Income Tax Appellate Tribunal - Ahmedabad
Accu Dress vs Assistant Commissioner Of Income Tax on 18 June, 1998
ORDER
S. L. Banerji, Vice President
1. This is an appeal by the assessee against the order, dt. 22nd March, 1996, passed by the CIT(A), Surat.
2. In its first ground of appeal the assessee objected against disallowance of Rs. 67,950 and Rs. 30,000 claimed as revenue expenditure. The relevant facts relating to this ground as observed by the AO are as follows :
3. During the course of assessment proceedings from the details of building repairs it was found that Rs. 30,000 is shown to have been paid for silcot work on road and ground. It was also found from the copies of bills that Rs. 67,950 is paid towards construction of compound wall admeasuring 755 R.ft. From scrutiny and reading of the relevant bills filed it revealed that Rs. 67,950 represents cost of entirely new compound wall. This was found from the narration in the said bill that "excavation, rubber soiling, rubber masonary work 24" upto plinth level, over plinth level 18" x 12" rubbel masonary work 9", brick work upto 6", at every 10 feet distance 14" brick work pillar, front side cement jally fixing with both sides plaster and finishing work". According to the AO this makes it evident that the new wall has been constructed and the expenditure has to be capitalised because as a result of this expenditure new asset of enduring nature has come into existence. Likewise, an amount of Rs. 30,000 is incurred towards carpeting on ground and preparing road with silcot. According to him this is also for new asset of enduring nature. He, therefore, disallowed Rs. 97,950 aggregating of these two amounts and opined that this is not a case of current repairs.
4. The learned CIT(A) confirmed the opinion of the AO.
5. The learned counsel for the assessee submitted that the facts of the case have not been properly appreciated by the AO or the CIT(A). The assessee is carrying on business of manufacturing diamond cutting tools and the said factory is situated at GIDC Industrial Estate, Umergaon, for over a period of ten years. Old compound wall had to be repaired since it was badly damaged on account of adjacent nallah overflowing during the monsoon. Similarly, Rs. 30,000 was paid on resurfacing and carpeting approach road which had fallen in bad shape due to several years wear and tear. The learned counsel for the assessee relied on the decision of the Gujarat High Court in the case of CIT vs. Bharat Suryodaya Mills Co. Ltd. (1993) 202 ITR 942 (Guj) and Satyadev Chambers (P) Ltd. vs. CIT (1979) 117 ITR 86 (Guj). In the first named decision it has been held that the assessee was required to demolish one side wall around his premises by the order of the Municipality and the wall was repaired in order to protect the property of the assessee. It was held that the expenditure should be treated as a revenue expenditure. In the second named decision the expenditure was incurred in the construction of a proper road to Bhaili. While there is already the road in existence the expenses were of a remedial nature and were incurred for the purpose of putting the road in proper shape, to run the business efficiently and conveniently and should be treated as revenue expenditure.
6. The learned Departmental Representative submitted that the quantum of expenditure and the nature of expenditure clearly indicates that the new compound wall has been erected which is of enduring nature. Therefore, the AO was justified in treating the expenditure of capital nature. He further relied on the decision of the Supreme Court in the case of Ballimal Naval Kishore & Anr. vs. CIT (1997) 224 ITR 414 (SC) wherein it has been held "that what the assessee did was not mere repairs but a total renovation of the theatre. This cannot be treated as current repairs within the meaning of s. 10(2)(v) of the 1922 Act (pari materia with s. 37 of the 1961 Act). It was a case of total renovation and was of capital nature". He, therefore argued that the order of the CIT(A) requires no interference.
7. We have considered the rival submissions, facts and materials on record. We have carefully considered the observations of the AO in this matter. We feel the narration of the bill which says that excavation, rubber soiling and rubbel masonary work had been done extensively, cannot necessarily mean construction of new compound wall. The nature of expenditure mentioned above is also required when the old wall had to be demolished, because of its wear and tear and a new wall is replaced. It may not be current repair under s. 31 but this is a revenue expenditure which can be considered under s. 37 of the Act. The decision cited by the learned Departmental Representative is in respect of current repair and not in respect of an expenditure in the parlance of s. 37 of the Act. One of the reasons given by the AO in disallowing the expenditure is that by this expenditure, the assessee obtained enduring nature and therefore it cannot be of revenue nature. In this respect we may refer to the decision of the Supreme Court in the case of Empire Jute Co. Ltd. vs. CIT (1980) 124 ITR 1 (SC), where it has been held that 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. 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 or 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 particular facts and circumstances of the given case. We may refer to the decision of the Gujarat High Court in the case of CIT vs. Elecon Engg. Co. Ltd. (1981) 132 ITR 752 (Guj) where it has been held that if the expenditure is merely incurred for running the profit-making apparatus or income-earning machine more efficiently and in a better manner or better utilisation of the profit-making apparatus, then, it is not an expenditure of a capital nature. The AO has not brought anything on record to show that there was no wall prior to this construction of the wall for which this impugned expenditure has been incurred. In absence of such material we are unable to hold that there was no wall prior to the wall which has been constructed in its place especially taking into consideration the business of the assessee and the place where it has been situated. We therefore reverse the order of the CIT(A) and allow this ground of the assessee.
