These are cross-appeals-one each by the assessee and the revenue-directed against the order dated 2-1-1996, passed by learned Commissioner (Appeals) for assessment year 1990-91.
Ground No. 1 of the revenue's appeal and grounds Nos. 2 and 3 of the assessee's appeal relate to deduction under section 32AB. The assessee claimed deduction under section 32AB at Rs. 3,29,15,481, against which the assessing officer allowed a deduction of Rs. 32,20,57,920 only.
Assessing Officer while allowing deduction has reduced the following amounts from the eligible profit for the purpose of allowing deduction under section 32AB : On first appeal, learned Commissioner (Appeals) took the view that earlier year's provision written back amounting to Rs. 30,52,103 would not form part of the eligible business, as per Parts II and III of Sch.
VI of the Companies Act and, therefore, he confirmed the action of the assessing officer in this regard. In respect of interest received Rs. 75422, learned Commissioner (Appeals) held that it formed part of business income, as per Parts II and III of Sch. VI, and, therefore, allowed deduction under section 32AB. In respect of rental income of Rs. 1,07,624, except income of Rs. 6,000, he was of the view that it is part of business income because the rent was recovered from the employees of the company and allowed deduction under section 32AB. In respect of profit on sale of unit amounting to Rs. 3,42,000, learned Commissioner (Appeals) held that it was not part of business activities of the assessee and profit on sale of these units would definitely not be includible in the business income of the assessee. Accordingly, it was held that this income would not be entitled to deduction under section 32AB. For other income of Rs. 3,742, learned Commissioner (Appeals) was of the view that it is incidental to the business activities of the assessee and, therefore, allowed deduction under section 32AB. The revenue has challenged the allowability of deduction under section 32AB in respect of interest, rent and other income; while the assessee has challenged confirmation of disallowance under section 32AB in respect of the provision no longer required and written back during the year and profit on sale of units.
Before us, in respect of provision no longer required and written back, learned authorised representative submitted that these are the provisions made in earlier years in respect of various expenses which had been written off during the year as provision was no longer required and it is an income relating to business and forming part of book profits, as per Parts II and III of Sch. VI. Details are filed at pp. 7-10 of the paper book. Our attention was invited to p. 1, consisting of P&L a/c of the assessee. According to learned authorised representative, a sum of Rs. 30,52,103 was added in book profit of audited balance sheet and, therefore, the assessee was entitled for deduction as it formed part of profits computed in accordance with Parts II and III of Sch. VI. Reliance was placed on the decision in the case of Highway Cycles Industries Ltd. v. Assistant Commissioner (2002) 255 ITR 105 (Chd)(AT)(SB). In respect of rental income, it is submitted that rent of Rs. 6,000 was received from Bank for installing ATM and it is part of business income, eligible for deduction under section 32AB, in view of the decision in the case of Highway Cycles Industries (supra). For profit on sale of units, it is submitted that the profit although assessed under the head 'capital gains' but funds were invested out of business of the company and whatever profit earned also formed part of business income, as per Parts II and III of Sch. VI and, therefore, the assessee is entitled for deduction. Units had been purchased and sold in earlier years also. Reliance is placed on the decision in the case of Highway Cycles Industries Ltd. (supra) as well as the decision in the case of Apollo Tyres Ltd. v. CIT (2002) 255 ITR 273 (SC). For interest income, rental income and other income, learned authorised representative submitted that learned Commissioner (Appeals) has rightly allowed deduction and now the issue is duly covered by paras 27-28 of the decision in the case of Highway Cycles Industries Ltd. (supra).
