Judgment:
ORDER
R. M. MEHTA, A.M. :
These are cross-appeals filed by both the parties against the order passed by the CIT(A) raising for our consideration numerous grounds.
2. First of all, we take up for consideration the assesseds appeal and dispose of the various grounds as follows :
3. In ground No. 1, exception has been taken to the action of the CIT(A) in confirming a disallowance of Rs. 23,499 made by the AO (Assessing Officer) by resort to the provisions of S. 40A(8). The Assessing Officer in the course of assessment proceedings observed that a sum of Rs. 1,56,663 paid as interest had not been taken into account while working out the aforesaid disallowance. He, thereforee, made a further disallowance of Rs. 23,499 over and above the sum of Rs. 39,744 offered by the assessed itself.
4. On further appeal, before the CIT(A), it was contended that the interest payment of Rs. 1,56,663 did not represent interest on any deposit, but pertained to hundies drawn in favor of suppliers on interest on delayed payments of bills. The CIT(A), however, found himself in favor of the Assessing Officer (AO) on the ground that details furnished by the assessed did not throw much light on the point at issue since only voucher numbers and the amount paid had been mentioned therein. The CIT(A) also referred to the definition of the term deposit and, thereafter, proceeded to reject the assesseds case with the following observations :
'The appellant has itself conceded that hundies are drawn in favor of the suppliers. This, in fact, means that the appellant has agreed that the amount due to the suppliers was a debt, in other words money borrowed. Similarly, when the payment of the bills is withheld it amounts to borrowing the money indirectly. In this view of the matter, I would hold that interest paid on hundies and on account on delayed payment of bills amounted to interest paid on monies borrowed and, thereforee hit by definition of the words deposit given in S. 40A(8). The disallowance of Rs. 23,499 is, thereforee, confirmed.'
5. The learned counsel for the assessed reiterated the arguments advance before the CIT(A) placing reliance in this connection on the decision of the Hon able Madhya Pradesh High Court in the case of CIT vs . Kalani Asbestos (P) Ltd. : [1989]180ITR55(MP) . According to him, the amounts pertaining to the hundies could not be termed as deposits within the meaning of S. 40A(8). He also referred to the details appended at page 34 of the paper book and also made a reference to the order of the CIT(A) for the asst. yr. 1983-84 contending in the process that a similar issue had been restored back to the file of the Assessing Officer. It was, thereafter, stated that the ITO in the second round had accepted the viewpoint canvassed by the assessed and held that disallowance under S. 40A(8) was not called for. We may, however, mention that a copy of the order passed by the Assessing Officer accepting the assesseds case was not filed before us. The learned Departmental Representative, on the other hand, supported the order passed by the CIT(A) reiterating thereafter the reasons recorded in the said order in rejecting the assesseds claim.
6. After examining the rival submissions, we find no good ground to interfere with the decision taken by the CIT(A) in confirming the disallowance. Even before us, the only piece of evidence, if it can be called that, is the one at page 34 of the Paper Book and this mentions voucher Nos. and the amount. There is nothing else to support the assesseds argument that the amounts borrowed on hundies should not be considered for the purpose of disallowance under S. 40A(8). As already observed by us, the assessment order for the asst. yr. 1983-84 pursuant to the set aside by the CIT(A) on this very point has not been furnished for our perusal. The decision of the Hon able Madhya Pradesh High Court in CIT vs. Kalani Asbestos (P) Ltd. (supra) is not applicable being distinguishable on facts. The issue before their Lordships was, whether the provisions of S. 40A(8) were attracted in respect of interest payments to Directors and share-holders on current accounts as distinguishable from deposits made by the aforesaid persons. The first ground in the appeal is, accordingly, rejected.
7. The second ground in the appeal pertains to the disallowance of a sum of Rs. 46,491 being the expenses relating to previous year. The ITO in the course of the assessment proceedings noted that the assessed had debited sums of Rs. 35,790 on account of sales and rebates, Rs. 21,253 on account of traveling and conveyance expenditure which related to the previous year. He also came across certain other expenses totalling Rs. 57,739 once again pertaining to the previous year but debited and claimed as deduction. On the ground that the assessed was maintaining its accounts on mercantile basis, he rejected the claim for deduction.
