Joint Commissioner Of Income Tax vs I.T.C. Ltd. on 7 September, 2007

[Cites 57, Cited by 30]

Income Tax Appellate Tribunal - Kolkata

Joint Commissioner Of Income Tax vs I.T.C. Ltd. on 7 September, 2007

Equivalent citations: (2008)115TTJ(KOL)45

ORDER

Jugal Kishore, A.M This Special Bench has been constituted under Section 255(3) of the IT Act, 1961 by the Hon'ble President, Tribunal in the case of M/s ITC Ltd. vide ITA No. 1541/Cal/2000 for asst. yr. 1997-98 to consider the following questions:

(1) That on the facts and in the circumstances of the case, the Hon'ble CIT(A) has erred in deleting addition of Rs. 38,64,109 debited to year's revenue account as value of stores written off by holding that it is for the AO to prove that consumable stores had cither not been used or individually costed less than Rs. 5,000 ignoring, in the process, the findings in assessment that claim could not be established on record.

(2) That, on the facts and in the circumstances of the case, the Hon'ble C1T(A) has erred in deleting addition of Rs. 5.00,000 on account of building, furniture, fixture and fittings thereby contravening enunciation by the jurisdictiorial High Court to the defect (sic-effect) that prohibition against guest house expenses stipulated in Section 37(4) is absolute.

(3) That, on the facts and in the circumstances of the case, the Hon'ble CIT(A) has erred in deleting addition of travelling expenses disregarding the specific finding that assessee could not discharge the statutory onus of providing that the entire amount debited as expenses represented revenue expenditure laid out wholly and exclusively for purposes of business.

(4) That, on the facts and in the circumstances of the case, the Hon'ble CIT(A) has erred in deleting addition of Rs. 67,59,104 without requiring the expenses to controvert the finding that the amount represented outgoings in the form of entertainment expenses.

(5) That, on the facts and in the circumstances of the case, the Hon'ble CIT(A) has erred in deleting the addition of Rs. 1,45,48,331 under the sub-head of payments to clubs disregarding the finding that no part of the expenditure could be shown to have any direct and intelligible nexus with business of the company as such.

(6) That on the facts and in the circumstances of the case, the Hon'ble C1T(A) has erred in deleting addition of Rs. 13,30,000 claimed as advertisement expenses when clearly the expenditure in question did not qualify to be treated as admissible revenue expenses of the company's business.

(7) That, on the facts and in the circumstances of the case, the Hon'ble CIT(A) has erred in deleting addition of 'repairs' when the order of assessment showed that material evidence to establish the claim had been omitted to be made available for AO's scrutiny.

(8) That, on the facts and in the circumstances of the case, the CIT(A) has erred in deleting addition of Rs. 1,77,05,366 basing his analysis on method of accounting thereby ignoring the fact that the provision represented purely contingent expenditure.

(9) That on the facts and in the circumstances of the case, the CIT(A) has erred in deleting addition of Rs. 55,00,000 by ascertaining capital or revenue nature of the expenses solely with reference to composition of the amount rather than the purpose each component of the expenditure was expected to serve.

(10) That the learned CIT(A) erred in law arid on facts in summarily deleting addition under Section 43B r/w Section 36(l)(va) without appreciating that the statutory disallowance is essentially to be based on facts and that unlike the governmental liabilities of other nature covered by Section 43B, option to claim deduction In the year of payment is not available under the law in regard to contribution to employees' provident and pension funds.

(11) That, on the facts and in the circumstances of the case, the Hon'ble CIT(A) has erred in deleting the addition/disallowances of Rs. 2.5 crores under the head other staff welfare business by holding that although the assessee could not furnish details of such expenses before the AO in course of assessment in deleting addition of Rs. 30,00,000 on account of expenditure on fuel soft coke for staff and mill workers by holding the same as in nature of employees welfare expenses incurred on the basis of an agreement with workers in gross disregard to Rule 46A of the IT Rules. 1962 as the assessee did not disclose the fact of the agreement with workers in course of assessment procedure and in deleting addition of Rs. 4,00,000 on account of school fees scholarship and educational tour expenses by holding that the expenditure were incidental to assessee's business.

(12) That the learned CIT(A) erred in law and on facts in deleting addition of miscellaneous expenses ignoring the trite law that a decision in regard to a different year cannot be taken as an authority on facts.

(13) That on the facts and in the circumstances of the case, the CIT(A) has erred in deleting addition by holding that the onus of proof is. not on the assessee, but on the AO.

(14) That on the facts and in the circumstances of the case, the CIT(A) has erred in deleting addition applicable without appreciating that arm's length principle had been clearly shown to have been violated.

(15) Learned CIT(A) erred in law and on facts in directing adoption of total turnover net of excise duty for purposes of computation of admissible amount of deduction under Section 80HHC which directly contradicts the law.

(16) That, on the facts and in the circumstances of the case, the Hon'ble CIT (A) has erred in directing the AO to allow deduction under Section 80HHC of the IT Act, 1961 as per computation made by the assessee's auditor without pointing out any defect in the computation made by AO.

2. At the outset, the learned Departmental Representative for the Revenue submitted that most of the additions in this case have been deleted by the learned CIT(A) following the decision of Tribunal for the asst. yr. 1994-95. He stated that the facts of 1994-95 are not identical to the facts of issues raised by the Revenue in this case. In 1994-95, the Hon'ble Tribunal while upholding the order of learned CIT(A) has basically observed that the special auditor under Section 142(2A) was appointed by the Revenue and such special auditor in his audit report has not commented anything adverse, which could support the observation of AO while making the additions in case of asst. yr. 1994-95. Learned Departmental Representative submitted that since no special audit was got done by the Revenue for the year under consideration, the decision of Tribunal for asst. yr. 1994-95 could not be relied for supporting the order of learned CIT(A) for the year under consideration. He stated that the learned CIT(A) should have adjudicated the matters on merit and should not have followed simply the order of Tribunal for asst. yr. 1994-95.

3. The learned Departmental Representative for the Revenue arguing the first ground raised by the Revenue, has submitted that the AO has dealt with the above ground at page No. 35 of his order, wherein he has given a specific reason for disallowing the above claim. It has been contended by the learned Departmental Representative that the assessee in this case could not submit any evidence and documents asked for by the AO. It has been pointed out by the learned Departmental Representative that though the AO has asked for details and evidences as per direction of this Tribunal while setting aside the matter to the file of assessee, and in its reply the assessee has relied upon the documents and evidences filed before the learned CIT(A). Learned Departmental Representative pleaded that, the assessee has not discharged its burden to prove the genuineness of the claim made by it. it has been submitted by the learned Departmental Representative that though the assessee has debited the entire value of such obsolete consumable stores, at the same time no resale value of such obsolete goods or stores has been shown by the assessee, which is highly surprising. She has submitted that even this Tribunal while adjudicating the ground No. 17 in case of 1994-95 had held that there should be some resale value of such items declared by the assessee. It has been submitted by the learned Departmental Representative that the learned CIT(A) while deleting the addition made by he AO, has only followed the decision of this Tribunal for the asst. yr. 1994-95, wherein Tribunal upheld the order of learned CIT(A) on the ground that no adverse comment was passed by the special auditor. Learned Departmental Representative contended that in these circumstances the order of this Tribunal for asst. yr. 1994-95 should not be simply followed for deciding the grounds raised by Revenue in this year.

4. The learned Departmental Representative has thereafter drawn the attention of this Bench on the details in respect of items of consumable stores which were written off by the assessee and has submitted that from the perusal of such details available at Annex. 3 to Enclosure B of the paper book No. II. it is evident that such written off obsolete consumable stores includes 1,246 metric ton of coal, which is highly improbable of becoming obsolete. It has, therefore, been contended by the learned Departmental Representative that since the assessee has not cooperated with the AO in providing details and evidences in support of the claim made, the AO has no option but to make disallowance, which has been deleted by the learned CIT(A) in a casual manner without disposing the same on merit and, therefore, such order of learned CIT(A) is liable to be reversed.

5. In his rival submission, the learned senior counsel Shri R.N. Bajoria appearing for and on behalf of the assessee has assailed the above submission of the learned Departmental Representative and has first pointed out that this Tribunal while restoring the matter back to the file of AO has basically done so to give an opportunity to the AO to examine the evidence and documents filed by the assessee before the learned CIT(A). However, the AO after such setting aside has asked for voluminous documents, which is not possible humanly. Shri Bajoria in support of his above contention has drawn the attention of this Special Bench on the letter of AO which is available at page No. 204 of the paper book, wherein the AO asked for the details in support of such obsolete consumer stores written off. It has been submitted by Shri Bajoria that the direction of this Tribunal should have been followed by the AO in a constructive manner as the restoration of issues were made by this Tribunal for the verification of evidence and documents filed by the assessee before the learned CIT(A) and it was not made with an intention to provide an opportunity to the AO to make fresh assessment in regard to such claim of the assessee. It has been submitted by Shri Bajoria that the assessee company is having a turnover of more than Rs. 6,000 crores and writing off Rs. 38,00,000 of consumer stores, which has become obsolete, is general phenomena in the line of the business of the assessee. Shri Bajoria has also pointed out that so far as the obsolence of coal is concerned such coal was wet having no value and even otherwise whenever such obsolete items were sold through auction, the assessee used to show the same under the head 'Miscellaneous income'.

6. Shri Bajoria has thereafter submitted that the facts of the present case are exactly similar to the facts of asst. yr. 1994-95 as the nature of business of assessee remains same and, therefore, the learned CIT(A) has rightly followed the decision of this Tribunal in the asst. yr. 1994-95 and such order of learned CIT(A) is liable to be upheld. The learned Departmental Representative in his rejoinder has once again reiterated that the AO is well competent to ask for the details from the assessee in respect of claim made by it and the assessee was duty bound to prove the genuineness of the claim made by it and since the assessee adopted the method of non co-operation by not filing the details called for, the action of AO was well within the ambit of law.

7. We have carefully considered the arguments of both the sides and perused the material placed before us. The assessee has written off the consumable stores amounting to Rs. 38 lacs, the details of which are furnished before the AO and kept at Annex. 3 of Enclosure B of the paper book No. II of the assessee are as under:

ITC Ltd.

Asst yr. 1997-98 Stores Written Off _______________________________________________________________________ | Amount | |______________________________________________________________________| |Stores & spares for MK-5 (revenue stores & spares for 4,36,003| | : cigarette machine) | |Stores & spares for MK 5-8-5 " 5,22,662| |Stores & spares for MK-8 " 45,923| |Stores & spares for PA7RO " 6,767| |Stores & spares for MAX 111 " 17,299| |Stores & spares for M2 Packer " 2,95,448| |Stores & spares for MKL- Duplex " 2,889| |Stores & spares for Bang Wrapepr " 98,055| |Bearings 2,01,584| |V-Belts 9,056| |Miscellaneous spares 63,480| |F & C on spares 73,878| |Coal 1246-872 Mts. 19,76,893| |Package & printing division munger-cost of silicon carbide 1,14,172| | _________| | Total 38,64,109| |______________________________________________________________________|

8. The assessee has not furnished any evidence to prove that the above consumable stores have become obsolete during the year under consideration. At the same time, considering the volume of the assessee's business wherein the assessce's turnover exceeded Rs. 6,000 crores, the possibility of some consumable stores becoming obsolete cannot be ruled out. Further, the obsolete stores would also have some realizable value. In the case of the assessee the items written off included 1,246 M.T. of coal. Even if the coal is dust or rejected, it has some realizable value. The learned counsel for the assessee has claimed that whenever consumable stores are sold, the amount realized are credited as other income in the assessee's books of account. However, the learned counsel for the assessee could not point out whether any amount on the realization of 1,246 M.T. of coal and other consumable items written off in the year under consideration was shown as miscellaneous income on its realization in this year or any of the subsequent years. Considering the totality of these facts and the arguments of both the sides, in our opinion, it would meet the ends of justice if the disallowance is sustained at 25 per cent of the consumable stores written off by the assessee. We hold and direct accordingly.

9. So far as the ground No. 2 raised by the Revenue is concerned, at the outset it was an agreed position between the parties that the above issue has to be decided in favour of the Revenue and against the assessee by virtue of the order of the Hon'ble Supreme Court in the case of Britannia Industries Ltd. v. CIT . In the said case, their Lordships held as under:

The only question which we are called upon to consider in the instant case is whether the expression 'premises and buildings' referred to in Sections 30 and 32 and used for the purposes of the business or profession would include within its scope and ambit the expression 'residential accommodation including any accommodation in the nature of guest house' used in Sub-sections (3), (4) and (5) of Section 37 of the Act. While the two expressions can be similarly interpreted, a distinction has been sought to be introduced for the purposes of Section 37 by specifying the nature of building to be a guest house. In our view, the intention of the legislature appears to be clear and unambiguous and was intended to exclude the expenses towards rents, repairs and also maintenance of premises/ accommodation used for the purposes of a guest house of the nature indicated in Sub-section (4) of Section 37. When the language of a statute is clear and unambiguous, the Courts are to interpret the same in its literal sense and not to give it a meaning which would cause violence to the provisions of the statute. If the legislature had intended that deduction would be allowable in respect of all types of buildings/accommodations used for the purposes of business or profession, then it would not have felt the need to amend the provisions of Section 37 so as to make a definite distinction with regard to buildings used as guest houses as defined in Sub-section (5) of Section 37 and the provisions of Sections 31 and 32 would have been sufficient for the said purpose. The decisions cited by Dr. Pal contemplate situations where specific provision had been made in Sections 30 to 36 of the Act and it was felt that what had been specifically provided therein could not be excluded under Section 37. The clarification introduced by way of Sub-section (5) to Section 37 was also not considered in the said case.

As mentioned in the decision of the Calcutta High Court in the case of CIT v. Biswanath Tea Co. Ltd. , any other interpretation would negate the very purpose of Sub-section (4) of Section 37.

It is another matter that at a subsequent point of time, the legislature felt it necessary to omit the said provisions, but they were in the statute book at the relevant point of time. The rigours of the same, in our view, cannot be avoided in the instant case.

10. We respectfully following the same decide the issue in favour of Revenue and against the assessee and accordingly allow the ground No. 2 raised by the Revenue.

