Vildirect: IncomeTax-caselaws-1984-VIL-61-ITAT-

1984-VIL-61-ITAT-

Equivalent Citation: ITD 009, 690,

Income Tax Appellate Tribunal MADRAS

Date: 30.03.1984

TUBE MILL (INDIA) PVT. LIMITED AND ANOTHER.

INCOME-TAX OFFICER.

BENCH

Member(s) : C. R. NAIR., CH. G. KRISHNAMURTHY., P. S. DHILLON.

JUDGMENT

Per Shri C.R. Nair, Accountant Member--In this appeal by the assessee its first contention is that the Commissioner (Appeals) was wrong in directing the ITO to grant deduction in accordance with the provisions of section 37(2A) of the Income-tax Act, 1961 ('the Act') in regard to the assessee's claim of entertainment expenditure of Rs. 54,331. The ITO disallowed the above claim without assigning reasons. Before the Commissioner (Appeals) the assessee submitted that the above sum represented expenditure on refreshments provided to clients which was admissible as deduction, following the Madras High Court decision in CIT v. Karuppuswamy Nadar & Sons [1979] 120 ITR 140. The Commissioner (Appeals) referred to the provisions of section 37(2A) and directed the ITO to grant allowance under the above provision, observing that the assessee had not produced any document to show that the entire expenditure was incurred on coffee, tea and refreshments to clients.

2. We heard the parties. At the hearing, reference was made to the provisions of Explanation 2 inserted with retrospective effect from 1-4-1976 by the Finance Act, 1983, according to which for the purpose of section 37(2A), 'entertainment expenditure' would include expenditure on hospitality of every kind, including provision of food or beverages to any person, whether by way of provision of food or beverages or in any other manner whatsoever and whether or not such provision is made by reason of any express or implied contract or custom or usage of trade, but does not include expenditure on food or beverages provided by the assessee to his employees in office, factory or other place of their work. In view of the above amended provision, only the expenditure to the extent incurred to the employees in office, factory or any other place of work would be excluded from the scope of the term 'entertainment expenditure'. In the absence of factual details on this point, we would direct the ITO to ascertain the factual position and disallow the expenditure to the extent, if any, required under section 37(2A) read with Explanation 2.

3. The assessee's next contention is that the Commissioner (Appeals) was wrong in allowing only Rs. 5,000 as business expenditure out of the assessee's claim for Rs. 17,168 incurred on account of Pooja. The ITO had disallowed the above sum on the ground that it was not proved to be a business expenditure nor it was staff welfare expenses, as it was purely in expenditure to invoke the blessings of God. On the assessee's appeal, the Commissioner (Appeals) referred to the Board's Circular dated 3-10-1968 (extracted in Chaturvedi and Pithisaria's Income-tax Law Vol. 1, 1977 edition, page 828), according to which, Pooja expenses without a monetary limit can be allowed as a deduction, so long as the expenses are not incurred for personal, social or religious purposes, but are incurred for business purposes. The Commissioner (Appeals) estimated that Rs. 5,000 was incurred on the staff members and that such an amount would constitute business expenditure and allowed the amount.

4. Before us the assessee's learned representative urged that the entire expenditure, though shown under the nomenclature of Pooja expenses, was in the nature of staff welfare. The departmental representative supported the order of the Commissioner (Appeals) and also made a plea that Pooja expenses cannot be treated as the staff welfare expenses. The Commissioner (Appeals') had estimated the expenditure incurred on staff welfare at Rs. 5,000 which he has allowed following the Board's Circular. While the assessee's claim that Pooja expenses in the nature of staff welfare is admissible, is supported by the Board's instructions as also the Punjab and Haryana High Court decision in the case of Atlas Cycle industries Ltd. v. CIT [1982] 134 ITR 458 relied on by the assessee, we are of the view that the relief granted by the Commissioner (Appeals) estimating the reasonable Pooja expenditure in the nature of staff welfare at Rs. 5,000 is reasonable. Hence, we decline to interfere.

5. The assessee's next contention is that the Commissioner (Appeals) erred in confirming the ITO's disallowance under section 35B of the Act dealing with 'export markets development allowance' to the tune of Rs. 1,07,271 less Rs. 3,581. The assessee had claimed weighted deduction on the following items

Rs.

(i) Subscription to Export Promotion Council 2,500

(ii) Bank charges 7,457

(iii) Export inspection agency charges 4,662

(iv) Exchange adjustment on account of exports 42,198

(v) Commission on export sales 1,57,725

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2,14,542

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The Commissioner (Appeals) held that the assessee was entitled to weighted deduction only in respect of items (i) and (iii) (Rs. 2,500 and Rs. 4,662) on which the relief comes to Rs. 3,581.

