Income Tax Appellate Tribunal - Ahmedabad
Inspecting Assistant Commissioner vs Madhusudan Vegetable Products Co. Ltd. on 12 January, 1990
Equivalent citations: [1990]33ITD107(AHD), (1990)37TTJ(AHD)343
ORDER
Per Shri B. M. Kothari, Accountant Member - The revenue has submitted the following ground in this appeal against the order passed by the CIT (A) for the A. Y. 1983-84 :
"1. The learned CIT (A) erred in law in directing the IAC (A) not to deduct the subsidy received from Government from the cost of assets for the purpose of depreciation and investment allowance.
2. The learned CIT (A) erred in law and on facts in deleting the addition of Rs. 1,59,129 being foreign tour expenses.
3. The learned CIT (A) erred in law and on facts in excluding LTC, HRA and P. F. contribution and medical reimbursement expenses from the perquisites."
2. The learned Departmental Representative contended that the CIT (A) has erred in directing the IAC (A) that the amount of subsidy received by the assessee from Government should not be deducted for computing the cost of assets for the purposes of depreciation and investment allowance. He submitted that the assessee itself gave the allocation of the amount of subsidy received with reference to different assets which clearly indicates that the amount of subsidy was given directly or indirectly for meeting the cost of assets by the Government.
3. The learned counsel for the assessee contended that this point is fully covered by various decisions of the Tribunal and also by the judgments of various High Courts in favour of the assessee. He relied upon the following judgment :
1. CIT v. Godavari Plywoods Ltd. [1987] 168 ITR 632/33 Taxman 505(AP)
2. CIT v. Bhandari Capacitors (P.) Ltd. [1987] 168 ITR 647 (MP)
3. CIT v. Diamond Dies Mfg. Corpn. Ltd. [1988] 172 ITR 655/40 Taxman 34 (Kar.)
4. CIT v. Relish Foods [1990] 180 ITR 454 (Ker.)
5. CIT v. Steel Tubes of India Ltd. [1990] 181 ITR 90/44 Taxman 266 (MP)
4. We have examined the rival submissions and have gone through the various judgments cited by the learned counsel. The various Benches of the Tribunal throughout the country have consistently been taking the view that central subsidy has been granted for ensuring the growth and expansion of industries in the notified backward areas and such amount of central subsidy cannot be deducted for computing the cost/WDV of assets for the purposes of granting depreciation and investment allowance. The various High Court judgments cited above clearly support this conclusion. The only High Court which has taken a contrary view is Punjab & Haryana in the case of CIT v. Jindal Bros. Rice Mills [1989] 179 ITR 470/46 Taxman 175. In view of the consistent view taken by the Tribunal and in view of the aforesaid judgments of Honble A. P., Karnataka, Kerala & M. P. High Courts, we confirm the findings given by the CIT (A) in this regard. Accordingly ground No. 1 of revenues appeal is rejected.
5. As regards ground No. 2, the learned D. R. vehemently contended that the CIT (A) has erred in deleting the addition of Rs. 1,59,129 being foreign tour expenses disallowed by the IAC (A). He submitted that the disallowance out of foreign tour expenses consisted of the following amounts :
(a) Partial disallowance at the rate of 50% of foreign tour expenses of Shri V. K. Somani, Director of the Company 53,043
(b) Foreign tour expenses of Smt. V. K. Somani.
1,06,086 1,59,129 He contended that the CIT (A) has entertained additional evidence while deleting the aforesaid disallowance made by the IAC (a). It was submitted that the assessee did not submit the copy of resolution passed by the Board of Directors by which Smt. Somani was appointed as Honorary Export and public Relations Adviser with effect from 3-12-1979. The bio-data of Smt. Somani and her experience in the sphere of interior decorations, drawings, and the details of her services rendered for ceramic division of the company were not brought to the notice of the assessing authority. Nowhere during the course of assessment proceedings it was submitted by the assessee that Smt. Somani had given suggestions and advice with regard to development of new products, new designs, colours and shapes in the production carried out by the new ceramic division of the company. Further the tour report of Smt. Somani was also not submitted before the assessing authority. The learned CIT (A) has seriously erred not only entertaining these additional evidences while deleting the disallowance of foreign tour expenses but he has also erred in accepting the same without even giving any opportunity to the assessing authority to examine such additional evidence and to cross-examine the concerned persons or to submit evidence in rebuttal thereof. It was contended that such additional evidence has been entertained and accepted in violation of specific rule 46-A of I. T. Rules, 1962. He, therefore, urged that the deletion of aforesaid disallowance made by the CIT (A) may be cancelled in the alternative the matter may be restored back to the IAC (A) or to the CIT (A) to redecide the same after giving reasonable opportunity to the assessing authority with respect to additional evidence submitted by the assessee.
