1. Assessee, a public limited company, is a leading manufacturer of jute bags and automobile batteries. It has its manufacturing units located at Chittivalasa (Andhra Pradesh) and Sikandrabad (UP) respectively. Since common points are involved in the appeals for the assessee as well as the Department, we can conveniently dispose of these appeals by a common order.
3. For asst. yr. 1984-85, Rs. 54,071 and Rs. 13,914 were debited towards expenses incurred on provisions, etc., purchased for Ocean View bungalow at Chittivalasa and staff holiday home at Puri. The AO asked the assessee to explain the nature of the expenditure. As regards the expenditure incurred over staff holiday home at Puri, the AO completely agreed with the contentions of the assessee. However, as regards expenses incurred for Ocean View bungalow at Chittivalasa (AP), the AO held that it was used as guest house and, therefore, expenses incurred thereon deserves to be disallowed under s. 37(4). In the letter of the assessee dt. 1st December, 1987, it is explained that the expenses were incurred on purchase of provisions for head office staff and commercial representatives who stayed in the guest house at Chittivalasa and that by having such an arrangement the company had saved otherwise an exorbitant expenditure which it was obliged to pay for hotels. While appreciating the circumstances in which the expenditure used to be incurred, the AO held that the expenses incurred on guest house by whatever name has to be specifically disallowed. He further stated that the assessee was able to give details of expenditure to an extent of only Rs. 54,071, there being expenses on purchase of provisions, etc., but had not given any details of other expenses like rent/depreciation, telephone, salary of attendants, electricity charges, painting, municipal taxes, etc., relating to the guest house. He estimated such expenses at Rs. 50,000 and made a total disallowance of Rs. 1,04,071 for the asst. yr. 1984-85 as regards Chitavalsa guest house. Similar disallowances were made for the asst. yrs. 1985-86, 1986-87 and 1987-88 at Rs. 1,20,169, Rs. 1,62,717 and Rs. 2,13,186, respectively.
4. In appeal before the CIT(A), it was contended that the guest house is situated in jute factory premises of the assessee-company as part of administration block and, therefore, it should be treated as expenses incurred on administrative office itself and on that ground whole of the expenses are allowable. These arguments were rejected by the learned CIT(A) and found that whole of the expenses were covered by the provisions of s. 37(4). The learned counsel submitted before us that the factory is located in a remote area in Andhra Pradesh and there is no boarding and lodging facility in and around that area for officers and representatives of the company who visit the factory from Calcutta/Delhi and it has been separately earmarked to provide lodging and boarding facility to them. It is not at all a guest house and expenses incurred thereon do not fall under s. 37(4) but should be considered as expenses incurred for providing accommodation to employees and representatives of the company on their visit to the factory. Allowing TA/DA at the normal rates to the transport to and from the factory to the next city could be avoided by running the guest house. It saves the assessee time and money, amounts spent during these visits, besides wastage of valuable man-hours to the company. Allowing normal TA/DA and transportation charges to the employees on tour and subsequent recovery of the expenses from them would result in large outflow of funds to the company besides avoidable paper work.
Therefore, on facts, this addition is to be deleted. The assessee relied upon the following case law : (ii) CIT vs. Kaira Distt. Co-op. Milk Producers Union Ltd. (1991) 192 ITR 608 (Guj); (v) CIT vs. Hindustan Aluminium Corpn. Ltd. (1989) 176 ITR 206 (Cal); (vii) Saraswati Industrial Syndicate vs. CIT (1982) 136 ITR 361 (P&H).
5. On the other hand, the learned Departmental Representative hotly contested the arguments of the learned counsel for the assessee and heavily relied upon the orders of the lower authorities and also on the provisions of s. 37(4). The learned Departmental Representative relied upon the Bombay High Court decision in the case of CIT vs. West Coast Paper Mills Ltd. (1991) 59 Taxman 398 (Bom) in which a distinction has sought to be drawn within "guest house" and "rest house". Rejecting the contention, the Bombay High Court has held as under at page 403 : "...... that the distinction drawn by the assessee between 'rest house' and 'guest house' is to be stated only to be rejected. If at all there is a distinction, it is a distinction without any substance. That being so, it cannot perhaps be disputed that upto a particular date the provisions of s. 37(3) are attracted in terms of which expenditure on the maintenance of a guest house can be allowed only if a register is maintained. The register having admittedly not been maintained, the expenditure could not have been allowed. After that date the provisions of s. 37(4) are applicable which completely prohibit allowance of any deduction of expenditure on the maintenance of guest house. Having regard to the above discussion, so far as the question at the instance of the assessee is concerned, we answer the question in the affirmative and in favour of the Revenue." 6. The AO agreed with the submission of the assessee-company that to a large extent the guest house was being used for the convenience of employees of the assessee coming from Delhi/Calcutta/Bombay on their official work. Chittivalsa is a remote village and the assessee's factory is situated far away from the main village. There are no hotels near about the assessee's factory. However, in our opinion, the provisions of s. 37(5) would be attracted and the accommodation cannot but be called guest house within the meaning of sub-s. (4). It was not the contention of the assessee-company that it is being maintained as a holiday home for its employees.
In Upper Ganges Sugar Mills Ltd. (1994) 206 ITR 215 (Cal), it is held that when it is not the assessee's case that the guest house was not the holiday home for the use of the employees on leave, expenses incurred on food, etc., provided to visitors and customers staying in the assessee's guest house, salary paid to guest house staff or depreciation on guest house were held not allowable.
Hence, we hold that it should be considered as guest house and the expenses incurred for the maintenance of such guest house are all must be held not allowable deduction. Hence, the assessee should fail on this ground.
7. The second ground for asst. yr. 1984-85 is against disallowance of Rs. 3,98,476. It represents provisions as well as contingencies written back. This ground is confined only for asst. yr. 1984-85 and similar ground is not found for other assessment years under appeal. No reasons were given by the AO while making this disallowance in his assessment order. Before the learned CIT(A), he stated that it was the unilateral action of the assessee to write back the provisions and contingencies not claimed in the last three years. It is contended that this does not amount to cessation of liability and, therefore, no addition is called for. Reliance is placed upon the following decisions : 8. The learned CIT(A) held that assessee had not produced any evidence to the effect that the persons entitled to claim the amount give them up and hence, the amounts have been written back in company's account.
Since no such evidence was produced saying that claim of the assessee remained unsubstantiated, the learned CIT(A) refused to interfere with the decision of the AO in this regard.
9. At the time of hearing, giving the break-up of this figure of total disallowance of Rs. 3,98,476, the learned counsel stated that it represents the following two amounts : It is admitted that the amounts were written back in the accounts of the assessee. It is also claimed that the first amount of Rs. 2,99,287 has been credited to the P&L a/c. Particulars of this amount were also found mentioned at page 1 of assessee's paper book. On 31st July, 1983, while writing back the amount of Rs. 2,99,287.68, the narration in the account is as follows : "The amount of sundry creditor lying since last 3 years being unclaimed written back." So also the narration with reference to Rs. 99,188.44 under the dt.
31st July, 1983, was as under : In the write up given to the learned CIT(A) on 29th September, 1989, it is stated that these amounts were not claimed or allowed as deduction in earlier assessment years and, hence, they should not have been considered as income. The amount of Rs. 2,99,287 from the narration quoted above appears to be representing the debts due by the assessee-company to outsiders. Since the creditors of the assessee-company were not claiming those amounts for the last three years, the amounts were written back.
