Income Tax Appellate Tribunal - Chandigarh
Hero Cycles Ltd. vs Assistant Commissioner Of Income Tax. ... on 12 May, 1998
ORDER
B.S. Saluja, J.M.
1. These are cross-appeals - one each by the assessee and the Revenue - against order of CIT(A), dt. 5th March, 1992. Since the appeals were heard together, the same are being disposed of by this consolidated order for the sake of convenience.
2. Ground No. 1 raised by the assessee relates to confirmation of disallowance of Rs. 4,28,923 under s. 40A(5) of the IT Act, 1961, including reimbursement of medical expenses. The AO observed from Annexure XXI of the audit report that the expenditure of Rs. 11,42,923 incurred on seven employees-directors, persons having substantial interest or relatives of directors (mentioned at p. 4 of the assessment order), resulted directly or indirectly in the provision of any remuneration, benefit or amenity. He also observed that complete details of remuneration were furnished by the assessee vide letter dt. 29th January, 1991 and that details included house rent allowance, soft furnishing allowance, medical reimbursement, contribution to provident fund, etc. He further observed that the maximum salary allowable to seven directors would work out to Rs. 7,14,000, as per provisions of s. 40A(5). He, therefore, proposed to disallow the excess amount of Rs. 4,28,923 and confronted the assessee. The assessee submitted that reimbursement of medical expenses could not be taken as a perquisite in the hands of the assessee-company for the purpose of disallowance under s. 40A(5). AO, however, rejected the plea and observed that reimbursement of medical expenses was to be taxed as part of salary only if the amount paid out exceeded Rs. 5,000. He also observed that reimbursement of such expenses like operation fee, hospitalisation charges and cost of medicines are excluded from taxable income without any ceiling if the expenditure is incurred on medical treatment in a hospital approved by the Government. He further observed that Shri Om Prakash Munjal had been suffering from retention of urine. He referred to the resolution passed by the Board of Directors on 10th September, 1985, that Shri Munjal should undergo operation and medical treatment in USA and the expenditure for his medical expenses including to and fro and stay of Shri Munjal and his wife would be incurred and borne by the assessee-company. He, therefore, held that reimbursement of medical expenses to Shri Munjal were perquisite and that the expenditure has to be taken into account for the purpose of disallowance under s. 40A(5). AO also analysed the resolution passed by the Board of Directors and held that the motive was to pass on the benefit from the company, over which the family had full control. He referred to Annexure XXI of the audit report and observed that all the Directors had been paid remuneration exceeding Rs. 1,02,000 with the exception of Shri Suresh Chander Munjal. He observed that if payment of insurance, electricity bills and subscriptions to the club is taken into account, even payment to Shri Suresh Chander Munjal would exceed Rs. 1,02,000. He observed that in the absence of specific definition of 'Salary' in s. 40A(5) the word 'Salary' has to be construed in the manner understood in the setting and context of facts of the present commercial and industrial climate. He referred to the case reported in Jeewan Lal (1929) Ltd. vs. CIT (1991) 187 ITR 709 (Cal), wherein it was held that payment of bonus was no longer considered a gift or bounty and that bonus is part of salary or wages of the employee. It was also held that cash gratuity paid to the employees was part of salary. AO, therefore, held that payment of superannuation, soft furnishing allowance, medical reimbursement, managerial commission, house rent allowance, leave wages salary, contribution to provident fund, etc., were all included in the salary for the purpose of s. 40A(5). He thus, computed the maximum salary admissible in the case of seven directors at Rs. 7,14,000 and disallowed the excess amount of Rs. 4,28,923.
2.1. On first appeal, learned counsel submitted that the reimbursement of medical expenses cannot be treated as perquisite under s. 40A(5). He submitted that the company needed the services of Shri O. P. Munjal and it had borne the said expenses amounting to Rs. 2,39,566 for his medical treatment. He referred to the resolutions of the Board of Directors passed on 10th September, 1985, wherein it was mentioned that Shri Munjal was not willing to go abroad for treatment as it was too expensive and that the company decided to bear the expenses as it needed his services. Learned counsel pointed out that Circular No. 33, dt. 1st August, 1955, and later on amended was relevant only in the case of an employee and not in the case of assessment of a company. He submitted that the said expenditure was allowable even under s. 36. He referred to the provisions of s. 40A(5)(a), second proviso, and pointed out that contribution to provident fund, superannuation fund, leave travel allowance and passage money, were outside the purview of the said provision. Learned counsel relied on the cases reported in T.T. (P) Ltd. vs. ITO (1980) 121 ITR 551 (Kar), CIT vs. Avon Cycles (P) Ltd. (1980) 126 ITR 448 (P&H) and CIT vs. Avon Cycles (P) Ltd. (1983) 144 ITR (St) 14. Learned CIT(A) considered the submissions and the case law cited. She held that the decision cited were distinguishable on facts. She observed that in (1980) 126 ITR 448 (P&H) (supra), issue of commission paid to the firm acting as a sole selling agent was involved. She observed that Hon'ble Punjab & Haryana High Court have held that payment by the company or firm did not amount to direct or indirect remuneration and fee to the director and relatives of the director and that the payment could not be disallowed under s. 40(c). She referred to the Board's Circular No. 445, dt. 31st December, 1985, and observed that while there were difference of opinion in the judgments of the two High Courts, the Department was bound by the CBDT circular. She, therefore, held that the expenditure met out by the company with regard to the medical treatment of one of its directors was covered by the CBDT circular and thus upheld the impugned addition.
2.2. Learned counsel Shri Subhash Agarwal submitted before us that the medical reimbursement to Shri O. P. Munjal amounting to Rs. 2,39,566 was not covered under the provisions of s. 40A(5). He also referred to the resolutions of the Board of Directors passed on 10th September, 1985, and urged that the expenditure on medical treatment was even allowable as business expenditure on account of the commercial expediency under s. 37(1). In support, learned counsel relied on the following decisions :
(i) CIT vs. Mafatlal Gangabhai & Co. (P) Ltd. (1996) 219 ITR 644 (SC) wherein it was held that payments made in cash to the employees were not covered by s. 40A(5)/40(a)(v).
(ii) CIT vs. Steel Ingots (P) Ltd. (1996) 220 ITR 552 (MP) wherein it was held that the expenditure on travel and medical expenses abroad of Financial Director and his wife was expenditure on account of commercial expediency and the expenses were connected with purpose of business and the Tribunal was justified in allowing the same under s. 37.
(iii) Sukhji Starch & Chemicals Ltd. vs. CIT (1996) 221 ITR 308 (P&H), wherein it was held that the reimbursement of medical expenses of the director of a company was not a benefit or amenity within the meaning of s. 40(c) and 40A(5).
(iv) Commonwealth Trust Ltd. vs. CIT (1997) 228 ITR 1 (SC) wherein it was held that payments in cash were not covered by s. 40(a)(v).
(v) CIT vs. Shriram Refrigeration Ind. Ltd. (1992) 197 ITR 431 (Del) wherein it was held that cash payment by way of reimbursement of medical expenses was not perquisite and not to be taken into account in calculating excess beyond limit. It was also held that house rent allowance, cash payment towards car allowance were not perquisite but were part of salary and had to be taken into account. Learned counsel submitted that this decision has been approved by the Supreme Court.
(vi) Asstt. CIT vs. Hans Raj Pahwa & Bros. Tribunal decision dt. 30th September, 1994 in ITA No. 1264/1989 asst. yr. 1986-87 wherein it was held that such medical expenditure could certainly be treated as part of salary, as held by Hon'ble Calcutta High Court in the case of I.E.L. Ltd. and Hon'ble Delhi High Court in the case Instalment Supply (P) Ltd. vs. CIT (1984) 149 ITR 457 (Del), but AO had made the disallowance under s. 40A(5) by treating the aforesaid expenditure as perquisite and not as salary, therefore, disallowance could not be upheld. The Tribunal rejected the Revenue's appeal on the issue.
