TMI Blog1996 (7) TMI 179X X X X Extracts X X X X X X X X Extracts X X X X ..... n addition of Rs. 20,000 was made which was confirmed in the first appeal. Looking to the past history of the case, the AO made an addition of Rs. 30,000 under s. 37(2A) of the Act. The learned CIT(A) upheld the disallowability of such expenditure but reduced the quantum from Rs. 30,000 to Rs. 25,000. 3. Shri Subhash Aggarwal, the learned counsel for the assessee, submitted that the disallowance of Rs. 25,000 was excessive particularly when the total expenses in this account had gone down from Rs. 17,90,247 to Rs. 14,21,835. The learned Departmental Representative relied on the orders of the authorities below. 4. Since the claim of the assessee in respect of staff welfare expenses is much less as compared to the preceding year, we uphold the disallowance to the extent of Rs. 20,000 only. The assessee gets itself of Rs. 5,000. 5. Sub-ground (b) is against the confirmation of disallowance of Rs. 73,340 out of sales promotion expenses. The AO found that the assessee had claimed sales promotion expenses on domestic sales at Rs. 8,94,335. The AO found that the assessee had debited a sum of Rs. 73,340 on account of expensive items such as silver vessels, silver glasses, etc. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d out by the learned counsel for the assessee. We, therefore, hold that the disallowance of Rs. 73,340 was not called for. It is hereby deleted. 10. Sub-ground (c) is regarding the confirmation of disallowance of Rs. 11,890 on account of taxis provided to the dealers. Sub-ground (d) which is also connected with sub-ground (c) is regarding the confirmation of disallowance of Rs. 8,351 being 1/4th of the airfare of dealers. Both these sub-grounds are dealt with hereinafter. 11. The AO noted that the assessee had spent a sum of Rs. 33,407 under the head 'sales promotion expenses' on account of airfare of dealers. He treated 25 per cent of the same as entertainment expenses. Similarly, the AO noted that the assessee had spent a sum of Rs. 11,890 on providing taxis to the dealers. This was also held to be expenditure in the nature of entertainment. Thus, the AO made an addition of Rs. 20,241 (Rs. 8,351 + Rs. 11,890) as entertainment expenses. The learned CIT(A) confirmed the disallowance. 12. Shri Subhash Aggarwal, relying on the decision of the Bombay High Court in the case of CIT vs. Kirloskar Oil Engines Ltd., submitted that neither taxi fare nor airfare could be treated as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs. 1983-84 and 1986-87 vide orders dt. 28th Jan., 1987 and 27th June, 1994, respectively. It was pointed out that in the order dt. 28th Jan., 1987 for asst. yr. 1983-84, the distribution of shirts, TVs, cycles, cardigans, pullovers, etc. was allowed as deduction. It was also pointed out that for asst. yr. 1986-87, the Tribunal vide order dt. 27th June, 1994 held that the gifts were for business purposes and hence allowable. The learned counsel drew our attention to pp. 1 to 15 of the assessee's compilation which are cash memos of the silver coins purchased. It was submitted that the total amount spent on the coins amounted to Rs. 1,13,494 out of which the share of the distributors was Rs. 56,777, the balance being paid by the assessee. It was submitted that these coins were given in pursuant to a scheme on the basis of the cycles sold by the dealers. The list of the dealers to whom the coins were given was also available from pages 4 onwards. It was, therefore, argued that these expenses were purely business expenses and were, therefore, allowable as a deduction. 17. The learned Departmental Representative submitted that the details filed by the assessee were not complete. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 50,000. 23. Sub-grounds (g) and (h) are against the confirmation respectively of Rs. 69,000 being the cost of velvet blankets and Rs. 77,614 being the cost of Titan watches given to dealers. The AO held that both the aforesaid expenses were not for business purposes of the assessee. He accordingly disallowed the expenses. The learned CIT(A) confirmed the action of the AO. 24. Shri Aggarwal submitted that the expenditure of Rs. 69,000 on the purchase of velvet blankets was fully vouched as per the two purchase vouchers placed at pp. 16 and 17 of the assessee's compilation. It was submitted that the velvet blankets and Titan watches were distributed to the dealers on the occasion of Diwali, that it was customary to do so to keep the dealers in good humour and that the expenditure in question was business expenditure. 