Income Tax Appellate Tribunal - Indore
Johnson Pedder Pvt. Ltd. vs Income Tax Officer (Dy. Cit V. Johnson ... on 17 May, 1995
Equivalent citations: (1995)53TTJ(INDORE)284
ORDER
SATISH CHANDRA, A.M. :
The assessee as also the Revenue are in appeal against the order dt. 25th July, 1990, of the CIT(A), Indore, pertaining to the asst. yr. 1984-85.
2. The learned representatives of both the sides have been heard and their arguments have been taken into consideration.
3. In assessees appeal in ITA No. 902/Ind/1990, the ground No. 1 relates to disallowance of Rs. 12,000 representing penalty/redemption fine imposed under Central Excise Rules, which has been confirmed by the CIT(A). The facts have been narrated by the Assessing Officer in the following words :
"During the year the Central Excise authorities has conducted a raid at Ujjain Division of the assessee-company on 15th Sept., 1981. During the course of verification of stock lying in bonded show room, the excise authorities noted that there was a difference between the ascertained balance and the recorded balance in the RC-1 Register in respect of some varieties of sanitaryware. No stock credits were mentioned. It was further found that in one register excess stock of 723 pieces of china and porcelain-wares (sanitarywares) valued at Rs. 35,015 was there while in another variety shortage of 1,509 pieces valued at Rs. 89,385 was found. Accordingly, these goods were seized by the excise authorities on which a penalty of Rs. 12,000 was levied. This sum has been debited by the assessee-company to the P&L account."
Since the assessee did not give any satisfactory explanation, the Assessing Officer made the impugned disallowance, against which the assessee appealed but was unsuccessful. Hence, the assessee is before us by way of second appeal.
4. Shri Sodani, the learned counsel for the assessee, invited our attention to the order dt. 17th Feb., 1983, passed by the Addl. Collector of Central Excise, copy of which appears at pp 5-13 of the compilation, whereby the Addl. Collector of Central Excise imposed a penalty of Rs. 2,000 on the assessee and gave an option to redeem the confiscated goods an payment of redemption fine of Rs. 10,000. Shri Sodani argued that the penalty and redemption fine aggregating Rs. 12,000 is an allowable expenditure. He pointed out that the penalty has been imposed, as the assessee was found to have not maintained the accounts properly. According to him, there was recording mistake in the excise register. The mistake was bona fide. He further pointed out that by paying the redemption fine of Rs. 10,000, the assessee-company could recover the goods worth Rs. 1,00,000 from the Excise department. Since the penalty and redemption fine had to be paid for preservation of title of goods, the same was deductible against the assessees income from business. In support of this contention, he placed reliance on the decision in the case of CIT vs. Pannalal Narottamdas & Co. (1968) 67 ITR 667 (Bom). Opposing the stand of the learned counsel for the assessee, Shri Jagdev, learned Departmental Representative, submitted that the penalty/redemption fine has been levied for contravention of Central Excise Rules and, therefore, the Revenue authorities were justified in making the impugned disallowance.
5. We have considered the rival submissions and perused the material placed before us. In the case of Haji Aziz & Abdul Shakoor Bros. vs. CIT (1961) 41 ITR 350 (SC), their Lordships of Supreme Court have held that an expenditure is not deductible unless it is a commercial loss in trade and a penalty imposed for breach of the law during the course of trade cannot be described as such. If a sum spent by an assessee conducting his business, because in conducting it he has acted in a manner which has rendered him liable to penalty for an infraction of the law, it cannot be claimed as a deductible expense, as it cannot be called commercial loss incurred in carrying on his business.