learned Departmental Representative, on the other hand, disputed the deductions allowed by learned Commissioner (Appeals) in respect of interest income, rent and other income and submitted that they do not form part of business profits. Interest has been received on FDRs. He invited our attention to p. 1 of the paper book. In respect of capital gains amounting to Rs. 3,42,000 on sale of units, our attention was invited to p. 3 of the paper book consisting of computation statement of income and thus, it was submitted that the assessee itself has shown income under the head 'capital gains' and it cannot become a part of business profit. In respect of rental income and amount written back, it was submitted that learned Commissioner (Appeals) has rightly disallowed deduction under section 32AB, as they do not form part of income of eligible business. Reliance was placed on order dated 14-2-2002, in ITA Nos. 1816 and 1933 of 1992 for assessment year 1989-90 in the case of Vardhman Spng. & Genl. Mills Ltd. where the Tribunal has directed the assessing officer to recompute and allow deduction under section 32AB, after verifying whether interest income and dividend on which relief has been claimed formed part of total income of the eligible business computed in accordance with Parts H and III of Sch. VI. These incomes are not linked with the income of eligible business and, therefore, no deduction should be allowed under section 32AB. According to learned departmental Representative, only those incomes are eligible under section 32AB which are related to the business profits. Reliance in this regard is placed on the following decisions : Reliance is also placed on the order dated 28-8-2001, in ITA No. 191 etc., of 1993 for assessment year 1989-90 in the case of Nahar Spng.
Mills Ltd., where the issue whether interest on FDR can be business income for rehef under section 80-I and 80HHC has been considered.
We have considered the rival submissions, perused the orders of tax authorities as also the case laws cited by the parties. In the case of Highway Cycles Industries Ltd. (supra), following two questions were referred for computation of deduction under section 32AB : (i) Whether, on the facts and circumstances of the case, the assessee is entitled to deduction under section 32AB in respect of income by way of rent, interest, lease rent, profits arising from transactions in investment, miscellaneous income and generators hire charges (ii) Whether, on the facts and circumstances of the case, profit from eligible business is to be computed in accordance with the provisions of the Income Tax Act or in accordance with Parts II and III of Sch. VI of the Companies Act for computing deduction under section 32AB, irrespective of heads under which such income is assessable under the Income Tax Act "27. Having analysed the provisions of section 32AB of the Income Tax Act, we proceed to consider and answer the two questions referred to the Special Bench. As regards question No. 1, we hold that all items of receipts of eligible business are entitled'to deduction under section 32AB of the Income Tax Act. However, receipts like construction, manufacture or production of articles specified in the list of the Eleventh Schedule as also receipts from business of leasing or hiring of machinery or plant to an industrial undertaking other than a small scale industrial undertaking are to be excluded. It is not the case of the assessee that it is a small scale undertaking or it has given its machinery on hire to an undertaking which is a small scale undertaking.
Therefore, rent on hiring of machinery is not eligible for deduction under 32AB. Likewise, hire charges from the generator (machine) fall in the same category and are not entitled to deduction as such receipts are specifically excluded under the definition of eligible profit'. It is not clear as to how and from where the 'rent' was received by the assessee. If the 'rent' is rent for hiring of machinery or plant, it is to be excluded for computing profits of the eligible business. We may add that the Tribunal as per settled law has no power of enhancement of assessment and our above observations should not be construed to suggest enhancement on any ground. In other words, if the lower authorities have allowed any relief to the assessee which is final and contrary to what we have observed above, the said relief cannot be withdrawn on account of what we have stated above in this decision. The authority can only act, if otherwise authorized by law.
28. As regards the second question, our answer is that profit from the eligible business is to be computed in accordance with Parts Il and III of Sch. VI of the Companies Act and not in accordance with provisions of the Income Tax Act. We answer both the questions accordingly." The assessee has filed before us audited copy of P&L a/c, audit report computing deduction under section 32AB but the company's audited balance sheet and schedules forming part of the audited P&L a/c and balance sheet are not filed. As per decision in the case of Highway Cycles Industries Ltd. (supra) all the items of eligible business are entitled to deduction under section 32AB, except receipt like construction, manufacture or production of articles specified in list of 11th Sch. as also receipt from business of leasing or hiring of machinery or plant to an industrial undertaking other than a small scale undertaking. Interest on FDRs for margin money, rent from employees of the company for keeping the accommodation and the misc.
