Rajasthan State Handloom Vs. Deputy Commissioner of Income Tax - Court Judgment

Excerpt:
1. the assessee is in appeal before us against the order of the learned cit(a), dt. 25th august, 1992, for asst. yr. 1986-87. in the first ground, the assessee has challenged the very legality of the assessment order on the ground that the notice under s. 148 was illegal.2. the assessee is a government of rajasthan undertaking. for the year under consideration, the due date for filing the return was 31st july, 1986. the due date for filing a belated return under s. 139(4) was 31st march, 1989. the assessee submitted its return showing nil income on 19th june, 1989. second return of income, purportedly a revised return was filed on 30th april, 1991, declaring an income of rs. 12,47,860.notice under s. 148 was issued on 13th may, 1991. in response to this notice, no return was filed but the assessee, vide its letter dt. 31st may, 1991, informed the department about having filed the revised return and also the earlier return. after taking note of both the returns filed, the assessment was completed at a total income of rs. 33,68,610 on 21st may, 1992.3. since both the returns had been filed beyond the time limit prescribed under s. 139(4), the legality of the assessment thereon was challenged before the cit(a) on the plea that in the eye of law, they were no returns at all. the cit(a), however, negatived the plea of the assessee on the ground that the assessee's letter dt. 13th may, 1991, contained an implicit request for treating the earlier returns as filed in response to notice under s. 148. the cit(a) further observed that s.292b took care of such irregularities. thus, holding the assessment to be valid, the cit(a) then proceeded to dispose of the appeal on merits.4. the plea of the learned counsel before us is also the same and has relied on the decisions reported in maya debi bansal vs. cit (1979) 117 itr 125 (cal), cit vs. phoolmati devi (1983) 144 itr 954 (all) and p.n. sasi kumar & bros. vs. cit (1988) 170 itr 80 (ker). the learned counsel also submitted that s. 292b is not helpful to the department in such cases where no return at all exists in the eye of law and for that reliance was placed on the decision in umashankar mishra vs. cit (1982) 136 itr 330 (mp).5. the learned departmental representative tried to distinguish the above decisions on the facts. it was contended that in this case the second return filed by the assessee constituted information in the hands of the ao and hence, notice was issued under s. 148 in order to regularise the returns. attention was drawn to the assessee's letter dt. 31st may, 1991. it was pointed out that the subject captioned in the said letter clearly referred to the notice dt. 13th may, 1991.moreover, subsequently also the assessee never raised any objection in the entire course of the assessment proceedings. thus, the assessee's conduct clearly showed that the assessee wanted the department to treat the returns filed as filed in response to notice under s. 148. at the most, the learned departmental representative contended, this may be treated as an irregularity but not void. referring to s. 292b, the learned departmental representative submitted that it was an omnibus provision. at the most it may be considered to be a mistake in interpreting the letter, which could be taken care of by s. 292b.6. after considering the rival submissions, we are of the considered opinion that the assessment made in this case is not invalid as contended on behalf of the assessee. we do agree with the submission of shri jhanwar that the returns filed by the assessee were non est, and because we agree with this submission, we are also of the view that s.292b cannot help the revenue. since there was no return, the question of validating any technical objection does not arise. but a non est return would not act a bar on the initiation of proceedings under s.147. as the assessee has filed its return beyond the time-limit prescribed under s. 139(4) and consequently is a case of 'no return', the assessee's case can squarely be considered to be a deemed case of income escaping assessment under cl. (a) of expln. 2 to s. 147. the purpose of s. 147 is to tax income which has escaped assessment. income can escape assessment in various ways like by underassessment or by understating the income in the return filed or by non-filing of return.the two returns filed by the assessee informed the ao and created reasons for him to believe that the assessee was having income which had escaped assessment. however, as the returns filed by the assessee were not valid returns in the eye of law, the ao could not proceed to make the assessment on the basis of those returns. had he done so, his action would have been void ab initio. but instead, he issued notice under s. 148 asking the assessee to furnish a return. this is one stage of the proceedings and in our opinion, the ao has acted well within his powers upto this stage.7. once notice was issued to the assessee, it was under obligation to file a return. however, instead of doing so, the assessee, vide its letter dt. 31st may, 1991, informed the ao about its having filed the two returns. this action of the assessee, in our opinion, did not have the effect of validating its otherwise invalid returns, but, for all intents and purposes, it was a request to treat those returns as having filed in compliance of the notice under s. 148. we do agree that the assessee's letter does not say in so many words to treat those returns as having filed in compliance of the notice. it simply mentions the fact about filing the returns and finally says