Regarding the disallowance of Rs. 2,99,287 representing the debts due to others but written back in the account books of the assessee in this year, the assessee relied upon the decision of the Hon'ble Supreme Court in State Bank of Travancore vs. CIT AIR 1958 SC, (1986) 158 ITR 102 (SC) and also the Gujarat High Court decision in Navjeevan Udyog Mandir P. Ltd. vs. CIT (1994) 207 ITR 40 (Guj). On the other hand, the learned Departmental Representative relied upon the two Calcutta decisions reported in CIT vs. Eastern Spg. Mills & Industries Ltd. (1994) 207 ITR 951 (Cal), CIT vs. General Industrial Society. Ltd. (1994) 207 ITR 169 (Cal) and Protos Engg. Co. Ltd. vs. CIT (1995) 211 ITR 919 (Bom). The assessee's head office is situated within Allahabad High Court's jurisdiction. There is no decision of Allahabad High Court cited before us. In the absence of any authority from the jurisdictional High Court, the principle that when there is conflict of judicial opinion on a particular question the decision in favour of the assessee should be preferred has to be followed.
The liability of the assessee to pay those amounts to the creditors does not depend upon the admission of those amounts by the assessee.
Therefore, writing back of those amounts need not have any effect on the question of liability. The liability on the part of the assessee would continue to be there so long as the limitation period is available to the creditors to recover those amounts. Therefore, in our opinion, disallowance of the amounts cannot have any legal consequence.
It is not the case of the AO that the debts due to the creditors were not true or genuine since all along they have been claimed in their accounts and they have been allowed in earlier years. In the absence of any evidence that the debts were not genuine and the creditors were bogus, the amounts should not be disallowed but should always be allowed as deduction while arriving at the real profit derived by the assessee in his business.
10. As regards the second amount of Rs. 99,188, the claim of the assessee was that when it is written back the amount was taken to the P&L a/c and was shown as part of the profit. This was not verified. We direct that this aspect is to be verified by CIT(A).
11. Ground No. 3 in the assessee's appeal for asst. yr. 1984-85 relates to disallowance of a sum of Rs. 63,136 representing 50% of entertainment expenses incurred by the assessee-company on its employees. Rs. 56,960 and Rs. 11,176 have been incurred as expenses on entertainment in Battery Division & Jute Division, respectively. The ITO allowed Rs. 5,000 only under s. 37(2A) since there are no profits and the balance aggregating to Rs. 63,136 was disallowed. In the appeal before the learned CIT(A), the assessee contended that 50% of the expenses should have been allowed as so much percentage was allowed by the appellate orders dt. 27th January, 1986, passed by the CIT(A). The learned CIT(A) held that entertainment expenses incurred on the employees are allowable if they are incurred in the factory premises or at the place of duty. However, there is no such evidence forthcoming in this appeal as to the place where the entertainment expenses were incurred and hence, he felt that no relief could be granted by him and confirmed the order of the ITO.12. On behalf of the assessee, the contention put forward before the CIT(A) was repeated. The learned Departmental Representative contended that the claim of 50% of expenses is quite excessive and it should be reduced either to 25% or 20%. It is contended before us that 50% of expenses are allowable since at least that much percentage of expenses were spent on employees. Assessee produces or manufactures automotive batteries. Depots and marketing divisions are located or scattered all over India. Buyers are mostly Govt. Deptt., State Transport Corporations. Upto asst. yr. 1983-84, 50% of expenses were allowed as deductions. Admittedly, in the preceding assessment year (asst. yr.
1983-84), the learned CIT(A) allowed 50% of expenses as allowable. We hold that the same percentage of expenses should be allowed in this year also.
13. Having regard to all the above, the appeal of the assessee for asst. yr. 1984-85 is partly allowed.
14. Ground No. 1 is covered and the same order on this subject delivered for asst. yr. 1984-85 should be applied here.
16. Ground No. 3 disallowing a sum of Rs. 3,67,872 in respect of bonus to Battery Division.
The aggregate claim on account of bonus is Rs. 41,77,450. It includes an amount of Rs. 3,18,162 which represents bonus pertaining to the immediately preceding accounting period. Further, a sum of Rs. 1,22,339 is identified as the excess of the amount payable under the provisions of the Payment of Bonus Act. This excess was indicted in the tax audit report (vide letter dt. 25th February, 1988). In that letter, the assessee had further stated that the change in the method of account was bona fide and it was done with a view to adopting a uniform system of providing for the expenditure on bonus on mercantile basis as has been the case in its Jute Division. The AO felt that the facts produced before him would clearly show that the assessee has been hitherto claiming bonus in the Battery Division on cash and with effect from the accounting year relevant to asst. yr. 1985-86 the same expenditure is claimed on accrual basis. He further found that during the accounting period, apart from claiming bonus on accrual basis, the assessee claimed an additional amount of Rs. 3,67,872 on payment basis. The AO held that even if the change in the method of accounting was bona fide, the assessee cannot follow two methods of accounting at the same time.
He followed the decision in Sheth Chemical Works vs. CIT (1983) 140 ITR 507 (Cal), where it was held that bonus provided on accrual basis is only allowable and the claim of bonus on payment basis is not allowed.
Thus stating, he disallowed a sum of Rs. 3,67,872 (vide para 9.1 of his orders). Before the learned CIT(A), besides contending that the change of method is bona fide, the assessee contended that it is entitled for the claim on actual payment basis for the preceding year and on accrual basis for the year under consideration. Reliance was placed upon some decisions. However, the learned CIT(A) held that the assessee cannot claim deduction of liability twice in the present accounting year as the allowance for earlier year on actual payment basis and for the year under consideration on accrual basis which method, he pointed out, would amount to double deduction. He further held that the legislature has amended the provisions of s. 43B so as to include bonus from asst.
yr. 1988-89. He had upheld the disallowance.
17. In the second appeal before the Tribunal, besides repeating the contentions already put forward before the CIT(A), the counsel for the assessee heavily relied upon the following decisions : On the other hand, the learned Departmental Representative relied upon the orders of the lower authorities. Clause (c) under s. 43B, which deals with the payment of bonus, was inserted w.e.f. 1st April, 1989, and, therefore, it applies for payment of bonus from asst. yr. 1989-90 onwards and not to bonus paid for the earlier years. Clause (c) of s.
43B makes it very clear that the payment of bonus or provision made towards bonus relating to earlier asst. yr. 1989-90 is not disallowable under s. 43B and, therefore, the application of the provisions of s.
43B by the learned CIT(A) in the impugned orders does not serve any purpose and has no relevance whatsoever.
The headnote of the Calcutta High Court decision in Dolaguri Tea Co.
(P) Ltd. (supra) is as under : "The assessee-company maintained accounts in respect of its business on mercantile basis and was being assessed on that basis, but in respect of bonus payable to the workmen, the deduction was being claimed by, and allowed to, the assessee in the earlier years on cash basis. During the previous year relevant to the asst. yr.
1984-85, the assessee claimed that it had changed its method of accounting even in respect of bonus payment and that it wanted to record the liability in respect of bonus on mercantile basis and claimed deduction in respect of same on that basis only. Since the change in the system of accounting for bonus took place for the first time in the relevant previous year, the assessee charged to its P&L a/c for the relevant previous year the bonus of Rs. 2,17,394 on actual payment basis and Rs. 4,45,710 being bonus payable for the said year on mercantile basis. The AO disallowed the sum of Rs. 4,45,710 being the bonus provided for the relevant previous year. On appeal, the said disallowance of Rs. 4,45,710 was confirmed by the CIT(A). On second appeal, the Tribunal allowed the assessee's claim.
