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TMI Blog2011 (10) TMI 610X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of entertainment. Ground No. 3 The CIT(A) erred in upholding the AC's contention that the Compensation received towards breach of contract from Bharat Vijay Chemicals amounting to ₹ 5,05,000 was taxable as a revenue receipt. The CIT(A) ought to have held that the said sum was a capital receipt and that the same was not chargeable to tax. Ground No. 4 The CIT(A) erred in upholding the AC's contention that the expenditure incurred on Production of TV films of ₹ 3,046,536, Production of Promotion films of ₹ 1 ,300,250 and Medical films of ₹ 892,759 are capital in nature. In any event the same are allowable under section 37(3) and, without prejudice if these contentions are rejected depreciation thereon ought to be allowed. Ground No. 5 The CIT(A) erred in holding that Lunch expenses etc. to personnel on outdoor duty of ₹ 5,76,143, 5% of total canteen expenses of ₹ 92,85,039 i.e. ₹ 4,64,252, Conference expenses of Rs.l,59,752 and Expenses on Annual General Meeting (AGM) of ₹ 6,991 are in the nature of entertainment expenses under section 37(2) of the Act. Ground No. 6 The CIT(A) erred in upholding the inclusion of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d: The Assessing Officer ought to have excluded excise duty element from the figure of total turnover for the purpose of computing deduction u/s 80HHC of the Act." 2 Ground no.1 is regarding the disallowance of ₹ 90 lacs debited in the P&L account on account of impending settlement with labours. 2.1 During the course of assessment proceedings, the Assessing Officer noticed that the assessee has debited a sum of ₹ 90 lacs being the provision on account of pending union settlement. The Assessing Officer further noted that as per note no.8, the liability was workout on the basis of union charter of demand and best possible estimates. The Assessing Officer questioned the allowability of the claim of the assessee and pointed out that the provision made by the assessee is not on the basis of any service condition or contractual obligation but on the basis of an impending settlement between the assessee and the union of workers. Therefore, the Assessing Officer was of the view that the liability for which the provision is made is contingent because it is depending upon the agreement, which is yet to be made. Accordingly, the Assessing Officer held that assessee's liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he VRS taken by some of the employees, the payment under the settlement was reduced and the excess of this provision was reversed. The ld senior counsel has submitted that the provision made by the assessee is not a malafide and unreasonable decision; but it was still an anticipated prudent commercial decision of the assessee to make the provision of the liability. The ld Sr counsel has submitted that, though that claim was allowed in the subsequent year; however, when the provision is a reasonable decision, based on the past experience and accounted for as prudent commercial practice, then, the disallowance of the same is not warranted solely on the ground that the claim was allowed in the subsequent year. He has relied upon the decision of the Hon'ble jurisdictional High Court in the case of United reported in 181 ITR 347 as well as in the case of CIT v. United Motors (India) Ltd., reported in 250 ITR 89. 3.2 On the other hand, the ld DR has submitted that the earlier MoS dt 29.2.1988 w.e.f 1.7.1987 expired on 31.12.1990 and thereafter, the charter of demand was made by the Union on 9.1.1991 and a long term settlement took place in 1993. Thus, the ld DR has submitted that the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Union reached to a point where the liability could be ascertained for higher payment to the workers. No material is on record to show that during the year under consideration any tentative settlement between the assessee and the employee's Union arrived in pursuant to the negotiations. Since the final settlement arrived between the parties in Aug 1993; therefore, there may be a reason for the assessee to estimate the liability in pursuant to the impending settlement as a result of negotiations between the parties. But there is nothing on record to suggest that any such stage or development has occurred during the year under consideration on the basis of which a prudent commercial decision can be taken. We can't overlook the question that when there was a MoS dt 29.2.1988 and thereafter there was a fresh charter of demands of dt 7.1.1991 then, why the assessee had not made any provision either on the basis of MoS dt 29.2.1988 or on the basis of charter of demands dt 7.1.199. There was no significant development or event occurred during the year under consideration which led to such provision of the liability likely to be finalised in view of the impending settlement. Further, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 991-92 as recorded in para 45 as under: "45. Ground No.3(A), 3(B) and 3(c) raised by the Assessee reads as follows: "3A. On the facts and in the circumstances of the case, the CIT(A) erred n holding that an amount of ₹ 9,00,000/- was in the nature of entertainment expenditure included in sales conference, business meeting expenses and canteen expenses." 