Income Tax Appellate Tribunal - Mumbai
Hindustan Lever Ltd. vs Inspecting Assistant Commissioner on 4 March, 1996
Equivalent citations: [1996]58ITD555(MUM)
ORDER
K.C. Singhal, J.M.
3. Ground No. 3 relates to the disallowance of an expenditure incurred on maintenance of guest house amounting to Rs. 7,32,299. Assessee has challenged the deduction of the expenditure relating to repairs, depreciation, telephone charges, wages of caretaker, canteen provision, gas charges as well as newspapers and subscriptions. Besides this, assessee has taken an additional ground in respect of rent of the guest house. As far as the expenditure on wages of caretaker and newspapers and subscriptions is concerned, assessee has not pressed the same. Hence, the disallowance in respect of these two items is confirmed. The contention of the assessee regarding repairs and rent in respect of guest house is that these expenditures are allowable under section 30 of the Act and, therefore, the disallowance under section 37(4) cannot be made in view of the Bombay High Court decisions in the case of CIT v. Chase Bright Steel Ltd. (No. 1) [1989] 77 ITR 124. Similar contention has been raised in respect to depreciation of the guest house as it is allowable under section 32. On the other hand, the learned Departmental Representative has opposed such contention of the assessee in view of the latest decisions of the Bombay High Court in CIT v. Ocean Carriers (P.) Ltd. [1995] 211 ITR 357 and Raja Bahadur Motilal Poona Mills Ltd. v. CIT [1995] 212 ITR 175 and also the decision of the Tribunal reported as Asstt. CIT v. Trade Links Ltd. [1995] 54 ITD 108 (Delhi). In respect of expenditure on canteen provisions and gas charges, the contention of the assessee is that these cannot be treated as maintenance expenses of guest house. According to him, these expenditure are incurred in respect to the persons who visited the guest house and not in respect of the guest house itself. Regarding telephone charges it was submitted by him that it cannot be treated as expenditure on the maintenance of guest house. On the other hand, the learned Departmental Representative submitted that these expenditures are covered within the ambit of the words "maintenance of guest house". Further, on the legal issue he submitted that section 37(4) specifically disallows expenditure on maintenance of a guest house and depreciation thereon. He also invited our attention to the recent decisions of the jurisdictional High Court in the cases of Ocean Carriers (P.) Ltd. (supra) and Raja Bahadur Motilal Poona Mills Ltd. (supra) wherein the issue has been decided against the assessee. He also referred to the Tribunal decision in Trade Links Ltd.'s case (supra).
3.1. In reply, the learned counsel for the assessee submitted that the judgment of the Bombay High Court relied upon by the revenue do not relate to the controversy before us. According to him, the questions referred to the High Court in those cases were entirely of different nature. He took us through the question referred to in those cases. He, therefore, submitted that judgment of a High Court has to be understood in the context in which it was delivered and not otherwise. In support of this contention, he relied upon the decision of the Supreme Court in the case of CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297.
