TMI Blog1990 (1) TMI 116X X X X Extracts X X X X X X X X Extracts X X X X ..... s matter in this appeal. However, we may mention that the issue has appeared in the assessee s appeals for the earlier assessment years. The Tribunal has held that neither the excess receipt would be taxable nor the deficit receipt would be admissible as business loss. 3. In Ground No. 2, the question is regarding the admissibility of full allowance in respect of a building called Kamla Retreat. This issue has also come in the prior assessment years and the order of the CIT(A) is, in effect, in accordance with the earlier years. So, this ground will stand rejected. 4. In Ground No. 3, the assessee is claiming the entire depreciation as per IT Rules on plant and machinery installed in JK Cotton Mills. This issue has also been considered by the Tribunal for the earlier assessment years and, following the decision therein, we uphold the order of the CIT(A) in restricting the depreciation to be 50% of what is admissible according to the IT Rules. 5. The next ground regarding 100% depreciation on plant and machinery, installed in PPL was not pressed at the time of hearing. Similarly, Ground No. 5 being loss on remittance of foreign exchange and Ground No. 6 being disallowance unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. In our opinion, these amounts for which credit vouchers were written back, were correctly brought to tax. As the facts explained show, the assessee had raised bills on supply of goods and these have been fully paid. The assessee had decided to give credit vouchers for quality difference without actually giving it to the parties. They had debited their purchase accounts and claimed deduction thereof in the years in which the credit vouchers were promised. Thus, the assessee had already got the benefit of deduction. We cannot understand how the party had not been given the credit for which the credit vouchers were issued. Once the credit vouchers are issued and a copy is given to the Accounts Department, automatically the parties accounts would be credited and they would be required to pay only an amount less than what was given credit for. If this has not happened and there is no doubt that it has not happened, it could be only because the parties were unaware of the credit voucher being in their favour. Thus, the assessee had been benefited by the deduction admissible when there was no liability at all and these reverse entries cancel those benefits. Under these circumstances, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to tax these amounts. This ground is disposed of accordingly. 11. In Ground No. 9, the question is, whether certain expenses incurred by the assessee in floating debentures, a part of which was convertible, is admissible as business expenditure. The total expenditure was Rs. 21.06 lakhs. The debentures were issued partly for working capital and partly for establishing of a new project called Polyester Filament Yarn Project. According to the ITO, the expenditure connected with the floating of debentures for a new project has a direct nexus with a capital expenditure and, therefore, would not be eligible for deduction. He had, in fact, disallowed the entire expenditure on the issues, but he CIT(A) had restricted the same to two items, Rs. 12,571 and Rs. 29,668. In respect of the first, i.e., Rs. 12,571, the total expenditure in issuing certain convertible debentures, was Rs. 50,284. Since a part of it is to be converted into equity shares, the CIT(A) held that a proportionate part would be for augmenting share capital and, therefore, capital in nature. With regard to Rs. 29,668, he held that these debentures were against the purchase of machineries and, therefore, capital in nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir engineers for supervision of the maintenance work of the kiln. On10th Feb., 1981, JK Satoh wrote back saying that they had completed the servicing and repairing work of Kiln No. 1. Another work given to them, was the overhauling and maintenance of EOT Crane No. 1 This work was also completed by7th Feb., 1981. The ITO did not allow these deductions and the reason given was that he was not satisfied with the evidence to show that JK Satoh had actually undertaken this work. We do not see why the department should doubt the genuineness of the claim We do not see what further evidence should be produced. There is correspondence between the two companies. The company had also given a letter of completion of the work. At the time of hearing, Shri Aggarwal, for the Department, submitted that no competition certificate was given and further the assessee company itself had their own engineers and supervisors and so there was no need for JK Satoh to depute their engineers. It was also submitted that if overhaul work was undertaken, there would have been other evidence available, which was not produced. We cannot accept these submission. It is not true to say that no completion certificate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accepted that the expenditure was rightly capitalised. Since this amount in dispute now is also connected with the Nylon Division, the CIT(A) has held that it was correctly capitalised. He further found that these were neither on repairs nor on replacement but were expenses incurred originally on the establishment of the office of the company in Ashoka Estate. Shri Monga, at the time of hearing before us, submitted that these are in connection with the furnishings in the office building. The amount suggests to us that the outlay was in connection with the acquisition of furniture and fittings. We, therefore, have to uphold the order of the CIT(A) on this point. 