8. Being aggrieved, the assessed took up the matter before the CIT(A), who after perusing the material on record and ascertaining the facts there from proceeded to hold that the expenditure of Rs. 21,253 on account of traveling and conveyance related to the year under consideration. As regards the expenditure of Rs. 35,790 claimed on account of rebates, it was pointed out by the assessed that although it related to the sales of the preceding year, the company had consistently been following the practice of providing for the rebates in the succeeding assessment year. Both the aforesaid claims were accepted by the CIT(A), who directed the ITO to allow necessary deduction. As regards the remaining items, the CIT(A) took note of the fact that excise duty to the extent of Rs. 2,627 and ESI amounting to Rs. 8,702 had been ascertained and paid during the assessment year under appeal. These two amounts were directed to be allowed, the relief allowed on all scores coming to Rs. 68,291. As regards the balance amounting to Rs. 46,491, he upheld the disallowance.
9. The learned counsel for the appellant restricted his submissions to the request being made for appropriate directions to be issued to the Assessing Officer to consider the claim for deduction in respective years. He also invited our attention to the details appended at pages 35 and 36 of the Paper Book. The learned Departmental Representative opposed the aforesaid request and pleaded that the order passed by the CIT(A) be confirmed, there being a categorical finding that the expenditure of Rs. 46,491 did not pertain to the year under appeal.
10. After examining the rival submissions and perusing the material on record, we find no reason to interfere with the decision taken by the CIT(A) in confirming the disallowance of Rs. 46,491. As regards the request of the learned counsel to direct the Assessing Officer to consider the claim in the respective years, we are of the opinion that the Assessing Officer may do so, strictly in accordance with the provisions of law, but on an application by the assessed, we do not issue any direction.
11. The third ground in the appeal pertains to the disallowance made by the Assessing Officer vis-a-vis the provisions of S. 37(3A) and which was subsequently confirmed by the CIT(A) in respect of certain items. The learned counsel at the outset stated that he was under instructions to restrict the claim to only two items and the first of these being expenditure on conveyance (details at page 38 of the Paper Book). Accordingly to him, the authorities below had not appreciated the matter in proper perspective, in as much as the expenditure of Rs. 25,020 did not pertain to the conveyance allowance given to the employees but was a reimbursement of the conveyance expenses incurred by them in performing official duties. This type of expenditure according to him, did not fall for consideration under S. 37(3A). The other item which he sought to press was the expenditure of Rs. 7,669 incurred on gifts. It was contended that even this was required to be excluded. The learned Departmental Representative, on the other hand, supported the order passed by the CIT(A).
12. After examining the rival submissions, we are of the view that in so far as the sum of Rs. 25,020 is concerned, the matter would require re-examination at the hands of the Assessing Officer since the case which has been argued before us is that this represents reimbursement of the conveyance expenses and does not represent conveyance allowance paid to various employees. No doubt, this claim was not raised earlier but in the interest of justice, we have decided to remit the matter back to the file of the Assessing Officer to verify the correct position after giving reasonable opportunity to the assessed. As regards the expenditure of Rs. 7,669 on gifts to customers, we find that no arguments were advanced before the CIT(A) (see written submissions). Even before us, no information was placed on record or submissions made. The disallowance on this score is, accordingly, confirmed.
13. The 4th ground in the appeal pertains to the disallowance/ addition of a sum of Rs. 5,28,504 made by the ITO and confirmed by the CIT(A) by resort to the provisions of S. 43B. We may mention that this was the liability appearing in the balance sheet on the last day of the previous year pertaining to the sales-tax payable.
14. Before us, the facts recorded by the CIT(A) in his order have not been challenged by the learned counsel and all that has been contented is that directions be issued to the ITO to allow deduction in the year of actual payment. The learned Departmental Representative, on the other hand, supported the order passed by the CIT(A) placing reliance on two decisions of the jurisdictional High Court in the case of Sanghi Motors vs. Union of India (1991) 187 ITR 703 and Escorts Ltd. vs. Union of India (1991) 189 ITR 81 .
15. After hearing both the parties, we find no good ground to interfere with the decision taken by the CIT(A) in confirming the disallowance/addition of a sum of Rs. 5,28,504 by resort to the provisions of S. 43B. The ITO may, however, examine the assesseds claim for deduction in the year of actual payment strictly in accordance with the provisions of law.
