TMI Blog1989 (2) TMI 137X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of the house rent allowance which is exempted under s. 10(13A) and depreciation on company's leased flat while computing the disallowance under s. 40A(5) of the IT Act. This ground is also common in all the departmental appeals for the assessment years under appeal. This issue again is covered as mentioned by the CIT(A) himself by a decision of the Special Bench of the Tribunal in the case of Blackie and Sons (India) Ltd. 3 SOT 72 and in the case of Glaxo Laboratories (i) Ltd. vs. ITO (1986) 26 TTJ (Bom) 214 (SB) : (1986) 18 ITD 226 (Bom) (SB) as well as Kodak Ltd. vs. IAC (1986) 18 ITD 213 (Bom) (SB). Following these decisions, we confirm the order of the CIT(A) on this issue and dismiss this ground. We hold that the CIT(A) was right in directing the IAC to exclude medical reimbursement, portion of the house rent allowance which is exempted under s. 10(13A) and depreciation on flat leased by the company while computing the disallowance under s. 40A(5). 4. The third ground which is again common for all the years under appeal is that the CIT(A) erred in directing the ITO to work out profits and gains of the new industrial undertaking on some reasonable basis and allow deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the ground that separate accounts in respect of the new industrial undertaking are not maintained. He directed the ITO to work out the profits and gains of the industrial undertaking on some reasonable basis as per the accepted accounting principles and allow deduction under s. 80 I as per law. The CIT(A), who dealt with this issue for the asst. yrs. 1983-84 and 1984-85 in his order dt. 25th March, 1988 gave his finding in para 14 of his order where he held following his predecessor's decision that the appellant should be given adequate opportunity of explaining its stand regarding the point raised by the IAC in the asst. yr. 1984-85. He also, therefore, sent the issue back to the IAC for applying the reasonable basis in these two years. Similarly, the CIT(A), who decided the issue for the asst. yr. 1985-86, dealt with it in para 10 of his order and sent back to the IAC the issue regarding computation of relief on some reasonable basis. So far as the departmental appeals are concerned, we would hold in principle that the assessee cannot be denied relief provided by the statute under s. 80 I merely because profits of the industrial undertaking cannot be separately worked out or be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars that the basic requirements of s. 80-I had not been fulfilled by the assessee. Nothing has been brought to our notice to point out that the assessee's claim for deduction in respect of the new industrial undertaking was not genuine or could not be allowed for non-fulfilment of any of the conditions mentioned in s. 80-I. The only reason why such relief was denied in the first year when it was claimed was that the profits of the new industrial undertaking with reference to which such deduction had to be computed could not be worked out because separate accounts in respect of such industrial undertaking were not maintained. If this is the only reason why the relief has been denied to the assessee, we are of the opinion that this reason is not sufficient nor is it supported by provisions of law for denying deduction claimed by the assessee. We would, therefore, confirm the finding of the CIT(A) on this issue and direct the IAC to work out the relief under s. 80 I on a reasonable basis after giving the assessee an opportunity of being heard. It will not be out of place in this context to mention that Shri Khare, the learned representative for the assessee, pointed out that a working ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred in deleting disallowance of Rs. 43,702 under s. 43B being contribution to Superannuation Fund even though the amount had been paid only after the closing of the accounting period. The CIT(A) has dealt with this issue in para 28 of his order. CIT(A) relied on the decision of the Tribunal in ITO vs. Thakarsi Babubhai Co. (1986) 26 TTJ (Ahd) 517 : 18 ITD 593 (Ahd). He also relied on the decision in the case of S. Govindraja Reddiar vs. ITO (1986) 19 ITD 177 (Coch) and ITO vs. Sanjay Sales Syndicate (1987) 27 TTJ (Bang) 52 : 30 Taxman (Bangalore) and deleted the disallowance of Rs. 43,702. In our opinion, the payment to the Superannuation Fund, though made after the closing of the accounting period, could be said to have been made as it related to the assessment year and was paid within the statutory time permissible for such payment. This view has been upheld by a decision of the Andhra Pradesh High Court in S. Subbarao and Co. vs. Union of India (1988) 71 CTR (AP) 34 : (1988) 38 Taxman 272 (AP). Following the rational of this decision, we would hold that the CIT(A) was right in allowing deduction of the impugned amount. This ground for asst. yr. 1984-85 is rejected. 9. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. This ground in the assessee's appeals is, therefore, rejected for all the years. 