1984-VIL-69-ITAT-DEL

Equivalent Citation: TTJ 022, 108,

Income Tax Appellate Tribunal DELHI

Date: 16.11.1984

MODIPON LIMITED.

Vs

INCOME TAX OFFICER.

BENCH

Member(s)  : G. KRISHNAMURTHY., R. L. SEGEL.

JUDGMENT

ITA No. 446/Del/1982, by the assessee M/s Modipon Ltd. Modinagar, a company incorporated under the Companies Act and ITA No. 467/Del/82, by the revenue, have been consolidated, heard together and are being disposed of by a common order for the sake of convenience. The year of assessment involved is 1974-75 for which the previous year ended 28th Feb., 1974.

ITA No. 446/Del/1982

2. Admittedly, the assessee had paid a sum of Rs. 2,00,000 to Multani Mal Modi Degree College Society, Modinagar, hereinafter referred to as M.M.M.D. C.S., as a donation as per entries in the books of accounts. The assessee, however, claimed before the ITO that the said payment was not in the nature of a donation, but constituted welfare expenses incurred by it for the benefit of its employees. It was, therefore, allowable as a revenue expenditure. This plea of the assessee has been rejected both by the ITO and the CIT (Appeals).

3. In the appeal before the Tribunal, the ld. counsel for the assessee Mr. O.P. Vaish urged that since the inception of the company it was felt that some suitable and workable arrangement was necessary for imparing education in English media to the children of the employees of the company; that with this humanitarian view, the General Manager of the assessee company, Dr. M.R. Jain approached the M.M.M.D.C.S. to start an English medium school; the major expenses for running the same to be borne by the assessee company whose employees were main beneficiaries of the said facility and that as a result of the said negotiation the M.M.M.D.C.S. under-took to set up an English medium school run on public school lines, which was named as "Dayawati Modi Public School", Modinagar. In support of this stand Mr. Vaish relied on the copies of the minutes of the M.M.M.D.C.S. dt. 20th Jan., 1973 ; the minutes of the M.M.M.D.C.S.'s meeting held on 8th April, 1973 and the affidavits dt. 24th July, 1976 of Dr. M.R. Jain, Plant Manager of the assessee-company and dt. 19th Jan., 1978 of Mr. V.V. Chabra, Accountant of M.M.M.D.C.S. These arguments are contravened by the Department representative, who has relied on the orders of the tax authorities.

4. We have given consideration to the above arguments. It is an admitted position that the assessee-company had made similar donations to the M.M.M.D.C.S. in the accounting period relevant to the asst. yrs. 1971-72, 1972-73 and 1973-74. It is also an admitted position that the question regarding the allowability of the said amount as revenue expenditure reached upto the Tribunal (Delhi Bench 'D' New Delhi in I.T.A. No. 14021 Del/1977-78, asst. yr. 1972-73), decided on 10th Aug., 1983. Therein, the Tribunal has not accepted the stand of the assessee that the said expenditure was allowable as revenue nature. For so holding the Tribunal has observed that no reservation of seats was made in the school for the employees of the assessee company and that the institution in question was set up for the benefit of the school-going children of the area, as in those years, in the year under consideration, there is nothing on the record to prove that the children of the employees of the assessee were to be given preferential school admission. No instance has been brought on record that the assessee company had given any assurance to the employees that they would take immediate steps to set up a English medium school in Modinagar on the lines of other public school, run in the country. There is also no evidence worth the name on the record to prove that the M.M.M.D.C.S. had assured the assessee-company that the children of its employees would be given preference in the admission to the school. No resolution to this effect seems to have been passed by the M.M.M.D.C.S. Furhter, there is nothing on record to prove from the minutes of the meeting of the managing committee of M.M.M.D.C.S. that Dr. M. R. Jain, Plant Manager of the assessee-company had been taken in the committee as a nominee of the assessee-company. So was the position regarding the election of Mr. K.K. Modi as the Vice President of the M.M.M.D.C.S. Reference may be made in this connection to the minutes of the M.M.M.D.C.S.'s meeting held on 8th April, 1973. Another thing to be mentioned at this stage is that the averments made in the affidavit of Dr. M.R. Jain are substantially the same as have been stated in the submission of the ld. counsel for the assessee Mr. O.P. Vaish. Hence, so of not much consequence. Another fact to be noticed is the letter of M.M.M.D.C.S. dt. 20th Nov., 1978 and it speaks about the contribution made by the assessee towards the contraction of the building of the school. The said letter does not seems to support the plea of the assessee that the payment in question made by the assessee to the M.M.M.D.C.S. was not in the nature of donation.

