Income Tax Appellate Tribunal - Mumbai
Proctor & Gamble India Ltd. , vs Department Of Income Tax on 23 February, 2004
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES 'F' : MUMBAI
BEFORE SHRI D. MANMOHAN, HON'BLE VICE P RESIDENT
AND
SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER
ITA. No. 3833/Mum/2004
Assessment year 1996-1997
Proctor & Gamble India Ltd.
DCIT, Cir. 7 (1) vs. (Now known as Proctor & Gamble
Mumbai Hygiene & Health Care Ltd.)
Mumbai - 11 P AN AAACP-6332-M
(Appellant) (Respondent)
For appellant : Shri Sandeep Dahuja
For respondent : Shri Yogesh Thar
ORDER
PER D.M ANMOHAN, V.P .
1. This appeal, filed at the instance of the Revenue, is directed against the Order dated 23-2-2004 of the CIT(A)-XIX, Mumbai and it pertains to the assessment year 1996-97. As could be noticed from the grounds urged before us, ground No. 5 is general in nature and therefore, it does not require independent consideration and the other grounds are taken up in seriatim.
2. Ground No.1 reads as under :
"On the facts and circumstances of the case and in law, the learned CIT(A) erred in deleting the addition of Rs. 2.00 lacs made by the A.O. u/s. 37 (2A) on account of club membership following the decision of Bombay High Court in the case of Otis Elevator Company which has not been accepted by the department."2
3. As could be noticed from the assessment order, the assessee incurred huge expenditure under the head 'entertainment expenses'. In clause 4 (viii) of the Tax Audit Report it was stated that expenses on ordinary hospitality have not been included; 25% of expenditure in business meetings on the employees has been claimed as deductible. The Assessing Officer noticed that huge expenditure was incurred on the staff lunch, provided outside the place of work since the expenditure includes cafeteria expenditure of Rs.50,13,051/-, in the absence of details, the Assessing Officer made an adhoc disallowance of Rs. 2 lakhs under section 37 (2) of the Act.
4. On an appeal filed by the assessee, the learned CIT(A) observed that staff on field duty have to incur expenditure outside the office premises and that should not be treated as entertainment expenditure. Following the decision of his predecessor in the case of sister concern for the assessment year 1996-97 the learned CIT(A) set aside the disallowance of Rs. 2 lakhs.
5. Aggrieved, Revenue is in appeal before us. At the time of hearing it was noticed that the disallowance was set aside presumably on the ground that it was incurred expenditure on club membership. The ITAT, in the case of sister concern for the assessment year 1994-95, followed its earlier order for the assessment year 1995-96 and by placing reliance of the Hon'ble Bombay High Court Order in the case of Otis Elevator Company (India) Ltd. vs. CIT 195 ITR 682, it has set aside the disallowance mainly on the ground that it pertains to the expenditure on membership fees paid to clubs. When we noticed that the impugned disallowance was on account of expenditure incurred on entertainment/lunch of the staff members and thus falls outside the ambit of section 37 (2) of the Act, the learned Counsel conceded that the decision of the learned CIT(A) was based on incorrect appreciation of 3 facts. In other words, having regard to the smallness of the amount, he was prepared to concede the claim of the Revenue. Under these circumstances and also having regard to the facts, we set aside the Order of the learned CIT(A) and uphold the disallowance of Rs. 2 lakhs made by the Assessing Officer under section 37(2) of the Act.
6. Vide ground No.2 the Revenue contends that the learned CIT(A) erred in deleting the disallowance of Rs.32,59,366/-, referable to destruction of obsolete stock-in-trade.