2.3. On a query from the Bench, as to whether it was a case of reimbursement of medical expenses in the case of Shri O. P. Munjal, as the company had purchased the air tickets, etc., learned counsel submitted that foreign exchange was released by the RBI and handed over to Shri Munjal and in the ultimate analysis the expenditure worked out to reimbursement and that it will fall outside the purview of the provisions of s. 40A(5). He referred to the details of expenses mentioned at p. 17 of the paper-book. He submitted that the said details include, apart from salary, bonus, leave wages salary, HRA, medical reimbursement, provident fund, superannuation and leave travel allowance. He referred to the provisions of s. 40A(5)(a), second proviso, and submitted that provident fund, gratuity fund and value of travel concession or assistance referred to in s. 10(5) are excluded from the purview of s. 40A(5)(a). He pointed out that HRA paid in cash is not covered by s. 40A(5)(a), in view of decisions reported in (1996) 219 ITR 644 (SC) (supra) and CIT vs. Smithkline Beecham Consumer Brands Ltd. (1997) 226 ITR 764 (P&H). On a query as to whether reimbursement of medical expenditure and HRA, etc., could be treated as part of salary, learned counsel replied that the Revenue authorities have only noted the provisions of s. 40A(5) and that the issue regarding salary is not before the Tribunal. He referred to p. 6 of the assessment order. Learned counsel took the alternative plea of applying the provisions of s. 40(c) and referred to the decision of Hon'ble Madhya Pradesh in the case of CIT vs. Steel Tubes of India Ltd. (1997) 140 Taxation 239, wherein it was held that in view of the decision in the case of CIT vs. Hico Products (P) Ltd., the Tribunal was justified in applying provisions of s. 40(c) as against the claim of the Department for application of the provisions of s. 40A(5). He referred to the decision of the Tribunal, (Jaipur Bench) in the case of Udaipur Mineral Development Syndicate (P) Ltd. vs. ITO (1992) 44 TTJ (Jp) 113, wherein it was held that reimbursement of medical expenses in the case of managing director who went abroad for his medical treatment accompanied by his wife and incurred expenses on hospital charges, air-tickets, medical bill, daily expenses, local conveyance, etc., could not be treated as personal expenses and that the same were allowable. He next referred to the decision of the Tribunal (Delhi Bench) in the case of Frick India Ltd. vs. Dy. CIT ITA No. 4487/91 dt. 28th February, 1996 for asst. yr. 1986-87, wherein in para 4 it was held that the services of Shri Manmohan Singh were very vital to the assessee-company and, therefore, to safeguard its business interest, the assessee-company considered it commercially expedient to reimburse the expenses incurred by Shri Manmohan Singh on his treatment abroad and that the claim represented expenditure laid out or expended wholly and exclusively for the purposes of the business of the assessee.
2.4. Learned Departmental Representative Shri Rakesh Goyal relied on orders of the tax authorities and submitted that only payments in cash were excluded from the purview of s. 40A(5). He also submitted that the director Shri O. P. Munjal was having a substantial interest in the company and the provision of s. 37 could not be invoked on the ground of commercial expediency as such expediency was not there. He further submitted that even medical expenses have to be included within the ceiling of Rs. 1,02,000, as mentioned in s. 40A(5). He submitted that the decision in (1996) 221 ITR 308 (P&H) (supra) deals with cash reimbursement and that the said decision was distinguishable vis-a-vis decision of Hon'ble Supreme Court in (1996) 219 ITR 644 (SC) (supra). He, therefore, urged that the disallowance should be confirmed.
2.5 We have carefully considered the submissions made by both the parties and have also perused the orders of the tax authorities. We have also seen the cash law relied upon by both the parties. It is observed that AO has included all the expenses mentioned at p. 1 of the paper-book within the definition of 'salary' and worked out the disallowance by invoking the provisions of s. 40A(5), after allowing expenses to the extent of Rs. 7,14,000 in the case of seven directors. It is also observed from the provisions of s. 40A(5)(a), second proviso, that certain amounts have been excluded from the purview of cl. (a), e.g., value of travel concession or assistance mentioned in s. 10(5), provident fund and gratuity fund payment referred to in s. 36(1)(iv) or (v). Further, Expln. 2 has defined 'salary' for the purposes of s. 40A(5). Provisions of s. 17(1) and (3) have been applied with certain modifications. The said Explanation also gives a definition of 'perquisite' in cl. (b) and sub-cl. (iv) mentions payment by the assessee of any sum in respect of any obligation which, but for such payment, would have been payable by the employee. Such payment would thus fall within the definition of expression 'perquisite'. We have also carefully seen the decision in (1996) 219 ITR 644 as also (1996) 221 ITR 308 (supra), wherein aforesaid decision of the apex Court has been mentioned. The ratio of the said decisions is that cash payments made on account of reimbursement of medical expenses are not covered by the provisions of s. 40A(5)(a)(ii) as well in sub-cl. (iv) of definition of 'perquisite' as given in cl. (b) of Expln. 2 to sub-s. (5). In the present case, the expenses on the medical treatment of Shri O. P. Munjal have not been reimbursed in cash but have been incurred by the assessee-company on his medical treatment in the form of air tickets for him and his wife, medical expenses incurred in USA and certain other incidental expenses aggregating to Rs. 2,39,566. If we closely looks at the provisions of sub-cl. (iv) of the definition of 'perquisite' only such payments by the assessee would fall within the definition which relate to any obligation which, but for such payment, would, have been payable by the employee, in this case Shri O. P. Munjal, it may be relevant to refer to the resolution of the Board of Directors, wherein it has been mentioned with reference to chest pain associated with breathlessness suggestive of angina pectoris, a heart disease, that "Shri O. P. Munjal does not want to go abroad for such treatment probably because it is quite expensive and that he has already incurred expenditure to the tune of Rs. 25,000 on medical treatment already undergone". It is further mentioned that Shri Munjal was advised rest by the doctors for 5-6 months and that he had decided to take complete rest for the said period. The chairman of the Board apprised the members that Shri Munjal was mainly managing the marketing department and that there was no managing director or whole-time director appointed since the year 1980. He further stressed on the usefulness and necessity to the assessee-company of the services of Shri Munjal and proposed that in the interest of the company the Board should insist upon him to undergo operation and ensure best treatment available anywhere in the world. The company thus decided to incur all the expenditure necessary for medical treatment including to and for travelling expenses, stay expenses incurred in India and abroad including that of his wife. A resolution to this effect was thus passed on 10th September, 1985. It is clear from the said resolution that Shri Munjal was not prepared to bear the expenses for his treatment abroad and that the company thought it necessary in the interest of business to meet the expenses on his treatment abroad for the heart ailment. In view of these facts and circumstances, we feel that it cannot be held that payment by the assessee-company in respect of medical expenses would have been borne by the employee himself. Thus, we feel that the said medical expenses cannot be brought within the definition of 'perquisite', as given in Expln. 2(b). We, therefore, feel that even though it is not a case of cash payment by the assessee-company to Shri O. P. Munjal on account of reimbursement of medical expenses, yet the ratio of the aforesaid decisions and other decisions of the Tribunal cited by learned counsel particularly (1992) 44 TTJ (Jp) 113 and (1996) 220 ITR 552 (MP) (supra) support the case of the assessee in as much as the said expenditure is also incurred by the assessee-company on the ground of commercial expediency. Accordingly, AO is directed to allow the expenditure of Rs. 2,39,566 out if disallowance of Rs. 4,28,923. Further, AO is directed to exclude the amounts falling within the purview of second proviso to s. 40A(5)(a) while computing ceiling amount of Rs. 1,02,000 under s. 40A(5) and allow appropriate relief to the assessee.
