TMI Blog1996 (8) TMI 144X X X X Extracts X X X X X X X X Extracts X X X X ..... e disallowed under s. 37(4). In the letter of the assessee dt.1st Dec., 1987, it is explained that the expenses were incurred on purchase of provisions for head office staff and commercial representatives who stayed in the guest house at Chittivalasa and that by having such an arrangement the company had saved otherwise an exorbitant expenditure which it was obliged to pay for hotels. While appreciating the circumstances in which the expenditure used to be incurred, the AO held that the expenses incurred on guest house by whatever name has to be specifically disallowed. He further stated that the assessee was able to give details of expenditure to an extent of only Rs. 54,071, there being expenses on purchase of provisions, etc., but had not given any details of other expenses like rent/depreciation, telephone, salary of attendants, electricity charges, painting, municipal taxes, etc., relating to the guest house. He estimated such expenses at Rs. 50,000 and made a total disallowance of Rs. 1,04,071 for the asst. yr. 1984-85 as regards Chitavalsa guest house. Similar disallowances were made for the asst. yrs. 1985-86, 1986-87 and 1987-88 at Rs. 1,20,169, Rs. 1,62,717 and Rs. 2,13,1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the lower authorities and also on the provisions of s. 37(4). The learned Departmental Representative relied upon the Bombay High Court decision in the case of CIT vs. West Coast Paper Mills Ltd. (1992) 102 CTR (Bom) 127 : (1991) 59 Taxman 398 (Bom) in which a distinction has sought to be drawn within "guest house" and "rest house". Rejecting the contention, the Bombay High Court has held as under at page 403: "......that the distinction drawn by the assessee between 'rest house' and 'guest house' is to be stated only to be rejected. If at all there is a distinction, it is a distinction without any substance. That being so, it cannot perhaps be disputed that upto a particular date the provisions of s. 37(3) are attracted in terms of which expenditure on the maintenance of a guest house can be allowed only if a register is maintained. The register having admittedly not been maintained, the expenditure could not have been allowed. After that date the provisions of s. 37(4) are applicable which completely prohibit allowance of any deduction of expenditure on the maintenance of guest house. Having regard to the above discussion, so far as the question at the instance of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal. 8. The learned CIT(A) held that assessee had not produced any evidence to the effect that the persons entitled to claim the amount give them up and hence, the amounts have been written back in company's account. Since no such evidence was produced saying that claim of the assessee remained unsubstantiated, the learned CIT(A) refused to interfere with the decision of the AO in this regard. 9. At the time of hearing, giving the break-up of this figure of total disallowance of Rs. 3,98,476, the learned counsel stated that it represents the following two amounts: (i) Rs. 2,99,287 - unclaimed sundry creditors; (ii) Rs. 99,188 - provisions not required. It is admitted that the amounts were written back in the accounts of the assessee. It is also claimed that the first amount of Rs. 2,99,287 has been credited to the P L a/c. Particulars of this amount were also found mentioned at page 1 of assessee's paper book. On31st July, 1983, while writing back the amount of Rs. 2,99,287.68, the narration in the account is as follows: "The amount of sundry creditor lying since last 3 years being unclaimed written back." So also the narration with reference to Rs. 99,188.44 und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hey have been allowed in earlier years. In the absence of any evidence that the debts were not genuine and the creditors were bogus, the amounts should not be disallowed but should always be allowed as deduction while arriving at the real profit derived by the assessee in his business. 10. As regards the second amount of Rs. 99,188, the claim of the assessee was that when it is written back the amount was taken to the P L a/c and was shown as part of the profit. This was not verified. We direct that this aspect is to be verified by CIT(A). 11. Ground No. 3 in the assessee's appeal for asst. yr. 1984-85 relates to disallowance of a sum of Rs. 63,136 representing 50% of entertainment expenses incurred by the assessee-company on its employees. Rs. 56,960 and Rs. 11,176 have been incurred as expenses on entertainment in Battery Division Jute Division, respectively. The ITO allowed Rs. 5,000 only under s. 37(2A) since there are no profits and the balance aggregating to Rs. 63,136 was disallowed. In the appeal before the learned CIT(A), the assessee contended that 50% of the expenses should have been allowed as so much percentage was allowed by the appellate orders dt.27th Jan., 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s produced before him would clearly show that the assessee has been hitherto claiming bonus in the Battery Division on cash and with effect from the accounting year relevant to asst. yr. 1985-86 the same