| SooperKanoon Citation | sooperkanoon.com/67659 |
| Court | Income Tax Appellate Tribunal ITAT Delhi |
| Decided On | Mar-29-1995 |
| Judge | G Agarwal, M Bakhshi |
| Reported in | (1995)54ITD352(Delhi) |
| Appellant | Food Specialities Ltd. |
| Respondent | Assistant Commissioner of |
2. Appellant is a company. The common dispute, inter alia, is relating to the addition on account of unpaid sales-tax collected by the assessee in the course of business. The Assessing Officer treated the collections on account of sales-tax as trading receipts of the assessee. Assessee is admittedly following the mercantile system of accounting. As on 31st December, 1984, a sum of Rs. 95,05,224 had remained unpaid out of the total collections made during the relevant previous year. The Assessing Officer after treating the said amount as a trading receipt of the assessee refused to allow deduction on account of corresponding liability by invoking provisions of Section 43B of the Income-tax Act, 1961.
3. For assessment year 1986-87, the addition on similar facts is Rs. 1,35,18,804.
4. Assessee had not included the collections on account of sales-tax as part of the turnover as separate account had been maintained on account of sales-tax collections to which the payments are also debited.
Accordingly, neither any collections are reflected in the trading account nor is any deduction claimed in respect of the payments in the trading account or profit and loss account. On these facts, assessee claimed that since a deduction was not claimed by the assessee on account of sales-tax in the profit and loss account, Section 43B could not be invoked. This contention has not been accepted by the revenue.
The CIT(A) has referred to two decisions of the Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd. v. CIT[ 1973] 87 ITR 542 and Sinclair Murray & Co. (P.) Ltd v. CIT [1974] 97 ITR 615 and held that the sales-tax collected by the assessee form trading receipts against which assessee would be entitled to deduction under Section 43B to the extent of payments made during the respective year.
5. Learned counsel for the assessee Shri Soli Dastur contended that the Assessing Officer was not justified in treating the sales-tax collections made by the assessee as part of the turnover. Referring to the decision of the Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd (supra) and in the case of Sinclair Murray & Co. (P.) Ltd (supra), the learned counsel contended that in these cases assessee had disputed the liability on account of sales-tax. In the case of the assessee, the liability on account of sales-tax was not disputed at all. Therefore, according to Shri Dastur, the decisions of the Supreme Court relied upon by the learned CIT(A) are inapplicable to the facts of this case. The learned counsel relied upon the decision of the Ahmedabad Bench of the Tribunal in the case of ITO v. Thakersi Babubhai & Co. [1986] 18 ITD 593 and Pune Bench of the Tribunal in the case of Hindustan Commercial Corpn. v. Second ITO [1990] 32 ITD 295 in support of the contention that where no claim was made by the assessee in the profit and loss account, Section 43B could not be invoked. Reliance was also placed on the decision of the Allahabad High Court in the case of CIT v. S.B. Foundry [ 1990] 185 ITR 555 and that of the Gauhati High Court in the case of India Carbon Ltd. v. IAC[1993] 200 ITR 759 in support of the contention that no disallowance under Section 43B could be made where assessee had not made a claim in the profit and loss account. Shri Dastur contended that the decisions of the Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd. and Sinclair & Murray & Co. (P.) Ltd (supra) have been considered by the Tribunal in reaching to the conclusion that provisions of Section 43B are inapplicable where no debit has been made in the profit and loss account on account of the liability. Shri Dastur was of the view that on re-conciliation of the decisions of the Supreme Court and those of the Tribunal, it is clear that the decisions of the Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd. (supra) and Sinclair Murray & Co. (P.) Ltd (supra) are inapplicable to the facts of this case as in those cases sales-tax collection by the assessee had neither been paid to the exchequer nor refunded to the customers. The liability to pay sales-tax had also been disputed. In the case of the assessee, according to Shri Dastur, liability is not disputed and the amount is in fact paid within the statutory period in the subsequent assessment years.
6. Shri Dastur, without prejudice to the afore-mentioned contentions, submitted that since the payment has been made by the assessee within the time allowed under the relevant statute, deduction was permissible in view of the proviso to Section 43B inserted by the Finance Act of 1987 w.e.f. 1-4-1988. Shri Dastur fairly conceded that the decisions of the Delhi High Court in the case of Sanghi Motors v. Union of lndia[ 1991] 187 ITR 703 and in the case of Escorts Ltd. v. Union of India[l99l] 189 ITR81 are against the assessee. He, however, contended that SLP against those decisions has been admitted by the Hon'ble Supreme Court.
7. The learned D.R., on the other hand, contended that the issue as to whether the sales-tax collected by the assessee is a trading receipt or not is well settled by the two decisions of the Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd. (supra) and Sinclair & Murray Co. (P.) Ltd (supra). The decisions of the Tribunal relied upon by the learned counsel for the assessee are relating to applicability of Section 43 as per the law as it then prevailed. According to learned D.R., the said decisions of the Tribunal are inapplicable.
8. We have given our careful consideration to the rival contentions. In order to resolve this dispute, two issues are to be decided. One is as to whether the sales-tax collected by the assessee during the course of business is a trading receipt of the assessee. The second issue involved is as to whether Section 43B is applicable in respect of such payments which have remained unpaid as on the close of the previous year but have been paid within the time allowed under the relevant statute in the subsequent assessment year. Insofar as the first issue is concerned, i.e.. as to whether the sales-tax collected by the assessee is a trading receipt it is, in our view, well settled by the two decisions of the Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd. (supra) and Sinclair Murray & Co. (P.) Ltd. (supra).