11. Brief facts relating to the ground No. 3 are that the assessee has made a total claim of Rs. 40.91 crores under travelling expenditure and in tax audit report, a disallowance under Rule 6D stood at Rs. 64.56,704, the AO observed that out of total travelling expenses a sum of Rs. 7,18,72.457 only has been taken into consideration by the auditors to quantify disallowance under Rule 6D. The AO has, therefore, observed that the balance travelling expenditure of Rs. 33.74 crores has not been considered for working out the disallowance under Rule 6D. He has further held that details of travelling expenses reveal that a sum of Rs. 58,30,454 has been incurred in connection with travelling undertaken by person other than employee of the assessee and the disallowance on this account under Rule 6D has been worked out at Rs. 8,92,258 and, therefore, the balance travelling expenditure for other person to the extent of Rs. 49,38,196 has also not been incurred by the employees or executives of the assessee and, therefore, the same is liable to be disallowed. The AO has thereafter seen from the details of balance travelling expenditure that the assessee has not filed the details and purpose of foreign visit made by the officer of the company and the details regarding Indian travel has also not been filed. He has accordingly considering the possibility of personal and pleasure trips disallowed 1 per cent of the claim of Rs. 33.72 crores over and above the disallowance of Rs. 49,38,196 claimed by the assessee on account of travelling expenditure by person other than employees of the assessee.

12. In appeal, the learned CIT(A) has deleted the addition made by the AO on account of travelling expenditure incurred by the assessee on person other than employees and the ad hoc estimate disallowance of Rs. 33,72,275 holding that the assessee has itself shown Rs. 8,92,258 as disallowable under Rule 6D and the fact that the AO has not questioned the basis of calculation. The CIT(A) has also considered the earlier order of his predecessor for the asst. yr. 1994-95 while deleting the additions of Rs. 49,38,196 and Rs. 33,72,275.

13. The Revenue being aggrieved with such order of learned CIT(A) has now come in appeal before us vide ground No. 3 as mentioned hereinabove.

14. The learned Departmental Representative for the Revenue has assailed the order of learned CIT(A) and has contended that so far as the disallowance of Rs. 49,38,196 is concerned, the same was rightly made by the AO as these expenditures were incurred by the persons other than employee of the assesses company and, therefore, by no stretch of imagination could be held as incurred for the purpose of business and could not be allowed as such expenditures do not satisfy the conditions for its admissibility as mentioned in Section 37(1) of the Act. The learned senior Departmental Representative extending her argument has pleaded that the learned CIT(A) has deleted such addition only by stating that the AO has not assigned any palpable reason for such disallowance. However, it is also a fact that the assessee has not been able to offer any reasonable explanation for incurring such expenditure for other than employees. She has also objected to the action of learned CIT(A) in deleting addition of Rs. 33,72,275 and has submitted that since the assessee has not submitted details of foreign travel and Indian travel, the AO has no option but to make the impugned disallowance, which has been deleted by the learned CIT(A) only by following the earlier appellate order of the CIT(A) and the order of Hon'ble Tribunal for the asst. yr. 1994-95. She has relied on the following judgments in support of her contention:

(1) Goodyear India Ltd. v. CIT ;

(2) CIT v. Premier Breweries Ltd. ;

(3) Ram Bahadur Thakar Ltd. v. CIT .

It has, therefore, been prayed by the learned Departmental Representative that since the learned CIT(A) while deleting the addition has not adjudicated upon the observation of AO while making the disallowance and, therefore, the order of learned CIT(A) should be set aside and that of AO be restored.

15. In his rival submission, the learned senior counsel for the assessee Shri R.N. Bajoria has defended the order of learned CIT(A) in deleting the two folds disallowance by the AO. He has first argued on the disallowance of travelling expenditure by non-employee and has submitted that the assessee had duly explained the nature and reason of such traveling expenditures on non-employees which were basically incurred by the auditors, retainers, consultants and non-executive directors, details of which were furnished along with the tax audit report and the assessee itself offered Rs. 8.92 lakhs being the amount spent in excess of Rule 6D. Shri Bajoria has submitted that the Annexure to the tax audit report clearly reflected the fact that the tax auditor had verified the amount of disallowance and there was no scope for a further disallowance under the said rule and in these circumstances, the learned CIT(A) was wholly justified in deleting the disallowance. It has been pointed out by Shri Bajoria that even otherwise the assessee company has got various factories, godowns and stock points at various locations of the country arid therefore it is necessary for the auditor, consultant and retainers to verify the documents and such verification is not possible without travelling to these places and, therefore, the action of AO in disallowing a sum of Rs. 49.38 lakhs was highly unjustified which has rightly been deleted by the learned CIT(A).

16. Defending the action of learned CIT(A) in deleting travelling expenses of Rs. 33.72 lakhs, Shri R.N. Bajoria has stated that the tax auditor has quantified the amount of travelling expenditure incurred by the employees in excess of r. 6D and the same has been offered to tax. It has been submitted by the learned counsel that the assessee in this case has duly submitted all the relevant documents and evidences, which clearly indicated that such expenditure was not incurred for personal and pleasure trips, which could enable the AO to make ad hoc disallowance. He has relied on the following judgments in support of his contention that since books of accounts being audited in accordance with the provisions of IT Act and has been accepted as true and correct, there is no justification to make any ad hoc or lump sum disallowance:

(i) Asstt CIT v. Perfect Project Ltd. (2002) 253 ITR 16 (Cat)(AT) (Calcutta Bench);

(ii) Sauaji Iron & Engg. Co. v. CIT ;

(iii) Dinesh Mills Ltd. v. CIT and

(iv) Nidhipati Singhania v. Asstt. CIT (1991) 39 FID 292 (All).

It has, therefore, been contended that observing the past order and considering the facts and circumstances involved in the case, the learned CIT(A) was justified in deleting two folds of disallowance made by the AO and such order of learned CIT(A) should be upheld.

17. We have given our careful consideration to the rival submissions made before us and have perused the orders of tax authorities. We have also considered the paper book filed by the learned counsel for the assessee and the case laws relied upon. In this case, the AO has made two folds disallowance under the head travelling expenditure. The first disallowance out of travelling expenditure is on account of expenditure incurred by the assessee to the tune of Rs. 59.3 lakhs towards travelling of non-employees out of which Rs. 8.92 lakhs has already been offered by the assessee under Rule 6D and the AO has made the disallowance of the balance of Rs. 49.38 lakhs holding that he was not convinced with the commercial expediency of the travelling undertaken by the non-employees of the assessee company. We after perusing the Annexure of tax audit report and other evidence and document on record find that such travelling expenditures were undertaken by the auditors, retainers, consultants and non-executive directors of the company, such fact has clearly been shown in the tax audit report furnished by the assessee.

The auditors have duly verified such travelling expenditures by non-employees and have thereafter quantified the sum of Rs. 8.92 lakhs disallowable under Rule 6D of the Act. So far as the Justification of balance Rs. 49.30 lakhs for the business of assessee is concerned, it is also an undisputed fact that the assessee company has various factories, godowns and stock point apart from branches and offices at various locations of the country and it is duty of auditors and other consultants to verify the documents and books of accounts in the order to give a conclusive and authentic report to the management. Apart from above, the criteria for allow ability of travelling expenditure is that whether the expenditure was incurred for the purpose of business or not. If the expenditure is incurred for the purpose of business, it is immaterial whether the expenditure was incurred by the employee of the assessee company or non-employee of the assessee company. when the assessee engages an outside agency, viz. auditor, consultant, advisor, etc. and the travelling is undertaken by them for the purpose of the business of the assessee company, the expenditure incurred by them in such travelling has to be borne by the assessee company and it would be an allowable expenditure being incurred for the purpose of business of the assessee company. In the present case, it has nowhere been brought on record by the AO that the expenditure was not incurred for the purpose of the business of the assessee company. The sole basis for disallowance of the expenditure was that the expenditure was incurred by the persons other than employees of the assessee company. In our opinion, the disallowance made by the AO was not justified and the learned CIT(A) has rightly deleted the same.

18. Coming to the ad hoc disallowance of Rs. 33.72 lakhs by the AO, we find that the tax auditor has quantified the amount of travelling expenditure incurred by the assessee company in excess of r, GD and has offered the same for tax. Though the assessee has submitted details of such expenditure, the AO has disallowed 1 per cent of such expenditure holding that personal and pleasure trips could not be ruled out. However, such observation of AO is not supported by any evidence on record. The learned Departmental Representative though has relied on several decisions, but facts of such decisions are not identical to the facts of this case.

19. In the case of Goodyear India Ltd. v. CIT (supra) relied upon by the learned Departmental Representative, the assessee failed to furnish the details of certain expenditure and also failed to produce the vouchers and other evidence in support of the genuineness of such expenditure. On the above facts, their Lordships of Delhi High Court have upheld the estimated disallowance out of those expenditure. However, in the case under consideration before us, the assessee has produced the details asked for by the Revenue authorities relating to the travelling expenditure. Therefore, the facts of the assessee's case arc different than the facts in the case of Goodyear India Ltd. (supra).

20. In the case of Premier Breweries Ltd. (supra), their Lordships of Kerala High Court held that the burden is upon the assessee to prove that the expenditure is incurred for the purpose of business. In the said case, the assessee has claimed the deduction for payment in respect of liaison work and corporate management charges. It was found by the AO that the corporation has already banned the liaisoning work and the assessee could not produce the evidence with regard to rendering of any service towards corporate management. In view of the above facts, the Hon'ble Kerala High Court upheld the disallowance with regard to the payment for liaisioning work and corporate management charges. There is no dispute with regard to the legal proposition laid down by their Lordships of Kerala High Court that the onus is upon the assessee to prove that the expenditure was incurred for the purpose of business. However, in the case under consideration before us, the assessee has already proved that the expenditure was incurred for the purpose of business- Even the AO himself has allowed 99 per cent of the expenditure incurred by the assessee company towards travelling. He only made the ad hoc disallowance of 1 per cent out of travelling expenditure on estimate basis. Therefore, in our opinion, this decision of Hon'ble Kerala High Court does not support the stand of the Revenue.

21. In the case of Ram Bahadur Thakar Ltd. v. CIT (supra), again their Lordships of Kerala High Court have reiterated that the burden is upon the assessee to prove that the foreign tour of the director was for the purpose of business. Since in that case the facts were not properly examined either by the AO or by the appellate authorities, on facts the matter was remanded to the Tribunal to dispose of the appeal afresh.

22. From these facts it is evident that the facts of the assessee's case are different than the facts of the cases relied upon by the learned Departmental Representative. Considering the facts of the assessee's case and the arguments of both the sides, we do not find any justification for 1 per cent disallowance on ad hoc basis out of the travelling expenditure incurred by the assessee. We, therefore, hold that the CIT(A) was justified in deleting such disallowance. Accordingly, the order of the CIT(A) on this point is sustained and ground No. 3 of the Revenue's appeal is rejected.

23. Brief facts relating to the ground No. 4 are that the assessee company has claimed entertainment expenses to the tune of Rs. 1,50,19,648 which was considered by the assessee for working out the disallowance under Section 37(2) in the computation of income. The disallowance worked out by the assessee stood at Rs. 75,04,824. The AO has observed that the assessee company made payment to club amounting to Rs. 2,18,12,229 out of which Rs. 33,68,772 represents payment made to clubs for different purposes. The AO thereafter on the scrutiny of accounts has found that the payment has been made in connection with entertainment against which the assessee claimed that the same were incurred during various business conferences and meetings held in the clubs. The AO has further observed that the details of workmen and staff welfare expenditure of Rs. 22.04 crores reveals that same includes Rs. 4.06 crores as expenses towards lunch and refreshment, for which the assessee has claimed that the same has been incurred against canteen expenses relating to workmen and staff. The AO has however observed that since no documentary evidence in support of the claim has been filed and the possibility of outsiders being entertained with lunch/refreshment could not be ruled out. He has disallowed 25 per cent of such expenditure i.e. Rs. 1,01,50,000. On the same analogy, he has also disallowed 25 per cent of the entertainment expenditure of Rs. 1,50,19,648 and of Rs. 33,68,772 being payment made to clubs and thereby making total disallowance under Section 37(2) at Rs. 1,42,64,210 against disallowance offered by the assessee at Rs. 75,04,824 and thereby making a further disallowance of Rs. 67.59,386.

24. In appeal, the learned CIT(A) has deleted the addition following the order of his predecessor for the asst. yr. 1994-95. In appeal before us the learned Departmental Representative for the Revenue has assailed such order of learned CIT(A) and has contended that the learned CIT(A) while deleting the addition has not taken into consideration the observation of AO and has deleted the vsame only by relying on the decision of his predecessor for the asst. yr. 1994-95, which was influenced by the special audit report. It has been contended by the learned Departmental Representative that since the assessee had not discharged its onus to justify the working out of disallowance under Section 37(2) by placing relevant evidence on record, the action of AO in making a further disallowance was correct and the same was made after duly appreciating the evidence, facts and circumstances of the case. She has once again relied on the same decision as relied by her while arguing ground No. 3 above.

25. In his rival submission, the learned counsel for the assessee has heavily defended the order of the learned CIT(A) and has contended that all the details were provided to the AO and the assessee after taking into consideration all the facts and evidence on record has itself disallowed a sum of Rs. 75,04,824 and, therefore, a further disallowance of Rs. 67,59,386 by the AO on ad hoc and presumptive basis was not at all correct and was rightly deleted by the learned CIT(A) following the order of his predecessor for the asst, yr. 1994-95 as the facts and circumstances of asst. yr. 1994-95 were exact and similar to the facts of the case during the year under consideration and, therefore, it has been contended that the order of learned CIT(A) be upheld.

26. We have given our careful consideration to the rival submissions made before us and have perused the orders of tax authorities. We have also considered the paper book filed by the learned counsel for the assessee and the case laws relied upon. The AO in this case has made a further disallowance of Rs. 67,59,386 over and above disallowance made by assessee at Rs. 75,04,824. The disallowance by the assessee has been made by taking into consideration the entertainment expenditure of Rs. 1,50,19,648 whereas the AO has further considered the 25 per cent on the amount spent by the assessee company towards payment to clubs at Rs. 33.69 lakhs and 25 per cent of lunch expenditure at Rs. 1,01,50,000 as entertainment expenditure for the purpose of disallowance under Section 37(2).

26.1 The AO while disallowing 25 per cent of expenditure incurred towards lunch and refreshment has given a specific observation that the assessee has not been able to submit evidence in support of his contention that these were exclusively used by the employee and other staff of the assessee company. The AO has given similar observation in case of expenditure incurred towards club payment. Since the assessee has not been able to submit any details or evidence in support of its contention that these expenditures were wholly and exclusively incurred for the employees and staff of the assessee company and possibility of outsiders being entertained with lunch/refreshment and at club cannot be ruled out, in our considered opinion, some disallowance is called for. The AO has worked out such disallowance at 25 per cent of payment to clubs and expenditure for lunch and refreshment, which is in our opinion on higher side, in our considered opinion, disallowance of 10 per cent in case of each of the expenditure will meet the ends of justice. We, therefore, direct the AO to disallow only 10 per cent of expenditure incurred for lunch/refreshment and for payment of club and then work out the disallowance under Section 37(2). We hold and direct accordingly and accept the ground No. 4 raised by the Revenue for statistical purposes.

