ORDER
Ram baradur, J.M..
This appeal by the assessed/appellant arises out of the order of the Commissioner (Appeals)-XXI, New Delhi, dated 13-8-1999, for the assessment year 1978-79.
2. The relevant grounds of appeal are reproduced below :
'The Commissioner (Appeals) erred in computing the total income at Rs. 1,35,04,753 as against the returned loss of Rs. 46,03,218. The appellant hereby challenges the correctness and validity of each and every disallowance of deduction of expenditure or trading liability and denial of any allowance and relief by the Commissioner (Appeals)-XXI converting the returned loss of Rs. 46,03,218 into a profit of Rs. 1,35,04,753.
1.1 The Commissioner (Appeals) erred in allowing Rs. 5,57,000 out of head office expenses of Rs. 10,34,501 as he did not differentiate the facts of this year but adopted the conclusions reached in prior years' assessments.
1.2 The Commissioner (Appeals) erred in upholding the action of the assessing officer that other income' comprised of dividend, interest and proof on exchange should have been prorated the head office expenses in equal ratio ignoring the fact that no special effort or expenditure was required to be incurred for earning the said income.
1.3 The Commissioner (Appeals) erred in upholding the action of the assessing officer in ignoring the fact that the subsidiary companies are fully and adequately staffed and they are fully competent and capable of looking after their administrative, financial, sales and technical aspect, and to run their business independently of any assistance from the appellant and that they in fact ran the business independently without seeking any assistance whatsoever from the appellant.
1.4 The Commissioner (Appeals) has erred in developing a ratio of 7:6 between the net profit in the trading operation and the net profit under 'other income' and apportioned the head office expenses in this ratio.
2.1 The Commissioner (Appeals) erred in allowing the assessing officer to proceed on the assumption that the appellant's business in the manufacture of concentrate and the appellant's business in the manufacture of mango pulp, etc., were two separate businesses and not one business.
2.2 The Commissioner (Appeals) erred in holding that the expenditure of Rs. 58,247 did not constitute revenue expenditure and, on the other hand, constituted capital expenditure. The assessing officer should have allowed the deduction of Rs. 58,247 as revenue expenditure.
3.1 The Commissioner (Appeals) erred in disallowing the write off of Rs. 31,350 representing unrealizable duty drawback claims on the ground that the appellant had not placed on record any documentary evidence that the claims for drawback had been rejected by the Government. The Commissioner (Appeals) has failed to appreciate that there is no practice with the Government authorities to formally intimate the rejection of any claim. The disallowance of Rs. 31,550 was included in disallowance of Rs. 89,797 (Rs. 58,247 + Rs. 31,550). The appellant submits that the written off amount of claims had not been realized even upon September, 1999.
4.1 The Commissioner (Appeals) has erred in endorsing the assessing officer's action in rejecting the appellant's claim for deduction of its accrued liability for payment of Rs. 1,20,00,000 to the bottlers by way of compensation arising under the terms of the agreements entered into with the bottlers even though he accepted the position without reservation that it was a trading liability which sprang directly from carrying on of the business and was incidental to the carrying on of the appellants business.
4.2 The Commissioner (Appeals) erred in endorsing the assessing officer's action in holding that the said liability was deductible in the assessment year 1979-80 and 1980-81 and not in the assessment year 1978-79, under appeal, as the said liability was not ascertained and quantified during the year under appeal,
4.3 The Commissioner (Appeals) erred in ignoring the patent fact established by the evidence on record that the appellant admitted its liability for payment of compensation claimed by the bottlers under clauses 19 and 21(c) of the bottlers' agreement as soon as the appellant was unable to manufacture Coca-Cola concentrate and Fanta beverage base from 15-6-1977, due to non-availability of import license to import the essential ingredients from abroad. The entire evidence produced by the appellant has been ignored.
4.4 The assessing officer erred in ignoring the material fact that the appellant had estimated its liability for payment of compensation to the bottlers at Rs. 1,20,00,000 in or about December, 1977, as a consequence of its acceptance of the liability for payment of compensation and on the basis of the particulars called for by it from the bottlers and furnished by the bottlers in pursuance thereof.
5.1 The Commissioner (Appeals) has erred in disallowing the provision of Rs. 55,53,012 in respect of liability for gratuity, pension and other separation benefits on wrong and untenable grounds as detailed below:
Rs.
Pension Fund
38,89, 815
Retrenchment benefit for the staff retrenched on 30-12-1977
8,52,318
Retrenchment benefit in respect of remaining staff
8,10,879
Total
55,53,012
The above accrued liability was actually paid by the appellant.
5.2 The Commissioner (Appeals) has erred in ignoring the fact that the appellant had contributed Rs. 17,00,000 to Citibank which is a trustee bank of the pension fund on 11-1-1978, pending the completion of the formalities for the execution of a regular trust deed which was effective from 4-1-1978, and which was done on 3-2-1978,
5.3 The Commissioner (Appeals) has erred in ignoring the fact that the liability for contributing the amount of Rs. 38,89,816 arose on 16-12-1977, when the pension plan came into effect and the liability for payment of the said amount was accepted to persuade the staff as a whole to agree to the termination of the services of the extra surplus staff in the interest of its existing business.
5.4 The'Commissioner (Appeals) erred in disallowing the amount of Rs. 8,52,318 in respect of the appellant's liability for severance pay in the shape of notice salary, retrenchment compensation and gratuity, etc., to the staff actually retrenched with effect from 30-12-1977, and the amount due to each employee was paid by 20-1-1978.