16. The 5th ground in the appeal pertains to the disallowance of a sum of Rs. 20,164 representing 1/5th of the vehicle maintenance expenses on grounds of Personal use by the Directors. The learned counsel for the assessed at the outset contended that there could be no disallowance in the case of a company, limited or private, since non-official use of the car on the part of the Directors could at the most result in addition in their respective assessments, but in so far as the company was concerned, the same represented a business expenditure. For the aforesaid proposition, he placed reliance on a Third Member decision of the Madras Bench of the Tribunal reported in ITO vs. Ashoka Betalnut Co. (P) Ltd. (1985) 21 TTJ (Mad) 465 : (1984) 10 ITD 788 (Mad) . The learned Departmental Representative, on the other hand, supported the order passed by the CIT(A).
17. We have examined the rival submissions, and in view of the Third Member decision in ITO vs. Ashoka Betalnut Co. (P) Ltd. (supra). We find ourselves unable to uphold the disallowance. The same is hereby deleted.
Ground No. 6 in the appeal pertaining to the deduction under S. 80J was not pressed and the same is hereby rejected.
18. In ground No. 7, objection has been taken to the action on the part of the CIT(A) in not entertaining the following additional ground raised before him during the course of hearing :
'The expenses of Rs. 1,13,172 disallowed by the learned IAC(A) in his order for asst. yr. 1985-86 on the ground that such expenses relate to earlier year deserve to be allowed in asst. yr. 1984-85.'
19. The learned counsel for the assessed at the outset stated that, in as mush as in the asst. yr. 1985-86, the CIT(A) had held that the expenditure in question pertained to asst. yr. 1984-85, the same was required to be allowed as a deduction and for which necessary directions be issued. The learned Departmental Representative, on the other hand, supported the action of the CIT(A) in rejecting the additional ground reiterating thereafter the reasons recorded by the first appellate authority in doing so.
20. We have perused the copy of the order of the CIT(A) in the asst. yr. 1985-86, which was furnished to us by the learned counsel during the course of hearing. The issue raised in the additional ground is discussed at page 7 of the said appellate order, but we do not find any categorical finding on the part of the CIT(A) whereby he has stated that the expenses aggregating Rs. 1,13,172 pertain to the asst. yr. 1984-85. He refers to the words 'earlier years'. Even before us, no factual information has been furnished and we find ourselves unable to issue any directions. Ground No. 7 in the appeal is, accordingly, rejected.
21. Taking up for consideration the Revenues appeal, the following grounds have been raised :
'On the facts and in the circumstances of the case, the learned CIT(A) has erred in :
(i) deleting the extra addition of Rs. 21,43,755;
(ii) allowing a relief of Rs. 68,291 out of disallowance of Rs. 1,14,782 on account of earlier years expenses;
(iii) directing to exclude selling commission of Rs. 4,42,671 from the total amount for working the disallowance under S. 37(3A) and thereby allowing a relief of Rs. 88,534.'
22. The assessed-company during the assessment year under appeal was engaged in the manufacture of paper. The said manufacturing activity was carried on in its two separate divisions, namely, the paper division, and the packing division. In the paper division, the company manufactured writing paper, printing paper, packing paper and wrapping paper. In the packing division, the manufacture was in respect of corrugated paper rolls and bitumanised paper and hessian laminated bags. The Assessing Officer, in the course of the assessment proceedings noted the following facts :
(a) The sales had declined to a figure of Rs. 5.60 crores from Rs. 5.92 crores in the preceding assessment year.
(b) The loss had gone up to Rs. 54,24,467 as against the corresponding figure of Rs. 22,06,204.
(c) The gross profit had declined by 1.67%.
(d) The yield had declined from 56.67% to 51.95% of the raw material consumed.
(e) That the method of accounting for the raw material was not logical and by this reference was made to the system adopted by the assessed in weighing the said raw material. Its Explanationn that excess unusable raw material was burnt and the ultimate conclusion arrived at by the ITO that the raw material received was more than the raw material reflected in the books of account and there being no Explanationn with regard to this. Further, the weight of the material imported was found to be invariably less than the weight declared in the documents and the assessed denied having lodged any claims with the suppliers.
23. On being confronted with the aforesaid facts, the assessed offered the following Explanationn :
(i) That the decline in the sales was mainly due to fall in demand of corrugated board and severe power cuts.
(ii) The fall in the yield was due to more consumption of wheat straw and due to non-availability of power.