27. Now we take up the ground No. 5 raised by the Revenue.

Brief facts are that the AO while computing the total income observed that the payment to clubs by the assessee company includes the expenditure of Rs. 1,45,48.331 for sponsorship, prize money, etc., which are not incidental to the business and has accordingly disallowed the same. In appeal, the learned CIT(A) has deleted the addition following the earlier appellate order for the asst. yr. 1994-95.

28. In appeal before us, the learned Departmental Representative for the Revenue has relied heavily on the order of AO.

29. In his rival submission, the learned counsel for the assessee has relied heavily on the order of learned CIT(A) and has further submitted that the details in regard to sponsorship expenditure were submitted before the AO and the AO without discussing the same has disallowed such expenditures in a casual manner. It has been submitted by the learned counsel that these expenditures are being incurred on account of sponsorship of games mainly hoardings displayed at the time of games, capitation fees to various sponsors and prize money etc. The learned counsel has submitted that the AO has made the disallowance on mere suspicion and conjecture and without discussing the nature of expenditure incurred by' the assessee. It has been submitted that the advertisements through sponsorship of events are incidental to the business of assessee to promote its product and create public awareness for the product of the company and, therefore, these expenditures are incidental to the business and have been incurred to promote the product of the company and, therefore, are allowable expenditure. In support of his contention, learned counsel has relied on the following case laws:

(1) CIT v. Delhi Cloth & General Mills Co. ;

(2) Asstt. CIT v. Hindustan Marketing & Advertising Co. Ltd. (1994) 49 TTJ (Del) 96;

(3) G.D. Pharmaceuticals Ltd. v. Dy. CIT (1997) 61 ITD 275 (Col).

It has, therefore, been prayed that the advertisement expenses incurred in connection with sponsorship of events arc allowable as revenue expenditure and. therefore, the order of learned CIT(A) in this regard should be upheld.

30. We have given our careful consideration to the rival submissions made before us and have perused the orders of tax authorities. We have also considered the paper book filed by the learned counsel for the assessee and the case laws relied upon. In this case, the AO has disallowed the expenditure observing that these are not incidental to the business of the assessee. However, there is no discussion about the nature of expenditure by the AO, whereas the assessee has submitted details in respect of expenditure incurred by it for sponsorship of events. Now a days it is common to sponsor some sports or events to advertise the products of the company or the company's corporate image itself. It is not in dispute that the assessee had also incurred the expenditure by sponsorship of events/sports for the purpose of advertising its product/corporate image. Such expenditure is the Revenue expenditure incurred for the purpose of business. The AO has not given any cogent reason for disallowing such expenditure. Hon'ble Delhi High Court in the case of Delhi Cloth & General Mills Co. (supra) has upheld the order of the Tribunal allowing the expenditure on football tournament incurred by the assessee. No contrary decision is referred to by the Revenue. In view of the above, considering the facts of the case arid the arguments of both the sides, in our opinion, the CIT(A) has rightly deleted the disallowance of expenditure on sponsorship of the events made by the AO. We uphold the order of the CIT(A) in this regard and reject ground No. 5 of the Revenue appeal.

31. Brief facts relating to ground No. 6 are that the assessee company has claimed a sum of Rs. 1.33 crores as sales promotion expenses included under the head "Advertisement expenditure". On being asked, the assessee submitted that the expenditure was incurred in connection with sponsorship on various events in order to promote its different cigarette brands. However, the AO has observed that the assessee failed to offer satisfactory explanation along with documentary evidence as to how the different promotional expenses were fully incidental to the genuine business needs of the assessee. He has thereafter inferred that atleast 10 per cent of the expenditure incurred by the assessee should be considered for not being incidental to the assessee's genuine business needs and has accordingly disallowed a sum of Rs. 13,30,000.

32. In appeal, the learned CIT(A) has followed the decision of his predecessor for the asst. yr. 1994-95 and has deleted the addition.

33. In appeal before us, the learned Departmental Representative for the Revenue has submitted that the assessee in this case has not been able to place on record necessity of such expenditure and, therefore, in these circumstances, the AO was very reasonable in disallowing 10 per cent of such expenditure, which should have been upheld by the learned CIT(A). The learned Departmental Representative has once again reiterated her submission that the decision of this Tribunal in upholding the deletion made by the learned CIT(A) in case of 1994-95 cannot be relied in the year under consideration as the decision of 1994-95 of this Tribunal was basically rendered considering the fact that special audit was conducted in that year, wherein no special audit has been made for the year under consideration. The learned Departmental Representative in support of her contention has relied on the same decisions relied by her while making ground No. 3 above.

34. In his rival submission, learned senior counsel Shri R.N. Bajoria has defended the order of learned CIT(A) and has submitted that the action of AO in disallowing 10 per cent of such expenditure is totally irrational, illogical and is based on presumption. It has been argued by Shri Bajoria that since the AO has himself accepted that 90 per cent of such expenditure was genuine, the action of AO in doubting and disallowing 10 per cent of expenditure is totally unwarranted and is based on misappreciation of the facts involved in this case, tie has further contended that in all past years, such expenditures have been allowed arid this is not a case of Revenue that the expenditure incurred by the assessee has benefited to a third party other than the business needs of the assessee and, therefore, in the circumstances, the action of learned CIT(A) in deleting the addition by following the order of his predecessor for the asst. yr. 1994-95 is liable to be upheld.

35. We have given our careful consideration to the rival submissions made before us and have perused the orders of tax authorities. We have also considered the paper book filed by the learned senior counsel for the assessee and the case laws relied upon. In this case, the AO has made the addition on the basis of presumption that at least 10 per cent of such expenditure must have been incurred other than business needs of the assessee. However, while disallowing 10 per cent of expenditure, the AO has not brought any material evidence on record to justify the disallowance that such expenditure has resulted benefit to a third party or has not been made by the assessee for its genuine business needs. The assessee has submitted the details of expenditure relating to sponsorship for organizing various events for the promotion of different brands of cigarettes manufactured by it. We also find that the assessee has showed the expenditure of Rs. 172.60 crores on account of advertisement expenses which includes Rs. 133 lakhs as sales promotion expenses as evident from the details of advertisement expenses available at p. 62 of the paper book. We find that the assessee company has made an expenditure on the sponsorship of various events like golf, polo, football, cricket, racing, badminton, etc. for the purpose of advertisement of its product. We have also noted down the fact that the Department has not disputed the identical expenditures in any of the previous year and the auditors have also not pointed out that any such expenses was not related or incidental to the business needs of the assessee and, therefore, in our considered opinion, the action of AO in disallowing 10 per cent of such expenditures without bringing any material evidence on record was not justified and the learned CIT(A) has rightly deleted the addition. We, therefore, uphold the order of learned CIT(A) in this regard and reject the ground raised by the Revenue.

36. Brief facts relating to ground Nos. 7 and 9 by the Revenue are that the assessee has incurred an expenditure of Rs. 12.32 crores on account of repairs to buildings, Rs. 17.29 crores on repairs to machinery and Rs. 13.37 crores on account of repairs to others. The AO from the perusal of details of such expenditures has observed that the repairs to buildings include expenditure of Rs. 1.28 crores for repairs to company flats, whereas repairs to others include expenditure of Rs. 2.43 crores making a total expenditure for repairs to Rs. 3.71 crores. The AO has further noticed that these company flats are exclusively used by the directors and the higher executives of the assessee company as their residence and, therefore, personal element in the expenditure incurred in connection with residential flats could not be ruled out and has accordingly disallowed 1/4th of such claim amounting to Rs. 92,75,000.

37. The AO has further observed that machinery repairs expenditure include charges of Rs. 55 lakhs for reinstallation of Loga machine at the Bangalore factory, which was brought from Saharanpur factory of the assessee. The AO has treated such expenditure in connection with installation of machinery as capital expenditure in view of the decision of the Hon'ble Supreme Court in the case of Sitalpur Sugar Works Ltd. v. CIT and the decision of the Hon'ble Bombay High Court in the case of CIT v. Otis Elevator Co. (I) Ltd. 51 ITR 443 [sic-(1990) 51 Taxman 443 (Bom)]. He has accordingly made the disallowance.

38. In appeal, the learned CIT(A) has deleted the addition following the decision of his predecessor for the asst. yr. 1994-95 in the case of disallowance of Rs. 92,75,000 and has also deleted the addition of Rs. 55,00,000 for reinstallation of the machinery holding that reinstallation of the machinery cannot be held as capital expenditure. The learned CIT(A) has observed that the decision of Sitalpur Sugar Works Ltd. (supra) relied by the AO is not applicable in the present case as the above decision relating to shifting of the entire factory from one place to another, whereas in the present case, the existing machine has been transferred from one factory to another for its efficient utilization.

39. The Revenue is aggrieved with such order of learned CIT(A) and has now come in appeal before us by raising grounds No. 7 and 9 of its appeal.

40. In appeal before us, the learned Departmental Representative for the Revenue has relied on the order of AO and has made the same submission that the decision of the learned CIT(A) and the Tribunal on the same issue for the asst. yr, 1994-95 cannot be relied upon as the decision was rendered by taking into consideration the special audit.

41. In his rival submission, the learned counsel for the assessee has relied heavily on the order of learned CIT(A). It has been contended by Shri Bajoria that so far as the disallowance of Rs. 92,75,000 is concerned, such disallowance was rightly deleted by the learned CIT(A) as the repairs of company flats used for directors and senior executives is a common feature and even otherwise any expenditure on such company flats resulting into benefit to the executives are considered in the hands of executives while determining the value of perquisites and in these circumstances, the action of AO was not correct and the learned CIT(A) was justified in deleting such addition.

42. Shri Bajoria has also defended the order of learned CIT(A) in deleting the addition of Rs. 55,00,000 and has pointed out that the service charges paid to the French company, who had supplied the machines, is not meant for shifting of entire factory and, therefore, the decision of Sitalpur Sugar (supra) by the Hon'ble Supreme Court was not applicable as rightly held by the learned CIT(A) while deleting the addition. It has, therefore, been submitted by Shri Bajoria that the order of learned CIT(A) was correct in holding that reinstallation of plant and machinery could not be held as capital expenditure and such order of learned CIT(A) is liable to be upheld.

43. We have given our careful consideration to the rival submissions made before us and have perused the orders of tax authorities. We have also considered the paper book filed by the learned counsel for the assessed and the case laws relied upon. So far as the disallowance of Rs. 92,75,000 is concerned, the AO in this case has accepted the repair expenditures to the extent of 75 per cent incurred by the assessee on the flats of company and disallowed 25 per cent of such expenditure observing that personal element in the expenditure incurred in connection with residential flats cannot be ruled out. The flats were owned by the assessee company and were utilised by the directors or employees of the assessee company for their residence. The expenditure incurred on the maintenance of the assets (flats) owned by the assessee company cannot be said to be the personal expenditure merely because these assets have been utilised by the directors/senior executives for their residence. When a residential accommodation is provided to the directors/executives of a company, the expenditure incurred thereon would be an allowable expenditure in the hands of that company. It would be perquisite in the hands of the directors/executives. The assessee is a company and any benefit and facility provided to the directors/executives even for their personal benefit cannot be said to be personal expenditure of the assessee company because the company and the employees are two different entities. Such facility, benefit or amenities would be perquisites in the hands of the employees. But so far as the company is concerned, it would be allowable as business expenditure because those facilities or benefits have been provided to the employees to retain their services for the purpose of business of the company. Furthermore, providing such facility to the employees is necessary to attract/retain the skilled and experienced human resources. In view of above, we are of the opinion that CIT(A) was justified in deleting the disallowance of Rs. 92,75,000 made by the AO.

44. Coming to the disallowance of expenditure of Rs. 55,00,000 for reinstallation of a Loga machine, we find that such reinstallation expenditures were incurred in connection with shifting of machinery from Saharanpur and installing the same at Bangalore unit of the assessee. The AO has disallowed such shifting and reinstallation expenses of such machinery treating the same as capital expenditure and by relying on the decision of the Hon'ble Supreme Court in the case of Sitalpur Sugar Works Ltd. (supra). However, the ratio of decision of the Hon'ble Supreme Court in the case of Sitalpur Sugar Works Ltd. (supra) arc not applicable to the facts of the present case as in the case of Sitalpur Sugar Works Ltd. (supra), the expenditures were incurred for shifting of entire factory. Whereas in the present case, the machinery from Saharanpur have been shifted to Bangalore unit and substituting is made for efficient utilization of the machinery apart from the fact that shifting of such machinery from one unit to another for its efficient use has not resulted into any addition in the assets of the assessee company and, therefore, in our considered opinion, such expenditure cannot be treated as capital expenditure and in these circumstances, the learned CIT(A) has rightly deleted the addition. Accordingly, we uphold the order of learned CIT(A) on this ground and reject the ground Nos. 7 and 9 raised by the Revenue.

45. Brief facts relating to the ground No. 8 by the Revenue are that the assessee company has created a provision of Rs. 2,37,67,318 on account of damaged and destroyed stock of cigarettes and debited the same to the P&L a/c. On being asked, it was submitted by the assessee before the AO that it is a policy of the company to destroy the damaged cigarettes from time to time after all formalities for getting approval in connection therewith are completed. Sometimes necessary approvals are not formerly obtained at the end of the year and as a result thereof and in order to keep conformity with the principle of mercantile system of accounting, a provision is created for the unapproved portion of the damaged cigarettes which is reversed at the beginning of the next financial year and subsequently throughout the year, all approved damaged stocks are written off. It was pointed out that even in the immediately preceding financial year, a provision of Rs. 60,61,952 was created for damaged stock and the same was reversed at the beginning of the financial year. The AO, however, not convinced with the explanation by the assessee, has not allowed such provision and after giving credits of Rs. 60,61.952. which was created by the assessee during the year under consideration, has disallowed a sum of Rs. 1,77,05,366 under this head. In appeal, the learned CIT(A) has deleted the addition holding that the necessary provision was made in the books in accordance with the mercantile system of accounting and, therefore, the addition is uncalled for. The Revenue is aggrieved with such order of learned CIT(A) and has now come in appeal before us.

46. In appeal before us, the learned Departmental Representative for the Revenue has assailed such order of learned CIT(A) and has contended that the provision made by the assessee company is absolutely contingent in nature as not ascertainable, which is evident from the fact that the assessee is itself reversing the entry on the very first day of the next financial year. It has been contended by the learned Departmental Representative for the Revenue that the entry made by the assessee on account of such provision is certainly a case of deviation/departure from the established accounting principles and such claim of the assessee is based merely on book entry and, therefore, the provision on account of damaged stock cannot be allowed. In support of her argument, she has relied on the decision of the Hon'ble Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT .

47. In his rival submission, the learned senior counsel for the assessee, Shri R.N. Bajoria has relied heavily on the decision of the learned CIT(A) and has pointed out that the identical issue arose before Tribunal in assessee's own case for the asst. yrs. 1988-89 and 1989-90 in ITA Nos. 3485 and 3486/Cal/1992, order dt. 12th May, 2000, wherein this Tribunal vide para 10 of the order held that when the assessee is following mercantile system of accounting, then the assessee is entitled for liability accrued towards giving the credit to the dealers for such damaged cigarettes. It has been submitted by Shri Bajoria that this is not a case of Revenue that the assessee is either claiming double deduction or of such provision made by the assessee has resulted into any diversion of tax to the immediately following year. It has been submitted that the assessee is following such system of making provision since long and, therefore, the action of AO in making disallowance without considering the merit of the provision by the assessee was highly unjustified and in these circumstances, the learned CIT(A) was correct in reversing such action of AO. It has, therefore, been pleaded that the order of learned CIT(A) be upheld.

48. We have given our careful consideration to the rival submissions made before us and have perused the orders of tax authorities. We have also considered the paper book filed by the learned senior counsel for the assessee and the case law relied upon. From the perusal of material available on record, it appeal's that the AO has disallowed the claim of the assessee on the basis of cash system of accounting, but the assessee is claiming the same on mercantile system of accounting. In this case, there is no dispute regarding the value of damaged cigarettes and the actual dispute is regarding the year in which it has to be allowed, the Department has basically deferred the assessee's claim for deduction in respect to the credit to be given to the dealers on return of damaged stocks by one year, whereas the assessee has claimed the same in the year in which it was sold. We have noted down the fact that it is an undisputed fact that the assessee consistently follows the mercantile system of accounting and, therefore, it has the liability towards giving the credit to the dealers for damaged cigarettes and such liability of the assessee cannot be held as contingent liability. We have also taken into consideration the fact that such provision for damaged stocks has been made by the assessee considering the quantum of sales made by it to the dealers and, therefore, the action of assessee in making provisions for such damaged stocks on the basis of its past experience cannot be held either bogus or contingent in nature keeping in view the fact that the assessee has not made double claim in cases of damaged stocks as evident from the accounting entry passed by it by reversing such provision in the immediately following year.

49. Coming to the case law relied by the learned Departmental Representative for the Revenue in the case of Sutlej Cotton Mills Ltd. (supra), wherein the Hon'ble Supreme Court has held as under:

It is now well settled that the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee may, by making entries which are not in conformity with the proper principles of accountancy, conceal profit or show loss and the entries made by him cannot, therefore, be regarded as conclusive one way or the other. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted profit or loss to the assessee.

Considering the facts involved in the present case, the above ratio laid down by the Hon'ble apex Court rather supports the claim of the assessee as the assessee is following such system of making provision since long and the value and quantity claimed by the assessee has also not been proved as false by the Revenue except deferring such claim by one year and since in the present case, the assessee has not concealed any particulars regarding such damaged stocks and such provision has been made at the end of year which is based on the expected damaged stocks on the sales made by it during the year under consideration. Such action of assessee cannot be held either bogus or illegal in nature keeping in view the fact that the assessee itself reversed such entry in the immediately following year and avails the deduction only which is being claimed by the dealers.

50. We also find that in identical conditions, this Tribunal in assessee's own case for the asst. yrs. 1988-89 and 1989-90 in ITA Nos. 3485 and 3486/Cal/1992 (supra) at para 10 held as under:

We are fully satisfied that when the assessee is following the mercantile system of accounting then the assessee is entitled for the liability accrued towards giving the credit to the dealers for such damaged cigarettes. Such provision of credit liability is duly reflected in P&L a/c which were also audited. Therefore, we set aside the orders of the authorities below and allow the claim of the assessee with respect to the provisions made for the said sum during the assessment years under consideration.

We, therefore, considering the facts and circumstances involved in the case and in the light of above discussion and respectfully following the earlier order of this Tribunal in assessee's own case, do not see any reason to interfere with the order of learned CIT(A) in reversing the action of AO and, therefore, uphold the same and reject the ground No. 8 raised by the Revenue.

51. Ground No. 10 raised by the Revenue relates to disallowance of contribution to PF/pension fund amounting to Rs. 74,06,687 made by the AO observing that such amounts were paid beyond the due date as prescribed in relevant Act and, therefore, contribution is to be disallowed in view of the Section 2(24)(x) r/w Section 36(l)(va) of the Act. The learned CIT(AJ in appeal has deleted such addition observing that the amounts were paid within the due dates as evident from the audit report and, therefore, the disallowance made by the AO was uncalled for.

52. in appeal, the learned Departmental Representative for the Revenue has assailed the order of learned CIT(A) and has submitted that the auditors of the assessee have themselves certified that the amounts debited to the P&L a/c in connection with provision for PF/pension fund were unpaid till 31st March, 1997 and were only paid on or before 30th Sept., 1997. It has been contended by the learned Departmental Representative that so far as the employees' contribution to PF is concerned, due date for payments with the appropriate authority has to be read as mentioned in Section 36(l)(va) and not as per Section 43B. She has pleaded that employer's contributions are also to be paid on or before the due date prescribed in PF/Pension Act and if the assessee fails to pay the same before the due date as prescribed in this Act, the same will be disallowed as held by the Hon'ble Madras High Court in a recent judgment in the case of CIT v. Synergy Financial Exchange Ltd. .

53. In his rival submission, the learned senior counsel Shri R.N. Bajoria has relied heavily on the order of learned CIT(A) and has drawn attention to this Bench on the details of payment of provident/pension fund, gratuity fund and ESI, which are available at p. 93 of the paper book and has pointed out that none of the payments were made beyond the due date (including grace period) as prescribed in those Acts and, therefore, there was no question of any disallowance either under Section 43B(b) or under Section 36(1 )(va) r/w Section 2(24)(10) of the Act. However, he was unable to state that whether such details of payments, which are available at p. 93 of the paper book, were produced before the AO for verification or not.

54. We have heard both the parties and have taken Into consideration the orders of tax authorities. We have also considered the paper book filed by the learned senior counsel for the assessee. So far as the employer's contribution towards PF/pension fund are concerned, these are being dealt under Clause (b) of Section 43B which reads as under:

43B Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of....

(b) any sum payable by the assessee as an employer by way of contribution to any PF or superannuating fund or gratuity fund or any other fund for the welfare of employees.

The assessment year in question before us is 1997-98 during which the second proviso to Section 43B during the relevant period reads as under:

Provided further that no deduction shall, in respect of any sum referred to in Clause (b), be allowed unless such sum has actually been paid in cash or by issue of a cheque or draft or by any other mode on of before the due date as defined in the Explanation below Clause (va) of Sub-section (1) of Section 36, and where such payment has been made otherwise than in cash, the sum has been realized within fifteen days from the due date.

The above second proviso has been omitted by the Finance Act, 2003 w.e.f. 1st April, 2004 and the Special Bench, Chennai in the case of Kwality Milk Foods Ltd. v. Asstt CIT has held that such amendment by the Finance Act, 2003 is retrospective in nature. However, the Hon'ble Madras High Court in the case of CIT v. Synergy Financial Exchange Ltd. (supra), has held that deletion of second proviso would not have any retrospective effect. Hon'ble Gauhati High Court in case of CIT v. George Williamson (Assam) Ltd. has held that such amendment to second proviso to Section 43B is retrospective in nature and therefore this will be applicable to earlier year also. Since there are two decisions one in favour of assessee and another against the assessee, in our considered opinion the view favourable to assessee should be taken as held by Hon'ble Supreme Court in case of CIT v. Vegetable Products Ltd. . We therefore, respectfully following the same hold that employer's contribution are to be allowed, if paid, on or before the due date of filing of return as prescribed in the IT Act.

55. Coming to the employees' contribution, we find that it is governed by Section 2(24)(x) r/w Section 36(1)(va) and not by Section 43B of the IT Act. By virtue of Section 2(24)(x), which reads as under, the employees contribution shall be included in the total income of the assessee:

2(24) 'income' includes--

(x) any sum received by the assessee from his employees as contributions to any PF or superannuating fund or any fund set up under the provisions of the Employees' State Insurance Act, 1948 (34 of 1948), or any other fund for the welfare of such employees;

As per Section 36(1)(va), the assessee will get the deduction for the payment of the employees' contribution made on, or before the due date. This section reads as under:

(va) any sum received by the assessee from any of his employees to which the provisions of Sub-clause (x) of Clause (24) of Section 2 apply, if such sum is credited by the assessee to the employee's account in the relevant fund or funds on or before the due date.

Explanation.--For the purposes of this clause, 'due date' means the date by which the assessee is required as an employer to credit an employee's contribution to the employee's account in the relevant fund under any Act, rule, order or notification issued there under or under any standing order, award, contract of service or otherwise:

55.1 From the combined reading of Sections 2(24)(x) and 36(1)(va), the position emerges that any contribution made by the employees to any PF, superannuation fund, ESI fund or any other fund for the welfare of such employees received by the assessee from his employees shall be deemed to be income of the assessee of the relevant year. However, the assessee will get the deduction therefor under Section 36(l)(va) only if he deposits the sum received from employees before the due date specified under the Act, Rule, Order or Notification governing the funds mentioned above. Thus the provision of Section 43B, which is applicable in respect of employer's contribution, is quite different than the provision of Section 36(l)(va) which is applicable in respect of employees' contribution. So far as the employer's contribution is concerned, as per proviso to Section 43B, the deduction is permissible if the payment is made on or before the due date for filing of the return as specified under Section 139(1) of the IT Act. But in respect of the employees' contribution, the deduction would be permissible only if the payment is made before the due date as provided in the respective Act, Rule, Order or Notification governing such fund, i.e. PF, superannuation fund, ESI fund or any other similar fund for the welfare of the employees. We may mention that the payment made within the grace period permissible under the Act, Rule, Order or Notification of the respective fund would be considered to be payment made within the due date as per Explanation to Section 36(1)(va). By providing the grace period, the competent authority governing the relevant fund permits the employers to make the deposits within such extended time as covered by grace period. Therefore, the payment made within the grace period would be considered to be payment made within due date under the respective Act, Rule, Order or Notification within the meaning of Explanation to Section 36(1)(va).

56. Coming to the facts of the present case, we find that it has been contended by the learned counsel that all the payments either in respect of employer's contribution or in respect of employees' contribution have been made on or before the due date including the grace period. However, it has been contended by the learned Departmental Representative that such details were not furnished before the AO and it would require verification at the end of the AO whether the payment was actually made within due date, as claimed by the assessee. After considering the arguments of both the sides, we deem it proper to restore the matter back to the file of the AO for verification of actual date of payment in this regard and thereafter recalculate the disallowance under Section 43B/36(1)(va), if any, as per our observation above. Needless to mention that the AO will allow adequate opportunity of being heard to the assessee. Accordingly, ground No. 10 of the Revenue's appeal is deemed to be allowed for statistical purposes.

57. Ground No. 11 by the Revenue relates to the deletion of addition of workmen and staff welfare expenses of Rs. 2.5 crores.

58. The assessee in this case has claimed the expenditure of Rs. 22.04 crores under the head "Workmen and staff welfare expenses". The AO while perusing the details observed that these claims included the following expenses:

____________________________________________________________________ |SI.| Nature of expenditure | Amount | |No.| | | |___________________________________________________________________| |1. |Fuel /soft coke for staff and mill workers | 30,00,000| |2. |Management staff social/sports activities |1,55.00,000| |3. |Workers' social and sports activities | 41,00,000| |4. |Cultural/ retiring gifts, long time service awards | 20,00,000| |5. |School fees/ scholarship and educational tours | 4,00,000| |_______________________________________________________|___________| The AO has disallowed the above expenditures observing that the assessee has not been able to explain as to how these expenditures were incidental to the assessee's genuine business needs. In appeal, such disallowance made by the AO was deleted by the learned CIT(A) observing that these expenditures related to the genuine business needs of the assessee and the AO has not been able to bring any material evidence on record to show that the expenditures were either not actually incurred or these were not incurred in connection with the genuine business needs of the assessee. The learned CIT(A) further observed that the identical disallowances were deleted by his predecessor for the asst. yr. 1994-95. The Revenue has disputed such deletion of addition by the learned CIT(A) and has now come in appeal before us.

59. In appeal before us, the learned Departmental Representative for the Revenue has assailed the order of learned CIT(A) and has submitted that the assessee was not under any contract/obligation to incur such expenditures for the employees. She has submitted that the expenditures on employees' social/sports activities were not incidental to the assessee's genuine business needs and, therefore, rightly disallowed by the AO.

60. In his rival submission, the learned senior counsel for the assessee Shri R.N. Bajoria has assailed the above submission of the learned Departmental Representative for the Revenue and has pleaded that the agreement with the workers were duly filed before the AO, a copy of which is also available at Annex. 19 of the paper book. It has been contended by the learned counsel that the cultural/social activities by the employees, tour and travelling are incidental to every business to keep the morality of the workers high for achieving the targeted goals. It has been submitted that the books of accounts of the assessee are audited and there is no justification to make an ad hoc or lump sum disallowance without bringing any material facts on record. He has stated that all the expenses were incurred for the welfare of employees and for organizing the sports and cultural activities, which are meant for the purpose of maintaining healthy and cordial relation with them. The learned senior counsel has also relied on the latest decision of the Hon'ble Special Bench, Chandigarh in the case of Punjab State Industrial Development Corporation Ltd. v. Dy. CIT (2006) 103 TTJ (Chd) (SB) 364 : (2006) 102 ITD 1 (Chd) (SB), wherein it was held that when the expenditure has been incurred by the assessee purely on commercial consideration, the same has to be allowed. It has, therefore, been pleaded that the order of learned CIT(A) be upheld.

61. We have given our careful consideration to the rival submissions made before us and have perused the orders of tax authorities. We have also considered the paper book filed by the learned senior counsel for the assessee and the case laws relied upon. The assessee in this case has claimed these expenditures for organizing employees social and sports activities, cultural/retiring gifts, long time service awards, school fees/scholarship and educational tours expenses. The AO has disallowed these expenditures holding that same are not incidental to the business needs of the assessee. However, this is also not a case of revenue that the expenditures were either not incurred or if incurred then were incurred for other than business purpose or for acquiring any assets. From the details of such expenditures, it is evident that these expenditures were incurred for the purpose of maintaining healthy and cordial relationship with the staff and workers of the assessee company, which in turn result in earning high profit and efficiency of the resources. The. reimbursement of fuel/soft coke for staff and mill workers has also been made as per contractual agreement with the staff and hence, purely incidental to the business.

