rent paid and once the payment was held to be for the business purpose under Section 37(1), no disallowance can be made by the AO on account of reasonableness under Section 40A(2)(a) because this provision was not applicable in the case of the assessee. The CIT(A) made a query from the assessee to give the details of services provided by M/s Dynamic Cosmetics Ltd., but the assessee was unable to furnish such details.
So, the CIT(A) was of the opinion that in these circumstances, this expenditure incurred by the assessee cannot be held to be wholly and exclusively for business purposes of the assessee. He was further of the opinion that though the Department cannot stand in the shoe of an assessee to decide the reasonableness of expenditure incurred but nevertheless the assessee cannot also resort to such reduction of income by paying a lease rent which is far in excess of the cost of the assets taken on lease. With these observations, the CIT(A) upheld the view taken by the AO and sustained the disallowance of Rs. 8,73,600 made by the AO in the asst. yr. 1993-94.
38.2 Similarly, while disposing of the appeal of the assessee relating to disallowance pertaining to lease money paid to M/s Dynamic Cosmetics Ltd. in the accounting year relevant to asst. yr. 1994-95, the CIT(A) was of the opinion that as this issue was examined in assessee's own case for asst. yr. 1993-94 in his appellate order, so, relying on the same, he confirmed the addition made by the AO amounting to Rs. 8,73,600 in asst. yr. 1994-95.
38.3 Before us, learned Authorised Representative for the assessee did not dispute that the lease rent amounting to Rs. 10,53,600 during the relevant assessment years was paid to the subsidiary of the assessee-company. He also did not dispute that as per balance sheet of M/s Dynamic Cosmetics Ltd., the total value of the computers and the total value of the office machinery as available with the subsidiary company as on 31st March, 1993 was Rs. 6,38,695 and Rs. 69,300, respectively. It is also not disputed that the lease rent paid by the assesses for one year during the assessment years under consideration was much more than the cost of computers and office machinery. The assessee, however, before us could not explain as to why lease rent of Rs. 10,53,600 was paid by the assessee to the subsidiary company of the assessee for the lease of the computers, fax machines, etc., when the WDV of the same during these years remained at Rs. 6,38,695 and Rs, 69,300, respectively. The learned Authorised Representative for the assessee though feebly contended that there were oral agreements with the subsidiary company by which they agreed to provide services, etc., to the assessee, so, the payment of excess lease rent than the WDV was justified but the learned Authorised Representative for the assessee could not lead any evidence in support of this contention. Lastly, conceding to the fact that the assessee could not give any justification for the payment of such an exhorbitant lease rent compared to the WDV of the assets, learned Authorised Representative for the assessee contended that a reasonable view for making the disallowance may be taken because the tax authorities below have made the disallowance in this regard which is exhorbitant.
38.4 On the other hand, learned Departmental Representative for the Revenue contended that in this case, the assessee was required to show that the lease rent paid by the assessee to the subsidiary company was wholly and exclusively for the business purposes to claim deduction under Section 37(1) of the Act, so, taking a reasonable view of the matter, the tax authorities below have rightly treated that approximately 25 per cent of the cost of the computers and the fax machines should be taken as the payment of lease rent for the purposes of business which is most fair and reasonable and hence, the balance lease rent amounting to. Rs. 8,73,600 in each assessment year under consideration has rightly been-disallowed by the tax authorities below treating the same as for non-business purposes.
38.5 We have considered the rival submissions of both the parties, perused the records and carefully gone through the orders of the tax authorities below. We are in agreement with the submissions of the, learned Departmental Representative for the Revenue because we are of the opinion that the entire annual lease rent of Rs. 10,53,600 paid by the assessee to, M/s Dynamic Cosmetics Ltd. which is much more than the WDV of the assets, cannot be called wholly and exclusively paid for business purposes by the assessee to the subsidiary company. We are further of the opinion that in case the assessee starts resorting to such reduction of its income by paying lease rent which is far in excess of the cost of the assets taken on lease, then the Department can certainly look into the reasonableness of the expenditure incurred by the assessee under Section 37(1) of the Act for coming to the conclusion whether the whole of the expenditure incurred by the assessee was wholly and exclusively for the purposes of its business.
Hence, in our opinion, the AO has been fair and reasonable in allowing the lease rent amounting to Rs. 1,80,000 to the assessee which is approximately 25 per cent of the cost of the assets taken on lease by the assessee treating the same for business purposes, and has rightly disallowed the balance lease rent amounting to Rs. 8,73,600 claimed by the assessee, treating the same to be for non-business purposes under Section 37(1) of the Act. Hence, we 'conclude that in the well reasoned and well discussed order, the CIT(A) has rightly upheld the impugned disallowance made by the AO during the asst. yrs. 1993-94 and 1994-95, and accordingly, the same in this regard, is confirmed. The ground No.2 of the appeals in ITA No. 1054/1996 and ITA No. 1022/1997 for asst.
yrs. 1993-94 and 1994-95, respectively, filed by the assessee are rejected.
39. In the result, all the instant appeals filed by the Revenue and the assessee are partly allowed.