7. The Assessing Officer observed that details of expenditure have not been filed and hence it is not possible to know as to how the material has become obsolete and why the writing off is required. He therefore rejected the contention of the assessee. Before the learned CIT(A) the assessee contended that it is the normal practice of the assessee to destroy stock which becomes obsolete and unsaleable, either due to shelf-life expiry or as a result of damages. It was also submitted that the shelf-life, in most cases, does not exceed two years from the date of manufacture and some of the products of the assessee become unsaleable, after passage of time, on account of decrease in moisture or progressive degeneration of its ingredients and thus rendering the product itself unsafe for human use. Package design changes and old price printed thereon are additional factors. Furthermore, as the fragrances used in the product are of proprietary nature and packed under very stringent quality controlled conditions, the same cannot be salvaged for repacking when damaged. Therefore, all such unsaleable products - to avert the possibility of misuse if disposed of in loose unbranded form - are immediately destroyed by burning on an 'as is where is basis' and also by writing off in the books at the same time. It was also submitted that the loss, on account of obsolete stock, is maintained as low as practicable and in the instant case it works out to a 4 negligible figure of less than 1% of the sales turnover. It may be noticed here that the case of the assessee-company is that it its turnover is in the range of Rs. 344 crores in this year whereas obsolete stock works out to less than 1%.
8. Having regard to the submissions of the assessee, the learned CIT(A) accepted the claim of deduction by observing as under :
"In the instant case the obsolete stock has been actually physically destroyed and charged to the P & L account during the year under consideration. Also, similar claims have been allowed to the appellant's sister concern. Further, the reason given by the A.O. for effecting the disallowance is, in my opinion, untenable. In my considered view it is not for the A.O. to decide whether or not any material has become obsolete and whether writing off the same is warranted. It cannot be gainsaid that the A.O. cannot prescribe the manner in which the business is to be conducted by the assessee. This, therefore, cannot form the ground of rejecting the claim for such write off. For these reasons this ground of appeal succeeds. The A.O. is directed to allow deduction for obsolete material written off of Rs. 32,59,366/-."
9. Aggrieved, Revenue is in appeal before us. Learned DR submitted that the decision of the ITAT in the case of the sister concern is distinguishable on facts. Adverting our attention to the Order passed by the ITAT, 'F' Bench, Mumbai in the case of M/s. P & G Hygine & Healthcare Ltd. (ITA. Nos. 844 & 859/Mum/2003 dated 30th June, 2009) learned DR submitted that in the case of sister concern the Assessing Officer has not disputed the factum of destruction of unsaleable inventory; disallowance was made on the ground that it was only a provision and not actually written off in the books of the assessee.
5Therefore, the Tribunal had no occasion to consider the issue as to whether a provision, without bringing on material any evidence to prove the factum of destruction, is admissible for deduction. He then adverted our attention to the Order passed by the Assessing Officer to submit that assessee has not furnished details before the Assessing Officer and hence there was no other alternative except to reject the claim of the assessee. For the first time the assessee furnished certain material before the Assessing Officer but even such material do not contain specific details with regard to license no, type of product, number of years, reckoned from the date of manufacture etc., to identify that the products destroyed were not sold in the market. Learned DR contended that fresh evidence was accepted by the learned CIT(A) without giving the Assessing Officer an opportunity of being heard and thus the learned CIT(A) was not justified in holding that the expenditure is reasonable. The learned CIT(A) has overlooked the fact that assessee has not furnished any report from the technical staff or office staff to analyse as to whether the stock has become obsolete or not and thus he was not justified in coming to a conclusion that the stock has actually become obsolete.
10. On the other hand the learned Counsel appearing on behalf of the assessee submitted that it is a matter of ethical business practice to discard and destroy such stock/material promptly to minimize inventory carrying cost of such material and also to avoid risk of such misuse if left undestroyed. It was also contended that the company always made an endeavour to keep losses to the barest minimum which was between 0.5% to 1% of the sales turnover. It was also contended that due to keen competition in the consumer-market, assessee-company needs to maintain quality of its product and any supply of damaged/obsolete stock in the market will effect goodwill created in the minds of the consumer and hence in the interest of business the assessee had to write off such stock in its books of account after 6 destroying the obsolete stock. Learned Counsel adverted our attention to the annexures filed before the CIT(A) to submit that the nature of products, quantity etc., were furnished before the learned CIT(A) and in the case of obsolete stock it cannot be kept in the store house to enable the departmental authorities to examine since it is periodically destroyed, in the presence of depot staff and the company personnel. He laid great emphasis on the percentage of the obsolete staff to submit that bearing in mind the business realities and nature of products assessee was dealing in, the loss is reasonable and thus justified the action of the learned CIT(A).