6. We have heard the parties. Regarding item (ii) (bank charges), this relates to collection of the sale price, which is not an expenditure falling within any of the sub-clauses of section 35B(1)(b). Similar is the position regarding item (iv) (exchange adjustment on account of exports). Regarding item (v) (commission on export sales) it was stated to be to Ambadi Enterprises. Regarding this item our attention was drawn to the recent Madras High Court decision in CIT v. Southern Sea Foods (P.) Ltd. [1983] 140 ITR 855. The High Court while disallowing the assessee's claim in that case, has laid down the guidelines to be applied regarding the admissibility or otherwise of weighted deduction regarding commission payment. Having regard to the above decision, we would vacate the Commissioner (Appeals)'s and the ITO's order on this point and restore the matter to the ITO for fresh consideration of point on the basis of the cited decision, with reference to the facts of the case.

7. The assessee's next contention is that the entire remuneration of Rs. 90,494 paid by the assessee as remuneration to its managing director should be allowed. The assessee had stressed for the allowance of the entire amount before the ITO with the plea that it has been approved by the Company Law Board of Government of India. The ITO, however, applied the provisions of section 40A(5) of the Act and disallowed a sum of Rs. 30,494 being the excess over the ceiling thereon at Rs. 60,000. On the assessee's appeal, the Commissioner (Appeals) held that the provisions of section 40(c) of the Act with the higher ceiling of Rs. 72,000 applicable to the directors applied to the assessee and, accordingly, he restricted the disallowance of Rs. 18,494.

8. Before us, the assessee has raised the same plea which was rejected by the lower authorities. The fact of approval of remuneration to the managing director by the Government of India is irrelevant for applying the provisions of section 40(c) which has been rightly applied by the Commissioner (Appeals). We would, therefore, reject this ground.

9. The assessee's next contention is that the Commissioner (Appeals) was wrong in disallowing the assessee's claim for payment of Rs. 78,047 being the foreign exchange difference as capital expenditure. The Commissioner (Appeals) upheld the ITO's disallowance of the sum as capital expenditure on the ground that it represented a repayment of principal and a portion of the purchase price of capital asset acquired by the assessee in the earlier years.

10. We have heard the parties. The same point was a subject-matter of appeal for the earlier assessment year 1976-77 before the Tribunal Bench 'C', which in its order dated 21-4-1981 in IT Appeal No. 66 (Mad.) of 1980 has held that the matter required more detailed consideration after gathering all the relevant facts and restored the matter to the ITO to decide the matter afresh after giving reasonable opportunity to the assessee. Following the above order, we would vacate both findings of the Commissioner (Appeals) and the ITO to dispose of the matter afresh along with the same issue for earlier year, including the assessee's alternate claim for grant of depreciation, if the expenditure in question is treated as capital expenditure.

11. The assessee's last contention is that the Commissioner (Appeals) erred in upholding the ITO's order computing the capital employed for the purpose of section 80J of the Act by deducting borrowed capital. The ITO had determined the capital under section 80J after deducting the liabilities, since the Madras High Court decision in Madras Industrial Linings Ltd. v. ITO [1977] 110 ITR 256 on this point in favour of the assessee had not been accepted by the department and was pending before the Supreme Court. The Commissioner (Appeals) rejected the assessee's plea that the liability was from the branch office to the head office of the assessee and it could not be deducted under rule 19A(3) of the Income-tax Rules, 1962 ('the Rules'). Before us in appeal, the assessee relied on the Madras High Court decision in Madras Industrial Linings Ltd.'s case, whereas the departmental representative urged that section 80J has been amended with retrospective effect from 1-4-1972 by the Finance (No. 2) Act, 1980, according to which, liabilities should be deducted. The departmental representative in this behalf referred to CIT v. K.N. Oil Industries [1982] 134 ITR 651 (MP) and Traco Cable Co. Ltd. v. CIT [1982] 138 ITR 385 (Ker.). The assessee's counter plea is that the retrospective amendment to section 80J has been challenged before the Supreme Court, before whom it is pending, and as such the issue as was discussed by the Tribunal for the assessment year 1976-77 in IT Appeal No. 66 (Mad.) of 1982 may be decided afresh after the Supreme Court decision is pronounced.

12. We have considered the rival submissions. This point has been considered in detail by the Madras Bench 'A' of the Tribunal in its order for the assessment years 1978-79 and 1979-80 in the case of Sundaram Fastners Ltd. [IT Appeal Nos. 1608 and 1609 (Mad.) of 1982, dated 27-5-1983].