In the instant case, it was an admitted fact that the assessee had changed the method of accounting in respect of the bonus from cash system to mercantile. Even otherwise the assessee was being assessed to income-tax on mercantile basis. The payment of bonus was undoubtedly a statutory liability and a provision in respect of bonus payable in accordance with law was clearly admissible in a case where mercantile system of accounting was being consistently followed. The AO had admittedly computed the income of the assessee for the year under reference in accordance with the mercantile system of accounting. It was also an admitted fact that the bonus for the preceding year which was actually paid during the relevant previous year was never claimed and/or allowed as a business deduction in the earlier year in view of the fact that all along the bonus payments were being claimed and allowed only on cash basis.
The relevant previous year was the first year of change and, therefore, both actual payments on account of bonus for the preceding year as well as the provision made by the assessee on account of bonus for the relevant previous year had to be debited in the P&L a/c of the assessee for the relevant previous year. It was nobody's case that change of accounting in respect of bonus was not bona fide.
Thus, the Tribunal correctly allowed the claim of the assessee in respect of bonus provision for the relevant previous year." The headnote of the Bombay High Court decision in West Coast Paper Mills Ltd. (supra) is as follows : "The assessee was following mercantile system of accounting in respect of other income and expenditure, but continued to follow cash method of accounting with regard to bonus liability, though with the introduction of the Payment of Bonus Act, 1965, the payment of bonus had become a statutory liability. During the year the assessee paid bonus. A provision for bonus was also made as the assessee had received a communication dt. 15th October, 1969, from the Federation of Indian Chambers of Commerce & Industry communicating the opinion of the Company Law Board that provision for bonus should be made in the account of the year for which the bonus was payable. Both the amounts were claimed as deduction. The ITO disallowed the claim for provision on the ground that the assessee was following the cash method for payment of bonus. On appeal, the AAC, relying on the Supreme Court decision in Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC), held that the provision for bonus was allowable as deduction. But he directed that the deduction for smaller amount on cash basis could not at the same time be allowed. On second appeal, the Tribunal came to the conclusion that the AAC was not right in withdrawing the deduction which was allowed by the ITO. There was no dispute that the assessee was maintaining its books insofar as bonus was concerned on cash basis. There could not also possibly be any dispute that during the previous year the assessee changed its method on the basis of a communication received from the Federation of Indian Chambers of Commerce and Industry communicating the opinion of the Company Law Board. In the circumstances it might not be possible to hold and in fact it had not been held by the Departmental authorities that the change of method claimed was not bona fide. It is not as if an assessee can never change its method of accounting. Method of accounting can be changed bona fide and regularly. If the method is followed regularly and is bona fide there does not appear to be any reason why the change should not be allowed. There is no authority for the view that the assessee could not change the method of accounting without seeking permission of the ITO and that it will be for the ITO to impose conditions for allowing the change of method.
The question was whether the assessee could claim deduction on both cash and provision basis. Whenever there is change of method, something of this kind is bound to happen in the year of change of method. In case the assessee had changed its method from mercantile to cash system, it might have been that in the year of change no deduction could have been claimed or allowed. However, that was no reason for not allowing the claim on the basis of changed method so far as the change was concerned and on the earlier method of the liability in regard thereto had not already been allowed as deduction.
Accordingly, the assessee was entitled to the deduction in the year in question both as regards the provision for bonus as also the bonus actually paid during the previous year".
In view of the above two decisions and in the absence of any decision of the Allahabad High Court on the point, we uphold the case of the assessee and we find that the change in method of accounting from cash to mercantile bona fide.
18. The 4th ground in the appeal for the asst. yr. 1985-86 relates to the addition of Rs. 20,000 representing 20 per cent of taxi hire while travelling outside the place of business. The addition is made under s.
37(3A) to (3D).
With regard to this disallowance, the assessee addressed a letter dt.
11th December, 1987, in which an amount of Rs. 6,94,108 purporting to be 20 per cent of the aggregate expenditure on advertisement, publicity, sales promotion and motor car expenses including conveyance allowance and payments made to hotels in excess of Rs. 1 lakh was offered for disallowance. The AO held that admittedly this offer of disallowance does not cover hire charges of motor taxis and amounts spent on private taxis during the course of outstation travelling. He estimated such expenses at Rs. 1 lakh and he made a disallowance of Rs. 20,000 and this disallowed amount of Rs. 20,000 was added to the already offered amount of Rs. 6,94,108 and thus the total addition came to Rs. 7,14,408. Pages 2 and 3 of the paper book disclose the aggregate disallowance offered of Rs. 6,94,108. In those papers, the particulars of amounts spent by the assessee-company on private taxis on outstanding travelling were also shown and the total of which came to Rs. 25,165.03. The contention of the learned counsel for the assessee was that when the total amount spent by the company on private taxis on outstation travelling was only Rs. 25,165 the disallowance of Rs. 20,000 on a mistaken conception that the hire charges on motor taxis and amount spent on private taxis during the course of outstation travelling was not shown, was clearly misconceived and the further disallowance of Rs. 20,000 is not called for. We agree with this contention and we cancel this further disallowance. In the result, the appeal for asst. yr. 1985-86 is partly allowed.
20. The second ground is disallowance of a sum of Rs. 50,785 representing 50 per cent of entertainment expenditure incurred. The assessee incurred an amount of Rs. 1,01,569 on entertainment. It purported to have claimed 50 per cent thereon as allowable since so much is stated to have been incurred on its staff while treating the guests. The ITO did not agree with the contention of the assessee.
According to him, the disallowance has to be made in accordance with the prescribed slab system provided under s. 37(2A) since the expenses are admittedly incurred on entertainment. Since no such plea was taken by the assessee during the assessment proceedings, the ITO allowed a deduction of Rs. 5,000 only under s. 37(2A) and disallowed the balance of Rs. 96,569 and added it to the income of the assessee-company. Even though ground No. 3 filed before the CIT(A) specifically deals with this addition of Rs. 50,785, we fail to come across any discussion or finding about it in the CIT(A)'s order. The matter has to go back to the CIT(A).
21. Ground No. 3 is about disallowance of a sum of Rs. 74,165 in respect of payment to clubs. The tax audit report indicated that an amount of Rs. 74,165 has been paid on account of payment to clubs. The AO has totally disallowed and wholly added the sum of Rs. 74,165 to the income of the assessee saying that these expenses are not allowable as they do not relate to the business activities of the assessee. The learned CIT(A) confirmed the addition stating that the assessee failed to establish that the expenditure was incurred wholly, necessarily and exclusively for the purpose of earning the income. It remained the contention of the assessee that except aggregate amount representing the subscription made to the clubs, the remaining amount out of Rs. 74,165 was already included in the entertainment expenses and also considered for disallowance. The disallowance under this head was Rs. 74,165. It is the claim of the assessee that Rs. 11,921.02 only represents the subscription to clubs and not the whole amount of Rs. 74,165. However, this aspect was never gone into by the lower authorities. We direct that this claim of the assessee may be gone into and necessary relief, if any, may be granted to the assessee.
22. Ground No. 4 : The 4th ground in this appeal for asst. yr. 1986-87 is about the addition of Rs. 52,00,272. The assessee is a manufacturer of batteries and it is also an exporter in the same commodity. In the manufacture of the batteries, most part of the raw material is to be imported from foreign countries. The policy of the Govt. is to make the exporters strong enough to compete with other nations in the international market. For that purpose, the Govt. is giving customs incentive for the imported raw materials which go into the manufacture of finished products which are exportable commodities. The quantum of customs duty concession thus granted by the Govt. of India bears a proportion to the value of the exports made by each of the exporters.
