TMI Blog1994 (6) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... that this very issue was the subject-matter of appeal before the Tribunal for the asst. yr. 1982-83, as also for asst. yr. 1983-84, when at page 11 of the order of the Tribunal, it was noted that, "this year with the change, inasmuch as, two managing directors of the company have also occupied the accommodation for their residences. Expenditure on that part of the accommodation, which is being used towards the residence of the managing director, has to be disallowed in view of the provisions contained in s. 40(c) of the IT Act". The Tribunal accordingly held that "the perquisite values towards the residential portion of the accommodation occupied by the managing directors as may be finally determined, should be deducted from the total claim and the balance may be apportioned in the ratio of 1/3rd and 2/3rd towards guest houses and business use respectively". The facts and circumstances being the same, respectfully following the order of the Tribunal, we direct accordingly. This ground of appeal is partly allowed. 4. This also disposes of ground of appeal Nos. 3.4 and 3.5 of the assessee, which is to the effect that the learned CIT(A) erred in not accepting the assessee's contenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and fair to take the estimated value on this account at Rs. 30,000 for each of the managing directors. The assessee, therefore, partly succeeds on this issue while the Revenue fails. 6. Ground No. 3.3 is that the CIT(A) erred in upholding Assessing Officer's order in not allowing the benefit of provisions of s. 40A(5)(b) in respect of salary payable to employees and managing directors while abroad on tours of company's business. The learned authorised representative for the assessee submitted that the period of employment means service period for which the employees have drawn salaries outsideIndia. In this connection he relied on the order of the Tribunal in the case of Usha International Ltd. The learned authorised representative also relied on Garware Shipping Corpn. Ltd. vs. ITO (1984) 7 ITD 118 (Bom). On the other hand, the learned Departmental Representative brought to our notice the judgment of Special Bench order in the case of ITO vs. Abbot Laboratories (P) Ltd. (1989) 31 ITD 183 (Bom) (SB) and McGaw Ravindra Laboratories (India) Ltd. vs. CIT (1992) 106 CTR (Guj) 24 : (1993) 62 Taxman 394 (Guj). 6.1 We have heard the learned representatives of both the parties and have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, as to what it would mean and include and in that context laid down unequivocally the principle that excise duty would more properly be taken into account in determining net profits and not in ascertaining the cost of manufacture. This principle is general in nature and would apply to all items manufactured. No exception can be taken to the enunciation of this principle on the ground that the Supreme Court was dealing with sugar. The point to be noted is that the Supreme Court was dealing with the meaning of the expression 'cost of manufacture' which is of universal application. Thus, the change in the method of accounting effected by the assessee in the assessment year under appeal by excluding excise duty on the unsold goods from the figure of closing stock was a bona fide one, finding support from a direct decision of the Supreme Court as aforesaid, and there being no specific prohibition laid down by the Institute of Chartered Accountants of India and its guidelines being recommendatory in nature. However, in the succeeding asst. yr. 1985-86, the assessee would not get the benefit of the amount in question and the same would become a part of its income in case it was claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure is vouched and in presentation articles no element of advertisement is involved and, therefore, r. 6B is not attracted. It was submitted that the test to be applied in such cases is business necessity and business expediency. It was submitted that all along in the past the claim of the assessee has been allowed. The learned authorised representative referred to the order of the Tribunal for asst. yr. 1982-83. On the other hand, the learned Departmental Representative submitted that presentation articles amounted to entertainment and, therefore, the learned CIT(A) was not justified in allowing a relief of Rs. 50,000 on this account. He placed reliance on Himachal Pradesh High Court in the case of CIT vs. Mohan Meakin Breweries Ltd. (1992) 101 CTR (HP) 22 : (1991) 192 ITR 134 (HP), Punjab Haryana High Court judgment in 181 ITR 81 (sic) and Allahabad High Court in Phoolchand Gajanand vs. CIT (1989) 76 CTR (All) 190 (FB) : (1989) 177 ITR 265 (All)(FB). 9.2 We have heard the learned representatives of both the parties and have also perused the relevant record. The claim of the assessee that r. 6B is not attracted is not dislodged by the Revenue. All the same relevant details are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the other hand, the learned Departmental Representative submitted that the primary aim in giving commission to selling agents is to promote assessee's sales. He referred to cls. 9(f) and 15 of the agreement and submitted that the sole selling agent is required to promote the sale of assessee's products at its own cost by participating in local fairs, exhibition, advertisement in local newspapers from time to time and a fixed percentage of his commission is required to be spent by the selling agent for such purposes. It was, thus, submitted that the commission paid is nothing but for promotion of sales and, therefore, was rightly considered by the authorities below for working out disallowance under s. 37(3A). 