In this order the Tribunal restored the issue regarding the computation of section 80J relief to the ITO's file with the direction that he should keep the matter pending till the Supreme Court decision is available or the decision of the Madras High Court, whichever is earlier, in the following terms :

"Recently in the case of CIT v. Surat District Co-operative Mills Producers' Union Ltd. Income-tax Application No. 81 of 1982, a question has been raised before the Gujarat High 'Court whether such a procedure followed by the Tribunal is erroneous in law or not. The View of the department was that when the law has been amended retrospectively, the amended law should have been applied notwithstanding the stay granted by the Supreme Court in other related matters. When a reference application under section 256(1) was rejected, a rule nisi was obtained from the Gujarat High Court under section 256(2) and while disposing of that rule, the Gujarat High Court held that the procedure followed by the Appellate Tribunal was quite correct when it merely remitted the respective matters after setting aside the order of the Commissioner (Appeals) for recomputation of the profit for the purpose of the claim under section 80J. In the light of the decision of the Supreme Court, it was with a view to save public time and cost and that there were no justifying reasons to call for a statement of the case from the Tribunal and decide the matter (sic). The application filed by the department under section 256(2) was rejected. It means that the procedure adopted by the Tribunal to remit the matters back to the Commissioner (Appeals) with a direction to recompute the profit for the purpose of claim under section 80J after the pronouncement of decision by the Supreme Court on the vires of the retrospective amendment, was approved. When that was so and more particularly, when a stay had been granted in the assessee's own case, the Commissioner (Appeals). should not have approved of the method of computation of relief adopted by the Income-tax Officer.

At the time of hearing of this matter, our attention has been invited to a decision of the Kerala High Court in the case of Traco Cable Co. Ltd. v. CIT [1982] 138 ITR 385 and that of the Madhya Pradesh High Court in the case of CIT v. Sanghi Beverages (P.) Ltd. [1982] 134 ITR 623 where both the High Courts held that for the purpose of granting relief under section 80J, only the amended law should be applied. But, neither before the Kerala High Court nor before the Madhya Pradesh High Court, question was posed as in the case before the Gujarat High Court. The claim of the department is that in view of the decision of the Kerala High Court, the Income-tax Officer was justified in applying the amended law. But that is beside the point. The point is what is the effect of the stay order granted by the Madras High Court and the Supreme Court. Though no stay order had been given for this assessee for this particular assessment year, either by the High Court or by the Supreme Court, the authorities below cannot ignore the fact that both the High Court and the Supreme Court have in other cases and for the present assessee for other assessment years, stayed the operation of the retrospective amendment of the Act and convinced of the existence of a prima facie case. The position of the income-tax authorities faced with that situation, is no doubt, delicate and difficult one. They have to levy the tax but at the same time, they have to decide judicially the objections raised by the assessee. In such circumstances, it is their duty to act with utmost fairness to the assessee so as to give them no ground for complaint. The concept of duty to act fairly has often been used by judges to denote an implied procedural obligation. In general it means a duty to observe the rudiments of natural justice in the exercise of functions that are not only judicial but even administrative. Smith's Judicial Review of Administrative Action, states further that the comparatively recent emergence of this use of the 'duty to act fairly' may also enable the Courts to tackle constructively procedural issues that have not traditionally been regarded as part of the requirements of natural justice. We have, therefore, to approach this matter from this contemporary spirit of natural justice. If the authorities ignore the fact that in other cases, Courts are granting stay of the operation of the amended provisions of section 80J, apart from discriminating against the assessee who have not approached the Courts for stay, they would be forcing them to approach the Courts involving expenditure for them and unnecessary burden of additional cases in the Courts. When it is known that the highest Court of the land is seized of the matter, the disposal of the case with reference to the amended law, without waiting for the decision of the Court would only lead to protracted litigation and expenditure both for the assessee and the revenue, unless the authorities are satisfied that revenue may be lost by not taking such immediate action, of which there is no evidence in this case. In the circumstances, disposal of these cases without waiting for the decision of the Supreme Court will be a fortuitous circumstance leading to an unfair exercise of discretion in the disposal of cases which may amount to an abuse of discretion and even an abuse of the due process of law. It is ill this context that the Tribunal had evolved the method of restoring the appeals to the lower appellate authorities for awaiting the decision of the Supreme Court in the interests of justice and to avoid procedural injustice and loss of public time and money, which has also received the approval of the Gujarat High Court. We are also of the considered view that the Central Board of Direct Taxes should have seen this case as a fit one for interference by way of general instructions only to avoid litigation, waste of public money and time. We are, therefore, of the opinion that in the facts and circumstances of the case the Income-tax Officer should not have deducted the liabilities and computed the relief under section 80J. We, therefore, vacate his finding and restore the assessments to his file with a direction that he should keep the matter pending till the decision of the Supreme Court or Madras High Court, whichever is earlier."