If an assessee, who is an exporter, exports and its export turnover is, say, Rs. 10 lakhs, to the extent of 20 per cent of such export turnover the Govt. of India grants customs duty concession. Admittedly, the impugned amount of Rs. 52,00,272 represents the customs duty concession received by the assessee in the accounting year in question. According to the assessee, the customs duty concession thus obtained by it would only go in reduction of the cost of raw materials initially and finally the cost of the finished products is going to be reduced. Thus, while helping in reducing the cost of inputs to the exportable commodities, the Govt. wanted to make the Indian exporters offer their products at internationally competitive prices and thus help the exporters to get more foreign exchange earnings to the country. The customs duty concession thus enjoyed by the assessee is duly reflected in the price of the commodities which it exported and the profits derived by the assessee from the overseas exporters are duly taxed. Thus, the assessee wanted to explain that Rs. 52,00,227 is not akin to a cash grant or a subsidy, etc. According to the assessee, the impugned amount does not represent the income earned by it and, therefore, it is not taxable.
The AO had held the following as the reasons for the disallowance of the impugned amount : "What the assessee has done is that at the time of export of its finished product automobile batteries, it got some export incentives which have been credited to sales account. The assessee company also got some duty free import licences as an incentive for exports.
Imports have been effected against aforesaid duty free import licences. While debiting the cost of total imports, the assessee has included in it a sum of Rs. 52,00,272 being duty draw back and other export incentives which have been credited by the assessee company at the time of export .... It is not understandable as to why customs duty has been charged to purchase account when no such payment has ever been made. The same is also not payable as the imports have been effected against duty free import licences. It is obvious that the entry has been made just to inflate the purchases".
Thus, the AO understood that the impugned amount is added to the value of the purchase and showed an inflated purchase figure. When the matter came in appeal before the CIT(A), the assessee filed a write-up dt.
22nd February, 1990, before him for correct appreciation of the stand the assessee had taken in this regard. The stand of the assessee reflected in that write-up is the following : "The sales of Battery Division for the year ended 31st July, 1985 included a sum of Rs. 56,10,910 in respect of net value of concessions on raw material to be imported against advance licences as per consistently followed practice. The assessee company exports batteries and it is entitled to import certain raw material without payment of Custom duty against certain advance licences issued by the Government. These licences are given to an exporter who uses imported raw material for his exportable goods. This amount of licence is an incentive to the Exporter which reduces the cost of imported raw material and enables him to keep prices of his merchandise internationally comparable.
As per past practice the Company determines the value of concession at prevalent market price for the raw material covered by these advance licences and credited to an "Advance Licence Account" by debiting it to an "Advance Licence Control Account". These accounts are shown as income and sundry debtors respectively. Basically at this stage it is neither an income nor any receivable. It is a notional entry which is made to reflect the incentives accrued during the period of accrual itself which otherwise would go to reduce the cost of raw materials at the time of imports. In fact this way profits of the Company on this advance are pre-poned and shown in advance at the time of its accrual only.
Later on, when the material is imported either in the same year or in subsequent year the value of concession determined as incentive/relief in custom duty and claimed/credited earlier as income is reversed by debit to the Advance Licence Account and a simultaneous credit to the Control Account. The value of raw material imported is taken in the books at the concessional amount without any effect.
The total adjustment, it would be seen, does not involve either any outside party or payment. As far as the Govt. is concerned it allows to import raw materials without payment of duty against this licence which is not a duty draw back. The assessee, to correctly present the working results, declares the benefits awarded to the Company in the year of the exports as higher income though this benefit is in fact actually available by way of lower cost of raw materials in the year of its import only. Thus, this entry in the books is not at all a financial entry as far as the second party is concerned but only an adjustment in the books to show the benefits/concessions during the same period in which they are made available. In other words, this advance licence is a sort of coupon on presentation of which concession in custom duty is allowed while importing the raw materials covered by this coupon. For example, the company on exports of Rs. 100 is entitled to import raw material worth Rs. 40 without duty which is 20 per cent of the import value. The moment company gets advance licence it credits Rs. 8 (being 20 per cent of 40) as income to Incentive Accounts and debits Rs. 8 to the Control Account which is in fact a notional account. Later on, when the material worth Rs. 40 is imported against this licence without duty the company debits Rs. 8 to the Incentive Account and by Rs. 8 credits the Control Account. It is in fact reversal of the earlier entry. The Govt. was not to be paid Rs. 8 any time and thus accordingly was not paid any thing at any stage. The net result of this Incentive Scheme is shown as income and corresponding debit balance in Control Account is shown as sundry debtors. The net effect of these entries is that the incentives are taken as income of the year in which it accrues instead of the year of receipt of raw material".
It is further explained that the real nature of the impugned amount represents the value of customs duty relief to be allowed to the assessee against imports to be made in future against exports. It is contended that the assessee as a matter of fact disclosed in its income an amount without earning it. Therefore, this amount should be deleted in full. However, the learned CIT(A), while confirming the disallowance, held the following : "Export incentives are taxable; once the duty-free incentive is valued and credited to the sales account, there is no justification in reducing the amount by passing a contra entry. However, the appellant company is free to debit the raw material account as and when these licences are utilised".
23. Before this Tribunal, it is contended on behalf of the assessee that Battery Division was granted certain licences to import material without payment of duty against export obligation. The benefit of non-payment of customs duty was quantified and taken as part of sales.
It is submitted before us that for the next assessment year, namely, 1987-88, the contention of the assessee that the impugned amount like the one now under consideration does not have the character of income was accepted by the AO in the reassessment proceedings. Our attention is also drawn to the printed balance sheet, the relevant portion of which is provided at page 5 of the second paper book filed on behalf of the assessee. Point No. 11(ba) therefrom is as follows : "11(a) Sales includes export incentives and duty drawback, etc.
amounting to Rs. 99,82,000 (previous year Rs. 59,06,556) which also includes Rs. 56,10,911 (previous year Rs. 39,24,535) on account of imports to be made against advance licence".
This document now appearing at page 5 of the second paper book was stated as part of account of balance sheet for asst. yr. 1986-87 dt.
31st July, 1985.
24. For asst. yr. 1987-88, in the reassessment proceedings, the AO himself had accepted the contention of the assessee that the payment of the impugned amount represents only preponement of income. He explained the reasons for his conclusion in his assessment order dt. 30th November, 1992, a copy of which is found at pages 15 to 17 of the second paper book filed by the assessee. The reasons given by the AO for his conclusion for the asst. yr. 1987-88 are set out as follows : "What the assessee does is that it gets duty free import replenishment licence for raw material as an export incentive. The moment a duty free import licence is received, its value is credited to the sales account and then at the end of the year, a contra entry is passed to debit the raw material by the value of such licence actually utilised during the year. The nature of such facility is more or less that of duty draw back. The only difference is that in duty draw back the assessee makes payment of duty and then allowed refund of the same and such refund being in the nature of export incentive, is an assessable income in the hands of assessee. In the case of assessee, the value of import licence is credited to sales account the moment a licence is received and then by passing a contra entry, the value of import licence actually utilised is added to the cost of raw material. In sum and substance, it is only preponement of income ..... Since the value of import licence is credited to sales account on receipt of such licence, and the cost of raw material is increased by the value of import licences actually utilised, the difference between the total value of licences received during the year and the value of licences actually utilised during the year already stands included in the assessable income and no separate addition on this account is called for".
