Income Tax Appellate Tribunal - Rajkot
Deputy Commissioner Of Income Tax vs Joshi Formulabs (P) Ltd. (Joshi ... on 18 January, 1999
ORDER
T. J. Joice, A.M.
1. As both the appeals pertain to the same assessment year and are directed against the same order of CIT(A), they are being disposed of by this common order for the sake of convenience.
ITA No. 764/Ahd/19902. This appeal has been filed by the Revenue against the order of CIT(A) dt. 20th December, 1989 for asst. yr. 1986-87. The first ground of this appeal pertains to disallowance under s. 43B. The total amount disallowed comes to Rs. 1,89,724 inclusive of a sum of Rs. 17,670 offered by the assessee for taxation. The details of the amount disallowed by the AO are as under :
Rs.
(1) Custom duty 1,698
(2) Central Sales-tax 67,019
(3) G.S.T. 1,422
(4) Sales-tax (Bombay) 90,441
(5) Sales-tax (Calcutta) 11,474
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1,72,054
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3. According to the AO the sales-tax collected has been credited to a separate account and payments made are debited to this account. Since the above said amounts are unpaid at the end of the accounting year, they have been disallowed by the AO when the matter was taken up before the CIT(A) he gave a finding to the effect that the following payments were made during the time allowed by the sales-tax authorities :
Rs.
5-4-1986 35,084
5-5-1986 28,022
5-4-1986 1,422
5-4-1986 267
5-5-1986 11,474
30-4-1986 89,504
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Total 1,65,773
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4. The CIT(A) directed the AO to verify the claim as per documentary evidence placed on record and allow it accordingly.
5. The learned Departmental Representative relied on the order of the AO. The learned counsel for the assessee relied on the order of CIT(A) : and also on the decision of the Tribunal in the case of CIT vs. Chandulal Venichand (1994) 209 ITR 7 (Guj). After considering the rival submissions we find that the Supreme Court in the case of Allied Motors vs. CIT (1997) 224 ITR 677 (SC) approving the decision of Gujarat High Court inter alia in Chandulal Venichand (supra). It is also settled law that sales-tax collected is revenue receipt as per the decision of the Supreme Court in the case of Chowringhee Sales Bureau (P) Ltd. vs. CIT (1973) 87 ITR 542 (SC). In the circumstances we do not find any infirmity in the order of the CIT(A) as he has directed the AO to verify the claim of the assessee in respect of the payment made within the time allowed by the sales-tax authorities. While doing so, the AO should keep in mind the observation of the Hon'ble Supreme Court in (1997) 224 ITR 677 (SC) and (1973) 87 ITR 542 (SC) (supra). This ground of appeal is dismissed.
6. The next ground of appeal relates to disallowance under s. 40A(2)(b). The AO has disallowed a sum of Rs. 18,000 in respect of rent, running charges and technical services paid to a sister concern and another amount of Rs. 36,000 in respect of running charges of machineries, paid to another sister concern. Both these disallowances have been made under s. 40A(2)(b) of the Act on the ground that it is excessive and unreasonable and has been made to a sister concern. The CIT(A) considered the arguments of the AO and those of the assessee and gave his finding in para 9 of the appellate order as under :
"According to this break up of details, the rent alone works out to around Rs. 7,500 and the other expenses on electricity, etc. are extra. As against this expenditure, the appellant had paid as per agreement a lump sum amount of Rs. 10,000 per month for the use of premises of Saurashtra Inox Tips (P) Ltd., Bhavnagar which is all inclusive. In other words the appellant claimed that this year's payment of rent at Rs. 10,000 per month is less than the rent and electricity payment made by the earlier management at Rajkot and, therefore, it should be allowed. Regarding the running expenses also the previous management was incurring an expenditure of more than Rs. 13,000 per month and whereas the average expenditure incurred by the appellant towards this running expenditure is only Rs. 10,000 per month which is also stated to be quite reasonable and hence the claim should have been admitted. Moreover, it is claimed that the entire expenditure is fully vouched as per the regular books of account maintained and the Dy. CIT(SR) was not justified in disallowing the expenditure and the ground that the payment were made to a sister concern after careful examination of the claim of the assessee. I also feel that the claim of expenditure, as compared to the immediately preceding year, is a little on the higher side. I, therefore, restrict the disallowance of the Dy. CIT (SR) to 50 per cent and the Dy. CIT (SR) should accordingly calculate the relief while giving effect to this order."
