This appeal of the assessee is directed against CIT(A)'s order dated 30-3-1998.
1. 'The learned CIT(A), hereinafter referred to as CIT(A), erred in confirming the disallowance of Rs. 90,520 representing fees paid to the Registrar of Companies and stamp duty in connection with issue of bonus shares.
2. The learned CIT(A) erred in confirming the disallowance of Rs. 53,844 as entertainment expenses and erred in approving the basis adopted by, the assessing officer.
3. The learned CIT(A) erred in holding that the expenditure on presentation articles carrying no logo or any insignia of the appellant in excess of the limit prescribed in rule 6B of the Act was disallowable and thereby, erred in confirming the addition of Rs. 1,76,433.
4. The learned CIT(A) erred in confirming the disallowance of' Rs. 1,00,000 as 'contingent expenses'.
5. The learned CIT(A) erred in confirming the disallowance of Rs. 2,59,419 by holding it to be interest paid on borrowals for payment of tax.
6. The learned CIT(A) erred in holding that interest of Rs. 7,46,107 on deposits required to be placed with the banks is income chargeable to tax under the head 'Other sources' and not 'Business'." Ground of appeal No. 2 was not pressed by the learned counsel of the assessee and hence the same is rejected.
Apropos ground of appeal No. 1, the learned counsel of the assessee contended that the CIT(A) was not justified in confirming the disallowance of Rs. 90,520 representing fees paid to the Registrar of Companies and stamp duty in connection with the issue of bonus shares.
The learned counsel contended that such expenditure is allowable as revenue expenditure. In support of his contentions the learned counsel relied upon the decision of Bombay High Court in the case of Bombay Burmah Trading Corpn. Ltd. v. CIT (1984) 145 ITR 793, which was followed by the same court in the case of CIT v. General Insurance Corpn. of India (No. 1)(2002) 254 ITR 203.
On the other hand, the learned DR contended that the case of the revenue is supported by the decision of Hon'ble Supreme Court in the case of Brooke Bond (India) Ltd. v. CIT (1997) 225 ITR 798 wherein it was held that expenditure incurred by a company in connection with the issue of shares with a view to increase its share capital is directly related to the expansion of the capital base of the company and is capital expenditure even though it may incidentally help in the business of the company and in the profit-making. The learned Departmental Representative further relied upon the CIT(A)'s order.
In his rejoinder, the learned counsel of the assessee contended that the issue of the bonus shares does not expand the capital base of the company and hence decision of the Supreme Court in the case of Brooke Bond (India) Ltd. (supra) has no application to the instant case. It was stated that issue of bonus shares is capitalization of assessee's own funds kept in the form of reserve etc. and thus there being no expansion of the capital base of the company, the decision of Supreme Court in the case of Brooke Bond (India) Ltd. (supra), is not applicable. It was pointed out that in the case of Brooke Bond (India) Ltd. (supra) relied upon by the learned Departmental Representative.
there was no issue of bonus shares and the expenditure was incurred in connection with the additional issue of shares.
We have given a careful consideration to the rival submissions in the light of the material placed before us. We are of the opinion that expenditure incurred by the assessee in connection with the issue of bonus shares is allowable as revenue expenditure in view of the decision of Bombay High Court in the case of Bombay Burmah Trading Corpn. Ltd. (supra). The learned counsel of the assessee has rightly pointed out that this decision of Bombay High Court has been approved by the Hon'ble Supreme Court in Punjab State Industrial Development Corpn. Ltd. v. CIT (1997) 225 ITR 792 (SC). Tile decision relied upon by the learned Departmental Representative is distinguishable in facts as the expenditure in the case of Brooke Bond (India) Ltd. (supra) was incurred in connection with the additional issue of shares and not in connection with the issue of bonus shares. The issue of bonus shares does not lead to the expansion of the capital base of the company and hence we hold that the decision of Supreme Court in the case of Brooke Bond (India) Ltd. (supra) has no application to the facts of the instant case. We, therefore, delete the disallowance of Rs. 90,520 sustained by the CIT(A).
Apropos ground of appeal No. 3, the learned counsel of the assessee contended that the point at issue stands covered in favour of the assessee by the decision of Bombay High Court in the case of CIT v.Allana Sons (P.) Ltd. (1995) 216 ITR 690 (Bom) and also by various decisions of the Tribunal.
On the other hand, the learned Departmental Representative contended that there should be no grievance as the learned CIT(A) has followed the decision of Bombay High Court in the case of Allana Sons (P.) Ltd. (supra). The learned Departmental Representative pointed out that out of disallowance of Rs. 8,04,666 made by the assessing officer under rule 6B, the learned CIT(A) has sustained the disallowance to the extent of Rs. 1,76,433.
