TMI Blog2006 (7) TMI 260X X X X Extracts X X X X X X X X Extracts X X X X ..... e of any computer machines, etc. During the previous year relevant to the assessment year under consideration, the assessee filed return of its income declaring loss of Rs. 1,43,30,330. The return was filed on30th Nov., 1997. It was processed under s. 143(1)(a) vide intimation dt.30th July, 1998. The case was, thereafter, selected for scrutiny assessment. While completing the assessment under s. 143(3), the AO worked out the income at Rs. 7,73,98,544 after making certain additions and disallowances. The additions/disallowances made by the AO were challenged before the learned CIT(A). On some items the learned CIT(A) sustained the disallowances and on others he gave some relief. The order of the learned CIT(A) is dt.24th Oct., 2000. On the items on which the learned CIT(A) sustained the disallowance, the assessee has preferred appeal for challenging the same whereas against the items on which the learned CIT(A) gave relief, the Department has come in appeal for challenging the deletion of additions. In the setting of above background, we proceed to decide the issues involved in these two appeals. Ground No. 1 of assessee's appeal and ground No. 2 of Revenue's appeal: 4. The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the assessment order and other record, the learned CIT(A) felt that neither the assessee nor the AO has properly worked out the details of the expenses under the head "Advertisement and publicity, trade shows", etc. He also blamed the auditors for not taking pains in identifying the expenses under various heads properly. After making detailed reference to the directions for asst. yr. 1996-97 and after producing paras 5.2, 5.3 and after reproducing para 5 of his order for asst. yr. 1996-97, he undertook the exercise of identifying expenses and for that purpose he issued a notice to the assessee vide his letter dt.24th Aug., 2000. This notice has also been reproduced by the learned CIT(A) on pp. 9 to 16 of the appellate order. 4.3. In response to this notice issued by the learned CIT(A), the assessee filed details giving the break-up of items of various expenses and also details of entertainment expenses. Break-up of such expenses, totalling to Rs. 17,25,289 is given in para 5 of the appellate order. 4.4. In reply to the notice issued under s. 251(2), dt.24th Aug., 2000, the assessee also conceded that expenditure of Rs. 1,61.472 debited under the head "Trade shows" was incurre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 9,48,233 for alleged entertainment expenses; and Rs. 12,703 for alleged expenses in excess of the limits under r. 6D of the IT Rules; and (ii) in any case, in treating the abovesaid disallowance of Rs. 9,60,936 as enhancement of assessment under s. 251(2) of the IT Act and in initiating penalty proceedings under s. 271(1)(c) of the Act in respect of the said disallowance/alleged enhancement of assessment." 4.8 The Revenue has challenged the deletion of disallowance of Rs. 1,39,65,037. The ground of Revenue, being ground No. 2, is reproduced herein as below: "On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the disallowance of Rs. 1,39,65,037 on account of 'trade house' and 'advertisement'." 4.9 While challenging the sustenance of disallowance of Rs. 9,60,936, the learned counsel for the assessee Shri Piyush Kaushik, after narrating the entire background of the matter and relevant facts, pointed out that the learned CIT(A) has not properly appreciated the nature of business of the assessee and the quantum of expenditure incurred for promoting business, in the sphere in which the assessee was operating. According to him, the natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 674 (Cal); (viii) CIT vs. Aluminium Industries Ltd. (1995) 126 CTR (Ker) 150: (1995) 214 ITR 541 (Ker); (xi) Associated Stone Industries (Kotah) Ltd. vs. CIT (2002) 123 Taxman 643 (Raj). 4.11 He also challenged the approach of the learned CIT(A) for issuing a notice of enhancement and for enhancing the entertainment expenses. 4.12 In the alternative, without prejudice to the above, it was contended by him that the employees of the assessee-company also participated in trade shows, events, etc. and, therefore, a part of expenditure incurred on food and beverages provided to the employees was not, in any case, entertainment expenditure. In this regard he has also submitted a written argument, a portion of which is as under: "Under the specific provision of Explanation to s. 37(2) of the Act as applicable for the subject assessment year entertainment expenditure does not include expenditure on food or beverages provided by the assessee to his employees in office, factory or other place of work. It was submitted before the CIT(A) vide the written submission dt. 4th Oct., 2000 that without prejudice to the submissions that the expenses as alleged by the CIT(A) are not in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into consideration this decision of Hon'ble jurisdictional High Court and following the same he had reduced 35 per cent of the expenditure on account of participation of employees. The computation made under this head by the AO in that year is as under: "Expenses on food and beverages included in the head 'Trade shows' and 'advertisement' 18,30,580 Less: 