7. In appeal before us, the learned Departmental Representative relied on the order of the AO. The learned counsel for the assessee on the other hand submitted that the expenditure has been incurred for the purpose of making the product more efficient and economical. The Company has other unit(s) at Bhavnagar and hence certain manufacturing is done at Bhavnagar. Certain machinery was shifted to Bhavnagar in order to maintain economy and for more efficient production and for this purpose rent is paid for the use of the premises and machinery running charges are paid for looking after production. There is nothing wrong in paying the amount to a sister concern if it is within the interest of the company. The AO has wrongly presumed that the Tip machinery is automatic and there is no need for an engineer.
8. However, the company has transferred the machinery for smooth running and for getting better production under the supervision of an engineer. The sister concerns are all Private Limited companies. Suffering the same rate of tax. The assessee-company has also got outside shareholders. The assessee-company will not try to inflate the expenses, because the collaborator's are also the partners and they will not tolerate unnecessary expenditure. In the previous year the company paid Rs. 7,500 p.m. to M/s. Kathiswar Metal Tin Works. The AO has allowed this and he has not taken into consideration the fact that besides Rs. 7,500 the company was paying by way of Rs. 9,660 p.m. against Rs. 10,000 paid to M/s. Saurashtra Inox Tips (P) Ltd. On the basis of these arguments, the learned counsel for the assessee pleaded that the addition be deleted.
9. After consideration the rival submissions we find that the addition made by the AO and the portion thereof sustained by the CIT(A) are unwarranted as the expenses are fully vouched and the regular books of accounts are maintained by the assessee-company and the sister concern. No presumption can be drawn against the assessee has explained the circumstances under which the machinery has been transferred to Bhavnagar and rent and running charges thereof are payable in respect of use of the premises and use of machinery under the expert supervision of the engineer in the manufacturing unit. It is for the assessee-company to devise ways and means of increasing efficiency in production and for this purpose genuine expenditure, if incurred, even in relation to a sister concern can be allowed under s. 37. No disallowance under s. 40A(2)(b) is called for as the expenditure is found to be reasonable and not excessive taking into account the totality of the circumstances of the case. Hence we delete the impugned addition of Rs. 18,000 and Rs. 36,000 in toto.
10. Third ground of appeal relates to the claim of bed debt of Rs. 6,150 disallowed by the AO but allowed by the CIT(A). In the assessment order it is mentioned that no details have been filed in respect of the bad debt claimed. The CIT(A) disposed of the matter vide para 11 of his order which is as under :
"The seventh ground of appeal relates to the disallowance of bad debts to the tune of Rs. 6,150. According to the Dy. CIT(SR), the amount of Rs. 6,150 was disallowed because the appellant company did not file any details when it was specifically asked to file the same. But before me, the learned authorised representative has filed certain particulars relating to this claim. An advance of Rs. 6,150 was made to one National Pipes Co. for supply of brass rods. It appears that, after placing of the order and before the receipt of brass rods, the company became sick unit and it was declared as such by the Government of Bengal. Hence, the advance given was written off when there was no hope of recovery as per the letter No. NPT/S-11/79/2068, dt. 23rd October, 1979 of National Pipe & Tubes Co., Calcutta-1(WB), wherein last para of the letter it was stated as under :
Accordingly we are not in a position either to settle your claims or to arrange supply of the materials against your pending orders at the old rates as stated in your letter under reference.
After looking into this documentary evidence placed on record by the appellant, I am satisfied that the claim of the appellant that this debt became bad and the claim has to be admitted. But the Dy. CIT (SR) to look into why this claim was not made earlier by the appellant when the debt became bad as early as on 23rd October, 1979 itself, as per the letter produced. If the Dy. CIT (SR) is satisfied that no such claim was made in earlier assessment years, the claim may be treated as allowed and necessary relief given."
11. On considering the rival submissions we find that the CIT(A) is justified in directing the AO to admit the claim. As there is no infirmity in the finding of the CIT(A) we confirm his order on this issue.
12. The 4th, 5th & 6th grounds of appeal relate to disallowance of depreciation and investment allowance, addition in respect of purchase of mould and addition in respect of suppressed production. The grievance of the Department is that the CIT(A) has erred in law in setting aside the matter for verification by the AO. The learned Departmental Representative relied on the order of the AO. On the other hand the learned counsel for the assessee pointed out that the set aside matter has been decided afresh by the AO and, therefore, these grounds of appeal have become infructuous. The learned Departmental Representative also conceded these points. In the circumstances these three grounds of appeal are dismissed as infructuous.