that "it is for information". however, the subject captioned in the letter mentions the assessment year and gives reference about the notice by its date. then the letter starts with the words "with reference to the above subject ..." in our opinion, this letter of the assessee cannot have any meaning, intention or purpose other than requesting the ao to treat the returns filed by it earlier to consider them as having filed in compliance to notice under s. 148. we repeat and clarify that this action of the assessee does not validate the invalid returns, but to avoid the duplication of the work of preparing and filing another return, the assessee wrote the letter dt. 31st may, 1991 in compliance of notice under s. 148. none of the decisions referred to by the learned counsel are applicable to the facts of the present case.8. thus, in our opinion, the notice under s. 148 was perfectly legal, the assessee duly complied with the said notice and hence, the assessment made is also legal. since we have held the assessment to be valid, we now proceed to dispose of the other grounds on merits. in this respect, the first grievance of the assessee is against the addition of rs. 11,70,397 being write off of unrecoverable yarn supplied to weavers.9. during the year, the assessee had made a provision of rs. 11,70,397 by debiting the same to the p&l a/c. this provision pertained to stock of yarn given to various weavers of the erstwhile rajasthan handloom project board (rhpb) which was taken over by the assessee-company in 1984. the ao was of the view that this loss did not belong to the assessee but to his predecessor. moreover, he was also of the view that the deduction was not permissible under s. 36(1)(vii) of the act as the relevant accounts have not been written off. in the first appeal, the cit(a) negatived the contention of the ao about the write off in the accounts. however, he disallowed the claim of the assessee on the ground that there was no justification for writing off the inventory during the year under reference in an arbitrary manner.10. the learned counsel drew our attention to the fact of acquisition of rhpb by the assessee-company with all its assets and liabilities. it was submitted that the said yarn in process given to the weavers, which was taken over by the corporation, amounted to rs. 23,33,268. this yarn was given to about 250 weavers for weaving. nearly, half of the yarn was received by the corporation during the accounting years 1984-85 and 1985-86. the weavers from whom yarn could not be recovered were scattered over the entire state in remotest villages. considerable efforts have been made to recover the yarn but most of the weavers are no longer traceable. it was contended by the learned counsel that by allowing the said deduction the interest of the revenue will not be prejudiced in view of the provisions of s. 41 of the act. with regard to the contention of the ao that the loss of the predecessor board cannot be allowed to the assessee, reliance was placed by shri jhanwar on the decisions reported at s. n. a. s. a. annamalai chettiar vs. cit (1968) 67 itr 584 (mad), jethabhai hirji & jethabhai ramdas vs. cit (1979) 120 itr 792 (bom), t. n. shah (p) ltd. vs. addl. cit (1979) 120 itr 354 (all), vithaldas h. dhanjibhai bardanwala vs. cit (1981) 130 itr 95 (guj), sarangpur cotton mfg. co. ltd. vs. cit (1983) 143 itr 166 (guj), cit vs. t. veerabhadra rao, k. koteswara rao & co. (1985) 155 itr 152 (sc). finally, it was submitted that exactly speaking this was not a bad debt but it was loss of stock which formed part of the inventory as work-in-progress and hence exact rules applicable to s.36(i)(vii) would not apply but the deduction was allowable under s.37(1) of the act.11. the contention of the learned departmental representative was mainly directed towards the fact that the assessee being a government corporation, the write off as claimed by the assessee could not be made so easily, and unless a conscious decision in that regard has been taken at the highest level, only thereafter the board could adopt the resolution to write off such irrecoverables. in this regard, he drew our attention to the copies of correspondence placed in the paper-book of the assessee from p. 54 onwards. thus, according to him, the write off was quite premature and no deduction could be allowed.12. we have considered the submissions and the material placed on record. firstly, we consider the effect of taking over predecessor's business with all its assets and liabilities. in the instant case, formerly handloom activities were being looked after by rhpb and the rajasthan small industries corporation ltd. (rajsico). by virtue of governor's order dt. 31st march, 1984, all assets and liabilities of rhpb were taken over by the assessee w.e.f. 1st april, 1984. a copy of the said letter is placed on record at p. 40 of the paper-book. again, by government order no. 6(3)/ind/2/79, dt. 31st march, 1984, rhpb was abolished as also the handloom activities carried on by rajsico. it was held by the supreme court in cit vs. t. veerabhadra rao k. koteswara rao & co. (supra) that if a business, along with its assets and liabilities is transferred by one owner to another, a debt so transferred would be entitled to the same treatment in the hands of the successor. in the instant case, of course, the impugned amount does not represent a debt as mentioned earlier. none-the-less, the principle laid down by the supreme court would be equally applicable in the case of work-in-progress also. hence, the contention of the revenue that the same belonging to the predecessor could not be allowed to the assessee holds no water.13. coming to the aspect of justification to write off the same amount, from the correspondence placed on the record it appears that quite an effort has been made to recover the yarn from the various weavers. it is evident from the record that despite best efforts and despite repeated reminders to the persons who were incharge of various depots, the corporation could not get the required information. this is also corroborated by note no. 3 in sch. 