11. We have carefully considered the rival submissions and perused the record. As could be noticed from the grounds of appeal the Revenue has not challenged the action of the learned CIT(A) on the ground of lack of opportunity to the Assessing Officer to cross-verify the particulars furnished before the learned CIT(A). Statute provides for filing an appeal by the department only after obtaining an authorisation from the concerned Commissioner. In the instant case, authorisation was given to the Assessing Officer only on the ground that the decision in the case of assessee's sister concern, M/s. Procter & Gamble for the earlier year was not accepted by the department. In other words, it is not the case of the appellant that no opportunity was provided by the learned CIT(A). It is also not the case of the Revenue that the details furnished before the learned CIT(A) were insufficient and facts in the case of sister concern are distinguishable on facts. Therefore, the learned DR cannot raise a new issue, without prior approval of the Administrative Commissioner to raise a new ground. Even if it is treated as a new argument in support of the Order passed by the Assessing Officer, we are of the view that in the peculiar circumstances of the case it may be difficult for the assessee, after a long gap of 15 years, to furnish better evidence than what is submitted before the learned CIT(A). No doubt, it is 7 the duty of the assessee to furnish reasonable evidence before the Assessing Officer and in the absence of proper evidence the Assessing Officer is at liberty to reject a claim of deduction; Business realities should not be altogether be ignored. Having regard to the fact that the deduction of obsolete stock works out to less than 1% we are of the view that the claim of deduction is reasonable. Therefore, we uphold the Order of the learned CIT(A) on this issue.
12. Ground No.3 pertains to the claim of deduction of Rs. 8 lakhs, referable to Corporate Membership Fees of a Club. Learned CIT(A) followed the decision of the jurisdictional High Court to hold that not only the annual subscription but even membership entrance fees of club is allowable as revenue expenditure. Learned DR merely relied upon the order of the A.O. Since learned CIT(A) followed the decision of the Hon'ble jurisdictional High Court, we do not find any infirmity in the Order of the learned CIT(A).
13. Ground No.4 reads as under :
"On the facts and circumstances of the case and in law, the learned CIT(A) directed to exclude the sales tax from the total turnover for the computa tion of deduction u/s. 80HHC relying on the decision of the Bombay High Court in the case of Sudershan Chemical Ltd. (245 ITR 769) which has not been accepted by the department."
14. At the time of hearing learned Counsel relied upon the following decisions to support the view of the learned CIT(A).
i. CIT vs. Lakshmi Machine Works (2007) 290 ITR 667 ii. CIT vs. Catapharma (India) P. Ltd. (2007) 292 ITR 641 8
15. Learned DR fairly submitted that the issue covered in favour of the assessee in the light of decisions of the Hon'ble Bombay High Court cited supra. However, he submitted that the Revenue has not accepted the legal position.
16. Having regard to the submissions of the assessee we do not find any infirmity in the Order of the learned CIT(A) and therefore, reject the contention urged by the Revenue.
17. In the result, appeal filed by the Revenue is partly allowed.
Order pronounced in the open Court, on this the 17th day of February, 2010.
Sd/- Sd/- (RAJENDRA SINGH) (D.M ANMOHAN) ACCOUNTANT M EMBER VICE P RESIDENT Mumbai, Date 17th February, 2010. VBP/- Copy to
1. DCIT, Cir. 7 (1), 452, Aayakar Bhavan, M.K. Road, Mumbai.
2. Proctor & Gamble India Ltd. (Now known as Proctor & Gamble Hygiene & Health Care Ltd. ) Tiecicon House, Dr. E. Moses Road, Mumbai - 11. P AN AAACP -6332-M
4. CIT(A)-XIX, C-10/409, Pratyaksh Kar Bhavan, Bandra-Kurla Complex, Mumbai - 400 051.
5 CIT, City-VII, Mumbai
6. D.R. 'F' Bench, Mumbai.
7. Guard File.
(True copy) By Order
Asst. Registrar, ITAT, Mumbai Benches
MUMBAI.