Income Tax Appellate Tribunal - Ahmedabad
Vikshara Trading & Investment ... vs Deputy Commissioner Of Income Tax on 30 March, 1998
ORDER
B.L. Chhibber, A.M.
1. The most important ground raised in this appeal by the assessee relates to the rejection of the assessee's claim of relief under s. 80-I of the Act.
2. The assessee is a private limited company engaged in the manufacturing of detergent powder, toothpaste, detergent cake, shaving cream, etc. The assessee-company claimed deduction under s. 80-I amounting to Rs. 67,10,045. The AO noticed that the assessee-company was manufacturing items mentioned in Sch. XI. As per the provisions of s. 80-I (2) an industrial undertaking manufacturing any of the articles or items specified in Sch. XI was not eligible for deduction under s. 80-I. However, second proviso below sub-s. (2) made it clear that this disqualification did not operate against small scale undertakings. For the purpose of s. 80-I the definition of small scale undertaking has been adopted from the provisions of s. 80HHA. As per these provisions, an industrial undertaking having the aggregated value of plant and machineries other than tools, jigs and moulds installed as on the last day of the previous year exceeding the sum of Rs. 35,00,000 cannot be regarded as small scale industrial undertaking. According to the AO from the perusal of balance sheet, it was noticed that the value of plant and machinery as on 31st March, 1993, was Rs. 78,41,733. He, therefore, issued a show-cause notice to the assessee as to why it should not be regarded as not being a small scale undertaking. In response the assessee took the position that it was manufacturing : (a) toothpaste, (b) detergent powder and cake, (c) shaving cream. These units were separate undertakings and, therefore, plant and machinery of each unit should be considered separately and the value of plant and machinery in each undertaking was less than Rs. 35,00,000. The assessee also pointed out that in the earlier years the disallowance made had been deleted by the learned CIT(A). The assessee also placed reliance on certain High Court judgments.
3. The AO considered these submissions and facts and circumstances of the case. He held that in the absence of any definition of 'industrial undertaking' in the Act the expression needs to be interpreted as normally understood in the common parlance. According to the AO in the common parlance an industrial undertaking would be separate and distinct if it is in a position to independently run. On this basis, the facts of the assessee's case did not support its contention that it should be regarded as three separate undertakings. The AO cited the following facts :
1. These activities were carried out in single premises having one compound-wall and having only one gate.
2. There was a common source of water.
3. There was single electric connection for running the entire plant and machinery. Another electrical connection was provided only for the office which too was common for all the activities.
4. There was no separate administrative office but a common administrative office.
5. Even inside the compound-wall there was no separate demarcation. No walls have been provided in between to make them separate enclosures. It was only with a view to maintain good quality products that the appellant had to isolate the toothpaste making from other products since that bacteria free environment is required for production of toothpaste.
6. There was a common laboratory for checking/testing the raw material. There was another laboratory for checking the final product of the toothpaste which was required for the reason of highly sophisticated equipments/apparatus. Separate laboratory for this purpose was not provided because there was a separate industrial undertaking but only because of the completion of checking the quality of the toothpaste.
7. There was common inward register in respect of raw materials. There was no separate material issue register. The purchases and sales in respect of all the products were entered in the same register. Manufacturing expenses were also debited in the same account. Overhead establishment expenses incurred were also common and debited in the common account.
8. Even at the end of the year, the income and expenditure relatable to various products was not separated and a single manufacturing trading and P&L a/c drawn.
According to the AO the above facts and circumstances showed that there was only one industrial undertaking in which the various items were produced and at best, it could be regarded as different sections of the same industrial undertaking. Thereafter the AO proceeded to examine as to whether the assessee-company employed requisite number of workers since for the purpose of deduction under s. 80-I it was necessary that the industrial undertaking must employ 10 or more workers in the manufacturing process carried on with the aid of power and must employ 20 or more workers in manufacturing process carried on with the aid of power. Since the assessee was manufacturing articles with the aid of power it was required to employ 10 or more workers in the manufacturing process. According to the AO the assessee did not fulfil this condition because the assessee had employed labour through contractors and not provided direct employment to workers, i.e., according to the AO the assessee had not employed 10 or more workers in the manufacturing process.
4. The AO further held that as far as the following incomes were concerned, the same were not entitled to any deduction under s. 80-I. Rs.
