TMI Blog1992 (2) TMI 150X X X X Extracts X X X X X X X X Extracts X X X X ..... gives the figures in the form of a chart. The Assessing Officer observed that the agents had sold an excess amount of 8,320 MT whose receipt was not recorded or accounted for. The Assessing Officer observed that though the sales had been suppressed, the expenditure incurred thereon was not suppressed. He took the view that there was unaccounted for production and sales. He observed that in the accounting years 1985 to 1987 the yield of clinker from raw meal was fixed, namely, for every 1.57 MT of raw meal, 1 MT of clinker was produced. The consumption of coal was 18 per cent to 23 per cent per MT of clinker. The Assessing Officer purported to undertake a stagewise scrutiny of the production records from which he inferred that the figures of production of the crushing machine (lime stone is crushed to an optimum size for 'raw meal') did not tally with the stock records of lime stone --- the quantity of stone crushed in the machine was not the same as the crushed lime stone received in the stocks, but was excessive. The assessee-company had prepared a chart to this effect which was filed before the Assessing Officer. The Assessing Officer found that the quantity of stone crushed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime i.e., 3,95,037 MT, 11,965 MT and 62,153 MT respectively). The weight of the lime stone after crushing process was said to be 4,52,835 MT including high grade lime stone at 62,153 MT and, therefore, the actual weight of crushed Morak lime stone came to 3,90,685 MT and the excess crushing as per the Stock Register came to 4,352 MT only and not 16,318 MT taken in the assessment order. It was also said that the excess weight had been recorded because sometimes during the crushing process over-size pieces are thrown out of the jaws of the crusher which were to be again put into the crusher and crushing done again. It was also said that the process being continuous over weight could not be recorded. The assessee's counsel was asked to give the working of the suppression of production on the above basis and the following figures were submitted by him as also appearing from page 2 of the assessee's first paper Book :---- " Qty. consumed Amount (Tons) (Rs.) Lime stone 4352.00 2,23,736 Laterite 19.58 1,393 Iron Ore 50.48 9,531 -------------- ---------- Raw mix 4422.06 Coal 609.72 2,79,355 -------------- Clinker produced 2816.61 Gypsum 165.81 25,459 China Clay 339. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-company apparently forgot to suppress the expenditure incurred on those sales ". The process of manufacture or production of cement is a closed process. The Assessing Authority was not able to controvert the fact that the overall quantity of material purchased/produced by the assessee-company had remained the same and that the weights given in the records were by estimate as the stocks could not be physically weighed at the end of each stage. It was also not controverted that re-crushing was done of over-size lime-stone and hardened china-clay. In fact, this appears to be the main basis for the addition, ultimately sustained by the learned CIT (Appeals). Before us it was pointed out on behalf of the assessee that in November 1986 the assessee had installed a tertiary crusher which was in the nature of a third degree crusher in order to ward off excess crushing figure. It was explained that it has a sieve which only lets the proper sized pieces to pass on for further process. The optimum size was said to be 25 mm. Sri D.P. Maloo, the whole-time Managing Director of the assessee had explained before us the entire process. There is also nothing said by the Income-tax Authorities t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Register, Stock Register and other records of which the specimens were given in the assessee's paper books. The assessee's manufacture/production is in operation since 1981 and it has not been shown that any addition had been made earlier. This is relevant because nothing specific has been detected in the assessment year in question to make the addition and the excess crushing figure of 4353 M.T. stands duly explained due to the over-size lime stone pieces. Therefore, though the figure of addition was reduced by the learned CIT (Appeals), there was no basis for making the addition because there was no evidence of any suppressed sale or suppressed production. The addition sustained on the basis of mere suspicion can, therefore, not be upheld as there is no basis. We also find that it is only on account of the excess crushing that the correctness and regularity of the records maintained by the assessee was doubted and the provisions of section 145(2) applied and upheld. Having regard to the entirety of the facts and material on record as also to the actual working and the processing of the manufacture of cement, we are of the view that there was no warrant or justification for resort ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se they were not in the nature of advertisement but had been incurred on the gifts for attracting new customers. The assessee had relied before the learned CIT (Appeals) on the Special Bench decision of the Bombay Bench 'B' in the case of First ITO v. French Dyes Chemicals (I) (P.) Ltd. [ 1984] 10 ITD 240 (SB). However, the learned CIT (Appeals) did not accept that submission. The learned CIT (Appeals) had in fact given a notice dated 11-10-1989 to the assessee to show cause why the entire amount of Rs. 2,78,896.58 in respect of presentation items be not disallowed fully in terms of section 37(2A) treating it as an expenditure in the nature of entertainment observing that it was a clear case of extending hospitality to customers and in fact was a better hospitality than providing a cup of tea, coffee, or a meal. He, therefore, disallowed the entire amount of Rs. 2,78,986. It thus resulted in an additional disallowance of Rs. 1,26,067 (Rs. 2,78,896 ---1,52,829). He also held that the disallowance of Rs. 1,58,829 made by the Assessing Officer was justified under rule 6B as the presentations were made by the assessee with a view to advertise or publicise its name and business activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HL). (iii) Sassoon J. David Co. (P.) Ltd. v. CIT [1979] 118 ITR 261 at 273 (SC). (iv) CIT v. Raj Bros. [1988] 171 ITR 249 (AP). Shri Kundra submitted that the gifts in question amounted to entertainment i.e., they fell under the expression " hospitality of every kind by the assessee to any person ". 