income which is incidental to the business income amounting to Rs. 75,422, Rs. 1,07,624 and Rs. 3,742 are, in our opinion, eligible for deduction under section 32AB, in view of the fact that there is no dispute that this income did not form part of total income of eligible business emputed in accordance with Parts II and III of Sch. VI. Ground No. 1 of the revenue's appeal is duly covered against the revenue by the decision in the case of Highway Cycles Industries Ltd. (supra), in the absence of any material or evidence that this income does not form part of eligible business computed in accordance with Parts II and III of Sch. VI. Therefore, we confirm the order of learned Commissioner (Appeals) allowing deduction under section 32AB in respect of interest income of Rs. 75,422, rent received of Rs. 1,07,624 and other income of Rs. 3,742. In respect of claim of the assessee for Rs. 30,52,103 for provision written back during the year, we find from copy of P&L a/c that this amount has been written back and added while computing profit to be taxed. Learned Commissioner (Appeals) has disallowed deduction in respect of the said amount observing that the assessee could not satisfy him how the provision written back would be profit from eligible business for this year computed as per Parts II and III of Sch. VI. From perusal of P&L a/c at p. 1, we find that this income has been added while working out profit before tax. We find from the provisions of section 32AB(1) , that the assessee is eligible for deduction if total income chargeable to tax under the head 'profit and gains of business or profession and out of this income he has either deposited any amount in an account with the Development Bank , as per section 32AB(1) or has utilized any amount for the purchase of any new ship, new aircraft, new machinery or plant, as per section 32AB(1) (b), then either the amount so deposited or utilized or a sum equal to twenty per cent of the profit of business as computed as per the accounts of the assessee audited in accordance with sub-section (5), whichever is less. The profits of business for the purpose of sub-section (1) shall be an amount arrived at after deducting an amount equal to the depreciation computed in accordance with the provisions of sub-section (1) of section 32 from the amounts of profits computed in accordance with the requirements of Parts II and III of Sch. VI, as increased by the aggregate of items eligible under section 32AB(3)(i)(ii)(vii). Nothing is brought on record to ascertain whether the provisions written off has become part of profit computed in accordance with requirement of Parts H and III of Sch. VI or not. We do not find copy of audit report and schedule forming part of profit and gains to ascertain whether the depreciation is quantified and qualified by the auditor, as reiterated on this issue that the amount has been written back not in accordance with requirements of Parts II and III of Sch. VI. We feel it appropriate and direct the assessing officer to reconsider the provisions written back to be part of profits of the assessee, if there is no qualification in the report of the auditor in this regard and there is no note in schedule or note on account or forming part of P&L a/c that this money has been written back by the assessee not in accordance with requirement of Parts II and III of Sch.
VI. So far as rental income of Rs. 6, 000 is concerned, we find that the assessee has received rent in respect of letting off premises for putting up ATM by Bankers. This income has been duly shown in audited P&L a/c of the assessee. This issue is duly covered by para 27 of the order in the case of Highway Cycles Industries Ltd. (supra). Following the said order, we direct the assessing officer to allow deduction under section 32AB in respect of rental income of Rs. 6,000.
So far as the issue relating to deduction under section 32AB in respect of profit on sale of units amounting to Rs. 3.42 lacs is concerned, after hearing the rival submissions, we find that profit on sale of units has been shown in its computation statement as income under the head 'capital gains', mentioning short-term capital gains on sale of investment (details enclosed)'. Details filed include only one transaction, i e., purchase of 3 lacs units on 29-9-1988 @ 13.56 each and sale of these units on 25-5-1989 @ Rs. 14.70 each. These details are available at p. 12 of the paper book. The assessee did not file before us audited balance sheet of the company to prove whether these units were held as capital investment or as current business asset. We have gone through the decision in the case of Apollo Tyres Ltd. (supra), in which there is a finding that the investment made by the assessee- company in units of UTI was in the course of its carrying on the eligible business. Manufacturing and sale of tyres and selling of units of UTI were carried with common funds and both the businesses were intertwined and interlaced and, therefore, business of purchase and sale of units was also an eligible business, within the definition of eligible business under section 32AB(2) and under these facts the assessee was entitled to deduction of 20 per cent of profit from that business, though the income therefrom was declared as income from other sources. In the case before us, no cogent material or evidence has been adduced, whether purchase and sale of units was the business of the assessee; funds were common and investment made in units in the course of carrying on the spinning business. The assessee itself has shown income from units being investment income. In the absence of any cogent evidence or material before us that the purchase and sale of units was (sic) part of business activity of the assessee, profit on sale of these units will fall in the category of eligible business. There is only one transaction for purchase and sale of units and, therefore, we do not agree with authorised representative that the assessee is eligible for deduction in respect of income earned on purchase and sale of units under section 32AB. A judgment has to be interpreted in the context in which it has been laid out. While holding against the assessee in this regard we rely on the decision in the case of CIT v.Sun Engineering Works (P) Ltd. (1992) 198 ITR 297 (SC) in which it has been laid down how a judgment of the apex court has to be interpreted.