expenditure is claimed on accrual basis. He further found that during the accounting period, apart from claiming bonus on accrual basis, the assessee claimed an additional amount of Rs. 3,67, 872 on payment basis. The AO held that even if the change in the method of accounting was bona fide, the assessee cannot follow two methods of accounting at the same time. He followed the decision in Sheth Chemical Works vs. CIT (1981) 21 CTR (Cal) 274 : (1983) 140 ITR 507 (Cal), where it was held that bonus provided on accrual basis is only allowable and the claim of bonus on payment basis is not allowed. Thus stating, he disallowed a sum of Rs. 3,67,872. Before the learned CIT(A), besides contending that the change of method is bona fide, the assessee contended that it is entitled for the claim on actual payment basis for the preceding year and on accrual basis for the year under consideration. Reliance was placed upon some decisions. However, the learned CIT(A) held that the assessee cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bonus provided for the relevant previous year. On appeal, the said disallowance of Rs. 4,45,710 was confirmed by the CIT(A). On second appeal, the Tribunal allowed the assessee's claim. On reference: Held In the instant case, it was an admitted fact that the assessee had changed the method of accounting in respect of the bonus from cash system to mercantile. Even otherwise the assessee was being assessed to income-tax on mercantile basis. The payment of bonus was undoubtedly a statutory liability and a provision in respect of bonus payable in accordance with law was clearly admissible in a case where mercantile system of accounting was being consistently followed. The AO had admittedly computed the income of the assessee for the year under reference in accordance with the mercantile system of accounting. It was also an admitted fact that the bonus for the preceding year which was actually paid during the relevant previous year was never claimed and/or allowed as a business deduction in the earlier year in view of the fact that all along the bonus payments were being claimed and allowed only on cash basis. The relevant previous year was the first year of change and, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not as if an assessee can never change its method of accounting. Method of accounting can be changed bona fide and regularly. If the method is followed regularly and is bona fide there does not appear to be any reason why the change should not be allowed. There is no authority for the view that the assessee could not change the method of accounting without seeking permission of the ITO and that it will be for the ITO to impose conditions for allowing the change of method. The question was whether the assessee could claim deduction on both cash and provision basis. Whenever there is change of method, something of this kind is bound to happen in the year of change of method. In case the assessee had changed its method from mercantile to cash system, it might have been that in the year of change no deduction could have been claimed or allowed. However, that was no reason for not allowing the claim on the basis of changed method so far as the change was concerned and on the earlier method of the liability in regard thereto had not already been allowed as deduction. Accordingly, the assessee was entitled to the deduction in the year in question both as regards the provision for bonus as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure incurred. The assessee incurred an amount of Rs. 1,01,569 on entertainment. It purported to have claimed 50 per cent thereon as allowable since so much is stated to have been incurred on its staff while treating the guests. The ITO did not agree with the contention of the assessee. According to him, the disallowance has to be made in accordance with the prescribed slab system provided under s. 37(2A) since the expenses are admittedly incurred on entertainment. Since no such plea was taken by the assessee during the assessment proceedings, the ITO allowed a deduction of Rs. 5,000 only under s. 37(2A) and disallowed the balance of Rs. 96,569 and added it to the income of the assessee-company. Even though ground No. 3 filed before the CIT(A) specifically deals with this addition of Rs. 50,785, we fail to come across any discussion or finding about it in the CIT(A)'s order. The matter has to go back to the CIT(A). 21. Ground No. 3 is about disallowance of a sum of Rs. 74,165 in respect of payment to clubs. The tax audit report indicated that an amount of Rs. 74,165 has been paid on account of payment to clubs. The AO has totally disallowed and wholly added the sum of Rs. 74,1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers offer their products at internationally competitive prices and thus help the exporters to get more foreign exchange earnings to the country. The customs duty concession thus enjoyed by the assessee is duly reflected in the price of the commodities which it exported and the profits derived by the assessee from the overseas exporters are duly taxed. Thus, the assessee wanted to explain that Rs. 52,00,227 is not akin to a cash grant or a subsidy, etc. According to the