7.1 From the above ground, it is clear that the issue was regarding the expenses in sales conference and business meeting expenditure and canteen expenses whereas in the year under consideration, the Assessing Officer disallowed the expenditure on account of gift articles. Therefore, it is apparent that the issue before us is not identical to the issue which was considered by the Tribunal in the assessee's own case for the AY 1991-92. 7.2 However, we further note that for the AY 1991-92 only ₹ 1,62,598/- was included and part of the whole issue as mentioned above, relating to the gift item. The Tribunal has adjudicated the said issue in para 53 as under: "53. Regarding the disallowance of ₹ 1,62,598 included in advertisement and publicity expenses as entertainment expenses, we find that the addition sustained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment. Rule 6B(1) provides that the allowance in respect of expenditure on advertisement shall not, inter alia, in respect of articles intended for presentation, exceed the limits which are set out in that rule. Therefore, articles intended for presentation must be such articles which advertise the company's wares in some manner or the other. In the present case, the Tribunal has found as a fact that the presentation articles were not in the nature of advertisement. In view thereof, the Tribunal has rightly come to the conclusion that rule 6B is not attracted. We may also add that the assessment for the relevant year was nil assessment and the amount involved in the present petition is only ₹ 10,905. Hence, no useful purpose would be served by granting the rule, in any event. 7.5 The Hon'ble High Court has held that the presentation articles were not in the nature of advertisement; therefore, the Tribunal has rightly come to the conclusion that Rule 6B is not attracted. 8 In the case in hand, the Assessing Officer, though initially proposed to disallow the expenditure u/r 6B; however, finally the disallowance was made u/s 37(2) being entertainment expenditure. The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ative history of the provision as well as the other decisions of the High Court. Finally, the High Court has concluded in paras 17 to 20 as under: "17 From the legislative history and the introduction of Explanation 2, we are of the opinion that the Legislature always intended that entertainment expenditure includes expenditure on provision of hospitality of every kind by the assessee. It was in order to resolve the ambiguity that Explanation 2 was added. The intention of the Legislature cannot be ascertained from any statement by way of Notes on Clauses of a Bill or brevet and as has been stated, the duty of the court is to find the natural meaning of the words in a statute in the context in which they are used. 18 It has always been considered permissible and even desirable for a court while interpreting a statute to take note of the history of the statute and the circumstances in which it was passed or the mischief at which it was directed. The reason is that the meaning which is to be given to a statute should be such as will carry out its object. (See Chettiam Veettil Ammad v. Taluk Land Board, AIR 1979 SC 1573). 19 Following the rule in Heydon's case [1584] 76 E. R. 63 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se the goods. The Appellate Assistant Commissioner has also found that the expenditure was for serving ordinary meals to the employees as well as to the farmer customers and they were not such which entertained or amused the guests since the assessee provided meals as a bare necessity of the business. In that view of the matter, therefore, these references must be rejected and we answer the questions referred to us in the negative and against the Commissioner. . . . " This conclusion of the Gujarat High Court on the finding of fact recorded by the Tribunal is consistent with the view we have taken and, therefore, we uphold the same for the reasons given by us which are sufficient to sustain the ultimate view. We may observe that the wide observations and the elaborate guidelines given in the Gujarat decision which are in excess of the broad test indicated by us and not necessary to support the conclusion, are unnecessary for the decision and, therefore, affirmance of the conclusion reached in the Gujarat decision should not be construed as an affirmance of the wide observations therein. We may now refer to the decision of the Delhi High Court in CIT v. Rajasthan Mercantile C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 3.3.1988 with BVC for not to make use of the know-how for manufacturing n-tributy Phosphate for suppliers to any other party. When it was fond that after some time, BVC started supplying the aforesaid products to parties other than the assessee, the assessee filed a suit for damages against BVC and finally the dispute was resolved in accordance with the consent terms whereby the BVC paid a sum of ₹ 5,05,000/- to the assessee and the assessee allowed BVC to sell the said products in the open market. The Assessing Officer proposed to treat the said amount as income of the assessee. The assessee submitted before the Assessing Officer that this amount represents damages received for breach of contract and not in the normal course of carrying on the business activities is therefore, a capital receipt not liable to be taxed. The contention of the assessee did not find favour from the Assessing Officer, who has assessed the said amount as income of the assessee 10.1 The assessee challenged the action of the Assessing Officer before the CIT(A) and the CIT(A) concurred with the view of the Assessing Officer. 