TMI Blog2003 (10) TMI 262X X X X Extracts X X X X X X X X Extracts X X X X ..... use most of the issues involved in the grounds of appeals taken by the parties are identical, for the sake of convenience. 3. In appeal ITA No. 1101/Chandi/1996; asst. yr. 1993-94, the Revenue has taken the following effective grounds: 1. On the facts and in the Circumstances of the case, the learned CIT(A) has erred in deleting the additions made on account of element of MODVAT amount in the closing stock by following appellate decisions in the previous years which have not been accepted by the Department. 2. The learned CIT(A) has further erred in allowing relief from disallowance from foreign travelling expenses by following the appellate decisions in the earlier years which have not been accepted by the Department. 3. The learned CIT(A) has also erred in deleting the addition of Rs. 27,46,076 made by the AO on account of interest-free advances to its sister-concern. 4. The CIT(A) has further erred in deleting the addition of Rs. 86,66,744 made by the AO on account of interest on investments in subsidiary companies. 5. The learned CIT(A) has also erred in reducing the disallowance on account of entertainment expenses from Rs. 2,14,351 to Rs. 73,283. 6. The learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 71,004 made by the AO by treating 75 per cent of expenditure debited under the head sales promotion expenses as entertainment expenses. 6. The learned CIT(A) has further erred in restoring the issue concerning the payment of lease amount of Rs. 15 lakhs for land, building and machinery to M/s ICL (Haryana) Ltd. back to the file of the AO for re-examination. 7. The learned CIT(A) has also erred in deleting the addition of Rs. 5,51,431 made by the AO on account of disallowance of guest-house expenses. 6. In appeal ITA No. 1022/Chandi/1997, asst. yr. 1994-95, the assessee has taken the following effective grounds: 1.(a) That there is no justification for disallowance of Rs. 73,740 out of foreign travelling expenses claimed by the appellant. (b) That the total expenditure is fully covered by r. 6D(1) of the Rules. 2. That the learned CIT(A) has erred in confirming the disallowance of lease money of Rs. 8,73,600 paid to Dynamic Cosmetics Ltd., particularly as the expenditure is not covered by s. 40 of the Act. 3. That there is no justification in setting aside ground. No.8 pertaining to disallowance of lease rent paid at Rs. 15 lakhs to ICL Steel (Haryana) Ltd. 7. In a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nch, dt. 22nd Aug., 2002, the issue involved in the ground of instant appeals of the Revenue is decided against the Revenue and in favour of the assessee and consequently, the respective orders of the CIT(A) in this regard for the asst. yrs. 1993-94 and 1994-95, are upheld and the ground No.1 of the appeals in ITA No. 1101/Chandi/1996, asst. yr. 1993-94 and ITA No. 1106/Chandi/1997, asst. yr. 1994-95, taken by the Revenue is rejected. 9. Now, we shall take up ground No.2 of the appeals of the Revenue in ITA No. 1101/Chandi/1996, asst. yr. 1993-94 and ITA No. 1106/Chandi/1997, asst. yr. 1994-95 in ITA No. 1l01/Chandi/1996, asst. yr. 1993-94 and ITA No. 1106/Chandi/1997, asst. yr. 1994-95, pertaining to the disallowance on foreign travelling expenses claimed by the assessee and ground No.1 of the appeals filed by the assessee in ITA Nos. 1054/Chandi/1996, asst. yr. 1993-94 and 1022/Chandi/1997, asst. yr. 1994-95, relating to the grievance of the assessee against the impugned disallowance sustained by the CIT(A). 9.1 The relevant and material facts for the disposal of this ground of appeals are that during the assessment year under consideration, the assessee spent an amount of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yr. 1994-95 are allowed for statistical purposes. 10. Now, we shall take up ground No.3 of the appeals filed by the Revenue in ITA No. 1101/Chandi/1996, asst. yr. 1993-94 and ITA No. 1 106/Chandi/1996, asst. yr. 1994-95 pertaining to the disallowance of interest made by the AO amounting to Rs. 27,46,076 and Rs. 20,80,752 for the asst. yrs. 1993-94 and 1994-95, respectively, out of interest-free advances given by the assessee to subsidiary companies and associated companies. 10.1 The CIT(A) deleted the additions made by the AO by relying on the various orders passed by his predecessor in the asst. yrs. 1991-92 and 1992-93 who in turn also placed reliance on the orders of the Tribunal. Chandigarh Bench, in the case of this very assessee in the asst. yrs. 1985-86, 1986-87, 1987-88 and 1988-89. 