In his rejoinder, the learned counsel of the assessee contended that rule 6B of IT Rules does not apply in the present case as the articles presented by the assessee did not carry any logo or insignia of the assessee company and hence the expenditure was not on advertisement.
We have given a careful consideration to the rival submissions. No material has been brought on record by the revenue to suggest that articles presented by the assessee carried any logo or insignia of the assessee company. Hence, the expenditure cannot be treated as advertisement expenditure and we hold that rule 6B has no application to the facts of the case. The addition sustained by the CIT(A) under rule 6B by restricting the disallowance to items in excess of Rs. 1,000 is, therefore. without any justification. The addition is, therefore, deleted. The appeal of the assessee succeeds on this ground.
Apropos ground of appeal No. 4, assessee is aggrieved by the CIT(A)'s action in confirming the disallowance of a sum of Rs. 1,00,000 made by the assessing officer on account of contingent expenses claimed by' the assessee. The assessing officer had disallowed this sum on the ground that the assessee had been following mercantile system of accounting and hence the provision for contingent expenditure cannot be allowed.
Before the CIT(A) the assessee had raised the following contentions: "The accounts for the year ended under appeal were signed by the auditors on 8-7-1994. Based on the past experience and the nature of expenses during the course of finalisation of the accounts for the year under appeal, the auditors of the appellant company suggested to make an ad hoc provision for expenses not identified but related to the year under appeal under the head "Contingent expenses". This was done with a view to comply with the provisions of section 209 of the Companies Act, 1956 so as to avoid the significance debit appearing in the prior years expenses account, details of such expenses liabilities included in the contingent expenditure, which are identified after the date of signing of the account but relates to the year under appeal, are furnished herewith and placed in the compilation. However, your honour, if it deems it fit, may disallow the excess amount of Rs. 239 debited under the head "Contingent liability expenses account"." However, the arguments of the assessee did not find favour with the learned CIT(A) and he held that submissions of the assessee could not be accepted in view of the fact that assessee's ground for disallowance of prior years expenses quantified during the year has been allowed in respect of ground No. 6 raised before him.
The learned counsel of the assessee reiterated the same arguments as were made before the CIT(A). It was stated by the assessee that as the bills from all the allied branches were not received, the provision of Rs. 1,00,000 was made on estimate basis. The learned counsel contended that liability was incurred during the year of account as the services were received by the assessee in the year of account. It was submitted that only quantification of the amount was done subsequently as the bills were received after the close of the accounting period. The learned counsel referred to the decision of Hon'ble Supreme Court in the case of State bank of Travancore v. CIT (1986) 158 ITR 102.
On the other hand, the learned Departmental Representative contended that liability had arisen in the succeeding year as bills for the services rendered to the assessee were received by the assessee only in the subsequent year. The learned Departmental Representative further contended that there is no proof of rendering of services during the year of account. It was also submitted by the learned Departmental Representative that the assessee's claim that in the subsequent year no such claim was made needs verification. The learned Departmental Representative vehemently contended that rendering of services during the year of account being not substantiated by necessary evidence, assessee's claim cannot be allowed.
In his rejoinder, the learned counsel of the assessee contended that he has no objection if the matter is sent back to the assessing officer for verification regarding the services received by the assessee for which liability of the expenses is claimed.
We have given a careful consideration to the rival submissions. We are of the opinion that bills for the services rendered to the assessee having not been received in the year of account, it cannot be said that the liability had arisen in the year of account. We find from the CIT(A)'s order that while dealing with ground of appeal No. 6 he has allowed the previous year's expenses for which the liability was quantified during the year of account. The learned CIT(A) also referred to CIT(A)'s orders for the assessment years 1991-92 and 1992-93 wherein keeping in view the consistent system of accounting followed by the assessee in respect of previous years expenses, the liability was allowed in the years in which the same was quantified on the receipt of the bills. In view of these facts we hold that the claim of contingent expenditure which has been made by the assessee by making a provision on estimate basis cannot be allowed in the year under consideration as the liability had not arisen in the year of account. Moreover, keeping in view the consistent system of accounting followed by the assessee, the learned CIT(A) has already allowed the correct previous years expenses in the year under consideration. Following its own consistent method, the assessee is free to claim the impugned expenditure in the subsequent year as has been done by the assessee for the assessment year 1991-92 and subsequent years. The appeal of the assessee on this issue is, therefore, rejected being devoid of merit.