6. The learned counsel for the assessee strongly objected to the aforesaid submissions made by the learned D. R. with regard to additional evidence entertained by the CIT (A). He pointed out that the revenue has not taken any such ground in the grounds of appeal submitted before the Tribunal. In the absence of any specific ground, the learned D. R. cannot validly challenge the entertainability of the additional evidence by the CIT (A). He pointed out that the return of income in this case was submitted on 27th June, 1983 which was unfortunately misplaced by the department and the assessee submitted a duplicate return declaring income of Rs. 72,21,710. The first effective hearing was commenced only when a detailed questionnaire was issued vide letter dated 11th October, 1985. Para 14(g) of the said letter required the assessee only, inter alia, to submit the details of foreign travelling. The assessee submitted a reply dated 18-11-1985 in which it was submitted that one of the companys Directors has undertaken foreign tour for export promotion of their products. It was also stated in that reply that necessary details were as per the tour report submitted along with the said letter. The learned counsel also stated that details of foreign travelling expenses as appearing at page 34 of the paper book were submitted before the learned assessing authority which clearly reveals that such expenses also included the expenses incurred with regard to the foreign trip of Smt. Somani. The copy of details of foreign travelling account submitted by the assessee before the learned assessing authority is as under :-
A.Y. 1983-84 Sr. No. Name of Person Period Places visited Expenses
1.
Shri V. Somany 29-9-1981 Zurich/Geneva/ 38,788.00 1-11-1981 Munich/London Cost of air ticket.
New York/Rome 55,640.65 Expenses
2. Mrs. V. Somany
-do-
-do-
38,788.00 Cost of air ticket.
3. Shri V. Somany 26-5-1982 Rome/Zurich/ 27,295.00 25-6-1982 Brussls/Amsterdam/ London Cost of air ticket.
24,366.15 Expenses
4. Mrs. V. Somany
-do-
-do-
27,295.00 Cost of air ticket.
TOTAL Rs. 2,12,172.80 It was pointed out that after submission of the aforesaid reply and the details no specific query was raised with regard to foreign travelling expenses incurred for Mr. & Mrs. V. Somani. He further pointed out that no disbelief or suspicion about the allowability of aforesaid expenditure was expressed by the learned assessing authority and the assessee knew about such observations only when the assessment order was received by it. It was under these circumstances that the assessee was compelled to submit additional material in support of allowability of the entire amount of foreign travelling expenses before the learned CIT (A). The learned counsel submitted that the CIT (A) was fully justified in entertaining the additional material in order to properly examine and consider the question relating to foreign travel expenses. He invited our attention towards the judgment of Honble Gujarat High Court in the case of CIT v. Motilal hirabhai Spg. & Wvg. Co. Ltd. [1978] 113 ITR 173 and Pari Mangaldas Girdhardas v. CIT [1977] CTR (Guj.) 647 to support his contention that additional evidence has rightly been entertaining additional evidence does not in any manner support the revenues contention especially because no specific ground of appeal has been taken by the revenue challenging the fact of additional evidence entertained by the CIT (A). The learned counsel submitted that the assessee is one of the leading companies and has submitted a return declaring an income of more than Rs. 72 lakhs. This fact itself should have convinced the learned assessing authority that a company of this status and size would not like to account for an expenditure which does not pertain its business. He submitted that Smt. Smiti Somani (Smt. Somani) is B. A. Hons. from Calcutta University. She has undertaken several courses in interior decoration, painting, gardening etc. in Calcutta and New Delhi. She is dedicated to the basic concept of art and its development in Indian style and in conformity with Indian culture. She was appointed as Honorary Exports and Public Relations Adviser with effect from 3rd December, 1979 as per resolution passed by the Board of Directors of the appellant company on that very day. A perusal of the resolution clearly reveals that this honorary appointment was give to Smt. Somani with a view of avail of her expert services in the areas of exports of ceramic products of the new ceramic division of the company and also in the area of public relations. It was further pointed out in the said resolution that the Board was of the opinion that it is in the interest of the company to avail such honorary adviser service particularly when the