5.5 The Commissioner (Appeals) erred in disallowing the provision amounting to Rs. 8,10,879 in respect of notice salary, leave Wary, gratuity and retrenchment compensation payable to its employees. Although the above amounts were not paid during the year, the liability for payment did arise in terms of the general acceptance by the staff. The liability raised was fully quantified and enforceable at any stage the employees left the corporation's service.
6. The Commissioner (Appeals) erred in upholding the disallowance of deduction of Rs. 29,248 relating to the foreign tour of the wives of the executives of the company as business expenses and in not following the decision of the Andhra Pradesh High Court in Addl. CIT v. P.R. Parthasarathy on the point. As the disallowance under section 40A(5) is to be computed with reference to section 17(3)(ii) what is not treated as salary under section 17(3)(ii) cannot be treated as salary under section 40A(5). Reliance is also made on the Kerala High Court's judgment in CIT v. Appollo Tyres Ltd. .
7. The CIT(A) has erred in disallowing the payment of Rs. 15,000 paid to M/s R.K. Khanna & Co. The Commissioner (Appeals) has failed to appreciate that the appellant had produced as evidence before the assessing officer two bills received from M/s R.K. Khanna & Co., one for the services rendered in connection with the income-tax cases and the second towards the services rendered in connection with consultation of general management and planning on which they were qualified and competent to advice. The evidence in the shape of two bills win be produced at the time of hearing.
8. The Income Tax Officer erred in disallowing a lumpsum provision of Rs. 5,047 being the estimated amount payable to M/s J.B. Dadachanji & Co. in connection with the trademark case. The amount has since been paid to M/s J.B. Dadachanji Co.
9. The Commissioner (Appeals) has erred in endorsing the assessing officer's action in disallowing the sum of Rs. 9,647 paid to M/s Mizar Govinda Annappai & Co. and M/s Herbertsons Ltd., towards their claim for duty drawback and cash entitlement as the appellate received legal notices from the parties enforcing their legal claims in respect of this amount.
10. The Commissioner (Appeals) erred in disallowing Rs. 19,516 considering it as an expense on entertainment. The assessing officer has ignored the submissions made by the appellate that the tea and snacks and working lunch was offered as a matter of business convenience in order to save time at the time the bottlers' conferences were held. Such expenditure cannot by any stretch of imagination be treated as entertainment expenditure.'
3. Ground Nos. 1 and 2 relate to disallowance of head office expenses amounting to Rs. 10,34,501 claimed by the assessed.
4. Before us, the learned counsel for the assessed/appellant, Shri Ajay Vohra and Smt. Amita Sharma, appeared and argued.
5. The assessed is a wholly-owned subsidiary of the Coca-Cola Company, which is a company incorporated under the laws of United States of America, having its headquarters of Atlanta, Georgia, U.S.A. The assessed has its main office at New York, referred to as the home office. The assessed had a branch office at New Delhi, which had been declared as a company under section 2(17)(iv) of the Act by the CBDT. It is being assessed to income-tax as a non-resident company in India since it was established in the year 1958. The Coca-Cola Company, the holding one, manufactures certain basic ingredients like '7X' for the manufacturing of coca-cola concentrate and other beverage bases in its factories in U.S.A. and in London. These basic ingredients are sold by the holding company exclusively to the assessed for further manufacture of coca cola concentrate and beverage basis for its branches numbering 25 spread in various countries including that in India.
6. Deduction of Rs. 10,34,501 on account of head office expenses was computed by prorating the expenses to each branch on the basis of the percentage of net product sales of the company as a whole. It was submitted on behalf of the assessed/appellant by Shri Ajay Vohra that the said practice was being followed consistently year after another. In this regard our attention was drawn to certificate of Ernst & Ernest placed at paper book p. 103. The assessing officer following the orders for earlier years, concluded that the least of the amounts computed on the following basis is to be allowed deduction
(a) The amount attributable to Indian branch after separately prorating the total head office expenses on the basis of the net products sale as 'other income';
(b) The amount which may be considered to qualify for remittances outside India in accordance with the overall ceiling limits for remittance fixed by the department of Economic, Affairs, Government of India, vide their letter No. 826/(71)-EF(INV), dated 4-5-1973, and N. 7/26(71)-EF(IW, dated 6-11-1974;
(c) 5 per cent of. the total income after deducting head office expenses,
The Commissioner (Appeals) however held that criteria (a) above having been struck down by the Supreme Court in appellant's own case, cannot be applied. The Commissioner (Appeals) developed a ratio of 7:6 comparing net profit of trading operating with net profit under 'other income' and directed the assessing officer to apportion the head office expenses on the said basis. The learned counsel for the assessed/appellant, Shri Ajay Vohra, vehemently contended that section 44C of the Income Tax Act which overrides sections 28 to 43A provides for deduction of head office expenses in a case of a nonresident assessed equivalent to the least of the following 3 amounts
(a) an amount equal to 5 per cent of the adjusted total income.
(b) an amount of so much of the expenditure in the nature of head office expenditure incurred by the assessed as is attributable to the business or profession of the assessed in India.
It was pointed out that since in the relevant year, the adjusted total income was a loss at Rs. 46,03,218, the amount was to be computed at the average rate of 5 per cent of the average adjusted total income of the assessed, for each of the three assessment years immediately preceding the relevant assessment year in terms of proviso to section 44C of the Act, Our attention was drawn to the definition of average adjusted total income, which has been defined to mean, in case where the total income of the assessed is assessable for each of the three assessment years immediately preceding the relevant assessment year, 1/3rd of the aggregate amount of the adjusted total income in respect of the previous year relevant to the aforesaid three years.