24. The Assessing Officer did not find the aforesaid Explanationns convincing on a reference to the material on record which he had occasion to examine. According to him, the assessed was manufacturing various types of paper and it was not possible to believe that material classified as unusable was not being put to any use. The Explanationns regarding the recording of the lower weight in respect of the raw material received and non-lodging of any claims with the foreign suppliers also did not find favor with the Assessing Officer. In the ultimate analysis, the Assessing Officer proceeded to reject the books of account and apply the provisions of S. 145. He held that the quantity of raw material received by the assessed was 8124 MT and estimating the percentage of yield at 55%, he concluded that the production should have been to the tune of 4,468.2 MT as against 4221 MT shown by the assessed. In other words, he concluded that there had been understatement of production to the extent of the difference viz. 247.2 MT and the same had been sold outside the books of account. At the average selling price, he made an addition of Rs. 21,43,755 to the trading account.
25. Being aggrieved with the action of the Assessing Officer, the assessed came up in appeal before the CIT(A). During the course of hearing, detailed arguments were advanced with reference to the material on record and these can be summarised as follows :
(i) That accounts had been accepted all along in the past right up to the asst. yr. 1983-84.
(ii) That before rejecting the books of accounts, the Assessing Officer should have disproved the entries in the said books of accounts specially when this was a case where the entire operations were subjected to checks by the Excise Department beginning with the purchase of raw material and ending with the dispatch of finished goods.
(iii) That the assessed had made payments for only that quantity of raw material which had been reflected in the books of account and the suppliers had agreed to necessary deductions as and when insisted upon by the assessed.
(iv) That there was a good system in operation in respect of the receipt of the raw material, its subsequent accounting in the records as also the determination of the unusable material and its adjustment.
(v) That it was only the net quantity of the raw material viz., minus unusable raw material, which was taken into account and the payment made thereof.
(vi) That the said raw material was inspected in the presence of the suppliers.
(vii) That the difference in the weights as per the assesseds weigh bridge and that recorded in the suppliers bills was in money terms very nominal over the year and come to only Rs. 5,113.
(viii) That no claims were lodged with the foreign suppliers since the loss was to be borne by the assessed according to the terms of the agreements entered into with these foreign suppliers.
(ix) That all receipts on account of raw material were to be entered in the excise records specially being maintained for that purpose and which were being regularly checked by the authorities.
(x) That the Assessing Officer had not brought on record any inflation of purchases or sales nor had he shown the purchase or consumption of spares, power, fuel and wages needed for the alleged production outside the books of account.
(xi) That the decline in the yield was due to the use of more wheat straw, which in the year under consideration was 46% as against 42% in the preceding assessment year. That the yield from wheat straw was less than the yield from other types of raw material.
(xii) That the Assessing Officer had not shown that the books of account were in any manner incomplete nor had he shown that the method of accounting followed by the assessed was not the one which was being regularly followed.
(xiii) That the nominal decline in the gross profit rate was due to the increase in the rates of power, coal, raw material and wages.
26. The assessed, in the course of the proceedings before the CIT(A) also filed the balance sheets of seven other paper manufacturing units to show that the percentage of yield was substantially lower. This evidence was passed on to the then Assessing Officer who was asked to file objections to the admission of such fresh evidence. It appears that the objection taken was that, in as much as sufficient opportunity has been given in the course of assessment proceedings, the additional evidence should not be entertained. On the next date of hearing, the Assessing Officer was also summoned and on this occasion, the learned counsel for the assessed contended that no enquiries, whatsoever, had been made regarding the decline in the percentage of the production. In order to verify the aforesaid statement, the CIT(A) requisitioned the assessment records and went through the entries recorded in the order-sheet. These have been reproduced at pages 7 to 9 of the appellate order. The CIT(A), thereafter, recorded a categorical finding that the assessed had not been questioned regarding the decline in the percentage of production. He accordingly, proceeded to entertain the additional evidence.
27. The CIT(A), thereafter, took note of the comparative position of the total quantity of raw material, the quantity of wheat straw and the percentage of the yield for the year under consideration and the immediately two preceding assessment years as follows :
Assessment year
1984-85
1983-84
1982-83
Total quantity
8124 MT
8779 MT
9935 MT
Wheat straw
3738
3677
4326
% of W. straw
46.1%
41.80%
43.5%
% of yield
51.95%
56.66%
55.10%
He also took note of the figures pertaining to 7 other manufacturing units to examine the assesseds contention that wheat straw yielded less paper as compared to the use of other raw material, as follows :
S. No.
Name
Total Consumption- MT
% of Wheat straw of the total consumption
Straw consumption
Total yield from all material
1.