3. Ground No. 2 by the assessee relates to rejection of method of valuation of closing stock and making addition of Rs. 10,17,767 on account undervaluation of closing stock. AO observed from the details of closing stock that the cost price of goods to be exported had been shown at Rs. 86,78,925. He also observed that FOB value of the said goods had been shown at Rs. 76,61,158. He further observed that while working out value of closing stock, FOB value of the goods lying at port was taken into account and that method of valuation of closing stock was the market price or cost price, whichever was low. AO observed that the goods exported carry certain benefits and incentive like cash compensatory payment, import licences entitlements, international price difference, etc., and the same became payable as soon as the goods are exported. He observed that the goods were lying at port and were in possession and ownership of the assessee. AO held that since the aforesaid benefits accrued to the assessee on export of goods on the basis of FOB value, FOB value did not represent correct value of the closing stock. He also observed that the assessee was declaring the aforesaid incentive on mercantile basis and including the same in its income. He, therefore, asked the assessee to explain as to why the difference between cost price and FOB value amounting to Rs. 10,26,767 be not added to the valuation of closing stock. The assessee, vide letter dt. 14th January, 1991 submitted that the system of valuation of goods in transit for export was same as in the last year, i.e., lower of the cost price or FOB value. The assessee emphasised that the goods to be exported were jointly under the trade-mark of foreign buyers and the assessee could not sell those goods in India and that if such goods were sold, they would fetch only the scrap value. The assessee pointed out that any variation in closing stock would not affect the tax liability since any addition made in the year under consideration would be set off against income of next year because the rate of taxation in the case of companies was maximum in both the years. The assessee also submitted that export incentives would become due after goods leave Indian shore. AO, however, did not accept the plea of the assessee and ultimately made an addition of Rs. 10,17,767. AO also relied on the case CIT vs. British Paint India Ltd. (1991) 188 ITR 44 (SC).
3.1. On first appeal, CIT(A) referred to the line of argument adopted by AO and held that as long as the assessee had shown these goods as part of its closing stock, value has to be taken at cost price or market price and that in this case market price of imported goods (reference is perhaps to goods to be exported) included certain benefits like cash compensatory incentive, import entitlements, etc. and thus market price should be more than cost price i.e., Rs. 86,78,925. She observed that the selling goods were in possession of the assessee and were recorded in closing stock, its value cannot be taken at less than cost price and by this method the assessee could not postpone its tax liability to next year. She, therefore, confirmed the impugned addition.
3.2. Learned counsel submitted that the method of accounting for valuation of closing stock adopted in this year was the same as followed in the earlier years. He also submitted that the assessee was valuing the goods at cost price or FOB price, whichever is less. He further submitted that FOB value represented the market value at which the assessee was exporting goods. The other arguments advanced by the learned counsel were the same as noted by the tax authorities. Learned counsel also referred to the application dt. 9th December, 1991, filed before the Settlement Commission, wherein the issue of valuation of closing stock for asst. yr. 1988-89 under consideration was mentioned and market value of goods had been shown at Rs. 76,61,158. He next referred to the order dt. 1st August, 1988 of the Settlement Commission for asst. yrs. 1984-85 to 1987-88, the applications in relation to which were admitted. He submitted that the method adopted by the assessee has been admitted by the Settlement Commission for the last four years. He next referred to the computation of total income for asst. yrs. 1984-85 to 1987-88 and submitted that no addition has been made by the Settlement Commission on this count. He referred to the decision of Hon'ble Madras High Court in the case of K. Mohammed Adam Sahib vs. CIT (1965) 56 ITR 360 (Mad), wherein it was held that in case of goods saleable only in foreign markets the assessee had right to value goods at 'nil' if there is no foreign market for the goods. He referred to the decision of the Tribunal (Calcutta Bench) in the case of Jay Shree Tea & Industries Ltd. vs. ITO (1984) 19 TTJ (Cal) 253 : (1983) 6 ITD 621 (Cal), wherein it was held that while valuing closing stock of fetilizer at market rate, the assessee was not required to include subsidy announced by Governments price support to which the assessee was entitled and which was actually received during the next year and was taxed in that year.
3.3. Learned Departmental Representative relied heavily on orders of tax authorities. He also submitted that FOB value was not correctly taken by the assessee and that the goods had a ready market in India. He further submitted that the decision in (1965) 56 ITR 360 (Mad) (supra), relied upon by learned counsel, is on different facts as in the said case the foreign market price was 'nil' as there was no demand.
3.4. We have carefully considered the rival submissions and have perused orders of the tax authorities and the other papers, to which our attention was invited during the course of hearing. We have also gone through the case law relied upon by learned counsel. It is observed that the assessee had shown value of closing stock in respect of the goods lying for export at port at FOB value, which is claimed to be the market value of goods for foreign buyers. The tax authorities have taken the cost price of the goods shown on the basis that the market price would be higher if export incentives are taken into account, to which the assessee would be entitled in due course. It is also observed that the assessee had already approached the Settlement Commission on the issue for asst. yrs. 1984-85 to 1987-88 and it has admitted the applications for those years and have not made any addition on this account, obviously they have agreed with the contention of the assessee in adopting FOB value for the purpose of valuation of closing stock. We also feel that contention of learned counsel do get support from the decision in (1984) 19 TTJ (Cal) 253 : (1983) 6 ITD 621 (supra) which is on similar facts, though relates to the amount of subsidy received in next year. In this case also, the assessee would have been entitled to export incentive only after export of goods. Thus, on the facts and circumstances of the case, we delete the addition of Rs. 10,17,767.
4. Ground No. 3 by the assessee relates to disallowance of interest at Rs. 36,587. The Department is also in appeal with reference to relief allowed by CIT(A) out of addition of Rs. 16,39,010 made by AO. The AO noted on examination of list of loans and advances that the assessee had made huge advances to persons closely connected with the assessee-company or its directors directly or indirectly. He asked the assessee to explain the rate of interest charged from those persons and the rate of interest paid to its creditors. The assessee filed reply dt. 14th January, 1991, stating that it had got huge tax-free funds and its own capital and reserves and accruals and in no case interest should be disallowed. The assessee relied on the decisions reported in CIT vs. Gopikrishna Murlidhar (1963) 47 ITR 469 (AP) and Shri Digvijay Cement Co. Ltd. vs. CIT (1982) 138 ITR 45 (Guj). The AO observed that the assessee had advanced an amount of Rs. 1,16,26,168 to M/s. Hero Fibres Ltd. and had not charged any interest. He observed that the assessee is promoter of M/s. Hero Fibres Ltd. and has given an undertaking to provide additional margin money to meet the working capital for meeting any cash losses. He referred to the notes to the balance sheet (p. 22 of the printed balance sheet) and observed that the company had also give loan of Rs. 50 lakhs to that company. He also referred to the loan agreement, wherein it was stipulated that no interest was to be paid on this loan unless dividend was paid by that company. For further reasons given in the assessment order, AO concluded that the plea of the assessee that it had got huge interest-free funds was misleading. He referred to the advance of Rs. 1 crore to M/s. Majestic Auto Ltd. and the rate of interest charged at 10 per cent from M/s. Munjal Castings. He also mentioned that the assessee had made huge advances to S/Sh. O. P. Munjal, Brijmohan Lal Munjal, Satyanand Munjal, Vijay Kumar Munjal, Ashish Kumar Munjal and Suresh Chander Munjal and that the interest at 10 per cent only had been charged from those persons. He also observed that the assessee was paying interest at more than 18 per cent to the bank, apart from bank charges but was charging interest at 10 per cent from the above-mentioned persons and not charging any interest from M/s. Hero Fibres Ltd. He, therefore, held that interest paid by the assessee to bank and others and on fixed deposits was not for the purposes of business and deduction of interest of Rs. 20,53,120 could not be allowed in full. He computed the deduction allowable on account of personal expenses at Rs. 4,14,110 and disallowed the balance amount of Rs. 16,39,010.