In respect of the road, from the facts it is apparent that the road was in existence and only silcot work has been done on the road. Silcot work cannot be done unless there is a road in existence. This is also for efficient running of the business and the expenditure incurred towards it should be considered as a revenue expenditure. On the basis of the decision of the Gujarat High Court in the case of Satyadev Chambers (supra) this ground is also allowed.
8. The next ground relates to lease rent of Rs. 92,160 and Rs. 9,600. From the depicted portion of the assessment order in the impugned order of the CIT(A) we find that the facts in short are that according to the AO the assessee-firm had adopted device by purchasing, selling and again taking the car on lease to get benefit of depreciation by payment in the form of lease rent. As the depreciation is not allowable on foreign car, it was felt that it is tax planning by dubious method which has been held by the Supreme Court in the case of CIT vs. McDowell & Co. (1985) 154 ITR 148 (SC).
9. The CIT(A) agreed with the AO.
10. The learned counsel for the assessee submitted that the authorities below had unnecessarily suspected the transaction and disallowed the payment. He pointed out that an imported car was purchased from Ashiya Motors for Rs. 6 lakhs. As the whole payment was to be made against delivery the assessee approached Cholamandalam Investment & Finance Co. Ltd. for finance available to the extent of 80 per cent. The company agreed for car lease and certain terms and conditions were agreed between the parties. The lease agreement, dt. 14th May, 1990, was entered into and the transaction of sale and lease-back was entered into. The lease rent amounting to Rs. 92,160 was actually paid by the assessee and other incidental expenses on stamp duty, etc. was also incurred for Rs. 9,600. On receipt of the car it was transferred to said company as per the lease agreement. The original car owner is not related to any of the partners of the assessee-firm. Similarly the assessee and its partners are not interested in the finance company or the car dealers. Only with a view to seek finance the assessee had entered into this transaction similar to many such transactions in vogue on a very large scale in India in view of globalisation, liberal import policy, rapid expansion of industry business and commerce, etc. could not have been viewed prejudicially as has been done by the authorities below. The learned counsel for the assessee relied on the decision of the Supreme Court in the case of India Cement Ltd. vs. CIT (1966) 60 ITR 52 (SC) where it has been held the lease obtained was not an asset or advantage of enduring nature, the expenditure was made for securing the use of money for a certain period, and it was irrelevant to consider the object with which the loan was obtained. He also relied on the decision in the case of CWT vs. Arvind Narottam (1988) 173 ITR 479 (SC) wherein it has been held by the Supreme Court that in any event, however, where the true effect on the construction of the deeds is clear, as in this case, the appeal to discourage tax avoidance is not a relevant consideration. He submitted that in this case the decision of the Supreme Court in the case of McDowell & Co. (supra) had been considered, nevertheless, effectiveness of the deeds has been accepted even if it is held the tax avoidance. He also relied on the decision of the Gujarat High Court in the case of Banyan & Berry vs. CIT (1996) 222 ITR 831 (Guj) wherein it has been held that agreement for division of amounts receivable by firm amongst erstwhile partners is not a device to evade tax.
11. The learned Departmental Representative submitted that the entire transaction of purchasing, selling and lease-back smack attempt of tax evasion. He submitted that the assessee could put car to use when it was purchased but instead he sold the same and took back the same on lease so that it can get deduction by way of lease rent otherwise as a owner it could not get/claim depreciation on imported car.
12. We have considered the rival submissions, facts and materials on record. In our opinion, the impugned transaction cannot be treated as a device of tax evasion unless it is proved that the lessor company is anyway associated with the assessee-company. In this transaction the lessor company will be taxed on the entire lease rent and as per taboo in the Act it will not be able to get depreciation on imported car. Therefore, unless any material has been brought on record that lessor company in anyway associated with the lessee company so that it can help the assessee-company in tax planning, we cannot accept the contention of the Department. We are therefore unable to agree with the Departmental Representative that the device had been adopted in this case. In view of the above we allow the assessee's claim of Rs. 92,160 the lease-rent paid to the lessor company along with the incidental expenses of stamp duty, etc. This ground is allowed.