It is not disputed before us that the collections made by the assessee are in the course of business as part of trading transactions. The ground on which such collections are claimed to be not as part of the trading receipts is that assessee is having a corresponding liability to pay to the Government and that assessee is acting as a conduit pipe for the collection of the tax on behalf of the Government. This claim of the assessee, in our view, is not well founded. The liability of sales-tax under the respective State Acts is upon the dealer and the liability is not on the customers. Assessee is liable to pay sales-tax under the relevant statutes irrespective of whether the liability is passed on by them upon the customers or not. As such it cannot be said that assessee is a conduit pipe for the purposes of making collections on behalf of the Government. It is a different matter that assessee is entitled to pass on his liability on account of sales-tax to the customers as part of the trading transaction. That gives it a character of trading receipt. The character of the trading receipt is not dependant on as to whether the liability on account of sales-tax has been disputed by the assessee or not. As already observed, it has to be first ascertained as to whether the collections made by the assessee are trading receipts, whether there is any liability of the assessee and as to when a deduction has got to be allowed on account of the corresponding liability, is a different matter. We may usefully refer to the decision of the Supreme Court in the case of McDowell & Co. Ltd. v. CTO [ 1985] 154 ITR 148. In this case under Rule 76(a) of the A.P.Distillery Rules, as amended in 1981, "No spirit or liquor manufactured or stored shall be removed unless the excise duty specified in Rule 6 has been paid by a holder of a D-2 licence before such removal"; and under the amended Rule 79(1), "On payment of the excise duty by the holder of the D-2 licence, a distillery pass for removal of spirit fit for human consumption may be granted in favour of any of the following persons only". Four kinds of persons were specified of whom the holder of a licence for sale of spirit by wholesale or retail was one such person. The appellant, a manufacturer of liquor and the holder of a D-2 licence, sold liquor to buyers who themselves paid to excise duty thereon directly and the Department sought to include a sum of Rs. 4,49,09,552.40 representing such excise duty in the appellant's turnover for a part of the year 1982-83. The High Court held that excise duty which was payable by the appellant but had, by an amicable arrangement, been paid by the buyer was actually a part of the turnover of the appellant and was, therefore, liable to be so included for determining its liability for sales-tax under the A.P. General Sales-tax Act, 1957. On appeal to the Supreme Court: Held, affirming the High Court, decision that under Rule 76 of the Distillery Rules, as amended in 1981, the liability for payment of excise duty was that of the manufacturer and Rules 80 to 84 did not detract from the position that payment of excise duty was the primary and exclusive obligation of the manufacturer and if payment be made under a contract or arrangement by any other person, it would amount to the meeting of the obligation of the manufacturer and nothing more. Payment of excise duty was a condition precedent to the removal of the liquor from the distillery and payment by the purchaser was on account of the manufacturer. According to normal commercial practice, excise duty should have been reflected in the appellant's bill either as merged in the price or shown separately.
In the hands of the buyer, the cost of liquor was what was charged by the appellant under its bill together with the excise duty which the buyer had directly paid on seller's account. The consideration for the sale was thus the total amount and not what was reflected in the bill. Excise duty, though paid by the purchaser to meet the liability of the appellant, was part of the consideration for sale and was includible in the turnover of the appellant.
9. In the present case it is the obligation of the assessee to pay sales-tax. Assessee should have reflected the sales-tax as part of the trading receipts. The mere fact that the sales-tax collections have been entered into a separate account and not credited to the trading account, is not decisive about the nature of the receipt. Since the character of the receipt is trading, the amount collected has rightly been treated to be part of the turnover. The Allahabad High Court, Gauhati High Court and the Tribunal's decisions relied upon by the learned counsel for the assessee are relating to the applicability of the provisions of Section 43B, in a case where the liability is not debited to the Profit and Loss account. None of the decisions cited is an authority for the proposition convassed on behalf of the assessee that the sales-tax received by the assessee from the customers is not a trading receipt.
9A. In the case of Punjab Distilling Industries Ltd. v. CIT[1959] 35 ITR 519 (SC), assessee carried on the business of sale of liquor in bottles. Apart from charging the price for the liquor, assessee recovered cost of the bottles termed as 'Empty Bottle Security Account'. The cost of bottles was refundable to the customers on the return of the bottles. A dispute arose as to whether the amount received by the assessee on account of empty bottle security deposit account was a trading receipt. Their Lordships of the Supreme Court observed that the assessee had recovered the extra price on account of sale of bottles as part of the trading transaction. There was no obligation upon the customers to return the bottles. The amount recovered by the assessee as empty bottle security deposit account was held to be part of the trading receipts. In the present case also, assessee had collected the sales-tax as part of its trading transaction. It is a different matter that sales-tax has been reflected separately in the books of account and may be in the sale bills also.
The said amount is not refundable.