13. The second ground in the assessee's appeals for asst. yr. 1982-83 is that the CIT(A) erred in holding that s. 17(3) specifically excludes HRA partly from profits in lieu of salary and in directing the IAC to exclude HRA indicated in s. 10(13A) for working out disallowance under s. 40A(5). We have already dealt with this issue while disposing of the departmental appeals and have confirmed the finding of the CIT(A) in this regard. However, it is necessary to deal with an argument advanced by Shri Khare in support of this ground that the entire amount of house rent allowance is not includible in salary for computing disallowance under s. 40A(5). 14. Shri Khare argued that Expln. 2 to s. 40A(5) provides that for the purpose of that sub-s. 'salary' has the meaning assigned to it in cl. (1) r/w cl. (3) of s. 17. Taking clue from cl.(a) of Expln. 2 to s. 40A(5), Shri Khare argued that cl.(3) of s. 17 gave inclusive definition of "profits of lieu of salary" and sub-cl.(ii) of cl. (3) provided for a parenthetical clause which had the effect of exempting from the scope of the term "profits of lieu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loyee-directors as against the sum of Rs. 16,180 taken by the assessee on the basis of r. 3 in computing the perquisite value. It was Khare's argument that having regard to the difficulty in determination of such expenses as can reasonably be attributed to the use of motor cars by the employee for his private or personal purposes, the value of perquisite in respect thereof as evaluated in accordance with r. 3 of the IT Rules ought to have been accepted and taken into account for this purpose. In support of this argument, Shri Khare relied on a decision of the Calcutta High Court in CIT vs. Britannia Industries Co. Ltd. (1981) 20 CTR (Cal) 272 : (1982) 135 ITR 35 (Cal). The Calcutta High Court confirmed the decision of the Tribunal that since under r. 3 of the IT Rules, 1962 the value of the perquisite of free cars provided to the employees for the purposes of assessment under the head 'salary' would be Rs. 150 p.m. the value of perquisite in the hands of the employees for the purpose of ceiling under s. 40 (c) should also be taken at the same amount. Shri Khare, therefore, argued that the CIT(A) should have directed that only the value of perquisite under r. 3 should be taken for d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same issue. It observed that r. 3 of the IT Rules, 1962 is applicable in computing the income chargeable under the head 'salary'. It cannot be projected into the exercise contemplated by s. 40A which deals with the topic 'deductible expenses' for computation of income under the "profits and gains of business or profession". Thus, the express language of r. 3 and in the setting in which it is enacted and in the light of the purpose for which it is enacted indicate that its applicability for the purpose of computing expenses contemplated by s. 40A is ruled out. The Gujarat High Court also considered the decision in Britannia Industries Co. Ltd.'s case which was relied upon on the behalf of the assessee and distinguished it on the ground that in that case the Calcutta High Court was considering the scheme of s. 40(c)(iii) which existed at the relevant time. In our opinion, these two decisions would squarely cover this issue in favour of the Revenue and meet the arguments raised by Shri Khare in this behalf. We would consequently hold for all the years that the CIT(A) was justified in coming to the finding that he did in respect of disallowance of perquisite in respect of actual exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 1982-83 and para 11 of his combined order for the asst. yrs. 1983-84 and 1984-85. In this context, two grounds have been taken by the assessee. One ground is that the CIT(A) erred in upholding the action of the IAC in making a disallowance of the aforementioned amounts for the three years in respect of travelling expenses. As another aspect of this ground, it is argued by Shri Khare that under r. 6D only expenditure incurred while on actual travel is subject to the limit laid down therein and any other expenditure including hotel expenditure incurred during stay at any place outside the headquarters for the purposes of business is entitled to be allowed in full. Alternatively and without prejudice, it is argued that under r. 6D the whole of the period spent outside the headquarters during the relevant previous year has to be taken into account and, therefore, it is argued that the disallowance under r. 6D should be restricted to Rs. 22,450 for 1982-83, Rs. 83,933 for 1983-84, Rs. 96,896 for 1984-85 and Rs. 95,248 for asst. yr. 1985-86. This alternative ground finds support in a decision of the Tribunal in S.V. Ghatalia vs. ITO (1983) 37 CTR (Trib) (Bom) 68 : (1983) 4 ITD 583 (Bom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he business effectuates and perpetuates the trade or commerce in question, then such induction or introduction of such a plant should be deemed to be such that they are placed in a position for service or use in the business. In view of these authorities, we are inclined to accept Shri Khare's claim that the assessee is entitled to investment allowance on cost of air-conditioners installed in factory buildings for all the years provided other conditions for allowance of investment allowance for each of these four years are found to have been satisfied. Similarly, we would direct that the assessee would be entitled to allowance by way of investment allowance on cost of refrigerators and water coolers installed in factory for asst. yrs. 1982-83 and 1983-84 if other conditions in this regard are satisfied. This common ground will be treated as allowed. 