Income Tax Appellate Tribunal - Ahmedabad
G.L. Rexroth Industries Ltd. vs Deputy Commissioner Of Income Tax on 1 March, 2000
ORDER
R.K. Bali, A.M.
1. These four cross-appeals relating to asst. yrs. 1986-87 and 1987-88 involve common points and are, therefore, disposed of by a common order for the sake of convenience. All these four appeals are directed against the combined order dt. 6th Dec., 1991, passed by the CIT(A)-V, Ahmedabad.
TTA No. 804/Ahd/1992 for asst. yr. 1986-87
2. ITA Mo. 804/Ahd/1992 is the appeal by the assessee wherein the substantive grounds taken are as under:
(i) The learned CIT(A) has erred in confirming the addition of Rs. 60,65,033 of the income of the assessee made by the AO by invoking the provisions of s.
41(1) of the Act.
(ii) The learned CIT(A) has erred in confirming the disallowance of Rs. 6,46,286 under Section 43B of the Act.
(iii) The learned CIT(A) has erred in holding that the assessee is liable to pay interest under Section 215 and while calculating the interest the addition of Rs. 60,65,033 made by the AO under Section 41(1) of the Act was not required to be excluded.
TTA No. 805/Ahd/1992 for asst. yr. 1987-88
3. ITA No. 805/Ahd/1992 is the appeal by the assessee wherein the substantive grounds taken are as under:
(i) The learned CIT(A) has erred in confirming the addition of Rs. 18,03,132 to the income of the assessee made by the AO by invoking the provisions of Section 41(1) of the Act.
(ii) The learned CIT(A) has erred in confirming the disallowance of Rs. 8,28,069 under Section 43B of the Act.
(iii) The learned CIT(A) has erred in confirming the disallowance of Rs. 78,664 made by the AO under Section 40A(5) of the Act.
(iv) The learned CIT(A) has erred in holding furniture allowance of Rs. 12,000 paid to Shri S.G. Gandhi, an employee, was a perquisite and includible as such while considering the disallowance under Section 40A(5).
(v) The learned CIT(A) has erred in confirming the disallowance of Rs. 21,868 being club expenses incurred by the chief executive of the company in connection with the business.
(vi) The learned CIT(A) has erred in holding that the assessee is liable to pay interest under Section 215 and while calculating the interest the additions of Rs. 18,03,132 and Rs. 8,28,069 under Section 43B were not required to be excluded.ITA No. 861/Ahd/1992 for asst. yr. 1986-87
4. ITA No. 861/Ahd/1992 is the appeal by the Revenue wherein the substantive grounds taken are as under:
The learned CIT(A) has erred in law and on facts-
(i) In deleting the disallowance of Rs. 17,347 made under Section 37(3) of the Act.
(ii) In directing to exclude the disallowance made under Section 43B from the total income while calculating interest under Section 215 of the Act. ITA No. 862/Ahd/1992 for asst. yr. 1987-88
5. ITA No. 862/Ahd/1992 is the appeal by the Revenue wherein the substantive grounds taken are as under:
The learned CIT(A) has erred in law and on facts-
(i) In deleting the disallowance of Rs. 77,496 made under Section 37(3) of the Act.
(ii) in reducing the disallowance of bonus provision by Rs. 3,27,765.
6. A perusal of the grounds taken by the assessee indicates that the main dispute is with regard to the additions of Rs. 60,65,033 for asst. yr. 1986-87 and Rs, 18,03,132 for asst. yr. 1987-88 which were made by the AO under s, 41(1) and which were confirmed by the C1T(A).
7. Briefly the facts relating to this common ground in both the appeals are that the assessee-company has purchased in the earlier years raw material and components to be used in the manufacture of products, namely, hydraulic systems and other equipments from its foreign collaborators Mannesmann Rexroth GmBH of West Germany and its subsidiary Hydromatik GmBH. The purchase price of raw material and components was debited in the manufacturing/P&L a/c of those years as an expenditure incurred by the assessee-company. However, the payment in respect of the material purchased was not made to the German collaborators and the amount remained unpaid and shown in the balance sheet under the head "current liabilities".
8. In order to help the assessee-company to secure financial stability, the collaborator decided not to recover the outstanding amount and accordingly the foreign collaborator and subsidiary waived the recovery of Rs. 60,65,033 in the asst. yr .1986-87 of Rs. 18,03,132 in the asst. yr. 1987-88. Both these amounts were credited to the P&L a/c in the respective assessment years. However, in the returns of income filed for both the years, these amounts were claimed as exempt. The AO did not accept the contention of the assessee with regard to the non-taxability of those amounts on the grounds that-
(i) since the amounts due from the company were for material and components, it was a trading liability of the assessee in the normal course of business,
(ii) since the waiver intimation of those amounts by the foreign collaborator was received by the assessee-company during the assessment years under consideration, the cessation of liability took place in these years only; and
(iii) since it is a cessation of liability, the same was taxable under Section 41(1) of the Act.
