TMI Blog2003 (3) TMI 284X X X X Extracts X X X X X X X X Extracts X X X X ..... nses in equal ratio ignoring the fact that no special effort or expenditure was required to be incurred for earning the said income. 1.3 The CIT(A) erred in upholding the action of the AO in ignoring the fact that the subsidiary companies are fully and adequately staffed and they are fully competent and capable of looking after their administrative, financial, sales and technical aspect, and to run their business independently of any assistance from the appellant and that they in fact ran the business independently without seeking any assistance whatsoever from the appellant. 1.4 The CIT(A) has erred in developing a ratio of 7:6 between the net profit in the trading operation and the net profit under other income and apportioned the head office expenses in this ratio. 2.1 The CIT(A) erred in allowing the AO to proceed on the assumption that the appellant s business in the manufacture of concentrate and the appellant s business in the manufacture of mango pulp, etc., were two separate businesses and not one business. 2.2 The CIT(A) erred in holding that the expenditure of Rs. 58,247 did not constitute revenue expenditure and, on the other hand, constituted capital expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision of Rs. 55,53,012 in respect of liability for gratuity, pension and other separation benefits on wrong and untenable grounds as detailed below Rs. Pension Fund 38,89, 815 Retrenchment benefit for the staff retrenched on30-12-1977 8,52,318 Retrenchment benefit in respect of remaining staff 8,10,879 Total 55,53,012 The above accrued liability was actually paid by the appellant. 5.2 The CIT(A) has erred in ignoring the fact that the appellant had contributed Rs. 17,00,000 to Citibank which is a trustee bank of the pension fund on 11th Jan., 1978, pending the completion of the formalities for the execution of a regular trust deed which was effective from 4th Jan., 1978, and which was done on 3rd Feb., 1978. 5.3 The CIT(A) has erred in ignoring the fact that the liability for contributing the amount of Rs. 38,89,815 arose on 16th Dec., 1977, when the pension plan came into effect and the liability for payment of the said amount was accepted to persuade the staff as a whole to agree to the termination of the services of the extra surplus staff in the interest of its existing business. 5.4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the appellate received legal notices from the parties enforcing their legal claims in respect of this amount. 10. The CIT(A) erred in disallowing Rs. 19,516 considering it as an expense on entertainment. The AO has ignored the submissions made by the appellate that the tea and snacks and working lunch was offered as a matter of business convenience in order to save time at the time the bottlers conferences were held. Such expenditure cannot by any stretch of imagination be treated as entertainment expenditure." 3. Ground Nos. 1 and 2 relate to disallowance of head office expenses amounting to Rs. 10,34,501 claimed by the assessee. 4. Before us, the learned counsel for the assessee/appellant, Shri Ajay Vohra and Smt. Amita Sharma, appeared and argued. 5. The assessee is a wholly owned subsidiary of the Coca-Cola Company, which is a company incorporated under the laws ofUnited States of America, having its headquarters ofAtlanta,Georgia,U.S.A.The assessee has its main office atNew York, referred to as the home office. The assessee had a branch office atNew Delhi, which had been declared as a company under s. 2(17)(iv) of the Act by the CBDT. It is being assessed to income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... office expenditure incurred by the assessee as is attributable to the business or profession of the assessee inIndia. It was pointed out that since in the relevant year, the adjusted total income was a loss at Rs. 46,03,218, the amount was to be computed at the average rate of 5 per cent of the average adjusted total income of the assessee, for each of the three assessment years immediately preceding the relevant assessment year in terms of proviso to s. 44C of the Act. Our attention was drawn to the definition of average adjusted total income, which has been defined to mean, in case where the total income of the assessee is assessable for each of the three assessment years immediately preceding the relevant assessment year, 1/3rd of the aggregate amount of the adjusted total income in respect of the previous year relevant to the aforesaid three years. 7. It was submitted by the learned Authorised Representative that on that basis the deduction admissible was calculated at an amount of Rs. 12,63,102. As regards the actions of the AO and CIT(A) in allocating head office expenses on the basis of the ratio of other income to manufacturing income/profit, while restricting the deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed total income has been worked out at Rs. 12,12,389 which is the amount to be considered in terms of cl. (a) of s. 44C of the Act. Coming now to cl. (b) of s. 44C of the IT Act, 1961, the said clause provides for computation of deduction of average head office expenditure which was defined in cl. (iii) of Explanation to s. 44C of the IT Act to mean (iii)(a) in a case where any expenditure in the nature of head office expenditure has been allowed as a deduction in computing the income of the assessee chargeable under the head "profit and gains of business or profession", in respect of each of the three previous years relevant to the assessment years commencing on the 1st day of April, 1974, the 1sr day of April, 1975, and 1st day of April, 1976, one-third of the aggregate amount of the expenditure so allowed; (b) in a case where such expenditure has been so allowed only in respect of two of the aforesaid three previous years, one-half of the aggregate amount of the expenditure so allowed; and (c) in a case where such expenditure has been so allowed only in respect of one of the aforesaid three previous years, the amount of the expenditure so allowed. 