Judgment:
ORDER
A KALYANASUNDHARAM, A.M. :
The assessed and the Revenue are in cross-appeals for the same assessment year and, thereforee, these two appeals have been put together and are being disposed of by this composite order.
ITA No. 533/Del/88 - Appeal by the assessed
2. The assessed has raised the legal issue regarding the CIT(A) refusing to accept the audited accounts of the assessed and confirming some of the additions despite the fact that various records were destroyed on fire which event was not at all disputed.
3. Appearing for the assessed, Shri Ajay Vohra submitted that there was a fire in the premises of the assessed on 3rd June, 1984 destroying records apart from other items. It was in these circumstances that the assessed was not in a position to compile the details and furnish them. He submitted that the assessed carries on the business of manufacturing carpets and tufted carpets for industrial business houses, hotels, etc. Shri Vohra submitted that the Revenue having noted the fact that the fire had destroyed the records could not have insisted upon making ad hoc disallowances but should have relied upon the audited statement of accounts. He relied on the Delhi High Court decision in the case of Addl. CIT vs . Jay Engineering Works Ltd. : [1978]113ITR389(Delhi) . Shri Vohra referring to the Delhi High Court decision submitted that in that case too various books of accounts were destroyed by fire and the question that was considered was whether the Tribunal was right in allowing deduction by relying upon mainly the auditors report which did not contain any adverse remarks about expenses. Their Lordships considering the fact that the fire had destroyed the books of accounts came to the conclusion that the Tribunal was justified in placing reliance on the material such as audited accounts and auditors report and thereby deleting the addition. He, thereforee, pleaded that the various ad hoc disallowance as made by the Assessing Officer and confirmed by the CIT(A) should be deleted.
4. The Departmental Representative placed heavy reliance on the orders and only pointed out that the issue as raised by the assessed does not arise form out of the order of the CIT(A). He submitted that this claim was never made before the CIT(A) and, thereforee, should not be allowed to be raised before the Tribunal.
5. We have given our careful consideration to the rival submissions on the above legal issue. A reading of the order of the CIT(A) para 3.1 indicate the fact that the account books were destroyed on fire was duly supported by the First Information Report filed before the police authorities. We would, however, refrain from making any observations in regard to this but proceed to consider the merits of the case in the following grounds.
6. The assessed has challenged the disallowance under r. 6D at Rs. 50,000 as against the original offer of Rs. 17,614 made by the assessed at the time of the original assessment. Shri Vohra submitted that the assessed withdrew the disallowance of Rs. 17,614 made by it originally on the ground that it came across certain decisions of the Tribunal which had held that the travel comes to an end as soon as the destination is reached and that expenses incurred thereafter could not be considered for disallowance under r. 6D. He submitted that the latter decisions of the Tribunal are against the assessed in so far as the issue of claim of the travel coming to an end as soon as the destination is reached. He pleaded that the initial disallowance as was made by the assessed was based on the present position, i.e. that the tour continues till the assessed reached back to his place of work. He submitted that on the basis the assessed has computed Rs. 17,614 which alone should have been disallowed as against ad hoc disallowance of Rs. 1 lakh which was reduced to Rs. 50,000 by the CIT(A).
The Departmental Representative submitted that in the absence of details, the claims of the appellant could not be examined and, thereforee, the disallowance as retained by the CIT(A) was justified.
On this issue, after considering the rival submissions and also in the light of the fact that the CIT(A) had noted that the books were destroyed on fire on 3rd June, 1984, the claim of the assessed that it could not file the details was accepts as reasonable proposition. The claim of the assessed even before the CIT(A) was that it had revised its return and modified the disallowance under r. 6D to nil on the basis that the travel came to and end the moment the person reached the destination. In these circumstances, the claim of the appellant that the disallowance should be restricted to Rs. 17,614 could not be said to be out of place. We accordingly restrict the disallowance to Rs. 17,614 as was made by the assessed at the time of filing of its original return.