5. To sum up, we find that the amount in question was initially debited in the books of the assessee as donation. The school is not being run excessively for the benefit of the employees of the assessee company. The children of the employees of the other companies of the Modi Group are equally entitled as other to the admission to the said school and other institution also, which are run by the M.M.M.D.C.S. at Modinagar. The said school is one of the many institutions run by the M.M.M.D.C.S. and the expenditure relating to these institutions is incurred by the M.M.M.D.C.S. from its won consolidated fund generating primary by donations from organisations of the Modi Group including the assessee company. It is, therefore, established that the fund provided by the assessee company to the M.M.M.D.C.S. in the year under consideration was not used exclusively for the purpose of the school, which in term cannot be said to have been run exclusively for the benefit of the employees of the assessee-company. The said payment of Rs. 2,00,000 by the assessee company to the M.M.M.D.C.S. cannot, therefore, be an expenditure laid out wholly and exclusively for the purpose of business of the assessee company. The order of the CIT(Appeals) in this behalf, therefore, is an order.

6.Admittedly, the assessee company had realised a sum of Rs. 8,51,255 as sales tax from customers and the same was credited to the sales-tax account, besides the sum of Rs. 30,444. Since the actual sales-tax payable by the assessee for the year stood at Rs. 8,51,255 the assessee deposited that amount with the said Department leaving a balance of Rs. 30,444 representing the excess provision which was not subsequently paid to the State treasury. It is also an admitted position that the said amount was applied for assessment by the assessee in its assessment for asst. yr. 1976-77. It is also a fact that the CIT (A) in the appellate order for the asst. yr. 1976-77 has held that the said amount did not reprenset the income of the assessee for the year. It is also a fact that the ITO while assessing the assessee for the year under consideration (asst. yr. 1974-75) was of the opoinion that since the said amount of Rs. 30,444 was received by the assessee in the year under consideration, it represented its income for the said year. He accordingly added the said amount to the total income of the assessee. The said view of the ITO has been upheld by the CIT (Appeals).

7. We have heard both the ld. counsel for the assessee Mr. O.P. Vaish and the Departmental Representative. The facts being, as stated in the preceding paragraph, the order of the CIT(Appeals) regarding the inclusion of the said amount of Rs. 30,444 as the income of the assessee for year under consideration has to be upheld. The amount was received towards sales-tax liability from the customers in the year under consideration when no such sales-tax liability was there. The income accrued in this year and not in the asst. yr. 1975-76. We, therefore, uphold the order of the CIT (Appeals) in this behalf.

8. Admittedly till the end of the preceding year the Panchsheel Park Bunglow was being used for the residence of the foreigner technician Mr. A.R. Swearinjen who proceeded on six months leave w.e.f. 2nd March, 1973. It is also an admitted position that the said bungalow was being used as a guest house of the company w.e.f. 16th June, 1973. The case of the assessee before the ITO was that between 2nd March, 1973 to 15th June, 1973 the said accommodation was kept vacant for the possible use of the same by the Mr. A.R. Swearinjen and only when it was known that he was not resuming his duty, the said accommodation was converted ITO guest house w.e.f. 16th June, 1973. This case of the assessee was not acceptable to ITO. According to him the said bungalow was used as a guest house immediately after Mr. Swearinjen left India on 2nd March, 1973. He accordingly has held that the expenses incurred by the assessee on rent, depreciation of furniture and electricity for the peirod 2nd March, 1973 to 15th June, 1973 were the expense relating to the running of the said guest house and so were disallowable.

9. Aggrieved by the said order of the ITO the assessee has brought the matter by way of appeal before the CIT (Appeals) who has agreed with the ITO. He has noticed that the expanses incurred by the assessee in respect of the use of the said bungalow w.e.f. 16th June, 1973 have been added back by the assessee itself in terms of s. 37(3) of the Act. No evidence was furnished by the assessee that the assessee had not taken over the occupation of the said bungalow right from the date on which Mr. Swearinjen had vacated it at the time of his departure from India on 2nd March, 1973 or that the said bungalow continued to be kept at the disposal and for the use of Mr. Swearinjen rigt up to the 15th June, 1973 on account of his leaving any belongings there. No evidence had been led by the assessee that when Mr. Swearinjen left India on 2n March, 1973 he was to return to his duties, if at all, after availing the leave without pay on which he had proceeded out of India as from 2nd March, 1973. Further had the bungalow been left vacant from 2nd March, 1973 to 15th June, 1973 there would have been no expenditure on electricity for this period but that was not so. The electricity bills for this period amounted to Rs. 635. That shows that the bungalow was used as a guest house even during this period of about 3 1/2 months.

