Income Tax Appellate Tribunal - Delhi
Silicon Graphics Systems India (P) Ltd. vs Joint Commissioner Of Income Tax on 14 July, 2006
Equivalent citations: (2006)103TTJ(DELHI)220
ORDER
P.N. Parashar, J.M.
1. These cross-appeals, filed by the assessee and the Revenue, arise out of CIT(A)'s order dt. 24th Oct., 2000 relating to asst. yr. 1997-98. Both the appeals were heard together and are being disposed of by a common order for the sake of convenience.
2. Shri Piyush Kaushik, advocate appeared on behalf of the assessee, whereas Smt. Sangeeta Gupta, CIT-Departmental Representative, represented the Revenue.
3. The assessee, namely, M/s Silicon Graphics Systems India (P) Ltd. was incorporated under the Indian Companies Act, in 1993. During the period covered under the asst. yr. 1997-98, it was carrying on the business of developing, manufacturing, selling and servicing computer systems and software. It also rendered technical assistance and services in connection with the use, purchase, sale, import, export, lease or distribution, license, design, manufacture of any. computer machines, etc. During the previous year relevant to the assessment year under consideration, the assessee filed return of its income declaring loss of Rs. 1,43,30,330. The return was filed on 30th Nov., 1997. It was processed under Section 143(1)(a) vide intimation dt. 30th July, 1998. The case was, thereafter, selected for scrutiny assessment. While completing the assessment under Section 143(3), the AO worked out the income at Rs. 7,73,98,544 after making certain additions and disallowances. The additions/disallowances made by the AO were challenged before the learned CIT(A). On some items the learned CIT(A) sustained the disallowances and on others he gave some relief. The order of the learned CIT(A) is dt. 24th Oct. 2000. On the items on which the learned CIT(A) sustained the disallowance, the assessee has preferred appeal for challenging the same whereas against the items on which the learned CIT(A) gave relief, the Department has come in appeal for challenging the deletion of additions. In the setting of above background, we proceed to decide the issues involved in these two appeals.
Ground No. 1 ofassessee's appeal and ground No. 2 of Revenue's appeal:
4. The assessee had claimed certain expenses on items like advertisement and publicity, trade shows and business promotion, etc. and a total sum of Rs. 1,88,01,574 was debited under the head "Advertisement and publicity" which was reflected in Schdule "J" to the balance sheet and P&L a/c as on 31st March, 1997. On perusal of the details, the AO required the assessee to furnish details. The assessee submitted the break-up of the amount which is as under:
(i) Advertisement and publicity 3,07,622 (ii) Trade shows 1,37,97,038 (iii) Business promotion 99,570 (iv) Business conference 53,568 (v) Literature 6,51,631 (vi) Gifts and presents 1,98,064 (vii) Meetings and conference - (viii) Entertainment 9,94,081
4.1. After considering the above items, the AO made disallowance of Rs. 1,39,65,033 by observing that the expenditure incurred by the assessee was in the nature of deferred revenue expenditure and is to be spread over five years. The observations of the AO in this regard are as under:
5.12. There could be no dispute that the advertisement would be an allowable expenditure. However, the benefits arising therefrom will encompass several years. Advertisement by nature is designed to give public information about merits as also to appeal to a mass public, here the target group for the assessee's product. Sometimes, some expenditure is of revenue nature but its benefit is likely to be derived over a number of years. Such expenditure is called deferred revenue expenses. In such cases, it would be most inappropriate if the whole of the expenses is charged to the P&L a/c of the year in which it is incurred. This expenditure, like capital expenditure, is also spread over the estimated period over which the benefit is likely to last. Accordingly, the expenditure is spread over five years for the reasons discussed above and in detail in the assessment order for asst. yr. 1996-97. This will result in disallowance of Rs. 1,39,65,037 on this account. This has been calculated after taking into consideration the expenditure aITRibutable to advertisement and publicity, trade shows and literature aggregating at Rs. 1,74,56,291. Disallowance : Rs. 1,39,65,033.
4.2. The assessee challenged the addition of Rs. 1,39,65,033 before the learned CIT(A). On going through the assessment order and other record, the learned CIT(A) felt that neither the assessee nor the AO has properly worked out the details of the expenses under the head "Advertisement and publicity, trade shows", etc. He also blamed the auditors for not taking pains in identifying the expenses under various heads properly. After making detailed reference to the directions for asst. yr. 1996-97 and after producing paras 5.2, 5.3 and after reproducing para 5 of his order for asst, yr. 1996-97, he undertook the exercise of identifying expenses and for that purpose he issued a notice to the assessee vide his letter dt. 24th Aug., 2000. This notice has also been reproduced by the learned CIT(A) on pp. 9 to 16 of the appellate order.
4.3. In response to this notice issued by the learned CIT(A), the assessee filed details giving the break-up of items of various expenses and also details of entertainment expenses. Break-up of such expenses, totalling to Rs. 17,25,289 is given in para 5 of the appellate order, 4.4. In reply to the notice issued under Section 251(2), dt. 24th Aug., 2000, the assessee also conceded that expenditure of Rs, 1,61,472 debited under the head "Trade shows" was incurred on food and beverages provided to various persons.