7. It was submitted by the learned authorised representative that on that basis the deduction admissible was calculated at an amount of Rs. 12,63,102. As regards the actions of the assessing officer and Commissioner (Appeals) in allocating head office expenses on the basis of the ratio of other income to manufacturing income/profit, while restricting the deduction to 5 per cent of total income, applying section 44C of the Act, it was submitted that the Tribunal in assessed's own case for the assessment year 1975-76 while holding section 44C of the Act to be not applicable did not approve at the aforesaid basis and allowed 95 per cent of the expenses as claimed by the assessed. It was further contended that the deduction of Rs, 10,34,501 was computed in accordance with the provisions of section 44C of the Act and ought to be allowed. The learned Departmental Representative relied on the order of the Commissioner (Appeals).
8. Having heard both the sides and having gone through the documents placed on record, we find considerable merit in the submissions made by Mr. Ajay Vohra. Section 44C of the Act contains special provisions for the deduction of an amount arrived at being the least of the three amounts as has already been discussed. The proviso to the said section provides that where the adjusted total income of the assessed is a loss, the amount under clause (a) shall be computed at the rate of 5 per cent of the average adjusted total income of the assessed. The average adjusted total income again has been defined in clause (ii) of Explanationn to section 44C as under :
'Explanation : (ii) average adjusted total income, means-(a) in a case where the total income of the assessed is assessable for each of the three assessment years immediately preceding the relevant assessment year, one-third of the aggregate amount of the adjusted total income in respect of the previous yeas relevant to the aforesaid three assessment years.
(b) in a case where the total income of the assessed is assessable only for two of the aforesaid three assessment years, one-half of the aggregate amount of the adjusted total income in respect of the previous years relevant to the aforesaid two assessment years.
(c) in a case where the total income of the assessed is assessable only for one of the aforesaid three assessment years, the amount of the adjusted total income in respect of the previous year relevant to that assessment year.'
Admittedly, the assessed has incurred a loss of Rs. 46,03,218 in the relevant previous year. thereforee, deduction under section 44C of the Act is to be worked out as per the proviso to the said section. The assessed has given the basis of the computation of deduction at pp. 172-173 of the paper book. In the said computation 5 per cent of the average adjusted total income has been worked out at Rs. 12,12,389 which is the amount to be considered in terms of clause (a) of section 44C of the Act. Coming now to clause (b) of section 44C of the Income Tax Act, 1961, the said clause provides' for computation of deduction of average head office expenditure which was defined in clause (iii) of Explanationn to section 44C of the Income Tax Act to mean-(iii)(a) in a case where any expenditure in the nature of head office expenditure has been allowed as a deduction in computing the income of the assessed chargeable under the head 'profit and gains of business or profession', in respect of each of the three previous years relevant to the assessment years commencing on the 1-4-1974, the 1-4-1975, and 1-4-1976, one-third of the aggregate amount of the expenditure so allowed; (b) in a case where such expenditure has been so allowed only in respect of two of the aforesaid three previous years, one-half of the aggregate amount of the expenditure so allowed; and (c) in a case where such expenditure has been so allowed only in respect of one of the aforesaid three previous years, the amount of the expenditure go allowed.
9. On this basis the average adjusted head office expenditure for the relevant assessment year, it was submitted, worked out to Rs. 12,63,102. Accordingly, amount of head office expenditure attributable to Indian branch in terms of clause (c) of section 44C of the Act amounting to Rs. 10,34,501 being the least of the three was claimed deduction by the assessed. We find no infirmities in the said computation.
10. Coming now to the objections taken by the Commissioner (Appeals) and the assessed of apportioning of head office expenses in the ratio of trading profits and other income, we find that the Tribunal in assessed's own case has rejected the said method adopted by the lower authorities and allowed deduction claimed by the assessed on the basis of its past consistent practice. Further, when a special provision has been enacted for computation of deduction of head office expenditure, there is no scope of any addition or alteration to the method provided therein. The computation of head office expenditure claimed by the assessed being in accordance with such provisions is allowable in toto. These grounds of the appeal of the assessed, thus are allowed.
11. In ground No. 3 of the appeal, the assessed has challenged the disallowance of Rs. 58,247 being production expenses in I respect of Bulsar plant. At the outset, the learned counsel of the assessed pointed out that the issue has been decided against the assessed by the Tribunal in appeal for assessment year 1975-76. Respectfully following the decision in assessed's own case, the disallowance is upheld and thus this ground of appeal is rejected.
12. The next ground relates to the disallowance of Rs. 31,550 being unrealizable duty drawback written off. The assessing officer disallowed a sum of Rs. 31,650 being claim of duty drawback pertaining to earlier years written off during the relevant previous year. The Commissioner (Appeals) on appeal upheld the action of assessing officer. Before us it was contended by the learned authorised representative that the aforesaid amount comprised of refund due on account of excise duty/customs duty/drawback which had been offered for tax in earlier years and since continuous follow up with the parties yielded no result, the assessed wrote off these amounts during the year. It was contended by the learned authorised representative that there is no warrant for disallowance of the said amount because the assessed bona fides believed that such sum is irrecoverable and was written off the same by the assessed/appellant, The basis of such writing off being the honest judgment of the assessed cannot be questioned and ought to be accepted. We find force in the contention of the learned counsel for the assessed. The amount of Rs. 31,550 having been offered for tax in earlier years and now written off ought to be allowed deduction as loss incidental to business. We, thereforee, direct the assessing officer to verify this aspect and allow the said amount if the same had been offered for taxation in earlier years.