13. The 7th and 8th grounds of appeal relate to disallowance of Rs. 12,683 made under s. 40A(2)(b) and of Rs. 13,500 made vide para 9(a) and (9b) of the assessment order. The first item in respect of purchases made from a sister concern namely Sanghvi Sharp Refills and the second item relates to sales made by the assessee to a sister concern namely Sanghvi Sales Co. The AO found that the purchase rate was very high whereas in the second case the sale rate is lower than the market rate. The AO, therefore, concluded that purchase rate was inflated and sale rate was suppressed in order to give undue advantage to a sister concern.
14. When the matter came up before the CIT(A), he discussed this in paras 14 to 16 of his order and deleted both the additions for the reasons given therein. Since the fact of the case are aptly narrated in the order of the CIT(A), we consider it necessary to quote the relevant portions of the CIT(A) which are as under :
"14. The 9th ground of the appeal is regarding the addition of Rs. 12,683 made by the Dy. CIT (SR) under s. 40A(2)(b) of the IT Act, towards the purchase of refills. This addition was discussed by the Dy. CIT (SR) in para 9-a of his order. According to the Dy. CIT (SR) the appellant has purchased 10,000 dozens of Sharp refills with nozzles from Sanghvi Sharp Refills @ 54,22 per gross. But when the Dy. CIT (SR) verified the sale with the price of the appellant's own production subsequently the rate came to Rs. 36 only per gross as on 1st July, 1988. When the appellant was asked by the Dy. CIT(SR) to explain as to why the appellant has purchased such a high rate of Rs. 54,22 as against Rs. 36 per gross when the appellant himself was able to market later, the appellant had explained that the purchased refills contained the imported tips and, therefore, the purchase price was far higher than the sale price of its own products at a much later date i.e. as on 1st July, 1988. It is also pointed out by the appellant that the appellant had sold its own product at Rs. 39 per gross in the subsequent years because of economization of such factors in order to push its sales faster in the market. The Dy. CIT(SR) was not agreeable to accept these contentions and, therefore, felt that the appellant had definitely paid Rs. 15.22 in excess per gross on the purchase of refills from the sister concern. Therefore, he disallowed a sum of Rs. 12,683 on the purchase of refills as excessive price under s. 40A(2)(b) of the Act. According to the authorised representative of the appellant, the Dy. CIT(SR) was not correct in rejecting the explanation made by the appellant simply because the purchases were made from sister concern. He had produced before me two types of ball pens, one containing the imported tip and the other containing the one manufactured by the appellant's own company, subsequently to show the difference in quality between the two pens in order to justify the price difference as well. According to the authorised representative the purchases made from the sister concern were superior in quality because of the thicker body and better tip than the one manufactured by the appellant later years and, therefore, the Dy. CIT(SR) was not justified in comparing the purchases of refills of the imported tips from sister concern with an ordinary tip refills of the appellant's own manufacture in the subsequent years. I have examined the contentions of the learned authorised representative. After seeing personally the two types of refills that were produced at the time of hearing. There is no doubt that the one purchased from the sister concern is thicker in body, taller in size and with a foreign tip, lacks definitely superior as compared to the one manufactured by the assessee-company, which definitely looked inferior in quality, justifying the price difference. Moreover, as stated by the appellant company when the appellant company commenced production of its own tips locally, the cost came to about Rs. 27 only per gross as against Rs. 36 they were earlier paying towards the imported tips. This itself explains the sizeable importance if imported tip and local tip. It is also seen that the earlier import of tips was subject to sale-tax at 4 per cent i.e. Rs. 2 per gross which increase was not there in the locally produced cost of tips in the subsequent years. In view of these factors and also in view of the smallness of difference of addition, I delete the addition of Rs. 12,683 as the cost of differences between imported tips and the locally manufactured tips.
"15. The 10th ground of appeal relates to an addition of Rs. 13,500 on sale of ball pens. In para 9(b) of his order this point was discussed by the Dy. CIT. As discussed in the above para, the appellant company had purchased some refills from Sanghvi Sharp Refills and after assembling the ball pens, the same were sold to Sanghvi Sales Co. at Rs. 14.85 per dozen after allowing 10 per cent deduction.