4.5. The assessee further conceded that Rs. 9,705, debited under the head "advertisement expenses" was incurred on food and beverages provided to various persons.
4.6. On the basis of his own analysis and the replies of the assessee, he worked out the total entertainment expenses at Rs. 18,96,466. After allowing statutory, deduction, the learned CIT(A) sustained the disallowance to the extent of Rs. 9,60,936 in the following manner:
(i) Entertainment expenses, as discussed above Rs. 17,25,289 + 1,61,472 + 9,705 18,98,466 Less : Statutory deduction @ 50% (Rs.) 9,48,233 __________
(ii) Enhanced disallowance under rule 6D, as discussed above 12,703 __________ Total 9,60,936 4.6.1 So far as the disallowance of Rs. 1,39,65,033 made by the AO in view of his observations, reproduced above, is concerned, the learned CIT(A) did not find any basis for the same and deleted the same. However, he clarified that the disallowance out of entertainment expenses made by the AO at Rs. 5,68,610 is not included in the disallowance of Rs. 9,60,936 sustained by him. We consider it proper to reproduce the observations and directions of the learned CIT(A) on this issue which are as under:
On examining the details of other expenses filed by the assessee, which were called for as per the notice under Section 251(2), I have not been able to identify any further disallowance expenses. It is clarified that in para 5.1.3, i.e., on p. 8 of the assessment order the AO has computed the disallowance out of entertainment expenses at Rs. 5,68,610 by taking into account the entertainment expenses other than the expenses identified by the undersigned in appellate proceedings, as discussed above.
4.7 In ground No. 1, taken by the assessee, the sustenance of disallowance of Rs. 9,60,936 has been challenged. The ground of the assessee is as under:
1. The learned CIT(A)-XV, New Delhi, hereafter referred to as 'CIT(A)' has grossly erred on facts and in law in:
(i) upholding the disallowance of Rs. 9,60,936 out of the expenditure under the head 'Advertisement and publicity' Rs. 9,48,233 for alleged entertainment expenses; and Rs. 12,703 for alleged expenses in excess of the limits under r. 6D of the IT Rules; and
(ii) in any case, in treating the abovesaid disallowance of Rs. 9,60,936 as enhancement of assessment under Section 251(2) of the IT Act and in initiating penalty proceedings under Section 271(1)(c) of the Act in respect of the said disallowance/alleged enhancement of assessment.
4.8 The Revenue has challenged the deletion of disallowance of Rs. 1,39,65,037. The ground of Revenue, being ground No. 2, is reproduced herein as below:
On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the disallowance of Rs. 1,39,65,037 on account of 'trade house' and 'advertisement'.
4.9 While challenging the sustenance of disallowance of Rs. 9,60,936, the learned Counsel for the assessee Shri Piyush Kaushik, after narrating the entire background of the matter and relevant facts, pointed out that the learned CIT(A) has not properly appreciated the nature of business of the assessee and the quantum of expenditure incurred for promoting business, in the sphere in which the assessee was operating. According to him, the nature of the business of the assessee was highly competitive and involved fast changes in the technology and to sell the technology developed within a short span of time, the assessee was required to make all efforts and for achieving success, rigorous publicity, campaigns, workshop and seminars, etc. were necessary and it was with this object that the assessee undertook these activities and incurred considerable expenditure on advertisement, in arranging trade shows and for conducting conferences and meetings in which, besides distribution of attractive brochures, other expenditure for business promotion was also incurred. He also pointed out that the AO neither doubted the genuineness of the expenditure nor required the assessee to verify the same. The AO, according to him, had accepted that the expenditure was allowable being revenue expenditure but, under a wrong notion, he thought that the assessee was likely to derive the benefit of this huge expenditure over a number of years and thus mechanically concluded that it was deferred revenue expenditure.
4.10 The learned Counsel also assailed the working of the learned CIT(A). According to him, the learned CIT(A) took pains in identifying the expenditure under the head "Entertainment expenses", but in fact he pointed out that these expenses were not for entertainment and were really for promoting the business of the assessee because the assessee had incurred the expenditure for promoting its business and for promoting sales, etc. In support of his submissions, the learned Counsel placed heavy reliance on the ratio of decision of Hon'ble Punjab & Haryana High Court in the case of CIT v. Indo Asian Switchgeais (P) Ltd. . He also made reference to the following decisions:
(i) Associated Marketing Agencies v. ITO (1992) 43 ITD 543 (Mad);
(ii) Ravi Marketing (P) Ltd. v. CIT (2005) 198 CTR (Cal) 354 : (2006) 280 LTR 519 (Cal);
(iii) Lakhanpal National Ltd. v. ITO ;
(iv) CIT v. Assam Asbestos Ltd. ;
(v) CIT v. Gujarat State Finance Corporation ;
(vi) Sarda Plywood Industries Ltd. v. CIT ;
(vii) CIT v. Eskaps (I)(P) Ltd. ;
(viii) CIT v. Aluminium Industries Ltd. (1995) 126 CTR (Ker) 150 : (1995) 214 ITR 541 (Ker);
(xi) Associated Stone Industries (Kotah) Ltd. v. CIT (2002) 123 Taxman 643 (Raj).