ceramic division of the company is in the stage of completion of construction. The copies of tour reports of Smt. Somani for her first foreign tour along with her husband to U. S. A. U. K. and West Europe from 29-9-81 to 1-11-81 and the tour report of her second tour to Europe from 20-5-1982 to 28-6-1982 were also placed before the CIT (A) in which she has given brief details of discussions regarding potentiality of export of sanitary-wares, with various parties in different countries. He submitted that Smt. Somani has rendered such services to the company without charging any remuneration and the company has merely met her actual expenses for foreign trip which was wholly incurred for business purposes of the company, and the same has rightly been allowed by the (CIT) (A). As regards the foreign travelling expenses of Shri Vikram Somani it was contended that the CIT (A) has rightly deleted the disallowance made by the assessing authority at the rate of 50% of expenses on his two foreign trips. It was pointed out that Shri V. Somani has been proceeding on foreign tours frequently and never any such disallowance was made out of expenses incurred for his foreign trips. The mere fact that his wife accompanied him in the two foreign trips cannot by itself justify the disallowance of 50% of the travelling expenses incurred in respect of his foreign trips which were wholly and exclusively undertaken for business purposes of the company. It was pointed out that complete details of such foreign travelling expenses, result of export promotion tour of Shri V. Somani and report given by Shri Somani were placed before the assessing authority and any disallowance out of his travelling expenses was apparently unjustified and invalid. The CIT (A) has, therefore, rightly deleted the disallowance made out of travelling expenses on foreign trips made by Shri Somani. The learned counsel thus strongly supported the order passed by the CIT (A) in which he has deleted the entire disallowance made out of foreign tour expenses.
7. We have carefully examined the rival submissions and have also gone through the orders passed by the learned authorities below. We have also gone through the various documents to which our attention was drawn by the learned representatives. The learned D. R. has not controverted the fact that during the course of assessment proceedings a query letter for the first time was sent by the IAC (A) vide letter dated 11th Oct. 1985, although the return of income had been furnished on 27th June, 1983. In the said query letter the IAC (A) has raised as many as 24 points and a routine query requiring details of foreign travelling expenses was also raised. The learned D. R. has also not disputed the fact that the assessee submitted details of travelling expenses before the assessing authority which appears at page 34 of the paper book and has been extracted hereinbefore. The said details of foreign travelling account clearly reveal that it was separately and distinctly shown that foreign travelling expenses also included expenses in respect of the foreign tour of Mrs. Somani. It has also not been pointed out as to whether any specific query thereafter was raised by the learned assessing authority by requiring the assessee to submit further supporting material to support the allowability of foreign travelling expenses in respect of the foreign trip of Smt. Somani. In view of these facts it was quite natural and necessary for the assessee to submit all the required details and supporting evidence to support the allowability of the aforesaid foreign tour expenses incurred in respect of the foreign visits of Mr. & Mrs. Somani before the learned CIT (A). A perusal of para 7 of the assessment order clearly reveals that the fact that Smt. Somani was an honorary export executive of the company was known to the assessing authority. In this context the copy of resolution passed by the Board of Directors of the company on 3-12-1979 submitted by the assessee before the CIT (A) merely supports what was already known to the assessing authority. It would be worthwhile to reproduce the said resolution :
"The Chairman informed the Board that one of the Directors Shri Arvind Chimanlal Dalal has requested the Board to avail the expert services of Smt. Smiti Somani in the areas of exports of Ceramic Products of the New Ceramic Division of the company and also in the area of public relations. He further informed that Smt. Smiti Somani has consented to provide honorary services to the Company and also informed that it is in the interest of the Company to avail such honorary advisory services particularly when the Ceramic Division of the Company is in the stage of completion of construction. After deliberations.