4.1. On first appeal, learned counsel submitted that an amount of Rs. 50 lakhs was advanced interest-free to M/s. Hero Fibres Ltd. as the assessee was promoter of the company and as it was its obligation to meet overhead expenditure, that is financial institution had put a condition that if the project exceeded the estimated cost, the promoter would have to meet with interest-free loans and balance loan was given to M/s. Hero Fibres @ 13.2 per cent and when the company was sold to Oswal group the interest was recovered and it was shown as income. With reference to M/s. Majestic Auto Ltd. learned counsel claimed that Rs. 1 crore was advanced during 23rd February, 1987, to 25th May, 1987, from various bank accounts. He pointed out that the assessee was having credit balance with the bank on a few dates when loans were advanced and, therefore, borrowed funds were not used for advancing loans and there was no nexus between the loans advanced and the loans raised from the banks. AO, who was present during appellate proceedings, argued that if the assessee had not advanced Rs. 1 crore, the amount would have been available in its bank and then the assessee was not required to have overdraft accounts for its own business purposes. AO admitted that the complexity of accounts made it difficult to find out the nexus but if overall view is taken, nexus becomes clear not only in the case of M/s. Majestic Auto Ltd. but in the case of other debtor also. The AO also mentioned that the assessee had purchased 4 per cent redeemable non-commulative preference shares of M/s. Bahadur Chand Investments (P) Ltd., which was losing proposition. The AO mentioned the facts of M/s. Rockman Cycle Industries' case, where addition was upheld by CIT(A). Learned CIT(A) considered the submissions and observed that the assessee had filed details of financial expenses to the tune of Rs. 20,53,120, as mentioned at p. 12 of the impugned order. After considering the submissions made on behalf of the assessee, CIT(A) concluded that expenses of Rs. 20,53,120 were not entirely related to interest on borrowed funds. She held that nexus was proved only in the case of M/s. Majestic Auto Ltd., where addition of Rs. 36,587 was called for. She observed that out of amount of Rs. one crore, Rs. 35 lakhs was advanced from current account and after encashment of cheque, there was a credit balance. Balance amount of Rs. 65 lakhs was advanced out of cash credit account and the closing balance, after encashment of cheque of Rs. 30 lakhs on 23rd February, 1987 was credited. She also observed that an amount of Rs. 15 lakhs was advanced on 10th March, 1987, and the opening balance in bank on that date was debit of Rs. 1.44 crores but at the end of the day overdraft was reduced to Rs. 1.24 crore. She further observed that an amount of Rs. 28 lakhs was advanced on 25th February, 1987, and opening balance on that date was credit of Rs. 37.63 lakhs. With reference to advance made to M/s. Hero Fibres Ltd., CIT(A) held that it was a contractual obligation. She also observed that advances were made in earlier years and not in this year and no such addition was made in earlier years. She also observed that once M/s. Hero Fibres Ltd. was sold, the assessee recovered interest from buyer of the company and had shown the same as its income in later years. With reference to advances to directors, CIT(A) observed that the said advances had been made from own funds of the company and on the relevant dates there was a credit balance and 10 per cent interest had been charged from the parties. She observed that the plea of AO that if loan had not been advanced the assessee would not have to borrow and incur interest liability had no bearing because otherwise the assessee had sufficient funds of its own which could have been advanced and that it was for AO to establish the nexus between the borrowings and advances to prove that the expenditure was for non-business purposes. With reference to 4 per cent redeemable non-cumulative preference shares, CIT(A) held that it was not proved that the advance was made from borrowed funds. She also observed that the addition made in earlier years on this account had been deleted by the Tribunal. In the ultimate analysis, CIT(A) restricted the disallowance of interest to Rs. 36,587. Both the assessee and the Revenue are aggrieved.
4.2. Learned counsel basically relied on order of CIT(A) but for addition of Rs. 36,587. He submitted that the assessee had credit balance on the relevant dates and no overdraft facilities were utilised as made out by AO. He referred to details of interest on advances to M/s. Majestic Auto Ltd., placed at p. 115 of the paper-book. It is mentioned that on 10th March, 1987, when Rs. 15 lakhs advance was given there was credit balance of Rs. 4,79,030 on 2nd May, 1987. Interest @ 16 per cent for 53 days has been calculated at Rs. 34,850. Again, when advance of Rs. 20 lakhs was given on 25th May, 1987, there was credit balance as on 4th June, 1987, of Rs. 8,54,653 and interest @ 16 per cent for 10 days has been calculated at Rs. 1,737. Thus, total interest was Rs. 36,587. It is also indicated that interest was recovered @ 10 per cent amounting to Rs. 22,173 and that net addition, if any, should have been Rs. 14,414. Learned counsel referred to the decision of the Tribunal, dt. 19th January, 1995, in ITA No. 70/90 (asst. yr. 1986-87) in the case of Rockman Cycle Industries (P) Ltd., wherein the issue of investment in 4 per cent preference shares had been considered and it was observed in para 10 of the order that the assessee could not be prevented from making investment in certain shares only on the ground that return from shares was very low. The Tribunal also did not agree with the Revenue that the benefit accruing @ 4 per cent from preference shares was not sufficient so as to justify the borrowing @ 18 per cent. It held that since the transactions were bona fide interest payable to the creditor was incidental and wholly for the purposes of business. Learned counsel next referred to the decision of the Tribunal dt. 16th August, 1994 in ITA No. 1198/89 asst. yr. 1986-87) in the case of Highway Cycle Inds. Ltd., wherein similar view had been taken and the issue decided in favour of the assessee. He also referred to the decision of the Tribunal dt. 18th January, 1994 in ITA No. 215/89 (asst. yr. 1985-86), wherein the issue of disallowance of Rs. 2,17,314 on account of advances to the parties was considered. In the said case, the assessee had advanced moneys to certain persons but did not charge any interest. The assessee had claimed that the money had been paid to Dr. Surinder P. S. Pruthi and Sh. S. Banerjee for carrying on certain business projects by the two experts. AO rejected the plea and made an addition @ 15 per cent per annum. The Tribunal observed that the assessee had overdraft account in bank but that alone would not be sufficient to prove that the advances made to Dr. Pruthi and Shri Banerjee were out of the borrowed funds. It further observed that unless there was nexus between the borrowings and advances, it will not be appropriate to disallow any part of interest paid by the assessee on its overdraft account. The Tribunal deleted the impugned disallowance.
4.3. Learned Departmental Representative relied heavily on order of AO and submitted that the advances had been given to closely related persons, i.e., directors and sister concern. He also submitted that the nexus may not be there but an overall view has to be taken. Learned Departmental Representative relied on the following decisions :
(i) CIT vs. Saraya Sugar Mills (P) Ltd. (1992) 193 ITR 575 (All) wherein it was held that on a finding that amount borrowed had been advanced to directors and their firms free of interest, disallowance of interest was justified.
(ii) Highways Construction Co. (P) Ltd. vs. CIT (1993) 199 ITR 702 (Gau) wherein it was held that on a finding that amount borrowed had not been used for purposes of business but for advancing money to managing director, without interest, disallowance of interest was justified.
(iii) CIT vs. Saraya Sugar Mills (P) Ltd. (1993) 201 ITR 181 (All);
(iv) Saraya Sugar Mills P. Ltd. vs. CIT (1993) 201 ITR 711 (All); and
(v) Phaltan Sugar Works Ltd. vs. CIT (1994) 208 ITR 989 (Bom) wherein it was held that interest on borrowed capital advanced to subsidiary company was not deductible under s. 36.