assessee, the impugned amount does not represent the income earned by it and, therefore, it is not taxable. The AO had held the following as the reasons for the disallowance of the impugned amount: "What the assessee has done is that at the time of export of its finished product automobile batteries, it got some export incentives which have been credited to sales account. The assessee company also got some duty free import licences as an incentive for exports. Imports have been effected against aforesaid duty free import licences. While debiting the cost of total imports, the assessee has included in it a sum of Rs. 52,00,272 being duty draw back and other export incentives which have been credited by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount. The value of raw material imported is taken in the books at the concessional amount without any effect. The total adjustment, it would be seen, does not involve either any outside party or payment. As far as the Govt. is concerned it allows to import raw materials without payment of duty against this licence which is not a duty draw back. The assessee, to correctly present the working results, declares the benefits awarded to the Company in the year of the exports as higher income though this benefit is in fact actually available by way of lower cost of raw materials in the year of its import only. Thus, this entry in the books is not at all a financial entry as far as the second party is concerned but only an adjustment in the books to show the benefits/concessions during the same period in which they are made available. In other words, this advance licence is a sort of coupon on presentation of which concession in custom duty is allowed while importing the raw materials covered by this coupon. For example, the company on exports of Rs. 100 is entitled to import raw material worth Rs. 40 without duty which is 20 per cent of the import value. The moment company gets advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 99,82,000 (previous year Rs. 59,06,556) which also includes Rs. 56,10,911 (previous year Rs. 39,24,535) on account of imports to be made against advance licence". This document now appearing at page 5 of the second paper book was stated as part of account of balance sheet for asst. yr. 1986-87 dt.31st July, 1985. 24. For asst. yr. 1987-88, in the reassessment proceedings, the AO himself had accepted the contention of the assessee that the payment of the impugned amount represents only preponement of income. He explained the reasons for his conclusion in his assessment order dt.30th Nov., 1992, a copy of which is found at pages 15 to 17 of the second paper book filed by the assessee. The reasons given by the AO for his conclusion for the asst. yr. 1987-88 are set out as follows: "What the assessee does is that it gets duty free import replenishment licence for raw material as an export incentive. The moment a duty free import licence is received, its value is credited to the sales account and then at the end of the year, a contra entry is passed to debit the raw material by the value of such licence actually utilised during the year. The nature of such facility is more or les ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c issue was raised with regard to the legality and correctness of this disallowance, it was not dealt with by the CIT(A). Hence, we direct that this matter should go back to the CIT(A) and he is directed to dispose it of according to law. 27. Ground No. 3 is again a disallowance of a sum of Rs. 58,353 purporting to represent payment to clubs. The contention of the assessee was that except club subscription, the balance amount was already included in the entertainment expenses and was considered for disallowance. On similar point, we have remanded the case to the lower authorities for earlier years. The same should follow this year also. 28. The fourth ground is against confirming addition of Rs. 10,59,125 on the ground that it represents previous year expenses. The particulars of these expenses are given at pages 27 and 28 of the paper book filed on behalf of the assessee. As per the particulars mentioned at page 27 of the paper book, admittedly a sum of Rs. 6,17,428.06 represents the previous year's expenses debited to P L A/c of the current year, i.e., accounting year relevant to the asst. yr. 1987-88. These expenses at page 27 represent the expenses incurred in the Battery D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that case was a firm engaged in the business of manufacture and sale of miniature bulbs. In the assessment proceedings for asst. yr. 1964-65, the firm claimed deduction of a sum of Rs. 60,000 as a bad debt. The case of the assessee was that it proposed to expand its business to undertake the manufacture of fluorescent tubes. For that purpose, it had sought the assistance of one Mohanlal Vyas and paid him between July, 1961 and April 1962 a sum of Rs. 60,000. In return, that person agreed to procure manufacturing licence under the provisions of Industries (Development and Regulation) Act and a licence or permit for the release of foreign exchange necessary for the import of machinery, plant and equipment for the manufacture of fluorescent