'b' forming part of balance sheet as at 31st march, 1986 (published accounts). the note mentions that no confirmation of stock of yarn and other stocks lying with weavers, printers and others have been received. however, while claiming loss on account of something which is irrecoverable, be it a debt or any other asset, it is the reasonable belief of the person who has to recover the same, that will form the basis for writing it off in the accounts. this view was also expressed by the jurisdictional high court in the decision reported in cwt vs. shree bhagpatia food industries (1994) 207 itr 1045 (raj). if the said belief falls short of any reasonability, for whatever reason, the said debt or asset will not be considered to be irrecoverable. note no. 3 on the notes on accounts referred to earlier, inter alia, includes the following sentence : "although action against them is in progress, the recovery seems doubtful and as such necessary provision has been made in the stock account of yarn with weavers (yarn-in-process)." 14. from the above note, it is clear that the recoverability of yarn 'seems doubtful' in the opinion of the board. this opinion of the board further gets confirmed in its reply to the comments by the auditors.according to the auditors, the provision for rs. 11,70,397 disclosed in the trading account, was incorrect and according to them, it should have been transferred to account current of rhpb. in reply to this comment by the auditor, the board, at p. 34 of the published accounts, mentioned as follows : "a final view has not been taken about the recovery of the amount, on account of balance yarn with the weavers and hence, at this stage it is not advisable to treat this amount as unrecoverable and as such presently it cannot be transferred to current account of rhpb. why provision was made has been explained in para 3 of notes on accounts and also in confirmatory with observations of a.g." from the above, reply of the board to the comments of the auditors, it is evident that the board itself does not hold a reasonable belief that the yarn given to the weavers is totally irrecoverable. the reply of the board and the notes on the accounts clearly reflect some hope of recovery. the provision is made, as explained in note no. 3 on the accounts, only because it seems doubtful of recovery. this is prudent accounting but for tax purposes entries passed in the accounts on the principles of prudent accounting cannot be considered. in view of this, the order of the cit(a) is justified and we do not intend to interfere in the same. we uphold the order of the cit(a) on this ground.15. the next ground relates to the sustenance of the disallowance of rs. 20,000 out of miscellaneous expenditure. the ao disallowed a sum of rs. 41,753 on the ground that no details thereof had been furnished.after scrutinising the details, the cit(a) thought it reasonable to restrict the disallowance to rs. 20,000. the details of such expenses have been placed on record and it is pointed out by the learned counsel that only the following three amounts are of entertainment nature, which are disallowable : according to the learned departmental representative, further three amounts, namely, rs. 26.75, rs. 46.75 and rs. 106.05 are also disallowable. considering the submissions of both the parties, we restrict the disallowance to the aggregate of the six items mentioned above amounting to rs. 560.51. the balance disallowance is deleted.16. the next ground relates to the disallowance of rs. 50,000 out of exhibition expenses. the assessee had made a provision of rs. 1,59,000 in respect of exhibition expenses. however, allegedly there was no evidence to prove that the liability related to this head arisen or accrued during the year, the ao disallowed the entire sum. the cit(a) restricted the disallowance to rs. 50,000.17. it was submitted by the learned counsel that certain details and vouchers could not be produced on account of the death of an employee, who was looking after these details. in view of this, the cit(a) made a fair estimate and restricted the disallowance to rs. 50,000. in our opinion, it would be quite fair to restrict the disallowance to rs. 20,000. we direct accordingly and hence, the balance addition of rs. 30,000 is deleted.18. the next ground relates to the disallowance of ex gratia amount of rs. 80,000. this amount also represented a provision for ex gratia to be paid to the employees. the ao disallowed the same on the ground that the deduction could be allowed only on actual payment basis. the cit(a) confirmed the action of the ao. we do not see any justification in sustaining the disallowance in view of the fact that the said deduction is allowable under s. 37(1) of the act and further since the method of accounting followed by the assessee is mercantile, the ratio of the decision of the supreme court in the case of kedarnath jute mfg. co.ltd. vs. cit (1971) 82 itr 363 (sc) would squarely apply. hence, the said disallowance is deleted.19. the last ground pertaining to the disallowance of rs. 25,000 on account of guarantee commission was not pressed at the time of hearing and hence, the same is dismissed as such.