4.4. We have carefully considered the submissions made by both the parties and have perused orders of the tax authorities and other relevant papers placed in the form of paper-book, to which our attention was invited during the course of hearing. We have also seen the case law relied upon by both the parties. It is observed that CIT(A) has given specific finding after examining each loan advanced by the assessee and after threadbare discussion, that only in the case of M/s. Majestic Auto Ltd., disallowance of Rs. 36,587 was to be made. It is also observed that the case law relied upon learned Departmental Representative is of no help to the Department as it is based on finding of fact. Learned Departmental Representative has not been able to dislodge the findings recorded by CIT(A) and he has only relied on order of AO. On facts and circumstances of the case, we, therefore, decline to interfere with order of CIT(A) insofar as it pertains to relief allowed to the assessee. With reference to disallowance made in the case of M/s. Majestic Auto Ltd. to the extent of Rs. 36,587, we have perused details placed at p. 115 of the paper-book, whereby learned counsel has tried to make out a case that if at all disallowance of only Rs. 14,414 was required. It is observed that whereas the date mentioned by CIT(A) in her order at p. 14 with reference to advance of Rs. 28 lakhs is 25th February, 1987, and opening balance on that date has been mentioned as credit of Rs. 37.63 lakhs, the amount of advance mentioned in calculation sheet placed at p. 115 in Rs. 20 lakhs as on 25th May, 1987, when there was a debit balance of Rs. 3,96,203, which ultimately was converted into credit balance on 4th June, 1987 at Rs. 8,54,653, where on the assessee has calculated interest at 16 per cent for ten days amounting to Rs. 1,737. We feel that it will be just and fair to restore the issue of addition of Rs. 36,587 to the file of AO for verification of the factual position only in this respect, after allowing the assessee a reasonable opportunity of being heard. In case the position mentioned is found to be correct, AO may allow appropriate relief to the assessee, otherwise disallowance of Rs. 36,587 would stand.
5. Ground No. 4 by the assessee relates to disallowance of Rs. 42,271 out of foreign travel expenses. The Department is also in appeal on this issue with reference to relief of Rs. 80,000 allowed by CIT(A) out of total disallowance of Rs. 1,22,271. The AO observed that the assessee has claimed an amount of Rs. 6.97,365 on account of foreign travelling of directors and others. AO observed that the assessee had claimed that some visits were undertaken by S/Shri S. K. Roy and Mahesh Munjal for the purpose of identification of sources and plant and machinery for M/s. Gujarat Cycle Ltd. He also noted that no machinery order was booked with those buyers by Gujarat Cycles Ltd. The assessee submitted that it was promoter of the said company and total expenses on that visit were Rs. 42,271. AO made the addition of this amount by holding that the expenditure to buy plant and machinery for Gujarat Cycles Ltd. was not allowable because it was relevant only for Gujarat Cycles Ltd. AO further noted that Shri Vijay Munjal and Shri S. K. Roy had travelled to Tanzania to make on the spot study of bicycle companies for taking over of those companies. He observed that complete details of expenses for visit to Tanzania were not furnished and that there were two visits to Tanzania. He, therefore, disallowed an amount of Rs. 80,000 on the ground that the expenditure did not relate to the assessee.
5.1. On first appeal, the assessee furnished details of visits to Tanzania by Shri S. K. Roy and Shri Vijay Munjal aggregating to Rs. 54,620. The assessee also furnished a copy of report given to RBI and the reasons given therein were that the trip was undertaken jointly by Shri Vijay Munjal, Director Exports and Shri S. K. Roy Director Works primarily to make on the spot study of viability of taking over of Lusaka Industries Ltd. and also for similar exercise on proposal to rehabilitate of National Bicycle Co. Ltd., Tanzania. It was also stated that an in-depth physical survey of both the plants was conducted and detailed discussions were held with the concerned Government authorities in Lusaka (Zambia) and Dar-es-Sallam (Tanzania). With reference to disallowance of Rs. 42,271, the assessee filed written submissions, wherein it was mentioned that AO disallowed the expenses on the ground that they related to Gujarat Cycles Ltd. and no machinery was actually purchased. It was stressed that the assessee's main object was to identify new sources of plant and machinery as well as to equip itself with modern technology and that the same would have benefited the assessee because it was also manufacturing bicycles. It was, therefore, urged that no disallowance was called for. The assessee relied on the decisions reported in Ambica Mills Ltd. vs. CIT (1964) 54 ITR 167 (Guj) and Addl. CIT vs. Motipur Sugar Factory (P) Ltd. (1982) 128 ITR 84 (Pat). Learned CIT(A) considered the submissions and observed that Shri Mahesh Munjal was neither director nor employee of the company. She also observed that Mahesh Munjal was director of Gujarat Cycles Ltd. and the expenditure incurred on his visit cannot be met by the assessee. She, therefore, sustained the disallowance of Rs. 42,271. With reference to disallowance of Rs. 80,000, CIT(A) observed relying on the cases of Hindustan Milkfood Mfrs. Ltd. vs. CIT (1989) 179 ITR 302 (P&H) and India Cement Co. vs. CIT (1966) 60 ITR 52 (SC) that the assessee had visited Tanzania and Zambia with good intention for considering the viability of taking over certain companies. She held that the expenditure was allowable and it did not matter if the venture did not mature as the expenditure was for the purpose of business. Both the assessee and the Revenue are aggrieved.
5.2. Learned counsel contested the disallowance of Rs. 42,271 as sustained by CIT(A) and submitted that the purpose of the visit was to identify machinery both for the assessee and Gujarat Cycles Ltd. He referred to the submissions made before AO and reproduced in para 8.2 of the assessment order. He submitted that though ultimately no machinery could be purchased, the expenditure was of revenue nature and ought to be allowed. In support, learned counsel relied on the following decisions :
(i) New Idea Farm Equipment Co. vs. ITO order dt. 7th February, 1994 in ITA No. 514/88 (asst. yr. 1985-86) (Chandigarh Bench) wherein similar issue of disallowance out of foreign travelling expenses was considered. In the said case, two partners of the firm had gone to West Germany for corroboration and also for improving the business, as there was a proposal for expansion of business by introducing cutlery manufacturing. The Tribunal held that the expenditure was incurred for business promotion by way of expansion and it could not be said that it was a new business proposed to be set up because the assessee was already in line of manufacturing trade. It further observed that simply because the project did not mature, effort could not be treated to be for non-business purposes.
(ii) UP Ceramics & Potteries Ltd. vs. Dy. CIT (1995) 52 TTJ (Del) 499 wherein the managing director had undertaken foreign tour to build foreign market and do study latest technology. It was held that the expenditure was allowable and the mere fact that there was no immediate benefit to the assessee's business was not a sufficient ground for disallowance of tour expenses.
(iii) Bralco Metal Industries (P) Ltd. vs. CIT (1994) 206 ITR 477 (Bom) wherein the meaning of the expression 'for the purpose of the business' and 'for the purpose of earning profits' was considered and it was held that the first expression was wider in scope than latter. It was further held that the expression 'wholly and exclusively' did not mean 'necessarily'. In that context, it was held that the expenditure incurred on foreign tour of managing Director for purchase of plant and machinery was an allowable deduction under s. 37 and that the tours were for the purposes and in connection with running business.
(iv) CIT vs. Woodcraft Products Ltd. (1996) 217 ITR 862 (Cal) wherein it was held that travel expenses incurred in connection with expansion of business which ended in failure were revenue expenses and allowable under s. 37.
He, therefore, urged that disallowance of Rs. 42,271 be deleted.
