TMI Blog2005 (7) TMI 299X X X X Extracts X X X X X X X X Extracts X X X X ..... tually found to be dead stock from which nothing can be realised because of the total absence of any demand therefor, its value falls drastically. This has been taken note of by the committee formed for recommending whether any item represents dead stock. We are, therefore, of the view that the assessee's claim requires to be accepted. Accordingly, we direct the AO to allow deduction in respect of provision of Rs. 211.24 lakhs. The disallowance of the balance of the claim is upheld and the ground is partly allowed. Expenditure on the clubs maintained by the company for the employees - We have no doubt in holding the expenditure in question is allowable u/s 37(1) of the IT Act. It seems to us that the expenditure has been rightly characterised as staff welfare expenses. Promoting sports and games in which the employees of the assessee-company exclusively participate is certainly in the interests of the assessee's business. It keeps the morale of the employees high. That in turn helps in the smooth functioning of the company and also improves the efficiency of the employees. All this is ultimately for the benefit of the assessee-company. It should also be kept in mind that su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 268.16 crores represents purchase of raw materials. With regard to the claim of Rs. 145.85 crores what we find from p. 28 of the assessment order is that only Rs. 126.06 crores represents purchase of raw material and components. Therefore, the assessee's claim is allowed only to the extent of Rs. 126.06 crores out of Rs. 145.85 crores. As regards Rs. 268.16 crores, the entire amount is allowable since it represents additional liability in respect of loans taken for purchase of raw material and components. The ground is thus allowed partly. - HON'BLE R.V. EASWAR, VICE PRESIDENT AND G.S. PANNU, A.M. For the Appellant : V.U. Eradi and C.P. Bahri, Advs. For the Respondent : Rajnish Kumar, Adv. ORDER R.V. Easwar, Vice President: 1. This appeal by the assessee relates to the asst. yr. 1992-93 for which the previous year ended on 31st March, 1992. 2. The assessee is a public sector undertaking engaged in the manufacture of power generating equipments and other heavy industrial items. The assessee company carries out projects for various State Governments and other public sector undertakings and is also involved in the setting up of power plants in India as well as abroad. 3. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd and its value is charged off in the books. 5. The learned counsel for the assessee submitted that the effect of the provision is only that the closing stock is being valued on the basis of the principle cost or market price, whichever is lower and since this method has been followed for several years in the past and on the basis of established procedure, the same has to be accepted. It is also pointed out that the assessee is a public sector undertaking and its accounts are subject to scrutiny by the C AG and, therefore, the bona fides of the procedure cannot be doubted. It is argued that in these circumstances, the claim should be allowed. 6. On behalf of the Department, the contention advanced is that the claim is only a provision based on an internal procedure and in the absence of any evidence for the realisable value of the stock, it cannot be acted upon. Reliance is also placed on the orders of the IT authorities. 7. On a careful consideration of the matter, we are of the view that having regard to the procedure followed by the assessee, the genuineness or the bona fides of the claim cannot be doubted. The note extracted above indicates that only when all the efforts to di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture is in the nature of staff welfare expenses and it is not in the nature of expenditure for subscription to social clubs or other recreation clubs. Our attention is drawn to pp. 27 to 34 of the paper book. We find therefrom that the assessee has townships at various manufacturing units across the country. Since the factories are situated outside the municipal limits of the town or city, the townships are also outside the city limits. Large number of employees of the assessee live in these townships. The assessee provides recreational facilities to the employees living in the townships as a welfare measure. This is essential for improving the work efficiency and cordial relationship with them. The townships have facilities such as schools, hospitals, shopping centres and recreational clubs. These institutions are managed by independent boards or committees of the representatives of the employees. What the assessee does is to reimburse the net expenses of the clubs and recreation centres after taking note of the recovery from the employees. This is debited under the head 'staff welfare expenses'. 12. In the tax audit report prepared under s. 44AB, the payment has been des ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in mind that such facilities are needed to be provided by the company also in view of the fact that the employees live in townships which are away from the main town/cities and if the employees are to engage themselves in such recreational activities, they may have to incur considerable expenditure and trouble in addition to time. All this is avoided. The expenditure in question, in our opinion, falls to be considered in the light of the judgment of the Supreme Court in CIT vs. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC). Accordingly, we direct the AO to allow the expenditure as deduction. The ground is allowed. 