9. On this basis the average ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... written off the same by the assessee/appellant. The basis of such writing off being the honest judgment of the assessee cannot be questioned and ought to be accepted. We find force in the contention of the learned counsel for the assessee. The amount of Rs. 31,550 having been offered for tax in earlier years and now written off ought to be allowed deduction as loss incidental to business. We, therefore, direct the AO to verify this aspect and allow the said amount if the same had been offered for taxation in earlier years. 13. In ground Nos. 5 and 6 of the appeal, the assessee has challenged the action of the CIT(A) in upholding disallowance of Rs. 1,20,00,000 being liability in respect of the compensation payable to bottlers on the ground that no loss accrued or arose in the previous year. Form the assessee s side it was submitted that the assessee had entered into agreements with its bottlers which obliged them to acquire for themselves bottles and other material bearing trademark of the assessee and severely restricting them from using the same for any purpose other than selling the products of the assessee. The said agreements also provided that on the expiration or earlier t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee applied for issue of fresh import licence on7th Sept., 1977. (2) The RBI withdrew licence to carry on business on5th May, 1978, i.e., during the succeeding previous year. (3) The assessee informed the AO of discontinuance of business under s. 176(3) of the IT Act w.e.f.1st May, 1978, only. 16. Our attention was invited to the cls. 18 to 21 of the bottlers agreement which stipulate the circumstances/rights and obligations leading to termination/in the event of termination of the agreement. It was contended on behalf of the assessee/appellant that as per cl. 20 r/w cl. 21(c) of the agreement, the corporation was under an obligation to supply the concentrate for the bottling of the soft-drink and in the event of failure to do so, the bottlers were free to terminate the agreement without any liability on their part and cl. 21(c) further provided that the corporation shall have the option to purchase from bottlers the supplies and materials being bottles, labels, advertisements, cases, bearing the trademark of the company. The assessee, it was submitted, on being declined the renewal of import licence, found itself helpless in supplying the bottlers concentrate needed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ead the rival submissions and also gone through the order of the CIT(A), and material on record. We come to the conclusion that the CIT(A) in sustaining the disallowance has mainly disputed allowability on the ground that the same arose in the next financial year. The basis for this inference apparently is the fact that amounts of compensation were actually distributed during the next financial year and the company appointed A.E. Ferguson Company as their representative in February, 1978, only. The CIT(A) has not challenged the basis of estimation made by the assessee. The issue for consideration before us is whether the liability accrued during the relevant previous year or the following year. 20. We have gone through the bottlers agreement. On conjunct reading of cls. 18 to 21 of the said agreement it emerges that the bottlers were free to terminate the agreement if the company failed to supply the concentrate/syrup required for bottling. It is an accepted fact that the assessee was denied import licence in June, 1977, and although the assessee had applied for renewal of licence by fresh application, the same was under consideration and pending disposal till the end of the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year. 23. Coming to the second leg of the apex Court s decision, the liability in the instant case was capable of being determined as assessee had uniformly applied a rate of Rs. 10 per case of 24 bottles as compensation to be paid to the bottlers and estimated its liability accordingly. As pointed out to us reasonableness of the estimate is evident from the same being close to the actual claim amounting to Rs. 1,25,97,806 and actual payment of Rs. 1,21,29,440. We accordingly hold that the liability towards bottlers compensation accrued during the relevant previous year and ought to be allowed as deduction in the year itself. 24. The next issued raised vide ground Nos. 7 and 8 is regarding provision made for pension fund amounting to Rs. 38,89,815. The facts in brief leading to the issue are as under: The assessee evolved a pension scheme covering all staff members on the rolls of the company which came into effect from16th Dec., 1977. A regular trust deed was drawn up and trustees were appointed for the administration of the pension fund. The trust deed was executed on 3rd Feb., 1978, w.e.f.4th Jan., 1978. The funds were transferred to the said trust on11th Jan., 1978. The s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for such deduction under s. 36(1)(iv) of the Act. The ITO disallowed the claim of the assessee holding that when s. 36(1)(iv) has provided for a specific deduction for the contribution made to a recognized provident fund, the legislature should be taken to have implied that contribution to a fund not recognized would not fall for deduction under the provision of s. 37. 27. On appeal by the assessee, the CIT(A) allowed the deduction claimed under s. 37, following the decision of the Tribunal dt.19th Aug., 1980, in ITA No. 238/Coch/1978-79, filed by the assessee itself. The Department thereupon filed ITA Nos. 134 and 135/Coch of 1984, appeals before the Tribunal. Following its earlier decision, the Tribunal rejected the contention taken by the Department and allowed the claim of the assessee for deduction of its contribution to the executive staff provident fund under s. 37 of the IT Act. On further appeal to the High Court, the Revenue contended that when there is a specific provision made in s. 36(1)(iv) of the IT Act for deducting payments to a fund for meeting the liability in respect of provident fund, such deduction could only be claimed under s. 36(1)(iv) of the Act. 28. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was in existence and claimed deduction in respect of the same under s. 37(1) of the Act. The Revenue in that case contended that there was no approved fund and since the subject was covered by s. 36(1)(iv), no amount was deductible under s. 37 of the Act. The Karnataka High Court after considering various judicial precedents observed as under: "The concept of commercial expediency is not foreign to a statutory corporation which is obliged to carry on a venture which any other commercial enterprise can also carry on. Where the assessee, a statutory corporation, was obliged to pay pension to its employees under the rules governing it and provision was made by it towards the pension fund though no approved pension fund was in existence and the claim for deduction did not fall under s. 36(1)(iv) of the IT Act, 1961, such provision is an expenditure laid out wholly and exclusively for purposes of business and is deductible under s. 37 of the Act." 29. The learned Departmental Representative, on the other hand, placed reliance on the order of the learned CIT(A). 30. We have heard the rival submissions of the parties and have perused the material on record including the judicial pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical expenses will be allowed as per company s existing medical assistance programme upto31st Aug., 1978. However, all coverage under this plan will stop from1st Sept., 1978. Bonus as applicable will be paid upto the dated termination along with final payment. All benefits under the Coca-Cola Export Corporation, India Branch Pension Plan will be met in accordance with the plan. Balance in the Coca-Cola Export Corporation Employees Provident Fund will continue to be governed by the current rules of the fund. Taxes, as applicable, will be deducted from the payment as required under the law." He placed reliance on the decision of Kerala High Court in Kar Valves Ltd. vs. CIT (1992) 197 ITR 95 (Ker). In reply, the Departmental Representative relied on the order of the CIT(A). 33. We have heard the rival submissions of the parties and gone through the facts of the case, and the decision of the Kerala High Court in Karvalves case. In that case the Court held that the liability to pay the retrenchment compensation accrued immediately after the notice was given to the employees in the relevant year. The expenditure was incurred in the course of business. The liability was fastened on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treating the same as perquisite under s. 40A(5) of the Act. The AO disallowed the same invoking the provisions of s. 40A(5) of the Act. 37. Before us, Shri Vohra vehemently challenged the disallowance and submitted that as common business practice, the senior executives of the company are accompanied by the spouses on their business visit abroad and the expenditure incurred by the company on the travelling of the spouses has been held to be an admissible business expenditure. Reliance for this has been placed on the following judicial pronouncements: (1) ITO vs. J.K. Synthetics Ltd. (1986) 18 ITD 490 (Del); (2) ITO vs. A.F. Ferguson (1987) 27 TTJ (Bom) 90 : (1986) 19 ITD 620 (Bom); (3) Glaxo Laboratories (India) Ltd. vs. ITO (1986) 26 TTJ (Bom)(SB) 214 : (1986) 18 ITD 226 (Bom)(SB); (4) Apollo Tyres; and (5) CIT vs. Sundaram Clayton Ltd. (2001) 166 CTR (Mad) 322 : (2001) 240 ITR 271 (Mad). It was further contended that the foreign travel of wives of the executives in any case does not constitute perquisites in the hands of the employees. Reliance was placed on the following decisions: (1) Dhirajlal Haridas vs. CIT (1983) 33 CTR (Bom) 144 : (1982) 138 ITR 570 (Bom) an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny advantage, it can be said that he was benefited. If he gains something either monetarily or otherwise, it can be said that he was benefited to that extent. Thus, the word "benefit" implies an element of advantage, profit or gain. Moreover, the word "benefit" occurs in a provision which treats the benefit given by a company as income of the person who can be said to have obtained it, with the result that it could become taxable in his hands. Considering all these aspects, we are of the opinion that the word "benefit" occurring in cl. (iv) would mean any advantage, gain or improvement in condition, and only if such a thing is obtained by an assessee from a company and if the other conditions are satisfied than only can be value of it be treated as his income. 40. In the alternative, it was contended that the case of the assessee would be covered by the second part of the clause. In our opinion, this contention is also misconceived. As pointed out above, by undertaking these foreign tours, the assessee had not incurred any obligation. She had undertaken the tours at the instance of the company and for the purpose of the business of the company. For undertaking such foreign tours, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd No. 13 relating to the provision of fee of Rs. 5,047 was not pressed before us and is, therefore, dismissed. 45. In ground No. 14, the assessee challenges the disallowance of Rs. 9,647 paid to M/s Mizargoinda Annapai Co. and M/s Herbertsons Ltd. towards their claim for duty drawback and cash entitlement. The AO disallowed the said claim on the ground that the said amount cannot be said to be a business loss. On appeal to the CIT(A), the disallowance was upheld on the ground that the loss in question does not pertain to the relevant previous year. 46. It was submitted before us that the said amount was to be paid to M/s Mizargoinda Annapai Co. and M/s Herbertsons Ltd. towards their claim for duty drawback in respect of cashew and mango pulp supplied and exported by the assessee in the past. 47. As per the agreement, all duty drawback refunds and import entitlements on export of goods were to be passed on to the suppliers. The same were inadvertently returned by the assessee and paid in the relevant previous year. Such amounts were also offered for tax by the assessee as its income in the year(s) of receipt. The details regarding the same are placed on paper book pp. 44/ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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