10.2 Before us, learned Departmental Representative for the Revenue simply placed reliance on the reasoning given in the order of the AO, whereas, on the other hand, learned Authorised Representative for the assessee submitted that this very issue arising in this ground of appeals also came up for consideration before the Tribunal in ITA No. 806/Chandi/1994 and ITA No. 930/Chandi/1994, ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ICL Towers Ltd. has given loan to M/s Haryana Telecom Ltd. The subsidiary companies have declared losses. Further, according to the AO, the assessee had invested in these subsidiary- companies out of the borrowed funds with the object of reducing its own tax liability and the same has not been invested by the assessee out of its own surpluses because had the assessee invested the money out of its own surpluses, there was no need for the assessee to raise loan amounting to more than Rs. 80 crores from the banks, etc. Hence, the AO, relying on the decision of the apex Court in the case of McDowell Co. vs. CTO, made the abovementioned disallowance. 11.2 The CIT(A) deleted the disallowance by making the following observations in ITA No. 1101 of 1996, asst. yr. 1993-94 and placing reliance on the same reasoning, deleted the disallowance made by the AO for the asst. yr. 1995-96 in ITA No. 1106 of 1997, asst. yr. 1994-95: "I have considered the above arguments and am of the opinion that factually it has not been proved by the appellant that the funds invested were not out of borrowed capital. However, the AO has also not been able to state the nexus between the borrowed capital and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isfy the assessing authority that he is entitled to obtain deduction in accordance with the taxing statute and thereafter in that case, their Lordships held: "The assessee was required to show that the amounts invested in or advanced to the subsidiary company came out of the assessee's own funds. The Tribunal with reference to the factual aspects came to hold that the money utilised was from the borrowed funds. Strong reliance had been placed on the accepted position that the assessee earned profit of more than Rs. 70 lakhs during the, year, which was much more than the investment and advance. The substance of this argument could have been countenanced had the assessee placed materials to show that it had generated surplus in excess of the investments and advances, prior to such investment and advance. No material was placed in this regard by the assessee. Therefore, the Tribunal was justified in holding that the assessee was not entitled to deduction of interest in respect of investments in and advances made to the subsidiary company." (ii) Decision of the Allahabad High Court in the case of CIT vs. H.R. Sugar Factory (P) Ltd. (1990) 87 CTR (All) 132 : (1991) 187 ITR 363 (All) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal also held that the amount borrowed had been utilised by the assessee for non-business purposes, viz., for investment in shares and consequently borrowings cannot be said to be for the purposes of the company. Held: 'That in view of the finding of the Tribunal that the amounts borrowed by the company had been utilised for non-business purposes, viz., for investment in shares, the interest paid on the capital borrowed could not be allowed as a deduction under s. 36(1)(iii). In view of the question of allowance under s. 57(iii) not having been argued before the Tribunal even though there was a passing observation that the interest may be allowed under the head 'Other sources', the question of considering the allow ability of the interest under s. 57(iii) could not be said to be comprehended in question referred to the High Court. Even assuming that the decision of allowability of interest under s. 57(iii) could be considered to be one fact of the question referred to the High Court, the assessee could not have the benefit of the said section because for an application of that section, there must be possibility of the income coming from the investment, though factually no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares were made by the assessee out of the borrowed capital. The AO simply went on assumption that in case the assessee had surpluses, there was no need for the assessee to take loans and the AO presumed that the investments made by the assessee were from the borrowed capital. The AO, however, has, not been able to prove from the record that the investments in shares by the assessee were made out of the borrowed capital. 