13. The next ground is in respect of bad debt. The AO observed that this represents mainly on account of Jyoti Diamonds and a copy of its accounts reveals that an amount of Rs. 20,849 is shown as a closing balance as on 31st March, 1990, as also the opening balance as on 1st April, 1990. In view of this the debt cannot be said to have been written off in the books of accounts during the year under consideration. Thus the prima facie condition of deduction of bad debt that an amount had been written off in the accounts is totally absent. No evidence is laid to establish that the debt was Rs. 4,726 in respect of L. M. Van. It was claimed that due to weak financial position the amount could not be recovered and hence written off. According to the AO mere writing off the debt as bad debt does not in itself make the debt admissible as deduction. In respect of balance of Rs. 49,002 no details worth-the-name nor the copies of other accounts have been furnished and as such the entire claim for bad debt was not accepted.
14. Before the CIT(A) the assessee submitted that the bad debt had been written off due to the fact that it was outstanding for a long time. The assessee placed reliance on the contention by stating that the difference between the provisions of s. 36(1)(vii) of the IT Act as prevailing upto amended provisions w.e.f. 1st April, 1989. The CIT(A) however was not convinced and he agreed with the AO, therefore dismissed the claim of the assessee.
15. The learned counsel for the assessee submitted that there was confusion on the part of the AO about the amount due from Jyoti Diamonds. In the assessment order the AO mentions that it is only Rs. 20,849, the balance which is carried on but Rs. 69,850 which has been written off had not been considered. In respect of Rs. 4,726 due from L. M. Van he claimed that it has to be allowed in view of the amended provisions in the Act. He relied on the following decisions :
(1) Lord's Dairy Farm Ltd. vs. CIT (1955) 27 ITR 700 (Bom); (2) Jethabhai Hirji & Jethabhai Ramdas vs. CIT (1979) 120 ITR 792 (Bom); (3) Sarangpur Cotton Mfg. Co. Ltd. vs. CIT (1983) 143 ITR 166 (Guj); and (4) CIT vs. Abdul Rajak & Co. (1982) 136 ITR 825 (Guj).
Lastly he relied on the decision of the Ahmedabad Bench of the Tribunal in the case of Motor Sales & Services in ITA Nos. 1474 & 2083/Ahd/1991, decided on 20th March, 1998, where the amended provisions had been taken into consideration and held that any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year, had been substituted for any debt or part thereof which is established to have become bad debt which shows that the establishment of bad debt in the year under consideration is no more relevant from asst. yr. 1989-90. He also argued that the Department cannot ask or insist on demonstrative proof of the fact which must satisfy the test of infallibility. All that is required is an honest judgment on the part of the assessee at the time when he makes the write off. For this purpose he relied on the decision of the Bombay High Court in the case of Jethabhai Hirji (supra).
16. The learned Departmental Representative on the other hand, submitted that the claim of the assessee cannot be allowed in view of the fact that firstly in respect of Jyoti Diamonds it appears that Rs. 20,849 has not been written off and secondly for Rs. 49,002 no details worth-the-name nor the copies of other accounts have been furnished.
17. We have considered the rival submissions, facts and materials on record. We feel that the issue should be restored back to the file of the AO in view of the fact that in respect of Rs. 49,002 he mentions that no details worth-the-name had been filed before him. The above words are therefore qualified. What are the details filed he had not mentioned. However, in respect of Rs. 4,726 we are of the opinion that the assessee should get relief on this point in view of the amended provisions and in view of the decision cited by the assessee's counsel. This ground is partly allowed for statistical purposes.
18. The next ground relates to disallowance of Rs. 20,000 on account of sales promotion. The AO observed that the assessee had claimed an amount of Rs. 1,73,628 under the head "sales promotion expenses". He observed that details furnished in this regard revealed that these expenses related to distribution of presentation articles, cost of which was less than Rs. 50. No evidence was led to establish that these presentation articles were distributed restrictively to the business associates only. According to the AO the presentation of articles to the friends, relatives and other dignified persons is quite obvious and not possible to be avoided. He disallowed Rs. 20,000. The CIT(A) confirmed the disallowance.
19. The learned counsel for the assessee submitted that the presentation of small articles without carrying logo of the company cannot be considered as sales promotion expenses. He further argued that the disallowance has been made only on surmises. That the presentation of articles might have been made for non-business purpose. The learned Departmental Representative strongly supported the order of the CIT(A).
20. We have considered the rival submissions and facts and materials on record. We agree with the learned counsel for the assessee that the disallowance has been made on the basis of surmises. Even for keeping good relations if the presentations have been given, the disallowance could not be made. We therefore direct the AO to delete this disallowance.
21. The next ground relates to deduction under s. 80HH. This ground is not pressed at the time of hearing. Hence the same is dismissed.
22. The next ground relates to levy of interest under s. 234B. In our view the assessee would get consequential relief in this respect.
23. In the result, the appeal is partly allowed for statistical purposes.