RESOLVED that Smt. Somani be and is hereby appointed as Honorary Exports and Public Relations Adviser, with effect from the date of this meeting.
As Shri Vikram Somani is interested in this resolution as husband of Smt. Smiti Somani, did not participate in the resolution."
The aforesaid resolution clearly reveals that at the time when the ceramic division of the company was near the stage of completion. It was decided by the Board of Directors to avail the expert services of Smt. Somani in the area of export of ceramic products of their new ceramic division and also in the area of public relations. Before considering the validity of the findings given by the CIT (A) deleting the entire disallowance made out of foreign trip expenses, let us consider the contention of the learned D. R. that the CIT (A) has erred in entertaining the additional evidence. The circumstances under which the additional evidence and supporting material was submitted by the assessee before the CIT (A) have been explained hereinbefore. Since the disallowance was made by the assessing authority without raising specific queries and without indicating any disbelief or suspicion about the non-allowability of foreign travelling expenses to the assessee during the course of assessment proceedings the assessee was left with no choice but to submit the entire relevant supporting material and evidence before the CIT (A) to support the allowability of such deduction claimed by the assessee-company. It would have been better if the CIT (A) had recorded reasons before entertaining such additional evidence in accordance with the provisions of rule 46-A of I. T. Rules, 1962. However, the Honble Gujarat High Court in the case of Motilal Hirabhai Spg. & Wvg. Co. Ltd. (supra), relied upon by the learned counsel, has clearly held that though the omission to record reasons as required by Rule 29 of Appellate Tribunal Rules, 1963 was a serious defect, it is not mandatory and the omission to record reasons for admitting additional evidence did not vitiate such admission. The additional material, if any, which the Tribunal took into account and which was made a part of the statement of the case was not objected to even when it was sent up to the Court as an integral part. The preliminary objection regarding the admissibility of additional evidence by the Tribunal could not, therefore, be sustained. In the present case, the department has not even raised a specific ground challenging the fact of additional evidence having been entertained by the CIT (A). According to rule 11 of the Appellate Tribunal Rules, 1963 no party shall be heard in support of any ground not set forth in the memorandum of appeal. The learned D. R. has not submitted any application for entertaining any such additional ground before the Tribunal challenging the decision of the CIT (A) to entertain the additional evidence. In view of rule 11 of the Appellate Tribunal Rules and in view of aforesaid judgment of the Honble Gujarat High Court we are not inclined to accept the aforesaid preliminary objection raised by the learned D. R. during the course of hearing about entertaining of additional evidence by the CIT (A).
7.1 Smt. Smiti Somani is B. A. Hons. and she has undertaken several courses in interior decoration as is evident from the bio-data of Smt. Somani submitted before the CIT (A). The Board, vide resolution dated 3rd December, 1979 realised the desirability and necessity of availing her expert services by appointing her as honorary exports and public relations adviser of the company with effect from that very date. The said resolution confirms her expertise knowledge, experience and qualifications which was useful for the new ceramic division of the company. The resolution passed in the year 1979 clearly establishes that the foreign trips of Smt. Somani were made for business purposes of the company and were made in order to promote the exports of the ceramic products of the company. The law makers have introduced various provisions providing for incentives in the I. T. Act for promotion of exports and also for growth of industries in the notified backward areas. The Government has given subsidy of more than 23 lakhs for setting up of the aforesaid ceramic division by the assessee-company in the backward area. The ceramic division of the company was undergoing its infant stage and the said unit had to compete with various other industries dealing in similar goods. The company opted to open new market by going for different designs, shapes and colour of various types of sanitary-wares which are normally used in bathrooms, toilet and kitchen. It was stated that Smt. Somani who had done interior decoration course rendered very useful service in selecting such colours and designs, of the companys products. The colour brochure of the companys products was also prepared under her advice and a copy of the colour brochure of the various coloured sanitary-wares manufactured by the company was also produced before the CIT (A) and such latest brochure