35% on a/c of employees participation 6,40,703 ----------- 11,89,877" 4.15 As the facts and circumstances of the two years are virtually the same and further as no mistake is found in the identification of the expenses by the learned CIT(A) under the head 'Trade shows' and 'advertisement', etc., we are of the view that the same pattern and same approach should be followed in this year for computing the disallowance under this head. Hence, without disturbing the determination of entertainment expenses at Rs. 18,96,466 we direct that the disallowance out of this expenditure shall be worked out after following the order for asst. yr. 1996-97 and 35 per cent on account of employees' participation shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch work has been done by the learned CIT(A). It may also be pointed out that the AO could not properly appreciate the nature of the business of the assessee and the nature of the expenditure incurred. For a proper appreciation of the entertainment expenditure and business promotion expenditure one has to understand the object and scope of s. 37(2A) r/w Explanation as applicable in the assessment year under consideration. In the case of CIT vs. Indo Asian Switch gears (P) Ltd., the Hon'ble Punjab Haryana High Court, while dealing with the object of s. 37(2A) has observed as under: "The definition in Expln. 2 is not the ordinary meaning of the words, 'entertainment expenditure', but the enlarged meaning given for the purposes of the Act w.e.f.1st April, 1976. The object of sub-s. (2A) is to disallow any lavish expenditure in the form of business expenditure. It is clear from the nature of expenditure in all the three assessment years in the present case that food and light refreshment had been served to the trainees and engineers attending the dealers' conference organized by the assessee. The expenditure cannot, therefore, be treated to be in the nature of entertainment but on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of Lakhanpal National Ltd. vs. ITO, the Special Bench of the Tribunal has considered the issue in detail and after discussing several authorities including the ratio of decisions in the case of Indo Swissgears (P) Ltd. and the decision of Hon'ble Delhi High Court in the case of CIT vs. Expo Machinery Ltd. has observed that the amount spent on tea, coffee, cold drinks and hotel expenses in respect of wholesalers, stockists and other visitors was allowable. 4.23 In the case of CIT vs. Assam Asbestos Ltd., the Hon'ble Gauhati High Court has observed that generally "entertainment expel1diture" is an expression of wide import. However, in the context of disallowance of entertainment expenditure, it must be construed strictly and not expansively. 4.24 The Hon'bleGujaratHigh Court in the case of CIT vs. Gujarat State Finance Corporation has applied this Explanation and has observed as under: "That the assessee had incurred expenditure in providing tea, coffee and refreshments to its staff members and constituents or customers in the normal course of business. The finding of fact which had been recorded was to the effect that the expenditure, which was incurred by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng that 35 per cent of the expenditure of Rs. 1,55,003 out of entertainment, seminar and conference expenses was not hit by the provisions of s. 37(2A) of the IT Act by relying upon the decision of the Tribunal in the case of Usha International Ltd., which has not been accepted by the Department?" 4.30 The Hon'ble High Court has allowed the issue in favour of the assessee. The relevant observations of the Hon'ble High Court are as under: "Apart from the fact that, in respect of Usha International Ltd , the petition under s. 256(2) of the IT Act was dismissed by this Court, we may note that the essential question is whether the expenditure of 35 per cent of Rs. 1,55,003 was hit by the provisions of s. 37(2A) of the IT Act. The CIT has found as a fact that, along with the customers, the employees of the company had also taken food. He, however, did not allow any expenditure because he was of the opinion that the expenditure on food and beverages was not incurred in the factory premises but was incurred in the hotels. The Tribunal has also found as a fact that the employees of the company had taken eatable along with the guests and customers of the company and the expenditure whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 5. Ground No. 2 (assessee's appeal): This ground runs as under: "2. The learned CIT(A) has also erred on facts and in law in disallowing- (i) Rs. 49,785 being 50 per cent of Rs. 99,570 business promotion expenses; and (ii) Rs. 24,784 being 50 per cent of Rs. 53,568 business conference expense on the alleged ground that the expenditure incurred under these heads is entertainment expenditure." 