TMI Blog1999 (1) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... sales-tax collected has been credited to a separate account and payments made are debited to this account. Since the above said amounts are unpaid at the end of the accounting year, they have been disallowed by the AO when the matter was taken up before the CIT(A) he gave a finding to the effect that the following payments were made during the time allowed by the sales-tax authorities: Rs. 5-4-1986 35,084 5-5-1986 28,022 5-4-1986 1,422 5-4-1986 267 -5-1986 11,474 30-4-1986 89,504 -------- Total 1,65,773 -------- The CIT(A) directed the AO to verify the claim as per documentary evidence placed on record and allow it accordingly. 3. The learned Departmental Representative relied on the order of the AO. The learned counsel for the assessee relied on the order of CIT(A) : and also on the decision of the Tribunal in the case of CIT vs. Chandulal Venichand (1994) 118 CTR (Guj) 257 : (1994) 209 ITR 7 (Guj). After considering the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imed that the entire expenditure is fully vouched as per the regular books of account maintained and the Dy. CIT(SR) was not justified in disallowing the expenditure and the ground that the payment were made to a sister concern after careful examination of the claim of the assessee. I also feel that the claim of expenditure, as compared to the immediately preceding year, is a little on the higher side. I, therefore, restrict the disallowance of the Dy. CIT (SR) to 50 per cent and the Dy. CIT (SR) should accordingly calculate the relief while giving effect to this order." 5. In appeal before us, the learned Departmental Representative relied on the order of the AO. The learned counsel for the assessee on the other hand submitted that the expenditure has been incurred for the purpose of making the product more efficient and economical. The Company has other unit(s) at Bhavnagar and hence certain manufacturing is done at Bhavnagar. Certain machinery was shifted to Bhavnagar in order to maintain economy and for more efficient production and for this purpose rent is paid for the use of the premises and machinery running charges are paid for looking after production. There is nothing w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is as under: "The seventh ground of appeal relates to the disallowance of bad debts to the tune of Rs. 6,150. According to the Dy. CIT(SR), the amount of Rs. 6,150 was disallowed because the appellant company did not file any details when it was specifically asked to file the same. But before me, the learned authorised representative has filed certain particulars relating to this claim. An advance of Rs. 6,150 was made to one National Pipes Co. for supply of brass rods. It appears that, after placing of the order and before the receipt of brass rods, the company became sick unit and it was declared as such by the Government of Bengal. Hence, the advance given was written off when there was no hope of recovery as per the letter No. NPT/S-11/79/2068, dt. 23rd Oct., 1979 of National Pipe Tubes Co., Calcutta-1(WB), wherein last para of the letter it was stated as under: Accordingly we are not in a position either to settle your claims or to arrange supply of the materials against your pending orders at the old rates as stated in your letter under reference. After looking into this documentary evidence placed on record by the appellant, I am satisfied that the claim of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . CIT (SR) under s. 40A(2)(b) of the IT Act, towards the purchase of refills. This addition was discussed by the Dy. CIT (SR) in para 9-a of his order. According to the Dy. CIT (SR) the appellant has purchased 10,000 dozens of Sharp refills with nozzles from Sanghvi Sharp Refills @ 54,22 per gross. But when the Dy. CIT (SR) verified the sale with the price of the appellant's own production subsequently the rate came to Rs. 36 only per gross as on 1st July, 1988. When the appellant was asked by the Dy. CIT(SR) to explain as to why the appellant has purchased such a high rate of Rs. 54,22 as against Rs. 36 per gross when the appellant himself was able to market later, the appellant had explained that the purchased refills contained the imported tips and, therefore, the purchase price was far higher than the sale price of its own products at a much later date i.e. as on 1st July, 1988. It is also pointed out by the appellant that the appellant had sold its own product at Rs. 39 per gross in the subsequent years because of economization of such factors in order to push its sales faster in the market. The Dy. CIT(SR) was not agreeable to accept these contentions and, therefore, felt tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll pens. In para 9(b) of his order this point was discussed by the Dy. CIT. As discussed in the above para, the appellant company had purchased some refills from Sanghvi Sharp Refills and after assembling the ball pens, the same were sold to Sanghvi Sales Co. at Rs. 14.85 per dozen after allowing 10 per cent deduction. According to the Dy. CIT(SR) Eco Sharp Marketing Co. was marketing similar pens at Rs. 18 per dozen in the subsequent year and, therefore, the Dy. CIT(SR) thought that the price of Rs. 14.85 per dozen on comparison, was far below, particularly because the sale was to the sister concern. Even after taking into consideration the normal discount of Rs. 18 per dozen, the sale price should not have fallen below Rs. 16.20 per dozen, which was the fair price according to the Dy. CIT(SR) and, therefore, he had estimated the difference between this fair price of Rs. 16.20 and the sale price of Rs. 14.85 as a profit diverted by the appellant towards its sister concern. This difference in value, according to the Dy. CIT(SR) was Rs. 13,500 on the quantity of 10,000 ball pens sold to the sister concern. The authorised representative, in the first place, has disputed the compari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls to the Eco Sharp Marketing Co., Baroda and Delhi giving them higher discount of 18 per cent which according to the AO was excessive as it was made to a sister concern. 14. Before the CIT(A) the assessee contended that this discount of 18 per cent was allowed even earlier by the Sanghvi Swiss Refills (P) Ltd., Bombay and this is the normal rate of discount that is being allowed by all the manufacture after deducting the margin for sales-tax and other expenses taking into consideration other aspects of the products by the assessee. This 18 per cent discount was allowed to the market agents who in turn incur packing charges, sales-tax, sub-commission to the selling agents, etc. The assessee produced before the CIT(A) seven invoices of sales made by Sanghvi Swiss Refills (P) Ltd., Bombay where the discount allowed in all the seven instances was 18 per cent. On considering this piece of evidence, the CIT(A) found that; the discount of 18 per cent claimed by the assessee incurred to its sister concerns was quite reasonable aspecially considering the fact that such discount was allowed in earlier years also and was given by other concerns in the market. Hence he deleted the addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee pleaded that the addition made by the AO is unwarranted and that the CIT(A)'s order in this regard may be upheld. 