11.6 Learned Authorised Representative for the assessee, in order to prove that the assessee has not made the investments out of the borrowed funds, drew our attention towards the balance sheet appearing in the annual report for 1992-93 placed at p. 80 of the paper book indicating that the share capital and reserves at surplus totalling to Rs. 32,53,70,535 were available with the assessee on 31st March, 1993, and the secured loans and unsecured loans totalling to Rs. 18,36,21,430, thus leaving the balance share capital and reserves and surplus at Rs. 14,17,49,105. Again, if we look at the investments made by the assessee upto 31st March, 1993, we would find that the investments were to the tune of Rs. 5,52,10,475. From these figures, it is evident that for invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odas Birla Santatikosh vs. CIT (1991) 190 ITR 578 (Cal). In this case, learned Authorised Representative for the assessee relied on the observations of their Lordships wherein defining the general principle of income-tax, they observed that: "The ITO cannot dictate to an assessee as to how he should carryon his business and that the IT Department cannot claim to be a sleeping partner of the assessee entitled to question the validity of his action." (ii) 173 ITR 473 (sic) Learned Authorised Representative for the assessee has referred to this citation in order to canvass that mere avoidance by the assessee cannot be the basis for making the addition/deletion of the disallowance. He referred to the following relevant portion of the decision of the apex Court in the above case: "Where the true effect of construction of deeds is clear, the appeal to discourage the avoidance is not a relevant consideration." (iii) Decision of the Gujarat High Court in the case of Banyan Berry vs. CIT (1996) 131 CTR (Guj) 127 : (1996) 222 ITR 831 (Guj). The learned Authorised Representative for the assessee has placed reliance on this citation on the finding of the High Court relating to the is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch investment. It is also clear that in the year under consideration, the assessee had not borrowed any fresh funds and so there was no question of making investment by the assessee from the fresh borrowed funds in the year under consideration. On the contrary, the AO has not given any finding from the record to show that there was any nexus between the investments and the borrowed capital. 11.10 Even in the case of Inman Metals Ferro Alloys Ltd., relied upon by the learned Departmental Representative for the Revenue, their Lordships of the Orissa High Court were of the opinion that in case the assessee is able to place material on record to show that it had generated surpluses in excess of the investment prior to such investments in advance, the assessee was entitled to deduction of interest in respect of investments made in the subsidiary companies. 11.11 In the instant case of the assessee, it is also important to mention that even the investments made in share capital of the subsidiary companies by the assessee could not be called the investments for non-business purpose because in the memorandum and the articles of the company, one of the objects the assessee-company men ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave been made from the surpluses of its own and not out of any borrowed funds, Hence, we are of the considered view that In the existing facts and circumstances of the case, the CIT(A) has rightly deleted the impugned disallowance made by the AO in ITA No. 1101 of 1996, asst. yr. 1993-94. Since the facts in the instant case of the assessee in ITA No. 1101 of 1996 are admitted to be identical on the issue and facts involved in ITA No. 1106 of 1997, asst. yr. 1994-95, so following the reasoning given hereinabove on this issue in ITA No. 1101 of 1996, asst. yr. 1993-94, we held that the CIT(A) has rightly deleted the impugned disallowance made, by the AO in ITA No. 1106 of 1996, asst. yr. 1993-94. Accordingly, the orders of the CIT(A) in this regard in ITA No. 1101 of 1996, asst. yr. 1993-94 and ITA No. 1106 of 1997, asst. yr. 1994-95 are upheld and ground No.4 of both the appeals is rejected. 12. Now, we shall take up ground No. 5 of the appeals filed by the Revenue in ITA No. 1101/Chandi/1996, asst. yr. 1993-94 and ITA No. 1106/Chandi/1996, asst. yr. 1994-95 pertaining to disallowance on account of entertainment expenses claimed by the assessee. 12.1 The relevant and material fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... putation of income as entertainment expenses. 12.3 Learned Departmental Representative for the Revenue was not able to controvert the above submissions of the learned Authorised Representative for the assessee. Hence, respectfully following the decision of the Tribunal, supra, the orders of the tax authorities below are set aside and the issue is restored to the file of the AO to reconcile the figures by disallowing 50 per cent of the same by treating to be the entertainment expenses and while doing so, the AO should allow credit to the amount included by the assessee in computation of income as entertainment expenses. Accordingly, ground No.5 of the appeals filed by the Revenue for the asst. yrs. 1993-94 and 1994-95 in ITA No. 1101 of 1996 and 1106 of 1996 is allowed for statistical purposes. 