11 Before us, the ld Sr counsel for the assessee has submitted that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnical know-how. It was made available by the employees, who left the services of the assessee. Therefore, when the case is in hand, the compensation received for allowing the BVC to use the technical know-how and sale of the products to the other parties and not for ratifying the past breach of contract. In any case, from the consent terms dated 25.6.1991; it could not be inferred that the assessee has transferred the technical know-how. Even otherwise, it is not the claim of the assessee that the assessee has transferred the technical know-how to BVC, Thus, it was only allowing the use of the technical know-how by BVC for manufacturing of the goods and to sell to the other parties. Therefore, the amount received by the assessee is nothing but in the nature of revenue and has been rightly assessed as income of the assessee. 13 The Hon'ble Supreme Court has also taken a similar view in the case of Rai Bahadur Jairam Valji in para 20 as under: "20 In the present case, the contract dated May 9, 1940, was simply an agreement to carry on business. In settlement of that contract, ₹ 2,50,000 was paid to the respondent. That was not a payment on account of any capital expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsumers and medical fertility repeated viewing. Thus, the ld Sr counsel for the assessee has submitted that these TV films and spots do not have any enduring benefit/life. 15.1 Alternatively, it has been submitted that the entire expenditure on advertisement and publicity is allowable u/s 37(3) irrespective of its nature whether it is of capital or revenue. Further, it has been urged that in any case, the depreciation at the prevailing rate of plant & machinery on the expenditure treated as capital in nature shall be allowed. He has relied upon various decisions and mainly the decision of the jurisdictional High Court in the case of CIT v. Geoffrey Manners and Co. Ltd. reported in 315 ITR 134 (Bom). He has further pointed out that a similar issue was decided by the Tribunal for the Assessment Year 1996-97, which has been confirmed by the Jurisdictional High Court as the appeal filed by the revenue has been dismissed. 15.2 The ld DR, on the other hand, has relied upon the orders of the lower authorities and submitted that the Assessing Officer has disallowed the expenditure by following the decision of the jurisdictional High Court in the case of CIT v. Patel International Film L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ively by holding that the same are in the nature of entertainment. 18.3 On appeal, the CIT(A) confirmed the action of the Assessing Officer. 19 We have heard the ld Sr counsel as well as the ld DR and considered the relevant material on record. The ld Sr counsel has pointed out that similar issue has been adjudicated by the Tribunal in assessee's own case for Assessment Year 1991-92 and therefore, the expenses on lunch and canteen may be decided on similar lines. 19.1 Regarding the expenses on conference and AGM, the ld Sr counsel has submitted that these are incurred for the purpose of business of the assessee. 19.2 The ld DR relied upon the orders of the lower authorities and submitted that as per the Explanation to sec. 37(2), the expenses incurred on hospitality by way of provision on food and beverage and whatever other manner are treated as entertainment expense. He has further pointed out that the assessee has failed to provide the necessary details and explanation as to whether the entire expenditure incurred on the employees or for entertaining outsiders also. 20 Having heard both the parties and considered the relevant material on record, we note that the Tribunal, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... teen expenses, the Tribunal has disallowed the ad-hoc expenses of ₹ 1 lac out of the total ₹ 2,20,000/- disallowed by the CIT(A). Accordingly, following the same ratio/analogy, we disallow ₹ 2 lacs each against ₹ 5,76,143/- on account of lunch expenses and ₹ 4,64,252/- on account of canteen expenses. To sum-up, a total disallowance of these two items would be ₹ 4 lacs. 22 Ground no.6 is regarding sales tax, trade discount and margins money not to be included in the total turnover for the purpose of deduction u/s 80HHC. 22.1 The Assessing Officer noted that the assessee has shown sales exclusive of sales tax, trade discount and cash discount etc. The Assessing Officer asked the assessee to explain as to why the said figure should not be included in the total turnover for the purpose of deduction /s 80HHC as these are of trading in nature. 22.2 After considering the reply of the assessee, the Assessing Officer increased the total turnover of the assessee by following amounts: I) Trade discount and margins ₹ 18,81,86,006/- ii) Trade discount and margins plan ₹ 7,16,41,285/- iii) Rebates ₹ 5,28,83,037/- iv)Cash discount & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is concerned, undisputedly, the sale turnover has been shown by the assessee net of trade discount and margins. It is to be noted that the invoice raised by the assessee is for the net amount and therefore, the amount of trade discount and margins cannot be added to the turnover. In view of the facts and circumstances, we decide this part of the issue in favour of the assessee. 