16. On considering the rival submissions, we find that the CIT(A)'s order in respect of this ground of appeal does not call for any interference. As rightly pointed out by the first appellate authority, the discount of 18 per cent has been allowed by similar concerns in similar dealings. Therefore, it cannot be said that the discount of 18 per cent is unreasonable of excessive having regard to comparable cases. Moreover, the AO has not found any irregularity in the books of accounts, bills or invoices. The addition has been made simply on the basis of suspicion that discount has been allowed to a sister concern for the purpose of diversion of profits. Since the assessee has legally proved the point that discount has been allowed after taking into consideration, the overall interest of its business in production, we are of the considered view that the addition is uncalled for. In other words, the CIT(A)'s finding in this respect is confirmed. 17. In the 10th ground of appeal the Revenue disputes the order of the CIT(A) in restricting the addition to Rs. 1,12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... difficulty of working capital as the company could best concentrate on production. There is no question of any extra commercial consideration, as it is in the overall interest of the company which would be proved by increase in production and profitability in the later year. The company has foreign collaborator's as partners and under the Company's Act there is provision to declare the dealings with sister concern and price, etc. The transactions are placed before the Board of Directors and they have approved the transactions. It is also submitted that the sale to sister concern comes to Rs. 35,440 kgs. and not 91,082 kgs. as submitted at the time of assessment. On the basis of this submission the learned counsel for the assessee argue that the addition sustained by the CIT(A) is unwarranted. He has also pinpointed that specific details furnished by him in the paper-book containing the copies of salebills and quatitative details relating to the transactions under reference. 20. We have carefully considered the rival submissions. As regards the quantity of sales to sister concern, it is now no longer disputed that the correct quantity comes to 37,365 kgs. as verified by the CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount the statement recorded by him during the course of search. However, the quality of scrap in the comparable cases quoted where the average price was shown at Rs. 10 per kg. remained unknown. On the basis of this reasoning, the CIT(A) proceeded to observed as under: "From this point of view, the via-media has to be struck to make the estimate reasonable and, therefore, I consider that an addition of Rs. 50 of the additions made by the Dy. CIT(SR) will be reasonable in the circumstances, keeping in view the comparable rate available on record. The Dy. CIT(SR) is, therefore, directed to work out the relief accordingly." 23. Before us the learned Departmental Representative relied on the order of AO whereas the learned counsel for the assessee vehemently disputed the addition made by the AO and extent of addition as sustained by the CIT(A). It is pointed out by the learned counsel for the assessee that generation of scraps depends on several factors. It is a technical matter and it cannot be estimated in general manner. A certificate of chartered engineer is produced which gives data regarding percentage of scrap generated. The AO has relied upon the statement of Shri J.D. Sang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes not call for an addition of the sort as made by the AO in the assessment order. Coming to the sale price rate per kg. of scrap also as pointed out earlier the AO has relied on information gathered from the Economic Times of a much later date which also does not help us in arriving at the correct rate prevailing on the action dates of sale. Since the assessee-company is maintaining the regular books of accounts, and sale invoices are available for verification, the statement of facts as given by the assessee based on such entries in the books, cannot be disbelieved on mere presumption. In this view of the matter, we delete the amount of addition in toto. 25. In the last ground of appeal, the Revenue objects to the addition sustained by the CIT(A) to the extent of 50 per cent in respect of sale of plastic scrap. 26. The addition made here is on similar grounds as mentioned in the case of brass scraps. The AO applied the rate of 45 per cent for the sale rate. According to him the correct rate of scrap should be Rs. 11.25 whereas the sale was effected by the assessee to a sister concern only at Rs. 7 per kg. Thus the addition has been made to the extent of Rs. 13,353 in the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of CIT(A), dt. 20th Dec, 1989 for asst. yr. 1986-87 which we have already discussed in connection with the Revenue's appeal for the same assessment year in para Nos. 2 to 30 above. 32. The first ground of this appeal is with regards to the disallowance under s. 40A(2)(b). Our observations in para Nos. 4 to 6 supra hold good in respect of this ground of appeal raised by the assessee. Consequently this ground is allowed. 33. The second ground of appeal raised by the assessee is in respect of the disallowance of a sum of Rs. 1 lakh paid to ex-director and ex-works manager at Rs. 50,000 each. The AO found that the assessee-company entered into an agreement with the outgoing director and the ex-works manager by which the services of these two retired persons were retained by the company in order to avoid competition as they had access to the ink formula which was the trade secret of the assessee-company alone. The AO was of the view that while making these payments, the assessee-company got a benefit of an enduring nature, in the form eliminating competition from these persons, case they did similar business. He also considered that the payment was made by way of compensation for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not every advantage of enduring nature acquired-by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently of more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular fact and circumstances of a given case. (iii) What is an outgoing of capital and that what an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process ..... X X X X Extracts X X X X X X X X Extracts X X X X
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