25. The learned Departmental Representative submitted that the recipients were not identifiable and that the expenditure in question was neither under a scheme nor for business purposes but was purely entertainment expenditure. Reliance was placed on the Kerala High Court decision in the case of Alleppey Co. Ltd. 26. After carefully considering the submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid to the sister concern for developing multi-speed freewheels. The AO disallowed the expenditure as the assessee was not manufacturer of freewheels. The AO observed that the expenditure on scientific research was allowable under s. 35 of the IT Act if it was spent on research relating to the business of the assessee or any amount paid by the assessee to recognised institutions. Since the expenditure in question had neither been incurred for assessee's own business nor paid to any recognised institution, the AO disallowed the same. 35. The learned CIT(A) noted that the assessee was not a manufacturer of freewheels and hence the development in this regard was not for the business purposes of the assessee. It was found that the assessee purchased freewheels from its sister concern Avery Freewheel (P) Ltd. at the market price and had also purchased the same from other parties for export purposes. Thus, according to the learned CIT(A), since the assessee was only a trader of freewheels, the expenditure of Rs. 4,81,000 had been rightly disallowed. 36. Shri Aggarwal drew our attention to the details of jigs and tools, samples and minor product adaptions and trial runs in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of Rs. 4,81,000. The major expenditure was on tools, dies and jigs (Rs. 1,96,000) and improvement and modifications of production machines (Rs. 1,74,000). In our opinion, such expenditure could not be treated as capital expenditure of the assessee. We, therefore, hold that the expenditure of Rs. 4,81,000 was revenue expenditure and was allowable as such in the hands of the assessee. We direct accordingly. 38. Ground No. 3 is against the confirmation of disallowance of Rs. 2,70,000 being the interest calculated on advance of Rs. 15 lacs to Shri Hans Raj Pahwa, managing director of the assessee-company. The AO noted that the assessee had advanced interest free loan of Rs. 15 lacs to Shri Hans Raj Pahwa, managing director of the assessee-company, during the period relevant to asst. yr. 1990-91. The said amount had been shown as security by the assessee and had been utilised by Shri Pahwa for acquiring property at Safdarjang Enclave, New Delhi. The AO disallowed a sum of Rs. 2,70,000 as interest on the ground that the money had not been advanced for purpose of business of the assessee and that the assessee had paid interest to the bank and others on the amounts borrowed by it whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 450 sq. yards and the construction consisted of ground floor, first floor and second floor. It was submitted that it was purely a business transaction between the assessee-company and Shri Pahwa and hence the ratio of the Allahabad High Court decision in the case of H.R. Sugar Factory Pvt. Ltd. did not apply. It was also submitted that the Revenue had not established any nexus between the amounts borrowed by the assessee-company on which interest was paid by it and the aforesaid amount of Rs. 15 lacs which was advanced to Shri Pahwa, interest-free. It was, on the other hand, contended that the amount of Rs. 15 lacs was advanced out of the assessee's own funds and not out of the borrowed funds. Our attention was also drawn to copy of the resolution passed at the meeting of the board of directors of the assessee-company held on 6th July, 1989 which is available at p. 28 of the assessee's compilation. According to this resolution, a sum of Rs. 15 lacs was to be given as security to Shri Hans Raj Pahwa for taking on rent property situated at Safdarjang Enclave, New Delhi, being purchased by Shri Pahwa on rent to be settled later on. It was clearly indicated in the resolution that wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any on which interest was paid and the interest-free advance of Rs. 15 lacs to Shri Pahwa. Taking all these circumstances into consideration, we hold that there was no justification for making/confirming a disallowance of Rs. 2,70,000 which is hereby directed to be deleted. 43. Grounds Nos. 4 and 5 are in respect of the assessee's claim under s. 80HHC of the Act. Relevant facts in this regard are these. For asst. yr. 1992-93, the assessee-company filed its return on 28th April, 1993 on total income of Rs. 66,86,860. In this return, claim under s. 80HHC of the Act was made at Rs. 1,30,09,312. The assessee revised this claim of deduction under s. 80HHC to Rs. 1,73,51,788 on the basis of the report of its auditors H.K. Chitkara Co. dt. 16th Dec., 1994. Copy of the audit report under s. 80HHC of the Act is placed at pp. 50 to 55 of the assessee's compilation. Assessment was completed on 24th Jan., 1995 on total income of Rs. 2,16,80,747. Claim under s. 80HHC was allowed by the AO at nil as per annexure 'B' to the assessment order. While computing the assessee's claim under s. 80HHC, total turnover was taken at Rs. 