1. Interest on bank deposits 43,86,197
2. Trading sales 8,80,07,275
3. Raw material sales 8,32,12,097
5. In nutshell, the AO held that the deduction under s. 80-I was not available to the assessee because :
1. The assessee-company is not a small scale industrial undertaking in terms of s. 80-I(2). Expln. 2.
2. The assessee-company is manufacturing an article as specified in Sch. XI of the Act and assessee not being a small scale industrial undertaking is not eligible for deduction under s. 80-I(2)(iii).
3. The assessee-company does not employ prescribed number of workers as per provisions of s. 80-I(2)(iv).
6. The assessee appealed to the CIT(A) and made detailed submissions as per its letter dt. 25th April, 1996. Thereafter the assessee once again made detailed submissions which were filed along with paper-books on 18th July, 1996. A complete set of written submissions and the paper-book was furnished to A. K. Jain, Dy. CIT(A) (AO) who attended personally before the CITA). Jain filed his detailed rejoinders to the assessees written submissions as per his letter dt. 9th August, 1996. A copy of the rejoinder was forwarded to the assessee and thereupon the assessee made further submissions as per his letter dt. 2nd September, 1996. After hearing both the sides in great detail and after considering the entire material placed before him the learned CIT(A) agreed with the finding of the AO and summed up his conclusion in para 48 of his order as per below :
"To sum up I hold that the appellant is not entitled to any deduction under s. 80-I for the following reasons :
1. The appellant has been manufacturing items enumerated in Sch. XI and the appellant is not a small scale undertaking because the value of plant and machinery as at the end of year far exceeded the sum of Rs. 35 lakhs. On the facts and in the circumstances of the appellant's case, the appellant is to be construed to be running a single industrial undertaking.
2. The appellant does not qualify the requirements of the employing 10 or more workers in its manufacturing process.
3. In any case there is no income or profit derived from the industrial undertaking of the appellant as far as asst. yr. 1993-94 is concerned.
7. Ketan H. Shah, the learned counsel for the assessee, submitted that both the AO and the learned CIT(A) were not justified in rejecting the assessee's claim under s. 80-I. As regards the first issue whether the assessee was running one unit or different distinguishable units, the learned counsel submitted that the map of the factory (which was produced before both the authorities below) showed that each unit was distinguishable having wall between each unit and there were as many as four laboratories and six offices for various sitting arrangements for office staff, storekeeper, directors, etc. He submitted that it was true that there was one common wall covering all units but it was because the property belongs to a single owner to whom the assessee paid rent for occupying various industrial sheds. In all GIDC plots the water is supplied by GIDC itself and it can be used for different units depending upon the requirements of the units. He argued that the assessee paid each unit labour charges, e.g., toothpaste labour charges Rs. 7,56,906, acid slurry labour charges Rs. 1,154, shaving cream labour charges Rs. 83,211, detergent labour charges Rs. 4,65,197, scouring powder labour charges Rs. 11,208, detergent powder cake labour charges Rs. 62,719 and these expenses have not been disallowed. Further, monthwise production of each unit was furnished and manufacturing and sales of each unit was also furnished. He drew our attention to details of unit/productwise holding of the plant and machinery as per Expln. No. 3 to s. 80-I(2) read with the definition given in cl. (b) to Explanation below sub-s. (8) of s. 80HHA which are as under :
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31st 31st 31st 31st 31st
March, March, March, March, March,
1991 1992 1993 1994 1995
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Det. Powder 9,001 1,10,994 78,182 78,182 36,749 Scouring powder 1,00,000 91,409 91,409 91,409 91,409 Toothpaste 16,96,564 16,96,564 16,96,564 16,96,564 57,802 Acid slurry 1,23,780 1,23,780 1,23,780 1,23,780 1,23,780 Shaving cream 17,78,405 17,78,405 17,78,405 17,78,405 17,78,405 Detergent cake 34,021 34,021 34,021 34,021 34,021
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As per cl. (1) of Expln. (b) the abovesaid working is based on the actual cost to the assessee since all the plant and machinery have been owned by the assessee. So, there is no other criteria applicable. He further drew our attention to various details unitwise/industrial undertakingwise which are as under :
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Scouring Toothpaste Detergent Detergent Scouring
powder cake powder powder
----------------------------------------------------------------------Workers 632 977 379 2,247 80
employed = 4,315 Sales 65,78,130 3,52,46,460 4,73,288 45,73,363 1,11,360 Area (sq. ft.) 4,462 10,197 800 4,455 1,260 Excise No. 3,307.10 3,306 3,401.20 3,402.90 3,405.40
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8. The learned counsel did not dispute that the office staff was common for all the units but argued that this was not the criteria so as to determine whether each unit was a separate unit. It was also not necessary to keep separate books of account for each unit. Since all the units were eligible for deduction under s. 80-I there was no need to keep separate books of account. According to the learned counsel the map of factory showed that there was clear demarcation in between each unit and merely saying that the same was to maintain good quality production does not result into any adverse finding against the assessee.