22. The next common ground concerns the disallowance of relief under s. 80-I. The claim made by Shri Khare amounts to Rs. 6,51,767 for the asst. yr. 1982-83, Rs. 17,08,327 for the asst. yr. 1983-84, Rs. 28,29,250 for the asst. yr. 1984-85 and Rs. 43,32,730 for the asst. yr. 1985-86. We have already dealt at length with this issue whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 84-85 and Rs. 5,018 for the asst. yr. 1985-86. We find that there is not much discussion in the CIT(A)'s order for any of these years why this expenditure has been directed to be disallowed. This issue is covered in favour of the assessee by a decision of the Gujarat High Court in CIT vs. S.L.M. Manekhlal Industries Ltd. (1977) 107 ITR 133 (Guj). We find that no reasons have been given either by the IAC or by the CIT(A) to disallow this claim. Prima facie, such expenditure has to be treated as welfare expenses, as having regard to the nature and extent of the business of the company, we do not consider it proper to uphold the decision of the CIT(A) in this regard. This common ground for all the years is consequently allowed. 26. We will now deal with grounds which are not common and which relate to specific years. The first such ground relating to the asst. yr. 1982-83 concerns the disallowance of excise duty payable in respect of goods manufactured and kept in bonded warehouses. Certain facts in this regard may have to be stated. The assessee filed its original return for the asst. yr. 1982-83 on 30th Aug., 1982. The assessee claimed deduction of Rs. 2,47,060 and showed it unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the year 1982 has been filed by Shri Khare and we find the following note in the year 1982 at page 14 of the said report: "1.A. The Company has changed its method of account in respect of excise duty. (a) The applicable excise duty paid or payable on finished goods in stock has been charged to the profit and loss account. (b) Hitherto, the excise duty paid on finished goods in stock as at the end of the year was shown under loans and advances and no provision was made for finished goods in bonded warehouses. (c) Provision for tax has been made on the basis that excise duty charged in the Profit and Loss account would be allowed for tax purposes. As a result of the above changes the profit before tax for the year is lower by Rs. 7,32,966 and the profit after tax is lower by Rs. 1,91,854." This note would clearly show that the assessee itself was aware of the fact that in the year 1981 it had not charged excise duty payable on finished goods to the profits loss account nor had it shown the same in the stock as per this system of accounting followed which system of accounting was charged by the assessee in the subsequent year i.e., in calendar year 1982. We are, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the calendar year 1981 and annual report have not been filed before us. The copy of the annual report for 1982 filed before us shows that in the schedule to the balance sheet at page 8 there is a specific mention that the said 2,40,000 shares were allotted w.e.f. 1st Jan., 1982 and therefore, firstly the expenditure, which was prima facie in connection with the increase in capital and therefore, on capital account was incurred for the year 1982 and on that account it is not admissible for the calendar year 1981. Alternatively and without prejudice, this expenditure has to be treated as capital expenditure connected with increase in capital from Rs. 16 lakhs to Rs. 40 lakhs and the treatment of such expenditure is governed by the principles laid down by the decision of the Bombay High Court in Bombay Burmah Trading Corpn. Ltd. and the decision of CIT vs. O.P. Monga (1986) 162 ITR 224 (Bom). Both these decisions appear to express a view which squarely supports the case of Revenue for treating such expenses as capital expenditure. We cannot persuade ourselves to accept Shri Khare's argument that such expenditure was required to be incurred for better management of the assessee's busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer and the claim allowed on its merits for both the years after giving the assessee an opportunity of being heard with respect to the details of the claim. This ground will be treated as allowed for statistical purposes. 