There is no change in method of accounting while recording the value of customs duty concession in the books of account of the assessee. The same type of accounting entries with regard to this item are followed both for asst. yr. 1986-87 as well as 1987-88. Since the system of accounts maintained is one and the same and for later asst. yr. 1987-88 the contention of the assessee was fully accepted by the AO himself, we hold that no part of Rs. 52,00,227 is taxable in the asst. yr. 1986-87.
We agree with the assessee's contention that the entry relating to Rs. 52,00,227 does not represent the income actually earned by the assessee and it does not bear the character of income. Hence, we allow the appeal of the assessee on this point. The appeal for asst. yr. 1986-87 is partly allowed.
25. This is an assessee's appeal for asst. yr. 1987-88. The first ground is with regard to disallowing a sum of Rs. 2,13,186 in respect of expenses incurred on Ocean View Bungalow situated at Chittivalasa.
We have already decided the issue for asst. yr. 1983-84 and the same order holds good for this year also. The assessee fails on this ground.
26. The second ground is attacking the disallowance of a sum of Rs. 82,243 representing 50 per cent of entertainment expenditure incurred by the assessee-company on the employees. The total disallowance under s. 37(2A) was Rs. 1,64,485 by the AO though a specific issue was raised with regard to the legality and correctness of this disallowance, it was not dealt with by the CIT(A). Hence, we direct that this matter should go back to the CIT(A) and he is directed to dispose it of according to law.
27. Ground No. 3 is again a disallowance of a sum of Rs. 58,353 purporting to represent payment to clubs. The contention of the assessee was that except club subscription, the balance amount was already included in the entertainment expenses and was considered for disallowance. On similar point, we have remanded the case to the lower authorities for earlier years. The same should follow this year also.
28. The fourth ground is against confirming addition of Rs. 10,59,125 on the ground that it represents previous year expenses. The particulars of these expenses are given at pages 27 and 28 of the paper book filed on behalf of the assessee. As per the particulars mentioned at page 27 of the paper book, admittedly a sum of Rs. 6,17,428.06 represents the previous year's expenses debited to P&L A/c of the current year, i.e., accounting year relevant to the asst. yr. 1987-88.
These expenses at page 27 represent the expenses incurred in the Battery Division run by the assessee. Similar expenses incurred in Chittivalasa Jute Mills amount to Rs. 4,41,697. The particulars of this expenditure were given at page 28 of the paper compilation. Thus, the total expenditure incurred both in Battery Division as well as in Jute Mills Division, which relates to the previous year but which was debited to P&L A/c of this year, amounts to Rs. 10,59,125. It is the case of the assessee that these expenses are of regular nature and no such expenses have even been disallowed either in the preceding year or in the succeeding year. The assessee contends that the impugned disallowance is in contradiction of the regular method of accounting followed by the assessee. Therefore, to be consistent with the earlier year's practice, the whole addition of R. 10,59,125 should be deleted.
29. Without prejudice to the above, it is stated that the assessee also received a sum of Rs. 6,02,485 on account of previous year's income and it should have been reduced by the AO while working out the disallowance on this account, if at all he so desired. Now, in this second appeal, the assessee prays that in case we sustain the disallowance of Rs. 10,59,125 alternative directions to allow the expenses in the previous year may be given because non-deduction of such expenses will amount to gross injustice to the assessee as these were very much incurred for the purposes of the business of the assessee. The particulars of the income relating to the previous year but which was credited in the present accounting year relevant to the asst. yr. 1987-88 were given at page 28 of the paper book. So, it is the contention of the assessee that firstly following the earlier practice of accepting the method of accounting regularly followed by the assessee, the addition of Rs. 10,59,125 should be deleted. If it is not possible, then the addition should be reduced by Rs. 6,02,485.
Alternatively, a direction may be given to allow amounts of Rs. 6,17,428 and Rs. 4,41,697 as deductions in the earlier assessment year to which they relate.
30. We have considered the contentions of the assessee. In Glass Miniature Bulb Industries vs. Addl. CIT (1993) 204 ITR 352 (SC), the question considered by the Hon'ble Supreme Court was whether a loss which was allowable in a particular year was permissible to be written off in a later year. The assessee in that case was a firm engaged in the business of manufacture and sale of miniature bulbs. In the assessment proceedings for asst. yr. 1964-65, the firm claimed deduction of a sum of Rs. 60,000 as a bad debt. The case of the assessee was that it proposed to expand its business to undertake the manufacture of fluorescent tubes. For that purpose, it had sought the assistance of one Mohanlal Vyas and paid him between July, 1961 and April 1962 a sum of Rs. 60,000. In return, that person agreed to procure manufacturing licence under the provisions of Industries (Development and Regulation) Act and a licence or permit for the release of foreign exchange necessary for the import of machinery, plant and equipment for the manufacture of fluorescent tubes. Shri Mohanlal Vyas procured the manufacturing licence but could not procure a licence or permit for the release of requisite foreign exchange for import of machinery, plant and equipment. Since the assessee could not import the machinery, the Govt. revoked the manufacturing licence as well. The assessee filed a suit for recovery of the sum of Rs. 60,000 against Mohanlal and obtained an ex parte decree. The assessee, however, did not take steps to execute the said decree and treated the decree as a bad debt and debited the said sum to the P&L A/c on 30th April, 1963, and claimed it as a deduction. The ITO rejected the assessee's claim. The AAC confirmed it. Before the Tribunal, the assessee shifted its stand and claimed as business loss. The Tribunal not only allowed the shifting stand but also allowed the claim of the assessee. In a reference by the Revenue, the High Court opined that it is a trading loss and it arose in the accounting year relevant to asst.
yr. 1963-64 and not in the accounting year relevant to asst. yr.
1964-65 in which it was claimed. The Hon'ble Supreme Court confirmed the decision of the High Court and held that the trading loss claimed by the assessee occurred during the year ending 30th April, 1962, and hence cannot be allowed in the asst. yr. 1964-65. Before claiming deduction of an expenditure incurred for the purposes of business, the expenditure should be claimed in the accounting year in which such expenditure was incurred but not in the subsequent assessment year. We understand that this is a first principle on which much elaboration need not be there.
In CIT vs. Bharat General & Textile Industries Ltd., the Calcutta High Court held that the provision for payment of leave salary accumulated in earlier year is not allowable as deduction. Therefore, the claim of the assessee cannot be allowed and the disallowance sustained by the learned CIT(A) is confirmed.
31. Now, with regard to the further claim that the deduction should be reduced by Rs. 6,02,484.65, the particulars of which are provided at 28 of the paper book, we find the following. The first item of the credit is the liability on bundling charges wrongly provided in the accounts Rs. 71,742.50, it is not known the date on which it is written back and it is not explained under what circumstances there ceased to be a liability on this account. Similar is the case of the 7th item mentioned as "Liability written back". What are the circumstances under which the amount was written back and the liability was felt no longer to be present, were not at all explained. Similar is the case with regard to item No. 8 mentioned as "Interest debiting notes raised to JCI" and item No. 9, mentioned as Cess recoverable on sales to DGS & D.What are the circumstances in which the amounts were claimed against each of these items were not at all attempted to be explained and, therefore, we fail to appreciate how we can take Rs. 6,02,484.65 as income relatable to the previous year but which was credited in this year. We only mention that there is no evidence at all produced by the assessee to prove its contention that this amount represents income, that too, relating to earlier assessment years but claimed in this year. We are, therefore, unable to give any credence to the assessee's alternate submission.
Similarly, we cannot also give any direction to the AO to allow the expenditure in the earlier assessment year since it is not permissible under law. There is no equity in tax matters. We, therefore, reject the assessee's plea in that regard.