9. Shah further argued that the observations of the AO that there was one common laboratory was not correct. In fact there were four separate laboratories. The learned counsel, therefore, concluded that each unit was distinguishable, and accordingly the assessee was entitled to deduction under s. 80-I in respect of each unit. Regarding the contention of the AO that the labourers working in the assessee's manufacturing unit cannot be treated as employees of the assessee but of the contractors engaged by the assessee, the learned counsel contended that while the bills were raised by the contractors all payments were directly made to the workmen each and every payment was also entered in the wages register. According to the learned counsel these workers were under the de facto control of the assessee-company. The contractors did not have any independent source of income or any independent factory. It was the assessee's manufacturing unit which provided the jobs to the labourers as well as the contractors. He, therefore, concluded that the assessee had engaged more than 10 workers and accordingly the assessee was entitled to deduction under s. 80-I, in view of the decision of the Tribunal, Ahmedabad 'A' Bench in Prithviraj Bhoorchand vs. Asstt. CIT (1993) 47 TTJ (Ahd) 179 : (1993) 47 ITD 361 (Ahd).
10. As regards deduction under s. 80-I in respect of profit on trading sales, sales of raw material the learned counsel drew our attention to the submissions to the CIT(A) placed at paper-book No. 4-p. A-48 wherein it was specifically stated that both the sales, i.e., trading and raw material sales are part and parcel of the imported goods item sales which the assessee is entitled to get imported on the basis of the import-export policy for which the assessee has got Letter of Authority to import such material after fulfilment of the export obligation. He further drew our attention to the import-export policy-para 127(1)(c) placed at paper-book p. A-91 wherein it was made clear that the assessee could sell out material imported. According to the learned counsel the assessee is entitled to import a specific raw material and not any material at its wish. Thus, it can only import the raw material which can be usable in its finished products. Thus, the assessee is entitled to import such raw material on particular finished goods only and in reference to particular raw material having particular quality and particular quantity. According to the learned counsel all these go to show that so-called imported raw material which the assessee was entitled to get on account of advance licence because it was supporting manufacture. Thus, such profit is the income derived from the income from industrial undertaking; that is directly derived from and linked with the finished product. The learned counsel also drew our attention to the submissions to the CIT(A) at paper-book p. A-48 wherein it was stated that two headings given, i.e., trading sales and raw material sales is only to have a clear mind to the effect that in a heading of trading sales, the assessee used to sell out the whole advance licence imported items. However, with reference to the raw material sales the assessee may use some of the items for its captive consumption. So, two headings were made in the P&L a/c. The details of all such advance licences were also filed before the AO. He further submitted that it was also worthwhile to note that the AO who had passed the order was also present and was heard at length before the CIT(A). The learned counsel submitted that there was not a single purchase or sale from local market and all the profit of so-called trading sales is on account of advance licences only. The break-up of the figure of 8.32 crores were also filed before the AO while filing the list of advance licence. He drew our attention to such details. He, therefore, submitted that the assessee was entitled to deduction under s. 80-I in respect of profits on trading sales and sales of raw material.
11. As regards deduction under s. 80-I in respect of interest earned on bank deposits, the learned counsel submitted that the bank insisted on fixed deposits before opening of letter of credit?. He emphasised that there is a distinction between the voluntary act and the act which the assessee was obliged to for achieving something else. As the letter of credit opening was entirely for the business of manufacturing, interest income cannot be viewed separately. According to the learned counsel, it was business income entitled to deduction under s. 80-I.
12. S.S. Panwar, the learned Departmental Representative strongly supported the orders of the authorities below. He was fair enough to concede that the assessee is an industrial undertaking engaged in manufacturing of toothpaste, detergent powder, etc., but it is not entitled to deduction under s. 80-I as it does not fulfil the required conditions. According to him the different units of the assessee are not distinguishable because there is interlacing, inter-dependence of the units and inter-mixing of the products. He further submitted that there was common management, common funds and the assessee had worked out excise set off and manufacturing expenses of the different units on pro rata basis. In support of his contention he relied upon the decision in B.R. Ltd. vs. V. P. Gupta, CIT (1978) 113 ITR 647 (SC), CIT vs. Indian Bank Ltd. (1965) 56 ITR 77 (SC), and the judgment of Gujarat High Court in the case of CIT vs. Alembic Glass Industries Ltd. (1976) 103 ITR 715 (Guj).
