TMI Blog1995 (3) TMI 156X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt 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 India [1991] 187 ITR 703 and in the case of Escorts Ltd. v. Union of India [1991] 189 ITR 81 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. and Sinclair Murray Co. (P.) Ltd. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. (P.) Ltd. and McDowell Co. Ltd. as also in the case of Punjab Distilling Traders Ltd., 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt in the case of Jamshedpur Motor Accessories Stores v. Union of India [1991] 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. [1992] 101 CTR (Ori.) 247, we are bound to follow the decision of the jurisdictional High Court of Delhi in the case of Sanghi Motors and Escorts Ltd. 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, 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 disa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. and Sinclair Murray Co. (P.) Ltd. 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 allowability of the claim, the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. 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. is also on the basis of the principle that no disallowance can be made under section 43B in respect of the payments whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (a)(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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 50% 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 advertisement 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. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 retainership 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 47. Ground No. 5 which is reproduced below is dismissed as not pressed : "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 dir ..... X X X X Extracts X X X X X X X X Extracts X X X X
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