9. Aggrieved with the orders of the AO, the assessee filed the appeals to the CIT(A) and submitted that the AO was not Justified in taxing the disputed amounts under Section 41(1) and for that the assessee filed a copy of the legal opinion given by Shri B.J. Diwan, retired Chief Justice of Gujarat High Court, on the basis of which in the published accounts of the assessee-company it was claimed that the amounts waived by the foreign collaborator are not liable to taxation. The CIT(A), however, upheld the action of the AO for the reasons given in paras 9 to 15 of the impugned order.
10. Before us, the learned authorised representative of the assessee submitted that the AO as well as CIT(A) had not properly appreciated the distinction between a trading liability and a debt which was shown as current liability in the balance sheet of the assessee-company and as such have wrongly invoked the provisions of Section 41(1) of the Act. It was pleaded that the assesses has not received any amount in cash or in kind and, therefore, the assessee has not obtained any benefit in respect of allowances or deduction made earlier and as such the provisions of Section 41(1) are not applicable. The learned authorised representative of the assessee heavily relied on the opinion given by Shri B.J. Diwan, retired Chief Justice of the Gujarat High Court, and as such it will be relevant to produce some of the observations on the basis of which the distinction is sought to be made between a trading liability and a current liability :
"He states in the instant case the querist company has not received any amount either in cash or in any other manner whatsoever during the course of the year 1985, and though it is receiving a remission or cessation of its debt due to German collaborator and its subsidiary, that benefit is not in respect of any trading liability. The expenditure for the purchase of raw materials in the shape of supplies of stores, spare parts, components and other raw materials were all items of expenditure and not trading liability. The company was not a trader dealing in buying and selling of supply of stores, machinery spare parts and components used in the manufacture of hydraulic systems. The phrase "trading liability" used in Section 41(1) is in juxtaposition to the word "losses or expenditure" and it is clearly envisages a trading activity, i.e., activity of buying and selling of materials. Therefore, when the German collaborator and its subsidiary have intimated to the querist company, that they do not propose to recover the bills aggregating to Rs. 60 lacs in respect of supply of stores, machinery spare parts and components used in the manufacture of hydraulic system, it is not remission or cessation of any "trading liability". In fact there was no "trading liability" but it was a "Debt" for expenditure of raw materials which were bought by the querist company from the German collaborator and its subsidiary company and for which the payment was not made between 1983 and 1985". He, therefore, opined that provisions of Section 41(1) are not applicable."
Accordingly, it was submitted that in view of the opinion of Shri B.J. Diwan, retired Chief Justice of the Gujarat High Court, the disputed amounts of Rs. 60,65,033 for asst. yr. 1986-87 and Rs. 18,03,132 for asst. yr. 1987-88 are not taxable under Section 41(1). Reliance was also placed on the decision of the Hon'ble Supreme Court in the case of CIT v. Canara Bank Ltd. (1967) 63 ITR 328 (SC).
11. The learned Departmental Representative strongly relied on the order of the CIT(A) and further submitted that admittedly the components and raw materials were purchased by the assessee-company from the foreign collaborator during the course of its business operations and the same were claimed as an expenditure in the relevant assessment years when the purchases took place. The assessee did not make the payment for the purchases and the amounts were shown under the head "current liabilities" in the balance sheet. It was pleaded that the "current liabilities" were in fact "trading liabilities" because the debt payable by the assessee was on account of trading operations and since these were remitted by the foreign collaborator, the assessee did receive a benefit in terms of Section 41(1) and the Departmental authorities were fully justified in taxing the same as the income of the assessee.