tubes. Shri Mohanlal Vyas procured the manufacturing licence but could not procure a licence or permit for the release of requisite foreign exchange for import of machinery, plant and equipment. Since the assessee could not import the machinery, the Govt. revoked the manufacturing licence as well. The assessee filed a suit for recovery of the sum of Rs. 60,000 against Mohanlal and obtained an ex parte decree. The assessee, however, did not take s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst each of these items were not at all attempted to be explained and, therefore, we fail to appreciate how we can take Rs. 6,02,484.65 as income relatable to the previous year but which was credited in this year. We only mention that there is no evidence at all produced by the assessee to prove its contention that this amount represents income, that too, relating to earlier assessment years but claimed in this year. We are, therefore, unable to give any credence to the assessee's alternate submission. Similarly, we cannot also give any direction to the AO to allow the expenditure in the earlier assessment year since it is not permissible under law. There is no equity in tax matters. We, therefore, reject the assessee's plea in that regard. 32. The 5th ground in the assessee's appeal for asst. yr. 1987-88 is the disallowance of a sum of Rs. 60,431 out of labour welfare expenses representing the amount spent on temple construction in the labour colony of the assessee-company at Chittivalasa. It was explained that this amount was spent on temple construction in the factory premises at Chittivalasa for the benefit of the workers only. It was further submitted that the jute factory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Chittivalasa and, therefore, in view of the Punjab Haryana High Court decision cited above and also in view of the Third Member decision in (1989) 77 CTR 113 (Del) (Trib), the expenses for construction of the temple, etc. claimed in this appeal cannot be allowed and the disallowance is found to be rightly made by the lower authorities. No interference is called for. The appeal for asst. yr. 1987-88 is partly allowed. ITA No. 8536, 8537, 8538 8539/Del/1990 Asst. yrs. 1984-85 to 1987-88 33. These are Departmental appeals. Since common points are involved, they can be disposed of by a common order. 34. The first common question which arises in these appeals is about the perquisite value on account of personal use of the car. It is the case of the AO that the assessee had incorrectly worked out the disallowance under s. 40A(5), by adopting the aggregate limit at Rs. 72,000 p.m. The AO found that all the persons including directors in respect of whom disallowances were worked out are employees and separate limits of Rs. 5,000 p.m. and Rs. 1,000 p.m. will have to apply in respect of salaries and perquisites respectively. The AO also found that in considering the disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wable under s. 40A(5). The difference between both the figures stands at Rs. 40,445. For asst. yr. 1987-88, the assessee offered to disallow a sum of Rs. 52,384 in Battery Division and a sum of Rs. 47,119 in Jute Division, respectively. Adopting the same principle as was adopted in the assessment order for asst. yr. 1984-85 that it is the amount spent by the assessee that has to be considered for disallowance and not the perquisite value in the hands of the employees as has been offered by the assessee, the AO computed the correct disallowance to be made under s. 40A(5) at Rs. 1,24,574. The difference between the AO and the assessee in respect of the disallowance under s. 40A(5) stands at Rs. 25,000. In the appeals preferred by the assessee before the CIT(A), the estimate of disallowance made by it under s. 40A(5) was accepted as correct and the appeals were allowed on the point for asst. yr. 1985-86, 1986-87 and 1987-88 also following the earlier assessment order for asst. yr. 1984-85. The Department is now in appeal before this Tribunal. 35. The learned Departmental Representative relied upon the following decisions in supporting the view taken by the AO while making the disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee should be preferred and the point is to be decided in favour of the assessee. In these circumstances, the order of the learned CIT(A) does not call for any interference from us. The Revenue should fail on this ground. 36. The next ground relates to the addition of Rs. 72,732 on account of value of closing stock. The AO found that the closing stock of finished goods has been valued after deduction Rs. 72,732 representing 3/4 per cent of brokerage. The case of the assessee was that it had already valued the stock of finished gunnies at the ruling market quoted price and since practically all the stocks are sold through brokers who are paid brokerage at 3/4 per cent, the net reliable value has been offered as the value of closing stock. The AO did not accept this contention. He held that the assessee is unable to make out its case. He further held that regardless of the consistency of the method the assessee claims to be following all along the brokerage provided is a contingent expenditure and will be allowed as a deduction as and when the sale takes place. Therefore, he held that it would not be proper accounting to reduce the value of closing stock on the basis of a conting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Following the highest authority of the Hon'ble Supreme Court, this point is to be decided in favour of the Revenue and against the assessee. 