32. The 5th ground in the assessee's appeal for asst. yr. 1987-88 is the disallowance of a sum of Rs. 60,431 out of labour welfare expenses representing the amount spent on temple construction in the labour colony of the assessee-company at Chittivalasa. It was explained that this amount was spent on temple construction in the factory premises at Chittivalasa for the benefit of the workers only. It was further submitted that the jute factory is located at a very remote area. The workers working in the factory are living in hutments located either in the factory premises or in the adjacent labour colony. For their benefit and use, Shree Ram Temple was constructed and the expenses were incurred on it for the purposes of labourers and workers. These were expenses totally incidental to the business of the company and should be allowed in full. The particulars of the expenses incurred are given as under :Cost of garden plant at Ram Temple 10,310Expenses in connection with openingceremony of Ram Temple 30,663Expenses in connection with maintenanceof Ram Temple 19,458 -------- The AO disallowed these amounts holding that they are not incidental to the business of the assessee. The learned CIT(A) held that the temple is not situated within the factory premises nor does it belong to the assessee-company. Further, he held that the expenses are not reliable (sic). The assessee relied upon the ITAT (Delhi)'s decision in Mohan Meakin Breweries Ltd. vs. ITO. In that case, temple maintenance expenses at Lucknow and Kasauli were claimed as business deduction on the ground that the temple is not situated within the factory premises.
The deduction claimed was not allowed.
In Atlas Cycle Industries Ltd. vs. CIT (1982) 134 ITR 458 (P&H), Patiala, the assessee constructed a temple at a cost of Rs. 3,01,375 primarily and directly for the benefit of its employees inside its factory premises and claimed before the ITO that the temple was a business asset entitled to depreciation under s. 32 of the IT Act. The assessee further incurred an expenditure of Rs. 5,500 by giving monthly grants to the Temple Committee and claimed deduction of the amount under s. 37. The ITO rejected the claim of the assessee for deduction.
The AAC confirmed it and also held that the expenditure incurred for the maintenance of the temple was not an admissible deduction. The Punjab & Haryana High Court held that since the temple had been erected for the purpose of the labour and this was a measure to keep them happy, it was a business asset and depreciation was allowable thereon under s. 32.
However, in this case, the learned CIT(A) found that the temple was constructed not in the factory premises of the assessee at Chittivalasa and, therefore, in view of the Punjab & Haryana High Court decision cited above and also in view of the Third Member decision in, the expenses for construction of the temple, etc. claimed in this appeal cannot be allowed and the disallowance is found to be rightly made by the lower authorities. No interference is called for. The appeal for asst. yr. 1987-88 is partly allowed.
33. These are Departmental appeals. Since common points are involved, they can be disposed of by a common order.
34. The first common question which arises in these appeals is about the perquisite value on account of personal use of the car. It is the case of the AO that the assessee had incorrectly worked out the disallowance under s. 40A(5), by adopting the aggregate limit at Rs. 72,000 p.m. The AO found that all the persons including directors in respect of whom disallowances were worked out are employees and separate limits of Rs. 5,000 p.m. and Rs. 1,000 p.m. will have to apply in respect of salaries and perquisites respectively. The AO also found that in considering the disallowance of perquisites, it is the amount spent by the assessee that is to be considered and not the perquisite value which is to be computed by invoking the IT Rules in any way relevant for working out the disallowance. The perquisite value in the hands of each of these following four employee-directors was estimated at Rs. 25,000 by the AO : Thus, the total disallowance made by him as worked in annexure given at the end of the assessment order came to Rs. 1,77,953 under the provisions of s. 40A(5). According to the assessee, the correct disallowance should be restricted to Rs. 97,903 only. The only difference between the AO's disallowance and the offer of disallowance by the assessee is with regard to the value of perquisite for chauffeur driven car made available to the four employee-directors mentioned above. It is the contention of the assessee that the valuation of perquisite for the purpose of s. 40A(5) should be taken in accordance with the provisions of r. 3C(ii) of IT Rules according to the ratio of the following case law : CIT vs. Nuchem Plastics Ltd. (1989) 179 ITR 196 (P&H); CIT vs.
Britannia Industries Ltd. (1982) 135 ITR 35 (Cal) and Porritts and Spencer (Asia) Ltd. vs. CIT (1989) 180 ITR 211 (P&H).
Accepting the contention of the assessee that the perquisite value of chauffeur driven car in the hands of the above four employee-directors should be estimated only in accordance with r. 3C(ii) of the IT Rules, he held that the disallowance under s. 40A(5) should be adopted only at Rs. 97,903 as against Rs. 1,77,953 for asst. yr. 1984-85. Similarly, for asst. yr. 1985-86, the AO worked out the addition at Rs. 1,39,658, whereas the assessee worked out the addition only at Rs. 85,715 under s. 40A(5) of the Act. For asst. yr. 1986-87, the assessee offered disallowance of Rs. 72,705 in the Battery Division and Rs. 66,925 in the Jute Division, respectively. However, purporting to make an estimate of perquisite of car with chauffeur offered to S/Shri G. M.Singhvi, K. K. Bajoria, directors and others, the AO made an addition of Rs. 1,80,075. Thus, whereas the assessee surrendered a sum of Rs. 1,39,630 as disallowance under s. 40A(5), the AO disallowed a sum of Rs. 1,80,075 as disallowable under s. 40A(5). The difference between both the figures stands at Rs. 40,445. For asst. yr. 1987-88, the assessee offered to disallow a sum of Rs. 52,384 in Battery Division and a sum of Rs. 47,119 in Jute Division, respectively. Adopting the same principle as was adopted in the assessment order for asst. yr.
1984-85 that it is the amount spent by the assessee that has to be considered for disallowance and not the perquisite value in the hands of the employees as has been offered by the assessee, the AO computed the correct disallowance to be made under s. 40A(5) at Rs. 1,24,574.
The difference between the AO and the assessee in respect of the disallowance under s. 40A(5) stands at Rs. 25,000. In the appeals preferred by the assessee before the CIT(A), the estimate of disallowance made by it under s. 40A(5) was accepted as correct and the appeals were allowed on the point for asst. yr. 1985-86, 1986-87 and 1987-88 also following the earlier assessment order for asst. yr.
1984-85. The Department is now in appeal before this Tribunal.
35. The learned Departmental Representative relied upon the following decisions in supporting the view taken by the AO while making the disallowance under s. 40A(5) : CIT vs. Shriram Refrigeration Industries Ltd. (1992) 197 ITR 431 (Del). In that case, the perquisite value of residential accommodation provided to employees or concession in rent provided to them had fallen for consideration, and while quantifying the said perquisite value, the question was whether the actual expenses of the employer or whether the perquisite value which should be computed under r. 3 of the IT Rules, 1962, should be taken into consideration. While answering the said question, the Delhi High Court held the following as per the headnote of the decision at page 432 of the report : "The amount of perquisite given by an assessee to an employee on account of rent for residential accommodation or concession in the matter of rent has to be computed with reference to the expenditure in the hands of the assessee (employer) and not with reference to r.
3 of the IT Rules, 1962, if it was possible to make such a computation. When the payment is made in cash, the actual payment has to be taken into consideration".
The learned Departmental Representative also relied upon the following decisions of other High Courts : CIT vs. Forbes, Ewart & Figgis Pvt. Ltd. (1982) 138 ITR 1 (Ker)(FB), Periakaramalai Tea & Produce Co. Ltd. vs. CIT (1993) 199 ITR 100 (Ker), CIT vs. Rajesh Textile Mills Ltd. (1988) 173 ITR 179 (Guj) and CIT vs. Ashoka Marketing Ltd. (1990) 181 ITR 493 (Cal).