Judgment:
1. The assessee is in appeal before us against the order of the learned CIT(A), dt. 25th August, 1992, for asst. yr. 1986-87. In the first ground, the assessee has challenged the very legality of the assessment order on the ground that the notice under s. 148 was illegal.

2. The assessee is a Government of Rajasthan undertaking. For the year under consideration, the due date for filing the return was 31st July, 1986. The due date for filing a belated return under s. 139(4) was 31st March, 1989. The assessee submitted its return showing nil income on 19th June, 1989. Second return of income, purportedly a revised return was filed on 30th April, 1991, declaring an income of Rs. 12,47,860.

Notice under s. 148 was issued on 13th May, 1991. In response to this notice, no return was filed but the assessee, vide its letter dt. 31st May, 1991, informed the Department about having filed the revised return and also the earlier return. After taking note of both the returns filed, the assessment was completed at a total income of Rs. 33,68,610 on 21st May, 1992.

3. Since both the returns had been filed beyond the time limit prescribed under s. 139(4), the legality of the assessment thereon was challenged before the CIT(A) on the plea that in the eye of law, they were no returns at all. The CIT(A), however, negatived the plea of the assessee on the ground that the assessee's letter dt. 13th May, 1991, contained an implicit request for treating the earlier returns as filed in response to notice under s. 148. The CIT(A) further observed that s.

292B took care of such irregularities. Thus, holding the assessment to be valid, the CIT(A) then proceeded to dispose of the appeal on merits.

4. The plea of the learned counsel before us is also the same and has relied on the decisions reported in Maya Debi Bansal vs. CIT (1979) 117 ITR 125 (Cal), CIT vs. Phoolmati Devi (1983) 144 ITR 954 (All) and P.N. Sasi Kumar & Bros. vs. CIT (1988) 170 ITR 80 (Ker). The learned counsel also submitted that s. 292B is not helpful to the Department in such cases where no return at all exists in the eye of law and for that reliance was placed on the decision in Umashankar Mishra vs. CIT (1982) 136 ITR 330 (MP).