62. We, therefore, on the basis of aforesaid facts and documents placed on record, are of the opinion that such expenditures were necessary for commercial expediency and, therefore, are to be allowed as held by the Hon'ble Supreme Court in its landmark decision in the case of Shahzada Nand & Sons v. CIT , which has been followed by the Hon'ble Special Bench, Chandigarh in the case of Punjab State Industrial Development Corporation Ltd. (supra), for the facility of reference the relevant portion of the Hon'ble apex Court is reproduced as under:

Commercial expediency must be tested in the context of current socio-economic thinking--commercial expediency must be Judged not in the light of the 19th century laissez faire doctrine which regarded man as an--economic being concerned only to protect and advance his self-interest but in the context of current socio-economic thinking which places the general interest of the community above the personal interest of the Individual and believes that a business or undertaking is the product of the combined efforts of the employer and the employees and where there is sufficiently large profit, after providing for the salary or remuneration of the employer and the employees and other prior charges such as interest on capital, depreciation, reserves, etc. a part of it should in all fairness go to the employees.

We, therefore, considering the facts and circumstances and relying on the above discussion, are of the opinion that the expenditures incurred by the assessce were necessary for commercial expediency and hence were incidental to the business needs and in these circumstances, the learned CIT(A) was justified in deleting the addition made by the AO. We, therefore, uphold the order of learned CIT(A) and reject the ground No. 11 raised by the Revenue.

63. Ground No. 12 raised by the Revenue relates to the disallowance of Rs. 7,67,40,000 under the head "Miscellaneous expenses", which was comprised of the following:

_______________________________________________________________________ | | Rs. | |_______________________________________________________|_____________| |(a) Social responsibility (public relation) | 2,26,00.000| |(b) Souvenir advertisement | 5,00,000| |(c) Garden expenses | 52,00,000| |(d) Residential expenses | 2,89,00,000| |(e) Sponsorship expenses | 21,00.00,000| |(f) Research and development | 7,00,000| |(g) Tobacco cultivation expenses | 32,00,000| |(h) Machine shifting expenses | 41,00,000| |(i) Salaries for Hotel Searock, Mumbai | 2,46,00,000| |(j) Music CC TV Charges (Hotels) | 10,00,000| |(k) Guest compensation charges | 1,00,000| |(1) Brokerage and commission | 1,00,000| |(m) Visitors expenses | 16,00,000| |(n) Sundries | 80,50,000| |_______________________________________________________|_____________| The AO has disallowed the above expenditure holding that either the above expenditures were not incidental to business or assessee did not produce any documents or evidences in support of the expenditures incurred by it. The AO in respect of the expenditures incurred as mentioned in A, B, C, E, J and M has observed that these expenditures are not related and incidental to the business of the assessee, whereas he has disallowed 10 per cent of residential maintenance expenses on the ground that personal expenses cannot be ruled out. Regarding expenditures as mentioned in F, G, K, L and N, the AO has disallowed the expenditures observing that relevant evidences were not filed before him by the assessee. The AO has also disallowed the machine shifting expenses considering the same as capital expenditure and has also disallowed salaries paid for Hotel Searock, Mumbai observing that the same cannot be allowed as the said hotel was not at all operational during the year under consideration.

64. In appeal, the learned CIT(A) has deleted the addition observing that the AO has not made any effort to establish that either the expenses were not incurred or if incurred these were not related to genuine requirement of the business of the assessee and disallowances have been made on mere surmises and conjectures. The learned CIT(A) has held that these expenses were incidental to the genuine needs of the assessee's business and identical additions made in earlier years have been deleted by his predecessors. The CIT(A) thereafter following the ratio laid down by the Hon'ble Supreme Court in the case of Dhakeswari Cotton Mills Ltd. v. CIT (1954) 26 ITR 775 (SC) has deleted the addition made by the AO.

65. The Revenue is aggrieved with such order of learned CIT(A) and has now come in appeal before us.

66. Smt. Pallavi Agarwal, learned Departmental Representative for the Revenue has relied heavily on the observation of AO while disallowing the above expenditures. It has been contended by her that either the assessee did not furnish the details asked for by the AO or the claims made by the assessee were not allowable as these were not incidental to the genuine business needs of the assessee. It has been pleaded by the learned Departmental Representative that since the assessee has not produced relevant details asked by the AO and has also not been able to explain the necessity of such expenditure for its business, the AO in these circumstances, had no option but to make the above disallowances.

It has, therefore, been pleaded by her that the order of AO be restored by setting aside the order of learned CIT(A).

67. In his rival submission, senior advocate Shri R.N. Bajoria, learned counsel for the assessee has relied heavily on the order of learned CIT(A) and has pleaded that all these expenditures were incidental to the business of the assessee. He has submitted that the expenditures in respect of social responsibility were made for maintenance of traffic island, road-side railings etc. which enhances the goodwill of the company and as such is an allowable expenditure. Arguing on advertisement expenses, the learned senior counsel has submitted that the advertisements in souvenirs are allowable as revenue expenditure in view of the Circular No. 200 dt. 28th June, 1976 [1976 CTR (Joam) 460} issued by the CBDT. Shri Bajoria has pointed out that the garden expenses were incurred for garden maintenance in the factory and office premises, which is purely business expenditure. Pleading for residential expenses, Shri Bajoria has stated that maintenance of residential complex at various units for providing security, electricity, water, repair and maintenance are purely incidental to the business and even otherwise, these expenses constitute perquisites in the hands of the employees and, therefore, no question arises in considering the same in the hands of the assessee. Shri Bajoria has then pleaded that the sponsorship expenses for organizing various social and cultural events to promote its-products and for creating public awareness are allowable expenditure in view of the decision of the Hon'ble jurisdictional High Court in the case of G.D. Pharmaceuticals Ltd. (supra).

68. Shri Bajoria has thereafter submitted that the other expenditures also such as research and development expenses, tobacco cultivation expenses, machine shifting expenses, music CC IV charges provided in the guest room in the hotel, guest compensation, brokerage and commission and other miscellaneous expenditures are incidental to the business activity of the assessee and the AO should have allowed the same. Arguing on salaries for Hotel Searock, Shri Bajoria has submitted that the AO had disallowed such salaries paid to Hotel Searock's staff without checking that the hotel was operating during the year under consideration and which is evident from the expenditure tax paid by the hotel.

69. Concluding his argument, Shri Bajoria has submitted that the entire order of AO in making disallowance under this head is without referring to any evidence or any material evidence on record and the AO has made addition on the basis of pure guess and surmises which are not legally sustainable and, therefore, these have rightly been deleted by the learned CIT(A). It has, therefore, been pleaded that the order of learned CIT(A] be upheld.

70. We have considered the rival submissions of the parties and perused the material placed before us. As stated in para 63 above, the AO disallowed total sum of Rs. 7,67,40,000 under the head "Miscellaneous expenses", which comprised of several expenses claimed by the assessee as business expenditure.

Social responsibility (public relation)--Rs. 2,26,00,000:

70.1 The AO disallowed the expenditure alleging that the same was not incidental to the assessee's business. It has been explained by the assessee's learned counsel that to maintain the goodwill of the company, the assessee had incurred this expenditure for the maintenance of traffic island, road-side railings, public toilets etc. We find substantial force in the arguments of the learned counsel. Now a days it is a common incidence that the company sponsors and takes responsibility towards beautification of the city to maintain its corporate image which ultimately help the company to advertise its products. Such expenditure is of revenue nature incurred for the purpose of its business. By incurring expenditure on some social obligation, the assessee ultimately was able to advertise its products at public places and this type of expenditure has definitely relevance with the company's business policy and incidental to the business to promote its product and create public awareness for the product of the company. The AO did not dispute the genuineness of expenditure incurred by the assessee. He has not given any cogent reason for disallowing this expenditure, except making general observation that it was not incidental to the assessee's genuine business needs. It was also not the case of the AO that the assessee could not furnish relevant details/evidence in support of incurring such expenditure. In view of the above, considering the facts of the case and the arguments of both the sides, in our opinion, the CIT (A) has rightly deleted the disallowance of expenditure on social responsibility made by the AO. We, therefore, uphold the order of the CIT(A) on this issue.

Souvenir advertisement-Rs. 5,00,000 70.2 Here also the AO disallowed the expenditure holding that souvenir advertisements were basically donation In nature. In ground No. 6 of this Revenue's appeal, the Department agitated deletion of addition on account of advertisement expenses. For the detailed discussion made above in paras 31 to 35 of this order, we find no reason to interfere with the order of the CIT(A) on this issue. Apart from that, we find by virtue of Circular No. 200 dt. 28th June, 1979 of CBDT, the claim in respect of expenditure on advertisements in souvenirs is to be allowed if there is evidence that the expenditure has been actually incurred. The AO in this case did not raise any question about non-furnishing of evidence in support of the claim. The Hon'ble Bombay High Court in the case of Century Spinning & Manufacturing Co. Ltd. v. CAT ( has held that the expenditure for advertisement in souvenir is not disallowable in view of CBDT Circular No. 200 dt. 28th June, 1979, which is binding on IT authorities in view of Section 119 of the Act. In view of the above, we hold that the addition made by the AO on this account was unwarranted and the CIT(A) has rightly deleted the same.

Garden expenses--Rs. 52,00,000 70.3 The AO treated the expenditure as inadmissible as according to him the garden expenses have no connection with the assessee's business. As explained by the assessee, garden expenses were incurred for maintenance of garden in the factory and office premises, which are purely business expenditure. It is a common factor that business houses and even small establishment put efforts to keep their working place attractive with a view to exhibit their image acceptable to their employees and public at large, which also helps the company to maintain its corporate image. For beautification of the business premises, gardening is the first choice. Therefore, it cannot be said that these expenses arc not related to assessce's business. In view of the above, we are of the opinion that the CIT(A) has rightly deleted the addition in absence of any contrary material being brought on record by the AO.

Residential expenses--Rs. 2,89,00,000 70.4 The assessee incurred expenditure on security, water, sewage, electricity, etc. for its residential complex at various units. The AO on the ground that personal element in the expenditure cannot be ruled out disallowed on estimate 10 per cent of the said expenditure which came to Rs. 2.89 crores. The residential complex owned by the assessee company at its different units were utilised by its directors or employees for their residence. The expenditure incurred on the security, water supply, electricity, etc. in connection with those accommodation cannot be said to be the personal expenditure merely because these residential accommodations have been used for personal need of the director/employees of the assessee company. It would be in that case perquisite in the hands of the directors/executives. The assessee is a company and any benefit and facility provided to the directors/executives even for their personal benefit cannot be said to be personal expenditure of the assessee company because the company and the employees are two different entities. Such facility, benefit or amenities would be perquisites in the hands of the employees. But so far as the company is concerned, it would be allowable as business expenditure. Further, we have already dealt with similar issue raised in grounds No. 7 and 9 of this appeal in paras 36 to 44 above and we have for the reasons stated therein deleted the partial disallowance of expenditure made by the AO. In view of the above, we hold that the AO was not justified in making partial disallowance of 10 per cent of the expenditure incurred on residential expenses and the CIT(A) has thus rightly deleted such disallowance, which we uphold.

Sponsorship expenses--Rs. 21,00,00,000 70.5 The assessee incurred expenditure and claimed deduction of Rs. 21 crores in connection with various social and cultural events organised by it to promote its product and for creating public awareness as allowable expenditure. The AO disallowed the same observing that the assessee failed to establish as to how this expenditure was genuinely incidental to its business needs. However, there is no discussion about the nature of expenditure by the AO, whereas the assessee has submitted details in respect of the same. While adjudicating ground No. 5 in paras 27 to 30 above, we have held that now a days it is common to sponsor some sports or events to advertise the products of the company or the corporate image itself. Such expenditure is revenue in nature and hence allowable. This finding of ours gets support from the decisions of Hon'ble Delhi High Court in the case of Delhi Cloth & General Mills Co. (supra). In view of the above, in our opinion, the CIT(A) has rightly deleted the disallowance of expenditure on sponsorship of social and cultural events. We, therefore, uphold his order on this issue.

(f) Research and development--Rs. 7,00,000 70.6 The AO found that the assessee claimed this expenditure to have been incurred in connection with research work at Bangalore and Rajahmundry. He disallowed the same holding that the assessee could not furnish evidence in support of the research work conducted by the assessee. We have heard the parties and perused the material placed before us. It is not disputed that the assessee company was having research units at Bangalore and Rajahmundry where research and development work is carried out. The allegation of the AO that the assessee could not establish that research work was being carried out in those research centres, in our considered opinion, is vague. When it is not disputed that the assessee has been maintaining two research units in two different places, then the natural conclusion in the absence of any evidence to contrary should have been that work for which these units are run must have been carried out. Therefore, when the existence of the research units are not disputed, the expenditure incurred thereupon cannot be said to be inadmissible as non-business expenditure. In view of the above, we uphold the deletion of addition of Rs. 7.00,000 and sustain the order of the CIT(A) on this issue.

(g) Tobacco Cultivation expenses--Rs. 32,00,000 70.7 According to the assessee, this expenditure had been incurred by its leaf tobacco division for promotion of tobacco cultivation. The AO observed that the expenditure was in the nature of aid given to the local tobacco farmers. In absence of evidence regarding the help rendered, the AO disallowed the claim. According to the assessee, this expenditure was incidental to the business activity of the assessee and the AO should have allowed the same. From the observation of the AO it. is evident that he did not dispute the expenses incurred but he disputed the nature of expenses as aid to the farmers. For manufacturing cigarettes the assessee required tobacco leaf. Therefore, if any expenditure is incurred for promotion of tobacco leaf cultivation by the farmers, the same was related to the assessee's business of production of cigarettes. In view of the above, we are of the opinion that the CIT(A) has rightly deleted the disallowance of Rs. 32 lakhs on this account, which we uphold.