It is, no doubt, true that the ratio of the above decisions supports the case of the assessee (sic). However, the assessee-company's registered office is in Ghaziabad which is situated within the Uttar Pradesh High Court's jurisdiction.
There is no direct decision of the Allahabad High Court on the point and there is a conflict of decisions among the other High Courts, some favouring the view canvassed by the assessee and some against the view of the Revenue. In these circumstances, we are of the view that the principle that when there is a conflict of decisions, there not being a direct decision of the relevant High Court, the decision expressing the view in favour of the assessee should be favoured and, therefore, acting according to the same principle, we hold that the Bombay (sic), Calcutta and Punjab & Haryana High Court decisions relied upon by the assessee should be preferred and the point is to be decided in favour of the assessee. In these circumstances, the order of the learned CIT(A) does not call for any interference from us. The Revenue should fail on this ground.
36. The next ground relates to the addition of Rs. 72,732 on account of value of closing stock. The AO found that the closing stock of finished goods has been valued after deduction Rs. 72,732 representing 3/4 per cent of brokerage. The case of the assessee was that it had already valued the stock of finished gunnies at the ruling market quoted price and since practically all the stocks are sold through brokers who are paid brokerage at 3/4 per cent, the net reliable value has been offered as the value of closing stock. The AO did not accept this contention.
He held that the assessee is unable to make out its case. He further held that regardless of the consistency of the method the assessee claims to be following all along the brokerage provided is a contingent expenditure and will be allowed as a deduction as and when the sale takes place. Therefore, he held that it would not be proper accounting to reduce the value of closing stock on the basis of a contingent liability. Thus, he made an addition of Rs. 72,732. In the appeal before the CIT(A), it is contended on behalf of the assessee that regular method of valuation of closing stock by the assessee was always by deducting the brokerage from the market value of the gunnies stock and this method stands accepted in earlier years. Accepting the regular method, the learned CIT(A) deleted the addition.
37. Aggrieved against the deletion, the Revenue is now in second appeal before this Tribunal. It is contended by the learned Departmental Representative that the brokerage is part of selling expenses. The method adopted by the assessee for valuing the closing stock was to value the same by the market value of the gunnies stock as on the last day of the accounting year. If the brokerage can be permitted to be added to the selling price of gunnies under law, then only the addition of Rs. 72,732 as the value of closing stock can be permitted. However, the learned Departmental Representative contends that there is a direct Supreme Court authority reported in Pt. Lakshmi Kant Jha vs. CWT (1973) 90 ITR 97 (SC), wherein it was held that selling expenses cannot be added to the selling price. The Hon'ble Supreme Court as per the headnote of the decision held the following : "It is not the amount which the vendor would receive after deduction of brokerage commission or other expenses for effectuation of the sale but the price which the asset would fetch when sold in the open market that would constitute the value of the asset for the purpose of s. 7(1) of the WT Act, 1957. In computing the value of an asset for the purpose of wealth-tax, expenses which may have to be borne in effecting the sale cannot be deducted from the price which the assessee would fetch if sold in the open market.
Held, accordingly, that in computing the market value of shares and stocks held by the assessee, the assessee was not entitled to deduction of the brokerage commission from the valuation of the shares as given in stock exchange quotations or quotations furnished by well-known brokers".
Therefore, it is well established that from the market price the brokerage cannot be permitted to be deducted. Without deduction of the brokerage commission, the market price of the stock should be determined. Therefore, the method of valuing closing stock by deducting Rs. 72,732 is not permissible under law. Following the highest authority of the Hon'ble Supreme Court, this point is to be decided in favour of the Revenue and against the assessee.
38. In the result, the Revenue's appeal for asst. yr. 1984-85 is partly allowed.
39. The first common ground in all these appeals by the Revenue is with regard to the proper disallowance to be made under s. 40A(5). While making the disallowance, the AO made higher disallowance of Rs. 53,382 for asst. yr. 1985-86, Rs. 40,445 for asst. yr. 1986-87 and Rs. 25,000 for asst. yr. 1987-88. The learned CIT(A) has cancelled the higher disallowance of the amounts mentioned above and allowed the assessee's ground in this regard in each of the separate appeals filed by the assessee. Following the discussion in the second appeal for asst. yr.
1984-85, we confirm the order of the CIT(A) and dismiss the first common ground of the Revenue for asst. yrs. 1985-86, 1986-87 and 1987-88 also.
40. The second common ground in the Revenue's appeals for the asst.
yrs. 1985-86, 1986-87 and 1987-88 is about the disallowance made under s. 40A(3) which was subsequently set aside by the CIT(A). For asst. yr.
1985-86, the disallowance is made with regard to the following expenses :(i) Entertainment 2,693.60(ii) Sales Promotion 5,002.50(iii) Rent 4,000.00(iv) Branding charges 43,500.00 Similarly, the disallowance made for asst. yr. 1986-87 was with regard to an expenditure of Rs. 1,76,860. For asst. yr. 1987-88, similar addition made was with reference to a sum of Rs. 1,06,819. Out of the total expenses of Rs. 5,36,493 for asst. yr. 1984-85, the AO found that expenses of more than Rs. 2,500 were incurred on each occasion in violation of s. 40A(3). He found such expenses have been listed out in Annexure IV to Form 3CD. The AO found that the listed expenses would make it clear that these have been incurred on payments to contractors, coal suppliers, the assessee's employees' canteen contractor and payments made to transporters. Before the AO, it was contended that the transporters always insisted upon cash payment and for the smooth running of canteen for workers, cash has to be paid to the contractors of the canteen. It is also the case of the assessee that cash payments were made to its own employees and all of them were supported by proper receipts. Further, the assessee contended that payments in cash have been made to J&K Minerals for purchase of coal. After considering the allowability of these expenses under s. 40A(3) r/w r. 6DD of the IT Rules, the AO was inclined to agree to the allowability of expenses incurred in respect of transporters and he disallowed the remaining expenses stating that they are clearly hit by s. 40A(3). Therefore, he has disallowed all payments excluding those made to the transporters figuring in Annexure IV referred to above. Thus, he made an addition of Rs. 4,32,730. Before the CIT(A), it is contended that the disallowance was made ignoring the facts of the case and the necessity of payments made in cash. According to the assessee, all these payments were made under exceptional circumstances and are duly supported by vouchers. In the tax audit report, they all have been certified as having been made in exceptional circumstances. The learned CIT(A) found that most of these expenses are by way of reimbursements to staff. Further, he held that the payment in question is covered by exceptional and unavoidable circumstances. Therefore, according to him, the addition is not justified and hence he deleted the addition.
41. The particulars of these payments were all provided at pages 33 to 37 of the paper book filed by the assessee. At the foot of page 35, with reference to an expenditure of Rs. 5,36,492, the following note is found : "This payment has been made to our own staff towards reimbursement of expenses incurred by them as per company's rules and for which we have taken proper receipt and accounted for whenever necessary in computing perquisites as per IT Rules".
Similarly, at page 36 of the paper book, with regard to the expenses of Rs. 1,12,748, the following notes in four paragraphs are found noted by the tax auditors : This payment has been made to our own staff towards reimbursement of expenses incurred by them as per Company's rules and for which we have taken proper receipts and accounted for wherever necessary in computing perquisites as per IT Rules.