5. The learned Departmental Representative tried to distinguish the above decisions on the facts. It was contended that in this case the second return filed by the assessee constituted information in the hands of the AO and hence, notice was issued under s. 148 in order to regularise the returns. Attention was drawn to the assessee's letter dt. 31st May, 1991. It was pointed out that the subject captioned in the said letter clearly referred to the notice dt. 13th May, 1991.

Moreover, subsequently also the assessee never raised any objection in the entire course of the assessment proceedings. Thus, the assessee's conduct clearly showed that the assessee wanted the Department to treat the returns filed as filed in response to notice under s. 148. At the most, the learned Departmental Representative contended, this may be treated as an irregularity but not void. Referring to s. 292B, the learned Departmental Representative submitted that it was an omnibus provision. At the most it may be considered to be a mistake in interpreting the letter, which could be taken care of by s. 292B.6. After considering the rival submissions, we are of the considered opinion that the assessment made in this case is not invalid as contended on behalf of the assessee. We do agree with the submission of Shri Jhanwar that the returns filed by the assessee were non est, and because we agree with this submission, we are also of the view that s.

292B cannot help the Revenue. Since there was no return, the question of validating any technical objection does not arise. But a non est return would not act a bar on the initiation of proceedings under s.

147. As the assessee has filed its return beyond the time-limit prescribed under s. 139(4) and consequently is a case of 'no return', the assessee's case can squarely be considered to be a deemed case of income escaping assessment under cl. (a) of Expln. 2 to s. 147. The purpose of s. 147 is to tax income which has escaped assessment. Income can escape assessment in various ways like by underassessment or by understating the income in the return filed or by non-filing of return.

The two returns filed by the assessee informed the AO and created reasons for him to believe that the assessee was having income which had escaped assessment. However, as the returns filed by the assessee were not valid returns in the eye of law, the AO could not proceed to make the assessment on the basis of those returns. Had he done so, his action would have been void ab initio. But instead, he issued notice under s. 148 asking the assessee to furnish a return. This is one stage of the proceedings and in our opinion, the AO has acted well within his powers upto this stage.

7. Once notice was issued to the assessee, it was under obligation to file a return. However, instead of doing so, the assessee, vide its letter dt. 31st May, 1991, informed the AO about its having filed the two returns. This action of the assessee, in our opinion, did not have the effect of validating its otherwise invalid returns, but, for all intents and purposes, it was a request to treat those returns as having filed in compliance of the notice under s. 148. We do agree that the assessee's letter does not say in so many words to treat those returns as having filed in compliance of the notice. It simply mentions the fact about filing the returns and finally says that "it is for information". However, the subject captioned in the letter mentions the assessment year and gives reference about the notice by its date. Then the letter starts with the words "with reference to the above subject ..." In our opinion, this letter of the assessee cannot have any meaning, intention or purpose other than requesting the AO to treat the returns filed by it earlier to consider them as having filed in compliance to notice under s. 148. We repeat and clarify that this action of the assessee does not validate the invalid returns, but to avoid the duplication of the work of preparing and filing another return, the assessee wrote the letter dt. 31st May, 1991 in compliance of notice under s. 148. None of the decisions referred to by the learned counsel are applicable to the facts of the present case.

8. Thus, in our opinion, the notice under s. 148 was perfectly legal, the assessee duly complied with the said notice and hence, the assessment made is also legal. Since we have held the assessment to be valid, we now proceed to dispose of the other grounds on merits. In this respect, the first grievance of the assessee is against the addition of Rs. 11,70,397 being write off of unrecoverable yarn supplied to weavers.

9. During the year, the assessee had made a provision of Rs. 11,70,397 by debiting the same to the P&L a/c. This provision pertained to stock of yarn given to various weavers of the erstwhile Rajasthan Handloom Project Board (RHPB) which was taken over by the assessee-company in 1984. The AO was of the view that this loss did not belong to the assessee but to his predecessor. Moreover, he was also of the view that the deduction was not permissible under s. 36(1)(vii) of the Act as the relevant accounts have not been written off. In the first appeal, the CIT(A) negatived the contention of the AO about the write off in the accounts. However, he disallowed the claim of the assessee on the ground that there was no justification for writing off the inventory during the year under reference in an arbitrary manner.