4.11 He also challenged the approach of the learned CIT(A) for issuing a notice of enhancement and for enhancing the entertainment expenses.
4.12 In the alternative, without prejudice to the above, it was contended by him that the employees of the assessee-company also participated in trade shows, events, etc. and, therefore, a part of expenditure incurred on food and beverages provided to the employees was not, in any case, entertainment expenditure. In this regard he has also submitted a written argument, a portion of which is as under:
Under the specific provision of Explanation to Section 37(2) of the Act as applicable for the subject assessment year (reference p. 10 of supplementary paper book No. III) entertainment expenditure does not include expenditure on food or beverages provided by the assessee to his employees in office, factory or other place of work. It was submitted before the CIT(A) vide the written submission dt. 4th Oct., 2000 (supra, reference pp. 2 and 3 of supplementary paper book No. III) that without prejudice to the submissions that the expenses as alleged by the CIT(A) are not in the nature of entertainment expenses, the disallowable expenses on account of entertainment expenses are to be computed after allowing a reasonable amount say to the extent of 35 per cent on account of the participation of employees. In the assessee's own case, the Tax Department had in the appeal effect order for the earlier year, i.e., asst. yr. 1996-97 (reference pp. 139 and 140 of supplementary paper book No. Ill) pursuant to set aside by the CIT(A) on the same issue computed the amount of disallowance on account of entertainment expenditure after excluding the expenses on account of employee participation @ 35 per cent of the gross expenses as per the decision of Delhi High Court in the case of CLT v. Expo Machinery Ltd. (reference pp. 136 and 137 of supplementary paper book No. III).
4.13 The learned Counsel for the assessee further pointed out that in asst. yr. 1996-97 while carrying out the similar directions of the learned CIT(A), the AO had recomputed the entertainment expenses and had considered this plea of the assessee. In this regard our attention was invited to the assessment order for asst. yr. 1996-97 passed under Section 250 and Section 143(3) of the IT Act dt. 24th Nov., 2000, available at pp. 138 to 140 of the paper book.
4.14 We have carefully considered the entire material on record and the rival submissions. So far as the act of identification of entertainment expenses is concerned, we find that the learned CIT(A) issued a detailed notice to the assessee in which he has even made reference to the expenses under the head "Trade shows" and expenditure incurred on sponsoring various events. The assessee in compliance to the notice submitted the details which have also been examined by the learned CIT(A). Thus, the learned CIT(A) has adopted a very scientific and systematic approach in identifying the entertainment expenses. It may be pointed out that similar exercise was undertaken by him in asst. yr. 1996-97. In fact he has mainly followed the same approach in this assessment year and has adopted the same method. It is significant to note that in the case of CYT v. Expo Machinery Ltd. , Hon'ble jurisdictional High Court has upheld the claim of the assessee that 35 per cent of the expenditure on entertainment is to be treated as relating to the participation of the employees. While giving effect to the directions of the learned CIT(A) for asst. yr. 1996-97, the AO has taken into consideration this decision of Hon'ble jurisdictional High Court and following the same he had reduced 35 per cent of the expenditure on account of participation of employees. The computation made under this head by the AO in that year is as under:
Expenses on food and beverages included in the head 'Trade shows' and 'advertisement' 18,30,580 Less : 35% on a/c of employees participation 6,40,703 _____________ 11,89,877 4.15 As the facts and circumstances of the two years are virtually the same and further as no mistake is found in the identification of the expenses by the learned CIT(A) under the head 'Trade shows' and 'advertisement', etc., we are of the view that the same pattern and same approach should be followed in this year for computing the disallowance under this head. Hence, without disturbing the determination of entertainment expenses at Rs. 18,96,466 we direct that the disallowance out of this expenditure shall be worked out after following the order for asst. yr. 1996-97 and 35 per cent on account of employees' participation shall be reduced from the total amount, of Rs. 18,96,440 and thereafter the statutory deduction, etc. shall be allowed. In view of the above, we set aside the finding of the learned CIT(A) on this point and direct the AO to recompute the disallowance of entertainment expenses under the head 'Trade shows' and 'advertisement' in the light of our observations made above. While doing so, the AO shall give full opportunity to the assessee of being heard and shall decide the matter as per law. Ground is allowed for statistical purposes and is disposed of as above.
4.16 So far as the grievance of the Department in its ground No. 2, as reproduced above, is concerned, the Department has challenged the deletion of disallowance of Rs. 1,39,65,037. We have already reproduced the observations of the learned CIT(A) in para 5.6 of his order.
4.17 The learned Departmental Representative has challenged the approach of the learned CIT(A). His main contention was that the learned CIT(A) was not justified in calling the details from the assessee at the appellate stage and in deciding the matter on the basis of such details. The learned Departmental Representative, therefore, prayed that the matter should be restored back to the file of AO for deciding the issue afresh. He also supported the order of the AO.
4.18 In reply the learned Counsel supported the order of the learned CIT(A). He further pointed but that in this assessment year the AO has followed the order of his predecessor for asst. yr. 1996-97 and since the decision for asst. yr. 1996-97 has been finalised in view of the assessment order passed under Section 250/143(3), dt. 24th Nov., 2000, there remains no scope or justification for remanding the matter again to the AO. In support of his arguments, the learned Counsel also placed reliance on various authorities some of which have been referred to above, while considering ground No. 1 in assessee's appeal.