38. In the result, the Revenue's appeal for asst. yr. 1984-85 is partly allowed. Asst. yrs. 1985-86 to 1987-88 39. The first common ground in all these appeals by the Revenue is with regard to the proper disallowance to be made under s. 40A(5). While making the disallowance, the AO made higher disallowance of Rs. 53,382 for asst. yr. 1985-86, Rs. 40,445 for asst. yr. 1986-87 and Rs. 25,000 for asst. yr. 1987-88. The learned CIT(A) has cancelled the higher disallowance of the amounts mentioned above and allowed the assessee's ground in this regard in each of the separate appeals filed by the assessee. Following the discussion in the second appeal for asst. yr. 1984- 85, we confirm the order of the CIT(A) and dismiss the first common ground of the Revenue for asst. yrs. 1985-86, 1986-87 and 1987-88 also. 40. The second common ground in the Revenue's appeals for the asst. yrs. 1985-86, 1986-87 and 1987-88 is about the disallowance made under s. 40A(3) which was subsequently set aside by the CIT(A). For asst. yr. 1985-86, the disallowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not justified and hence he deleted the addition. 41. The particulars of these payments were all provided at pages 33 to 37 of the paper book filed by the assessee. At the foot of page 35, with reference to an expenditure of Rs. 5,36,492, the following note is found: "This payment has been made to our own staff towards reimbursement of expenses incurred by them as per company's rules and for which we have taken proper receipt and accounted for whenever necessary in computing perquisites as per IT Rules". Similarly, at page 36 of the paper book, with regard to the expenses of Rs. 1,12,748, the following notes in four paragraphs are found noted by the tax auditors: (1) Payment to Staff This payment has been made to our own staff towards reimbursement of expenses incurred by them as per Company's rules and for which we have taken proper receipts and accounted for wherever necessary in computing perquisites as per IT Rules. (2) Payment to Transporters Transporters always insist for cash payment. Most of our transportation for which payments have been made in cash represent payment to truck drivers/owners for carrying coal/raw material for which individual consignm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... buy its provisions to run its large canteen. Though the company normally buy its provisions out of the Govt. quota from the authorised shops to whom payments are usually made by cheque/drafts, sometime due to non- availability of material there or due to acute scarcity of some items, the company is forced to buy the same in open market in cash and such amount should not be considered for disallowance at all. The total amount on this account comes to Rs. 33,284 and it should be deleted. 44. In respect of payment to contractors, coal suppliers and assessee's employees, the assessee contended that they are all covered by r. 6DD(j). The assessee cited the Tribunal (Jaipur Bench) decision in Shrinarain Chhaganlal vs. ITO (1988) 30 TTJ (Jp) 125 where it was held that at all places where purchase are made and the assessee does not have a bank account and that place being not a place of business of the assessee, any payment made over and above Rs. 2,500 in cash should not be disallowed since such payment is covered under sub-r. (j) of r. 6DD. In the present case, the factories of the assessee are located at remote places and the employees of the assessee's factory have to go into the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... que being illiterate and also do not have sufficient funds to maintain bank accounts and, therefore, they have to be paid in cash. Their leader, who is known as Jamadar (contractor), also insists for cash payment due to the above reason. Therefore, this payment of Rs. 48,500 should also be allowed in full. Thus, the contention of the assessee's counsel is that the relief granted by the CIT(A) with regard to the addition under s. 40A(3) is fully justified and does not call for any interference from us. 48. The learned Departmental Representative on the other hand, relied upon Late Smt. Jyothi Chellaram vs. CIT (1988) 73 CTR (AP) 167 : (1988) 173 ITR 358 (AP) and argued that at least the mater must be sent back to the lower authorities to give a clear finding considering the nature of the payment and the special circumstances under which the cash was paid. 49. Thus, having considered the arguments of both sides, we feel that the learned CIT(A) while passing the impugned orders has completely gone into the detailed explanation given by the assessee for making payment in cash in amounts more than Rs. 2,500 at a time. The learned Departmental Representative contended that how reimbu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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