31. There is one common ground for all four years under appeal which is that the IAC erred in not allowing the claim for deduction of Rs. 48,04,444 for the asst. yr. 1983-84 being the liability arising out of the Drugs (Price Control) Order, 1979, for payment into the Drugs Price Equalisation Account. Similar ground has been taken for the asst. yr. 1984-85 in respect of item of expenditure of Rs. 76,37,068 and for the asst. yr. 1985-86 in respect of Rs. 93,01,560. So far as the asst. yr. 1982-83 is concerned, this ground has been taken by way of additional ground purportedly on 1st Sept., 1986. It has been brought to our notice by the Departmental Representative that this ground does not arise out of the order of the first appellate authority so far as asst. yr. 1982-83 is concerned because the CIT(A) did not have occasion to deal with it. On that account itself, this ground is liable to be dismissed as we have no jurisdiction to deal with an issue which can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision in the account. The IAC for the asst. yr. 1983-84 has disallowed the claim merely by saying that this was a disputed liability and had not crystallised during the relevant period. During the calendar year 1972, the assessee changed its accounting system, of which the IAC has taken notice. Schedule 17 of the balance-sheet has mentioned change in accounting policies. The company has changed its accounting policy in respect of insurance claims and export incentives which from 1982 onwards it started accounting for on cash basis. However, this fact by itself cannot be cited as has been done by the IAC to deny deduction on account of a statutory liability if the assessee can otherwise establish that such liability did arise during the relevant accounting period and the fact that the liability was disputed in appeal or that proper accounting entry in respect of such liability was not made would not come in the way of the assessee making the claim in view of the aforementioned decision of the Supreme Court in Kedarnath Jute Mill's case. In view of these observations, we will set aside the decision of the CIT(A) for these three years, restore the matter to the file of the IAC with a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8,081 . (iii) Case history pads for Doctors 10,777 . (iv) Special calendars for Doctors 56,628 . (v) Pen stands for Doctors 3,18,244 . (vi) Ball Pens 52,515 . (vii) Direct Mailing Campaign 2,18,921 1,71,236 (viii) Doctor's literature 14,03,434 8,70,413 (ix) Conventions, Exhibitions etc. . 10,510 (x) Misc. Promotion . 4,63,008 . . 65,23,592 44,17,859 The assessee is a pharmaceutical company and Shri Khare could not deny that what it had distributed by way of samples were samples of medicines mostly given to medical practitioners and physicians or the assessee's constituents. We are satisfied that these have been rightly treated as advertisement as they can by no stretch of imagination be treated as sales promotion expenses. The other expenses from items (ii) to (viii) like case history pads for doctors, pen stands, ball pens have also to be treated, in our opinion, as advertisement expenses. Particularly items like Doctor's literature and special calendars for d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 985-86 are concerned, the relevant cl. (3A) and (3B) as they stood operative w.e.f. 1st April, 1984 read as under: "(3A) Notwithstanding anything contained in sub-s. (1), where the expenditure or, as the case may be, the aggregate expenditure incurred by an assessee on any one or more of the items specified in sub-s. (3B) exceeds one hundred thousand rupees, twenty per cent of such excess shall not be allowed as deduction in computing the income chargeable under the head "Profits and gains of business or profession". "(3B) The expenditure referred to in sub-s. (3A) is that incurred on— (i) advertisement, publicity and sales promotion: or (ii) running and maintenance of aircraft or motor cars; or (iii) payment made to hotels". Clause (3A) thus specifically provided that the expenditure referred to in cl. (3A) included payment of expenses made to hotel. Therefore, both these cls. (3A) and (3B) have to be read together and for that reason the disallowance made by the IAC and confirmed by the CIT(A) has to be sustained. Further, the Spl. Bench of the Tribunal in Sundaram Finances Ltd. vs. IAC (1984) 18 TTJ (Mad) 348 (SB) : 7 ITD 845 (Mad) (SB) have on this issue held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as expenditure of the type contemplated under cl. (3A) or (3B), the ITO should consider whether it is really expenditure of that type or whether it is an expenditure incurred in the curse of business to cope up with competing markets. On this issue, the matter will be sent back to the IAC for the asst. yr. 1985-86. This ground will be treated as allowed for statistical purposes. 40. The next ground, which is peculiar to the asst. yr. 1985-86, concerns the addition on unclaimed credit written back amounting to Rs. 64,693. The CIT(A) has dealt with this issue in para 24 of his order for asst. yr. 1985-86. Strangely enough, the CIT(A) has confirmed the addition on the ground that no details were furnished before the IAC. There is no discussion of this issue anywhere in the body of the order of the IAC. The nature of the unclaimed balances written back to the profit loss account is not known and the reason why it is claimed that there is no remission under s. 41(1) is not clear either from the order of the IAC or from the order of the CIT(A). If the amount is a trade debt which could not be recovered and has been written back on the ground that the hope for recovery has been give ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