4.19 We have carefully considered the entire material including the case law on which reliance has been placed by the learned Counsel for the assessee. Firstly we want to observe that the approach of the AO in treating the expenditure as deferred revenue expenditure cannot be justified in law. Thus, the manner in which the disallowance has been made by him, is not found to be tenable. Otherwise also, the AO was not justified in not bifurcating the expenditure properly which work has been done by the learned CIT(A). It may also be pointed out that the AO could not properly appreciate the nature of the business of the assessee and the nature of the expenditure incurred. For a proper appreciation of the entertainment expenditure and business promotion expenditure one has to understand the object and scope of Section 37(2A) r/w Explanation as applicable in the assessment year under consideration. In the case of CIT v. Indo Asian Switchgears (P) Ltd. (supra), the Hon'ble Punjab & Haryana High Court, while dealing with the object of Section 37(2A) has observed as under:
The definition in Expln. 2 is not the ordinary meaning of the words, 'entertainment expenditure', but the enlarged meaning given for the purposes of the Act w.e.f. 1st April, 1976. The object of Sub-section (2A) is to disallow any lavish expenditure in the form of business expenditure.
It is clear from the nature of expenditure in all the three assessment years in the present case that food and light refreshment had been served to the trainees and engineers attending the dealers' conference organized by the assessee. The expenditure cannot, therefore, be treated to be in the nature of entertainment but on account of business necessity and expediency. The assessee had shown these expenditures under two heads namely, "Dealers' conference expenditure" and "Sales promotion expenditure" in the asst. yr. 1975-76 and under the second head, as aforesaid, in the next two years. Obviously, such expenditures do not fall within the ambit of Section 37(2A) of the Act. The nature and purpose of expenditure distinctly establish that expenditure on food and light refreshment was for the advancement of business and for advertisement and publicity of the goods manufactured by the assessee. Question No. 3 in the asst, yr. 1975-76 and question No. 2 in the next two assessment years are answered in the negative and in favour of the assessee.
4.20 In the case of Associated Marketing Agencies v. ITO (supra), the Madras Bench of the Tribunal has observed that since the main purpose of the conference is for retaining the presence of the dealers throughout the conference, provision of lunch and dinner is to be made perforce and therefore such expenditure will not call for disallowance.
4.21 In the case of Ravi Marketing (P) Ltd. v. CIT (supra), the Hon'ble Calcutta High Court has observed that holding conference or seminars of distributors or agents is one of the accepted methods of sales promotion. The observations of the Hon'ble Calcutta High Court are as under:
The authorities under the IT Act can examine the genuineness of the expenditure and the purpose for which it was expended. Once it is established that the amount was genuinely expended and it was expended for a particular purpose, the only discretion that is left to the authority under the Act is to apply the law on the basis of such established fact or finding. If the purpose for which it is expended is eligible for deduction under a particular head, no discretion is left to the authority either to surmise with the quantum that ought to have been spent or to surmise or presume the purpose differently and convert the same to some other head. Holding conferences or seminars of distributors or agents is one of the accepted methods or manners of sales promotions. How and to what extent it would be expedient for the business can be decided by the assessee in its wisdom. Whether, by reason thereof he gains or fails is immaterial. It is definitely an expenditure for the purpose of his business.
4.22 The Ahmedabad Bench of the Tribunal in the case of Lakhanpal National Ltd. v. LTO (supra), the Special Bench of the Tribunal has considered the issue in detail and after discussing several authorities including the ratio of decisions in the case of Indo Swissgears (P) Ltd. (supra) and the decision of Hon'ble Delhi High Court in the case of CIT v. Expo Machinery Ltd. (supra) has observed that the amount spent on tea, coffee, cold drinks and hotel expenses in respect of wholesalers, stockists and other visitors was allowable.
4.23 In the case of CIT v. Assam Asbestos Ltd. (supra), the Hon'ble Gauhati High Court has observed that generally "entertainment expenditure" is an expression of wide import. However, in the context of disallowance of entertainment expenditure, it must be construed strictly and not expansively.
4.24 The Hon'ble Gujarat High Court in the case of CIT v. Gujarat State Finance Corporation (supra) has applied this Explanation and has observed as under:
That the assessee had incurred expenditure in providing tea, coffee and refreshments to its staff members and constituents or customers in the normal course of business. The finding of fact which had been recorded was to the effect that the expenditure, which was incurred by the assessee was not high or lavish. The expenditure having not been incurred for giving any lavish parties, it could not be considered to be an expenditure incurred for entertainment. It was therefore, admissible.
4.25 In another case, i.e., Sarda Plywood Industries Ltd. v. CIT (supra), the Hon'ble Calcutta High Court has gone to the extent of observing that it is not for the Department to consider whether commercial expediency justified the expenditure. In that case disallowance of Rs. 25,000 out of expenditure incurred on sponsoring a horses race and of Rs. 25,000 out of expenditure on sponsoring a golf competition by the appellant-company for publicity of its products was held to be justified.