13. In ground Nos. 6 and 7 of ITA No. 1101/1996, asst. yr. 1993-94, the Revenue is aggrieved because the CIT(A) has deleted the addition of Rs. 10,95,000 on account of lease rent paid to M/s ICLS in asst. yr. 1993-94. In ground No.6 of ITA No. 1106/1997, asst. yr. 1994-95, the Revenue is aggrieved because the CIT(A) instead of sustaining the addition of Rs. 15 lakhs paid on account of lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e properties as sale consideration itself was returned to the purchaser as interest-free loan. The assessee explained before the AO that it was running two units, one at Kila Zaffaragarh and the other in Jind. The unit in Jind was incurring huge losses and, therefore, the management had taken a decision to dispose of this unit to avoid losses. Further, according to the assessee, efforts were made to sell the unit but no buyer was available and hence it was decided to run this unit separately and accordingly, it was sold to ICL Steel Haryana Ltd. Since the assessee had certain orders to fulfil the unit was taken on lease on the same date. As far as loan given to M/s ICL Steel is concerned, it was returned in March, 1993, and sale was made to stop permanent losses being incurred by the assessee. The AO did not accept these arguments of the assessee but further analysed that no benefit had been derived by the assessee by the sale of this unit because the same money was itself returned by the assessee as interest free loan and rather further liability had been incurred by the assessee by paying lease rent. The AO was further of the opinion that this was only an arrangement made by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .e., a few days after the receipt of the sale consideration of these properties from that party. Learned Departmental Representative for the Revenue contended that the assessee in its explanation before the AO has submitted that it was having two units, one at Rajpura and the other in Distt. Jind in his steel division and unfortunately the unit at Jind was incurring huge losses. Thus, the company management took a decision to dispose of this unit to avoid losses. They made efforts to sell this unit but no other buyer was available. Hence, they decided to run this unit separately and sold the same to M/s ICLS on 10th Oct., 1991. Other contention raised by the assessee before the AO was that as the assessee had some orders in hand and the goods has to be supplied to the customers, so this unit was taken on lease on the same date. Another explanation made before the AO by the assessee was that the interest-free loan of Rs. 50 lakhs was advanced to M/s ICLS for getting its business running and the same was returned in March, 1993, and lastly, that this unit was sold to reduce the permanent losses and to save the business of the assessee-company. Learned Departmental Representative for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, it is clear that this arrangement was made by the assessee simply to reduce the tax liability and this expenditure was incurred for the non-business purpose and hence the AO has rightly disallowed the same. Even if there is no dispute about the agreement having been taken place between the assessee and M/s ICLS in respect of the lease money, and even if the AO has not disputed the payment of this lease money but since the assessee has used this transaction as device to avoid tax, so the AO has rightly disallowed the expenditure claimed by the assessee by applying the ratio of the decision of the apex Court. In addition thereto, he submitted that as the transaction was not bona fide, so the AO has rightly disallowed the claim of the assessee under s. 37 of the Act." 13.4 On the other hand learned Authorised Representative for the assessee referring to pp. 2 to 19 of the paper book submitted that in asst. yr. 1992-93, as no addition has been made by the AO, so in asst. yr. 1993-94, under consideration before this Bench, the AO was not justified in making the addition for the amount of the lease rent paid to M/s ICLS. In support of his this plea, learned Authorised Rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee pertaining to the lease rent because the assessment was framed under s. 143(1) and not under s. 143(3), and so the principle of res judicata does not apply to the instant issue involved in this ground of appeal because the facts of each case have to be appreciated separately and since in the instant case, no adjudication was made by the AO on this issue in the asst. yr. 1992-93, the AO was not wrong in making the disallowance in the assessment year under consideration, i.e., 1993-94. He also submitted that the facts