Infraction of law is not a normal incident. In the case before us, the Central Excise authorities imposed a penalty of Rs. 2,000 on the assessee as charge under r. 173Q(b) of Central Excise Rules, 1944, in so far as it related to non-accountal of excisable goods manufactured by the assessee were proved. Since the assessee has contravened Central Excise Rules and Regulations in properly maintaining the excise records and was accordingly visited with penalty of Rs. 2,000, this penalty cannot be regarded as wholly laid out for the purpose of assessees business and, therefore, following the apex Courts decision (supra), the disallowance of Rs. 2,000 is confirmed. As regards the payment of redemption fine of Rs. 10,000, the excess stock of 723 pieces of china and porcelainware valued at Rs. 35,015 were ordered to be confiscated under r. 173Q of the Central Excise Rules, 1944. The Addl. Collector, Central Excise, however, gave an option to the assessee to redeem the same on payment of redemption fine of Rs. 10,000. In similar circumstances, their Lordships of Madras High Court have held in the case of CIT vs. N.M. Parthesarathy (1995) 212 ITR 105 (Mad) that redemption fine was compensatory in nature and as such deductible under S. 37 of the Act. In that case also, the goods belonging to the assessee had been confiscated under S. 111(d) of the Customs Act, 1962, r/w S. 3 of the Imports & Exports (Control) Act, 1947. However, under S. 125 of the Customs Act, 1962, an option had been given to the assessee to pay, in lieu of confiscation a fine of Rs. 1,84,000, which has been reduced on appeal and the goods had been cleared exercising the option. Relying on the ratio of decision of Honble Supreme Court in the case of CIT vs. Ahmedabad Cotton Mfg. Co. Ltd. (1994) 205 ITR 163 (SC), their Lordships of Madras High Court held that redemption fine was compensatory in nature and, hence, allowable as deduction. Following the decision (supra) we hold that redemption fine paid by the assessee under Central Excise Rules in exercise of option conferred under the said rules is allowable expenditure under S. 37(1) of the Act. Disallowance of Rs. 10,000 is hereby deleted.
6. Grounds No. 2 and 3 relate to disallowance of Rs. 2,66,289 under S. 40A(3) of the Act, which has been confirmed by the CIT(A). The Assessing Officer found that the assessee had made cash payments to the following parties on different dates in contravention of the provisions of S. 40A(3) of the Act :
Rs.
M/s. Mahajan & Mahajan 6,000 M/s. Sunil Brothers 24,837 M/s. Eagle Industries 65,188 M/s. B.M. Industries 27,892 M/s. Fit-way Engineers 13,343 M/s. Tenveer Engineers 3,277 M/s. M.N. Shaikh Contractors (including SM/PM & JM Shaikh) 1,25,752 2,66,289 During the course of assessment proceedings, it was submitted that M/s. Mahajan & Mahajan were the assessees railway clearing agents at Dewas and the sum was given to them to pay railway freight on behalf of the company for clearing the wagons. It was submitted that the provisions of S. 40A(3) were inapplicable to this cash payment. For the remaining payments, it was explained that the parties are labour contractors, who used to supply to the company the casual workers for the purpose of production as well as other jobs. It was also stated that none of the payments exceeded Rs. 2,500 and as the same was given for disbursement of wages to labour contractors the transactions were not covered by the provisions of S. 40A(3) r/w r. 6DD. The Assessing Officer did not accept the explanation. According to the Assessing Officer M/s. Mahajan & Mahajan maintained books of account and bank account and, therefore, the assessee could have very well issued cheques/drafts to them for payment of freight, etc. As regards payment of labour contractors, the Assessing Officer observed that the contractors are having their own bank accounts and the assessee could have very well issued cheques for payment of salary and wages, etc., well in advance. As such, payments are of routine nature. For these reasons, he made the impugned disallowance. The assessee carried the matter in appeal.
7. Before the CIT(A), it was contended that the payment made to the railway agent is covered by r. 6DD(b) whereas the payments made to other contractors are covered by r. 6DD(j). The submissions of the assessee did not find favour with the CIT(A). According to him, payment made to the railway agent cannot be considered as payment made to the railways and, therefore, r. 6DD(b) was inapplicable to the payment made to M/s. Mahajan & Mahajan. As regards the payments made to other parties, the CIT(A) recorded, inter alia, the following findings :
"It does not appear to be rational that the payments should have been made to the contractors only for distribution of wages to labour. Apparently, the payment has been made to contractors for supply of labour and as such it cannot be said that the payments have been made to only workers and such amount being less than Rs. 2,500 each, does not fall within the purview of S. 40A(3). The provisions of r. 6DD(j) also do not apply as has been clearly brought out by the Assessing Officer that these are periodical payments to be made and no case for exceptional circumstances has been made out. Therefore, the disallowance is fully justified and the same is hereby upheld."
The above findings have been challenged by the assessee before the Tribunal.