10. The learned counsel drew our attention to the fact of acquisition of RHPB by the assessee-company with all its assets and liabilities. It was submitted that the said yarn in process given to the weavers, which was taken over by the Corporation, amounted to Rs. 23,33,268. This yarn was given to about 250 weavers for weaving. Nearly, half of the yarn was received by the Corporation during the accounting years 1984-85 and 1985-86. The weavers from whom yarn could not be recovered were scattered over the entire State in remotest villages. Considerable efforts have been made to recover the yarn but most of the weavers are no longer traceable. It was contended by the learned counsel that by allowing the said deduction the interest of the Revenue will not be prejudiced in view of the provisions of s. 41 of the Act. With regard to the contention of the AO that the loss of the predecessor Board cannot be allowed to the assessee, reliance was placed by Shri Jhanwar on the decisions reported at S. N. A. S. A. Annamalai Chettiar vs. CIT (1968) 67 ITR 584 (Mad), Jethabhai Hirji & Jethabhai Ramdas vs. CIT (1979) 120 ITR 792 (Bom), T. N. Shah (P) Ltd. vs. Addl. CIT (1979) 120 ITR 354 (All), Vithaldas H. Dhanjibhai Bardanwala vs. CIT (1981) 130 ITR 95 (Guj), Sarangpur Cotton Mfg. Co. Ltd. vs. CIT (1983) 143 ITR 166 (Guj), CIT vs. T. Veerabhadra Rao, K. Koteswara Rao & Co. (1985) 155 ITR 152 (SC). Finally, it was submitted that exactly speaking this was not a bad debt but it was loss of stock which formed part of the inventory as work-in-progress and hence exact rules applicable to s.

36(i)(vii) would not apply but the deduction was allowable under s.

37(1) of the Act.

11. The contention of the learned Departmental Representative was mainly directed towards the fact that the assessee being a Government Corporation, the write off as claimed by the assessee could not be made so easily, and unless a conscious decision in that regard has been taken at the highest level, only thereafter the Board could adopt the resolution to write off such irrecoverables. In this regard, he drew our attention to the copies of correspondence placed in the paper-book of the assessee from p. 54 onwards. Thus, according to him, the write off was quite premature and no deduction could be allowed.

12. We have considered the submissions and the material placed on record. Firstly, we consider the effect of taking over predecessor's business with all its assets and liabilities. In the instant case, formerly handloom activities were being looked after by RHPB and the Rajasthan Small Industries Corporation Ltd. (RAJSICO). By virtue of Governor's order dt. 31st March, 1984, all assets and liabilities of RHPB were taken over by the assessee w.e.f. 1st April, 1984. A copy of the said letter is placed on record at p. 40 of the paper-book. Again, by Government order No. 6(3)/Ind/2/79, dt. 31st March, 1984, RHPB was abolished as also the handloom activities carried on by RAJSICO. It was held by the Supreme Court in CIT vs. T. Veerabhadra Rao K. Koteswara Rao & Co. (supra) that if a business, along with its assets and liabilities is transferred by one owner to another, a debt so transferred would be entitled to the same treatment in the hands of the successor. In the instant case, of course, the impugned amount does not represent a debt as mentioned earlier. None-the-less, the principle laid down by the Supreme Court would be equally applicable in the case of work-in-progress also. Hence, the contention of the Revenue that the same belonging to the predecessor could not be allowed to the assessee holds no water.