of each case have to be appreciated separately while making the addition or disallowance. In support of his contention, he placed reliance on the following: (i) Decision of the Karnataka High Court in the case of Karnataka Forest Plantations Corporation Ltd. vs. CIT (1986) 53 CTR (Kar) 308 : (1986) 156 ITR 275 (Kar), wherein their Lordships held: "That every assessment year was a separate and distinct proceeding and its validity or invalidity did not depend upon the validity or the invalidity of the proceedings for the previous or subsequent years. Even assuming that the petitioner had not challenged similar assessments for the previous and subsequent ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the business or profession. 'True test of an expenditure laid out wholly and exclusively for the purpose of trade or business is that it is incurred by the assessee as incidental to its trade for the purpose of keeping the trade going and making it pay and not in any other capacity than that of a trader. CIT vs. Delhi Safe Deposit Co. Ltd. (1982) 26 CTR (SC) 411 : (1982) 133 ITR 756, 760 (SC) and Malwa Vanaspati Chemical Co. Ltd. vs. CIT (1985) 44 CTR (MP) 90 : (1985) 154 ITR 655 and 659 (MP). 16. In CIT vs. Globe Theatres (P) Ltd. (1979) 8 CTR (Bom) 134 : (1980) 122 ITR 240 (Bom), their Lordships explained as to how this test is to be applied by, observing "that the manner applied the test to ask the question : Has the expense been incurred with the sale object of furthering the trade or business interest of the assessee, unallowed or unmixed with any other consideration? If the expense is found to bear an element other than the trade or business interest of the assessee, the expenditure is not allowable one." In this very order, their Lordships of Bombay High Court while explaining allowability of this expenditure, 'issued following guidelines: "To arrive at the conclusio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is not laid out wholly and exclusively for the purpose of business of the assessee and to disallow it". 20. In Workmen, Associated Rubber Industry Ltd. vs. Associated Rubber Industry Ltd. (1985) 48 CTR (SC) 355 : (1986) 157 ITR 77 (SC), their Lordships emphasising on duty of Court while considering to allow an expenditure claimed by the assessee observed, "it is the duty of the Court in every case where ingenuity is expanded to avoid taxing and welfare legislation, to get behind smoked screen and discover the true state of affairs. The Court is not to be satisfied with form and leave well alone the substance of transaction. Avoidance of welfare legislation is as common as avoidance of taxation and the approach in considering the problems arising out of such avoidance has necessarily to be the same". These observations were made by their Lordships in this case while placing reliance on their earlier decisions delivered in the case of CIT vs. Shri Meenakshi Mills Ltd. (1967) 63 ITR 609 (SC) and McDowell Co. Ltd. 21. From the ratio of abovementioned decisions, it is evident that the question as to whether the item of expenditure is wholly and exclusively laid out for the purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness of M/s ICLS Ltd. gets running smoothly, also does not seem to have any force because in that case the assessee could have simply advanced the interest-free loan to M/s JCLS Ltd. instead of entering into this transaction of selling the land, building and machinery to ICLS Ltd. and then taking back the same on lease at a monthly rent of Rs. 1.50 lakhs. Had this transaction been genuine and genuinely entered wholly and exclusively for the purpose of business either of the assessee or of ICLS Ltd., there was no need of entering into such type of sale, lease agreement and then in advancing interest-free loan to M/s ICLS Ltd., and more so, when no business activity was carried out by ICLS Ltd. after the purchase and lease, of these assets during the asst. yr. 1993-94. 25. Another explanation given by the assessee for taking premises and machinery on lease from M/s ICLS Ltd when the same was sold by the assessee to M/s ICLS Ltd. was that the assessee had some orders in hand and the goods had to be supplied to the customers, so, for manufacturing the goods from raw material, the assessee took on lease the building and machinery, from M/s ICLS Ltd, But, we again find that in asst. yr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sons as discussed by us hereinabove in this order. 