8. Shri Sodani, the learned counsel for the assessee, invited our attention to the reply dt. 5th March, 1987, submitted before the Assessing Officer, a copy of which appears at pp 16-17 of the compilation. He submitted that M/s. Mahajan & Mahajan is a railway agent and the amount has been paid to them for payment to the railways on behalf of the assessee-company. According to him, the payment is covered by exception provided under r. 6DD(b). Shri Sodani pointed out that M/s. Sunil Bros. is fabricator, whereas the remaining parties are labour contractors, who had arranged casual workers to the assessee-company and the payments were made to them for disbursement of wages to the labourers on their behalf. He invited out attention to certain wage sheets showing name of each worker and the amount paid to him as per the attendance. These sheets form part of the assessees compilation. He refuted the observation of the Assessing Officer that these contractors had their own bank accounts. According to Shri Sodani, these contractors did not have their bank accounts at Dewas. He further submitted that these contractors had taken payments in cash from the assessee-company and had in turn made cash payments to labourers, who had no bank account at Dewas and the labourers did not accept the cheques. Shri Sodani further pointed out that certain payments had been made on Saturdays. He pointed out that 7th May, 1983, 9th April, 1983, 10th Sept., 1983, 11th June, 1983, 6th Aug., 1983 and 12th Nov., 1983 are Saturdays, whereas 7th Aug., 1983 was Sunday. According to Shri Sodani, since payments had to be made on Saturday and Sunday, this itself show that there was urgency of payment and had to be made in cash. Shri Sodani placed strong reliance on the decision of Gujarat High Court in the case of Hasanand Pinjomal vs. CIT (1978) 112 ITR 134 (Guj), wherein their Lordships held that practicability for the purpose of r. 6DD(j)(2) must be judged from the point of view of the businessman and not of the Revenue. He vehemently argued that the assessee-company had to make payment in cash to the labour contractors in the interest of business expediency and, therefore, such payments are outside the purview of the provisions of S. 40A(3) r/w r. 6DD(j). Opposing the stand of Shri Sodani, Shri Jagdev, the learned Departmental Representative, contended that the Revenue authorities were perfectly justified in disallowing the impugned payment in cash in contravention of the provisions of S. 40A(3) of the Act. According to him, the assessee had not established that there were unavoidable or exceptional circumstances enumerated under r. 6DD(j) so as to bring its case out of the mandatory provisions of S. 40A(3). He highlighted the point that the assessee had made cash payments to the labour contractors and not to the workers and, therefore, such payments were clearly hit by the provisions of S. 40A(3) of the Act.
9. We have given a careful thought to the rival submissions. So far as the payment of freight charges to M/s. Mahajan & Mahajan, who are railway clearing agents, is concerned, it has been clarified in Boards Circular No. 34, dt. 5th March, 1970, that cl. (b) of r. 6DD specifically exempts such payments from the purview of S. 40A(3). Therefore, cash payment to M/s. Mahajan & Mahajan for being paid to the railways being freight charges is allowable deduction under S. 40A(3).
As regards the remaining payments, it is not in dispute that the payments have been made to the labour contractors in cash who had arranged labour to the assessee. Since the assessee-company had made cash payment to the labour contractors, these payments in cash exceeding Rs. 2,500 on different dates, are clearly hit by the provisions of S. 40A(3) of the Act. It is now well settled that onus to prove the existence of any of the mitigating circumstances lies on the assessee. The foremost reason for making disallowance by the Assessing Officer is that the contractors had bank account and, therefore, the assessee could have very well issued cheques to them. However, this finding of the Assessing Officer has been challenged before us and it has been asserted that the labour contractors did not have their bank accounts at Dewas where the payments have been made to them. However, no evidence in support of this assertion has been brought on record. In the absence of any supporting evidence, this assertion of the assessee cannot be accepted without verification. Undoubtedly, absence of bank account is a crucial circumstance and should be regarded as an exceptional circumstance to enable the assessee to avail exemption under r. 6DD(j) of the IT Rules, 1962. Whether the contractors in question had bank accounts at Dewas at the material time needs verification. If on verification, it is found that they did not have bank account, then the payment made to them in cash will be covered under exceptional circumstances enumerated in Boards Circular No. 220, dt. 31st May, 1977. It may also be stated that it has been brought to our notice that certain payments had to be made on Saturday, i.e., after the close of the banking hours and/or on bank holiday, i.e., Sunday. No evidence in support of this contention has also been produced at any stage of the proceedings. However, if on verification, it is found that even if the payees had bank accounts at Dewas but certain payments had to be made to them in cash after the close of the banking hours on Saturdays or on bank holidays due to business exigencies, such payments would also be covered under the exceptions enumerated in the said circular of the Board. We would, therefore, set aside the issue of cash payments to the labour contractors and restore the matter to the file of the Assessing Officer with a direction to him to redecide the issue afresh in the light of the above observations and after allowing reasonable opportunity of hearing to the assessee.