Apropos ground of appeal No. 5, the assessee is aggrieved by CIT(A)'s action in confirming the disallowance of Rs. 2,59,419 by holding it to the interest on borrowings for the payment of advance tax. The assessing officer has made the disallowance by observing as under: "The arguments of the assessee would not hold good here since if there are reserves and surplus of the profits of the assessee they have been consumed or have taken the form of assets, stock in trade, raw materials, etc. When the profits of the assessee are consumed in above form, there is no liquidity left with the assessee. When the assessee withdraws amount from its OD account, the debit balance increases. The bank gives the OD facility; to meet. the working capital of the assessee and not for payment. of income-tax. When the assessee withdrawn funds from the current account, the debit balance increases and thereby there is a commitment increase in the interest expenditure.
The interest expenditure incurred by the assessee additionally for payment of advance tax is a disallowable expenditure. The assessee has quantified this interest without prejudice, which amounts to Rs. 2,59,419. However, in view of the reasons discussed above, the same is disallowed, since the interest expenditure incurred on borrowing for payment of advance tax is not an allowable deduction. Therefore, the interest amount of Rs. 2,59,419 is added to the total income of the assessee." The learned CIT(A) confirmed the disallowance made by the assessing officer by observing as under- "The above submissions of the appellant cannot be accepted. The assessing officer in the assessment order has clearly pointed out that the bank has given overdraft facilities to make the payment of advance tax and nothing has brought on record by the appellant to counteract the findings of the assessing officer in the assessment order and in view of the Supreme Court decision in the case of East India Pharmaceutical Works reported in 225 ITR 627, the action of the assessing officer in disallowing interest payment of Rs. 2,59,419 for payment of advance tax is hereby confirmed and the appellant's ground is dismissed." The learned counsel of the assessee contended that the point at issue stands covered in favour of the assessee by the following orders of the Tribunal passed in assessee's own case: (i) order dated 6-5-2002 of ITAT Mumbai Bench I passed in ITA No.1454/M/94 for the assessment year 1990-91.
(ii) order dated 30-6-2003 of ITAT Mumbai Bench B in ITA No. 4905/M/98 for the assessment year 1995-96.
(iii) order dated 4-11-2003 of ITAT Mumbai Bench A in ITA No. 3163/M/99 for the assessment year 1996-97.
The learned counsel further submitted that the matter was restored back to the file of the assessing officer by the following orders of the Tribunal passed in assessee's own case: (i) order dated 2-5-2003 of ITAT Mumbai Bench B in ITA No. 8207/13/95 for the assessment year 1991-92.
(ii) order dated 10-1-2003 of ITAT Mumbai Bench D passed in ITA No.9320/M/95 for the assessment year 1992-93.
Copies of the aforecited orders of the Tribunal are available in the paper book filed by the assessee.
On the other hand, the learned Departmental Representative contended that the assessee's contention that profit embedded in the sale proceeds (which were credited to overdraft account) was utilised for the payment of advance tax, cannot be accepted. The learned Departmental Representative pointed out that the turnover of the assessee was about Rs. 52 crores and the total income was declared in the return of income at Rs. 1.66 crores. The learned Departmental Representative contended that assessee has not discharged its burden that only the profit embedded in the sale proceeds was utilized towards payment of advance tax. The learned Departmental Representative contended that this issue raised by him was not there before the Tribunal when the orders relied upon by the assessee were passed and hence the issue should be decided independently and should not be taken as a covered issue.
In his rejoinder, the learned counsel of the assessee contended that facts being identical the point at issue stands covered by the orders of the Tribunal passed in the preceding and succeeding assessment years. The learned counsel reiterated that in respect of some of the assessment years the Tribunal has dismissed the departmental appeal on identical facts. By referring to page 49 of the assessing officer's order, the learned Counsel pointed out that net profit as per profit and loss account was Rs. 1,79,78,244 and hence the total income referred to by the learned Departmental Representative is not relevant.
We have given a careful consideration to the rival submissions in the light of the material placed before us. In fact during the course of hearing, the learned counsel of the assessee stated that he has no objection if the issue is restored to the file of the assessing officer for readjudication of the issue as per the directions of the Tribunal for the assessment year 1992-93 given in ITA No. 9320/M/95. We find that the Tribunal vide its order dated 2-5-2003 passed in ITA No.8207/13/95 for the assessment. year 1991-92 had followed its aforecited order for assessment year 1992-93 and restored the matter back to the file of the assessing officer. We, therefore, set aside the order of the authorities below on this point and restore the matter back to the file of the assessing officer for readjudication as per the directions of the ITAT of the assessment year 1992-93.
Apropos ground No. 6, the case of the assessee is that interest on deposits required to be placed with the banks is income chargeable to tax under the head 'Business' and not under the head 'Other Sources'.
However, the learned counsel contended that he has no objection if decision of Special Bench of Delhi Tribunal in the case of Lalsons Enterprises v, Dy. CIT (2004) 89 ITD 25, is applied for working out deduction under section 80HHC.On the other hand, the learned Departmental Representative contended that the point at issue is not covered by the aforecited decision of Special Bench of Delhi Tribunal. According to the learned Departmental Representative the decision of Apex Court in the case of Pandyan Chemicals Ltd. v. CIT (2003) 262 ITR 278, is applicable to the facts of the case.