13. As regards whether the assessee had employed 10 or more workers, the learned Departmental Representative submitted that the workers were not directly employed by the assessee but were employed by different contractors. Workers employed through the contractors cannot be considered as workers of the assessee. In support of his contention he relied upon the Bangalore Bench of the Tribunal in Krishna Plastic Industries (P) Ltd. vs. ITO (1985) 14 ITD 121 (Bang).
14. As regards profit on trading sales and interest on bank deposits, the learned Departmental Representative submitted that there was no direct nexus between the manufactured goods and the goods imported and hence, the assessee is not eligible for deduction under s. 80-I. He submitted that it may be possible that some goods imported by the assessee might have been used in the manufacturing process, then only pro rata deduction under s. 80-I may be allowed. He submitted that interest income does not qualify for deduction under s. 80-I in view of the judgment of Madras High Court in the case of CIT vs. Universal Radiators (P) Ltd. (1981) 128 ITR 531 (Mad).
15. We have considered the rival submissions and perused the facts on record. There is no dispute that the assessee is an industrial undertaking engaged in the manufacturing of toothpaste, detergent powder, etc. The question before us is whether the assessee industrial undertaking is entitled to deduction under s. 80-I of the Act. The authorities below have denied deduction under s. 80-I on the following three grounds :
1. The assessee-company has been manufacturing items enumerated in Sch. XI and the assessee is not a small scale undertaking because the value of plant and machinery of all the units as at the end of the year far exceeded a sum of Rs. 35 lakhs.
2. The assessee-company does not qualify the requirement of employing 10 or more workers in its manufacturing process.
3. There is no income or profit derived from the industrial undertaking of the assessee per asst. yr. 1993-94 is concerned.
4. The assessee is not entitled to deduction under s. 80-I in respect of profits on trading of goods imported by it; profits on sale of raw materials and on interest received on fixed deposits.
16. After hearing both the sides we agree with the contentions of the learned counsel of the assessee that each unit of the assessee is distinguishable; independent; having separate existence of its own; having separate and distinct excise number. In the absence of any evidence we do not agree with the contention of the learned Departmental Representative that there is interlacing inter-financing and inter-dependence of the different units. We have perused the details given by the assessee before the authorities below in respect of each unit and relied upon by the learned counsel and reproduced in para 7 above from which it can be seen that each unit is independent capable of being run/close without affecting the other unit. In asst. yr. 1995-96 the assessee closed scouring powder unit without affecting other units. Out of six products, only two products, i.e., toothpaste and detergent cake fall under Sch. XI. However, even detergent cake cannot be equivalent to soap in view of the decision of the Chandigarh Bench in the case of Rasan Detergent (P) Ltd. vs. IAC (1995) 52 ITD 55 (Chd). Manufacturing process of each unit is also different. Raw material ratio of each unit is also different. Separate lists of plant and machinery were already on records since asst. yr. 1991-92. We accordingly hold that for allowing deduction under s. 80-I each unit is to be considered separate and independent one.
16.1. As regards the second issue whether the assessee employs 10 or more workers we find that each unit employed more than 10 workers though labour is employed through contractors; in essence it is the assessee-company which has provided employment to staff-workers. It is always the essence which matters and not the form. The case of the assessee stands squarely covered by the decision of the Ahmedabad Bench in the case of Prithviraj Bhoorchand cited supra where it has been held that workers employed through the contractor in the manufacturing process have to be treated as workers employed by the industrial undertaking within the meaning of s. 80-I(2)(iv). A similar view has been held by the Jaipur Bench of the Tribunal in Rajasthan Transmission Wires (P) Ltd. vs. ITO (1985) 22 TTJ (Jp) 343. The reliance placed by the learned Departmental Representative on the decision of Bangalore Bench of the Tribunal in (1985) 14 ITD 121 (Bang) (supra) is of no assistance to the Revenue. In that case no wages were paid by the assessee and the agency employed was also separate industrial undertaking. However, in the case of the assessee; the assessee has directly paid wages as per contractors' confirmation and workers had worked in the assessee's industrial undertaking with assessee's electricity/raw material. Accordingly we hold that the assessee had employed more than 10 workers in its units and as such the assessee is entitled to deduction under s. 80-I.