5.3. Learned Departmental Representative relied heavily on order of AO and his subsequent arguments were reiteration of line of argument taken by AO to make the disallowance. Learned Departmental Representative stressed that Gujarat Cycles Co. was a sister-concern and that CIT(A) has rightly sustained the disallowance of Rs. 42,271. He pointed out that the decision reported in (1989) 179 ITR 302 (supra) was distinguishable on facts and CIT(A) erred in allowing expenditure of Rs. 80,000 to the assessee. He submitted that in this case the existing company was incurring expenditure for taking over of companies in foreign countries and that expenditure could be capitalised in the case of taking over of the companies in Tanzania/Zambia.
5.4. We have carefully considered the submissions made by both the parties and have also perused orders of the tax authorities. We have also seen the case law relied upon by learned counsel. We feel that contention of learned counsel have some force in relation to part of expenditure incurred by the assessee and are duly supported not only by aforesaid orders of the Tribunal but also by the High Court decision reported in (1994) 206 ITR 477 (supra). It is observed that the plea taken before tax authorities was that the expenditure of Rs. 42,271 had been incurred in connection with business needs of both the assessee-company and Gujarat Cycles Ltd. There is no dispute that the assessee-company was already in line of manufacturing bicycles and, therefore, we feel that it will be just and fair to allow proportionate expenses insofar as the assessee is concerned. We feel that keeping in view the turnover of the assessee-company and the fact that it was already in line of manufacturing bicycles, it would be just and fair to allow expenditure of Rs. 30,000 out of total expenditure of Rs. 42,271 made for both the concerns. Balance of Rs. 12,271 will be disallowed as incurred in the case of Gujarat Cycles Ltd. AO may allow appropriate relief to the assessee.
6. Ground No. 5 raised by the assessee relates to disallowance of camp office expenses at Rs. 73,694. AO observed that the directors held camp office in big cities to meet dealers and suppliers and that their wives accompanied them and their travelling expenses, rail/airline tickets had been debited under the head 'travelling' and claimed as business expenses. He also observed that there were other expenses of Rs. 7,120 on conveyance. AO also referred to Annexure V of the tax audit report and ultimately held that an amount of Rs. 73,694 was disallowable. The assessee had pleaded before AO that dealers/suppliers were asked to meet directors in hotel instead of paying visits to each of them. AO, however, observed that the assessee could not explain as to why wives were helpful in conducting business. He further observed that the wives of directors were not employees of the company.
6.1. On first appeal, learned CIT(A) following line of argument of AO held that the expenditure of Rs. 73,694 was not wholly and exclusively for the purposes of business. She, therefore, confirmed the disallowance.
6.2. Learned counsel submitted that CIT(A) was not correct in observing that similar expenses had been disallowed in past also. He pointed out that there was no such disallowance for asst. yr. 1982-83. He also pointed out that the assessee had gone to the Settlement Commission in relation to asst. yrs. 1984-85 to 1987-88 on this issue also, in addition to other issues. Learned counsel, however, relied on the following decisions for the proposition that expenditure incurred on wives which has been allowed in case of foreign buyers should also be allowed for the year under consideration and that mere fact that in this case tour within India is involved should not make any difference.
(i) Glaxo Laboratories (India) Ltd. vs. ITO (1986) 26 TTJ (Bom) 214 (SB) : (1986) 18 ITD 226 (Bom)(SB) wherein it was held that foreign travel expenses of the wife of the chairman of the board of directors of the assessee-company were allowable as business expenditure. In the process, the Tribunal held that "in the modern age, and more so in the western countries, the senior executives are, as a matter of social custom, accompanied by their wives when they visit, though for business purposes, has necessarily some social aspects also. Under these circumstances, the impugned expenditure was an allowable expenditure".
(ii) ITO vs. J. K. Synthetics Ltd. (1986) 18 ITD 490 (Del) wherein also it was held that the expenditure incurred by the assessee-company on foreign tour of wives accompanying its loyal employees, who went abroad for business purposes of assessee, was allowable.
(iii) Apollo Tyres Ltd. vs. Asstt. CIT (1992) 44 TTJ (Coch) 534 wherein the Tribunal followed the decision in the case of Glaxo Laboratories (India) Ltd. (supra)
(iv) Pahwa Chains (P) Ltd. (Chd) Tribunal's order dt. 18th January, 1994 in ITA Nos. 811-815/89; asst. yrs. 1983-84 to 1987-88 in Chandigarh Bench wherein relying on aforesaid decision of Special Bench in the case of Glaxo Laboratories (India) Ltd. (supra), decided the issue in favour of the assessee.
6.3. Learned Departmental Representative relied heavily on orders of tax authorities and submitted that similar disallowance had been made in asst. yr. 1985-86 and that the decisions relied upon by the assessee are distinguishable on facts as in those cases wives accompanied the directors on foreign visits. He, therefore, urged for confirmation of impugned disallowance.
6.4. We have carefully considered the rival submissions in the light of aforesaid decisions of the Tribunal. It is observed that the Settlement Commission has sustained certain disallowances on account of director's camp office expenses under r. 6D. Disallowance in asst. yr. 1985-86 has been made at Rs. 6,987 and for asst. yr. 1986-87 at Rs. 7,840. However, no disallowance on this account has been made in asst. yrs. 1984-85 and 1987-88. We feel that the plea of learned counsel has some force and mere fact that in the above cases wives accompanied the directors on foreign tour should not make any difference. In the present age, we have to accept the fact that wives accompanying the directors do influence business transactions and they are indirectly helpful in augmenting the business of the company. Considering the developing aspect of women participation in various fields, we would not be correct to be bogged down by old concepts. Accordingly, we feel that the impugned expenditure is an allowable expenditure. Thus, addition of Rs. 73,694 is deleted.
7. Ground No. 6 by the assessee relates to disallowance of 10 per cent expenses for telephones installed at the residence of the directors. AO observed that the telephone expenses at the residence of the directors were of the order of Rs. 29,465 in the case of Shri Satyanand Munjal, Rs. 33,851 of Shri Brijmohan Lal Munjal, Rs. 5,287 of Shri S. K. Roy, Rs. 89,856 in the case of Shri Ashish Kumar Munjal. There was no information regarding expenses at the residence of Shri Ashish Kumar Munjal. AO disallowed an amount of 10 per cent in the case of first three directors and an amount of Rs. 20,000 in the case of Shri O. P. Munjal on the ground that he should have been getting information from outside in respect of his illness. He disallowed an amount of Rs. 2,000 on estimate basis in the case of Shri Ashish Kumar Munjal. Total disallowance worked out to Rs. 28,859.
7.1. On first appeal, learned CIT(A) held that it would be just and fair to disallow 10 per cent of the expenses even in respect of Shri O. P. Munjal. She, therefore, reduced the disallowance accordingly.
7.2. Learned counsel contended that there could be no disallowance in the case of limited company on account of use of telephone on the ground of the expenditure being for non-business purposes. He relied on the decision in the case of Asstt. CIT vs. Oswal Woollen Mills Ltd. (1995) 51 TTJ (Chd) 152, wherein it was held that in the case of public limited company in which public are substantially interested, there would be no question of any personal user of the telephone by the directors. The Tribunal had relied on its earlier decision reported in ITO vs. Ashoka Betel Nuts Co. (P) Ltd. (1985) 21 TTJ (Mad) 465 (TM) : (1984) 10 ITD 788 (Mad)(TM). He further relied on the case reported in Bharat Motor Parcel Service vs. ITO (1992) 44 TTJ (Hyd) 404, wherein it was held that expenditure on telephone at the residence of the managing partner partly disallowed on the basis of personal user was not justified as the branches of the firm were spread over different cities and towns and the managing director was required to contact them for the purposes of business. He also referred to the decision reported in (1994) 50 ITD 558 (Ahd).
7.3. Learned Departmental Representative relied on orders of tax authorities and submitted that personal usage of the telephone by directors cannot be ruled out and that the disallowance has been made on the basis of non-business usage. Learned Departmental Representative also argued that if the company had no control over directors for non-business use of telephone, then average limit of s. 40A(5) should apply to include such expenses.