19. The next two items, Rs. 35,044 and Rs. 42,361 can be taken together. They represent expenses on a building calledKamlaCastlebuilding at Mussorie. The assessee s case is thatKamlaCastlebelongs to a trust and the assessee has a right to use one wing of the building as a Holiday Home for the employees. The ITO had requested the assessee to lead evidence thatKamlaCastlewere used as a Holiday Home. No such evidence was produced. He, therefore, treated it as a guest house and, since expenditure on maintenance of guest house ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of the disallowance of Rs. 77,405 inKamlaCastlebuilding repairs. Since there is no evidence that the building is a Holiday Home, the claim for depreciation should be considered only on the ground that it is a guest house. The assessee is, therefore, not entitled to this claim. 23. Ground No. 12 covers the assessee s grievance regarding weighted deduction under s. 35B. The first is on the travelling expenses toKenya. This issue has come up before the Tribunal for the asst. yr. 1981-82 and, for the reasons given in paragraph 60 of the order for the year 1981-82, we hold that the assessee is not eligible for the deduction. 24. However, in respect of the expenditure of s.1,71,606 on seminars and exhibitions, we hold that the assessee would be eligible for the deduction for the reasons given in paragraph 62 of the same order mentioned above. 25. In Ground No. 13, the question is, whether the assessee is eligible for the provisions made against the liability towards gratuity. A total claim of Rs. 38,99,293 was made. Part of this claim was Rs. 5,60,563 respecting actual gratuity payments to the employees of JK synthetics, who became eligible for the same during the year. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al amount taken credited in their books by the Gratuity Fund. Therefore, the acknowledgement of the liability and the acknowledgement of the receipt are already there in the accounts of the respective parties. In the case of DELHI FLOUR MILLS LTD. vs. CIT (1974) 95 ITR 151 (Del) a similar question arose. Therein, the assessee, under an agreement with the employees, had made a provision for the amount of gratuity payable and further the account of each employee was credited with the corresponding amount. The Delhi High Court has held that it is enough to meet the requirements of the statute. The fact that the decision is prior to the introduction of s. 40A(7) does not make any difference to this limited issue, i.e., whether an amount due to the gratuity fund, but not paid, could be claimed as a deduction. A part from that, the Kerala High Court recently had held in the case of CIT vs. CHAKOLA SPINNING WEAVING MILLS LTD. (1989) 76 CTR (Ker) 163 : (1989) 178 ITR 603 (Ker) that a provision of the amount due to the gratuity fund, would be eligible for deduction and s. 40A(7) does not sand in the way of such a claim. 27. However, the question still remains as to whether the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as deduction either as bad debt or as business loss. 31. In Ground No. 15, the assessee is questioning the disallowance under s. 40A(8) out of the interest on public deposits. This had been correctly disallowed for the reasons stated by the Tribunal for the asst. yr. 1980-81 in paragraphs 23 and 24 of their order. This will stand confirmed. 32. Ground No. 16 contains six different issues. The first is the disallowance due to excess totalling Rs. 2,424. This is correctly disallowed. The second is a disallowance as entertainment expenditure amounting to Rs. 1,23,761. The ITO has held this to be entertainment expenditure and, therefore, inadmissible. This had been confirmed by the CI(A). While accepting that there is an element of entertainment in it, Shri Monga claimed that at least 50% of this expenditure should be allowed as a deduction. From the details given in the CIT(A) orders, we find that Rs. 1,01,822 represented lunch, tea, etc., provided to customers as well as the employees. Rs. 3,720 is in respect of a press conference, Rs. 10,941 was incurred in providing tickets for cricket matches and the balance as miscellaneous expenses. Since a part of this expenditure would b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing funds for running of this school and this year they had provided Rs. 67,000. This was disallowed on the ground that it could be only a donation. We think that the assessee should succeed in this case. This is to be viewed only as a part of a scheme for the welfare of the employees. The cement factories of the assessee are situated at places, where there are no proper educational facilities. It is, therefore, necessary for the assessee, in order to have good relations with the employees, that a proper school is made available for the children. They have, therefore, two alternatives before them, either running the school themselves or arranging with an existing school for provision of the employees children. Had the assessee adopted the first course, there would have been no problem at all in allowing the expenditure. There is a direct nexus with the assessee s employees and, therefore, it would be treated as an expenditure laid out for the welfare of the employees. In our opinion, the principle would be the same if the assessee had adopted the second alternative. After all the school is in the premises of the factory. No doubt, it is run by an education society which is an inde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayments on actual basis. With regard to the accrual of interest on the balances, remaining with the assessee, there cannot be any doubt at all. We have already quoted above the clause under which the Fund would be entitled to interest. Shri Monga also informed us that right from 1972-73 onwards, the claim for deduction of interest had been allowed every year and, for the first time, it is being disallowed in the year 1982-83. While we accept the Department s contention that there is no res judicata. However, when a departure is made from a practice of several years, some additional material should have been there Rs. 1,15,029 would stand deleted. 