10. We may reiterate that none of the decisions cited on behalf of the assessee is an authority for the proposition convassed on behalf of the assessee that the sales-tax recovered by the assessee from the customers is not a trading receipt. We will refer to these decisions in detail while dealing with other issue involved in this case i.e., relating to the applicability of provisions of Section 43B.11. We may however point out that the question considered by the respective benches was as to whether provisions of Section 43B would be applicable in a case where no deduction was claimed by the assessee in respect of the payments which have been made within the statutory period of limitation but beyond the end of the previous year. The respective benches, on the basis of law as then prevailing, held that provisions of Section 43B could not be attracted. The said decisions are not the authority for the proposition convassed on behalf of the assessee that the sales-tax collected does not form part of the turnover. On the contrary the decisions of the Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd. (supra), Sinclair Murray & Co. (P.) Ltd. (supra), McDowell & Co. Ltd. (supra) and Punjab Distilling Traders (P.) Ltd. (supra) support the view that the amount received by the assessee as sales-tax forms part of the turnover.
11A. The contention on behalf of the assessee that the afore-mentioned decisions would be applicable only in such cases where liability is disputed, in our view, is not well founded. The character of the receipt is not dependant on the liability of the assessee vis-a-vis the receipt. The nature of receipt is the area belonging to receipts/income whereas the liability of the assessee on account of sales-tax relates to the area of expenditure. The two cannot be inter-mixed.
12. The treatment given by the assessee in the books of account is also not decisive of the character of the receipt. The true nature of the receipt is to be determined in accordance with the character of the receipt.
13. In fact it is not disputed that the sales-tax has been recovered as part of the trading transaction. The only ground of treating it separately is that assessee has a corresponding liability against the receipt. The contention of the assessee is that it has acted only a conduit pipe for payment of taxes on the sales effected by them and, therefore, the receipt is not a trading receipt. Applying the principles laid down by their Lordships of the Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd (supra), Sinclair Murray & Co. (P.) Ltd. (supra) and McDowell & Co. Ltd (supra) as also in the case of Punjab Distilling Traders Ltd. (supra), we hold the sales-tax receipts have rightly been treated by the Assessing Officer as trading receipts. The contention raised on behalf of the assessee that the sales-tax recovered is not a part of the trading receipts is, therefore, rejected.
14. Now the second issue that arises for our consideration is as to whether provisions of Section 43B have rightly been invoked in this case. A question has been raised before us on behalf of the assessee that a method of accounting was followed by the assessee on reflecting the sales-tax receipts separately and not debiting any amounts in respect of the corresponding liability to the trading or profit and loss account. The payments were debited to this account directly as and when made. This system of accounting adopted by the assessee had been accepted by the revenue in the past. As such it was, according to the learned counsel, not permissible for the department to deviate from the past and tinker with the method of accounting regularly adopted by the assessee. This contention raised on behalf of the assessee is also not acceptable in view of the fact that in the past the system adopted by the assessee did not affect the determination of the true assessable income before the insertion of Section 43B. Whereas sales-tax was part of the income, there was a corresponding liability which was allowable as a deduction in view of the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT[1971] 82 ITR 363. However, with the insertion of Section 43B the method adopted by the assessee is found to be defective in so far as true assessable income cannot be deducted therefrom. Applying the principle laid down by their Lordships of the Supreme Court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44, when true income cannot be deduced from the method adopted by the assessee, the Assessing Officer has the power to reject the same notwithstanding the fact that such a system had been accepted in the past. Therefore, we hold that Assessing Officer was justified in rejecting the method of accounting adopted by the assessee, as such a method in view of provisions of Section 43 B, would not give the true assessable income of the assessee.
15. Now we deal with the second aspect of the matter i.e., as to whether Section 43B could be invoked on the facts and in the circumstances of the case. We have already held that the sales-tax recovered by the assessee is the part of the turnover. As per the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co.
Ltd. (supra), assessee following mercantile system of accounting would be entitled to deduction in respect of the corresponding liability.
This decision of the Supreme Court has however, been superseded by the insertion of Section 43B w.e.f. 1-4-1984. Section 43B provides for deduction in the year of payment. However; a proviso has been inserted to Section 43B by the Finance Act of 1987 w.e.f. 1-4-1988 providing for an exception in such cases where the payment is made before the time allowed for filing of the income-tax return for the relevant assessment year. In such cases also, deduction would be permissible in the assessment year relevant to the previous year relating to which the payment has been made within the said time. This proviso has been held to be applicable w.e.f. 1-4-1988 by their Lordships of the Delhi High Court in the case of Sanghi Motors (supra) & Escorts Ltd. (supra).
Though a contrary view has been taken by the Patna High Court in the case of Jamshedpur Motor Accessories Stores v. Union of lndia[l99l] 189 ITR 70, Calcutta High Court in the case of CIT v. Shri Jagannath Steel Corpn. [1991] 191 ITR 676, Orissa High Court in the case of CIT v.Pyarilal Kasam Manji & Co., we are bound to follow the decision of the jurisdictional High Court of Delhi in the case of Sanghi Motors (supra) and Escorts Ltd. (supra). Therefore, the benefit of the proviso is not applicable to the assessee for assessment years 1985-86 and 1986-87.
16. We may now refer to the decisions cited on behalf of the assessee regarding the applicability of provisions of Section 43B. In our view, none of the decisions are applicable to the facts of this case.