27. Hence, on considering the facts and circumstances of the case, we are unable to agree with the submissions of learned Authorised Representative for the assessee. The question as to whether an item of expenditure is wholly and exclusively laid out for the purpose of the business or not, has to be decided on the facts of each case, the necessary condition being that it must be laid down or expended wholly or exclusively for the purpose of assessee's business. The true test of expenditure being wholly or exclusively for the purpose of assessee's business is that it is incurred by the assessee as incidental to his trade for the purpose of getting the trade going and by making it pay and in any capacity as a trader. The word 'business' used in s. 37(1) in association with expression 'for the purpose of' is a Word of one commutation. In the context of taxing statute, the word 'business' would signify continued commercial activity which is carried on with the end view of making and earning profits. Therefore, under s. 37(1) of IT Act, connection has to be established between expenditure-incurred and the activity undertaken by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t March, 1994. Even during the asst. yr. 1994-95 under question, the AO disallowed the total lease rent amounting to Rs. 15 lakhs paid for this period, on the reasoning that as the facts and circumstances for the year under question were also the same as accepted for the previous asst. yr. 1993-94, so, on the same basis, he disallowed the lease rent amounting to Rs. 15 lakhs during the asst. yr. 1994-95 under consideration. 29.3 Learned CIT(A) was of the opinion that for claiming deduction of lease rent under s. 37(1), the assessee was required to give details of the commercial exploitation of land, building and machinery, and also the assessee was required to show that it has paid lease rent exclusively for the business purposes, and since the assessee has not been able to show the same and also these aspects have not been examined in depth by the AO, so, the CIT(A) restored this issue back to the file of the AO for re-examination at his level in order to ascertain the aspects whether there was any commercial exploitation of these assets by the assessee or whether the assessee has made this payment wholly and exclusively for the purpose of business. With this order of the CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture is under s. 40A(2) in case the expenditure is found to be unreasonable or excessive. This disallowance under s. 40A(2) of the Act can also be made if the directors of the assessee-company and lessor company are common and have substantial interest in the lessor company. Since this expenditure does not fall under any of these categories of s. 40A(2), the same cannot be disallowed under s. 40A(2). He further contended that as this expenditure is allowable under s. 37(1) of the Act and the section does not allow the AO to determine the excessive or unreasonableness of the expenditure, so, the same cannot be disallowed even under this section. He also contended that the only condition laid down under s. 37(1) was that the expenditure should be wholly and exclusively for business purposes and this expression "wholly and exclusively" does not mean necessarily, because ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his business or not. Such an expenditure may be incurred voluntarily or without any necessity and it is incurred for promoting the business or to earn profits, so, the assessee can claim deduction under s. 37(1) ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is fully allowable and is for commercial exploitation of the assets. Further, the ICLS is independently assessed and the rate of tax was higher in its hands. The CIT(A) after considering these submissions of the assessee, deleted the addition of Rs. 15 lakhs by making following observations in his order: "I have carefully considered the facts of the case and the rival submissions. The AO during the course of the hearing pointed out that in the balance sheet of ICL Steel Haryana Ltd., it is stated that the company became a partner of the firm namely, Superior Investment Co. vide partnership deed dt. 1st April, 1994. In this firm, Shri Devinder Singh and Smt. Sita Chaudhary have 5 per cent share each and ICL Industries Punjab Ltd., the appellant, has 20 per cent shares. He thus pointed out that both the companies, i.e., ICL Industries Punjab Ltd. and the lessor M/s ICL Steel Haryana Ltd. belong to the same group and the whole exercise is a colourable device to avoid taxes by diverting its income and the decision of the Hon'ble Supreme Court in Mcdowell Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126: (1985) 154 ITR 148 (SC) applies squarely to the facts of the case of the appellant. He a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant's argument that since a huge amount of raw material, scrap and semi-finished goods was lying at the factory premises and the appellant had also plant and machinery worth about Rs. 1 crore which would have cost a lot of money to shift