4. Both the parties have been heard at length on this issue. Case law referred to by the parties have been considered carefully. On our opinion, the first contention of the assessee that expenditures incurred by it on food and beverages do not fall within the meaning of the words "maintenance" has to be accepted as the word "maintenance" would include only those expenditures which are incurred for preservation and upkeep of the guest house. The literal meaning of such word, no doubt, include food and clothing, etc. But that meaning can be attributed only when it is used with reference to human being such as maintenance of wife or children. Where the word "maintenance" has been used with reference to the guest house it would not include such expenditure but would, in our opinion, include expenditure such as repairs, whitewash, salary of the caretaker, telephone and electricity etc. Therefore, we hold that expenditure on food, beverages and gas charges would not fall under section 37(4) while expenditure on telephone would be includible for disallowance. Our view also finds support from the decision of the ITAT in the case of J.K. Synthetics Ltd. v. ITO [1990] 32 ITD 775 (Delhi). The other controversy whether the expenditure by way of rent and depreciation allowance in respect of guest house can be disallowed under section 37(4) or not requires serious consideration. For the first time the issue whether expenditure on rent and repairs in respect of guest house could be disallowed under section 37(3) was raised before the Hon'ble Bombay High Court in the case of Chase Bright Steel Ltd. (No. 1) (supra). The Court considered the language of section 37(3) and noted that the provisions of section 37(3) stated with the words "notwithstanding anything contained in sub-section (1)". In view of this language, the Hon'ble High Court held that the non obstante provisions were vis-a-vis sub-section (1) of section 37 and not vis-a-vis any other provisions of the Act. Therefore, the court held that any expenditure which is allowable under the provisions of sections 30 to 36 could not be disallowed under section 37(3). Since, according to the court, rent and repairs of the guest house were allowable under section 30 the issue was decided in favour of the assessee. Thereafter such issue against came up before the Bombay High Court in the case of Century Spg. & Mfg. Co. Ltd. v. ITO [1991] 189 ITR 660. There the question was whether the depreciation in respect of guest house could be disallowed under section 37(4) or not. After considering the language of section 37(4) the court held as under :
"Sub-section (4) of section 37 of the Income-tax Act, 1961, is no doubt a non obstante clause, but it is non obstante clause vis-a-vis sub-section (1) and sub-section (3) of section 37 only. If an expenditure or allowance is allowable under other sections of the Income-tax Act, 1961, the allowance cannot be withdrawn or denied to the assessee because of the prohibitory provisions in section 37(4) of the Income-tax Act, 1961. Therefore, the assessee will be entitled to depreciation on the premises used as guest house."
On the basis of these two decisions the Tribunal has been consistently deciding the issue in respect of expenditure by way of rent and depreciation on guest house in favour of the assessee. But the revenue has not contended that we should not follow these two decisions as recently the Bombay High Court has decided this issue against the assessee in two cases, viz., -
(1) Ocean Carriers (P.) Ltd. (supra), and (2) Raja Bahadur Motilal Poona Mills Ltd. (supra).
According to the revenue these two decisions being latest should be followed by the Tribunal. We have gone through these two decisions of the Hon'ble Bombay High Court and find that those decisions are distinguishable inasmuch as the question referred in those two cases were entirely different. In the case of Ocean Carriers (P.) Ltd. (supra) the following question was referred for the opinion of the High Court :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the expenditure of Rs. 10,029 as maintenance expenses and Rs. 11,375 as depreciation allowance, for the assessment year 1977-78 in relation to the flats at Jupiter Apartments and Sunita Apartments, was not expenditure incurred on the maintenance of residential accommodation in the nature of a guest house, and was, therefore, an admissible deduction ?"
Perusal of the above question shows that the court was concerned with the nature of the accommodation and not with the legal issue which is before us. This is clear from the relevant portion oft he judgment which is being reproduced as under :-
"Taking the totality of the circumstances into consideration, in our view, by providing accommodation to the members of the crew as also to representative of the assessee's principal non-resident shipping companies in these flats, the assessee-company had treated these flats as its own guest house and since these guest houses were not maintained exclusively as a holiday home for the employee of the assessee-company, the assessee-company was not entitled to allowance under section 37(4) in respect of any expenditure on maintenance thereof incurred after February 28, 1970, nor to any depreciation allowance. The Tribunal was wrong in setting aside the order of the Commissioner of Income-tax and upholding the action of the Income-tax Officer. Hence, we answer the question referred in the negative and in favour of the Revenue."
Similarly in the case of Raja Bahadur Motilal Poona Mills Ltd. (supra) the court was not concerned with the controversy as arising in this appeal. The question before the Hon'ble Court was about the nature of the expenditure. The question referred in that case reads as under :-
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenses of Rs. 21,951, Rs. 17,601 and Rs. 8,273, respectively for 1970-71, 1971-72 and 1972-73 assessment years related to the maintenance of residential accommodation in the nature of a guest house within the meaning of section 37(3)/37(4) of the Income-tax Act, 1961?"
The court has decided the issue against the assessee after following its earlier decision in the case of Ocean Carriers (P.) Ltd. (supra). In our considered opinion, the controversy before us is squarely covered by the decisions of the Hon'ble Bombay High Court in the cases of Chase Bright Steel Ltd. (No. 1) (supra) and Century Spg. & Mfg. Co. Ltd. (supra). Such controversy had not been there before the Hon'ble Bombay High Court in the later two decisions. Hence, after following the earlier two decision of the Hon'ble Bombay High Court, we decide the issue in favour of the assessee and hood that rent and repairs in respect of guest house as well as depreciation thereon cannot be disallowed under section 37(4).