17. In the case of S.B. Foundry (supra), an addition of Rs. 8312 and Rs. 1961 shown as UP Sales-tax and Central Sales-tax outstanding as on the close of the previous year added under Section 43B. The Tribunal had found that the amount in dispute represented the sales-tax realisation of the last month of the relevant previous year and that the said amount was payable in the next month and had actually been so paid. On these facts, the Tribunal held that there was no question of disallowing the amount taken to the balance-sheet on the liabilities side and in the circumstances of the case, there was no question of any add back from the profit and loss account. Their Lordships of the Allahabad High Court held that "no error in the approach taken by the Tribunal was pointed out to us". They accordingly declined to grant reference under Section 256(2). As is clear from the facts, the outstanding amount on account of sales-tax was found to have been paid within the time allowed under the statute. The date of decision of the High Court is 9th April, 1990. If the proviso added to Section 43B is taken into account as applicable retrospectively as is the view of various High Courts but for Delhi High Court then no disallowance could be made. The position in the case of assessee is different as the jurisdiction of this case falls within the Delhi High Court and the principle that proviso to Section 43B is not applicable retrospectively has got to be kept in mind in deciding the issue involved in this case.
It is because of the decision of the Delhi High Court in the case of Sanghi Motors (supra) and Escorts Ltd (supra) that the decision of the Allahabad High Court relied upon by the assessee is inapplicable. The principle that when no liability is claimed in the profit and loss account, no disallowance under Section 43B can be made, is applicable on the facts and in the circumstances of the case before the Allahabad High Court. We have already given our reasons elsewhere in this order as to why this principle would not be applicable in the case the assessee when proviso to Section 43B is not applicable assessment year involved being assessment years 1985-86 and 1986-87.
18. In the case of Indian Carbon Ltd (supra) their Lordships of the Gauhati High Court followed the decision of the Allahabad High Court in the case of S.B. Foundry (supra). It was specifically held that the issue involved before their Lordships was as to whether Section 43B was applicable and not as to whether sales-tax collected formed part of the trading receipts. Reference in that case was made to the decision of the Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd (supra) and Sinclair Murray & Co. Ltd (supra). The principle laid down by their Lordships of the Supreme Court were not applied on the ground that the issue involved before their Lordships was as to whether Section 43B was applicable and not as to whether sales-tax collected formed part of the trading receipt.
19. In the present case, the Assessing Officer has specifically rejected the method adopted by the assessee and applied the principle laid down by their Lordships of the Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd (supra) and Sinclair Murray & Co.
(P.) Ltd. (supra). Once it is held that the sales-tax recovered by the assessee is a trading receipt, the amount so collected forms the part of the income. When we come to the question of allow ability of the claim, the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra) is for the benefit of the assessee. The principle laid down therein is that a deduction has got to be allowed to the assessee on account of the corresponding liability. It is at this stage that provisions of Section 43B come into play. We are, therefore, of the considered view that the afore-mentioned decision of the Gauhati High Court is also inapplicable to the facts of this case.
20. The decision of the Tribunal in the case of ITO v. Thakersi Babubhai & Co. (supra) is also on the basis of the principle that no disallowance can be made under Section 43B in respect of the payments which had not become due. Similar is the position in the case of Hindustan Commercial Corpn. (supra).
21. In none of the cases referred to above, the principle laid down by their Lordships of the Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd and Sinclair Murrary & Co. (P.) Ltd (supra) has been refuted and in none of the cases, the method of accounting adopted by the assessee was rejected and the receipts treated as trading receipts.
Moreover, Section 43B has been amended from time to time. The view taken by us is in accord with the decision of the Supreme Court in the cases of Chowringhee Sales Bureau (P.) Ltd (supra) and Punjab Distilling industries Ltd (supra), Sinclair Murray & Co. P. Ltd (supra), Mcdowell& Co. Ltd (supra) and British Paints (India) Ltd. (supra). The decisions cited on behalf of the assessee are accordingly distinguishable and inapplicable.
22. At this stage, we may usefully refer to the decision of the Supreme Court in the case of CIT v. Sun Engg. Works (P.) Ltd [1992] 198 ITR 297. In this case it has been held that the decision of the Court takes its colour from the questions involved in the case in which it is rendered and while applying the decision to a latter case, Courts must carefully try to ascertain the true principle laid down by the decision. A particular judgment must be read as a whole and the observations from the judgment have to be considered in the light of questions which were before the Court.
It has to be borne in mind that in this case the revenue has treated the sales-tax collections of the assessee as part of the trading receipts. This action of the Assessing Officer has been upheld by us.
If the principles laid down in the cases relied upon by the assessee are applied then assessee would be denied a deduction in respect of the corresponding liability as when assessee has not made a claim in the profit and loss account or trading account, there is no question of allowance of deduction and applicability of provisions of Section 43B.This way assessee will suffer as no deduction would be permitted to him even in the year of payment. In fact invoking of Section 43B after having held sales-tax recoveries as part of the trading receipts is for the benefit of the assessee in so far as a deduction is allowed to the assessee in the year of payment by virtue of Section 43B.23. It has been admitted before us that deduction has been allowed to the assessee in the years of payment. We, therefore, uphold the additions of Rs. 95,05,224 for assessment year 1985-86 and Rs. 1,35,18,804 for assessment year 1986-87.
24. For assessment year 1985-86 ground No. 2 is relating to disallowance of Rs. 9,23,883. The learned counsel contended that the CIT(A) has not recorded any reasons for sustaining the disallowance. In our view, the CIT(A) has decided the issue along with the claim relating to deduction of claim of Rs. 95,05,224. We are, however, of the view that assessee is entitled to relief in respect of payments not covered under Section 43B(a) such as payments on account of provident fund and ESI. We will give our reasons for that Section 43B is applicable in respect of various payments as specified in Sub-sections (d)(b)(c) and (d). The Andhra Pradesh High Court in the case of Srikakollo Subba Rao & Co. v. Union of India [1988] 173 ITR 708 held that Section 43B is not applicable in respect of any sums which had not become payable in the previous year under the relevant statutes. The afore-mentioned decision of the Andhra Pradesh High Court was superseded by insertion of Explanation 2 by the Finance Act of 1989 w.e.f. 1-4-1984 defining any sum payable" to mean a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law.