13. In ground Nos. 5 and 6 of the appeal, the assessed has challenged the action of the Commissioner (Appeals) in upholding disallowance of Rs. 1,20,00,000 being liability in respect of the compensation payable to bottlers on the ground that no loss accrued or arose in the previous year. Form the assessed's side it was submitted that the assessed had entered into agreements with its bottlers which obliged them to acquire for themselves bottles and other material bearing trademark of the assessed and severely restricting them from using the same for any purpose other than selling the products of the assessed. The said agreements also provided that on the expiration or earlier termination of the agreement, the bottlers would not use such material for any purpose but were required to remove and erase all references of the assessed- company. They were also bound to forthwith deliver to the assessed all concentrate beverage base usable, returnable or non-returnable bottles, cases, labels, etc. in their possession or under the control, and the assessed on its part was liable to pay to the bottlers a sum equal to the reasonable market value of such supplies delivered to it. The assessed was during the relevant previous year, denied the import license by the Controller of Imports and Exports, Ministry of Commerce, Government of India, for importing proprietary ingredients for the manufacture of Coca-Cola concentrate and Fanta beverage base. The assessed was severely handicapped due to such denial and had to discontinue the production of concentrate with effect from 15-6-1977. As a result of discontinuance of production, it became virtually impossible for the assessed to supply its products to the bottlers and, the agreements with the bottlers virtually stood terminated by reason of the provisions of clause 19 of the agreements.
14. Shri Ajay Vohra, learned authorised representative of the assessed/ appellant, explained that with a view to prevent the misuse of bottles and other materials by the bottlers the instructions were issued to the bottlers for destroying the bottles in their possession or under their control, in the presence of the assessed and/or its representative. Though the bottlers did not decline to comply with the instructions, claims for the value of bottles to be delivered by them, were put up in terms of clause 21(c) of the agreement. The assessed also received legal notices from some bottlers within the relevant previous year (pp. 32-33/65-168 of the paper book). The assessed was neither in a position nor it did attempt to shirk off its liability under the agreement. Though, the assessed acknowledge its liability for payment of compensation, it however, disputed the amount of the compensation claimed by the bottlers. The assessed made an estimate of its liability of Rs. 1,20,00,000 after carefully studying the information collected by its officers sent out for the purpose and the information sent by the bottlers.
15. The lower authorities however, declined to entertain the claim of the assessed on the ground that :
(1) There was no suspension of the business since the assessed applied for issue of fresh import license on 7-9-1977.
(2) The RBI withdrew license to carry on business on 5-5-1978, i.e., during the succeeding previous year.
(3) The assessed informed the assessing officer of discontinuance of business under section 176(3) of the Income Tax Act with effect from 1-5-1978, only.
16. Our attention was invited to the clauses 18 to 21 of the bottlers agreement which stipulate the circumstances/rights and obligations leading to termination/in the event of termination of the agreement. It was contended on behalf of the assessed/appellant that as per clause 20 read with clause 21(c) of the agreement, the corporation was under an obligation to supply the concentrate for the bottling of the soft-drink and in the event of failure to do so, the bottlers were free to terminate the agreement without any liability on their part and clause 21(c) further provided that the corporation shall have the option to purchase from bottlers the supplies and materials being bottles, labels, advertisements, cases, bearing the trademark of the company. The assessed, it was submitted, on being declined the renewal of import license, found itself helpless in supplying the bottlers concentrate needed for the bottles of the soft-drink. Fearing unrest amongst the bottlers and misuse of assessed's bottles, cases and other supply materials bearing the assessed's trademark, the assessed chose to exercise the option of purchasing them from the bottlers to avoid any dispute being raised/misuse of its trademark which would have spoiled its trade name in the market. The aforesaid decision, it was contended, was a pure business decision and the bona fides of such action cannot be questioned. As regards the question of accrual of liability, it was contended by the learned authorised representative of the assessed that the assessed's liability for payment of compensation accrued no sooner than the company was unable to carry out the contractual obligation to supply concentrate and beverage base from its plant in India. The accrual of such liability, it was submitted that it was automatic under the terms of the agreement on the occurrence of contingency as set out therein and as sustained by the claim put up by the bottlers.
17. This basis for computation of compensation paid to various bottlers was uniform @ Rs. 10 per case and there was no ambiguity or arbitrariness in the compensation paid to the bottlers. It was submitted that the reasonableness of the estimate made by the assessed is evident from the fact that the actual amount of compensation paid by the company in the succeeding year, amounting to Rs. 1,21,29,440 does not differ much from its estimates. The liability for payment of such compensation accrued during the relevant previous year itself and only the payment was deferred till the time the claims were settled. Reliance was placed on the following decisions of the Apex Court on the following cases :
(1) Bharat Earth Movers v. CIT ;
(2) Metal Box Co. of India Ltd. v. Their Workmen ; and
(3) Calcutta Company Ltd. v. CIT .
In the aforesaid cases it has been held by the Hon'ble Apex Court that once the accrual of liability is established the deduction in respect of such liability ought to be allowed in the year of accrual irrespective of the fact that the liability may be quantified subsequently or beyond the relevant previous year.
18. The learned Departmental Representative, on the other hand, strongly relied on the order of the Commissioner (Appeals).
19. We have head the rival submissions and also gone through the order of the Commissioner (Appeals), and material on record. We come to the conclusion that the Commissioner (Appeals) in sustaining the disallowance has mainly disputed allowability on the ground that the same arose in the next financial year. The basis for this inference apparently is the fact that amounts of compensation were actually distributed during the next financial year and the company appointed A.E. Ferguson & Company as their representative in February, 1978, only. The Commissioner (Appeals) has not challenged the basis of estimation made by the assessed. The issue for consideration before us is whether the liability accrued during the relevant previous year or the following year.