17. As regards the third issue that there is no income or profit derived from the industrial undertaking of the assessee-company, we do not find any merit in it. As per the order of the CIT(A), p. 29 first para, it was observed that there was huge loss on sale of manufacturing of the goods and as such the matter ends here itself inasmuch as the assessee-company did not derive any such income and instead incurred the loss. In our view the finding given by the CIT(A) is contrary to the facts and in contradiction to the finding given in the AO's order p. 13, middle para wherein it was stated that the total gross profit rate including advance licence trading profit comes to 20.67 per cent as against in the immediate preceding year it was 11.98 per cent as per the AO (p. 14 of the AO's order). The AO himself has observed that the sale of manufacturing items is of Rs. 13,02,08,135 and the GP comes to Rs. 1,43,60,315 which is 11.02 per cent (excluding advance licence/trading profit) as against in the immediate preceding year the profit rate was 11.7 per cent. So, the finding given by the learned CIT(A) is in contradiction to the facts on record because there is no such manufacturing loss.
18. As regards the profit on trading of imported goods and imported raw material, we do not find any merit in the findings of the authorities below that the assessee is not entitled to deduction under s. 80-I in respect of the above items. The assessee-company is undisputedly an exporter. Both the sales, i.e., trading and raw material sales are part and parcel of the imported goods which the assessee is entitled to import on the basis of said norms of import-export policy, for which the assessee has Letter of Authority to import such material after fulfilment of the export obligation. As the import entitlements came into existence because of the exports made by the assessee the profits resulting from the sale of the import entitlements were closely and intimately connected with the assessee's business of manufacture and export of manufactured commodities. Moreover the mode in which the assessee acquired the import entitlements without paying a price for it shows that the transaction of acquiring import entitlements amounted to an exchange by exporting self-manufactured goods the assessee got import entitlements which amounted to a barter or which may be termed as receiving the sale price for the goods exported partly in cash and partly in kind. The said barter/exchange was voluntarily done by the assessee by registering itself under the Export Promotion Scheme of the Govt. of India. Such exchange or barter, therefore, constitute an adventure which resulted in realising the sale proceeds of the goods exported. The transaction of sale of import entitlements has taken place in connection with the business carried on by the assessee of manufacture and export of manufactured commodities in the usual course and, therefore, it is assessable business income. This view finds support from the judgment of the Hon'ble Calcutta High Court in the case of United Bank of India Ltd. vs. CIT (1963) 50 ITR 258 (Cal). The Hon'ble Supreme Court of India in the case of Sardar Indra Singh & Sons Ltd. vs. CIT (1953) 23 ITR 415 (SC), had also occasion to consider this proposition. It was held by the Hon'ble Supreme Court of India that the question in such cases was whether the sales which produced a surplus were so connected with the carrying on of the assessee's business that it could fairly be said that the surplus was the profits and gains of such business. It is further noted that there is not a single purchase or sale from local market and all the profit of the so-called trading sales is on account of advance licences only. Hence, we hold that profits on trading and sale of raw materials were business income entitled to relief under s. 80-I. 18.1. The reliance placed by the authorities below on the judgment of Madras High Court in the case of CIT vs. Eastern Sea Foods Export (P) Ltd. (1995) 215 ITR 64 (Mad) is of no assistance to the Revenue. The judgment in that case is in respect of replenishment licence whereas in the case of the assessee, it is in respect of advance licence. It is further seen that the case referred and followed by the AO is totally distinguishable from the facts of the case of the assessee because in that case the relevant period of export was from July, 1972, to September, 1972, and the working of the import replenishment was 10 per cent of total export, that is why, though the assessee was engaged in sea foods it had imported stainless steel, that is, altogether different commodities. In the case of the assessee-company, it is entitled to get advance licence in respect of the items to be exported by the company and entitlement of the import and/or working is based on fulfilment of export obligation. In our view the assessee's case finds support from the judgment of Karnataka High Court in the case of Sterling Foods vs. CIT (1991) 190 ITR 275 (Kar), wherein it has been clearly held that profits on sale of import entitlements are to be treated as business income for special deduction under s. 80HH in respect of such income.