The said explanation is applicable only in respect of payments referred to in Section 43B(a). In respect of other payments not covered by Explanation 2, the decision of the Andhra Pradesh High Court in the case of Srikakollo Subba Rao & Co. (supra) would be pplicable. This has been held so by the Delhi Bench of the Tribunal of which one of us is a party in the case of Indian A luminium Cables Ltd.[l9' 2] 41 ITD 80.
We, therefore, restore this issue to the file of the Asscsirg Officer for identifying the payments out of Rs. 9,23,883 which do not fall within Clause (a) of Section 43B. Deductions in respect of such.
amounts shall be allowed to the assessee subject to the verification that the said payments which had remained unpaid as on the close or the previous year have been made by the assessee within the statutory period of limitations under the respective statutes.
25. For assessment year 1985-86, the third ground of appeal is as under: On the facts and in the circumstances of the case and in law, the CIT(A) erred in adding back a sum of Rs. 43,21,874 pertaining to Excise Duty on unsold goods held in stock, on the mistaken ground that the method of valuation was improper and untenable and that such excise duty embedded in the closing stock falls for addition under Section 43B of the Income-tax Act, 1961? 26. For assessment year 1986-87, similar ground has been taken in Ground No. 1. The amount involved is Rs. 49,37,872. The issue is covered by the decision of the Special Bench of this Tribunal in assessee's own case as in ITO v. Food Specialities Ltd [1994] 49 ITD 21 (Delhi). We, respectfully following the afore-mentioned decision, delete the addition subject to the direction that suitable adjustment is made in the respective assessment years in accordance with the decision of the Special Bench of the Tribunal.
On the facts and in the circumstances of the case and in law, the CIT(A)-IX, erred in misconstruing rent/hire charges of shelf-space of Rs. 25,76,505 as advertisement, publicity and sales promotion expenses and thereby disallowing 20% thereof as provided under Section 37(3A) of the Income-tax Act, 1961.
28. Assessee company had claimed rent/hire charges shelf charges amounting to Rs. 25,76,505. It was claimed that rent/hire charges had been paid by the assessee for rent of shelf space in major outlets selling the company's product in order to ensure that most of the products of the assessee company are stored in pre-determined acceptable positions. In the preceding year, the CIT(A) has decided that 5096 of the payment could be related to the storage of the company's product in front shop windows and balance 50% of the expenses could be treated for the purposes of advertise merit and accordingly disallowance under Section 37(3A) could be computed. For the year under appeal, the CIT(A) has taken a contrary view. The CIT(A) has rejected the contention on behalf of the assessee with the following observations : As to the expenditure on rent/hire charges of shelf space of show windows, the assessee vide its letter dated 5-10-1987 has filed the following reply: Rent/hire charges of shelf space are charges paid for the rent of shelf space in major outlets, selling the company's product in order to ensure that most of our products are stored in pre-determined acceptable positions. This is done to control the conditions in which the products are stored, and hence reduce as far as possible losses on account of bad storage of goods.
However, the contention of the assessee is not acceptable. The show windows are basically not for any storage of goods but for display of the goods which has a massive advertisement and publicity value.
Further to find out the correct position a list of the persons to whom such rent/hire charges have been paid was asked from the assessee who supplied a list for the persons attached with two of the cash distributors. Enquiry was got conducted through the Inspector of the office. From the statement of few persons, it is found that a nominal amount ranging from Rs. 50 to Rs. 200 per month is given through the cash distributors for the display of the goods in show windows and not for any kind of storage. In fact the meagre amounts itself show that the payment is not towards any rent for storage of goods but an incentive under the 'display scheme'. The persons with whom enquiries were made have refused to receive any kind of rent but only the display scheme. In this connection, I may also refer the standard agreement which the assessee enters with its distributors a copy of which was supplied vide letter dated 1-9-1987. Clause 4(a) of the Agreement provides that: (a) The goods sent by us should be properly stored on wooden pallets and slightly away from the walls. All reasonable care should be taken to avoid any loss/damage to the goods and they should be protected against damage by heat, floor, pest, poison or odorous substances and ensure that the same will be in as good a condition as they were when delivered to your. Further, the goods bought from us should be stored in a separate godown as far as possible.
5. Display: You will assist the company by carrying out sales promotion by : (i) displaying at your premises and distributing in retail outsets advertising materials, and (ii) erecting prominent display of the company's products in your show/shop window of such other display area.
Thus a perusal of these clauses of agreement make it clear that the expenditure in question is for display of the company's products and for sales promotion and rightly debited and grouped by the assessee under the head 'Advertisement and Sales promotion' in the published accounts. Therefore, keeping in view the totality of the facts stated above the contention of the assessee on rent/hire charges for shelf space of show windows is rejected and the same will be considered for disallowance under Section 37(3A).