4.26 In the case of CIT v. Eskaps (I) Ltd. (supra), the same Hon'ble High Court has also observed that where hospitality is undertaken solely with the object of promoting the business, the expenditure was not disqualified because the nature of the activity necessarily involved some other result. It was held that it is not in the nature of entertainment expenditure within the meaning of Section 37(2B) of the IT Act.
4.27 The Hon'ble Kerala High Court in the case of CIT v. Aluminium Industries Ltd. (supra), has also justified such expenditure as business expenditure. The observations of the Hon'ble Court in this regard are as under:
That once it was found that the expenditure had been incurred by the assessee for publicity or advertisement, it was not for the Department to consider what commercial expediency justified the expenditure. The reasonableness of the expenditure could be gone into only for the purpose of determining whether in fact the amount was spent.
That when the assessee commissioned its 'relay' project in January, 1982, the Chief Minister of the State was invited. Press conferences were held and the assessee brought out a newspaper supplement. Those activities caused an expenditure of Rs. 2,38,689 and the assessee claimed deduction of the same as business expenditure under the head 'Advertisement 4.28 In view of this authority also it is clear that the expenditure incurred by the assessee was claimed as revenue expenditure and was allowed as such.
4.29 In the case of CIT v. Expo Machinery Ltd. (supra), following question was referred to the Hon'ble High Court:
Whether, on the facts and in the circumstances of the case, the Tribunal was correct both on facts and in law in holding that 35 per cent of the expenditure of Rs. 1,55,003 out of entertainment, seminar and conference expenses was not hit by the provisions of Section 37(2A) of the IT Act by relying upon the decision of the Tribunal in the case of Usha International Ltd., which has not been accepted by the Department?
4.30 The Hon'ble High Court has allowed the issue in favour of the assessee. The relevant observations of the Hon'ble High Court are as under:
Apart from the fact that, in respect of Usha International Ltd, the petition under Section 256(2) of the IT Act was dismissed by this Court, we may note that the essential question is whether the expenditure of 35 per cent of Rs. 1,55,003 was hit by the provisions of Section 37(2A) of the IT Act. The CIT has found as a fact that, along with the customers, the employees of the company had also taken food. He, however, did not allow any expenditure because he was of the opinion that the expenditure on food and beverages was not incurred in the factory premises but was incurred in the hotels. The Tribunal has also found as a fact that the employees of the company had taken eatable along with the guests and customers of the company and the expenditure which is incurred on food, etc. of the employees is expressly excluded by virtue of the provisions of Section 37(2A), Expln. 2, it is a finding of fact as to whether any part of the expenditure of Rs. 1,55,003 was incurred on the food, etc. of the employees. This finding of fact has been answered in favour of the assessee. It is necessary in such a case that certain amount of estimate has to be resorted to. The Tribunal has estimated such expense as 35 per cent which cannot be said to be unreasonable and, in any case, this estimate is also a question of fact. The expense on the eatables of the employees which is excluded from the purview of Section 37(2A) includes expense which is incurred, inter alia, at the place of work of the employees. When the employees are having their food along with the company's customers in a hotel, in discharge of their official duties, the employees ate taking food while at work because it is their work and duty to entertain the customers of the company. Therefore, wherever any expenditure is incurred on the food and beverages of the employees at the time when they are working would obviously be excluded from the purview of Section 37(2A).
4.31 We do not want to add the bulk to this order by making reference to various other decisions but can conclude that if the expenditure is found fully justified for the promotion of business then the same cannot be disallowed by treating it as entertainment expenditure. However, facts of each case are to be minutely scrutinized for coming to a just and proper conclusion.
4.32 So far as the present case is concerned, we do not find any merit in the ground taken by the Department, firstly, because in our opinion, the CIT(A) has properly considered the matter including the nature of expenditure for coming to the conclusion that the expenditure cannot be disallowed to the tune of Rs. 1,39,65,033 as done by the AO. Secondly, the Department has not been able to substantiate its ground before us by pointing out that the expenses under various heads were not allowable. We, therefore, fully concur with the findings of the learned CIT(A) in deleting the disallowance of Rs. 1,39,65,033 and reject the ground of Revenue.
4.33 In the result, whereas ground No. 1 of assossee's appeal is allowed for statistical purposes, as observed in para 4.15 of this order, ground No. 2 taken in the appeal of the Revenue is dismissed.
5. Ground No. 2 (assessee's appeal):
This ground runs as under:
2. The learned CIT(A) has also erred on facts and in law in disallowing-
(i) Rs. 49,785 being 50 per cent of Rs. 99,570 business promotion expenses; and
(ii) Rs. 24,784 being 50 per cent of Rs. 53,568 business conference expense on the alleged ground that the expenditure incurred under these heads is entertainment expenditure.