was also submitted before us during the course of hearing. It was further stated that if any other technical and experienced person would have been appointed it would have caused the company more expenditure. The company had only incurred expenses for Smt. Somanis air ticket. The fact that the accompanied her husband Shri V. K. Somani during such foreign tour in fact resulted in cutting down the travelling expenses on her foreign trip because even otherwise Shri Somani would have incurred such expenses like hotel, taxi, etc. The Honble Gujarat High Court in the case of CIT v. Satellite Engg. Ltd. [1988] 113 ITR 208 has held that the true object of the incentive provisions introduced in the I. T. Act is to encourage setting up of new industrial undertakings by offering various various types of tax incentives. The Legislature has also been progressively relaxing the provision relating to earning of tax benefits by new industrial undertakings, the end in view being to encourage setting up of new industries by substantial investment of new capital. Any interpretation of such a provision must, therefore, be in consonance with this avowed aim and object of the Legislature and not such as would defeat the same. In view of aforesaid discussions and in view of the detailed reasons given by the CIT (A) in his order, we are of the considered opinion that the travelling expenses incurred with regard to foreign tours of Smt. Somani have rightly been allowed by the CIT (A) as the same were obviously incurred for business purposes of the company.
7.2 As regards the partial disallowance out of foreign travelling expenses incurred in respect of Shri V. K. Somani, the disallowance has rightly been deleted by the CIT (A) as the entire foreign travel expenses incurred by him were wholly and exclusively for business purposes as is evident from the report of his foreign tours submitted before the assessing authority. In the past no such disallowance was made out of expenses incurred for his foreign visits. The company is making substantial exports and has declared income of Rs. 72,21,710. The company which is engaged in such laudable activities of setting up of industries in notified backward area and which is also engaged in exporting its products to foreign countries should be trusted with regard to such expenses incurred in connection with foreign travelling unless there is any specific and positive material justifying any disallowance out of such expenses. The learned D. R. has not disputed the submission made by the learned counsel that details of foreign travelling account giving separately and distinctly the details of expenditure incurred in relation to foreign trips of Smt. Somani were given to the assessing authority. If the IAC (A) was not satisfied about the allowability of such expenditure, he should have specifically required the assessee to submit further evidence in support of its allowability or he should have examined Smt. Somani for deciding the question of allowability of such expenditure. Instead of doing all this he observed in the assessment order that the assessee has attempted to conceal the particulars relating to foreign travelling expenses incurred in connection with the foreign trips of Smt. Somani. It has further not been pointed out by the learned assessing authority that the expenses incurred with regard to foreign travelling is in excess of the limits prescribed under rule-6-D. In view of the aforesaid discussions we have no hesitation in confirming the order passed by the CIT (A) deleting the entire disallowance out of foreign tour expenses. Accordingly ground No. 2 taken by the revenue is also rejected.
8. Coming to ground No. 3, the learned D. R. was fair enough to point out that similar issue has been decided against the department in Ashok Mills case and the department has filed reference application in that case. The department intends to keep this matter alive. The learned counsel for the assessee supported the order passed by the CIT (A).
9. We have considered the rival submissions and have also gone through the order passed by the learned CIT (A). This point has been discussed by the CIT (A) in para 7 of the order which is reproduced hereunder :
"(7) The next ground of appeal relates to disallowance of Rs. 52908 made u/s 40A (5) of the Act. According to appellant, the IAC was not justified in taking (a) Medical Reimbursement expenses (b) L. T. C. (as per rules of the company), (c) H. R. A. (d) P. F. contribution as perquisites of employees for section 40A (5). The appellant is correct in this respect. I hold that these items from (a) to (d) are to be excluded for making calculations u/s 40A (5) of the Act. After this is done, according to the appellants calculation, disallowance is reduced to Rs. 15,646. The IAC (A) is, accordingly directed to verify the calculation of the said disallowance".
We agree with the reasons and conclusions derived by the CIT (A) and confirm his order with regard to ground No. 3
10. In the result, the appeal is dismissed.