6. Ground No. 5 relates to the disallowance of Rs. 1,64,543 on account of provisions for sales tax made by the assessee-company. The brief facts are these : The assessee included by way of provisions the sum of Rs. 1,64,543 in respect of sales tax under the head "provisions for rates and taxes and others" and the same was debited to the profits & loss account. This provisions has been made in respect of sales effected by the assessee against the declaration forms to various parties throughout the country. The explanation of the assessee vide letter dated 29-11-1995 regarding the manner of creation of reserve is extracted below :
"We have examined the records and inform you that as per the consistent accounting practice followed by the company, it had made a provision for sales tax of Rs. 1,64,543 for non-receipt of declaration forms and included under the head 'Rates and Taxes - Others' amounting to Rs. 102.21 lakhs debited to the P & L account, as stated in note 4 on page 9 of the printed Report & Accounts for 1982. We enclose herewith a detailed statement audited by the auditors showing the calculation of the amounts of Rs. 1,64,543 together with the relevant statements received from the four branches of the company for the year ended 31-12-1982. You will observe from the statements that as per the scientific basis followed by the company for determination of the provision, the closing provision required as on 31-12-1982 was ascertained at Rs. 76,62,848 as against the provision at Rs. 74,98,304 lying in the accounts, requiring an additional provision of R. 1,64,543 to be made good in the 1982 accounts."
Further at page-2 of the letter it has been stated as under :
"However, as a prudent measure of business practice, the company has been consistently following a system of ascertaining at the end of each year the quantum of sales for which such declaration forms have not been received and determining and providing for the differential sales tax liability and charging the said expenditure to its business income. In event of the declaration forms being received at a subsequent date, the company has also been ensuring that the liability originally provided for is suitably reduced by necessary addition to the business income."
Assessee claimed the aforesaid amount as expenditure on the basis of mercantile system of accounting. The claim was supported by he decision of the apex court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363. Such claim was rejected by the Assessing Officer as well as the CIT(A).
7. Both the parties have been heard. The learned counsel for the assessee has reiterated his arguments which were taken by the assessee before the Assessing Officer as well as the CIT(A). On the other hand, the learned Departmental Representative has relied on the order of the CIT(A). After considering the rival contentions of the parties, we are of the view that the contention of the assessee is without force. The scheme of the Maharashtra Sales Tax Act is that no tax is payable by the assessee when the sale is effected to the registered dealers against declaration forms. Similarly under the Central Sales Tax Act assessee is liable to pay concessional rate of tax if the sale is effected to the registered dealers of other Status against the declaration forms. Accordingly, no further liabilities is fastened on the assessee once sale is shown to have been made against such declaration forms until and unless these declaration forms are not furnished in the course of assessment proceedings. In such eventuality the demand is raised by the sales tax authorities at the time of completion of the assessment. Prior to that there is no statutory liability. Therefore, in our opinion, the liability created by the assessee by way of provisions is only a contingent and, therefore, cannot be allowed.
The reliance placed upon the decision of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra) by the assessee's counsel is misplaced. The ratio of that judgment is that statutory liability is created as soon as the sale is made which is allowable where the method of accounting is mercantile. In that case taxable even had taken place during the impugned year. But in the present case the taxable even does not take place during the year under consideration inasmuch as the sale is made to the registered dealers against the declaration forms. Under the Central Sales Tax Act it is only the concessional rate of tax which is to be paid by the assessee in respect of which there is no dispute before us. The provisions made by the assessee is only in respect of tax which might have to be paid by the assessee in the even of non-furnishing of declaration forms. The event of non-furnishing of declaration forms takes place at the state of assessment which is much after the end of the assessment year. Liability, if any, would crystallize at that moment only. Hence the decision of the apex court, in our opinion, does not help the assessee.