19. As regards the question whether the assessee is entitled to relief under s. 80-I in respect of interest income earned on fixed deposits we hold that the interest income was the business income of the assessee. As has been stated by the learned counsel of the assessee the bank insisted upon fixed deposit before opening letter of credit account and accordingly the assessee had to deposit amounts in the fixed deposits for the same purpose. Letter of Credit account was opened for the business of the assessee during the course of the business of the assessee. Whether interest income will be income from business or income from other sources will mainly depend upon the facts of each case. It is evident that in this case the assessee was an exporter and against the export licence used to import raw materials. The assessee's bankers were insisting that the assessee shall place sufficient amount with it so as to enable it to issue letter of credit against security of the fixed deposit. Thus, it was out of business compulsion that the assessee had to deposit money in fixed deposit and consequently earned interest thereon. Therefore, in our opinion the purpose of placing money in fixed deposit with the banks was not to earn interest on investment of surplus funds, but the investment was necessitated by compelling business requirements. In our view the issue stands covered in favour of the assessee by the decision of the Gujarat High Court in the case of CIT vs. Gujarat Mineral Rural Development Corpn. (1981) 132 ITR 377 (Guj). A similar issue came up before the Tribunal, Ahmedabad 'A' Bench in the case of Asstt. CIT vs. Cambatta Family Trust, (ITA No. 3903/Ahd/1990; asst. yr. 1986-87 [reported at (1998) 62 TTJ (Ahd) 685] to which both of us were parties. We decided the issue in favour of the assessee following the judgment of the Gujarat High Court in the case of Gujarat Mineral Rural Development Corpn. (supra). Following our aforesaid decision we hold that the assessee is entitled to deduction in respect of interest income earned on fixed deposits.
20. In the light of the above discussion, we hold that the assessee is entitled to deduction under s. 80-I as claimed by it. The ground raised by the assessee accordingly succeeds.
21. The next dispute is the rate at which deduction under s. 80-I should be given to the assessee. According to the AO, the assessee is not entitled for any deduction under s. 80-I. Without prejudice to this stand, the AO has further held that the assessee's claim for deduction at the rate of 30 per cent is not correct because such higher deduction is available only to those companies which begin manufacture or production during the period commencing on 1st April, 1990, and ending on 31st March, 1991. According to the AO in the case of the assessee, it had commenced manufacture or production much before 1st April, 1990. The AO did not accept the argument of the assessee that in the earlier year he was only local quality manufacturer which is distinguishable from the export quality manufactured during the period 1st April, 1990, to 31st March, 1991. On appeal the CIT(A) confirmed view of the AO Ketan H. Shah, the learned counsel for the assessee reiterated the submissions made before the authorities below. According to him the first year of the eligibility was admitted to be the asst. yr. 1991-92 as per the assessment record and in past two years the claim of 30 per cent had been rightly allowed and further no claim under s. 80-I had been allowed in the asst. yr. 1989-90. The learned Departmental Representative relied upon the orders of the authorities below.
22. We have considered the rival submissions. Since we have held that the assessee is entitled to deduction under s. 80-I we deem it fit to restore the issue regarding the rate at which such deduction should be allowed to the file of the AO. He is directed to allow deduction under s. 80-I at the appropriate/permissible rate after giving an opportunity of being heard to the assessee.
23. The next grievance of the assessee is that the learned CIT(A) is not justified in confirming an addition of Rs. 12,64,660 to the trading results. During the course of assessment proceedings the AO made the above addition on the ground that the amount of purchases recorded by the assessee in the names of Aids Chem., Alpine Chemicals and Savai Sales and another concern were not verifiable and could not be considered to be totally correct and there may be elements of inflation of the purchase price. On appeal the CIT(A) restored this issue to the file of the AO for readjudication because during the course of proceedings before him the AO who appeared before him admitted that further investigation was called for to arrive at a correct conclusion. K. H. Shah, the learned counsel submitted that the learned CIT(A) has disposed of the ground relating to the trading addition in a summary manner without deciding each and every grounds taken and/or the argument as per the written submissions dt. 25th April, 1996. He submitted that instead of restoring the issue to the file of the AO the CIT(A) ought to have disposed of the ground after taking into consideration the submissions made by the assessee's representative. The learned Departmental Representative submitted that in the absence of full details the learned CIT(A) was justified in restoring this matter to the file of the AO.
24. We have considered the rival submissions and perused the facts on record. We find that the CIT(A) has restored this issue back to the file of the AO because some points raised in the assessment order were not clear and some further details were called for, for arriving at a judicially correct conclusion. We accordingly uphold the order of the CIT(A) restoring the issue to the file of the AO. Needless to say that the AO will give full opportunity to the assessee while readjudicating the issue. This ground accordingly fails and is dismissed.