According to the Dy. CIT(SR) Eco Sharp Marketing Co. was marketing similar pens at Rs. 18 per dozen in the subsequent year and, therefore, the Dy. CIT(SR) thought that the price of Rs. 14.85 per dozen on comparison, was far below, particularly because the sale was to the sister concern. Even after taking into consideration the normal discount of Rs. 18 per dozen, the sale price should not have fallen below Rs. 16.20 per dozen, which was the fair price according to the Dy. CIT(SR) and, therefore, he had estimated the difference between this fair price of Rs. 16.20 and the sale price of Rs. 14.85 as a profit diverted by the appellant towards its sister concern. This difference in value, according to the Dy. CIT(SR) was Rs. 13,500 on the quantity of 10,000 ball pens sold to the sister concern. The authorised representative, in the first place, has disputed the comparison of the Dy. CIT(SR) of the sale price of this year with the sale price of the succeeding year, where the marketing conditions should have been different from that of this year. Moreover, the ball pens sold to Eco Sharp Marketing Co. at Rs. 16.20 during the year under consideration. Therefore, according to the authorised representative the Sharp brand pen is certainly superior to easywrite brand, which came to the market recently as compared to the well known Sharp brand, who were the pioneers in the line of business because they were the first to introduce this type of ball pens in the market. The authorised representative also stressed that being a new product in the market, the price were fairly low, in order to push up the sales as compared to the established brands like Sharp brand in the market.
16. As I have already mentioned in the above para, while dealing with the refills, I had examined the two types of ball pens under comparison and noticed that the Sharp brand is certainly superior in quality when compared to the Easy write brand and moreover there was no justification, as rightly pointed by the authorised representative for comparing this year's sale price with the sale price of the immediately succeeding year without knowing the market conditions during that period. The only point for adding this sum of Rs. 13,500 was that the assessee had sold the products to its sister concern. As was rightly pointed out by the authorised representative, the new product in the market will be able to compete with the established products only if certain margin of discount is allowed, so that bulk product can be pushed into the market. In this case, the purchaser happens to be a sister concern but this should not be a case for taking any adverse inference in the matter particularly when the quality and quantity of product is distinctly maintained. I, therefore, feel that the addition of Rs. 13,500 made is unwarranted and hence disallowed."
15. After considering the relevant records and the rival submissions we do not find any reason to interfere with the findings of the CIT(A) in this regard.
16. In the 9th ground of appeal, the Revenue disputes the order of the CIT(A) in deleting the addition made by AO in respect of discount of Rs. 1,74,790 given to the sister concerns. In para 10 of assessment order the AO has stated that the assessee had sold refills to the Eco Sharp Marketing Co., Baroda and Delhi giving them higher discount of 18 per cent which according to the AO was excessive as it was made to a sister concern.
17. Before the CIT(A) the assessee contended that this discount of 18 per cent was allowed even earlier by the Sanghvi Swiss Refills (P) Ltd., Bombay and this is the normal rate of discount that is being allowed by all the manufacture after deducting the margin for sales-tax and other expenses taking into consideration other aspects of the products by the assessee. This 18 per cent discount was allowed to the market agents who in turn incur packing charges, sales-tax, sub-commission to the selling agents, etc. The assessee produced before the CIT(A) seven invoices of sales made by Sanghvi Swiss Refills (P) Ltd., Bombay where the discount allowed in all the seven instances was 18 per cent. On considering this piece of evidence, the CIT(A) found that the discount of 18 per cent claimed by the assessee incurred to its sister concerns was quite reasonable aspecially considering the fact that such discount was allowed in earlier years also and was given by other concerns in the market. Hence he deleted the addition of Rs. 1,74,000.
18. Before us, the learned Departmental Representative relied on the order of AO whereas the learned counsel for the assessee relied on the order of CIT(A). It is further submitted by the learned counsel for the assessee that AO has treated all the refills on equal footing without considering that different brands of refills have been sold at different rate of discount. Bismi brand of refills are in fact sold to party who owns the Bismi brands and sells the same under this brand. Easywrite brand refills have been sold at 4 per cent discount to parties working in Gujarat where no sales-tax is chargeable, no freight is payable. Only the Echo and Sharp brand of refills are sold to Echo Sharp Marketing Co. at 18 per cent discount, which covers besides 4 per cent of general discount, sales-tax as applicable in each state and other expenses. The sales are made to the sister concerns in order to push up sales and thereby increase production. The sister concern carries substantial advertising, propaganda and this helps in increasing sales. This is not with ordinary dealers. The dealers are dealing in several items and they are not interested in advertisement or make special effort to increase sales. There is no diversion of profit on a large scale from the assessee to the sister concern as ultimately the sister concern has earned profit hardly of 1 to 1.5 per cent. If the assessee-company makes direct sales instead of selling to sister concern the assessee would have incurred sale price etc. and there was also possibility of incurring bad debts. In view of this, the assessee company thought it fit for its own interest to make sales to the sister concern at 18 per cent discount. Echo Marketing Co. has wide distribution range having branch offices at various places and this has greatly pushed up sales of consumable products on a large scale. It is in the interest of the assessee-company to sell through one company only and not through several dealers because by this process the assessee-company concentrates on production. Since the sales are to a Private Limited Company there is no diversion of profit to avoid tax as the tax rate is the same. There is no extra commercial consideration involved in this transaction. On the contrary it has resulted in addition to the assessee's business.