29. As is seen from the facts stated above, the expenditure had been booked by the assessee under the head 'Advertisement and Sales promotion expenses'. From the agreements between the parties as described by the CIT(A) it is clear that the assessee had made it part of the condition with the distributors that the goods sent by the assessee would be properly stored on wooden pallets and slightly away from the walls. The distributors were also bound to take reasonable care so as to avoid any loss, damage to the goods and to protect the said goods against damage by heat, floor, pest, poison or odorous substance and to ensure that the same would be in as good a condition as they would be when delivered to the distributors. A clause in the agreement has also been found which relates to sales promotion. Since the terms and conditions of the agreement establish that the expenditure incurred by the assessee was partly for sales promotion and partly for protecting the goods from damage etc., there was justification for apportionment of the expenditure. The CIT(A) in the preceding year has apportioned the expenditure between the two activities at 50: 50. We have no reasons to differ. We, therefore, reverse the finding of the CIT(A) for this year and hold that 50% of the expenditure only be attributed to the sales promotion out of Rs. 25,76,505.
30. The 5th ground of appeal is relating to the addition of Rs. 3,10,000 paid to M/s A.M. Qubic P. Ltd. by invoking the provisions of Section 40A(6). Assessee company had made a claim of Rs. 4,02,000 in the profit and loss account out of which a sum of Rs. 4 lakhs had been paid to M/s. A.M. Qubic P. Ltd. On enquiry, Assessing Officer was informed that the amount have been paid to the said company for consultancy in matters relating to expansion and consolidation of milk licences and finalisation of royalty proposals on the product of the company. There was no formal agreement between the assessee company and M/s. A.M. Qubic P. Ltd. However, a letter written by the Managing Director appointing M/s. A.M. Qubic P. Ltd. as a consultant w.e.f.
1-4-1983 was produced according to which M/s. A.M. Qubic P. Ltd. were to undertake the following jobs with a time schedule :To finalise consolidated of our milk licence and theflexibility to produce nestomalt.
30-6-1083To finalise the TAF/royalties on agglomerated coffeesand coffee blends 30-6-1983 To assist if we so require in dealing with instant coffee exports through the coffee board and with any other questions which may arise from time to time.
31. In reply to the query raised by the Assessing Officer, it was explained that following advise was given by M/s. A.M. Qubic P. Ltd.: Advice regarding industrial licencing procedures. Advice regarding procedures for entering into foreign collaboration agreements.
Follow up with respective government deptt. in respect of applications for industrial licences and registration of foreign collaboration agreements made by the company.
Assessing Officer made enquires and found that one of the employees of the assessee company Mr. A. Ramalingam had floated a company under the name and style of M/s. A.M. Qubic P. Ltd. The said employee had been working with the assessee as a Finance Manager. The said company was incorporated on 18th January, 1982 with the main object of carrying on the business of manufacturers, buyers, sellers, importers and exporters and dealers in all kinds of and classes of packing and packing material including corrugated boards, boxes etc. The ultimate main business of the company M/s. A.M. Qubic P. Ltd. was to manufacture corrugated boxes and the main supply was to M/s. Food Specialities Ltd. Shri A.Ramalingam had left the services of the company on 31st March, 1983.
Shri Ramalingam was in service on 10th March, 1983 with the assessee when M/s. A.M. Qubic P. Ltd. was appointed as consultant. In respect of his findings that payment to M/s. A.M. Qubic P. Ltd. was nothing but a payment to Mr. A. Ramalingam in consideration of his part services and it was a kind of retainer ship for some more time. In this regard the Assessing Officer made the following observations : (i) The agreement between M/s. Food Specialities Ltd. and M/s.
Nestle Products Technical Assistance Co. Ltd. is dated 20th December, 1982. The application filed before the Government of India, Ministry of Industries was 28th April, 1982 and the agreement was finalised on 30-5-1983.
(ii) The technical collaboration agreement with M/s. NESTEC was on 28-2-1994 and the application submitted was on 3-3-1983, and the approval for collaboration agreement was executed on 19-11-1985.
(iii) Foreign collaboration proposals for Milo and Soya Projects did not materialise and the assessee has not produced any record regarding this project.
(iv) Application for composite milk licence was on 29-12-1981 and revised application was filed on 15-12-1982 and the date of approval was 10-5-1983.
He, therefore, invoked Section 40A(6) and disallowed a sum of Rs. 3,10,000. By this process, deduction of Rs. 90,000 was allowed in respect of the payments made to M/s. A.M. Qubic P. Ltd. out of Rs. 4,00,000.
32. The CIT(A) has confirmed the disallowance by holding that the payment to M/s. A.M. Qubic P. Ltd. has rightly been treated as payment to Shri A. Ramalingam and that the principle laid down in the case of Mcdowell & Co. Ltd. (supra) (SC) is applicable.
33. The CIT(A) has further held that the expenditure incurred by the assessee is for the establishment of a new industrial unit and therefore, the expenditure has got to be treated as a capital expenditure. The CIT(A) has observed that assessee was going to start units for Nesto Milk instant tea and Soya projects. He has accordingly directed the Assessing Officer to treat the expenditure on capital account.
34. The learned counsel for the assessee contended that provisions of Section 40(6) have wrongly been invoked in this case as the payment has been made to M/s A.M. Qubic P. Ltd. which is a duly incorporated company. Sh. Ramalingam admittedly was the employee of the assessee in the preceding assessment year but he is not 100% shareholder of the said company. According to Shri Dastur it is not disputed by the revenue that services had been rendered as deduction to the extent of Rs. 90,000 has been allowed. Since payment has not been made to the former employee, Section 40A(6) is inapplicable. Shri Dastur contended that the said section is a disallowing provision and that it must be strictly followed. It was accordingly contended that since the case of the assessee does not fall within the ambit of Section 40A(6), the disallowance is unwarranted.