25. The next ground raised by the assessee relates to disallowance out of foreign tour expenses. During the course of assessment proceedings the assessee was asked to justify the expenditure of Rs. 6,93,044 claimed as deduction on account of foreign tour. It was stated by the assessee that they were hitherto making exports through the export house of Space Enterprise but during the year under appeal, with a view to explore the possibility of making direct exports the directors of the assessee-company visited Moscow, UK, Dubai, USA, etc. However, direct exports could not materialise on account of stiff competition from the companies like Colgate, Palmolive and other foreign companies. The assessee filed Xerox copies of the passports of the directors who travelled before the AO. From the perusal of the reply and details furnished the AO noted that Kiritbhai Patel had gone to Middle-East and stayed as many as 26 days at Kuwait. There he contacted only one person, viz., Amrutbhai Thakkar of Crescent Commercial Co. Ltd. According to the AO the assessee could not have devoted all the 26 days for business purpose and maximum 7 days can be considered for the business purpose executed by this person. Similarly, he held that the other directors also overstayed in the foreign countries visited by them respectively. He accordingly disallowed 50 per cent of the claim and made an addition of Rs. 4,34,626. On appeal the CIT(A) confirmed the addition.
26. K. H. Shah, the learned counsel for the assessee, submitted that there was no justification for the impugned addition. He drew our attention to the tabularised chart of each director placed at p. 8 of the paper-book. He submitted that the directors did visit foreign countries for getting export orders and they stayed in those countries for business purposes. They neither had any relatives in those countries to live with nor had gone for pleasure trip. He submitted that all relevant evidence about the permission of the Reserve Bank of India (RBI), foreign exchange got by each director, copies of bills of stay, etc., were produced before the AO. According to him only because there was no immediate direct benefit to the assessee-company the AO was not justified in curtailing the claim of the assessee. S.S. Panwar, the learned Departmental Representative relied upon the orders of the authorities below.
27. We have considered the rival submissions and perused the facts on record. The factum of the directors' having travelled to foreign countries for getting export orders is duly established. We also do not find any merit in the findings of the authorities below that the directors overstayed in each country. There cannot be any presumption as assumed by the authorities below that the directors had gone for some sort of pleasure trip. Whether the assessee is benefited by foreign travel or not, is a subsequent event not relevant as held by the Delhi Bench of the Tribunal in (1995) TLR 498. In any case there would be r. 6D applied for which the auditors have already applied and worked out disallowances. Here we are supported by the order of the Tribunal, Ahmedabad Bench in Raymon Glues & Chemicals vs. IAC (1993) 46 TTJ (Ahd) 693 : (1994) 75 Taxman 127 (Ahd). We accordingly hold that the foreign trips were undertaken by the directors for business purposes and there is no justification for disallowing the foreign tour expenses at the rate of 50 per cent on pure estimate. We accordingly delete the addition of Rs. 4,34,626. This ground accordingly succeeds.
28. The next ground raised by the assessee relates to disallowance of a sum of Rs. 48,442 out of telephone expenses. The AO made the disallowance at the rate of 1/5th of the expenditure incurred on telephone installed at the residence of the directors on account of personal use of the telephone by the directors and members of their families. On appeal the CIT(A) upheld the addition by his brief remarks "the estimate of disallowance as made by the AO does not appear to be excessive or unreasonable. This ground of appeal is rejected".
29. We have heard both the parties. The disallowance has been made by the AO and confirmed by the CIT(A) on pure estimate. In our view in view of the written submissions before the authorities below dt. 25th April, 1996 and the decision of Shalimar Fashions (P) Ltd. vs. ITO (1981) 11 TTJ (Del) 326 as well as Bombay Special Bench decision in Daks Copy Services (P) Ltd. vs. ITO (1989) 34 TTJ (Bom) (SB) 604 the disallowance is uncalled for. The impugned addition is accordingly deleted. The assessee gets a relief of Rs. 48,442. This ground accordingly succeeds.
30. The next ground relates to the disallowance of a sum of Rs. 15,000 on account of entertainment expenditure. The assessee incurred an expenditure of Rs. 81,806 which was claimed to have been incurred on the members of staff only. The AO held that such expenditure was bound to include certain expenditure on visitors and outsiders. In the absence of any such details he estimated such expenditure at Rs. 40,000 resulting into a disallowance of Rs. 15,000 under s. 37(2A).