7.4. We have carefully considered the rival submissions on this issue. It is observed that the tax authorities have disallowed an amount of 10 per cent on the basis of non-business use of telephone by the directors. A reference to s. 38(2) may be made, whereunder deductions under s. 30(a)(ii) and (c), 31(i) and (ii) and 32(1)(ii) shall be restricted to a fair proportionate part depending on use of the building, machinery, plant or furniture for the purposes of business or profession, as the AO may determine. The expenditure on telephone is obviously not covered by the said provision, as mentioned in s. 38(2). On the other hand, contention of learned counsel is supported by aforesaid decisions of the Tribunal as ultimately the expenditure on telephone which is to be borne by the company cannot be for non-business purposes. Thus, the impugned disallowance is deleted.
8. Ground No. 7 relates to disallowance of expenses of Rs. 45,806 in respect of visits of export dealers. AO observed that the assessee had incurred total amount of Rs. 90,831 on lodging and boarding, rail/air fare, conveyance, presentation of articles and miscellaneous expenses in respect of visits of export dealers. He asked the assessee to explain as to why expenses may not be disallowed. The assessee submitted that an amount of Rs. 45,025 has already been added back in statement of taxable income under the head 'entertainment expenses' and rest of the expenses are allowable. The assessee also pointed out that the dealers visit's expenses were also held allowable by Bombay High Court. The assessee argued that the articles presented were the business expenses. AO, however, turned down the plea of the assessee. He held that total expenses incurred on providing facilities to the dealers were covered by the definition given in s. 37(2A). He, therefore, made an addition of Rs. 45,806 by observing that the assessee had already added back the amount of Rs. 45,025.
8.1. On first appeal, the assessee submitted that out of total expenses of Rs. 90,831, expenses on lodging and boarding have already been added back by the assessee himself and that out of remaining expenditure an amount of Rs. 17,853 had been incurred on rail/air fare and an amount of Rs. 13,544 had been incurred on conveyance. He submitted that such expenses were not covered under s. 37(2A). The assessee also submitted that an amount of Rs. 14,410 had been incurred on presentation of articles and the same were allowable in view of decision of Hon'ble Delhi High Court in the case reported in CIT vs. Associated India Exports (1991) 188 ITR 125 (Del), CIT(A) considered the submissions and observed that in the past the expenditure on visits of dealers has been upheld by the Tribunal as entertainment expenditure. She, therefore, confirmed the addition.
8.2. Learned counsel submitted that the disallowances made were not correct. He referred to order of the Tribunal, dt. 22nd April, 1993 in ITA No. 125/88 (asst. yr. 1982-83) in the case of Hero Cycles (P) Ltd., wherein similar issue was considered in paras 41-42 and it was held that lodging expenses, miscellaneous expenses, travelling expenses and conveyance expenses were allowable as a business deduction. Regarding expenditure on gift articles, the Tribunal noted that the articles did not carry any logo or name of the assessee-company and that the expenses were allowable and not hit by r. 6B. Regarding boarding expenses, the Tribunal held them to be covered by the provisions of s. 37(2A) and disallowed the same. He further referred to the decision of the Tribunal dt. 26th July, 1996, in ITA 1049/95 in the case of Avon Cycles Ltd. for asst. yr. 1992-93, wherein it was held in para 21 that in the modern day business world expenses on distribution of silk suits, shawls, sweaters to the dealers were bound to be incurred on the dealers in the interest of the assessee's business, so that the dealers work with great zeal and vigour and sales in a competitive business world do not suffer. He further referred to the decision of Hon'ble Punjab & Haryana High Court in the case of CIT vs. Escorts Employees Ancillaries Ltd. (1997) 224 ITR 28 (P&H), wherein it was held that gift presented to foreign suppliers and collaborators while on visit to assessee's place of business were in the nature of expenditure incurred wholly and exclusively for the purpose of business and the same could not be held to be in the nature of expenditure on publicity or advertisement. In view of the above, learned counsel urged that the disallowance be deleted.
8.3. Learned Departmental Representative relied on orders of tax authorities and submitted that the expenses on foreign dealers were in the nature of entertainment and could be allowed within the limits laid down in law. He referred to the decision of Hon'ble Kerala High Court in the case of CIT vs. Alleppey Co. Ltd. (1994) 207 ITR 598 (Ker), wherein it was held that the expenditure incurred in presenting curios to foreign buyers was in the nature of entertainment expenditure.
8.4. We have carefully considered the submissions made by both the parties in the light of the case law relied upon by them and have also perused orders of the tax authorities. It is observed that the assessee has himself added back the amount incurred on boarding and lodging and that AO has disallowed the remaining amount of Rs. 45,806. We feel that the contention made by learned counsel has force in the light of the aforesaid decision of the Tribunal and the jurisdictional High Court's decision (supra). Accordingly disallowance of Rs. 45,806 is deleted.
9. Ground No. 8 relating to disallowance of bonus allocable surplus set on, was not pressed by the learned counsel for the assessee. This ground is accordingly rejected.
10. Ground No. 9 by the assessee relates to deduction under s. 32AB of the Act. AO observed that the assessee had claimed deduction of Rs. 84,44,527 under s. 32AB. He also observed that the assessee revised the claim to Rs. 1,11,26,180. The assessee submitted that the claim was revised in view of amendment in s. 28(iiib) and that cash assistance received had become taxable under the head 'business income' and it was included in the income and fresh calculations had been made. AO observed that there was little discrepancy in as much as the assessee had included interest received from bank and even miscellaneous income, royalty and share of profits from partnership business as income from business. AO observed that the business of the assessee was to manufacture cycles and its parts and not to advance loan to others and charge interest from them. He, therefore, held that interest was not business income and with reference to miscellaneous income the position was the same. He observed that the miscellaneous income worked out to Rs. 29,48,590. He also observed that out of other income, an amount of Rs. 8,46,158 related to refund of Central sales-tax, sale of old newspapers, claim from insurance companies, etc. AO, therefore, recalculated deduction allowable under s. 32AB at Rs. 96,78,665.
10.1. On first appeal, the assessee argued that AO had allowed deduction under s. 32AB only in respect of amounts taxable under the head 'profits and gains of business' and that, as per s. 32AB, the amount had to be utilised for purchase of machinery for deposit with IDBI out of income chargeable to tax under the head 'profit and gains of business or profession' and that deduction was allowable at 20 per cent of the profit of eligible business. The assessee referred to sub-s. (3), whereunder profit of eligible business would be the amount of profits computed in accordance with the requirements of Parts II and III of Sch. VI of the Companies Act, subject to further adjustments provided in the section. The assessee pleaded that there was no provision for adjustment of any amount which was not a business income. In the alternative, the assessee contended that the income excluded by AO was in the nature of business income. CIT(A) considered the submissions and rejected them. She observed that deduction was allowable at 20 per cent of profit of eligible business or profession or a sum deposited or utilised or aggregate of the two, whichever was less. She referred to the provisions of s. 32AB(3) and observed that where no separate accounts are maintained, separate income is to be determined. She also observed that the said provisions clearly show that income from other sources and income from non-eligible business was to be excluded. The assessee, however, submitted that out of Rs. 29,48,590 excluded by AO, an amount of Rs. 11,28,930 under the head 'overhead recovered' was an internal adjustment entry and that the expenditure incurred on behalf of others was recovered and that the said recovery is in any case off-set against the expenditure of the assessee and such expenditure was reduced to that extent. The assessee also pointed out that salary, house rent, conveyance allowance, etc., was recovered from Hero Sahibabad - a unit of the assessee-company. Similar submissions were made by the assessee, which have been reproduced at p. 31 of the CIT(A)'s order. The stress of the argument of the assessee was that nature of most of the receipts was business income. CIT(A) considered the submissions and held that overhead recovery charges recovered from Munjal Sales Corporation, as rent for use of office were not business income and that rest of the income was business income. She then referred to details of interest mentioned at p. 279 of the paper-book furnished to AO. The amount of interest received by the assessee on various export incentives worked out to Rs. 6,11,007. CIT(A) observed that the amount of Rs. 6,11,007 had been wrongly mentioned by AO as export incentive and that actually it was interest received on export invoices during the course of business and the same was business income. CIT(A) further examined other items and held that rent received was not business income, dividend received as income from other sources, share of profit from partnership firm was not business income for the purpose of s. 32AB and that only the firm would get the benefit. With reference to interest received from bank, CIT(A) directed AO to go through details and where interest is received on FDRs as margin money for opening LCs in favour of suppliers, etc., interest should be allowed as business income; and where interest is collected from buyers or dealers for late payments as per business practice that interest should also be allowed as business income, but interest received on loans and advances given to directors or individuals or other sister-concerns or any liability is paid on behalf of certain parties in cash and the amount is debited to those parties, then interest received on that account will be income from other sources and excluded from eligible profits under s. 32AB. CIT(A) also held that royalty received from Majestic Auto Ltd. was in the nature of income from other sources and was to be excluded from computation under s. 32AB. She also held that profits on sale of fixed assets was in the nature of business income. The assessee is aggrieved on the ground that deduction of 20 per cent under s. 32AB is to be computed with reference to profits from business or profession, as against 20 per cent of book profit.