We would direct likewise and restore the issue regarding section 80J to the ITO for fresh decision, after the decision of the Supreme Court or the Madras High Court, whichever earlier is available.

13. In the result, the assessee's appeal is treated as partly allowed for statistical purposes.

Per Shri P.S. Dhillon, Judicial Member - I am not in a position to agree with my learned brother on the issue of section 80J relief. The reason is that the Tribunal is taking the view that the provisions of amended section 80J leaves no scope for the contention of the assessee's acceptance as stated in the order of my learned brother in view of the decisions of the Hon'ble Kerala and Madhya Pradesh High Court in Traco Cable Co. Ltd.'s case and in K.N. Oil Industries' case. Reliance can also be placed on the decision of the Tribunal, in particular IT Appeal Nos. 3 to 5 (Mad.) of 1983 of the Madras Bench 'C' dated 30-6-1983. Since on this issue, in several cases, we differed with each other and as such I have to do so over here, hence, a question be framed on this issue for reference under section 255(4) of the Act, which, according to the Learned Accountant Member is right, and this matter also be heard together with such matters.

ORDER UNDER section 255(4) OF THE INCOME-TAX ACT, 1961--Whereas we are unable to agree on the point set out below for the assessment year 1977-78, we refer the following point of difference of opinion to the President for reference to Third Member, under section 255(4) :

" Whether, on the facts and in the circumstances of the case and relying on the ratio of the earlier decision of the Tribunal in the case of Sundaram Fastners Ltd., the Tribunal would be justified in vacating the findings of the Commissioner (Appeals) and the Income-tax Officer regarding the computation of the deduction under section 80J of the Income-tax Act, 1961, and restoring the matter to the Income-tax Officer for recomputation of the profit after the decision of the Supreme Court or the Madras High Court, regarding the retrospectivity of the amended section 80J [as amended by section 17 of the Finance (No. 2) Act, 1980] becomes available ? "

THIRD MEMBER ORDER

Per Shri Ch. G. Krishnamurthy, Vice President--Owing to difference of opinion between my learned brothers on the point set out below, the President has nominated me as the Third Member under section 255(4) :

" Whether, on the facts and in the circumstances of the case and relying on the ratio of the earlier decision of the Tribunal in the case of Sundaram Fastners Ltd., the Tribunal would be justified in vacating the findings of the Commissioner (Appeals) and the Income-tax Officer regarding the computation of the deduction under section 80J of the Income-tax Act, 1961,--and restoring the matter to the Income-tax Officer for recomputation of the profit after the decision of the Supreme Court or the Madras High Court, regarding the retrospectivity of the amended section 80J [as amended by section 17 of the Finance (No. 2) Act, 1980] becomes available ? "

2. The point of difference was very clearly worded and the difference of opinion between my learned brothers is whether the decision of the Tribunal in the case of Sundaram Fastners Ltd. should be followed and that the order passed by the Commissioner (Appeals) should be vacated and that the ITO should be directed to recompute the capital base after the decision of the Supreme Court or the Madras High Court regarding the validity of the retrospective amendment to section 80J as amended by section 17 of the Finance (No. 2) Act, 1980.

3. Normally, there should not have been a difference of opinion in such a case, because it is the convention of the Tribunal that whenever there is a decision of the Tribunal on identical point, that decision should be followed unless some points not covered by that decision arise or the law, in the meantime, has been amended or a decision of the Supreme Court is available taking a contrary view. Even when any such thing happens, the convention that we have built up is that the Bench should refer the case to a larger Bench for decision instead of itself differing from the view expressed by another Bench. This is to develop a healthy convention that one co-ordinate Bench should not criticise or refuse to follow the view expressed by another co-ordinate Bench. The matter if referred to a larger Bench, the decision of the larger Bench would then be available to all the Members in the country. This is the convention that we have been following all along. That apart, the Madras High Court has not only approved of this practice, but even judicially laid it down as a guideline for the Tribunal in the case of CIT v. L.G. Ramamurthi [1977] 110 ITR 453 (Mad.)., it may be necessary and apposite to quote from the headnote of that case :