31. On appeal, the CIT(A) gave a relief of Rs. 10,000. Thus, only an amount of Rs. 5,000 is in dispute before us. After hearing both the sides we are of the opinion that the relief given by the CIT(A) is fair and reasonable and no further relief is called for. This ground accordingly fails and is dismissed.
32. The next ground raised by the assessee relates to confirmation of penalty of Rs. 6,550. During the course of assessment proceedings the AO noted that the assessee had been penalised under the ST Act (penalty amount Rs. 550) and under the Factories Act (penalty amount Rs. 6,000). He accordingly disallowed these two amounts. On appeal, the CIT(A) confirmed the same.
33. We have heard both the parties. Infringement of law is no incidence of business. Accordingly we concur with the findings of the authorities below and hold that the assessee is not entitled to deduction of Rs. 6,500-being penalties under the ST Act and the Factories Act. This ground accordingly fails and is dismissed.
34. Ground No. 7 raised by the assessee relates to charging of interest under ss. 234B and 234C which reads as under:
"In not appreciating the facts and/or law that the appellant totally denies liability to pay interest under ss. 234B and 234C in view of the written submission dt. 25th April, 1996, relevant p. 31 in which the reliance as per para 3 was placed on Ranchi Club Ltd. vs. CIT (1996) 85 Taxman 201 (Pat), decision of Patna High Court".
The AO charged interest under ss. 234B and 234C. Before the CIT(A) the assessee denied its liability under ss. 234B and 234C. Reliance on this behalf was placed on the Gujarat High Court judgment CIT vs. Bharat Machinery & Hardware Mart (1982) 136 ITR 875 (Guj). The CIT(A) held as under:
"Inasmuch as I have already restored the ground relating to the additions to the trading results to the file of the AO. The AO is also directed to grant corresponding reduction in the amount of interest in accordance with relief granted by this order."
35. K. H. Shah, the learned counsel for the assessee submitted that the assessee was not liable to pay any interest under ss. 234B and 234C at all. In support of his contention he relied upon the decision of this Tribunal in the case of the assessee for the asst. yr. 1988-89 to which both of us were parties. The learned Departmental Representative relied upon the order of the authorities below.
36. We have considered the rival submissions. In the case of the assessee in ITA No. 3005/Ahd/1992 vide order dt. 27th February, 1997, for the asst. yr. 1989-90 this Tribunal observed as under:
"We have considered the rival submissions and perused the facts on record. Sec. 207, as substituted by the Direct Tax Laws (Amendment) Act, 1987 w.e.f. 1st April, 1988, lays down that tax shall be payable in advance during any financial year, i.e., 1st April, to 31st March, in accordance with provisions under ss. 208 to 219, in respect of the total income of the assessee which would be chargeable to tax (not charged to tax) for the assessment year immediately following that financial year. Such income on which advance tax is payable is to be called the "current income". As is evident from the facts of the case the assessee having suffered a loss, had no such current income on which advance tax was payable. The provisions of ss. 207 to 219 relating to the advance tax are based on the principle "pay as you earn". As held by the Kerala High Court in the case of Lord Krishna Bank Ltd. vs. ITO (1989) 178 ITR 509 (Ker), the advance tax means only the tax paid before the assessee as required by the Act. We accordingly hold that the assessee was not unable to pay any advance tax and, hence, there is no justification for charging interest under s. 234B".
The facts this year before us are identical to those relating to asst. yr. 1989-90. Accordingly, we hold that the assessee was not liable to pay any advance tax and hence there is no justification for charging interest under s. 234B and 234C. This ground accordingly succeeds.
37. The last grievance of the assessee relates to non-admission of additional ground raised before the CIT(A). It has been submitted before us that additional ground (No. 10) was raised in the written submissions dt. 25th April, 1996, before the CIT(A). Shah the learned counsel for the assessee prayed that since the AO himself had appeared before the CIT(A) and all the material facts were disclosed before the AO and the claim was also made before the AO there is no reason to discard the additional ground raised by the assessee. He submitted that he will be satisfied if the CIT(A) is directed to entertain the additional ground and dispose of it after hearing the parties.
38. The learned Departmental Representative has no objection to our giving such a direction to the CIT(A). We accordingly direct the CIT(A) to entertain the additional ground raised before him and adjudicate upon the same after giving an opportunity of being heard to the parties.
39. In the result, the appeal is allowed in part.