(h) Machine shifting expenses--Rs. 41,00,000 70.8 The assessee incurred expenses of Rs. 41 lakhs for shifting of cigarette business machinery from one factory to another. It was explained by the assessee's learned counsel that this represented the expenses of freight, insurance etc. incurred by the factories in connection with the movement of the idle machinery for their efficient utilisation and hence the same is allowable under the provisions of the IT Act. We have heard the parties and perused the material placed before us. The jurisdictional High Court in the case of CIT v. Karanpura Development Co. Ltd. has held that shifting of machinery from one factory premises to another factory premises did not result in any enduring benefit to the assessee arid the expenditure cannot be treated as capital in nature. The assessee has also filed a copy of order of Tribunal. Kolkata Benches in the case of the assessee for asst. yr. 1991-92 in 1TA No. 157/Cal/1996, order dt. 30th April, 2001, which is placed at pp. 49 to 67 of the paper book. In that order, the Tribunal on pp. 13 and 14 (pp. 61 to G3 of the paper book) after detailed discussions and deliberations upheld the order of the CIT(A) in deleting the addition made on this account by the AO. Facts and circumstances being identical, we respectfully following the decision of Hon'ble jurisdictional High Court in the case of Karanpura Development Co. Ltd. (supra) and the said order of the Tribunal do not find any reason to differ with the deletion of disallowance made by the CIT(A) on this issue. We uphold the same.

(i) Salaries for Hotel Searock, Murnhai--Rs. 2,46,00,000 70.9 During the year under appeal, the assessee incurred expenditure on salaries for Hotel Searock, Mumbai and claimed the same as deduction. The AO treated the said expenditure as inadmissible observing that the hotel suffered huge damages due to a bomb blast in earlier year. Repairs of this hotel were still in progress during the relevant accounting year and hence the said hotel was not at all operational. The learned counsel submitted that the AO disallowed the expenditure without checking with the assessee whether the hotel was operating. Referring to pp. 100 to 110 of the paper book, the learned counsel submitted that these documents will prove that the hotel was operating and Ihe hotel was also paying expenditure tax in respect of sales of this hotel. Therefore, the disallowance was unjustified. We have heard the parties and perused the material placed before us. The assessee's accounts are audited. On p. 100 of the paper book, the assessee has submitted the details of sales/income of the hotel for the year ended 31st March, 1997, relevant to assessment year under appeal, which is duly certified by the auditor. This page reflects the total sales/income of Rs. 11,94,142. Pages 101 to 103 of the paper book are copies of return of expenditure and statement of chargeable expenditure. Pages 104 to 110 show break-up of month-wise chargeable expenditure, expenditure tax collected and deposited to Government. On perusal of these documents, it is clearly established that the assessee's hotel at Mumbal was in running and in operational condition during the assessment year under appeal. Therefore, the AO's observation that the hotel was under repair and non-operational during the year is not based on any evidence on record. In view of the above, we are of the opinion that the expenditure incurred by the assessee on salaries for Motel Searock, Mumbai was genuine and hence allowable. We, therefore, uphold the order of the CIT(A) in deleting such disallowance made by the AO. We direct accordingly.

(f) Music CC TV charges (Hotels) - Rs. 10,00,000

(k) Guest compensation charges - Rs. 1,00,000 70.10 The assessee claimed the said expenditure incurred in its running hotel business. The AO found the claim of the assessee to be non-incidental in nature and hence disallowed the same. The CIT(A) allowed the claim of the assessee. The assessee's learned counsel submitted that the AO mistakenly disallowed these expenses on the assumption that it is not incidental to the assessee's business. The assessee is engaged in hotel business and such expenditure was incurred in hotel in the normal course. Music and colour T.V. are provided in all the rooms in the hotel and expenses were incurred for smooth operation of these electronic equipments. In regard to guest compensation charges, it was submitted that compensation to hotel guests is occasionally paid for routine issues like quality of food etc. It was further submitted that the above expenses were very small and an insignificant fraction of the turnover. Therefore, disallowances made by the AO were unjustified.

We have heard the rival contentions of the parties and perused the material placed before us. So far expenditure claimed under the head 'Music CC TV charges (Hotels)' is concerned, providing of these articles in the rooms of the hotel, in our considered opinion, would be capital in nature. Therefore, the claim of the assessee for allowance of this expenditure as business expenditure cannot be accepted. We, therefore, reverse the order of the CIT(A) and sustain the addition of Rs. 10,00,000 in this regard. At the same time, however, we direct the AO to allow depreciation on such Music CC and TV as per law.

In regard to expenditure on guest compensation charges, we find substantial force, on the facts and in the circumstances of the case, in the submission of the assessee's learned counsel. In view of the above, we do not find any reason to interfere with the order of the CIT(A) on this issue. The deletion of addition of Rs. 1,00,000 on this account is, therefore, upheld. We direct accordingly.

(1) Brokerage and commission--Rs. 1,00,000

(m) Visitors' expenses--Rs. 16,00,000 70.11 The AO disallowed expenditure on brokerage and commission of Rs. 1,00,000 in absence of relevant confirmation. In regard to visitors' expenses, the AO alleged that commercial expediency of this expenditure could not be established by the assessee. The learned counsel submitted that brokerage and commission cover brokerage paid to agents for obtaining houses for employees to be provided by the assessee. The visitors' expenses cover expenses incurred in connection with visit of various VIPs to the assessee's offices/units. It was also pointed out that expenditure on entertainment had already been offered for tax in pursuance of the tax audit report and hence there cannot be double disallowance. It was further submitted that these expenses were routinely incurred at various offices/locations and the same being Incidental to business is allowable expenditure. We find that during the year under appeal, the assessee had incurred expenditure of Rs. 1 lakh on payment of commission and brokerage for searching out accommodation for the employees to be provided by the assessee. Considering the smallness of the expenditure and the fact that providing accommodation to the employees by the assessee is not questioned, the related expenditure thereon cannot be disallowed. In view of the above, we uphold the order of the CIT(A) on this issue in deleting the disallowance of Rs. 1,00,000. In regard to visitors' expenses of Rs. 16 lakhs, the assessee being a big industrial house, being one of the highest tax payers in the State of West Bengal, is visited by several VIPs and other business personalities and as a matter of natural courtesy, the assessee has to incur some expenditure on those visitors to maintain its goodwill and reputation in the business field. This is related to its running of the business. The AO did not dispute incurring of the said expenditure. His only stand was that of lack of commercial expediency, which in our opinion is not correct. We, therefore, find no reason to uphold the said disallowance, which is deleted.

(n) Sundries--Rs. 80.50,000 70.12 The AO for want of verification of details duly supported by evidences disallowed to the extent of 1/10th of the total expenditure claimed under this head of Rs. 8.05 crores, which came to Rs. 80,50,000, which was deleted by the CIT(A). The assessee's learned counsel submitted similar expenditure has been allowed in past years by the CIT(A) and also by the Tribunal in the assessee's own case for asst. yrs. 1988-89 and 1989-90. We find that the assessee has not been able to produce the bifurcation of such expenditure either before the Revenue or even before us. In these circumstances, the CIT(A) was not justified in deleting the addition entirely and hence some disallowance under this head is called for. Though the AO has made a disallowance of Rs. 80,50,000, i.e. 10 per cent of total sundry expenses at Rs. 8.05 crores. but such disallowance is also on higher side considering the volume of turnover of the assessee. We, therefore, restrict the disallowance to 5 per cent. The disallowance is thus sustained at Rs. 40,25,000 and the assessee will get relief of Rs. 40,25,000. We direct accordingly.

71. Now we take up the ground No. 13 raised by the Revenue. At the time of hearing, the Revenue has sought to modify the ground No. 13 and has filed the modified ground of appeal which reads as under:

That on the facts and circumstances of the case the Hon'ble CIT(A) has erred in deleting addition by the AO of Rs. 4.78 crores on account of advancing interest free loans to subsidiaries.

72. The learned counsel for the assessee had no objection to the modification of ground No. 13 by the assessee. Accordingly, we consider and take up modified ground No. 13 for adjudication.

73. Brief facts relating to this ground are that the AO has disallowed the interest of Rs. 4,78,20,000 by calculating notional interest at the rate of 18 per cent per annum on loans to subsidiaries observing that interest-free advances were made to the subsidiaries out of borrowed funds. In appeal before the learned CIT(A), it was submitted by the assessee that the loans to the subsidiaries were given out of the assessee's own fund and the AO has simply notionally disallowed interest on such loans on the ground that interest was also disallowed in earlier years. It was submitted before the learned CIT(A) that the identical disallowance was deleted by this Tribunal in asst. yrs, 1988-89 and 1989-90. The learned CIT(A) after considering the submission of the assessee and following the decision of this Tribunal has deleted the addition made by the AO.

74. In appeal before us, the learned Departmental Representative for the Revenue has assailed the order of learned CIT(A) and has submitted that the learned CIT(A) while deleting the addition has merely followed the earlier decision of this Tribunal for the asst. yr. 1988-89. It has been pleaded that the Tribunal while allowing relief to the assessee has basically observed that the onus was upon the Department to prove that the borrowed funds were utilised for advancing interest-free loans to its subsidiaries. Learned Departmental Representative has stated that such observation of Tribunal does not hold good in view of the latest decision of the Hon'ble Punjab & Haryana High Court in the case of CIT v. Abhishek Industries Ltd. and the decision of the Third Member (Chennai Tribunal) in the case of Kumaragiri Textiles Ltd. v. Dy. CIT (2006) 103 TTJ (Chennai) (TM) 805 : (2006) 100 ITD 57 (Chiennai) (TM). It has, therefore, been submitted that the order of AO be restored.

75. In his rival submission, the learned counsel for the assessee has heavily defended the order of learned CIT(A) and has pointed out that the learned CIT(A) has deleted the addition following the earlier decision of this Tribunal in assessee's own case and such order of Tribunal was based on the various decisions of the Hon'ble Calcutta High Court. It has been pointed out by Shri Bajoria that the Hon'ble Calcutta High Court in a recent judgment in the case of CIT v. Britannia Industries Ltd. has also decided the similar issue in favour of the assessee. Learned counsel has pleaded that the assessee company has sufficient own funds to advance the same to its sister concern and has stated that the profit of the company during the year itself is in hundred crores where the loans to subsidiaries arc even less than Rs. 50 crores.

76. It has also been stated by Shri Bajoria that the decision of the Hon'ble Punjab & Haryana High Court in the case of Abhishek Industries Ltd. (supra) relied by the learned Departmental Representative does not hold good in case of the assessee, as the Hon'ble Punjab & Haryana High Court in its order has disagreed with the decision of the Hon'ble Calcutta High Court in the case of Britannia Industries Ltd. (supra). It has been submitted that since the jurisdictional High Court has decided the case in favour of assessee and the facts and circumstances of the case are identical as were involved in the case of Britannia Industries Ltd. (supra), the order of the learned CIT(A) in deleting the addition made by the AO should be upheld.

77. We have given our careful consideration to the rival submissions made before us and have perused the orders of tax authorities. In this case, the assessee company has made following interest-free loans to its wholly subsidiary companies:

              (i)M/s Sumit Investments Ltd.      19.3 crores
            (ii)M/s Pinnacle Investments Ltd.  15.0 crores
            (iii)M/s Sage Investments Ltd.     11.0 crores

The AO has disallowed notional interest by calculating 18 per cent per annum on such loans to subsidiaries observing that, the borrowed funds were utilised to advance interest-free loans to the sister concern. The observation of AO is based on the facts that such advances were made out of cash credit account maintained by the bank. The assessee has pleaded that it had sufficient own fund to make interest-free loans to its subsidiaries and has also submitted that such advancement of interest-free loans to the subsidiaries is a regular feature in ease of assessee company and this Tribunal after considering the various Judgments of the Hon'ble Calcuta High Court has decided the issue in favour of assessee.

78. The learned Departmental Representative for the Revenue in support of his contention has relied on the judgment of the Hon'ble Punjab & Haryana High Court in the case of Abhishek Industries Ltd. (supra) and the decision of the Hon'ble Tribunal, Third Member Court in the case of Kumaragirt Textiles Ltd. (supra). However, the decision of the Hon'ble Punjab & Haryana High Court in the case of Abhishek Industries Ltd. (supra) is not applicable to the present case as while deciding the issue the Hon'ble Punjab & Haryana High Court has disagreed with the decision of the Hon'ble jurisdictional High Court in the case of Britannia Industries Ltd., whereas the Hon'ble Calcutta High Court in almost identical facts in case of Britannia Industries Ltd. decided the issue in favour of assessee by holding as under:

From the above discussion, we find in relation to each assessment years involved in this appeal that the recipient of interest-free loan was not a firm of relatives; the advance was made for the purpose of business within the meaning of Section 36(1)(iii); that there was regular course of business between the assessee and the firm; and that the advances were made to MCAP in the regular course of business; such advances were made in the course of business for commercial expediency and for the purpose of business; the findings arrived at by the learned Tribunal were not perverse; the entire expenditure was made from the mixed account; therefore, there would a presumption that the amount was made out of the own fund of the assessee and not from the borrowed capital; that there were sufficient funds and that the advances were made from the mixed account. Therefore, the CIT(A) and the learned Tribunal both were right in presuming that the advance was made out from the assessee's own fund eligible for the benefit of Section 36(1)(iii).

79. Apart from the above judgment, we find that the Hon'ble Supreme Court in a recent judgment in the case of S.A. Builders Ltd. v. CIT has held as under:

To consider whether one should allow deduction under Section 36(1)(iii) of interest paid by the assessee on amounts borrowed by it for advancing to a sister concern, the authorities and the Courts should examine the purpose for which the assessee advanced the money and what the sister concern did with the money. That the borrowed amount is not utilized by the assessee in its own business but had been advanced as interest-free loan to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits.

Once it is established that there was nexus between the expenditure and purpose of the business (which need not necessarily be the business of the assessee itself) the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman.

80. In the present case, admittedly advances were made to sister concern out of cash credit account with the bank but the AO in this case has not made a case that these advances were not made in the course of business for commercial expediency and for the purpose of business whereas the assessee is making such interest-free advance to its sister concern since long during the regular course of business. The assessee has also disclosed a profit of more than hundred errors, which justify the claim of the assessee to have made advance out of own fund and, therefore, the other case law relied by learned Departmental Representative in case of Kumaragiri Textiles Ltd. (supra) also does not support the action of AO as in that case, the assessee failed to establish that it had sufficient own fund to advance interest-free loan to sister concern.

We, therefore, considering the facts and circumstances of the case, are of the opinion that the Revenue in this case has failed to make a case that borrowed funds were utilised for advancing interest-free loan to sister concern whereas the assessee company has duly exhibited as to the availability of own fund to enable it to make interest-free advance to its sister concern during the course of its normal business. The facts of this case are identical to the facts of the case of Britannia Industries Ltd. (supra), which has been decided in favour of assessee by the Hon'ble jurisdictional High Court. We, therefore, do not see any reason to interfere with such order of learned CIT(A) in deleting the addition and accordingly uphold the same and reject ground No. 13 of Revenue.

81. The Revenue has modified the ground No, 14 which reads as under:

On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the addition of Rs. 13,28,09,673 made under Section 40A(2)(a) of the IT Act, 1961 without appreciating that arm's length principle had been violated in this transaction.