19. On the basis of these submissions the learned counsel for the assessee pleaded that the addition made by the AO is unwarranted and that the CIT(A)'s order in this regard may be upheld.
20. On considering the rival submissions, we find that the CIT(A)'s order in respect of this ground of appeal does not call for any interference. As rightly pointed out by the first appellate authority, the discount of 18 per cent has been allowed by similar concerns in similar dealings. Therefore, it cannot be said that the discount of 18 per cent is unreasonable of excessive having regard to comparable cases. Moreover, the AO has not found any irregularity in the books of accounts, bills or invoices. The addition has been made simply on the basis of suspicion that discount has been allowed to a sister concern for the purpose of diversion of profits. Since the assessee has legally proved the point that discount has been allowed after taking into consideration, the overall interest of its business in production, we are of the considered view that the addition is uncalled for. In other words, the CIT(A)'s finding in this respect is confirmed.
21. In the 10th ground of appeal the Revenue disputes the order of the CIT(A) in restricting the addition to Rs. 1,12,095 as against addition made by AO at Rs. 4,55,410 on account of ink at a lower price to the sister concern. The AO found that the selling price of ink to the sister concern was at a rate lower by Rs. 5 per kg. compared to the selling rate in respect of other dealers. In this view of the matter he disallowed a sum of Rs. 4,55,410 on account of sales at a lower rate for extra commercial consideration.
22. When the matter came up before the CIT(A) he carefully considered the detailed working given by the assessee's representative at p. 89 of the paper-book submitted to him. It was found that the quantity of ink sold to the sister concern was only 35,440 kgs. and not 91,882 kgs. as wrongly worked out by the AO. The CIT(A) has noted that the correct figures were placed before the AO. The AO did not consider this aspect at all in the assessment order After re-examination of the details, the CIT(A) found that the actual quantity sold to the sister concern was 37,365 kgs. and not 35,440 kgs. as worked out by the assessee. The reworking done by the CIT(A) has been conceded to by the assessee's representative. The CIT(A) further observed that the rate of Rs. 5 per kg. fixed by the AO was on the high side and he was of the view that the ends of justice would be met by restricting the addition to Rs. 1,12,095 which works out to Rs. 3 per kg.
23. In the appeal before us, the learned Departmental Representative relied on the order of AO whereas the learned counsel for the assessee has contested the addition sustained by the CIT(A). It is pointed out by the learned authorised representative that the average selling rate was allowed because of concession due to MODVAT. Further it was also due to different types of ink having different rates on account of difference in quality. Average realisation is lower in later years due to more production of lower type ink. Lower price of Rs. 5 was given by earlier management and the new management just continued with the lower rate and, therefore, after the changes of management the sister concern did not get any extra concession. However, the concession depends upon annual off take of purchase which is applicable to outsiders also as per individual arrangement. It is in the interest of the assessee-company to sell the ink to sister concern because it would push the sales. This arrangement helped the assessee-company in having no difficulty of working capital as the company could best concentrate on production. There is no question of any extra commercial consideration, as it is in the overall interest of the company which would be proved by increase in production and profitability in the later year. The company has foreign collaborator's as partners and under the Company's Act there is provision to declare the dealings with sister concern and price, etc. The transactions are placed before the Board of Directors and they have approved the transactions. It is also submitted that the sale to sister concern comes to Rs. 35,440 kgs. and not 91,082 kgs. as submitted at the time of assessment. On the basis of this submission the learned counsel for the assessee argue that the addition sustained by the CIT(A) is unwarranted. He has also pinpointed that specific details furnished by him in the paper-book containing the copies of salebills and quatitative details relating to the transactions under reference.
24. We have carefully considered the rival submissions. As regards the quantity of sales to sister concern, it is now no longer disputed that the correct quantity comes to 37,365 kgs. as verified by the CIT(A) as stated by the authorised representative. Since the quantitative particulars and rates are evidenced by bills and vouchers and since the sister concerns are assessed to tax there is no reason to doubt the genuineness of the selling rate. In the circumstances we find that the addition made on suspicion and surmises is unwarranted. It is not proved either by the AO or by the CIT(A) that lower sale price has been adopted by the assessee for extra commercial consideration. In the circumstances we delete the addition in toto.