12. We have heard the learned representatives of both the parties and have also perused the relevant record. We have gone through the specimen copy of the agreement placed in the paper book very carefully. We notice that there is nothing in the agreement which could be said to be as relating to promotion of sales by the selling agents. The agreement stipulates various services required to be rendered by the selling agent before becoming entitled to the amount of commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxi hire charges. This ground of appeal is partly allowed. 14. Ground No. 7.1 is against disallowance of foreign tour expenses of Rs. 90,386 treated as capital by the Revenue. The amount of Rs. 90,386 is constituted of (a) expenditure relating to Seth K.K Modi for going to U.K. and Italy for purchase of machinery for Modipon Expansion Plan and Tyre Cord Project Rs. 10,728 out of total expenditure of Rs. 32,183 (1/3rd). This was disallowed on the ground that expenditure was related to setting up of a new plant and Shri Modi went abroad for purchase of machinery, which was not ultimately purchased; (b) Rs. 22,608 on account of Swiss tour of Shri V.K. Singhal a senior executive of the company, to explore the readymade garment market. This was disallowed on the ground that the assessee was not engaged in this line of business and the expenditure involved was, therefore, not related to the business of the assessee; (c) Rs. 50,278 on travel of Shri I.K. Gupta, another senior executive to USA for discussion for setting up a plant to manufacture of Polyster filament yarn and nylon in Nigeria. This amount was also disallowed as relating to a new project; (d) Rs. 6,772 being 1/3rd of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The learned authorised representative also referred to the reports submitted by the executives of their visits abroad at pages 189 to 194 of the paper book. The learned authorised representative further submitted that disallowance for travelling expenses has to be computed under r. 6D as s. 37(3) starts with non obstante clause. It was, therefore, submitted that it is not to be seen whether the expenses are capital or revenue in nature but only that amount can be disallowed which is in excess of the amount as per r. 6D. Reliance is placed on Himachal Pradesh High Court decision in the case of Mohan Meakins Breweries Ltd. vs. CIT (1979) 10 CTR (HP) 405 : (1979) 118 ITR 101 (HP). 14.5 The learned Departmental Representative, on the other hand, submitted that expenditure disallowed is not incurred for the purposes of business of the assessee but was aimed at setting up of new projects and purchase of plant and machinery relating thereto, as also setting up of an altogether new business when some of the foreign travels did not result in any tangible results. He places reliance on Bombay High Court judgment in the case of CIBA of India vs. CIT (1993) 114 CTR (Bom) 105 : (1993) 202 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authorised representative submitted that the disallowance is unjustified, inasmuch as, it is only at the specific request of the Federation that Mrs. Modi accompanied Shri Modi, who admittedly went on a business trip since his expenditure relating thereto has been fully allowed. He submitted that it is also in the interest of the assessee-company, that the wife of the managing director accompanies him when he went toPakistan. He refers to the judgment of Bombay Tribunal in the case of ITO vs. R.F. Ferguson Co. (1986) 19 ITD 620 (Bom). The learned Departmental Representative, on the other hand, places reliance on in the case of Bombay Mineral Supply Co. P. Ltd. vs. CIT (1985) 153 ITR 437 (Guj) and CIT vs. T.S. Haaji Moosa Co. (1986) 51 CTR (Mad) 200 : (1985) 153 ITR 422 (Mad). 15.1 We have heard the learned representatives and have also perused the relevant record. No material exists on record to justify the business expediency of the wife of Shri Modi accompanying Shri Modi toPakistan. The disallowance made is, therefore, confirmed keeping in view the ratio of Hon'ble Gujarat High Court as also Madras High Court in the case of Bombay Mineral Supply Co. and T.S. Haaji Moosa, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the parties and have also seen the relevant record. A plain reading of Expln. 2 to s. 43B revealed that for the purposes of cl. (a) any sum payable means a sum, for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law. Examined in this background we find that the sums involved towards EPF and gratuity fund contribution of the assessee are not payable during the relevant previous year under the relevant laws governing provident fund and gratuity fund. Therefore, we find merit in the contention of the assessee. The judgment of Hon'ble Andhra Pradesh High Court in the case of Srikakollu Subbarao Co. vs. Union of India (1988) 71 CTR (AP) 34 : (1988) 173 ITR 708 (AP) and order of the Tribunal in the case of Indian Aluminium Cables fully support the case of the assessee. As such we hold that no disallowance could be made as relating to contribution of the assessee towards provident fund and gratuity fund (Rs. 6,915). 