99,91,12,804. Profit of business was taken at negative figure of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... completely ignored and the 90 per cent of export incentive had still to be taken into consideration for working out the claim under s. 80HHC of the Act. It was submitted that the term "profit" had not been defined anywhere in the IT Act. The dictionary meaning of profit meant an advantage whereas loss meant disadvantage. It was submitted that as per the proviso to cl. (c) of sub-s. (3) of s. 80HHC, it was stipulated that the profits computed under cl. (a) or cl. (b) or cl. (c), shall be further increased by the amount which bears to 90 per cent of any sum referred to in cl. (iiia), the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. It was, therefore, submitted that the insertion/use of the word "increased" was significant. According to the learned counsel, the loss worked out in terms of cl. (a) and cl. (b) of sub-s. (3) of s. 80HHC could not be increased by the amount of 90 per cent referred to in the proviso by making an algebraic sum total of the items. It was submitted that if under cl. (a) and/or cl. (b) of sub-s. (3) of s. 80HHC the resultant figure was a negative figure, then those figures had to be taken at nil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with his submissions in this regard. According to us, the plain reading of s. 80HHC shows that the negative profit worked out under cls. (a) and (b) of sub-s. (3) of s. 80HHC cannot be "increased" by a positive profit. A negative figure cannot be increased by a positive figure. It can be adjusted not increased. The plain reading of the proviso to cl. (c) of sub-s. (3) of s. 80HHC provides clue that the negative profit or loss worked out under cls. (a) and (b) has to be ignored. If there is a profit under cls. (a) and (b), there is no difficulty in increasing the same by the 90 per cent export incentive as stipulated in cl. (c) but if the profits under cls. (a) and (b) are negative, then harmonious construction suggests that those losses cannot be increased by a positive figure under cl. (c). Even if there is a ambiguity the same has to be interpreted in favour of the assessee. The interpretation placed by us on the provisions contained in sub-s. (3) of s. 80HHC gets further support from the decision of the Cochin Bench of the Tribunal in the case of A.M. Moosa. The headlines in that case on which we rely are reproduced as under. "It is a bounden duty to liberally construe the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim of the assessee in principle duly supported by the tax auditors is hereby approved. 47. The only other controversy is with regard to the 'turnover' which is to be taken into account while working out the relief under s. 80HHC of the Act. The AO took the total turnover at Rs. 96,17,13,277 as shown by the assessee itself. There is, therefore, no dispute about this figure. The AO, however, added the following five items to the total turnover amounting to Rs. 3,73,99,527:— . . Rs. (I) Sale of scrap 2,32,79,391 (II) CST and ST 1,24,33,956 (III) Trade discount 4,31,658 (IV) Misc. income 9,36,795 (V) Insurance claim 3,17,727 . . 3,73,99,527 This action of the AO was confirmed by the first appellate authority. 48. Shri Aggarwal submitted that he was conceding that sale of scrap was part of the total turnover and hence this issue be decided in favour of the Revenue. As regards the remaining four items, it was submitted that the same could not form part of the total turnover. It was for instance pointed out that CST and ST collected from the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issions made by the learned counsel and as supported by the decision of the Calcutta Bench of the Tribunal in the case of Chloride India Ltd. Trade discount miscellaneous income and insurance claim shall also not be treated as part of the total turnover for the reasons mentioned by the learned counsel with which we agree. 52. In view of the above discussion, the AO is directed to work out the relief under s. 80HHC admissible to the assessee. 53. Ground No. 6 regarding the non-allowance of deduction under s. 80M on dividend income from SBI Mutual Fund was not pressed at the time of hearing and is accordingly treated as dismissed. 54. Ground No. 7 which is the last effective ground is against the upholding of levy of interest under s. 234B. Brief facts in this regard are these. The AO directed the charging of interest under s. 234B of the Act. Interest under the said section was accordingly charged. The learned CIT(A) upheld the action of the AO. 55. Shri Aggarwal submitted that before charging interest under s. 234B of the Act, the AO is duty bound to give an opportunity of hearing to the assessee which in the present case was not allowed and hence the charging of intere ..... X X X X Extracts X X X X X X X X Extracts X X X X
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