20. We have gone through the bottlers agreement. On conjunct reading of clauses 18 to 21 of the said agreement it emerges that the bottlers were free to terminate the agreement if the company failed to supply the concentrate/syrup required for bottling. It is an accepted fact that the assessed was denied import license in June, 1977, and although the assessed had applied for renewal of license by fresh application, the same was under consideration and pending disposal till the end of the relevant previous year, and the assessed was not in position to supply the beverage as per its contractual obligation towards the bottlers. The assessed, thereforee, directed the bottlers to destroy the bottles/ supply material lying with the bottlers in order that the bottles/supply material are not misused. The said option was exercised in terms of clause 21(c) of the Act (sic-agreement). It was pointed out that the assessed had started correspondence with its bottlers regarding its inability to supply the beverage and had also received notices from some of its bottlers which are placed in paper book at pp. 32-33/165-168. The mere fact that the assessed actually wrote to the assessing officer informing the closure of business on 5-5-1978, when all hopes of receiving the import license had receded, in itself does not lead to the inference that the liability did not accrue in the relevant previous year. The fact that the assessed had recognized its liability and chose to pay off the same, and had started taking constructive steps in that direction during the relevant previous year itself, is sufficient to establish the accrual of the liability in the year under appeal.
21. The Apex Court in the case of Bharat Earth Movers (supra) has held that if a business liability has definitely arisen in the accounting year, the deduction should be allowed although that liability may have to be quantified and discharged at a future date. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied, it was held by the apex Court, that the liability is not a contingent one. The liability is in present though it will be discharged at a future date. It was further held that it does not make any difference if the future date on which the liability shall have to be discharged is not certain. The Hon'ble Apex Court in coming,to the aforesaid conclusion applied the ratio of its decisions in Metal Box Co. of India Ltd. (supra) and Calcutta Company Ltd. (supra).
22. In the instant case, in view of the aforesaid discussion, we are convinced that the liability to pay off the bottler's accrued no sooner than the assessed was unable to supply the concentrate to its bottlers. The stand of the assessed is supported by the fact that legal notices had been received by the assessed from the bottlers within the relevant previous year.
23. Coming to the second leg of the Apex Court's decision, the liability in the instant case was capable of being determined as assessed had uniformly applied a rate of Rs. 10 per case of 24 bottles as compensation to be paid to the bottlers and estimated its liability accordingly. As pointed out to us reasonableness of the estimate is evident from the same being close to the actual claim amounting to Rs. 1,25,97,806 and actual payment of Rs. 1,21,29,440. We accordingly hold that the liability towards bottlers compensation accrued during the relevant previous year and ought to be allowed as deduction in the year itself.
24. The next issued raised vide ground Nos. 7 and 8 is regarding provision made for pension fund amounting to Rs. 38,89,815. The facts in brief leading to the issue are as under :
The assessed evolved a pension scheme covering all staff members on the rolls of the company which came into effect from 16-12-1977. A regular trust deed was drawn up and trustees were appointed for the administration of the pension fund. The trust deed was executed on 3-2-1978, with effect from 4-1-1978. The funds were transferred to the said trust on 11-1-1978. The scheme was introduced by the assessed as a replacement of gratuity plan earlier applicable to the managers and also extended to other employees. The assessed had in its books of account debited a sum of Rs. 39,89,915 towards pension fund. The assessing officer disallowed the same on the ground that it was not in accordance with the provisions of section 36(1)(iv) of the Act. On appeal to the Commissioner (Appeals), the action of the assessing officer was upheld on the ground that
(a) The trust deed was executed on 3-2-1978;
(b) The same was effective from 4-1-1978; and
(c) The contribution to the fund of Rs. 17 lakhs was made on 11-1-1978.
25. Before us, it was contended on behalf of the assessed/appellant that the pension plan, inter alia, thought of and introduced by the assessed, was a part of the inducement offered to the employees not to oppose but to agree to the termination of the services of the surplus staff during the period of cut in business. The decision to introduce a plan was taken in the best interest of the business for reducing the liabilities and expenses. The liability for contributing the amount of Rs. 39,89,915 arose on 16-12-1977, when the pension plan was introduced/came into effect and covered the employees on the rolls of the company on that date. The fact that the necessary formalities were completed subsequently would not seek to postpone the liability which arose on 16-12-1977, itself, the learned authorised representative of the assessed, strenuously argued.
26. Our attention was invited by the learned authorised representative to the judicial pronouncements of the Hon'ble Kerala High Court in the case of CIT v. Aspinwall & Co. (Travancore) Ltd. and of the Hon'ble Karnataka High Court in the matter of Chief CIT v. Karnataka Electricity Board , where the assessed, a public limited company, carrying on business of manufacture and sale of coir products claimed deduction of an amount of Rs. 16,359 for the assessment year 1978-79 and an amount of Rs. 90,220 for the assessment year 1979-80 being contributions made by it to the executive staff provident fund. The assessed in that case contended that the executive staff provident fund of the company being unrecognized, it was entitled to claim deduction by virtue of the provisions contained in section 37, even though it may not be eligible for such deduction under section 36(1)(iv) of the Act. The Income Tax Officer disallowed the claim of the assessed holding that when section 36(1)(iv) has provided for a specific deduction for the contribution made to a recognized provident fund, the legislature should be taken to have implied that contribution to a fund not recognized would not fall for deduction under the provision of section 37.
27. On appeal by the assessed, the Commissioner (Appeals) allowed the deduction claimed under section 37, following the decision of the Tribunal dated 19-8-1980, in ITA No. 238/Coch/1978-79, filed by the assessed itself. The department thereupon filed ITA Nos. 134 and 135/Coch of 1984, appeals before the Tribunal. Following its earlier decision, the Tribunal rejected the contention taken by the department and allowed the claim of the assessed for deduction of its contribution to the executive staff provident fund under section 37 of the Income Tax Act. On further appeal to the High Court, the revenue contended that when there is a specific provision made in section 36(1)(iv) of the Income Tax Act for deducting payments to a fund for meeting the liability in respect of provident fund, such deduction could only be claimed under section 36(1)(iv) of the Act.