5.1 The AO in para 5.13 of the assessment order has considered the issue of expenditure relating to business promotion at Rs. 99,570; expenditure on business conference at Rs. 53,568; and expenditure on entertainment at Rs. 9,94,081 and held that these expenses were in the nature of entertainment. It is to be pointed out that the AO made the disallowance on the ground that details were not furnished by the assessee. In appeal, it was submitted before the learned CIT(A) that as per office audit report these expenses were not classified as entertainment expenses. It was also pointed out that details of these expenses were filed on pp. 75 to 77 of the paper book. By pointing out such details it was submitted that these were business expenses and not entertainment expenses. The learned Counsel also placed reliance on the ratio of decision of Hon'ble Delhi High Court in the case of Expo Machinery Ltd. (supra) and submitted that a deduction of 35 per cent may be allowed against these expenses as being expenses incurred on food and beverages which were attributable to the participation of employees. The learned CIT(A) after making reference to the direction on similar issue in asst. yr. 1996-97 made disallowance of 50 per cent by observing as under:
As the facts are similar, to my mind, it would be in the fitness of things if 50 per cent of these expenses are attributed to providing food and beverages to the participants other than expenses incurred on food and beverages provided to the employees:
Out of business promotion 99,570
Out of business conference 53,568
____________
1,53,138 50
______________
per cent entertainment expenses 76,569
5.2 The learned Counsel placed reliance on the same authorities which were cited before him in respect of ground No. 1 of assessee's appeal. He further made reference to the details of expenditure available at p. 148 of the paper book. He pointed out that the amount has not been properly worked out by the learned CIT(A). According to him out of this amount a sum of Rs. 13,57,174 was under the head "Expenses material" and the learned CIT(A) was not justified in disallowing 50 per cent of such expenditure also. In support of this argument the learned Counsel placed reliance on the decision in the case of Umacharan Shaw & Bros. v. CIT (1959) 37 FFR 271 (SC). According to him, the disallowance made by the learned CIT(A) was based on estimate which approach cannot be justified and sustained.
5.3 The learned Departmental Representative, on the other hand, supported the order of the AO.
5.4 We have carefully considered the entire material and the rival submissions. In our opinion, the learned CIT(A) was not justified in including the amount covered under the head "Expenses material", lie was also not justified in making disallowance of 50 per cent expenditure on ad hoc basis. Hence we are unable to concur with his view on this issue. After examining the details, we are of the opinion that each item of expenditure should be examined separately. Hence, we consider it fit and proper to set aside the finding of the learned CIT(A) and restore the matter back to the file of AO for fresh adjudication after taking into consideration the argument of the learned Counsel for the assessee raised before us and also applying the decision of Hon'ble Delhi High Court in the case of Expo Machinery Ltd. (supra). We order accordingly. Ground is allowed for statistical purposes.
6. Ground No. 3 (assessee's appeal):
This ground has not been pressed and is rejected being not pressed.
7. Ground No. 4 (assessee's appeal):
This ground challenges the disallowance of Rs. 5,13,000 on account of donations. The assessee had debited a sum of Rs. 5,13,000 on account of donations. The AO did not accept the claim of the assessee and disallowed the same.
7.1 In appeal, the learned CIT(A) has upheld the action of the AO by observing as under:
10.4.1 have carefully considered the matter, I am afraid the learned Authorised Representative's arguments hold no water. I have perused the letter dt. 17th Dec, 1996 written by Shri R.K. Iyengar, Head of Maths Department of IIT, Delhi, to the appellant-company. From this letter it is clear that this amount of Rs. 5 lakhs is in the nature of a donation given for establishing a scholarship as mentioned above. Therefore, this is not covered under Section 37(1). Similarly, I find that the other donations of Rs. 10,000 and Rs. 3,000 given to Himalayan Environment Trust, Gangotri Conservation Project and to IGP Fund, respectively, do not qualify for deduction under Section 37(1). Accordingly, the disallowance of Rs. 5,13,000 made by the AO on account of donations is sustained.
7.2 Before us, the learned Counsel for the assessee submitted that the Departmental authorities have not properly considered the aim and object behind the alleged donation. According to him, under the guidelines for awarding scholarship in the name of "Silicon Graphics Systems Scholarships", the assessee-company had incurred the expenditure which was for promotion of its business. In support of his contention, the learned Counsel also placed reliance on the ratio of decision reported in National Aluminium Co. Ltd. v. Dy. CW (2006) 101 TTJ (Ctk) 948. He also placed reliance on the decision of Hon'ble Madras High Court in the case of CIT v. Balaji Enterprises and the decision of Hon'ble Supreme Court, CIT v. Balaji Enterprises .
7.3 We have gone through the guidelines issued by Indian Institute of Technology, Delhi, filed at p. 152 of the paper book, in which the Institute has requested the assessee-company to provide scholarships. The assessee-company in pursuance of this letter and also the guidelines for awarding scholarship, has donated a sum of Rs. 5 lakhs to the Indian Institute of Technology, Delhi, towards sponsorship of the students of Five Year Integrated M. Tech. in Mathematics and Computer. Neither the AO nor the learned CIT(A) has considered the guidelines of the Institute and the purpose of awarding the scholarship. On going through this material, it is clear that the scholarships were granted by the assessee in the larger interest of business. The scholarship was given at the request of the Institute. The learned CIT(A) has not appreciated the facts properly. We, therefore, consider it proper to set aside the finding of the learned CIT(A) and restore the matter to the file of AO for deciding the matter afresh after taking into consideration the above referred material. While doing so, he shall provide due opportunity of being heard to the assessee. Ground is allowed for statistical purposes.