7. The assessed has raised the issue of claim of weighted deduction in respect of various expenses incurred at Rai Bareli officer and Varanasi office. The expenses for which weighted deduction has been claimed are commission, clearing charges at Port, interest paid to bank of FOBP documents, bank commission on such documents, business promotion in India. Shri Vohra submitted that the claim regarding clearing charges, interest, etc., are invariably decided against the assessed by the Tribunal. He submitted that in regard to commission paid to Indian agents, they are entitled for weighted deduction in view of the decisions in CIT vs . GEC of India Ltd. : [1991]192ITR559(Cal) , CIT vs . Kerala Nut Food Co. : [1991]192ITR585(Ker) and CIT vs. Steel Tubes of India Ltd. (1989) 44 Taxman 266. He also submitted that this claim is allowable in view of the Special Bench decision in the case of J. Hemchand & Co. vs. ITO (1982) 1 SOT 150 (Bom) as well as ITO vs. Bharat Skin Corporation (1984) 18 TTJ (Mad) 408 : (1983) 6 ITD 320 (Mad) . He was also fair enough to point out that the Special Bench of the Tribunal in the case of Happy Sound Industries (1982) 1 SOT 172 has decided this issue against the assessed. In regard to business promotion expenses incurred in India, he placed reliance on Special Bench decision in J. Hemchand, (supra) and also on Happy Sound Industries (supra).
The Departmental Representative supported the orders on the above issue.
After considering the rival submissions on the above issue and in view of the Special Bench decision in the case of Happy Sound Industries (supra) the claim of the assessed regarding commission payment to agents in India are not entitled to weighted deduction. In regard to the claim of the business promotion expenses which are stated to be incurred on foreign buyers, they would fall in S. 35B(1)(b)(ix), and accordingly this claim of the assessed is upheld.
The other claims regarding clearing charges, interest, etc., are not entitled to weighted deduction and accordingly these claims are rejected.
8. The assesseds has claimed deduction in respect of expenses on foreign technicians. Shri Vohra pleaded that the authorities below had disallowed the claim of the deduction on the ground that the details regarding period of stay, date of arrival and the departure and Government approvals, etc., were not made available. The pleas advanced was that it was a known fact that the assessed had set up a plant for manufacture of carpets with foreign technical collaboration. The technical collaborator had been deputing their technicians in connection with the plant so set up from time to time and it was in connection with the visit of those technicians in India the expenses have been incurred. He submitted that the expenses so claimed are debited to administration in the profit and loss account, Annexure-17 of the accounts. He submitted that the details of expenses incurred on the various technicians as filed are appearing in pages 21. He placed reliance on the Delhi High Court decision in Addl. CIT vs. Jay Engineering Works (supra) and treated that the disallowance is uncalled for in view of the fire having destroyed the records.
The Departmental Representative reliance on the orders. On this issue a perusal of the printed accounts (Annexure-17) indicates that the foreign technicians expenses amounting to Rs. 1,96,286 have been charged to the administration expenses. The perusal of the auditors report did not indicate any adverse remarks in regard to the expenses. There is also an adverse remark in regard to profit and loss account not showing the true profit or loss. In these circumstances, the reliance placed on the Delhi High Court decision in Jay Engineering Works Ltd. (supra) could not be said to be out of place. Accordingly, we allow the claim of the assessed.