25. In the 11th ground of appeal, the Revenue is objecting to the CIT(A)'s order in restricting the addition on account of sale of brass scrap to the extent of 50 per cent of addition made by the AO. According to the AO the assessee has shown generation of brass-scrap of 6180.5 kgs. The percentage of generation of scrap shown by the assessee comes to 42.75 per cent. On the other hand in the course of search conducted at Bombay Mr. J. D. Sanghvi, who is director of the assessee-company had stated that one kg. consumption of brass wires gives a scrap of 450 gms. i.e. 45 per cent, Since the assessee consumed 19,456 kgs. and brass rod of 45.3 kgs. the minimum scrap would be generated @ 45 per cent which should be 6,525.6 kgs. whereas the assessee has shown only 6,180.5 kgs. That apart the AO noticed that wholesale rate of sale of brass scrap is Rs. 51 per kg. as per Economic Times dt. 27th March 1989. This was found to be equal to 45 per cent of the average sale-price of brass of virgin variety. Hence the AO was of the view that rate of scrap sale should be 28.2 per kg. as the average rate of purchase price of wire was Rs. 68.66 kg. On the basis of these figures he worked out the total scrap sale which would have been made by the assessee at Rs. 1,84,002, against that shown by the assessee at Rs. 50,381. Hence, the difference of Rs. 1,33,621 was added to the total income of assessee.
26. When the matter came up before the CIT(A), he considered at length the detailed submission by the assessee's representative including the details of actual scrap production for asst. yrs. 1984-85 and 1985-86. After considering the details before him, the CIT(A) came to the conclusion that the AO was carried away by the news in the Economic Times for arriving at the conclusion that the sale of scrap should be Rs. 28.2 per kg. The AO had also taken into account the statement recorded by him during the course of search. However, the quality of scrap in the comparable cases quoted where the average price was shown at Rs. 10 per kg. remained unknown. On the basis of this reasoning, the CIT(A) proceeded to observed as under :
"From this point of view, the via-media has to be struck to make the estimate reasonable and, therefore, I consider that an addition of Rs. 50 of the additions made by the Dy. CIT(SR) will be reasonable in the circumstances, keeping in view the comparable rate available on record. The Dy. CIT(SR) is, therefore, directed to work out the relief accordingly."
27. Before us the learned Departmental Representative relied on the order of AO whereas the learned counsel for the assessee vehemently disputed the addition made by the AO and extent of addition as sustained by the CIT(A). It is pointed out by the learned counsel for the assessee that generation of scraps depends on several factors. It is a technical matter and it cannot be estimated in general manner. A certificate of chartered engineer is produced which gives data regarding percentage of scrap generated. The AO has relied upon the statement of Shri. J. D. Sanghvi but that was on approximate basis. The present percentage of scrap would vary depending upon the quality, size, brass condition of product, which may vary from batch to batch, loss of weight, transportation, etc. further reliance made by the AO was on the statement of dealer in Bombay was also unjustified as the assessee has not been given a copy of the statement nor was given an opportunity to cross-examine the brass-dealer. It is further pointed out that the AO compared the price with prevailing in March, 1989 whereas he had to see the prevailing prices in 1985-86. Moreover the price shown in Economic Times is of scrap produced from sheet metal. Whereas the scrap generated from manufacturing process of assessee contains oil, and other impurities which cannot be comparable with the scrap referred to in Economic Times. The assessee's counsel has also produced statement of other brass dealers as proof of the market rate prevailing at the time. The learned counsel for the assessee has also relied upon the quantitative details of scrap generated by the assessee-company and copies of invoices relating to the transactions under reference.
28. On considering the rival submission, we find that the addition made by the AO is based on a rough estimate. The AO has relied on the rate quoted in the Economic Times, dt. 27th March, 1989, whereas we are concerned with the accounting year ended on 31st March, 1986, relevant for asst. yr. 1986-87. The statements relied on by the AO in respect of two parties, examined during the course of search also do not give a precise quantification of scrap generation as it is only an approximation. More reliance has to be placed on the certificate given by a technical expert which appears at p. 128 of paper-book submitted by the learned counsel for the assessee. It is not necessary for us to re-produce the contents of the certificate which gives the relevant technical details running into 6 pages involving diagrams, formulas and other scientific data. Suffice to say the generation of scrap is depending on the method of production, the quality of raw material used, the size and shape of the brass wire, the type of machinery used and various other factors. The AO has noted that the generation of scrap shown by the assessee comes to 42.75 per cent whereas he has presumed it to be 45 per cent. This variation, in our considered view, does not call for an addition of the sort as made by the AO in the assessment order. Coming to the sale price rate per kg. of scrap also as pointed out earlier the AO has relied on information gathered from the Economic Times of a much later date which also does not help us in arriving at the correct rate prevailing on the action dates of sale. Since the assessee-company is maintaining the regular books of accounts, and sale invoices are available for verification, the statement of facts as given by the assessee based on such entries in the books, cannot be disbelieved on mere presumption. In this view of the matter, we delete the amount of addition in toto.