82. The learned senior counsel for the assessee has not pressed any' serious objection on such modified ground No. 14 and after hearing both the parties such application for modification of ground No. 14 is accepted.

83. Brief facts relating to this ground are that the assessee company has made substantial purchases of tobacco from its fully owned subsidiaries viz. M/s All India Tobacco Co. Ltd. (in short A1TC) and M/s Elan Enterprises Ltd. (in short EEL). The assessee purchased tobacco of 87,07,939 kgs. valued at Rs. 60,20,23,738 from M/s AITC and tobacco of 29,62,211 kgs. valued at Rs. 20,41,64,531 from EEL. The AO observed that purchases of tobacco from outside dealers during the month of April, 1996 to March , 1997 is as under:

_____________________________________________________________________ |Month | Quantity | Value (Rs.) | Rate/Kg. (Rs.) | | | (Kg.) | | | |______________|_______________|_________________|___________________| |April 1996 | 8,32,600 | 4,38,23.562 | 52.63 | |May, 1996 | 16,60,600 | 8,47,74,205 | 51.05 | |June, 1996 | 11,03,200 | 5,27,99,683 | 47.86 | |July, 1996 | 8,01,000 | 10,17,13,309 | 126.98 | |Aug., 1996 | 2,71,800 | 1,69,73,082 | 62.45 | |Sept., 1996 | 47,145 | 28,11,473 | 59.63 | |Oct., 1996 | - | - | - | |Nov., 1996 | - | - | - | |Dec., 1996 | - | - | - | |Jan., 1997 | - | - | - | |Feb., 1997 | 2,14,080 | 1,51,98,760 | 71.00 | |March, 1997 | 6,87,008 | 6,02,20,358 | 87.66 | | |____________ |______________ | | | | 56,17,433 | 48,00,27,741 | | |______________|_______________|_________________|___________________| Whereas purchases from M/s AITC during the month of September, 1996 and January,1997 are as under:

_____________________________________________________________________ | Month | Quantity | Value(Rs.) | Rate/Kg.(Rs.) | | | (Rs.) | | | |_____________|_______________|_________________|___________________| |Sept., 1996 | 12,87,104 | 9,0732,370 | 70.49 | |Jan., | 74,20,835 | 51,12,91,368 | 68.90 | |_____________|_______________|_________________|___________________|

84. The AO observed that. M/s EEL had opening stock of raw material valued at Rs. 62.52 per kg. and noticed that the purchases from M/s EEL were made in May, 1996 at Rs. 68.92 per kg. comparing to purchase from outsiders of such tobacco at Rs. 51.05 per kg. The AO has accordingly observed that the assessee company has purchased tobacco from its subsidiaries at a higher rate than the prevailing rate in the market during the relevant period and has worked out the excess payment to its subsidiaries at Rs. 13,28,09,673 and has disallowed the same by invoking the provision of Section 40A(2)(a) of the Act. In appeal, the learned CIT(A) has deleted such addition following the decision of his predecessor in case of asst yr. 1994-95 and has held that there is no tax evasion by the assessee company and there were bonafide transactions with the subsidiaries which do not attract the provisions of Section 40A(2).

85. In appeal before us, the learned Departmental Representative Shri Raja Ram Shah has assailed the order of learned CIT(A) and has submitted that the facts of the present case are different than decided by the learned CIT(A) in case of 1994-95 and upheld by the Hon'ble Tribunal. It has been submitted that the AO in earlier years has held such transactions with subsidiaries as sham transaction, whereas in the present case, the AO has not considered the transactions with subsidiaries as sham transaction but has disallowed the payment by invoking the provisions of Section 40A(2)(a). The learned Departmental Representative has further stated that in asst. yr. 1994-95, the assessee company had also made sales to its subsidiary companies, whereas no sale to its subsidiaries has been made in this year by the assessee company and, therefore, the facts of the present case are altogether different than the facts involved in case of asst. yr. 1994-95. The learned Departmental Representative has thereafter relied on the observation of AO while disallowing the payment made to subsidiaries and has contended that from the perusal of observation of AO, it is evident that the assessee company has paid excess amount on the purchases made from its subsidiaries. It has been stated that from the facts and figures mentioned by the AO in assessment order, it is apparent that the assessee company paid higher amount for the purchases of raw materials from its subsidiaries, whereas raw materials at cheaper rate were available with outsider sellers. The learned Departmental Representative has pointed out that since the AO in this case has established that excess payments were made by the assessee to its subsidiaries against purchase of material, it was the onus, of the assessee to establish the reasonableness of such payment. Since the assessee failed to explain the reason for such excess payments to its subsidiaries, the AO has rightly made the disallowance. In support of his plea, the learned Departmental Representative has relied on the following decisions:

(i) Khan Carpets v. CIT ;

(ii) Nirma Industries Ltd. v. Asstt, CIT(2005) 95 TTJ (Ahd)(SB) 867 : (2005) 95 ITD 199 (Ahd)(SB).

86. In his rival submission, learned senior counsel for the assessee Shri Bajoria has assailed the above submission of the learned Departmental Representative and has submitted that the assessee in this case has not made any attempt to furnish any inaccurate particulars before the AO and even the auditor in audit report has mentioned such transaction with subsidiaries. Shri Bajoria has submitted that the assessee company purchases two types of tobaccos i.e. raw tobacco and old and matured tobacco. Raw tobaccos are generally purchased from outsiders through auction, whereas old and matured tobaccos are generally purchased from subsidiaries. It has been submitted that raw tobaccos purchased are first processed and are stored for at least six months to achieve best results. The assessee company has to incur large holding cost in form of storage and interest charges for holding such tobaccos for six months. The learned senior counsel submits that in another way, the cost of raw tobaccos becomes costlier after six months, since these become old and matured tobaccos. The learned counsel has pleaded that these subsidiaries are holding the tobaccos for more than six months and the assessee company has purchased matured tobaccos from its subsidiaries at the prevailing rate of such matured tobacco in the market.

87. The learned senior counsel further submits that the learned Departmental Representative is not correct in defending the order of AO contending that the facts of the earlier year are not similar to the facts of the present case. He has submitted that in the asst. yr. 1991-92, GP margins of subsidiary companies were ranging from 2.5 per cent to 4.47 per cent, whereas in the year under consideration such margin is only nearly 1 per cent. The learned Authorised Representative further submitted that the Revenue has not found any infirmity while completing the assessment of these subsidiaries. Concluding his argument, Shri Bajoria has submitted that since purchase from subsidiary company has been made in the interest of the assessee's business, no disallowance under Section 40A(2)(b) was to be made and the learned CIT(A) was correct in reversing such order of AO.

88. Parties were heard and records were perused. Section 40A(2)(a) reads as under:

Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in Clause (b) of this subsection, nd the AO is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.

89. A plain reading of provisions contained in Section 40A(2)(a) makes it clear that it would be applicable if the following conditions are satisfied:

(i) where the assessee incurs any expenditure;

(ii) the payment for such expenditure is to be made to any person referred to in cl. (b) of this Sub-section;

(iii) the AO is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facility for which the payment is made.

90. All the above conditions must be satisfied so as to apply the provisions of Section 40A(2)(a). So far as the facts of the case under consideration before us are that there is no dispute that the assessee has incurred the expenditure and the payment has been made to a person referred to in Clause (b). The only dispute is whether the payment for such expenditure is excessive or unreasonable having regard to the fair market value of the goods. In this regard, we agree with the submission of the learned Departmental Representative that whether the payment is excessive or unreasonable is to be examined in each year and merely because in the preceding year the addition was deleted by the Tribunal would not be sufficient to delete the addition in subsequent year, because the payment may be reasonable in one year and it may be unreasonable or excessive in other year. But now the question remains whether in the year under consideration the AO had enough material to form the opinion that the payment made for the purchase of tobacco from sister concern is excessive or unreasonable having regard to the fair market value of such goods. As per the chart given by the AO himself at p. 25 of the assessment order, which is also reproduced by us in our order, the purchase of tobacco from outside varies from Rs. 47.86 per kg. to Rs. 126.98 per kg. Thus there was huge variation in the rates of purchases of tobacco from outside dealers. The AO has not disputed or doubted the genuineness of the above rates of tobacco purchased from outside dealers. Thus it is an established fact accepted by the Revenue itself that the rates of tobacco vary considering the quality of the tobacco. It has been explained by the learned counsel that the tobacco purchased from the sister concern is of better quality because sister concern after purchasing the tobacco process it and keeps it in the stock for a longer period so that it can mature. From the finding of the AO in p. 26 of the assessment order, it is evident that the sister concern namely M/s EEL had an opening stock of the tobacco of 40,12,938 kgs. valued at Rs. 25.09 crores. Thus the sister concern had carried the huge stock of the tobacco so that the same can mature. The tobacco has been sold to the assessee as per requirement of the assessee. The purchase of the tobacco from sister concern namely AITC was @ Rs. 70.49 kgs. in September, 1996 and Rs. 68.90 per kg. in January, 1997. The highest rate of purchase from outside was in July, 1996 which was Rs. 126.98 per kg. Thus the purchase from the sister concern was at lower rate than the highest rate of purchase from outside. However, if we compare the purchase rate of the same month, i.e. September, 1996 in which purchase from outside was Rs. 59.63 per kg. while it was Rs. 70.49 per kg. from sister concern. The purchase rate from sister concern is little higher than the purchase rate from outside. However, it has been explained by the learned counsel that the purchase from the sister concern was of the matured tobacco which was kept in the stock for quite a long period by the sister concern. This fact has not been denied or rebutted by the AO. On the other hand, in the case of other sister concern M/s EEL, the AO himself has recorded the finding that the sister concern carried the huge stock of tobacco for quite a long period. The other purchase from the sister concern namely M/s AITC was in January, 1997, which was @ Rs. 68.90 per kg. In January, 1997, there was no purchase from outside but the nearest purchase from outside was in February, 1997, which was at rate of Rs. 71 per kg., which is higher than the purchase from sister concern. Similarly, the purchase fromsister concern namely M/s EEL was at the rate of Rs. 68.92 per kg. The AO himself has recorded the finding that M/s EEL had brought forward the opening stock which was at the rate of Rs. 62.52 per kg. which was sold to the assessee at the rate of Rs. 68.92 per kg. The sister concern has incurred the expenditure by way of godown charges and interest, etc. in keeping huge stock of tobacco and, therefore, the gross margin of approximately 10 per cent charged by the sister concern to meet the cost of expenditure for carrying of stock and also for the profit for the services rendered by them cannot be said to be excessive or unreasonable. In view of the above factual position, we are unable to agree with the Revenue that the AO had sufficient material to form an opinion that the payment to the sister concern for purchase of tobacco was unreasonable or excessive having regard to the fair market value of tobacco. Accordingly we uphold the order of the learned CIT(A) in this regard and reject the ground raised by the Revenue.

91. Now we take up ground No. 15 raised by the Revenue. Ground No. 15 raised by the Revenue is squarely covered in favour of assessee by the recent decision of the Hon'ble Supreme Court in the case of CIT v. Lakshmi Machine Works , wherein your Lordship held as under:

The object of the legislature in enacting Section 80HHC of the Act was to confer a benefit on profits accruing with reference to export turnover. Therefore, 'turnover' was the requirement, commission, rent, interest, etc. did not involve any turnover. Therefore, 90 per cent of such commission, interest, etc. was excluded from the profits derived from the export. Therefore, even without the clarification such items did not form part of the formula in Section 80HHC(3) for the simple reason that they did not emanate from the 'export turnover', much less any turnover. Even if the assessee was an exclusive dealer in exports, the said commission was not includible as it did not spring from the 'turnover', just as interest, commission, etc. did not emanate from the 'turnover', so also excise duty and sales-tax did not emanate from such turnover. Since excise duty and sales-tax did not involve any such turnover, such taxes had to be excluded. Commission, interest, rent, etc. do yield profits, but they do not partake of the character of turnover and, therefore, they were not includible in the 'total turnover'. The above discussion shows that income from rent, commission, etc. cannot be considered as part of business profits and, therefore, they cannot be held as part of the turnover also. In fact, in Civil Appeal No. 4409 of 2005, the above proposition has been accepted by the AO, if so, then excise duty and sales-tax also cannot form part of the total turnover' under Section 80HHC(3), otherwise the formula becomes unworkable. In our view, sales-tax and excise duty also do not have any element of 'turnover1, which is the position even in the case of rent, commission, interest, etc. It is important to bear in mind that excise duty and sales-tax are indirect taxes. They are recovered by the assessce on behalf of the Government. Therefore, if they are made relatable to exports, the formula under Section 80HHC would become unworkable.

Respectfully following the decision of the Hon'ble Supreme Court in the case of CAT v. Lakshmi Machine Works (supra), xve decide the issue in favour of asscssee and against the Revenue and accordingly reject the ground No. 15 raised by the Revenue.

92. Ground No. 16 relates to deduction under Section 80HHD of the Act. Brief facts relating to this issue are that the asscssee company apart from other activities also run and manage a chain of hotels known as "Welcome Group of Hotels". The assessee company has claimed a deduction of Rs. 30,39,30,662 under Section 80HHD of the Act as per auditor's report in Form No. 10CCAD. The assessee company has computed the deduction under Section 80HHD on hotel-wise basis. The AO has, however, recomputed the computation on pro rata basis and has computed such deduction in the proportion as hotel foreign exchange receipts bear to the total turnover from all the activities of the assessee. The AO has accordingly worked out deduction under Section 80HIID at Rs. 7,22,78,182 against deduction claimed by the assessee at Rs. 30,39,30,662 resulting in reduction of the allowance by Rs. 23,16.52,480. The learned CIT(A) in appeal has accepted the claim of the assessce for deduction under Section 80HHD at Rs. 30,39,30,662 following his decision for the asst. yr. 1994-95. The Revenue has disputed such order of learned CIT(A) and has raised the ground No. 16 against such order of learned CIT(A).