16.3 As regards amount relating to Textile Committee cess, the provisions of s. 43B, as existed on the statute for the relevant assessment year do not bring in its fold such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is excise duty and nothing else and as such is allowable as a deduction under s. 43B, the same having been actually paid. 17.1 The learned Departmental Representative, however, supported the orders of the authorities below and submitted that there was no demand from the Excise department and the payment made is at assessee's own volition and, therefore, rightly disallowed. 17.2 We have heard the learned representatives and have seen the relevant record. The issue is resolved in the order of Chandigarh Bench of the Tribunal in the case of Raj San Deep Ltd. vs. Asstt. CIT ITA No. 1853/Chd/1992, asst. yr. 1989-90, date of order dt.18th Feb., 1993, wherein on a set of same facts and under similar circumstances it has been held that such excise duty, as is deposited as per r. 173G of the Central Excise Rules, 1944, whether paid in advance or otherwise, retained the character of excise duty and, therefore, covered by the provisions of s. 43B. The Tribunal accordingly held that excise duty which is deposited in the account-current, by way of advance excise duty and is actually paid in the treasury qualifies for deduction under s. 43B. The facts and circumstances being the same, resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y following the order of the Tribunal direct accordingly. 19.2 As regards Modi Bhavan it is noticed that 20% of expense relating thereto have been allowed by the CIT(A) as relating to office use of the premises in the case of Modi Industries Ltd., as also held by the learned CIT(A) in assessee's own case. 19.3 After hearing the learned representatives of both the parties, we are of the view that no interference is called for and as such we endorse the findings of the CIT(A). 19.4 As regards G-11, Maharani Bagh it is submitted that though specific ground No. 16.1 was taken before the learned CIT(A) he did not adjudicate upon the same. After hearing the learned representatives for both the parties, we are of the view that in this case also it would be just and fair to treat 20% of expenses as relating to office use of the premises and rest being relating to guest house. 19.5 As regardsLucknowaccommodation, we notice that 50% of expenses stand allowed by the Assessing Officer himself in the case of Modi Rubber Ltd., a sister concern. Therefore, the same standard should have been adopted by the authorities below. We, therefore, direct that 50% of expenses claimed by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s was disallowed being fines and penalties as expenses incurred on release of imported items. The learned authorised representative for the assessee submitted that the authorities below failed to appreciate the true nature of the expenditure and they were mainly guided by the nomenclature of fines and penalties. The learned authorised representative took us through the details at page 256 of the paper book and pointed out that the major items of Rs. 10,000, Rs. 20,000, Rs. 3,000 and Rs. 40,000 are by way of expenses on release of imported items and do not involve any breach of law. He submitted that the expenditure involved is by way of additional duty paid to Customs department for getting the imported items released. He invited our attention to the order of the Tribunal in para 86 for asst. yr. 1977-78 and again to para 18 for asst. yr. 1983-84, wherein on a set of same facts and under similar circumstances the claim has been allowed. The learned Departmental Representative, on the other hand, supported the orders of the authorities below. 20.1 We have heard the learned representatives of the parties and have also perused the relevant record. On a consideration of relevant fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's opening stock would stand reduced by corresponding figure since it could not avail of a double deduction. We, therefore, respectfully following the order of the Special Bench allow this ground of appeal. 26. Ground Nos. 16.1 and 16.2 are not pressed. 27. Ground No. 17 is that the learned CIT(A) erred in wrongly restricting the allowance of expenses incurred by the employees welfare trust under s. 40A(10) to the extent of contribution received by them during the year under consideration, thereby upholding the disallowance of Rs. 30,727 being expenditure incurred out of contributions already disallowed in earlier years. It has been brought to our notice that this issue already stands covered in favour of the assessee by the order of the Tribunal for asst. yr. 1982-83 as also in its order for asst. yr. 1983-84. Respectfully following the orders of the Tribunal, we allow this ground of appeal. 28. Ground No. 17.2 does not survive in view of the relief allowed against ground No. 17.1. 29. The remaining grounds of appeal taken by the assessee are general. 30. ITA No. 1231/Del/1988 The first ground of appeal taken by the Revenue is that CIT(A) erred in deleting addition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatives for both the parties. We find that the facts and circumstances in the case of the assessee are same as prevailed in the case of Modi Industries when the Tribunal after going deep into the issue involved, upheld the order of the learned CIT(A) allowing the change in method of valuation of closing stock introduced by the assessee. Further, in the case of ITO vs. Modi Rubber Ltd. (at 400) the Tribunal held: "It is well settled proposition of law that a taxpayer is free to employ, for the purpose of his trade, has own method of keeping accounts, and for that purpose to value his stock-in- trade in accordance with the established method of stock valuation. A method of accounting adopted by trader consistently and regularly cannot be discarded by the Assessing Officer unless in his opinion the income of the trade cannot be properly deduced therefrom. It is also well settled that the assessee is permitted to change the method of accounting as well as the method of valuation of closing stock from time to time subject to the condition that the Assessing Officer is satisfied that the change effected by the assessee is bona fide for meeting the changed situation or changed circumstanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med." 30.3 Therefore, respectfully following the orders of the Tribunal, we uphold the order of the learned CIT(A) and dismiss this ground of appeal. 