At p. 299, it has been laid down : "It is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Supreme Court divorced from the context of the question under consideration and treat it to be the complete law declared by the Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before the court. A decision of the Supreme Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, Courts must carefully try to ascertain the true principle laid down by the decision." Ground No. 2 of the revenue's appeal and grounds Nos. 4 and 5 of the assessee's appeal relate to the computation of deduction under section 80HH. The assessee has claimed deduction under section 80HH in respect of units Nos. 3 and 4. assessing officer, while computing deduction, excluded the followings : As per the assessing officer, the aforesaid income was not derived from the manufacturing activities of the assessee and, therefore, he excluded the same from the income. On first appeal, Commissioner (Appeals) confirmed the order of the assessing officer regarding interest income but in respect of rental income it was submitted that it had been received from the workers and staff by way of deduction from their salary for accommodation provided by the assessee- company.
A sum of Rs. 3,488 was received from SBP for providing ATM facility.
Therefore, Commissioner (Appeals) took the view that the assessee will be entitled for deduction in respect of Rs. 1,01,624 received from the workers and staff being the profit derived from business of the assessee and confirmed the action of the assessing officer in respect of Rs. 3,488. For misc. income, Commissioner (Appeals) observed that the receipt is on account of cost of identity cards and other matters relating to business of the assessee and, therefore, eligible to deduction under section 80HH.learned Departmental Representative relied on the order dated 28-6-2001 in ITA No. 191 of 1993 for assessment year 1989-90 in the case of Nahar Spinning Mills Ltd. copy filed at pp. 18-24 of the paper book and submitted that for any income eligible for deduction under section 80HH, we have to see whether income is derived from eligible business or not and for determining so, the immediate source from which income is generated has to be looked into. Thus, she submitted that interest income and rental income cannot be held to be income derived from the industrial undertaking. Learned authorised representative, on the other hand, submitted that the income was derived from the industrial undertaking. He further submitted that rent includes a sum of Rs. 1,01,624 received from the employees to whom the accommodation belonging to the assessee was given during the course of carrying on the business of the industrial undertaking, while balance was received from SBP for providing ATM. Interest was received on FDRs, details of which are available at p. 13 of the paper book. The assessee received total interest of Rs. 75,422, out of which Rs. 43,843 was allocated to unit-3. Thus, the income was derived from the industrial undertaking.
Reliance is placed on the following decisions : (ii) Assistant Commissioner v. Gallieum Equipment (P) Ltd. (2001) 79 ITD 41 (Del)(TM), (iii) S. Damanjit Singh v. Assistant Commissioner (2002) 121 Taxman 303 (Del)(Mag),Associated Flexibles & Wires (P) Ltd. v. Dy. CIT (1999) 70 ITD 374 (Pune); andVikshara Trading & Investment (Ahd) Ltd. v. Dy. CIT (1999) 63 TTJ (Ahd) 141.
We have considered the rival submissions, perused the case laws and find that section 80HH lays down that where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits an gains, of an amount equal to twenty per cent thereof. We agree with learned Departmental Representative that the Tribunal in the case of Nahar Spinning Mills Ltd. (supra) has interpreted the words 'derived from' but in the context of deduction available under section 80HHC, not in respect of deduction under section 80HH. The issue involved there was whether interest received on FDRs can be regarded to be the income derived from eligible business.
In the aforesaid case, the Tribunal observed as under : "Further, in order to see whether the receipts from FDRs is income derived by the assessee from its export business of goods outside India, we have to look into the source of income and thereafter see whether there is a direct nexus between the income of the assessee received from interest on FDRs and the business of the assessee from export of goods outside India. In order to arrive at these conclusions, we have to look into the guidelines laid down by the apex court in the two landmark decisions-one in the case of CIT v. Sterling Foods (supra) and the other in the case of Hindustan Lever Ltd. v. CIT (supra) as discussed in detail by is in our order of even date passed in ITA No.337 of 1992 and CO 54 of 1992.