28. The learned counsel drew our attention to p. 741 of the judgment wherein it was held as under
'As rightly contended by counsel appearing on behalf of the assessed, the answer to the above contention raised by the revenue is found in the judgment of this court in CIT v. High Land Produce Co. Ltd. . In the above decision this court considered similar contentions raised by the revenue in the matter of deductions towards gratuity liability and it was held that even though the claim for deduction towards gratuity liability cannot be made under section 36(1)(v) of the Income Tax Act, there is nothing standing in the way of the assessed claiming deduction under section 37(1). After referring to a decision of the Calcutta High Court in Liberty Cinema v. CIT , wherein the scope of section 10(2)(xv) of the Indian Income Tax Act, 1922, similar to section 37(1) of the Income Tax Act, 1961, was considered, this court observed at p. 807 :
'The residuary nature of the provision in section 37(1) will, thereforee, have to be given its full play. Bearing in mind the reason for the introduction of the words within brackets not being expenditure of the nature described in sections 30 to 36, we have to remember that those words do not preclude certain species of liabilities but only exclude consideration of liabilities which would fall under any of these sections.'
This court held that the mere fact that a claim will not fall under any of the sections 30 to 36 will not automatically make the claim sustainable under section 37(1) of the Act as well. The above decision was taken in appeal before the Supreme Court by the revenue and the Supreme Court affirmed the same (vide CIT v. Highland Produce Co. Ltd. . The two decisions relied on by the revenue, which took a contrary view, cannot be treated as good law in view of the abovementioned decision of the Supreme Court. We, thereforee, reject the contentions raised by the revenue that the assessed is not entitled to claim deduction under section 37(1) in respect of its contribution to the executive staff provident fund, since the claim will not come under section 36(1)(iv). The learned counsel also contended that the facts in Karnataka Electricity Board case (supra) are on all fours with the facts of the assessed's case. In that case too the assessed had made provisions towards pension fund, though no approved fund was in existence and claimed deduction in respect of the.same under section 37(1) of the Act. The revenue in that case contended that there was no approved. fund and since the subject was covered by section 36(1)(iv), no amount was deductible under section 37 of the Act. The Karnataka High Court after considering various judicial, precedents observed as under :
'The concept of commercial expediency is not foreign to a statutory corporation which is obliged to carry on a venture which any other commercial enterprise can also carry on. Where the assessed, a statutory corporation, was obliged to pay pension to its employees under the rules governing it and provision was made by it towards the pension fund though no approved pension fund was in existence and the claim for deduction did not fall under section 36(1)(iv) of the Income Tax Act, 1961, such provision is an expenditure laid out wholly and exclusively for purposes of business and is deductible under section 37 of the Act.'
29. The learned Departmental Representative, on the other hand, placed reliance on the order of the learned Commissioner (Appeals).
30. We have heard the rival submissions of the parties and have perused the material on record including the judicial pronouncements of the different High Courts, and we find ourselves in agreement with the submissions made by the learned counsel for the assessed. The decision of the Karnataka High Court, we observe, is squarely applicable to the instant case and respectfully following the same, we decide the issue in favor of the assessed.
31. In ground No. 9, the assessed challenged the disallowance of R8. 8,53,318 in respect of the assessed's liability for severance pay to the staff actually retrenched with effect from 30-12-1977. The assessed has made provision in its books for Rs. 8,52,318 being provision for payment of notice salary, retrenchment compensation and gratuity to the staff who were given notice of retrenchment on 30-12-1977. The assessing officer disallowed the same on the ground that the services were effectively terminated from 28-2-1978, and, thereforee, liability on this account could not be said to have accrued during the relevant previous year. The Commissioner (Appeals) on appeal declined to interfere with the order of the assessing officer on this issue.
32. Shri Ajay Vohra, the learned counsel for the assessed, challenged the order of the Commissioner (Appeals) and submitted that the services of the staff'in this case were terminated on 30-12-1977, by giving them two months statutory notice as required under the Industrial Disputes, Act, 1947. The staff was informed not to attend the office with effect from 30-12-1977, and was requested to collect all dues payable on termination of their'services. The services of the staff were terminated as per the terms agreed with the workers union.. The general terms of the separation plan were as follows
'All workmen will be paid compensation under the Industrial Disputes Act, 1947, @ 15 days salary for every year of service (service of six months and above will be considered as one year). All employees will be entitled to two months notice or salary including H.C.L.A. and H.R.A. in lieu thereof. All employees covered under the union agreement dated 10-11-1972, will be paid an ex gratia payment of one month's salary (including H.C.L.A. and H.R.A.). All workmen will be paid gratuity as per the provisions of Payment of Gratuity Act, 1972, or as per the company's gratuity plan. Payment of leave travel assistance for the year 1977, if not availed, and salary in lieu of annual leave not yet availed for 1977, will be included in the final payment. Reimbursement of medical expenses will be allowed as per company's existing medical assistance programme up to 31-8-1978. However, all coverage under this plan will stop from 1-9-1978. Bonus as applicable will be paid up to the dated termination along with final payment. All benefits under the Coca-Cola Export Corporation, India Branch Pension Plan will be met in accordance with the plan. Balance in the Coca-Cola. Export Corporation Employees Provident Fund will continue to be governed by the current rules of the fund. Taxes, as applicable, will be deducted from the payment as required under the law.'