Mukerian Paper
28134
87.3%
24554
27%
2.
Shiva Paper Mills Ltdl
14545
82.3%
11965
47.7%
3.
Circhar Paper Mills
15077
81.5%
12887
38.8%
4.
Aurangabad Paper Mills Ltd.
16798
11.7%
1975
34.6%
5.
Nath Pulp and Paper Mills Ltd.
21381
70.3%
15024
32.6%
6.
Madhya Bharat Papers Ltd.
13590
65.1%
8856
42.6%
7.
Shreyans Paper Mills Ltd.
29325
87.5%
25651
27.8%
28. After examining these submissions and noting the objection raised by the Assessing Officer with reference to the material on record, the CIT(A) in the ultimate analysis, concluded that the addition of Rs. 21,43,755 was not warranted on the facts of the case and he proceeded to delete the same observing as follows :
'I also find that the Assessing Officer has proceeded to make the addition on hypothetical basis. Without going into reasons given by the assessed, he has held that the appellant should have got a yield of 55%. The reasons as mentioned in the assesseds letter dt. 28th Jan., 1987 are as under :
i. Availability of smooth power
ii. Quality of coal used for boiler for generation of heat.
iii. Different quality of paper manufactured.
iv. Quality of raw material used.
v. Breakdown period of machine.
The assessed has not been questioned on this aspect at all after 28th Jan., 1987. As regards the total quantity of raw material used, I find that the IAC(Asst.) proceeded on certain presumption without going into the reasons given by the assessed for recording the lower of the two weights between the weight found as per assesseds weight bridge and the weight shown by the supplier. I cannot help saying that the IAC(Asst.)s zeal and enthusiasm got the better of his discretion. If there was any doubt about the genuineness of the entries, the first thing that ought to have been done was to examine the suppliers. Secondly, the assessed has been repeatedly saying that the entire record was subject to the control and inspection of the excise authorities. In such circumstances, rejection of the books without examining the officials of the Excise Department was unwarranted. To sum up I would say that the addition cannot be sustained. The assessment order suffers from a number of infirmities. Firstly, the assessed does not appear to have been questioned regarding the percentage of yield. Secondly, there does not appear to be any basis for not accepting the weight of the raw material recorded by the assessed. There is no material to corroborate the IACs conclusions. There is no material to sustain the IACs finding that the yield should have been 55% of the raw material used. There is also no material to establish that the extra production, if any, was sold outside the books. Hence, the addition of Rs. 21,43,755 is deleted. The appellant gets a relief of Rs. 21,43,755.'
28. After hearing both the parties, the Department Representative in support of the order passed by the Assessing Officer and the learned counsel for the assessed in support of the order passed by the CIT(A), we find no good ground to interfere. The CIT(A) has discussed the matter at length vis-a-vis the material on record and has, thereafter dealt with each of the arguments advanced by reference to the points made by the Assessing Officer in making the impugned addition and it is only after doing so that he has deleted the addition. In as much as we fully agree with his conclusions (already reproduced), we do not find it necessary to record any separate reasons. It may not be out of place to mention that no specific challenge has been made to any of the factual findings recorded by the CIT(A) in the appellate order during the course of hearing before us. In the final analysis, the action of the CIT(A) is upheld and ground No. 1 in the appeal is rejected.
29. As regards ground No. 2, we have already discussed the matter at length while dealing with the connected ground raised in the assesseds appeal (No. 2). In the view that we have taken in disposing of that ground, we do not find it necessary to discuss the matter here once again. This ground, is, accordingly, rejected.
30. As regards ground No. 3, the Assessing Officer for the purpose of working out the disallowance under S. 37(3A) included selling commission amounting to Rs. 4,42,671 but on further appeal, the CIT(A) following the decision of the Chandigarh Bench of the Tribunal in the case of ITO vs . Meera & Co. deleted the same.
31. After hearing both the parties, we find no good ground to interfere with the decision of the first appellate authority, in as much as the matter now stands concluded also by the two decisions of the Hon able Calcutta High Court in the case of CIT vs . Hindustan Motors : [1991]192ITR619(Cal) and CIT vs . Sutlej Cotton Mills : [1992]194ITR66(Cal) . Respectfully following the same, the order of the CIT(A) is confirmed.
32. In the result, the assesseds appeal is partly allowed whereas the Revenues appeal is dismissed.