Another contention was raised by the learned counsel for the assessee that this system is followed by the assessee consistently for many years and such claim has been allowed in the past. Hence, there is no reason for departing with the same. We are unable to accept this proposition. In our view, if claim is not legally allowable, then it should not be allowed merely because it had been allowed in the past. Under the mercantile system of accounting, an expenditure is allowable even if the payment is not made if it is otherwise legally allowable. The view of ours is fortified by the judgment of the Hon'ble Supreme Court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44. Wherein similar proposition was turned down. In that case a particular method of account of closing stock was being consistently followed which was found by the authorities to the defective. The Supreme Court negatived the contention of the assessee that a claim of the assessee should be allowed as it was based on the method of accounting being consistently followed by the assessee. In view of the aforesaid judgment of the apex court, this contention of the assessee has to be rejected. Hence, we dismiss this ground of appeal.
8. Ground No. 6 relates to the deduction under section 80HHC. assessee is engaged in the business of export of various items. During the year under consideration, certain exports were made from Malaysia through M/s. Lever Brothers amounting to Rs. 1,54,48,631 against which assessee received convertible foreign exchange. The claim under section 80HHC was made in respect of such exports which has been denied by the Assessing Officer on the ground that it was not be bought within the ambit of this provision. On appeal, the CIT(A) considered the provisions of section 2(18) of the Customs Act, 1962, which defines exports according to which it means taking out of India to a place outside India. He also endorsed the view of the Assessing Officer that exports according to which it means taking out of India to a place outside India. He also endorsed the view of the Assessing Officer that exports must be by an Indian company who is a resident in India. Hence, he confirmed the disallowance of the deduction under section 80HHC. Aggrieved by this order, assessee is in appeal before the Tribunal.
Both the parties have been heard. After considering the rival contentions we are of the view that there is no merit in the contention of the assessee. In our considered opinion the exports must be from India in order to claim deduction under section 80HHC. The CIT(A) has given cogent reasons in support of his order. According to the definition of section 2(18) of Customs Act, 1962, export means taking out of India to a place outside India. In our view dispatch of goods from Malaysia cannot be said to be an export outside India for the purpose of section 80HHC. Hence, we reject the contention of the assessee.
9. The other aspect of deduction of section 80HHC relates to the claim of the assessee in respect of incremental turnover of export. Assessee had claimed deduction at the rate of 5% on the incremental export turnover productwise and not with respect to the total turnover of exports. This claim of the assessee has been rejected by the Assessing Officer as well as the CIT(A). Aggrieved by the same, assessee is in appeal before the Tribunal. Both the parties have been heard at length. In our considered opinion, claim of the assessee is without force. According to the provisions of section 80HHC, applicable to assessment year 1983-84, assessee was entitled to a deduction of 1% of the export turnover and a further deduction of the amount equal to 5% of the amount by which the export turnover during the previous year exceeded the export turnover during the immediately preceding year. The contention of the learned counsel for the assessee has to be rejected on two grounds, viz., (i) the word "exceeds" used by the Legislature in sub-clause (b) of clause (1) of section 80HHC presupposes the existence of some turnover in the preceding year. Therefore such provisions cannot be applied to a situation where there is no export in the preceding year, (ii) if the contention of the assessee is accepted it would amount to discrimination between two equals. For example, company A exports goods worth Rs. 1 crore during the year without there being any export in the preceding year and company B who has exported goods worth Rs. 50 lakhs in the preceding year also exports goods worth Rs. 1 crore during the year under consideration. In such situation though both the companies have exported goods worth Rs. 1 crore, they will be allowed different deductions if the contention of the assessee is accepted. According to the formula adopted by the assessee-company A it would be able to claim deductions of Rs. 5 lakhs on the incremental turnover while company B would only be able to get deduction of Rs. 2 1/2 lakhs. This would amount to discrimination. Hence, such an interpretation as put forth by the assessee cannot be accepted. Therefore, in our opinion, it is only the difference between the total export turnover of the current year over the total export turnover of the preceding year which is entitled to a further deductions of 5% on the incremental turnover. Hence this contention of the assessee is rejected.
Another aspect of such deduction in ground No. 6 relates to the export turnover in respect of goods exported to Nepal & Bhutan has not been pressed before us. Hence that part of the ground is dismissed as not pressed.