He placed reliance on the decision of Kerala High Court in Kar Valves Ltd. v. CIT . In reply, the Departmental Representative relied on the order of the Commissioner (Appeals).
33. We have heard the rival submissions of the parties and gone through the facts of the case, and the decision of the Kerala High Court in Karvalves' case (supra). In that case the court held that the liability to pay the retrenchment compensation accrued immediately after the notice was given to the employees in the relevant year. The expenditure was incurred in the course of business.. The liability was fastened. on the assessed as a result of notices of retrenchment given by it and the retrenchment compensation was deductible under section 37(1) of the Act.
34. In the instant case, it is nobody's case that the notice was not issued on 30-12-1977. The notice having been issued during the relevant previous year, the liability for compensation was fastened during the relevant previous year itself as held by the Kerala High Court. We are, thereforee, inclined to agree with the contention for the assessed that the claim per provision made for severance pay ought to be allowed in the relevant previous year and direct the assessing officer to allow the same.
35. Ground, No. 10 is an extension of ground No. 9 and challenges the disallowance of provision of Rs. 8,10,879 in respect of severance pay liability which arose in terms of general acceptance by the staff. The assessed had, during the relevant previous year, booked an amount of Rs. 8,10,879 in respect of notice salary, retrenchment compensation, gratuity and repatriation expenses in respect of remaining staff. The lower authorities disallowed the same on the ground that the. claim was infructuous since the employees were not retrenched. The learned counsel appearing for the assessed reiterated the submissions made in respect of ground No. 9 and contended that the employees in question were ultimately retrenched. The learned Departmental Representative relied on the order of lower authorities. It is admitted that the provision of Rs. 8,10,879 is, in respect of employees who were not served with retrenchment notice issued on 30-12-1977. No liability had accrued in respect of such employees during the relevant previous year. The provision made by the assessed, is in such circumstances, in respect of a contingent liability which cannot be allowed as deduction. The fact that the employees were legitimately retrenched, would make no difference to the legal situation that there was no accrual of liability during the relevant previous year. We, thereforee, uphold the order of the lower authorities and reject the appeal in respect of this ground.
36. Next issue arising out of ground No 11 is the disallowance of Rs. 29,249 relating to the foreign tour of wives of the executives of the company. During relevant previous year the assessed had booked Rs. 29,249 on account of air tickets of Smt. Kisan Mehta, wife of area manager of the assessed, treating the same as perquisite under section 40A(5) of the Act. The assessing officer disallowed the same invoking the provisions of section 40A(5) of the Act.
37. Before us, Shri Vohra vehemently challenged the disallowance and submitted that as common business practice, the senior executives of the company are accompanied by the spouses on their business visit abroad and the expenditure incurred by the company on the traveling of the spouses has been held to be an admissible business expenditure. Reliance for this has been placed on the following judicial pronouncements
(1) ITO v. J.K. Synthetics Ltd. (1986) 172 (DelHI) 490 ;
(2) ITO v. A.F. Ferguson (1986) 172 (Bom) 620 ;
(3) Glaxo Laboratories (India) Ltd. v. Income Tax Officer (1986) 1277 (Bom) 226 ;
(4) Apollo Tyres (supra); and
(5) CIT v. Sundaram Clayton Ltd. (2001) 240 ITR 271 .
It was further contended that the foreign travel of wives of the executives in any case does not constitute perquisites in the hands of the employees. Reliance was placed on the following decisions :
(1) Dhiralal Haridas v. CIT and
(2) CIT v. Smt. Kamarini Gautam Sarabhai .
The learned Departmental Representative relied on the order of the assessing officer.
38. Gujarat High Court in the case of Kamalini Gautam Sarabhai (supra) had before it a case where for the assessment year 1972-73 the assessed filed return of income disclosing total income of Rs. 81,289. The assessment was completed on 10-3-1975. Later on, the Income Tax Officer during the course of assessment of K.P. came to know that the said company had incurred expenditure on the foreign tours of one of its directors H and his wife K. The assessed (sic-Income Tax Officer) also noticed that for the tour of K, the company had expended Rs. 39,753. In view of this information, the Income Tax Officer remanded the assessment and ultimately included the said amount of Rs. 39,753 in the total income of the assessed and assessed it.
39. The Tribunal held that it could not be said on the basis of the material on record that the assessed had ever approached the company either directly or through anyone else for obtaining the benefit or perquisite in question. thereforee, the first part of section 2(24)(iv) was not attracted. The Tribunal also held that there was no material to show that if the sum in question had not been paid by the company, it would have become payable by the assessed's husband, who was a director of the company. thereforee, the second part of section 2(24)(iv) was also not attracted. The Tribunal, thereforee, allowed the appeal and directed that the said sum be excluded from the computation of the assessed's total income. On further appeal to the High Court, their Lordships of the Gujarat High Court taking a view favorable to the assessed observed as under :
'In view of the rival contentions raised before us, what we are required to consider is whether by undertaking the foreign tour, the assessed can be said to have obtained any benefit from the company in which her husband was a director. The answer would obviously depend upon the true interpretation of the word 'benefit' occurring in the 1st part of the said clause.'
The clause refers to 'benefit' obtained from a company. Thus, the context in which such word has been used will have to be borne in mind while interpreting the word 'benefit'. The dictionary meaning of the word 'benefit', is advantage or profit or anything contributing to improvement of condition. If a person derives any advantage, it can be said that he was benefited. If he gains something either monetarily or otherwise, it can be said that he was benefited to that extent. Thus, the word 'benefit' implies an element of advantage, profit or gain. Moreover, the word 'benefit' occurs in a provision which treats the benefit given by a company as income of the person who can be said to have obtained it, with the result that it could become taxable in his hands.