8. Ground No. 5 : This ground challenges the sustenance of disallowance of Rs. 1,00,000 out of total disallowance of Rs. 1,58,462 on account of write off of obsolete inventory.
8.1 The assessee-company had debited miscellaneous expenses at Rs. 1,58,462. It was claimed that it represented payment for write off of obsolete inventory and other goods. The AO disallowed this expenditure against which the assessee came in appeal. It was contended before the learned CIT(A) that it was an allowable expenditure. Details of these expenses were also filed in appeal. The learned CIT(A) has given relief to the assessee to the tune of Rs. 58,462 by observing as under:
10.7. I have carefully considered the matter. From the details of the expenses filed it is noticed that in many cases the nature of expenditure has not been mentioned. There are number of entries which simply mention that petty cash expenses for the day have been incurred for such and such amount. No further details in this regard are available. Also there are several items of expenditure where it has simply been mentioned as follows:
Expenses incurred during travelling.
No further details in this regard are available. To my mind, it would meet the ends of justice if out of a total disallowance of Rs. 1,58,462 a disallowance of Rs. 1 lakh is sustained for disallowable expenses in the absence of details. The appellant-company would be entitled to a relief of Rs. 58,462.
8.2 The learned Counsel for the assessee submitted that since detail was filed before the learned CIT(A), the learned first appellate authority should have decided the matter properly after examining such details.
8.3 On the other hand, the learned Departmental Representative pointed out that the issue stands covered by the order of the Tribunal for asst. yr. 1995-96. In that year the matter was set aside to the file of AO for fresh adjudication.
8.4 We have carefully considered the entire material. Copy of the order for asst. yr. 1995-96 has not been filed before us nor the details of the expenses have been pointed out. In absence of this material, we consider it proper to set aside the findings of the learned CIT(A) on this point and restore the matter back to the file of AO for fresh disposal of the issue. Accordingly, orders of authorities below on the issue in question are set aside and the matter is restored (to) the file of AO for fresh adjudication, after providing full opportunity of being heard to the assessee and as per law. Ground is allowed for statistical purposes.
9. Ground Nos. 6 and 7 of assessee's appeal and ground No. 4 of Revenue's appeal:
9.1. Ground Nos. 6 and 7 of assessee's appeal are as under:
6. The learned CIT(A) has erred on facts and in law in upholding the disallowance of Rs. 6,78,587 being 50 per cent of Rs. 13,57,174 of the expenses incurred under the head 'Expensed materials'
7. The learned CIT(A) has erred on facts and in law in upholding the disallowance of Rs. 3,03,139 being 50 per cent of the expenses of Rs. 6,06,278 on subscription and membership fees.
9.2 Ground No. 4 of Revenue's appeal reads as under:
4. On the facts and in the circumstances of the case, the learned CIT(A) has erred in allowing relief of Rs. 6,78,587 on account of 'other expenses material' and Rs. 3,03,139 on account of sales option and membership fee, as all these expenses were not explained vis-a-vis business expediency.
9.3 The learned CIT(A) has considered the entire material in paras 10.8 and 10.9 of his order. He has given relief of Rs. 9,81,726 which has been challenged by the Revenue in ground No. 4 referred to above. On the other hand, the assessee has challenged the sustenance of the disallowance.
9.4 Before us the learned Counsel for the assessee submitted that the assessee had incurred expenditure, details of which were furnished before the learned CIT(A) but he has not properly adjudicated the issue.
9.5 The learned Departmental Representative, on the other hand, supported the order of AO.
9.6 On going through the orders of Departmental authorities it appears that full details have not been furnished or the same have not been examined. The above disallowance made by the learned CIT(A) is without any basis. In our opinion the matter should be decided after proper examination of details, Therefore, we consider it proper to set aside the finding of learned CIT(A) and restore the matter to the file of AO for fresh adjudication on the issue in question. Accordingly, orders of authorities below, on the issue in question, are set aside and the matter is restored to the file of AO for fresh adjudication, after providing full opportunity of being heard to the assessee and as per law. Grounds are allowed for statistical purposes only.
10. Ground Nos. 8, 9 and 10 of assessee's appeal:
These grounds have not been pressed before us, Accordingly the same stand dismissed being not pressed.
11. Ground Nos. 11, 12 and 13 of assessee's appeal:
These grounds are general in nature and require no specific adjudication.