Following the guidelines laid down by the apex court in the cases supra, we hold that there is no nexus between earning of interest income on FDRs and the business of the export of goods or merchandise by the assessee outside India. Hence, the interest income amounting to Rs. 3,57,855 earned by the assessee on FDRs would not constitute profits and gains derived from the export activities of the assessee and so this income cannot be included in the business profits of the assessee for the purposes of computing deduction under section 80HHC.We also derive support from the judgment of Kerala High Court in the case of Nangi Topen Bhai & Co. v. Assistant Commissioner (2000) 243 ITR 192 (Ker).
We have also gone through the case laws relied upon by learned authorised representative specifically mentioned at the bar that the Tribunal has been provided only with ITRs and ITDs and if any other decision is relied upon, a copy of the same must be filed. In the absence of such copy being filed, we are not able to look into the decision reported in TTJ/Taxman. In the case of Transpower (P) Ltd. (supra), the Tribunal allowed deduction on interest income because interest had accrued on fixed deposits in Bank made for procuring Bank guarantee for obtaining overdraft facility. Thus, FDRs were made as a necessity for carrying on business. In the case before us, no such facts have been brought on record that the FDRs were made as a compulsion to carry on business of the industrial undertaking. FDRs were made by the assessee-company and interest income on which deduction had been claimed related to the allocation of total interest earned among the eligible business and other business. Therefore, this decision will not assist the assessee. In the case of Gallieum Equipment (P) Ltd. (supra), we find that FDRs were made with the Bank for issuing Bank guarantee demanded by the customers of the assessee.
Therefore, FDRs were inextricably linked with day-to-day business of the assessee and were having nexus with the industrial undertaking.
Under these circumstances, the Tribunal held that interest derived on such FDRs had to be treated as income derived from the industrial undertaking. In the case before us, there is no evidence that the FDRs were made as a compulsion for carrying on its business. Thus, this case will also not assist the assessee. Ratio of the decision in the case of Vellore Electric Corpn Ltd. (supra) will also not assist because the assessee there being an electric corporation had to invest the amount in contingency reserve in security specified under the Electricity Supply Act. Therefore, the investment was necessary by law and without investment in specified security, electricity supply company could not carry on the business. There, the issue was not related to the interpretation of the words 'derived from' but the apex court was concerned with the interpretation of the word 'attributable to'. While interpreting the word 'attributable to' relying on its earlier decision in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT (1978) 113 ITR 84 (SC). it was held that the expression attributable to' has been used to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity. This would mean that it is not necessary that the income should have been earned from the actual conduct of the business of generation and distribution of electricity. What is required, is that the activity from which the income was derived/earned must have a direct and proximate connection with the priority industry of generation and distribution of electricity. Due to use of the word 'attributable to' the apex court also held that the income earned by way of interest on the sums appropriated to the contingencies reserve which has been invested in securities can be said to be profits and gains attributable to the business of the electricity company for the purpose of section 80-1. The assessee cannot get any support from the ratio of this decision because the words used in section 80HH are 'derived from'. and not 'attributable to'. 'Attributable to is a wider term than 'derived from', as has been interpreted in the case of Sterling Food (supra).