29. In the last ground of appeal, the Revenue objects to the addition sustained by the CIT(A) to the extent of 50 per cent in respect of sale of plastic scrap.
30. The addition made here is on similar grounds as mentioned in the case of brass scraps. The AO applied the rate of 45 per cent for the sale rate. According to him the correct rate of scrap should be Rs. 11.25 whereas the sale was effected by the assessee to a sister concern only at Rs. 7 per kg. Thus the addition has been made to the extent of Rs. 13,353 in the assessment order.
31. The CIT(A) after considering the arguments on behalf of the assessee, adopted a similar reasoning as in the case of ground of appeal relating to brass scrap. He was of the view that the assessee was selling this scrap to the people who are offering to purchase rather than inviting any quotations for the sale. In this view of the matter, he restricted the addition as in the case of brass scrap to 50 per cent of the addition that was resorted to by the Dy. CIT(SR).
32. Before us, the learned Departmental Representative relied on the order of AO whereas the learned counsel for the assessee vigorously disputed the finding given by the AO as well as by the CIT(A). It is pointed out by the learned counsel for the assessee that the AO has erred in arriving at the percentage of 45 per cent based on his reasoning for the brass scrap. The price of plastic scrap under the normal circumstances cannot be more than 15 per cent to 20 pre cent of the virgin material price. The learned counsel has also relied on the quantitative details and invoices relating to the scrap sales given in the paper-book.
33. On considering the evidence on record and the rival submissions, we find that the addition made by the AO is totally unjustified. It is purely based on suspicion and surmises. The AO is not at all justified in adopting the 45 per cent formula as in the case of brass scrap to plastic scrap. Even though we do not have precise technical data, supported by technical certificate as in the case of brass scrap, we are inclined to believe the arguments advanced on behalf of the assessee especially in view of the fact that no real investigation has been made by the AO to disprove the sale bills produced by the assessee. The assessee-company is maintaining regular books of accounts. The bills for all the sales including plastic scraps are available for verification. The rates depend upon the condition of the scrap at the time of sale. It is also depending on the price offered by the would be purchaser.
34. Moreover the amount involved is not big considering the turnover of the company. Therefore, the addition of Rs. 13,353 made by the AO 50 per cent of which has been confirmed by the CIT(A) deserves to be deleted in toto.
35. In the result ITA No. 764/Ahd/90 is dismissed.
ITA No. 785/Ahd/199036. This appeal has been filed by the assessee against the order of CIT(A), dt. 20th December, 1989 for asst. yr. 1986-87 which we have already discussed in connection with the Revenue's appeal for the same assessment year in para Nos. 2 to 30 above.
37. The first ground of this appeal is with regards to the disallowance under s. 40A(2)(b). Our observations in para Nos. 4 to 6 supra hold good in respect of this ground of appeal raised by the assessee. Consequently this ground is allowed.
38. The second ground of appeal raised by the assessee is in respect of the disallowance of a sum of Rs. 1 lakh paid to ex-director and ex-works manager at Rs. 50,000 each. The AO found that the assessee-company entered into an agreement with the outgoing director and the ex-works manager by which the services of these two retired persons were retained by the company in order to avoid competition as they had access to the ink formula which was the trade secret of the assessee-company alone. The AO was of the view that while making these payments, the assessee-company got a benefit of an enduring nature, in the form eleminating competition from these persons, case they did similar business. He also considered that the payment was made by way of compensation for loss of office. In this view of the matter he disallowed it is as capital expenditure. Before the CIT(A) the assessee's representative clarified that the payments were made as compensation for the loss of office on retirement but it was more for safeguarding the interest of the company by avoiding future competition, if any, in case these persons set up business on similar line. The learned representative of the assessee cited several decisions before the CIT(A)-Champion Engg. Works Ltd. vs. CIT (1971) 81 ITR 273 (Bom), V. Damodaran vs. CIT (1967) 64 ITR 26 (Ker), CIT vs. Nchanga Consolidated Coppermines Ltd. (1965) 58 ITR 241 (PC), CIT vs. Bowrisankara Steam Ferry Co. (1973) 87 ITR 650 (AP), Bleeze & Central (P) Ltd. vs. CIT (1979) 120 ITR 33 (Mad), P. S. Subramanyan, ITO vs. Simplex Mills Ltd. (1963) 48 ITR 182 (SC), and Empire Jute Co. Ltd. vs. CIT (1980) 124 ITR 1 (SC). Out of these, the CIT(A) specifically discussed the observations of the Supreme Court in Empire Jute Co. Ltd. vs. CIT (supra) and therefore, he has come to a conclusion that the addition made by the AO was justified as the expenditure claimed, was of a capital nature.