5.1 The AO in para 5.13 of the assessment order has considered the issue of expenditure relating to business promotion at Rs. 99,570; expenditure on business conference at Rs. 53,568; and expenditure on entertainment at Rs. 9,94,081 and held that these expenses were in the nature of entertainment. It is to be pointed out that the AO made the disallowance on the ground that details were not furnished by the assessee. In appeal, it was submitted before the learned CIT(A) that as per office audit report these expenses were not classified as entertainment expenses. It was also pointed out that details of these expenses were filed on pp. 75 to 77 of the paper book. By pointing out such details it was submitted that these were business expenses and not entertainment expenses. The learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oper to set aside the finding of the learned CIT(A) and restore the matter back to the file of AO for fresh adjudication after taking into consideration the argument of the learned counsel for the assessee raised before us and also applying the decision of Hon'ble Delhi High Court in the case of Expo Machinery Ltd. We order accordingly. Ground is allowed for statistical purposes. 6. Ground No. 3 (assessee's appeal): This ground has not been pressed and is rejected being not pressed. 7. Ground No. 4 (assessee's appeal): This ground challenges the disallowance of Rs. 5,13,000 on account of donations. The assessee had debited a sum of Rs. 5,13,000 on account of donations. The AO did not accept the claim of the assessee and disallowed the same. 7.1 In appeal, the learned CIT(A) has upheld the action of the AO by observing as under: "10.4. I have carefully considered the matter. I am afraid the learned Authorised Representative's arguments hold no water. I have perused the letter dt.17th Dec., 1996written by Shri R.K. Iyengar, Head of Maths Department of ITT,Delhi, to the appellant-company. From this letter it is clear that this amount of Rs. 5 lakhs is in the nature of a do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ground is allowed for statistical purposes. 8. Ground No. 5: This ground challenges the sustenance of disallowance of Rs. 1,00,000 out of total disallowance of Rs. 1,58,462 on account of write off of obsolete inventory. 8.1 The assessee-company had debited miscellaneous expenses at Rs. 1,58,462. It was claimed that it represented payment for write off of obsolete inventory and other goods. The AO disallowed this expenditure against which the assessee came in appeal. It was contended before the learned CIT(A) that it was an allowable expenditure. Details of these expenses were also filed in appeal. The learned CIT(A) has given relief to the assessee to the tune of Rs. 58,462 by observing as under: "10.7. I have carefully considered the matter. From the details of the expenses filed it is noticed that in many cases the nature of expenditure has not been mentioned. There are number of entries which simply mention that petty cash expenses for the day have been incurred for such and such amount. No further details in this regard are available. Also there are several items of expenditure where it has simply been mentioned as follows: 'Expenses incurred during travelling.' No fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ef of Rs. 9,81,726 which has been challenged by the Revenue in ground No. 4 referred to above. On the other hand, the assessee has challenged the sustenance of the disallowance. 9.4 Before us the learned counsel for the assessee submitted that the assessee had incurred expenditure, details of which were furnished before the learned CIT(A) but he has not properly adjudicated the issue. 9.5 The learned Departmental Representative, on the other hand, supported the order of AO. 9.6 On going through the orders of Departmental authorities it appears that full details have not been furnished or the same have not been examined. The above disallowance made by the learned CIT(A) is without any basis. In our opinion the matter should be decided after proper examination of details. Therefore, we consider it proper to set aside the finding of learned CIT(A) and restore the matter to the file of AO for fresh adjudication on the issue in question. Accordingly, orders of authorities below, on the issue in question, are set aside and the matter is restored to the file of AO for fresh adjudication, after providing full opportunity of being heard to the assessee and as per law. Grounds are allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on articles for which the assessee has not discharged, its onus of providing primary facts and evidences." 13.1 The AO has made disallowance of Rs. 1,98,064 by observing as under: "With regards to gifts, the complete details have not been made available. The assessee was asked to furnish these details and the business expediency. No details were forthcoming in this regard. Accordingly, having regard to the fact that the assessee has failed to discharge the onus cast upon it of the substantiated claim made, the entire sum of Rs. 1,98,064 is disallowed." 13.2 The learned CIT(A) has considered the issue in paras 6 to 6.2 of his order. It was submitted before him that gifts were given on different occasions in the course of business, such as, new year, Diwali, marriage functions of business associates. It was specifically pointed out on behalf of the assessee that the articles of presentations did not bear the name or logo of the company and hence could not be said to be in the nature of advertisement and, disallowable under r. 6B of the IT Rules. 13.3 The learned CIT(A) has given relief of Rs. 99,000 to the assessee by observing as under: "I have carefully considered the m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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