and the shifting of the operations would also have effected the business of raising fixed deposits from the public and, therefore, it was commercially expedient for them to continue to lease the plant and machinery and the factory premises during the accounting period relevant to the assessment year and in view of the case cited at (1979) 10 CTR (SC) 383 : (1979) 118 ITR 261 (SC), i.e., Sassoon J. David Co. (p) Ltd. vs. CIT and the apex Court decision reported as 64 ITR 381 (sic) and J.K. Woollen Manufacturers vs. CIT (1969) 72 ITR 612, CIT vs. Panipat Woollen General Mills Co. Ltd. 1976 CTR (SC) 317 : (1976) 103 ITR 66 (SC), the decision of Sanjeevi Co. vs. CIT (1966) 62 ITR 156 (Mad) and Raja Ram Kumar Bhargava vs. CIT (1963) 47 ITR 680 (All), the expenditure is an allowable expenditure under s. 37(1) of IT Act, and the addition made cannot be sustained and is deleted. As regards the application of s. 40A(2) of IT Act, no case is made ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e asst. yr. 1994-95. In support thereof he has placed reliance on Mcdowell Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC), (1985) 48 CTR (SC) 355 : (1986) 157 ITR 77 (SC) and CIT vs. S. Kannan (1994) 118 CTR (Kar) 318 : (1994) 210 ITR 585 (Kar). In addition thereto, Departmental Representative for the Revenue placed reliance on the reasoning given in that order of AO and submitted that the CIT(A) without properly discussing the order of AO has wrongly deleted the impugned addition of Rs. 15 lakhs. On the other hand learned Authorised Representative for the assessee reiterated the submissions which he made before the CIT(A) and submitted that whether the assessee has taken on lease the assets from ICLS Ltd. wholly and exclusively for the purpose of its business depends on facts of each case and in case we go through the order of CIT(A), it becomes clear that the assessee has paid the lease money to ICLS wholly and exclusively for its business purpose because the assessee has sold the steel division to reduce its losses. 30.4 Learned Authorised Representative for the assessee in support of the contention that the CIT(A) has rightly deleted the impugned addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olly and exclusively for the purpose of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any capacity other than as a trader. Sec. 37(1) of IT Act being a residual provision, it cannot be taken aid of, unless and until it is established that none of the provisions of ss. 30 to 36 are applicable to a given case. The scope of s. 37(1) is essentially wider. The word 'business' used in s. 37(1) in association with the expression "for the purpose of' is a word of wide connotation. In the context of taxing statute, the word 'business' would signify an organised and continuous course of commercial activity which is carried on with the end in view of making and earning profits". In the case of Mysore Kirloskar Ltd. vs. CIT (1987) 61 CTR (Kar) 265 : (1987) 166 ITR 836 (Kar) their Lordships at p. 837 observed. "Under s. 37(1), if the' expenditure has been incurred by the assessee voluntarily even without necessity, but if it is for 'promoting business, deduction would be permissible" and at p. 838 held-"That the word "for the purpose of the business' used in s. 37(1) should not be li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 31st March, 1993 worth Rs. one crore which were not easily saleable in the market. So, the assessee in anticipation that if it could get some orders, work-in-process could be completed and raw material sold, took the plant and machinery on lease. The assessee did not carry out any manufacturing activity during the asst. yr. 1994-95 but had sold out the closing stock for a total sum of Rs. 65,95,943. That the assessee had substantial deposits in the shape of fixed deposit as on 1st April, 1993, to the tune of Rs. 56,63,000 which went upto Rs. 72,13,000 as on 31st March, 1991, and this increase in the fixed deposits at a reasonable rate of interest would not have taken place in case the assessee was not in occupation of office premises. Lastly, that the market rate of interest, on the closing stock of Rs. one crore was much higher than the lease rent of Rs. 15 lakhs paid by the assessee to ICLS Haryana Ltd. 33. Before proceeding further, we would like to mention from the order of AO that out of total sales of Rs. 51,19,66,997, the sales at LCN site was shown at Rs. 65,95,943 which comes to only at 1.28 per cent of the total sales of the assessee-company. Further, on 31st March, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot carry out any manufacturing in the asst. yr. 1994-95 and ultimately the assessee had to sell unfinished goods and the stock of raw material at the end of asst. yr. 1994-95. In these