35. Referring to the findings of the revenue authorities that services have not been rendered, our attention has been drawn to the explanation of the assessee before the revenue authorities and the jobs performed by the said company is described in paras 7.1 and 7.2 of the CIT(A)'s order. The finding of the revenue authorities that the payment had not been made for business considerations, according to the learned counsel, is unwarranted as the business experience was to be considered from the point of view of the businessman.
36. With regard to the finding of the CIT(A) that the expenditure is on capital account, the learned counsel contended that the expenditure relating to the projects which did not materialise was to be allowed as a revenue expenditure. However, the expenditure relating to the projects which have materialised could be treated on capital account.
37. We have given out careful consideration to the rival contentions.
The expenditure has been disallowed on two grounds. Firstly, it has been held that the expenditure has not been incurred for the purposes of business. Secondly, it has been held that the benefit has been given to the ex-employee of the assessee and therefore, deduction was to be restricted to Rs. 90,000. The finding of the revenue relating to the first issue, in our view, is contradictory. On the one hand, revenue authorities have invoked Section 40A(6) which if applicable provides that where the assessee incurs any expenditure by way of fee for services rendered by a person, who at any time during the 24 months immediately preceding the previous year was an employee of the assessee.... It is clear from the language of Section 40A(6) that the provisions would be applicable only when the assessee has incurred an expenditure and the payment has been made to a person, who has been in the employment of the assessee during the 24 months immediately preceding the concerned previous year. Therefore, we do not approve of the finding of the Assessing Officer as well as that of the CIT(A) that the expenditure has not been incurred for the purposes of business.
38. Next issue that arises for our consideration is as to whether a disallowance under Section 40A(6) could be made by treating the payment to M/s A.M. Qubic P. Ltd. as a payment to the former employee, namely, Shri A. Ramalingam. The said section reads as under : 40A(6). Where the assessee incurs any expenditure by way of fees for services rendered by a person who at any time during the twenty-four months immediately preceding the previous year was an employee of the assessee, (b) where the assessee has also incurred in relation to such person any expenditure by way of salary referred to in Sub-clause (i) of Clause (a) of Sub-section (5), the aggregate of such expenditure by way of fees and by way of salary, shall not be allowed as a deduction to the extent such expenditure by way of fees or, as the case may be, the aggregate of such expenditure by way of fees and by way of salary exceeds ninety thousand rupees.
It is well settled principle of law that the disabling provision must be strictly construed. The language used in Section 40A(6) when strictly construed, does not permit the disallowance made to a company of which one of the directors is a former employee. Section 40A(6) applies in a case where the payment is made to the former employee and hot to a company in which the former employee is having even the substantial interest. It is not disputed before us that whereas Shri A.Ramalingam was the former employee of the assessee he was not having 100% share in M/s A.M. Qubic P. Ltd. Therefore, the payment made by the assessee to M/s A.M. Qubic P. Ltd. would not fall within Section 40A(6).
39. The principle laid down in the case of McDowell & Co. is also inapplicable as neither the Assessing Officer nor the CIT(A) has gone into the constitution of the company namely, M/s A.M. Qubic P. Ltd. It has not been established that the other shareholder(s) of M/s A.M.Qubic P. Ltd. were benami of Shri A. Ramalingam. The company has been duly incorporated and therefore, is a separate legal entity than the individual Shri A. Ramalingam. We, therefore, do not approve the finding of the revenue authorities that the payment to A. M. Qubic P.Ltd. would be a payment to Shri A. Ramalingam within the meaning of Section 40A(6). However, the question as to whether the expenditure is to be treated as capital expenditure is not seriously disputed before us but for the expenditure related to such projects as have not materialised. Whereas we hold that the expenditure of Rs. 4 lakhs has been incurred for the purposes of business and no disallowance under Section 40A(6) is permissible, we remit the issue to the file of the Assessing Officer for the purposes of determination of the expenditure relating to such projects as have not materialised either in this year or in any of subsequent assessment years. The expenditure attributable to such projects would be allowable as a revenue expenditure whereas the expenditure incurred in respect of the other projects which have materialized should be a considered as on capital account. In case of any difficulty in quantifying the expenditure in respect of each project, the Assessing Officer may resort to reasonable estimation. We direct accordingly.
40. For assessment year 1985-86, the last ground of appeal is relating to the apportionment of overhead expenses for the purposes of computation of deduction under Section 80-I. Assessee had made a claim under Section 80-I to the tune of Rs. 1,48,33,957 in respect of cereal plant. The Assessing Officer worked out the net profits of the cereal plant unit at Rs. 74,47,280 and allowed a deduction of Rs. 18,61,820.
While working the net profit of the cereal unit, the ITO attributed a sum of Rs. 73,86,677 out of the head office expenses on account of overhead expenses to the cereal plant. The Assessing Officer adopted the turnover of the respective units as the base for allotment of overhead expenses. Assessee has disputed the apportionment of overhead expenses to the cereal plant.