9. The assessed has also claimed deduction of Rs. 8,286 charged to repair expenses based on the Delhi High Court in Jay Engineering Works (supra). For the reasons mentioned above, we allow deduction of the said expenditure. The assessed has claimed deduction in regard to excise duty liability of Rs. 12,02,000. Shri Vohra submitted that the excise authorities had demanded excise duty on the post-manufacturing expenses treating the same as part of the assessable value. The order as passed by the Asstt. Collector was set aside by the Collector (A) on 29th Oct., 1979. The Asstt. Collector by means of his order dt. 25th March, 1986 has raised a revised demand of Rs. 9,47,000. The plea advanced by Shri Vohra was that the CIT(A) unjustifiably refused to allow deduction on the excise duty liability on the ground that it would be allowed as a deduction in the year the finality of the assessment is reached. He pleaded that the CIT(A) while rejecting the claim has not disputed the fact that the demand as was raised by the Asstt. Collector pertains to the goods that was manufactured during the relevant previous year and also the fact that the revised order passed by the Asstt. Collector dt. 25th March, 1986 was available to him before he could dispose of the appeal. He pleaded that in view of the fact the appellate proceedings are continuation of the assessment proceedings, the deductions as claimed by the assessed should have been allowed and for this proposition he placed reliance on the Supreme Court decision in Kedarnath Jute . v. CIT : [1971]82ITR363(SC) and also the Delhi High Court decision in Addl. CIT v. Rattan Chand Kapoor : [1984]149ITR1(Delhi) . He also made reference to the Calcutta High Court decision in the Century Enka Ltd. vs. CIT : [1981]130ITR267(Cal) .
The Departmental Representative placed reliance on the orders. On this issue, a perusal of the orders of the authorities below indicate that the fact that the demand on excise duty on the post manufacturing expenses were raised during the previous year relevant to the assessment year is not in dispute. The assessed had challenged the levy filing an appeal to the Asstt. Collector and at the same time obtained stay of operation of the Asstt. Collectors order from the Collector (A). The Collector (A) had subsequently decided the issue and reduced the demand to Rs. 9,47,000. This indicates that on principle the assessed has no dispute that the excise duty is livable on the post-manufacturing expenses and what was disputed was with reference to the quantum. thereforee, the liability had clearly crystallised as soon as the demand was raised on the assessed by the excise authorities. thereforee, in the light of the Supreme Court decision in the case of Kedarnath Jute . vs. CIT (supra), Rs. 12,02,000 is allowable and we allow the same. We may observe that it was in the year 1986 that the demand came to be reduced and accordingly for asst. yr. 1987-88, the difference between Rs. 12,02,000 and Rs. 9,47,000 could be considered for being treated as income under S. 41(1) of the Act subject to the fact that the excise authorities have not filed any appeal against the order of the Collector (A),.
ITA No. 731 - Appeal by the Revenue
10. The Revenue has objected to the allowing of weighted deduction at 50 per cent on the inland tour expenses of the Export Manager and also the entertainment expenses as incurred by him, allowing weighted deduction on interest paid to bank for packing credit. The Departmental Representative submitted that expenses incurred in India are not entitled to weighted deduction. In regard to interest payment to bank on packing credit, he submitted that they are in the nature of expenses that are chargeable to trading account indicating that they are part of the cost of production and, thereforee, are not eligible for weighted deduction.
Shri Vohra, however, submitted that the expenses incurred by the Export Manager and also on the entertainment was in relation to the Russian delegation and in the light of the Special Bench decision in J. Hemchand & Co., the CIT(A) was justified in allowing the claim. He submitted that the CIT(A) had followed the Madhya Pradesh High Court decision in CIT v. Vippy Solvex Products Pvt. Ltd. : [1986]159ITR487(MP) . He also submitted that the Special Bench of the Tribunal in Samir Diamonds Exports (P) Ltd. v. ITO (1988) 30 TTJ (Bom) 569 : (1988) 25 ITR 73 has also held likewise.