10. In the result, the assessees appeal is partly allowed.
11. In Revenues appeal in ITA No. 918/Ind/90, only one substantive ground has been taken, which reads as under :
"On the facts and in the circumstances of the case, the learned CIT(A) erred in holding that the growth incentive paid at Rs. 2,68,141 does not fall within the purview of S. 37(3A) and thereby directing the Assessing Officer to exclude the amount for working out the disallowance under S. 37(3A)."
12. The Assessing Officer found that the assessee had worked out disallowance under S. 37(3A) of the Act at Rs. 82,012. The Assessing Officer, however, noted that the assessee had allowed discount towards growth incentive to the stockists, who purchased goods beyond the target fixed individually. He treated the same as sales promotion expenses and included it for calculating disallowance under S. 37(3A) of the Act. This was challenged in appeal.
13. Before the CIT(A), it was contended that growth incentive of Rs. 2,68,141 did not fall within the purview of S. 37(3A) of the Act. Reliance was placed on the Tribunal, Hyderabad Bench B decision in the case of Moped India Ltd. vs. IAC (1984) 7 ITD 324 (Hyd), wherein it was held that the incentive bonus paid by the assessee to its dealers over and above the commission did not fall within the purview of S. 37(3A). The contention of the assessee was acceptable to the CIT(A), who directed the Assessing Officer to exclude the amount of growth incentive for the purpose of disallowance under S. 37(3A). Aggrieved thereby, the Revenue is in appeal before the Tribunal.
14. Shri Jagdev, the learned Departmental Representative, supported the order of the Assessing Officer and argued that there did exist clear relationship between growth incentive paid by the assessee and sale of goods by it to the stockists. As the growth incentive is directly related to sales promotion, the same has rightly been considered by the Assessing Officer for the purpose of disallowance under S. 37(3A) of the Act. In this connection, he referred to the decision of Karnataka High Court in the case of Smith Kline & French (India) Ltd. vs. CIT (1992) 193 ITR 532 (Kar). Opposing the stand of the learned Departmental Representative, Shri Sodani submitted that the assessee-company has allowed discount towards growth incentive to the stockists, who purchased goods beyond the target fixed as per the policy of the company and such discount did not fall within the purview of S. 37(3A) of the Act. In support of his contention, he placed reliance on the following decisions :
(i) Moped India Ltd. vs. IAC (supra)
(ii) CIT vs. Santosh Agencies (1995) 123 CTR (Cal) 171;
(iii) ITO vs. Sivalingam Agencies (1994) 22 ITC 416; and
(iv) Fibre Shells Ltd. vs. ITO (1994-95) 26 BCAJ 874.
15. We have considered the rival submissions and perused the decisions cited before us. It is not in dispute that the assessee-company has allowed discount of Rs. 2,68,141 to the stockists, who purchased goods beyond the fixed targets. In the case of Santosh Agencies (supra), the assessee had allowed special discount to the dealers and their Lordships of Calcutta High Court held that such special discount was not covered by the expression sales promotion expenditure as appearing in S. 37(3A) of the Act. The observations of their Lordships may be extracted, thus :
"Sales promotion connotes activity akin to advertisement and publicity. Rewarding the selling agents with special discount or pleasure trips on the basis of performance cannot be said to be sales promotion pertaining to the same genus as advertisement and publicity. By these rewards given to the selling agents the assessee cannot be said to have taken a drive to draw the attention of the consumers. The entire effect of the expenditure is consumer-neutral. It may have an indirect effect on the market in the sense this will instil in the selling agents a greater fervour in pushing up sales. But we cannot distinguish any activity as sales promotion by the mere affect of the activity on the saleability. It is only such expenditure in the nature of advertisement and publicity which creates a stir amongst the consumers directly by means of exhibitions, shows and other methods of popularising the assessees commodity, that can be said to be activity similar to or of like nature as advertisement and publicity. By giving rewards to the selling agents to motivate them for performance is not anything that publicises the assessees commodity."
16. It may be stated that the decision in the case of Smith Kline & French (India) Ltd. vs. CIT (supra) relied on by the learned Departmental Representative is distinguishable on facts. In that case, the assessee was manufacturer of drugs. It had incurred expenditure on physicians samples. It was held by the Honble Karnataka High Court that expenditure on distribution of physicians samples amounted to expenditure on advertisement and sales promotion. In the case before us, the assessee gave growth incentive to its stockists by way of allowing discount on cost of goods purchased by them beyond his fixed target. Such an expenditure cannot be treated as sales promotion expenses. In this view of the matter, we do not find any merit in the Revenues appeal, which fails.
17. In the result, the Revenues appeal is dismissed.