26 Ground no.7 is regarding the disallowance of expenditure on foreign visitors. 26.1 The assessee has shown air fare and hotel expenses on foreign visitors, who came to India in connection with MCP project and claimed the same as revenue expenditure. The Assessing Officer asked the assessee to produce the date wise details of the said expenditure. The assessee submitted before the Assessing Officer that it does not have the record of date wise details of the activities undertaken during the foreign travel. The Assessing Officer held that since the expenditure was incurred for the purpose of process of operation of the MCP project; therefore, it is capital in nature and depreciation shall be allowed on this account for Assessment Year 1993-94. 26.2 On appeal, the CIT(A) held that the expenditure is for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 3,71,534/- on account of air fare in respect of the visits of the foreign persons. The Assessing Officer treated the said expense as entertainment by applying the provisions of sec. 37(2A) of the I T Act. Accordingly, the entire expenditure of ₹ 7,18,148/- was held as in the nature of entertainment and hospitality to the foreign visitors and subjected to the limit specified u/s 37(2A) of the I T Act. 30 On appeal, the CIT(A) accepted the contention of the assessee in respect of reducing the disallowance to the extent of ₹ 1,67,768/-, which has been disallowed by the Assessing Officer as capital expenditure and directed the Assessing Officer to verify the same. 30.1 Before us, the ld Sr counsel for the assessee has submitted that the issue has been decided by the Tribunal for the Assessment Years 1981-82 to 83-84, and has been held for the purpose of business. 30.2 The ld DR on the other hand has relied upon the orders of the lower authorities and submitted that the expenditure is clearly in the nature of hospitality as the assessee has spent the expenses of air fare and hotel accommodation of the foreign visitors, who came to India. 31 We have considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arding disallowance of excess provision. 32.1 The assessee made the provision for the expenses which were found by the Assessing Officer in excess to the actual expense. The whole of the excess provision are as under: i) Bank charges ₹ 1,35,175/- ii) Dies and Chemical dvn. ₹ 5,30,276/- iii) Water charges ₹ 13,365/- Total ₹ 6,78,816/- 32.2 The assessee claimed that it is following the policy of making annual provision for expenditure at the end on the basis of available bills and departmental estimates of expenses incurred for which bills have not been received till the time the annual accounts are finalized. These provisions are reversed in the subsequent year against the relevant expenses and subsequent payments against the said provision are debited in the succeeding year. Therefore, it was also contended that the disallowance made by the Assessing Officer of ₹ 6,78,816/- constitutes a negligible 1.85% of the total provisions made by the assessee and therefore, cannot be held to be excessive, erroneous and malafide. The grievance of the assessee is restricted on the point that the CIT(A) has not directed the Assessing Officer to reduce the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 2,52,152/- and hence, the provisions of sec. 43B are applicable. Accordingly, we do not find any illegality in the orders of the lower authorities. If the assessee has offered any income part of this disallowance for the Assessment Year 1993-94, that is a subject matter of that assessment year and not Assessment Year under consideration. Accordingly, this ground of the assessee is dismissed. 37 Ground no.11 is regarding disallowance of ₹ 50 lacs on account of premium payable on redemption of non convertible debentures. 37.1 During the year under consideration, the assessee has debited a sum of ₹ 50 lacs on account of premium on non convertible debenture. After considering the explanations of the assessee, the Assessing Officer held that the premium became payable only in sixth and seven years and not in the year of issuance of debenture. Accordingly, the Assessing Officer disallowed ₹ 50 lacs and added the same to the total income of the assessee. 37.2 On appeal, the CIT(A) agreed with the view of the Assessing Officer. 38 Before us, the ld Sr counsel for the assessee has submitted that the premium payable @ 5% on redemption of the debentures should be allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts in the circumstances of the case." 39.1 Accordingly, following the decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corpn Ltd (supra), we allow proportionate claim of the premium payable on the debentures to be spread-over to the period of debenture. Accordingly, this ground is partly allowed. 40 Ground no. 12 is regarding deduction u/s 80M for reducing 2% of the dividend income towards administrative and overhead expenses. 40.1 We have heard the ld Sr counsel for the assessee as well as the ld DR and considered the relevant material on record. The Sr counsel has submitted that no disallowance can be mad from the dividend income for the purpose of allowing deduction u/s 80M. He has further submitted that similar issue has been decided by the Tribunal for the Assessment Year 1991-92. He has also relied upon the decision of the Hon'ble Supreme Court in the case of CIT vs General Insurance Corpn of India reported in 254 ITR 203 (SC). 