12. We have considered the rival submissions and have also gone through the orders passed by the AO as well as CIT(A) along with the opinion given by Shri B.J. Diwan, retired Chief Justice of the Gujarat High Court, copy of which is also filed before us. A perusal of the opinion (relevant observations of which have been quoted by us in para 10 of this order) indicates that an attempt is being made by the assessee-company to plead that the purchases of raw materials, machinery spare parts and components are not in the nature of trade and, therefore, the amounts outstanding against such supplies are not trading liabilities and hence waiver of recovery of outstanding amounts in respect of supplies of such raw materials, spare parts and components is not remission or cessation of trading liability and as such the amounts waived by the foreign collaborator were not taxable under Section 41(1). We are afraid, that the arguments advanced by the learned authorised representative of the assessee based upon the opinion of Shri B.J. Diwan, retired Chief Justice of the Gujarat High Court, cannot be accepted. It is no doubt true that the assessee is not dealing in/trading in supply of stores, machinery spare parts and components but is manufacturing hydraulic systems and other equipments and for which raw materials, machinery spare parts and components are used and, therefore, the assessee may not be directly dealing in sale and purchase of the stores, spare parts and components but it is definitely engaged in trading the same after converting those items into hydraulic systems by way of assembling and the net result is that the raw materials, stores, machinery spare parts and components purchased from the German collaborator are traded by the assessee-company. It is also important to note that the supplies made by German collaborator have not been capitalised by the assessee treating the same as assets but these have been claimed as purchases for which deduction has been claimed by the assessee and allowed by the AO in the relevant assessment years Thus, the expenditure incurred for the purchase has been considered as a revenue expenditure by the AO and has been allowed deduction of such expenditure from the profit of the assessee-company for those years and, therefore, as and when the profit increased on account of remission of an amount which originally contributed to decrease of the earlier profit, it will amount to a benefit. It is undisputed that the recipient of the benefit is the assessee in the asst. yrs. 1986-87 and 1987-88 and as such the provisions of Section 41(1) are clearly applicable. In order to bring an amount to tax under Section 41(1) two conditions are required to be satisfied, viz., that the amount has been allowed as a deduction in some earlier years and that during the assessment year in dispute the assessee has received the benefit representing the amount in question by way of cessation or remission of the liability in regard to the said amount, The amount may, be actually received or it may be adjusted by way of adjustment entry or a credit note or in any other form when the cash or the equivalent of cash can be said to have been received by the assessee. In the case before us it is not the case of the assessee that the liability has ceased by unilateral action of the assessee but the cessation of liability of debt incurred on account of purchases made in earlier years has taken place by bilateral act of both the creditor and the debtor. The creditor agreed to forego the debt to save the assessee-company from financial crisis and to help the assessee-company to secure financial stability. But the reason for waiver of liability is not relevant for determining the taxability of the disputed amounts. Accordingly, we will uphold the action of the Departmental authorities in this regard and hold that the amount of Rs. 60,65,033 for asst. yr. 1986-87 and Rs. 18,03,132 for asst. yr. 1987-88 are liable to tax under Section 41(1) in the case of the assessee.
13. Before parting, we may observe that the decision of the Hon'ble Supreme Court in the case of Canara Bank Ltd. (supra) is distinguishable on facts because in that case the disputed amount was originally stock-in-trade and then it was blocked and sterilised and the bank was unable to deal with that amount and it ceased to be its stock-in-trade. Accordingly, the increase in its value owing to exchange fluctuation was held to be a capital receipt. The facts in the case before us are clearly different and as such the ratio of that case is not at all applicable. Accordingly, we will adjudicate ground No. (i) in both the appeals filed by the assessee in favour of the Revenue and against the assessee.
14. As regards ground No. (ii) relating to the disallowance made under Section 43B is concerned, the learned authorised representative of the assessee submitted that the disputed amounts were paid before filing of the returns within the time allowed and as such the Departmental authorities were not justified in making the disputed additions under Section 43B. The learned Departmental Representative supported the order of the CIT(A).
14.1. After hearing the parties to the dispute, we restore the question of disallowance under Section 43B, to the file of the AO to be re adjudicated in accordance with the principles laid down by the Hon'ble Supreme Court in the case of Allied Motors (P) Ltd. v. CTT (1997) 224 ITR 677 (SC).
15. Coming to ground No. (iii) in ITA No. 804/Ahd/1992, ground No. (vi) in ITA No. 805/Ahd/1992 and ground No. (ii) in ITA No. 861/Ahd/1992, the learned authorised representative of the assessee submitted that in view of the decision of the Gujarat High Court in the case of CTT v. Bharat Machinery & Hardware Mart (1982) 136 ITR 875 (Guj) no interest should be charged. The learned Departmental Representative supported the order of the CIT(A). 15.1. We have considered the rival submissions. The facts in the case of Bharat Machinery & Hardware Mart (supra) are entirely different and are quite distinguishable from the facts in the case of the assessee. Here the disputed amounts added to the income under Section 41(1) are clearly taxable and as such the AO was justified in charging the interest under Section 215 in relation to those amounts. However, if on verification the AO finds that the disputed additions made under Section 43B for both the years are required to be deleted in view of the decision of the Hon'ble Supreme Court in the case of Allied Motors (P) Ltd. (supra), he will allow consequential relief to the assessee in the interest chargeable under Section 215.