8. We have carefully considered the rival submissions as also the decisions referred to above. As we have already seen, the gifted articles for which the expenditure aggregates to Rs. 49,385 consisted of 25 cotton sarees, 55 wall clocks, 250 suit lengths. The details appear at page 25 of the assessees Paper Book. 8.1 So far as the items aggregating to Rs. 10,551.60 are concerned, they consisted of gift cheques of various amounts aggregating to Rs. 9,208 as per the details appearing at page 29 of the assessee's paper book. They were given as marriage gifts to persons connected with the assessee. These are, therefore, of a type different from presentation articles. There was an amount of Rs. 1,343.60 also included in the amount of Rs. 10,551.60 which is mentioned as " tips to waiters, room boys, peons, watchman etc. In our view, so far as the gift cheques and tips etc. are con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r presentation having a value of more than Rs. 50 (the value has been raised to Rs. 200 by the Income-tax 10th Amendment Rules, 1990). The Assessing Officer had also purported to make a total disallowance of Rs. 1,52,229.56 extending the application of rule 6B to other items also, The expression " advertisement " has not been defined in the Act or the Rules. However, there is absolutely no material on the record to show that any of these articles were meant for advertisement or publicity of the assessee's business. We have already noticed the contention raised on behalf of the assessee that none of the articles had the assessee's " emblem ", " logo ", " mark ", " name " or " sign " on them. It is also not possible to find any material on the basis of which it could be said that any amount of Rs. 32,885 had been offered by the assessee voluntarily for disallowance under rule 6B as per the Tax Audit Report. Therefore, we are of the clear view that no disallowance could be made by treating these articles of presentation as or by way of advertisement. 8.5 Generally speaking, gifts or presentations (other than food or beverages) could be given to any of the following :--- (i) Employ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods. In the definition of " Entertainment Expenditure " under Explanation 2 to section 37(2A) no reference is made to gifts though the definition includes provision of food or beverages or in any other manner whatsoever. That is why the important question to be examined is whether the presentation of gifts can be said to amount to hospitality of every kind given by the assessee to any person in any manner whatsoever. This brings us to the question as to what is meant by hospitality. This term has not been defined under the Act. Fortunately for us, the following definitions have been mentioned in the aforesaid decision of the Gujarat High Court in the case of Patel Bros. Co. Ltd. :--- Hospitable --- " Receiving and entertaining strangers with kindness and without reward ; kind to strangers and guests ; pertaining to the liberal entertainment of guests " (page 433). (As per New Webster Encyclopaedic Dictionary of the English Language, at page 410). Hospitality --- Webster's New (i)" ....... the act, practice or quality of Twentieth Century Dictionary, page receiving and entertaining strangers 879. or guests in a friendly and generous way ". (pp. 432) New Webster Encyc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, of the view that the expenditure incurred on the aforesaid gifts or presentations could not be disallowed or considered for disallowance as entertainment expenditure as done by the learned CIT (Appeals). 8.8 We may before concluding, also refer to the decisions cited on behalf of both the sides. In the case of Odhams Press Ltd. the House of Lords had held that whether a sum was wholly and exclusively laid out for the purposes of trade was a question of fact. In the case of Korner, the House of Lord was emphasising on the direct purpose. In the case of Sassoon J. David Co. (P.) Ltd., the Supreme Court at page 273 emphasised that it is the purpose and not the motive which is important. In the case of Mysodet (P.) Ltd., Karnataka High Court held that hotel bills and other expenses were expenditure in the nature of entertainment and not as business promotion expenses. In the case of Raj Bros., Andhra Pradesh High Court was considering only the fact that the expenditure on advertisement, publicity and sales promotion was subject to the limits specified in section 37(3) and that the aggregate of such expenditure was further subject to the limits specified in section 37(3A). In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the School and the Club the shortfall, considering the actual expenditure. He submitted that to the extent of the actual expenditure, the amount could be allowed. He also pointed out that in the subsequent year such claims were allowed. On the other hand the learned Departmental Representative relied on the orders of the Income-tax Authorities. 13. After considering the rival submissions, we find that though apparently section 40A(9) does not seem to be attracted as the amounts do not represent payments made for the setting up or formation of or as contribution to any fund, trust, company, association of persons or body of individuals or society registered under the Societies Registration Act, 1860 or other institution for any purpose, however, the full details not being on the file and the assessing authority having made the disallowance merely on the basis of the Tax Audit Report, this matter requires to be restored to the Assessing Officer for a decision afresh in accordance with law after bringing the material on the record and after examining the exact nature of the claim and the details thereof. 13.1 So far as the amount of Rs. 1500 paid to Mangalam Karamchari Sahakari ..... X X X X Extracts X X X X X X X X Extracts X X X X
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