13. Coming to the aspect of justification to write off the same amount, from the correspondence placed on the record it appears that quite an effort has been made to recover the yarn from the various weavers. It is evident from the record that despite best efforts and despite repeated reminders to the persons who were incharge of various depots, the Corporation could not get the required information. This is also corroborated by Note No. 3 in Sch. 'B' forming part of balance sheet as at 31st March, 1986 (published accounts). The note mentions that no confirmation of stock of yarn and other stocks lying with weavers, printers and others have been received. However, while claiming loss on account of something which is irrecoverable, be it a debt or any other asset, it is the reasonable belief of the person who has to recover the same, that will form the basis for writing it off in the accounts. This view was also expressed by the jurisdictional High Court in the decision reported in CWT vs. Shree Bhagpatia Food Industries (1994) 207 ITR 1045 (Raj). If the said belief falls short of any reasonability, for whatever reason, the said debt or asset will not be considered to be irrecoverable. Note No. 3 on the Notes on Accounts referred to earlier, inter alia, includes the following sentence : "Although action against them is in progress, the recovery seems doubtful and as such necessary provision has been made in the stock account of yarn with weavers (yarn-in-process)." 14. From the above note, it is clear that the recoverability of yarn 'seems doubtful' in the opinion of the Board. This opinion of the Board further gets confirmed in its reply to the comments by the auditors.

According to the auditors, the provision for Rs. 11,70,397 disclosed in the trading account, was incorrect and according to them, it should have been transferred to account current of RHPB. In reply to this comment by the auditor, the Board, at p. 34 of the published accounts, mentioned as follows : "A final view has not been taken about the recovery of the amount, on account of balance yarn with the weavers and hence, at this stage it is not advisable to treat this amount as unrecoverable and as such presently it cannot be transferred to current account of RHPB. Why provision was made has been explained in para 3 of notes on accounts and also in confirmatory with observations of A.G." From the above, reply of the Board to the comments of the auditors, it is evident that the Board itself does not hold a reasonable belief that the yarn given to the weavers is totally irrecoverable. The reply of the Board and the notes on the accounts clearly reflect some hope of recovery. The provision is made, as explained in Note No. 3 on the accounts, only because it seems doubtful of recovery. This is prudent accounting but for tax purposes entries passed in the accounts on the principles of prudent accounting cannot be considered. In view of this, the order of the CIT(A) is justified and we do not intend to interfere in the same. We uphold the order of the CIT(A) on this ground.

15. The next ground relates to the sustenance of the disallowance of Rs. 20,000 out of miscellaneous expenditure. The AO disallowed a sum of Rs. 41,753 on the ground that no details thereof had been furnished.

After scrutinising the details, the CIT(A) thought it reasonable to restrict the disallowance to Rs. 20,000. The details of such expenses have been placed on record and it is pointed out by the learned counsel that only the following three amounts are of entertainment nature, which are disallowable : According to the learned Departmental Representative, further three amounts, namely, Rs. 26.75, Rs. 46.75 and Rs. 106.05 are also disallowable. Considering the submissions of both the parties, we restrict the disallowance to the aggregate of the six items mentioned above amounting to Rs. 560.51. The balance disallowance is deleted.

16. The next ground relates to the disallowance of Rs. 50,000 out of exhibition expenses. The assessee had made a provision of Rs. 1,59,000 in respect of exhibition expenses. However, allegedly there was no evidence to prove that the liability related to this head arisen or accrued during the year, the AO disallowed the entire sum. The CIT(A) restricted the disallowance to Rs. 50,000.

17. It was submitted by the learned counsel that certain details and vouchers could not be produced on account of the death of an employee, who was looking after these details. In view of this, the CIT(A) made a fair estimate and restricted the disallowance to Rs. 50,000. In our opinion, it would be quite fair to restrict the disallowance to Rs. 20,000. We direct accordingly and hence, the balance addition of Rs. 30,000 is deleted.

18. The next ground relates to the disallowance of ex gratia amount of Rs. 80,000. This amount also represented a provision for ex gratia to be paid to the employees. The AO disallowed the same on the ground that the deduction could be allowed only on actual payment basis. The CIT(A) confirmed the action of the AO. We do not see any justification in sustaining the disallowance in view of the fact that the said deduction is allowable under s. 37(1) of the Act and further since the method of accounting followed by the assessee is mercantile, the ratio of the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co.

Ltd. vs. CIT (1971) 82 ITR 363 (SC) would squarely apply. Hence, the said disallowance is deleted.

19. The last ground pertaining to the disallowance of Rs. 25,000 on account of guarantee commission was not pressed at the time of hearing and hence, the same is dismissed as such.