12. Ground No. 1 of Revenue's appeal:
This ground challenges the deletion of addition of Rs. 6,75,72,230 being customs duty included in closing stock. The learned CIT(A) has allowed relief to the assessee by following the decision of Special Bench of the Tribunal in the case of Indian Communication Network (P) Ltd. v. IAC (1994) 48 TTJ (Del)(SB) 604 : (1994) 206 ITR 96 (Del)(SB)(AT). His observations as contained in para 3 are as under:
Ground No. 2 deals with the AO's action in disallowing under Section 43B a sum of Rs. 6,75,72,366 being customs duty as included in the closing stock valuation. The AO has discussed this issue in detail on pp. 2 to 7 of the assessment order, The learned Authorised Representative of the appellant-company has drawn specific attention to my order dt. 7th Jan., 2000 in Appeal No. 185/1999-2000 for the asst, yr. 1996-97 in the appellant-company's case where this issue was decided in favour of the appellant-company. In that order I had specifically placed reliance on the decision of the Hon'ble Tribunal Special Bench in the case of Indian Communication Network (P) Ltd. v. IAC (1994) 48 TTJ (Del)(SB) 604 : (1994) 206 FL'R 96 (Del(SB)(AT), where this issue was decided in favour of the assessee. As this issue is covered in favour of the assessee, for the same reasoning as is given in my order dt. 7th Jan., 2000 for asst. yr. 1996-97, this ground is decided in favour of the appellant-company. The appellant-company is entitled to relief of Rs. 6,75,72,366.
12.1 The learned Departmental Representative could not point out any contrary decision. In our view there is no legal mistake in the order of the learned CIT(A) because he has followed the decision of Special Bench of the Tribunal against which no decision could be pointed out by the learned Departmental Representative. Hence, we uphold the order of the learned CIT(A).
13. Ground No. 3 of Revenue's appeal:
This ground runs as under:
On the facts and in the circumstances of the case, the learned CIT(A) has erred in allowing relief of Rs. 99,032 being expenditure on articles for which the assessee has not discharged its onus of providing primary facts and evidences.
13.1 The AO has made disallowance of Rs. 1,98,064 by observing as under:
With regards to gifts, the complete details have not been made available. The assessee was asked to furnish these details and the business expediency. No details were forthcoming in this regard. Accordingly, having regard to the fact that the assessee has failed to discharge the onus cast upon it of the substantiated claim made, the entire sum of Rs. 1,98,064 is disallowed.
13.2 The learned CIT(A) has considered the issue in paras 6 to 6.2 of his order. It was submitted before him that gifts were given on different occasions in the course of business, such as, new year, Diwali, marriage functions of business associates. It was specifically pointed out on behalf of the assessee that the articles of presentations did not bear the name or logo of the company and hence could not be said to be in the nature of advertisement and, disallowable under Rule 6B of the IT Rules.
13.3 The learned CIT(A) has given relief of Rs. 99,000 to the assessee by observing as under:
I have carefully considered the matter. A similar issue had come up for adjudication before me in the appeal for asst. yr. 1996-97 in the appellant-company's case. The facts in this regard are similar. It is very clear that the appellant-company has hedged on providing complete details in this regard. Not only were those details not given to the auditors and the AO but the same have also not been filed in appeal. Only general statements are being made to justify these expenses. As full details have not been filed it is very clear that the entire expenses cannot be allowed. The onus of placing primary facts and primary evidence on record was that of the appellant-company and this onus has not been discharged. However, keeping in view the facts and circumstances of the case it would meet the ends of justice if 50 per cent of these expenses are allowed as business expenses. The disallowance of the balance 50 per cent of these expenses is upheld. Therefore, the appellant is entitled to a relief of Rs. 99,032 on this count.
13.4 On going through the order of the learned CIT(A), we do not find any scope to interfere. Hence, we uphold the view taken by the learned CIT(A). Gfound fails.
14. Ground No. 5 of Revenue's appeal:
This ground runs as under:
On the facts and in the circumstances of the case, the learned CIT(A) has erred in holding that the assessee company was eligible for deduction under Section 80-O of IT Act, 1961 and not following the order of CIT(A)-VII, New Delhi, in Appeal No. 176/1997-98, dt. 3rd March, 1994 for asst. yr. 1994-95 on the same issue.
14.1 The assessee had received, in convertible foreign exchange, a sum of Rs. 1,24,27,974 as consistency loss (sic) being consideration for use outside India of information concerning commercial experience and skill from an enterprise outside India. The AO did not allow the claim.
14.2 In appeal, before the learned CIT(A) following submission was made:
The appellant is entitled to a deduction under Section 80-O to the extent of 50 per cent of the said amount. Since, there was no gross total income as per return filed, the claim for deduction under Section 80-O was made in the notice to the computation of income. In spite of the fact that the income has been assessed at a gross total income of Rs. 7,73,98,544, deduction under Section 80-O was not allowed on the simple ground that the claim of the assessee-company had been turned down in the earlier assessment years.
14.3 The learned CIT(A) after making reference to his order for asst. yr. 1996-97 set aside the matter by observing as under:
11.2. I have carefully considered the matter. As per para 7.4 of my order for asst. yr. 1996-97 it has been said that the services rendered by the appellant-company for earning the consultancy fees in convertible foreign exchange would qualify for deduction under Section 80-O. The AO is directed to allow deduction under Section 80-O as per law at 50 per cent of the net income received in convertible foreign exchange for the services mentioned above. The AO is directed to pass a speaking order on this issue while giving effect to this order.
14.4 On going through the order of the learned CIT(A) we do not find any scope to interfere in his order, as the matter was remanded back to the AO for deciding the issue afresh, the Revenue should not have any grievance. Ground fails.
15. In the result, assessee's appeal is allowed for statistical purposes whereas Revenue's appeal stands partly allowed for statistical purposes.