13. Ground Nos. 6 and 7 are directed against the decision of the IT authorities to apportion a part of the expenditure incurred by the assessee against the dividend income and thereby reducing the deduction available under s. 80M of the Act and their action in apportioning a part of the expenditure against tax-free interest income from bonds. The expenditure apportioned is Rs. 1 lakh and 2 lakhs, respectively. The contention of the learned counsel for the assessee before us is that factually no expenditure had been incurred by the assessee for earning the dividend inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dal 5,000 Jhansi Grant of BHEL Education Society 12,50,000 HEEP, Hardwar Central School 77,01,000 Schools run by BHEL Education Management Board 2,03,07,000 Delhi Public School 5,00,000 ARP Staff Club 914 4,76,57,787 16. The contention before us is that s. 40A(9) is not attracted at all and that the expenditure is allowable under s. 37(1). It is clarified that the assessee does not contribute to the educational institutions, but meets the expenditure incurred in running them, thus subsiding the education cost of the children of the employees. It is contended further that s. 40A(9) was introduced by the Finance Act, 1984, with retrospective effect from 1st April, 1980 and that it was introduced to curb the undesirable practice of corporate bodies of making large contributions to so-called welfare funds and at the same time keeping the utilisation of the welfare funds discretionary and subject to no discipline. Our attention was drawn to the speech of the Hon'ble Finance Minister reported in (1984) 39 CTR (TLT) 35 : (1984) 146 ITR (St) 65 at p. 68, wherein there is reference to the object for which the section was introduced. The provisions of the Finance Act, 1984, were explaine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that s. 40A(9) of the Act does not apply to payments made to school in which the children of the employees are studying. Such payments have been considered as amounts spent for the welfare of the employees and were held deductible under s. 37(1) of the IT Act. Referring to the judgment of the Hon'ble Andhra Pradesh High Court in the case of Raasi Cements Ltd. VS. CIT (2005) 198 CTR (AP) 179 : (2005) 275 ITR 579 (AP), a decision which supports the Department, the learned counsel for the assessee submitted that in this case, the fund was maintained by the employer himself and, therefore, there was discretion in him to use the fund as he pleased and further that it was not a case of contribution made directly to the school as a staff welfare measure. He submitted that in any case, where two views have been taken by different Courts, the view in favour of the assessee should be followed, in the absence of any judgment of the jurisdictional High Court and for this submission cited the judgment of the Supreme Court in the case of CIT VS. Kulu Valley Transport Co. (P) Ltd. (1970) 77 ITR 518 (SC) and the judgment in CIT VS. Podar Cements (P) Ltd., Etc. (1997) 141 CTR (SC) 67: (1997) 22 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, the assessee has no grievance. Accordingly, the ground is dismissed. 22. Ground No. 10 is directed against the addition of Rs. 67.8 lakhs on the ground that the price escalation has not been accounted for to that extent. The learned counsel for the assessee drew our attention to p. 34 of the printed accounts which laid down the accounting policy for price escalation. It was stated therein (note 10) that generally, in case of price escalation on contract of sales and services where the basis of price escalation has been agreed, income is taken on billing or accrual, to the extent latest indices are available, otherwise, it is reckoned on acceptance/receipt. The amount in question represents price escalation which is not agreed to by the customer. The escalation is raised by the assessee unilaterally. It was clarified before us, that wherever escalation is accepted by the customer, there would be no problem and the amounts actually received, in accordance with the bill, are taken credit for. The question is whether it can be said that income accrues to the assessee when the escalation has not been accepted by the other party. In our opinion, it cannot. There is no accepta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parts. The gist of the ground is that the Departmental authorities were not justified in disallowing the liability on account of exchange rate fluctuations. Though several sub-grounds have been taken, what was argued before us was the disallowance of Rs. 145.85 crores and Rs. 268.16 crores. Out of the amount of Rs. 268.16 crores, a sum of Rs. 47.16 crores has been debited to the P L a/c and the balance has been treated as deferred revenue expenditure. The amount of Rs. 145.85 crores has been provided in the P L a/c as a liability. A perusal of the orders of the Departmental authorities shows that they have treated the liability to be contingent and have, therefore, disallowed the same. It is claimed before us that the liability which arose on account of exchange rate fluctuation was in respect of purchase of raw materials from abroad and thus the liability was on account of revenue expenditure and that the only question is whether the liability is contingent. A subsidiary question that arises in respect of the amount treated as deferred revenue expenditure, is whether the fact that the assessee treated the liability on deferred basis can go against its claim. In this connection, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epartmental Representative, however, was three-fold. He first contended that the amount of liability which has been treated as deferred revenue expenditure cannot be allowed as deduction because, the assessee itself is of opinion that the benefit of the liability would enure to it for more than one year. This objection cannot be sustained because it is settled law that the manner in which accounting entries are made in the assessee's books of account is not decisive of the treatment to be given in the income-tax assessments. Reference in this connection, may be made to the judgment of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. VS. CIT (1997) 141 CTR (SC) 387 : (1997) 227 ITR 172 (SC), wherein it has been held that accounting practice cannot override the provisions of IT Act and that the question whether certain deductions are permissible in law or not has to be decided according to the principles of law and not in accordance with the accounting practice. 