The ratio of the decision in the case of Seshasavee Paper & Board Ltd. (supra) will also not support the case of the assessee because the said case relates to deduction under section 80-1, where in the year of dispute, the words used in section were 'attributable to' and not 'derived from'. In the said case, the High Court has distinguished the words 'attributable to' and 'derived from'. In the case of 'attributable to', the relevant relief is not confined only to the profits of the priority industry, while it be so in the case of 'derived from'. The ratio of the decision in the case of Associated Flexibles & Wires (P) Ltd. (supra) also will not support the case of the assessee because there also there was a finding that the assessee made FDRs with the Bank out of business compulsions to avail of various credit facilities and, therefore, the Tribunal held that there was a direct nexus between eaming of interest and manufacturing activity of the assessee-company. In our view, section 80HH simply provides for allowing deduction at a specified percentage on income derived by the assessee from an industrial undertaking or the business of a hotel, etc. There is no reference to the allowability of deduction at specified rate on the profits of the business, as computed under the head 'profits and gains of business or profession', as has been provided under section 80HHC. It is thus, in contrast to the wording of section 80HHC, wherein Expln. (baa) below sub-section (4A) defines profits of the business to mean as computed under the head 'profits and gains of business or profession', after making certain adjustments. It shows the intention of the legislature in providing deduction under section 80HHC in respect of profits of the business under the head 'profits and gains of business or profession' but the same is clearly absent in section 80HH because there is no such sub-section or Explanation which could hint at allowing a deduction on the income under the head 'business income'. Had there been such intention, it would have stated so in unambiguous words in section 80HH, as has been done in section 80HHC. Accordingly, we are of the view that so far as interest on FDRs is concerned, assessing officer has rightly observed that the income is not directly related to manufacturing activity of the assessee and such income cannot be called to be the income derived from the industrial undertaking. The assessee is, therefore, not entitled for deduction under section 80HH in respect of interest income of Rs. 43,843. We are of the same view in respect of rental income of Rs. 3,488 because the immediate source of income is hiring of space for, ATM to the SBP. This income is not derived from the industrial undertaking. Therefore, the assessee is not entitled for deduction under section 80HH in respect of rental income of Rs. 3,488. So far as rental income earned from the staff is concerned, we find that immediate source is accommodation being provided to the employees who worked in the industrial undertaking. Therefore, this is also not directly linked with the industrial undertaking. Accordingly, we set aside the order of Commissioner (Appeals) in respect of rent received from the employees and restore the action of the assessing officer, holding that the assessee is not entitled for deduction under section 80HH in respect of rental income derived from the employees amounting to Rs. 1,01,624. Thus, ground No. 2 of the revenue's appeal is allowed and grounds Nos. 4 and 5 of the assessee's appeal are rejected.
Ground No. 3 of the revenue's appeal and ground No. 6 of the assessee's appeal relate to deduction in respect of articles presented/distributed by the assessee. Assessing Officer made a disallowance of Rs. 14,33,249 under r. 6B, in respect of 5133 articles presented, after allowing Rs. 50 per article, observing that these were in the nature of advertisement. Before Commissioner (Appeals), the assessee submitted that 667 cabinet pieces costing Rs. 54,35,303 were given to the dealers for storage of tubes of sewing threads being manufactured by the assessee- company and, therefore, these were in the nature of advertisement. Other items included silver coins presented to customers/dealers. A sum of Rs. 3,11,487 was spent on the occasion of Diwali, out of which a sum of Rs. 3,35,335 had been disallowed by the assessing officer under r. 6B. Commissioner (Appeals) allowed expenditure incurred on cabinets in toto. Out of the Diwali expenses, he confirmed the disallowance to the extent of Rs. 46,379 and in respect of other gifts items he confirmed disallowance to the extent of Rs. 70,583, rejecting the plea of the assessee that these did not relate to advertisement. A further disallowance out of wall clocks amounting to Rs. 94,329 out of Rs. 1,72,379 was confirmed by Commissioner (Appeals). Thus, Commissioner (Appeals) disallowed the expenditure to the extent of Rs. 2,21,291, consisting of Rs. 70,583 under the head 'Sales promotion and gift scheme', Rs. 46,379 Diwali expenses and Rs. 94,329 under the head 'advertisement'. Both the parties are before us.
After hearing the rival submissions, we feel that so far disallowance under the head 'Sales promotion and gift scheme' and in respect of various items distributed not having logo of the assessee are concerned, are covered by the order dated 14-2-2000, in ITA No. 1816 of 1992 for assessment year 1989-90 in the case of Vardhman Spng & Genl Mills Ltd., in which the Tribunal has clearly held that r. 6B will not apply when the items presented during the course of the business.