16. As regards ground Nos. (iii) and (iv) in ITA No. 805/Ahd/1992 were concerned, after hearing the parties to the dispute, we are of the opinion that the issue in dispute is covered in favour of the assessee and against the Revenue as per the decision of the Hon'ble Supreme Court in the case of CIT v. Mafatlal Gangabhai & Co. (P) Ltd. (1996) 219 TTR 644 (SC) In the aforesaid decision, the Hon'ble Supreme Court held that the language employed in Section 40(a)(v)/40A(5) is not capable of taking within its ambit cash payments made to the employees by the assessee. These cash payments will, of course, be treated as salary paid to the employees and will be subject to the limits/ceiling, if any, in that behalf. But they cannot be brought within the purview of the words "any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite"--moreso because of the words "whether convertible into money or not". The further word included in s, 40A(5) "including any sum paid by the assessee in respect of any obligation which but for such payment would have been payable by such employee" contemplate a situation where the assessee makes a payment (in cash) in respect of an obligation of the employee which would have been payable by the employee if it is not paid by the assessee-company. However, such payment by the company is not a payment to the employee but to a third party and as such would not cover cash payment made to the employee. Accordingly, we will hold that the Departmental authorities were not justified in treating the amount of Rs. 78,644 and Rs. 12,000 as perquisite for the purpose of calculating the disallowance under Section 40A(5).
17. Coming to ground No. (v) in ITA No. 805/Ahd/1992 which relates to club expenses of Rs. 21,868 incurred by the chief executive is concerned, the same is allowable as a business expenditure in view of the decision of the Gujarat High Court in the case of Gujarat State Export Corporation Ltd. v. CIT (1994) 209 ITR 649 (Guj). Accordingly, the addition of Rs. 21,868 is directed to be deleted.
18. Coming to the Revenue's appeals, the learned first appellate authority has dealt with the deletion of the disallowances of Rs. 17,347 for asst. yr. 1986-87 and Rs. 77,496 for asst. yr. 1987-88 made by the AO under Section 37(3) in paras 16.1 to 16.3 and 26 of the impugned order as under:
16.1. The first point for consideration in this year is in respect of disallowance under Section 37(3) of the IT Act in respect of presentation articles of Rs. 17,347. The appellant-company presented various articles on various occasions to its important customers and guests as token of goodwill. The expenditure was Rs. 17,491. The AO allowed Rs. 145 as the articles costing below Rs. 50 and disallowed Rs. 17,347 being in excess of Rs. 50.
16.2. It was submitted by the learned counsel of the appellant that the presentation articles did not bear the name or logo, of the company and were given to create goodwill and maintain good business relations. Therefore, these expenses were not a part of advertisement expenses and provisions of s, 37(3) and Rule 6B are not attracted. Reliance was placed inter alia on the decision of the Gujarat High Court in the case of CIT v. SLM Maneklal Industries Ltd, (1977) 107 ITR 133 (Guj).
16.3. On careful consideration of the matter and keeping in view the decision of Hon'ble Gujarat High Court in the case of SLM Maneklal Industries (supra) I would hold that the expenditure incurred on presentation articles do not fall within the purview of Section 37(3) or Rule 6B and being in the nature of business expenses fully allowable. I would, therefore, delete the addition of Rs. 17,347."
"26. The next ground of appeal relates to disallowance under Section 37(3) and Rule 6B of Rs. 77,496 being presentation and gift articles. The facts are identical to that of asst. yr, 1986-87 and for the reasons given above, I would delete the addition in this year also."
18.1. The action of the CIT(A) is quite in conformity with the decision of the Gujarat High Court in the case of SLM Maneklal Industries Ltd. (supra) and as such it requires no interference. Accordingly, we will adjudicate ground No. (i) in ITA Nos. 861 and 862/Ahd/1992 in favour of the assessee and against the Revenue.
19. Coming to ground No. (ii) in ITA No. 862/Ahd/1992 the learned first appellate authority has discussed this issue in paras 32 and 33 of the impugned order as under:
"32. The next ground of appeal relates to disallowance of Rs. 3,34,000 being provision for bonus. It was pointed out by the learned counsel of the appellant that the appellant is paying bonus in the previous year and therefore during the current year provision is made and which is allowable. This is a practice followed by the appellant right from beginning and same has been allowed. 33. On going through the details filed I have found that the appellant had made provision of Rs. 3,34,000 but actual payment amounted to Rs. 3,27,765 only. I would, therefore, direct the AO to allow deduction to the extent of Rs. 3,27,765 and balance amount should be disallowed."
19.1. After hearing the parties to the dispute, we find that the order of the CIT(A) requires no interference at all as the CIT(A) has directed the AO to allow deduction for the actual amount of bonus paid out of the provision made and no fault can be found with the reasoning and conclusion of the CIT(A) in this regard.
20. In the result, the appeal filed by the assessee are partly allowed and the appeals filed by the Revenue are dismissed.