44. In Ground No. 19, the questions are on the admissibility of depreciation. The assessee had claimed depreciation of Rs. 2,47,641 in respect of certain electrical fittings and vehicles which were earmarked for cement unit 3. On the ground that the new unit had not started functioning, the claim was rejected. In our opinion, the reasoning will not hold good. The assets on which depreciation is claimed fall into two categories. One is electrical fittings. The other is vehicles, like trucks, bus jeep etc. While we can accept the Departmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible to say that it is an integral part of the unit. Therefore, the analogy of many other requirements in order to enable a unit to work, is not completely correct. Where the unit cannot even theoretically run without the air-conditioners, we have to hold that they are part and parcel of the acrylic unit. On this finding, we will hold that the assessee is entitle to extra shift allowance. 47. The last point under depreciation, i.e., depreciation on scientific research, etc., was not pressed at the time of hearing. 48. Ground No. 20 contains objections regarding disallowance of foreign tour expenses. Item (a) is Rs. 32,370 representing the expenses relating to the family members of the employees. This ground has been decided in favour of the assessee for the year 1981-82 in paragraph 44 of the Tribunal s order. For the reasons stated therein, we will allow the assessee s claim. For the same reasons, we would allow the expenditure of Rs. 7,580 and Rs. 1,41,119. 49. An amount of Rs. 2,32,242 has been incurred in relation to foreign tours for purchase of machinery. For the reasons stated in our order for the year 1981-82 in paragraph 51, we would accept the Department s contentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntific research. It is a common ground that these were acquired during the accounting year relevant to the asst. yr. 1981-82. By way of an additional ground, the assessee has claimed a deduction for that year. We have already held, while disposing of the appeal for the asst. yr. 1981-82, that the claim will not be admissible for the asst. yr. 1981-82. For the reasons stated therein, the assessee is entitled to this deduction in this year. 55. The point covered in Ground No. 23 is the disallowance of part of the expenditure on consultancy fees. The first point is an amount of Rs. 3,000, which represented the fee paid to find out, whether the assessee had any tax liability in respect of a foreign collaborator. In our opinion, this does not come under s. 80VV. The assessee merely wanted to ascertain whether any liability would be foisted on them in respect of the collaboration agreement. This is a business expenditure admissible under s. 37. 56. An amount of Rs. 59,955 has been disallowed, which represents the retainership fees paid to several counsels. This had been disallowed on the ground that, either they relate to income-tax matters or they were unproved expenditure. There is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laimed as deduction. On21st Jan., 1980, he assessee had entered into an agreement with M/s Zimmer for technical know-how relating to the continuous manufacture of polyester staple fibre, in a plant which the assessee intended to set up inKota. Clause 1 of the agreement gives the area covered by the technical know-how and they were: "1.(a) the technical know-how shall include, but not be limited to the following information, material and documents in the possession, power of control of Zimmer relating to the manufacture of polyester staple fibre in the PLANT: (1) List of equipment to be manufactured inIndiaand description of all items with materials of constructions and with specification, sketches, etc.; (2) Equipment drawings and arrangements to the extent enabling the elaboration of working drawings of all equipment to be manufactured inIndia; (3) List of all measuring and control instruments (mechanical, electrical, pneumatic and electronic) inclusive of their specification; (4) Utility requirements; (5) Mechanical Safeguards; (6) General PLANT lay out, elevations and sections indicating the position of all equipment on each floor or level; (7) Required scheme of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , construction or procurement of the same or similar equipment or to file any patents. JKS will oblige their personnel respectively." Then he stated that the expenditure was only for putting up a plant and, therefore, capital in nature. 62. The CIT(A) was of opinion that the payment was merely an advance and no liability has arisen and, therefore, the assessee could not claim this amount as deduction. 