Respectfully following the aforesaid order of the Tribunal and being consistent, we delete the disallowance of Rs. 70,583 confirmed by the Commissioner (Appeals). We also confirm his action in deleting the disallowance made by the assessing officer. We also confirm the action of Commissioner (Appeals) in respect of deletion of disallowance of Rs. 5,43,303, incurred in respect of the purchase of cabinets distributed to dealers for storage of tubes of sewing thread. The expenditure incurred on these cabinets is not in the nature of advertisement. We feel that Commissioner (Appeals) has rightly deleted the impugned disallowance. Disallowance in respect of Diwali expenses cannot also be sustained. We find that it is customary for a businessman to incur expenditure on the occasion of Diwali, by distributing sweets and various items to its customers and business associates. We feel that the impugned expenditure is wholly and exclusively incurred for the purpose of the assessee's business. Accordingly, we delete the disallowance made by the assessing officer and confirmed by Commissioner (Appeals) in this regard. In respect of disallowance of Rs. 94,329 made by the assessing officer and confirmed by Commissioner (Appeals), we feel that the assessee has incurred a sum of Rs. 1,72,379 on wall clocks, which bear the logo of the company and, therefore, r.
6B was clearly attracted. From the details filed at p. 16 of the paper book in respect of the expenditure incurred on wall clocks, it is clear that the expenditure is in excess of Rs. 60 per clock. We confirm the disallowance made by the tax authorities to the extent of Rs. 94,329 only. Accordingly, ground No. 3 of the revenue's appeal is rejected and ground No. 6 of the assessee's appeal stands allowed in part. Assessing Officer is directed to sustain the disallowance under r. 6B only to the extent of Rs. 94,329 out of Rs. 14,33,249.
Ground No. 4 of the revenue's appeal relates to computation of disallowance under r. 6D in respect of expenditure amounting to Rs. 1,79,388. Assessing Officer noted that tax auditors have worked out the disallowance, as per r. 6D to the extent of Rs. 1,79,388. Before Commissioner (Appeals) it was submitted that this includes-the expenditure tax. Commissioner (Appeals) accepted the plea and directed'the assessing officer to reduce the disallowance by expenditure-tax. After hearing the rival submissions, we find that under r. 6D allowance in respect of expenditure incurred on travelling is restricted. It lays down the limit of the expenditure incurred by an assessee in connection with travelling by an employee or any other person within India or outside India for the purposes of business or profession of the assessee. The expenditure, in our view, includes the amount the assessee has incurred on travelling by way of hotel bill, whether it includes any levy or tax because the expenditure so incurred relates to the business and in the hands of the assessee no breakup of hotel expenses into hotel rent and expenditure-tax is required for claiming deduction. Even if hotel expenses include any expenditure-tax, this is not allowable as a tax but can be allowed as an expenditure incurred under the head 'travelling'. The nature of expenditure in the hands of the recipient is not relevant for the purpose of claiming deduction in the hands of the person incurring the expenditure. We cannot interpret the rule in such a manner, so that the hotel expenditure can be segregated into expenditure-tax and other hotel expenses because nature of the expenditure in the hands of the assessee will remain hotel expenses incurred for the purpose of travelling carried on for' business. Therefore, we do not agree with the reasoning given by the Commissioner (Appeals) and setting aside the impugned order, we restore the order of the assessing officer regarding disallowance of Rs. 1,79,388 in excess of r. 6D. Ground stands allowed.
Ground No. 5 of the revenue's appeal relates to deletion of 20 per cent of the expenditure at Rs. 5,10,427 disallowed by the Commissioner (Appeals) as entertainment expenses. Assessing Officer noted that the assessee has incurred a sum of Rs. 5,10,427 under the head 'entertainment'. As per tax audit report, 20 per cent of expenditure is not in the nature of entertainment because this has been incurred for its own employees while accompanying the business associates. Assessing Officer did not agree. In first appeal, Commissioner (Appeals) directed the assessing officer not to treat 20 per cent expenditure to be in the nature of entertainment expenses. After hearing the parties, we do not find any illegality or infirmity in the impugned order. Commissioner (Appeals) was fair enough to treat 20 per cent of the expenditure to be the staff welfare expenses, as it is customary that the employees also accompany the customers and business associates whenever they are being entertained. Accordingly, this ground gets rejected.