facts, we do not agree with the plea of the assessee that in case the assessee had not taken the assets on lease and had shifted its office, it would not have received the excess deposits in 1994-95 because it is not possible that the depositors had not come to know about the sale of assets till asst. yr. 1994-95 when the same were, in fact, sold by the assessee in asst. yr. 1992-93. Moreover, there is no such evidence on record to show that the depositors were merely making deposits because of smaller units being with the assessee and not because of the magnitude of the business carried out by the assessee, as is evident from the sales made by the assessee during the year under consideration which were to the extent of Rs. 51,19,66,997 whereas closing stock lying at LCN site sold during the asst. yr. 1994-95 was only to Rs. 59,943 which was just 1.28 per cent of the total sales. 35. We are further of the opinion that the AO, in fact, has adhered to the guidelines as discussed by us hereinabove whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t satisfies the test of commercial expediency and the same has to be judged from the point of view of the assessee but such point of view has to be prudent and reasonable point of view which is free from an apparent taint of excessiveness, collusiveness or colour able discretion. But, if the attendant circumstances of the transaction indicates, the ulterior motive behind the expenditure and even on the face of it, it appears that by this transaction, the assessee was unduly benefiting the other persons then such transactions are required to be carefully looked into by the concerned authorities for arriving at the conclusion whether the expenditure has been incurred wholly and exclusively for the purpose of the business. Hence once the transaction entered into by the assessee with its sister-concern, appears to be merely a paper transaction then in order to ascertain the genuineness of the transaction, we have to carefully examine all the facts in detail in order to arrive at the conclusion whether such transaction is genuine or not; for that purpose the motive, objective and purpose of expenditure is required to be examined by us. 37. Having analysed these facts in details as abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he only allowed the lease rent at Rs. 1,80,000 and disallowed the balance lease rent amounting to Rs. 8,73,600. On the same basis the AO made disallowance of Rs. 8,73,600 in asst. yr. 1994-95. Aggrieved with the order of AO the assessee filed an appeal before the CIT(A) and submitted before him that the AO cannot question the reasonableness of the lease rent paid and once the payment was held to be for the business purpose under s. 37(1), no disallowance can be made by the AO on account of reasonableness under s. 40A(2)(a) because this provision was not applicable in the case of the assessee. The CIT(A) made a query from the assessee to give the details of services provided by Mis Dynamic Cosmetics Ltd, but the assessee was unable to furnish such details. So, the CIT(A) was of the opinion that in these circumstances, this expenditure incurred by the assessee cannot be held to be wholly and exclusively for business purposes of the assessee. He was further of the opinion that though the Department cannot' stand in the shoe of an assessee to decide the reasonableness of expenditure incurred but nevertheless the assessee cannot also resort to such reduction of income by paying a lease ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this regard which is exhorbitant. 38.4 On the other hand, learned Departmental Representative for the Revenue contended that in this case, the assessee was required to show that the lease rent paid by the assessee to the subsidiary company was wholly and exclusively for the business purposes to claim deduction under s. 37(1) of the Act, so, taking a reasonable, view of the matter, the tax authorities below have rightly treated that approximately 25 per cent of the cost of the computers and the fax machines should be taken as the, payment of lease rent for the purposes of business which is most fair and reasonable and hence, the balance lease rent amounting to Rs. 8,73,600 in each assessment year under consideration has rightly been disallowed by the tax authorities below treating the same as for non-business purposes. 38.5 We pave considered the rival submissions of both the parties, perused the records and carefully gone through the orders of the tax authorities below, We are in agreement with the submissions of the learned Departmental Representative for the Revenue because we are of the opinion that the entire annual lease rent of Rs. 10,53,600 paid by the assessee to M/s ..... 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