39. In the appeal before us, the learned counsel for the assessee reiterated the arguments submitted before the first appellate authority whereas the learned Departmental Representative supported the observations made by the AO and the CIT(A).
40. On considering the rival submissions and the evidence on record we find that the CIT(A) while applying the principles laid down by the Supreme Court in Empire Jute Co. Ltd. (supra) has misdirected himself in arriving at a conclusion against the assessee in the present case. In fact following principle laid down by the Supreme Court actually support the plea raised by the assessee in the present case :
"(i) It is not a universally true proposition that what may be a capital receipt in the hands of the payee must necessarily be capital expenditure in relation to the payer. The fact that a certain payment constitutes income or capital receipt in the hands of the recipient is not material in determining whether the payment is revenue or capital disbursement qua the payer.
(ii) There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently of more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular fact and circumstances of a given case.
(iii) What is an outgoing of capital and that what an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. The question must be viewed in the larger context of business necessity or expediency."
41. By applying the above principles to the facts of the present case, we find that the payment made by the assessee was incurred for the purpose of preserving an existing asset and not for the purpose of acquiring any new asset or any new benefit of an enduring nature. The ex-director and ex-works Manager had access to the secret formula used by the assessee in its manufacturing process and by retaining them in the service of the company even after retirement, the company ensured that there would not be any competition from these persons by setting up rival manufacturing concerns. Thus it is clear that the company was only trying to protect its existing asset so that its business could be carried on smoothly without the apprehended competition from its own retired personnel. It is well settled in law by several decisions of the Supreme Court and of the High Court that expenditure incurred for preservation of protection of a business asset is revenue in nature and not capital expenditure as held in :
(i) Dalmia Jain & Co. vs. CIT (1971) 81 ITR 754 (SC);
(ii) CIT vs. Delhi Safe Deposit Co. Ltd. (1982) 133 ITR 756 (SC);
(iii) CIT vs. Bhawani Prasad Girdharilal (1981) 127 ITR 800 (All); and
(iv) Indian Copper Corporation vs. CIT (1977) 110 ITR 434 (Pat).
42. Reliance is also placed on the decisions (1967) 64 ITR 26 (Ker) (supra), CIT vs. Coal Shipment (P) Ltd. (1971) 82 ITR 902 (SC), (1973) 87 ITR 650 (AP) (supra) and CIT vs. Late G. D. Naidhu & Ors. (1986) 165 ITR 63 (Mad). In view of the legal position, as briefly mentioned above, we hold that the CIT(A) was not justified in sustaining the addition of Rs. 1 lakh, made by the AO.
43. Ground No. 3 in the assessee's appeal relates to the disallowance on sale of ink to sister concern amounting to Rs. 1,12,095. This point has been considered by us, in the Revenue's appeal vide paras 17 to 20 supra. Consequently this ground of appeal is allowed.
44. Ground No. 4 is dismissed as not pressed.
45. Ground No. 5 relates to the addition on account of sale of scrap of brass and ground No. 6 relates to addition on account of sale of plastic scrap. We have discussed these issues in ground Nos. 11 & 12 respectively arising in the Revenue's appeal, discussed in paras 21 to 24 and 25 to 29 supra respectively. Consequently, these two grounds in the assessee's appeal are allowed.
46. Ground Nos. 7 to 9 are in respect of depreciation and investment allowance on mould, addition on account of suppression of production and disallowance of purchase of mould. All these three issues were set aside by the CIT(A) for reconsideration by the AO. At the time of hearing of this appeal, it was stated by the learned counsel for the assessee that these matters have been considered afresh by the AO in pursuance of the CIT(A)'s order. Hence these grounds are dismissed as infructuous at present.
47. In the result, ITA No. 764 is dismissed and appeal in ITA No. 785/Ahd/90 is treated as partly allowed.