We have given a careful consideration to the rival submissions in the light of the material placed before us. In the case of Pandyan Chemicals Ltd. (supra), it was held by the Hon'ble Supreme Court that interest derived by the industrial undertaking of the assessee on deposits made with the electricity board for supply of electricity for running the industrial undertaking could not be said to flow directly from the industrial undertaking itself and were not profit or gain derived by the undertaking for the purpose of special deduction under section 80HH. The instant case relates to deduction under section 80HHC and not deduction under section 80HH. In our opinion, interest derived by the assessee on deposits with the bank will, for the purposes of deduction under section 80HHC, be considered as profits of the business but the same will be determined as per Explanation (baa) to section 80HHC. We are of the opinion that the decision of Special Bench of the Delhi Tribunal cited supra is directly application to the facts of the instant case. The Special Bench of the Tribunal in the case of Lalsons Enterprises has held as under: "For the purpose of applying Explanation (baa) below sub-section (4B) of section 80HHC and while reducing 90 per cent of the receipt by way of interest from the profits of the business, it is only the 90 per cent of the net interest remaining after allowing a set-off of interest paid, which has a nexus with the interest received, that can be reduced and not 90 per cent of the gross interest." The point at issue is, therefore, restored to the file of the assessing officer with the direction to dispose of the same in the light of the above observation of the Special Bench.
The following additional grounds of appeal have been raised by the assessee.
1. "The appellant prays for exclusion of sales tax of Rs. 2,51,98,558 (Annexure-A to the order of assessment) for qualifying deduction under section 80HHC of the Act.
2. The appellant prays for exclusion of Rs. 4,82,92,000 (P. 18 of the order of assessment and Annexure A to the order of assessment) from turnover for quantifying deduction under section 80HHC of the Act." It was stated that the aforesaid additional grounds arise out of the order of the assessing officer and, therefore, they should be admitted for hearing. On the other hand, the learned Departmental Representative contended that the additional grounds raised by the assessee do not arise out of the CIT(A)'s order and hence they should not be admitted for hearing. In his rejoinder, the learned counsel of the assessee by relying upon the judgment of Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 and of Pune Bench of the Tribunal in the case of Thermax Babcock & Wilcox Ltd. v. Dy. CIT (2000) 73 ITD 5, contended that the Tribunal has jurisdiction to admit and decide such questions as arise from the facts as given before the assessing officer though such questions do not arise from the order of the CIT(A).
We have given a careful consideration to the rival submissions in the light of the material placed before us. We are of the opinion that the contention of the department that additional grounds should not be admitted as these questions were not dealt with by the CIT(A) is not acceptable. The Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. (supra) has held as under: "Under section 254 of the Income Tax Act, the Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, we do not see any reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of that item. We do not see any reason to restrict the power of the Tribunal under section 254 only to decide the grounds which arise from the order of the CIT(A). Both the assessee as well as the department have a right to file an appeal/cross-objections before the Tribunal. We fail to see why the Tribunal should be prevented from considering questions of law arising in assessment proceedings although not raised earlier." Respectfully following the aforecited judgment of the Hon'ble Apex Court, we admit both the additional grounds raised by the assessee.
Apropos additional ground of appeal No. 1, the learned counsel of the assessee contended that the point at issue stands covered by the decision of Hon'ble Bombay High Court in the case of CIT v. Sudarshan Chemicals Industries Ltd. (2000) 245 ITR 769, wherein it was held that excise duty and sales tax are not includible in total turnover for the purposes of computation of deduction under section 80HHC. The learned Departmental Representative could not dispute the contention raised by the assessee. We, therefore, allow the additional ground of appeal No.1 raised by the assessee.
Apropos additional ground of appeal No. 2, the learned counsel of the assessee contended that other income of Rs. 4,82,92,000 (details of which are available at page 18 of the assessment year should be excluded from the total turnover for quantifying deduction under section 80HHC. It was stated that such other income is not includible in total turnover though it is a part of business income. On the other hand, the learned Departmental Representative relied upon the order of the assessing officer.
Having considered the rival submissions, we find that the assessing officer has held in his order that "Since the money has been received from the activity related to the business and the assessee itself has shown this income as business income, it is very difficult to hold that this do not fall part of the turnover. Therefore, the other income of Rs. 490.53 lakhs excluding dividend and property income and interest income is considered as part of the turnover". We do not find any infirmity in the above observation of the assessing officer. We, therefore, hold that this additional ground raised by the assessee is devoid of merit and hence the same is rejected.