63. We can straightaway dispose of the point raised by the CIT(A). We are satisfied that the payments are not in the nature of an advance. As we have pointed out, the agreement has been approved by the Govt. towards the end of November, 1981, and the first payment became due within one month thereof. It was paid during the accounting year. The second payment also became due on transfer of the documents and that was also during the accounting year. Therefore, the liability had accrued and the assessee had paid the amount as per this liability. 64. The question still remains, whether, on these facts and circumstances, the amount would be revenue in nature. Shri Monga relied upon the decision of the Supreme Court in the case of ALEMBIC CHEMICAL WORKS CO. LTD. vs. CIT (1989) 77 CT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncreasing the yield of penicillin. They agreed to supply the assessee sub-cultures, which are most suitable penicillin producing strains, technical information, know-how and written description of the process for fermentation along with a flow-sheet of the process of pilot plant. They also agreed to provide the design and specification of the main equipment in such a plant. They would also arrange for the visits of technicians and for the training of the assesse s employees. The Supreme Court found that there was no evidence for holding that the assessee had obtained, under the agreement, a completely new plant with a completely new process and a completely new technical know-how. What had happened was only an improvisation and the mere introduction of new bio-synthetic source required the erection and commissioning of a totally new and different type of plant and machinery. There was, in fact, no new plant at all coming into existence. At page 390 they observed: In the present case, the principal reason that influenced the option of the High Court was that the initiation and exploitation of the new process brought in their wake a new venture requiring an altogether new plant. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents for erection of a plant. Item 1 is the list of equipments to be manufactured inIndiaand the descriptions of materials for construction. Item 2 is the equipment drawings, item 3 is list of measures and control equipment, item 4 is utility requirements, item 5 is mechanical safeguards thereon, item 6 is general plan lay out, elevations and sections indicating the position of all equipments. In fact, all item 1 to 8 inclusive, relate to know-how of putting up of the plant. Item 9 to 16, however, are in connection with the product of the assessee. Clause 9 makes it very clear that all these documents and informations would be utilised for the erection and operation of the plant. Thus, a finding of fact has to be given that one part of the technical know-how relates to the putting up of a plant. It is in this connection that the decision of the Full Bench of the Madras High Court in the case of JONAS WOODHEAD SONS (INDIA) LTD., cited by Shri Aggarwal, becomes relevant. There also, the High Court found that the terms of agreement provided for rendering of assistance and furnishing of information for the purpose of setting up a factory, as well as manufacture of the licenced produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pears that this is not a liability raised against the assessee. The employees are running a co-operative society and this amount is the sales-tax liability of the co-operative society. It was submitted that the assessee-company had agreed with the co-operative society that they would clear the society s liability to sales-tax. It is in this manner that the claim is being made. At the time of hearing Shri Monga fairly admitted that there is no written agreement to support the claim. Under these circumstances, the claim cannot be admitted in this year. It should be treated as an expenditure for staff welfare and allowed in the year in which the payment is made. For this year, the disallowance will stand confirmed. 72. In Ground No. 27, there are four points. The first is the disallowances of 50% of the expenses in the property at River Side Road. The disallowance has to be upheld in view of the decision of this point for the earlier years. An amount of Rs. 46,243 has been disallowed out of general charges. The details of these payments are given at page 98 of the paper book. We find that these are expenses incurred by the employees for the purpose of business and reimbursed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly retaining with him higher amount out of the price of cement. Since there was the condition that these amounts would be subject to interest, the assessee had calculated the possible interest payable at 15% and arrived at a figure of Rs. 15,59,670 and claimed it as a deduction. The claim was disallowed by the ITO as well as the CIT(A). 80. We agree with the CIT(A). The wording of the order of the High Court is very clear. The assessee will have to pay interest only on the contingency of having to return the excess collection to the Cement Controller. Till such contingency happens, there is no liability on the part of the assessee. Under the mercantile system of accounting, a liability to pay interest can accrue only if there was a existing contract stipulating payment of interest. In this case, there is no contract in existence. The liability to pay interest is closely connected with the obligation to return the excess collection. The refund of excess collection again is contingent on the High Court dismissing the writ petition. During the accounting year, the writ petition has not been taken for hearing. Therefore, the contingency has not happened. So the condition precedent ..... X X X X Extracts X X X X X X X X Extracts X X X X
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