Considering all these aspects, we are of the opinion that the word 'benefit' occurring in clause (iv) would mean any advantage, gain or improvement in condition, and only if such a thing is obtained by an assessed from a company and if the other conditions are satisfied than only can be value of it be treated as his income.
40. In the alternative, it was contended that the case of the assessed would be covered by the second part of the clause. In our opinion, this contention is also misconceived. As pointed out above, by undertaking these foreign tours, the assessed had not incurred any obligation. She had undertaken the tours at the instance of the company and for the purpose of the business of the company. For undertaking such foreign tours, neither had she incurred any obligation nor was any obligation incurred by the husband who was a director of the company. For this reason, even the second part was not attracted in this case. The Tribunal was, thereforee, right in holding that the expenditure. of Rs. 39,753 incurred by Karam Chand Prem Chand (P) Ltd. on foreign tours was not includible as income under section 2(24)(iv) of the Act in the computation of the total income of the assessed.
41. In the light of the aforesaid decision of the Gujarat High Court and the facts of the case, we hold that the expenditure incurred on air ticket of the wife of Shri Kishan Mehta, area manager of the assessed, cannot be termed as perquisite, in view of the decisions of the Bombay High Court in Dhiraj Lal Haridas's case (supra) and Kamalim Gautam Sarabhai's case (supra), we, thereforee, direct the assessing officer to allow the claim of the assessed.
42. Ground No. 12. of the appeal relates to the disallowance of Rs. 15,000 being amount paid to M/s R.K. Khanna & Co. towards management advice and tax matters. The lower authorities disallowed an amount of Rs. 10,000 out of payment of Rs. 15.,000 made to M/s R.K. Khanna & Co. by invoking the provisions of section 80VV of the Act. Shri Ajay Vohra, learned authorised representative of the assessed, submitted that the assessed had paid Rs. 10,000 to M/s R.K. Khanna & Co. as general management fee not related to income-tax matters which is outside the purview of section 80VV of the Act. It was contended that section 80VV governs payments made as fee for tax matters. Since the aforesaid payment did not relate to tax matters, thereforee, the same is outside the purview of the section. Reliance was placed on the following decisions
1. K.L. Poddar & Sons (P) Ltd. v. CIT ;
2. India Termit Corpn. Ltd. v. Income Tax Officer ;
3. Income Tax Officer v. J.K. Synthetics Ltd. v. Income Tax Officer (supra);
4. Modipon Ltd. v. IAC (1995) 52 TTJ (DelHI) 477;
5. Delhi Engineering Co. v. Income Tax Officer (1991) 42 TTJ (DelHI) 238; and
6. CIT v. Volga Restaurant (2002) 253 ITR 405 .
43. We have gone through the case law cited and ' the submissions made from both the sides, and find ourselves inclined to agree with the submissions made by the learned authorised representative. In view of the jurisdictional High Court judgment, we decide the issue in favor of the assessed. .
44. Ground No. 13 relating to the provision of fee of Rs. 5,047 was not pressed before us and is, thereforee, dismissed.
45. In ground No. 141, the assessed challenges the disallowance of Rs. 9,647 paid to M/s Mizargoinda Annapai & Co. and M/s Herbertsons Ltd. towards their claim for duty drawback and cash entitlement. The assessing officer disallowed the said claim on the ground that the said amount cannot be said to be a business loss. On appeal to the Commissioner (Appeals), the disallowance was upheld on the ground that the loss in question does not pertain to the relevant previous year.
46. It was submitted before us that the said amount was to be paid to M/s Mizargoinda Annapai & Co. and M/s Herbertsons Ltd. towards their claim for duty drawback in respect of cashew and mango pulp supplied and exported by the assessed in the past.
47. As per the agreement, all duty drawback refunds and import entitlements on export of goods were to be passed on to the suppliers., The same were inadvertently returned by the assessed and paid in the relevant, previous year. Such amounts were also offered for tax by the assessed as its income in the year(s) of receipt. The details regarding the same are placed on paper book pp. 44/70-74. In reply, the learned Departmental Representative supported the order of the assessing officer.
48. Having gone through the evidence placed on record and having heard both the parties, we are inclined to accept the contention of the assessed that the claim ought to be allowed within the relevant previous year and accordingly direct the assessing officer to allow the claim of Rs. 9,647.
49. The last ground of appeal, i.e., ground of appeal No. 15 is regarding disallowance of Rs. 19,516 spent on holding bottlers meeting. The said amount 'was disallowed by the lower authorities holding it to be expenditure in the nature of entertainment expenses.
50. Shri Ajay Vohra, learned authorised representative of the assessed/ appellant, invited our attention to the following case law wherein it is held that the expenditure on dealers conference is not in the nature of entertainment expenditure and is allowable under section 37(1) of the Act
(1) CIT v. Indo Switchgears (P) Ltd. (1996) 222 ITR 72 ;
(2) Sharda Plywood Industries v. CIT ;
(3) CIT v. Modern Bakeries Ltd. ; and
(4) Associated Marketing Ltd. v. Income Tax Officer (1992) 43 ITD 543 (Mad).
51. We have gone through the cited case law including that of the jurisdictional High Court. The Delhi High Court in Modern Bakeries (supra) has held that the expenditure in connection with the conference of various social welfare departments of government and incurred on lunch and dinner to foreign dignitaries who had come to help the assessed to run its business more efficiently and for the entertainment of guests at various branches cannot be termed as entertainment expenditure.
52. In view of the aforesaid pronouncements, the claim of the assessed deserves to be allowed and the ground of appeal is accordingly decided in favor of the assessed.
53. In the result, the appeal is partly allowed.