93. In appeal before us, the learned senior Departmental Representative for the Revenue Dr. Raja Ram Shah has assailed the order of learned CIT(A) in allowing the claim of the assessee under Section 80HHD. It has been submitted by the learned Departmental Representative that the deduction claimed by the assessee on the basis of hotel-wise is not at all correct and has pleaded that deduction under Section 80HHD has to be computed taking into consideration Sub-section (3) of such section, which says that profit derived from services provided to foreign tourists shall be the amount which bears to the profit of business (as computed under the head "Profits and gains of the business or profession"). The same proportion as the receipt bears to the total receipt of the business carried on by the assessee. It has been emphasized by Dr. Raja Ram Shah that the interpretation of legislature while enacting Section 80HHD was very clear and was meant for allowing deduction in respect, of profit on the receipt from foreign tourists proportionately taking the total receipts of the business carried on by the assessce. .It has been argued by the learned Departmental Representative that there was no intention for allowing unit-wise deduction under Section 80HHD and the word "a hotel" used in Sub-section (1) of Section 80HHD is simply a syntextually expression but relates to the entire business activity of the assessee including in running of a hotel business. The learned Departmental Representative, however, could not state the reason for considering the entire receipts from all other activities carried on by the assessee for working out deduction under Section 80HHD by the AO. He has, therefore, also argued on alternative plea from the side of Revenue and has pleaded that at least receipt of the entire hotel business should be considered while computing deduction under Section 80HHD. The learned Departmental Representative in support of his above contention has relied on the decision of Tribunal, Cochin Bench in the case of Hotel & Allied Trades (P) Ltd. v. Dy. CIT (2004) 91 TTJ (Cochin) 1025 : (2002) 83 ITD 85 (Cochin). He submitted that it has been held by the Tribunal. Cochin Bench that hotel business of the assessee should be taken as a whole and not in a part. It has, therefore, been pleaded that the order of AO be restored by setting aside the order of learned CIT(A).

94. In his rival submission, the learned senior counsel for the assessee has relied heavily on the order of learned CIT(A) and has pleaded that the assessee company has rightly computed the deduction under Section 80HHD by computing the deduction for each hotel separately and these have fully been verified and certified by the auditors in the line with the practice followed by the assessee in earlier year also. It has been contended that the above method of computation has duly been accepted by the learned CIT(A) in asst yr. 1994-95 and such order of learned CIT(A) has been upheld by this Tribunal.

95. The learned counsel has thereafter stated that Section 80HHD is intended to promote foreign exchange earnings for the country and Sub-section (1) to Section 80HHD clearly allows deduction to an assessee engaged in the business of a hotel approved by the prescribed authority. The learned counsel has emphasized on the words "business of a hotel" and has stated that the same is meant for deduction in respect of each approved hotel and, therefore, deduction under Section 80HHD is to be computed for each hotel separately. The learned senior counsel Shri Bajoria has stated that if profit and turnover of totally unrelated business, like tobacco, paper, printing and packaging are taken than the computation under Section 80HHD will result into a incongruous and unrealistic result without any rational relationship to the profit derived by a hotel from serving foreign tourists. It has been stated that Sub-section (2) lays down that Section 80HHD applies only to services provided to foreign tourists and the receipts in relation to which are received from convertible foreign exchange. It has been stated that the words "services provided to foreign tourists" clearly indicate that receipts with reference to services provided by the hotel and has nothing to do with other activities of the assessee and. therefore, other activities i.e. profit and turnover of other business except approved hotel business are to be excluded for the computation of deduction under Section 80HHD.

96. Shri Bajoria has further submitted that computation for deduction under Section 80HHD is to be computed by taking of profit and receipts of hotel-wise and not by taking the profit and turnover of all the approved hotels. It has been submitted that if the computation for deduction under Section 80HHD are made by taking profit and turnover of all the approved hotels then the hotels running in loss will jeopardize the prospects of good hotel, which is not the intention of the legislature while enacting Section 80HHD. It has, therefore, been pleaded by the learned senior counsel that the computation in respect of deduction under Section 80HHD has rightly been claimed by the assessee and, therefore, the order of learned CIT(A) be upheld.

97. We have given our careful consideration to the rival submissions made before us and have perused the orders of tax authorities. We have also considered the relevant material available on record. Section 80HHD during the asst. yr. 1997-98 reads as under:

80HHD. (1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of a hotel or of a tour operator, approved by the prescribed authority in this behalf or of a travel agent, there shall, in accordance with and subject to the provisions of this section, be allowed....

(a) fifty per cent of the profits derived by him from services provided to foreign tourists; and

(b) so much of the amount out of the remaining profits referred to in Clause

(a) as is debited to the P&L a/c of the previous year in respect of which the deduction is to be allowed and credited to a reserve account to be utilized for the purposes of the business of the assessee in the manner laid down in Sub-section (4).

The relevant Sub-Sections (2), (2A) and (3) read as under:

(2) This section applies only to services provided to foreign tourists the receipts in relation to which are received in, or brought into, India by the assessee in convertible foreign exchange within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf.

Explanation 1.--For the purposes of this Sub-section, any payment received by an assessee, engaged in the business of a hotel or of a tour operator or of a travel agent, in Indian currency obtained by conversion of foreign exchange brought into India through an authorized dealer, (from another hotelier, tour operator or travel agent, as the case may be.) on behalf of a foreign tourist or group of foreign tourists, shall be deemed to have been received by the assessee in convertible foreign exchange if the person making the payment furnishes to the assessee a certificate specified in Sub-section (2A).

Explanation 2.--For the purposes of this sub-section, the expression 'competent authority' means the RBI or such other authority as is authorized under any law for the time being in force for regulating payments and dealings in foreign exchange.

(2A)--Every person making payment to an assessee referred to in the Expln. 1 to Sub-section (2) out of Indian currency obtained by conversion of foreign exchange received from or on behalf of a foreign tourist or a group of foreign tourists shall furnish to that assessee a certificate in the prescribed form indicating the amount received in foreign exchange, its conversion into Indian currency and such other particulars as may be prescribed.

(3)--For the purposes of Sub-section (1), profits derived from services provided to foreign tourists shall be the amount which bears to the profits of the business (as computed under the head 'Profits and gains of business or profession' the same proportion as the receipts specified in Sub-section (2) as reduced by any payment, referred to in Sub-section (2A), made by the assessee bear to the total receipts of the business carried on by the assessee.

98. From the plain reading of the above Section 80HHD, the assessee should fulfill the following conditions to be entitled to deduction prescribed in the above section:

(i) the assessee should be an Indian company or a person resident in India;

(ii) the assessee should be engaged in the business of a hotel or a tour operator approved by the prescribed authority in this behalf; or

(iii) the assessee should be a travel agent.

If the assessee fulfills the above conditions, he is entitled to 50 per cent of the profit derived by him from the services provided to the foreign tourists. Sub-section (3) prescribes the procedure to compute the profit derived from services provided to foreign tourists. As per this sub-section, such profit is to be worked out as per the following formula:

Profits of the business (as computed under the head "Profits and gains of business or profession) multiplied by the receipts in convertible foreign exchange on account of services provided to foreign tourists divided by total receipts of the business carried on by the assessee.

99. There is no dispute that the assessee has fulfilled the conditions prescribed under Sub-section (1) of Section 80HHD so as to be eligible for deduction in this section. The dispute is with regard to the computation of the profit derived from the services provided to the foreign tourists. As per assessee, the computation as per formula given in Sub-section (3) of Section 80HMD is to be made in respect of each approved hotel separately. While as per Revenue, the computation is to be made considering the total receipts of all the hotels as well as all other businesses of the assessee and also the profits of all the hotels and other businesses run by the assessee. From the plain reading of Section 80HHD(1), we find that the assessee, who is engaged in the business of a hotel or of a tour operator is entitled to deduction under Section 80HHD, Now the question is the alphabet "a" used before the word hotel and tour operator is to be interpreted as "one" or it is only an article used before the noun i.e. hotel. In our opinion, the alphabet "a" is used here only as an article and cannot be interpreted as "one". If the alphabet 'a' used before the word hotel is interpreted as "one", the result would be that an assessee who is running one hotel or an, assessee who is operating one tour would only be entitled to deduction under Section 80HHD and not the persons who are running more than one hotel or a tour operator who is operating more than one tour would not be entitled. It cannot be the intention of the legislature. Therefore, we are of the considered opinion that the alphabet "a" used before the word hotel cannot be interpreted as one.

100. Now the next question is what is the meaning of the word "the profits of the business" as used in Sub-section (3) of Section 80HHD, whether the profit of all the businesses is to be considered or the profit of the hotel business is to be considered and whether the profit of each hotel is to be considered separately. In our opinion, meaning of the word "the profit of the business" used in Sub-section (3) means "the business" referred in Sub-section (I), i.e. the business of a hotel, which is approved by the prescribed authority in this behalf. Therefore, the profit of the business other than the business referred in Sub-section (1) has to be excluded while computing the profit derived from services provided to the foreign tourists under Sub-section (3). It would not be out of place to mention here that the assessee is engaged in several business activities like manufacturing and sale of cigarettes, paper, packaging material, etc. All these businesses are separate and independent than the hotel business of the assessee. The inclusion of profit of these businesses would distort the correct determination of the profit derived from the services rendered to foreign tourists. In the case of assessee itself in the year under consideration by including the profits and receipts of other businesses, the deduction under Section 80HHD is worked out lesser than the deduction claimed by the assessee. But in the subsequent year, when the profit from the other businesses is more, the deduction under Section 80HHD works out to more than what is claimed by the assessee and Revenue itself has computed the deduction under Section 80HHD considering the hotel business alone. However, we arc also unable to agree with the contention of the learned counsel that the deduction is to be computed separately in respect of each hotel. Section 80HHD(1) refers to the business of a hotel. The business of a hotel which is approved by the prescribed authority has to be considered as a whole being the business which is entitled for deduction under Section 80HHD(1). Therefore, we hold that the deduction under Sub-section (3) of Section 80HHD has to be computed by taking the profits of the hotel business approved by the prescribed authority. To clarify, if the assessee had ten hotels and seven hotels are approved for the purpose of Section 80HHD(1) and three hotels are not approved then the profit of all these seven hotels would amount to the profits of the business of the hotel approved for the purpose of Section 80HHD(1). Therefore, the AO has to compute the deduction under Section 80HHD(3) by taking the profits of all the hotels approved by the prescribed authority. The same is to be multiplied by the receipts in convertible foreign exchange for the services provided to foreign tourists by all these hotels and is to be divided by the total receipts of all the approved hotels. We hold accordingly.

101. The assessee has also raised an additional ground during the course of hearing which reads as under:

That on the facts and circumstances of the case, the Hon'ble CIT(A) has erred in deleting addition of Rs. 12.53 crores under the head 'Advertisement expenses' made by the AO comprising of expenditure incurred in connection with sponsorship, cinema, films, etc. and fabrication jobs.

102. The learned senior counsel for the assessee has not pressed any serious objection and therefore, after hearing both the parties, application for admission of the additional ground is accepted.

103. Brief facts relating to this additional ground are that the assessee company has made a total claim of Rs. 172.60 crores, out of which Rs. 52.79 crores were incurred in connection with sponsorship of various sports events, like golf, polo, football, etc. The AO has presumed that at least 10 per cent of such expenditures was not commercially expedient to the business of the assessee and has disallowed the same. He has also disallowed Rs. 5.74 crores incurred by the assessee for advertisement in cinema, film, video, etc. holding that these are non-incidental to the business of assessee. The AO apart from the above two disallowances has also made a disallowance of 10 per cent in connection with fabrication job of Rs. 15,05,65,278 and thereby making the total addition under the head 'Advertisement' at Rs. 12.53 crores. In appeal, the learned CIT(A) has deleted the addition following his decision in earlier assessment year decided in favour of assessee.

104. In appeal, the learned Departmental Representative for the Revenue has assailed the order of learned CIT(A) and has relied on the order of AO. The learned Departmental Representative has submitted that disallowance on account of notional income from dismantling fabrication material out of fabrication expenses for Rs. 1.51 crores has rightly been made by the AO. The learned Departmental Representative has submitted that even this Tribunal while deciding the case for asst. yr. 1994-95 has upheld the contention of the Revenue that notional income of 10 per cent being salvage value of dismantled fabrication material cannot be ruled out. The learned Departmental Representative while arguing for deletion of other expenses by CIT(A) has simply relied on the order of AO.

105. In his rival submission, the learned senior counsel for the assessee has heavily defended the order of learned CIT(A) and has submitted that sponsorship expenses and expenditures on cinema and video have been incurred solely and exclusively for the business of the assessec and these expenditures have been incurred for promoting the product of the business and for creating public awareness. Arguing on fabrication expenses, it has been submitted by the learned counsel that the assessee is crediting the salvage value of such dismantled fabrication materials as and when disposed by the assessec and such receipts from sale of salvage value are credited under the head "Miscellaneous income" at the time of realization and, therefore, no question arises for considering any notional income out of such fabrication charges. It has, therefore, been prayed that the order of learned CIT(A) be upheld.

106. We have given our careful consideration to the rival submissions made before us and have perused the orders of tax authorities. The AO has made disallowance under this head mainly on three expenditures, viz.

       Expenses for sponsorship for sports              5.28 crores
     Cinema, film, video expenditure                  5.74 crores
     Salvage value of dismantled fabrication material 1.51 crores

The AO has accepted the genuineness of such expenditures in cas of sponsorship and video and cinema expenses to the extent of 90 per cent and has disallowed 10 per cent of such expenditures presuming that it might have been incurred for other than business needs. However, such observation of AO is not supported by any material evidence on record. Whereas while deciding ground No. 12 i.e. regarding disallowance of miscellaneous expenditure, we have already held that advertisements through sponsorship events and through cinema and videos are incidental to the business of the assessee as these are incurred to promote its products and create public awareness of the activities of the company and these expenditures are purely and exclusively meant for the business needs of the assessee as also held by this Tribunal in the case of G.D. Pharmaceuticals Ltd. (supra). We, therefore, do not find any infirmity in the order of learned CIT(A) in deleting the addition in respect of sponsorship expenses and expenses incurred on cinema and video and, therefore, uphold the same and reject the objection raised by the Revenue.

107. The learned Departmental Representative has also disputed the order of learned CIT(A) in deleting the addition of Rs. 1.51 crores made by the AO considering notional income available to the assessee from dismantling of fabrication materials. We have noted down the fact that the assessee has claimed that income available to it out of such salvage value of fabrication material is being credited under the head "Miscellaneous income" and such contention of learned counsel has not been rebutted by the learned Departmental Representative before us.

108. We, therefore, in these circumstances are of the opinion that the addition made by the AO in respect of notional income available to the assessee from dismantled fabrication material is not correct as the same will tantamount to double addition keeping in view the fact that the assessee is itself crediting such income available to it as soon as it realises the income from the sale of salvage material. We, therefore, in view of the above facts, do not see any reason to interfere with the order of learned CIT(A) in this regard and uphold the same and reject the additional ground raised by the Revenue.

109. In the result, the appeal filed by the Revenue is party allowed.

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Income Tax Appellate Tribunal - Kolkata

Joint Commissioner Of Income Tax vs I.T.C. Ltd. on 7 September, 2007

Equivalent citations: (2008)115TTJ(KOL)45