40.2 On the other hand, the ld DR has submitted that the onus is on the assessee to produce the relevant records and establish that no expense has been incurred for earning dividend income. He has relied upon the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered the relevant material on record. The assessee alleged that this issue was raised before the CIT(A) as additional ground vide letter dated 24.9.1997. However, the CIT(A) has not adjudicated this issue. It is to be noted that this issue requires verification of the facts and it appears that no claim was made even before the Assessing Officer. In any case, before the CIT(A) also the assessee claimed to have raised additional ground and not in the Memo of Appeal. When the issue has not at all been considered and adjudicated by the CIT(A) and no steps were taken by the assessee before the CIT(A), then the same does not emanate from the order of the lower authorities. In view of the fact that the assessee has not taken any steps before the lower authorities to raise and adjudication of this issue, we decline to entertain the ground raised by the assessee and hence, the same is dismissed. Additional Ground: 45 Ground no.14 is regarding excise duty to be excluded from the total turnover for the purpose of deduction u/ 80HHC. 46 We have heard the ld Sr counsel for the assessee and the ld DR and considered the relevant material on record. Since this issue involved in the appeal is p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) has erred in directing the Assessing Officer to compute and allow deduction u/s 80Iand 80HH on the same basis as claimed and directed by the CIT(A) for Assessment Year 1993-94. vii) On the facts and in the circumstances of the case and in law, the ld CIT(A) has erred in directing the Assessing Officer to restrict the disallowance to 2% of th dividend income as in the preceding year." 48 Ground no.l is regarding valuation of the closing stock. 49 We have heard the ld DR and the ld Sr counsel for the assessee and considered the relevant material on record. At the outset, we note that this issue is considered and adjudicated by the Tribunal in assessee's own case for Assessment Year 1993-94 in ITA No.213/Mum/1997 vide order dated 19.8.2005. In view of the order of the coordinate Bench of the Tribunal in assessee's own case, the issue is decided in favour of the assessee and against the revenue. 50 Ground no.2 is regarding deletion of addition of ₹ 10 lacs made by the Assessing Officer under Rule 6D. 50.1 The Assessing Officer made an adhoc disallowance of ₹ 10 lacs in respect of conveyance and telephone expenses incurred during the domestic travel. 50.2 On appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure by the Assessing Officer without referring to para 27 of the assessment order whereby, the Assessing Officer has already given due credit to the assessee while calculating the disallowance out of the travel expenses. 55 We have heard the ld DR as well as the ld Sr counsel for the assessee and considered the relevant material on record. To avoid the double deduction as well as double addition, we have already made necessary observations while deciding the issue involved in assessee's appeal. Accordingly, the issue raised by the revenue is remanded to the record of the Assessing Officer to verify and decide the same in accordance with law. 56 Ground no.4 is regarding deletion of addition being 10% on foreign travel expenses in MCP project. 57 We have heard the ld DR as well as the ld Sr. counsel for the assessee and considered the relevant material on record. At the outset, we note that identical issue has been decided by the Tribunal in assessee's own case for AY 1991-92 in para 56 & 56.1 as under: 56. We have heard the rival submissions. The disallowance has been made on the basis that the foreign travel was for the benefit of the parent company and that some of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he paper book. In view of the above, we direct that the disallowance sustained by the CIT(A) be deleted. Ground No.4(a) is allowed and therefore Ground No.4(b) and (c) do not require any adjudication. Ground No.2 of the Revenue is dismissed 57.1 Accordingly, this issue is decided against the revenue and in favour of the assessee. 58 Ground no.5 is regarding closing stock on account of Modvat credit. 59 We have heard the ld DR and the ld Sr counsel for the assessee and considered the relevant material on record. The ld Sr counsel for the assessee has submitted that this issue is covered in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of Indo Nippo Chemicals reported in 261 ITR 275. He has further submitted that this issue has already been decided by the Tribunal in assessee's own case for AY 1991-92 in para 13 as under; "13. Before us, it is not in dispute that the issue raised by the revenue in Ground No. 3 has to be dismissed in view of the decision of Hon'ble Supreme Court in the case of Indo Nippon Chemical Co. Ltd., 261 ITR 275 (SC). In the aforesaid decision, Hon'ble Supreme Court has held that whether the net method of valuation ..... X X X X Extracts X X X X X X X X Extracts X X X X
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