41. It is the case of the assessee that administrative expenses were not to be apportioned at all in working out the profits of the cereal unit. In the alternative, it has been contended that the basis adopted by the Assessing Officer for apportioning of the overhead expenses is totally unrealistic. Shri Dastur contended that the increase in expenditure of overheads alone would be the basis for attributing the expenditure relating to cereal units. In this connection, reliance has been placed on the decision of the Chandigarh Bench of the Tribunal in the case of Punjab Con-cosi Steels Ltd. v. Assistant Commissioner [1994] 49 ITD 430. Reference was also made to a decision of the Bangalore Bench of the Tribunal in 17 ITD 14 (sic). However, we find that there is no such decision in as such. We will, therefore, consider the decision of the Chandigarh Bench of the Tribunal. Only the learned D.R., has relied upon the orders of the revenue authorities.
42. We have given our careful consideration to the rival contentions.
It is not disputed before us that separate books of account have not been maintained in respect of the cereal plant unit. However, assessee has been in a position to identify the direct costs relating to the cereal plant unit. In respect of such expenditure, there is no dispute.
For the purposes of computing the deduction under Section 80-I, profits of the new industrial unit are to be computed in accordance with the provisions of the Income-tax Act. The profits referred to in Section 80-I are the assessable profits. In this connection, we may usefully refer to Section 30AB. This section provides in unambiguous term that where a deduction is provided on the basis of the income under any of the provisions in Chapter VIA under the head "C", the income computed under the provisions of the Act alone be deemed to be the amount of the income of that nature which is derived or received by the assessee and which is included in his gross total income. Thus, the answer to the question raised in this appeal is quite obvious. The income of the new in industrial unit is to be computed in accordance with the provisions of the Act. The true income of the unit cannot be determined without taking into account the overhead expenses that are necessarily to be incurred for carrying on of the business. We, therefore, do not agree with the contention raised on behalf of the assessee that no part of overhead expenses can be attributed to the new industrial unit. The decision of the Chandigarh Bench of the Tribunal relied upon by the assessee is inapplicable to the facts of this case. In that case, assessee had maintained regular books of accounts and production records in respect of each unit and assessee had taken into account manufacturing expenses, administrative expenses and even depreciation.
The expenditure in one of the units which was head office of the assessee was considered by the Assessing Officer to be higher as compared to other units. On that ground, Assessing Officer had reallocated the expenditure which the Tribunal held, was not permissible. In the case before us, assessee has not taken into account any overhead expenses at all. Moreover, no separate books of accounts have been maintained for each unit. The question involved in this case is purely of identifying the expenditure relating to the new unit and not re-allocation of the expenses relating to other units.
43. We, however, are convinced that the basis adopted by the Assessing Officer for working out the overhead expenses attributed to the new industrial unit has not given reasonable results. The basis of turnover would be one of the factors for working out the reasonable amount of overhead expenses attributable to the new unit. The other important factor that has to be considered is the increase in the overhead expenses incurred by the assessee after the setting up of the new point. The increased expenditure can be apportioned between the old units and the new units on the basis of the turnover. The amount so worked may be termed as 'A'. The amount worked by the Assessing Officer in respect of the entire overhead expenses on the basis of turnover may be termed as 'B', The figures arrived as 'A' and 'B' be added and divided by 2. The resultant amount, in our view, would be the reasonable amount of overhead expenses attributable to the hew unit. We would, therefore, remit this issue to the file of the Assessing Officer for working out the profits relating to the new cereal unit on the basis of our above direction, and recompute the deduction under Section 80-I.44. The appeal of the assessee for assessment year 1985-86 is accordingly partly allowed.
45. For assessment year 1986-87, Ground Nos. 1, 2 and 3 have been disposed of alongwith similar grounds in assessment year 1985-86.
46. Ground No. 4 is relating to disallowance of Rs. 28,056 and Rs. 2,732 being income-tax deducted at source from salary and CPF. This issue is remitted back to the Assessing Officer for fresh consideration in view of our decision relating to provident fund and ESI contributions etc. dealt with in para 24 of our order relating to assessment year 1985-86.
That on facts and circumstances of the case and in law, the CIT(A) has erred in upholding disallowance of Rs. 1,78,183 incurred on providing scholarship to a prospective employee.
48. Ground No. 6 is relating to the computation of profits relating to cereal unit for the purposes of computation of deduction under Section 80-I.49. For the reasons given for assessment year 1985-86 this issue is remitted back to the Assessing Officer for recomputation of deduction under Section 80-I. in accordance with the directions for assessment year 1985-86 as per para 43 above.
50. Ground No. 7 is relating to disallowance of Rs. 1 lakh to M/s A.M.Qubic P. Ltd. on the ground that the expenditure is on capital account.
For assessment year 1985-86 we have remitted this issue also to the file of the Assessing Officer for determination of the expenditure attributable to the existing units and the units which have not materialised. The expenditure has got to be apportioned accordingly.
This issue is, therefore, set aside for fresh determination.
51. Ground No. 8 is relating to deduction amounting to Rs. 1,01,51,750 on account of advance surtax under Section 7A of the Companies (Profits) Surtax Act as a deduction in computing the profits and gains of business.
52. The claim of the assessee is disallowable in view of the decision of the Gauhati High Court in the case of Makum Tea Co. (India) Ltd. v.CIT[ 1989] 178 ITR 453 and that of the Bombay High Court in the case of Lubrizol (India) Ltd. v. CIT[1991] 187 ITR 25. No contrary decision has been brought to our notice supporting the claim of the assessee. We, therefore, uphold the disallowance by respectfully following the afore-mentioned decisions.