Transporters always insist for cash payment. Most of our transportation for which payments have been made in cash represent payment to truck drivers/owners for carrying coal/raw material for which individual consignment can be tagged. It is impossible to pay them in cheque as they face difficulty in encashing the cheque. This is their genuine complaint.
This work was done at our Works by a local contractor. The payment was made in cash from plant as there was no Current Account in operation at Sikandrabad (Works).
These payments were made for procuring emergency spares for production Department due to which production was being held up".
At page 37 of the paper book, total expenditure of Rs. 83,315.94 was bifurcated into the following two categories :Payment to staff 63,361.79Payment of others 19,954.15 ----------- The footnote at the end of the page with regard to the above note is as follows : These payments have been made to our own staff towards reimbursement of expenses incurred by them as per Company's Rules and for which we have taken proper receipts and accounted for whenever necessary in computing perquisites as per IT Rules".
Regarding this disallowance under s. 40A(3), an exhaustive explanation was submitted by the assessee before the CIT(A) by its note dt. 3rd October, 1989. Para 11 in that note deals with the various types of expenses and how the cash payment is warranted for the regular conduct of business of the assessee-company.
42. It is stated that out of the total expenses of Rs. 5,36,492, a sum of Rs. 71,863 was given directly to the transporters and another sum of Rs. 98,824 given through employees for freight payment. Thus, the total amount of transportation and freight paid in cash comes to Rs. 1,70,687. Though the AO stated that the entire amount of freight and transportation is not disallowable, he had restricted the amount to a sum of Rs. 1,03,763 only by making an addition of Rs. 66,924.
43. With regard to the payment in cash for purchase of provisions for the staff canteen, it is stated that in the appeal for asst. yr.
1982-83 the learned CIT(A) had held that such cash payments were all covered by the exception to r. 6DD and hence nothing on this account should be disallowed. Further, it is stated that the Jute Division of the company is running at a remote rural area where most of the shopkeepers are not even till today accustomed to banking habits. The assessee-company buy its provisions to run its large canteen. Though the company normally buy its provisions out of the Govt. quota from the authorised shops to whom payments are usually made by cheque/drafts, sometime due to non-availability of material there or due to acute scarcity of some items, the company is forced to buy the same in open market in cash and such amount should not be considered for disallowance at all. The total amount on this account comes to Rs. 33,284 and it should be deleted.
44. In respect of payment to contractors, coal suppliers and assessee's employees, the assessee contended that they are all covered by r.
6DD(j). The assessee cited the Tribunal (Jaipur Bench) decision in Shrinarain Chhaganlal vs. ITO (1988) 30 TTJ (Jp) 125 where it was held that at all places where purchase are made and the assessee does not have a bank account and that place being not a place of business of the assessee, any payment made over and above Rs. 2,500 in cash should not be disallowed since such payment is covered under sub-r. (j) of r. 6DD.In the present case, the factories of the assessee are located at remote places and the employees of the assessee's factory have to go into the countryside to buy goods urgently required and procure immediate services also. They do not know from whom the raw material will be purchased or services will be procured. On this score, market study would be made and the employees of the assessee decide and purchase the item or procure services for which payments are made in cash then and there as there is no time for buying a bank draft.
Further, at the places where normally these purchases are made, the assessee does not have any bank account. All these payments are supported by vouchers and identity of the payee is also established beyond doubt. The circumstances do not allow payment by crossed cheque/draft. Therefore, all such payments aggregating to Rs. 8,511.45 should be allowed in full.
45. A perusal of the list will also show that a sum of Rs. 2,13,410 was paid by the company to its staff for expenses incurred by them for travelling and reimbursement of medical expenses, rent for a month and payment of salary, wages, bonus and gratuity. Gratuity is payable in cash as stipulated by Payment of Gratuity Act and thus it has been a statutory requirement which is duly complied with. Further, employees also insist for payment of LTA and other reimbursement of expenses incurred by them in cash. All these payments are fully supported by vouchers and are verifiable. They are covered under r. 6DD(j).
46. Further, the coal suppliers insist for cash payment when material is purchased from them during shortage period. Sometimes, the suppliers under orders for purchase made earlier do not come and cash purchases are to be made due to non-availability of material locally. Without such purchases, the manufacturing unit comes to a standstill. The factory being located in a remote, area, does not leave any option to it except to concede to the demand of the seller and purchase the coal in cash. Such purchases are all covered by r. 6DD(j). Hence, the total amount of Rs. 40,642 should be allowed in full.
47. Similarly, the contractors for other services sometimes insist for cash payments at the end of the day and force to pay in cash and they in turn have to pay to the labour for the day. In fact, those contractors act as agents of the assessee. Such types of circumstances have been considered by the Board as exceptional circumstances in Circular No. 920, dt. 31st May, 1977. The labour do not take any payment by cheque being illiterate and also do not have sufficient funds to maintain bank accounts and, therefore, they have to be paid in cash. Their leader, who is known as Jamadar (contractor), also insists for cash payment due to the above reason. Therefore, this payment of Rs. 48,500 should also be allowed in full. Thus, the contention of the assessee's counsel is that the relief granted by the CIT(A) with regard to the addition under s. 40A(3) is fully justified and does not call for any interference from us.
48. The learned Departmental Representative on the other hand, relied upon Late Smt. Jyothi Chellaram vs. CIT (1988) 173 ITR 358 (AP) and argued that at least the matter must be sent back to the lower authorities to give a clear finding considering the nature of the payment and the special circumstances under which the cash was paid.
49. Thus, having considered the arguments of both sides, we feel that the learned CIT(A) while passing the impugned orders has completely gone into the detailed explanation given by the assessee for making payment in cash in amounts more than Rs. 2,500 at a time. The learned Departmental Representative contended that how reimbursement of expenses claimed by the own employees of the assessee would be an exceptional circumstances. We feel that this argument is quite untenable. Rule 6DD(e) would show that where the payment is made by way of adjustment against the amount of liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee is an exceptional circumstance. Here, the employees went on tour and incurred several items of expenditure and if that expenditure was reimbursed, we feel that the said payment represents a payment made by way of adjustment against the amount of liability already incurred.
Further, we are thoroughly satisfied that payment were all made under exceptional circumstances and cancellation of disallowance by the learned CIT(A) under s. 40A(3) is justified under the facts and circumstances of the case. Our finding equally applies to similar disallowance made under s. 40A(3) for asst. yrs. 1986-87 and 1987-88 also. Thus, the Departmental appeals on this point fail.
50. There is ground No. 3 in the departmental appeal for asst. yr.
1987-88 and that is with regard to the deletion of the addition of Rs. 1,61,051 being claim disallowed relating to irrecoverable balance. The AO made this addition stating that the assessee has not explained the circumstances under which the amount of Rs. 1,61,051 debited to the P&L A/c became irrecoverable. In appeal, the learned CIT(A) held that on settlement of accounts with the party such amounts were written off and, therefore, the addition is worthy to be disallowed. In the note dt. 22nd September, 1990, filed before the CIT(A), it is clearly stated that in respect of irrecoverable balance written off (Rs. 1,61,051) the details were all filed before the AO and it was explained the circumstances under which these amounts were written off on settlement of parties accounts. Thus, it is the contention of the assessee that the settlement between the assessee and the parties from whom the petty amounts were due and they were written off. No evidence to the contrary is secured by the Revenue and, therefore, we feel that the cancellation of the addition by the learned CIT(A) is quite in order and does not call for any interference from us.
51. In the result, the Departmental appeal for asst. yr. 1984-85 is partly allowed, while Departmental appeals for asst. yrs. 1985-86, 1986-87 are dismissed.