10.2. Learned counsel invited our attention to order of the Tribunal dt. 14th January, 1997 in ITA No. 1039/91; asst. yr. 1987-88 in the case of Highway Cycles Industries, wherein similar issue was considered. He submitted that rental income and interest were considered in the said case and it was held by relying on decision of the Tribunal (Cochin Bench) reported in Apollo Tyres Ltd. vs. Dy. CIT (1992) 43 ITD 464 (Coch) that interest received was to be treated as part of income from eligible business. He also referred to decision of the Tribunal (Delhi Bench) (TM) reported as Asstt. CIT vs. Northern India Theatres (P) Ltd. (1995) 52 TTJ (Del) 156 (TM) : (1996) 56 ITD 42 (Del) (TM) and submitted that the said decision has also been considered in the aforesaid order, in addition to decision reported as CIT vs. Sudarshan Plywood Ltd. (1995) 80 Taxman 326. He further referred to the decision of the Tribunal (Ahmedabad Bench) reported as Dy. CIT vs. New Commercial Mills (1994) 48 TTJ (Ahd) 662, wherein it has been held that royalty received from exploitation of trade-mark is business income. In view of the foregoing, learned counsel submitted that interest income and royalty should be included in computation of income eligible for deduction under s. 32AB.
10.3. Learned Departmental Representative though relied on orders of the tax authorities was fair enough to state that the issue is covered by the decisions of the Tribunal.
10.4. We have carefully considered the rival submissions on this issue and have perused orders of the tax authorities. We have also seen the case law relied upon by learned counsel. It is observed that royalty income as shown by the assessee is squarely covered by the decision of the Tribunal reported in (1994) 48 TTJ 662 (supra). Similarly, it is observed that interest income received on short term loan advanced to directors out of its business income and interest collected from buyers for late payments would be covered by the aforesaid decision of the Tribunal in the case of Highway Cycle Industries (supra). The order of CIT(A) is thus modified to that extent. However, it is observed from the impugned order, p. 33, that she [CIT(A)] has referred to any liability paid on behalf of certain parties in cash and debited to those parties, interest income received would be treated as income from other sources and would be excluded from eligible profit. We feel that this part of order of CIT(A) has to be upheld and AO will verify as to how much interest is connected with such liability. AO is accordingly directed to allow appropriate relief to the assessee.
11. Ground No. 10 of the assessee's appeal relates to consequential relief in respect of interest charged under s. 215. Both the parties agreed that this ground is consequential in nature. AO is accordingly directed to allow consequential relief to the assessee in view of this order.
12. Ground No. 11 by the assessee relates to direction issued by CIT(A) to AO to allow relief on account of gifts to dealers subject to furnishing of names and addresses of dealers. The Department is also in appeal on this issue with reference to the decision of CIT(A) for assessing the gift of articles presented to dealers in their hands instead of in the hands of the assessee. AO had disallowed an amount of Rs. 1,83,897 with reference to articles presented to dealers. AO observed that the practice of the assessee was to pay visits to different stations and distribute articles of presentation to the customers. He also observed that value of articles exceeded Rs. 50 and, therefore, added the whole expenditure of Rs. 1,83,897.
12.1. Before CIT(A), the assessee relied on the judgments reported in 183 ITR 243 (sic), CIT vs. Indian Aluminium Cables Ltd. (1990) 183 ITR 611 (Del) and the decision of the Tribunal reported in 32 ITD 318 (sic). In the alternative, the assessee claimed that Rs. 50 per article may be allowed as decided in the case of Majestic Auto for asst. yr. 1984-85. The assessee submitted that the nature of expenses was small gifts, which included bed-sheet, dry fruit, pant pieces, HMT watches, etc., and that gifts had been made to dealers and none of these carried the trademark of the assessee. The assessee, therefore, urged that the expenditure was not in the nature of advertisement. The assessee pointed out that most of the gifts had been made to dealers for the purpose of sales made by them and some of the gifts were made on the occasions of Diwali in order to keep good relations. CIT(A) considered the submissions and held that dry fruits, sweets and gifts given at the occasion of Diwali should be allowed as it is in line with the business trend and was not in the nature of advertisement expenditure. She held that other gifts were covered by the provisions of s. 28(iv) and would be taxable in the hands of the recipients and in case the assessee gives names and addresses of the dealers, the same should be allowed and intimation may be sent to the ITOs assessing those dealers.
12.2. Learned counsel submitted that gifts were given to dealers on the basis of sales made by them as also on the occasion of Diwali and that gifts did not carry any trademark of the assessee. Learned counsel referred to the decision of the Tribunal dt. 26th July, 1996 in ITA No. 1049/95 (supra), wherein it has been observed in para 21 that in the modern day business world, expenses on distribution of silk suits, shawls, etc., to its dealers are bound to be incurred in the interest of the assessee's business, so that they work with great zeal and vigour and the sales in competitive business would not suffer. He further referred to the decision of the Tribunal dt. 22nd April, 1993 in ITA No. 125/88 (supra), wherein it allowed the expenditure on making gifts which did not carry any logo or name of the assessee-company. Learned counsel also referred to the decision reported in (1997) 224 ITR 28 (supra). On a query regarding details of expenses of more than Rs. 50. Learned counsel filed details as contained in Annexure VII. The items gifted included bedsheet, suit, shirts, re-fill of flasks, etc. Total amount on such items worked out to Rs. 1,27,226.
12.3. Learned Departmental Representative relied on order of AO and submitted that the expenditure was in the nature of entertainment expenditure. He further submitted that even if a visiting card is attached to the gift, it serves the purpose of logo. He, therefore, urged that order of AO may be upheld.
12.4. We have carefully considered the rival submissions on the issue and have also perused the orders of tax authorities. We feel that it will be just and fair to restore this issue to the file of AO, who may go through details, examine the same in the light of CIT(A)'s order and allow appropriate relief to the assessee. However, we feel that the observations of CIT(A) regarding taxing of gifts in the hands of dealers have to be expunged as the same are not in consonance with the provisions of s. 28(iv), relied upon by her. The order of CIT(A) thus stands modified to that extent.
13. No other ground was pressed before us.
14. In the result, both the appeals of the assessee and the Revenue are partly allowed, as above.