" No Tribunal of fact has any right or jurisdiction to come to a conclusion entirely contrary to the one reached by another Bench of the same Tribunal on the same facts. It may be that the members who constituted the Tribunal and decided on the earlier occasion were different from the members who decided the case on the present occasion. But what is relevant is not the personality of the officers presiding over the Tribunal or participating in the hearing but the Tribunal as an institution. If it is to be conceded that simply because of the change in the personnel of the officers who manned the Tribunal, it is open to the new officers to come to a conclusion totally contradictory to the conclusion which had been reached by the earlier officers manning the same Tribunal on the same set of facts, it will not only shake the confidence of the public in the judicial procedure as such, but it will also totally destroy such confidence. The result of this will be conclusions based on arbitrariness and whims and fancies of the individuals presiding over the Courts or the Tribunals and not reached objectively on the basis of the facts placed before the authorities.

If a Bench of a Tribunal on the identical facts is allowed to come to a conclusion directly opposed to the conclusion reached by another Bench of the Tribunal on an earlier occasion, that will be destructive of the institutional integrity itself. That is the reason why in a High Court, if a single judge takes a view different from the one taken by another judge on a question of law, he does not finally pronounce his view and the matter is referred to a Division Bench. Similarly if a Division Bench differs from the view taken by another Division Bench it does not express disagreement and pronounce its different views, but has the matter posted before a Fuller Bench for considering the question. If that is the position even with regard to a question of law, the position will be a fortiorri with regard to a question of fact. If the Tribunal wants to take an opinion different from the one taken by an earlier Bench, it should place the matter before the President of the Tribunal so that he could have the case referred to a Full Bench of the Tribunal consisting of three or more members for which there is provision in the Income-tax Act itself."

I may also add that on an earlier occasion, the Madras High Court had to make the following observation in the case of CIT v. S. Devaraj [1969] 73 ITR 1 :

" Before we leave the matter, we would like to make a further observation. We found in this case that the same Tribunal, though manned by different officers on different occasions, and with reference to the same assessee and assessments relating to two different years, has come to conflicting decisions on the scope and effect of section 12(2), which, on the face of it, should be embarrassing to the revenue and assessees in general. There is, of course, no provision in the Income-tax Act relating to the matter and the doctrine of res judicata also may not be applicable to orders of the Tribunal. Even so, in our opinion, it is proper and desirable that when the Tribunal takes a particular view on the scope and effect of a statutory provision, it does not contradict itself and come to a diametrically opposite view later ; but in such a case, it follows the earlier view and, if and when the aggrieved party applies, should make a reference to this Court of the question."

Following this healthy convention and the rule laid down by the Madras High Court in S. Devaraj's case, I must say that whatever may be the view of the learned Judicial Member on the correctness of the view expressed by the earlier Bench in the case of Sundaram Fastners Ltd., it is expected that the earlier Bench's view be followed and disagreement, more particularly criticism, are avoided.

4. The substance of the matter is whether the procedure of remitting the matter to the ITO to await the decision of the Supreme Court will be in the interest of justice and balance of convenience. The Gujarat High Court has held that the procedure followed by the Tribunal was quite correct when it merely remitted the matters after setting aside the orders of the Commissioner (Appeals) for recomputation of the profit for the purpose of the claim under section 80J in the light of the decision of the Supreme Court. That was with a view to save public time and cost. It further held that there was no justifying reasons even to call for a statement of the case from the Tribunal and decide the matter. In following this procedure, it is to be remembered that no final order has been passed by the Tribunal against any party and the matters are left open.

5. Since that is the only point of difference before me and since the merits are not in issue before me, I would, accordingly, agree with the view expressed by the learned Accountant Member that the view expressed by the earlier Bench in the case of Sundaram Fastners Ltd., should be followed for vacating the findings of the Commissioner (Appeals) and restoring the matter to the ITO regarding the computation of the deduction under section 80J awaiting the final outcome of the decision of the Supreme Court or the Madras High Court, as the case may be, regarding the retrospectivity of the amended section 80J.

6. The learned departmental representative argued before me that he has nothing to urge other than referring me to the decisions of the High Courts, in the cases of Traco Cable Co. Ltd., K. N. Oil Industries and CIT v. Toshiba Anand Lamps Ltd. [1984] 145 ITR 563 (Ker.). in view of the fact that the point of difference referred to me is confined to whether the order of the Tribunal in the case of Sundaram Fastners Ltd., should be relied upon or not, I am afraid, I will not be able to go into the decisions cited by the learned departmental representative before me, as that would mean going into merits, which is not the point of difference referred to me.

7. The matter will now go before the earlier Bench for disposal of the appeal in accordance with the opinion of the majority.

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