On the above issue, on the claim of weighted deduction on the Export Manager, salary and on the entertainment expenses respectively, following the Special Bench decision in the case of J. Hemchand & Co., we uphold the orders of the CIT(A). In regard to interest paid to bank on export packing credit account, the Madhya Pradesh High Court in Vippy Solvex (P) Ltd. (supra) has clearly held that since the amounts are advanced for purchase of raw materials for the purpose of manufacturing of goods solely for exports and that too such credit facility was provided on furnishing of the export contract with the foreign party and the preferential rate of interest being charged for such advances, the expenses so incurred was for execution of the contract for supply of goods outside India and accordingly allowed weighted deduction. The Special Bench in Samir Diamonds Export Pvt. Ltd. (supra) have made reference to the Madhya Pradesh High Court decision and have held likewise. Since no contrary decisions of other High Courts have been brought in/or any decision of the Supreme Court for taking a contrary view, we are following the above decisions. We may also point out that in the event of there being contrary views by other High Court, then also in the light of the Supreme Court decision in the case of CIT v. Vegetable Products Ltd. : [1973]88ITR192(SC) a view that is favorable to the assessed should have been taken.
11. The Revenue has objected to the allowing of deduction on guarantee commission and commitment charges. The plea advanced by the Departmental Representative in this connection is that these should have been capitalised. On the other hand, Shri Vohra pleaded that these guarantee commission and commitment charges are in regard to machinery under deferred payment scheme. These are expenses incurred after the machine has been set up and, thereforee, in view of the provisions contained in S. 43, Expln. 8 such charges have to be allowed as revenue expenses.
On this issue, after considering the rival contentions, since it is not disputed that these expenses are related to machinery that were imported on deferred payment scheme and that the machinery has already been set up, in view of the provisions contained in Expln. 8 to S. 43, such expenses as incurred after the machinery have been set up are clearly allowable as revenue expenditure. The order of the CIT(A) on this issue is accordingly upheld.
12. The Revenue has objected to the allowing of deduction of deduction of excise duty liability on carded gilled silver of Rs. 37,21,631 despite the fact that the assessed has disputed the demand and obtained a stay from the Delhi High Court. The Departmental Representative submitted that the excise authorities charged excise duty on carded gilled silver. He further submitted that by means of Finance Bill, 1982, retrospective amendment was made to the excise law w.e.f. 1979 and included carded gilled silver as subject to central excise. He submitted that the assessed had challenged the Bill as such also and also the retrospective amendment by filing a Writ in the High Court. He submitted that in these circumstances, it is not the case of disputing the very liability but it is a case of disputing the very enactment. It was accordingly pleaded that the assessed could not have been allowed deduction.
Shri Vohra made reference to the details that was filed at page 29 and also to the details at pages 30 and 31. He submitted that since by means of an amendment to the Act which was given retrospective operation, the assessed was made liable in regard to carded gilled silver and the demand having been raised on the assessed for the accounting period relevant to the assessment year, the claim was rightly allowed by the CIT(A).
13. On the said issue, after considering the rival submissions since by means of an amendment to the Excise and Salt Act, the carded gilled silver has been treated as an excisable item with retrospective effect from 1979, the liability being a statutory one and the assessed following the mercantile system of accounting, the claim is allowable in the light of the decision in Kedarnath Jute . Co. (supra). It has been held in the case of CIT v. J. K. Synthetics Ltd. : [1983]143ITR771(All) by the Allahabad High Court in which the nylon polymer on which excise was demanded by the authorities was challenged in a Writ before the Delhi High Court and the Delhi High Court held that it was not so chargeable in favor of the assessed and the matter is sub-judice before the Supreme Court was noted. However, since the Act was subsisting it was concluded that the liability being a statutory one has to be allowed as deduction so long as the system of accounting being mercantile. Accordingly, we uphold the order of the CIT(A) on this issue.
14. The last of the issues is in regard to the allowing of depreciation on roads and culverts. On this issue, after considering the rival submissions, and since the Supreme Court in CIT v. Gwalior Rayon Silk . (1992) 104 CTR 243 had held that roads within the factory premises are necessary adjuncts to carry on business activity so also the drains, etc., and thereforee, are part of building, allowing depreciation to road and culverts have been rightly held to be buildings. We accordingly uphold the order of the CIT(A) on this issue as well.
15. In the result, the appeal by the assessed is allowed in part while the appeal by the Revenue is dismissed.