31. The next grievance of the Revenue is with regard to relief of Rs. 50,000 allowed by the learned CIT(A) towards expenditure on presentation articles. This is common to assessee's ground of appeal No. 5.3. For the reasons given therein, we find no merit in this ground of appeal. It is dismissed. 32. Ground No. 3 is that the learned CIT(A) erred in holding that hotel expenses of employees of the assessee-company on foreign tours cannot be considered in computing the disallowance under s. 37(3A). The assessee incurred a total expenditure of Rs. 3,66,000 in foreign currency on foreign travels of its executives. For the purpose of working out disallowance under s. 37(3A) the Assessing Officer estimated a sum of Rs. 3 lakh out of the expenditure of Rs. 3,66,000 as relating to hotels. On appeal the learned CIT(A), agreeing with the assessee, took the view that there is no basis for estimating hotel expenses out of foreign exchange allowed by the Reserve Bank ofIndia. He, thus, directed exclusion of the expenditure estimated. The lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ves. The issue is already discussed and decided in favour of the assessee by earlier orders of the Tribunal for asst. yr. 1982-83 and for asst. yr. 1983-84. The facts and circumstances being the same, respectfully following the orders of the Tribunal, we dismiss this ground of appeal. 34. Ground No. 9 is with regard to disallowance of Rs. 43,000 under s. 80VV. It is the case of the Revenue that the nature of expenditure involved is related to proceedings before the IT authorities and, therefore, the same is liable to be disallowed in full under s. 80VV. On the other hand, the learned authorised representative for the assessee has referred to details of the amount of Rs. 43,000 at page 240 of the paper book, which show that amount involved is paid as retainership to Shri O.P. Vaish Rs. 21,000, Smt. Manju Vaish Rs. 18,000 and M/s Salve Salve Rs. 4,000. It is contended that no part of this amount can be said as relating to proceedings before the IT authorities, for which separate amount of Rs. 28,698 is provided for and has been disallowed. The learned authorised representative has also referred to the order of the Tribunal in the case of ITO vs. J.K. Synthetics Ltd. (1986) 18 ITD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36.1 The learned Departmental Representative supports the order of the Assessing Officer. On the other hand, the learned authorised representative for the assessee submits that HRA is specifically exempt under s. 10(13A) and, therefore, would not constitute an element for consideration under the provisions of s. 40A(5). He also referred to the definition of salary in sub-cl. (iv) and referring to the term profits in lieu of or in addition to any salary or wages, took us to sub-cl. (iii) of s. 17, where profits in lieu of salary has been explained in sub-cl. (ii). It is provided that profits in lieu of salary includes any payment other than payment referred to in s. 10(13A). Obviously, therefore, the amount involved, i.e., rent being specifically to the extent exempt under s. 10(13A) would not constitute part of salary as elaborated in s. 17(3)(ii). We accordingly uphold the finding of the learned CIT(A) and dismiss this ground of appeal. 37. Ground No. 13 is that the learned CIT(A) erred in allowing payment of Rs. 2 lakh made by the assessee to one Shri T.M. Sen. The relevant facts are that the Assessing Officer disallowed a sum of Rs. 2 lakh out of miscellaneous expenditure of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed for the period of currency of agreement, i.e., 3 years. The learned authorised representative, on the other hand, supported the order of the learned CIT(A) and submitted that the expenditure which is in lump sum is incurred towards preventing Shri Sen from entering into competitive activities, Shri Sen having acquired trade secrets of the assessee-company being in the employment of the company for over 20 years and a whole time director for more than 12 years. 37.2 We have heard the learned representatives and have also perused the relevant record. There is no dispute that Shri Sen having worked for a very long period in the company in different capacities had acquired considerable knowledge relating to company's trade secrets, know-how, processes and business information. The company in order to avoid Shri Sen from entering into any independent business activity which could be detrimental to the assessee, paid him the amount of Rs. 3,50,000 under an agreement which was to run for three years. It was a simple and straight business transaction solely aimed at preventing an otherwise potential business competitor which could prove inconvenient to the assessee causing it conside ..... X X X X Extracts X X X X X X X X Extracts X X X X
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