Ground No. 7 of the assessee's appeal, relates to sustenance of disallowance of Rs. 2,53,805 under section 37(3) towards guest house expenses. Assessing Officer noted that the assessee had incurred a sum of Rs. 1,50,335 on maintenance of guest house. While working out the said expenditure, the assessee had not counted for rent amounting to Rs. 90,000. Assessing Officer also noted that the assessee had made a recovery of Rs. 1,530 and, therefore, he worked out total amount of Rs. 2,53,805 after adding depreciation on estimate basis amounting to Rs. 15,000 and ultimately, thus, disallowed a total sum of Rs. 2,53,805 as guest house expenditure incurred by the assessee. Commissioner (Appeals), in first appeal, upheld the disallowance, on the basis of provisions of section 37(4) read with Expln. (ii). Before us, learned authorised representative relied on the order dated 19-4-2001 in ITA Nos. 96 and 97/95 for assessment years 1989-90 and 1990-91 in the case of Dy. CIT v. Punjab Tractors Ltd. and the assessee's own case for assessment year 1989-90 in ITA No. 1849 of 1992, copies filed in the paper book. Reliance is further, placed on the decision in the case of JCT Ltd. v. Dy. CIT (2001) 253 ITR 61 (AT)(Cal). Learned Departmental Representative, on the other hand, relied on the order dated 14-2-2002 (supra), wherein under para. 5. 1, the Tribunal has confirmed the disallowance for maintenance of guest house (sic) used by the auditors of the company, after discussing the provisions of sections 37(4) and 37(5). According to learned departmental Representative, when there specific provisions for disallowance of an expenditure, special provision has to prevail over general provisions, otherwise the special provision will become redundant and the provisions of section 30 to 36 have not to be applied for guest house expenditure because they represent the general provisions. After hearing the rival submissions and going through the decisions referred to supra, we find that the facts are similar to assessment year 1989-90. Assessing Officer disallowed a sum of Rs. 2,64,798, which consisted of Rs. 1,60,738 incurred on maintenance of guest house, Rs. 89,060 consisting of rent, after recovery and Rs. 15,000 depreciation. Commissioner (Appeals) allowed a relief of Rs. 90,075. The Tribunal rejected the revenue's appeal observing that if an expenditure is admissible under section 30, the same will be outside the purview of section 37(3). In ITA No. 1817 (supra), the Tribunal restored the issue to the file of the assessing officer for the assessing officer to decide the same oil merits and to ascertain as to whether the expenditure belonged to the auditor or not.
We find that recently the Special Bench has decided this issue and therefore, now it is duly covered by the decision of the Special Bench in the case of Eicher Tractors Ltd. v. Dy. CIT (2002) 77 TTJ (Del)(SB) 681, wherein it was held as under : "The intention of introducing section 37(4) is expressed in the widest possible terms and the avowed object is to check lavish expenditure.
There was a specific and avowed intention to disallow expenditure incurred after 28-2-1970, on the maintenance of a guest-house and Explns. (i) and (ii) to section 37(4) and section 37(5) were worded in the widest possible terms to include within their sweep every type of expenditure incurred on the maintenance of a guest house. By applying the well-settled rules of interpretation, it becomes quite apparent that section 37(4) is a specific provision whereas sections 30, 31 and 32 are general provisions and the former overrides the latter. In the decision of the High Courts as also some of the Tribunals not only has the legislative intent been highlighted, but the question of interpretation has also been dealt with and discussed at length. Not only is the opinion amongst the High Courts divided, but even in the same High Court, different views have been expressed at different points of time.There is a legal proposition that the view favourable to the assessee should be adopted, but this would not be applicable to the present case considering the divergence of opinion amongst various High Courts as also in the same High Court at various points of time and the various Benches of the Tribunal. Under these circumstances, that view is adopted/followed which appears to take into account the legislative intent and which is rnbulded on the well-known rules of interpretation.
In the final analysis, the action of the tax authorities in rejecting the claims on account of rent and repairs is upheld. ITO v. Mohan Meakin Breweries (1987) 20 JTD 179 (Del) and Assistant Commissioner v.Trade Links Ltd. (1995) 54 ITD 108 (Del) approved." The decision of the Special Bench is binding on us and we cannot, therefore, take different view. Accordingly, we confirm the order of Commissioner (Appeals) in this regard, relying on the aforesaid decision of the Special Bench as also oil the decision in the case of CIT v. L. G. Ramamurthi & Ors. (1977) 110 ITR 453 (Mad). Ground gets rejected.
In the result, both the appeals of the revenue as well as the assessee are partly allowed.