30. The second contention of the learned CIT, Departmental Representative was that only when the amount of the additional liability is remitted can deduction be allowed and before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t would be capital receipt and, therefore, the loss on account of extra payment was not allowable as revenue loss. It will be seen that the facts of this case are quite different from the facts of the present case. In the present case the claim is that the loans were taken for the purpose of acquiring raw material which were allowable as revenue expenditure. The additional liability is, therefore, allowable as revenue expenditure. In the case of International Combustion, it was held, distinguishing the earlier judgments in Bestobell, that in the case of an assessee following the mercantile system of accounting the appreciation of outstanding liability arising on revenue account, due to devaluation of Indian rupee is allowable as loss. This decision actually supports the proposition canvassed on behalf of the assessee. In the case before the Hon'ble Calcutta High Court the liability was incurred in the course of business on account of purchase of goods which were stock-in-trade. In the case before us the claim is that the liability was incurred on account of purchase of raw material which are undisputedly revenue items. Therefore, it is not a case of mere indebtedness as in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... how that they were settled in the relevant accounting year. We therefore, uphold the orders of the IT authorities. The prayer for directions for the earlier years is also rejected since the Tribunal cannot issue directions in respect of assessment years not before it. The ground is accordingly dismissed. 35. Ground No. 16 is directed against the disallowance of Rs. 61 lakhs in the assessment representing adjustments made on the basis of the observations of the C AG. However, before us, the claim was confined to Rs. 33 lakhs representing the following: (1) Hyderabad-Payment to collaborators Rs. 29 lakhs` (2) Hyderabad-R D cess Rs. 1 lakh (3) R D cess Rs. 1 lakh (4) Others-Misc. expenses Rs. 2 lakhs Rs. 33 lakhs The contention before us is that the above amounts were incorporated in the accounts as per the directions of the C AG and, therefore, the same had to be followed by the assessee and there was little choice in the matter. We find that this issue has been dealt with in para 24 of the CIT(A). The ground on which the disallowance has been made and sustained is that there were no details furnished by the assessee during the appellate proceedings. Even before us, the only ground t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the section was introduced. The question before the High Court was whether receipts which have no nexus with the export activity can be included in the total turnover. The Bombay High Court held as follows, at p. 442 of the report: Similarly, prior to 1st April, 1992, there was one more distortion. In most cases, the Department used to include receipts whereby total turnover came to be artificially inflated. This brought down the export profits. Prior to 1st April. 1992, export turnover excluded freight or insurance. However, such exclusion was not provided for in total turnover. Therefore, by cl. (ba) of the Explanation, total turnover also excluded freight or insurance. A reading of cl. (b) and cl. (ba) of the Explanation clearly indicates that the legislature has brought on par the components of export turnover and sale turnover. Both the numerator and the denominator show that they refer to sale proceeds. Any receipt which does not form part of sale proceeds cannot come within the ambit of the above ratio. This is also in view of the fact that proration applies to business profits in order to work out the export profits. Therefore, the numerator and the denominator are requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur directions. 37. The other contention with regard to s. 80RRC is that the AO was wrong in reducing the gross total income first by the deduction under ss. 80HH, 80HHB and 80-I and granting deduction under s. 80HHC only from the balance. The contention is that the deduction is available from the export profits themselves which cannot be reduced by the deductions mentioned in the aforesaid sections. The contention of the assessee is supported by the language of s. 80HHC(1). The deduction contemplated by the section is of the profits derived by the assessee from the export of goods or merchandise. The section does not authorise the adjustments of the deductions under ss. 80HH. 80HHB and 80-I from the export profits before the deduction under s. 80HHC is given. These sections are not concerned with export profits at all. Whatever deduction is computed by applying the formula prescribed by s. 80RRC is to be allowed against the export profits without such profits being reduced by other deductions. There is no warrant in law enabling the AO to do so. We, therefore, accept the assessee's contention. This ground is partly allowed. 38. Ground No. 18 is directed against the action of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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