10. In the appeal before the Tribunal, the ld. counsel for the assessee Mr. O.P. Vaish has argued that the said bungalow was provided by the assessee company to Mr. Swearinjen for his residence. Since he had gone on long leave for six months, the said bungalow was kept vacant for his use after his return from leave. It was used as a guest house w.e.f. 16th June, 1973. There is nothing on the record to justify the disallowance of rent, electricity charges and depreciation on furniture for this period. These arguments are controverted by the Departmental Representative who has relied on the orders of the tax authorities. We after deliberation agree with the CIT (Appeals). Mr. Swearinjen was in occupation of this bungalow till 2nd March, 1973. The said bungalow was used as guest house w.e.f. 16th June, 1973. Mr. Swearinjen had admittedly proceeded on long leave without pay. There is nothing on the record that he was to return to India after avail the said long leave. There is also nothing on record to prove that any luggage or personal effects of Mr. Swearinjen were kept in this bungalow during this period from 2nd March, 1973 to 15th June, 1973 so as to be in his constructive possession. Further had this bungalow been unoccupied as is sought to be made out by the assessee, there should have been no expenditure on electricity for this period. The facts are, however, to the contrary. Electricity charges paid for this period of 3 1/2 months come to Rs. 635. To say in other words, there was extensive use of lights in the bungalow during this period of 3 ½ months. That clearly displace the case set up by the assessee before the tax authorities. We, therefore, agree with the CIT(A) disallowing the rent, electricity charges and depreciation of furniture as claimed by the assessee for the period 2nd March, 1973 to 15th June, 1973. Presumably during the period, as from 16th June, 1973 the bungalow was used as a guest house by the assessee. Whatever be, it is not proved on record that the above expenditure in the shape of rent, electricity charges and depreciation of furniture was an expenditure incurred wholly and exclusively for the purpose of the business of the assessee. We hold likewise.

11. Vide agreement dt. 24th Nov., 1972 executed between Dr. Mithu Kothari and the assessee, the former was engaged as medical adviser on retainership basis for a period of ten years w.e.f. 10th Nov., 1972. In terms of the said agreement the assessee had advanced to Dr. Kothari a loan of Rs. 70,000 for the purchase of certain medical apparatus etc. She was to receive a retainer free of Rs. 600 per month, which was to be adjusted towards the loan advanced by the assessee-company to her. The said agreement was revocable at the instance of the assessee-company after November, 1976, and after the agreement was so revoked the doctor was immediately to pay the balance sum of the loan outstanding as on the date of the termination of the agreement and for the delaying payment she was also to pay interest 15per cent per annum in addition to the outstanding loan amount. The assessee-company also undertook to bear all the maintenance expenses of a Chevrolet car, which she imported into the country. Accordingly in the year under consideration the assessee had to pay to Dr. Kothari, retainer fee of Rs. 7200, besides incorporating expenditure to the tune of Rs. 25,00 on the motor car.

12. Pursuant to the said claim of the assessee, the ITO ha examined Dr. Kothari on two occasion. From the said statements, the ITO found out that Dr. Kothari had utilised the loan amount not for the purpose of buying any equipment or apparatus for her clinic but for paying her loans and dues in respect of custom duty levied on the imports of her Chevrolet Car, maintenance expenses of which, the assessee-company had undertaken to bear, that the payment of retainer fee to doctor was not a genuine business expenditure because the so called agreement entered into on 24th Nov., 1972 was a mere device contrived for the purpose of paying her the purchase price for her imported car which the assessee's directors and executives were said to be using and which could not be brought out right from her because of the government restriction on the transfer of imported cars. He accordingly disallowed the claim of the assessee regarding the payment of retainer fee of Rs. 7,200 and the motor car expenses on the maintenance of doctor Kothari's car of Rs. 25,000. Aggrieved by the said disallowance, the assessee brought the matter by way of appeal before the CIT (Appeals), who while upholding the addition in the matter of the retainer fee of Rs. 7200 has restricted the disallowance regarding the motor-car maintenance expenses to the extent of Rs. 3,000 only.

13. In the appeal before the Tribunal the ld. counsel for the assessee Mr. O.P.Vaish has urged that the ITO has not doubted the payment made by the assessee to doctor Kothari by way of retainer fee. Further from the statement of doctor Kothari, recorded on oath, it was established beyond any shadow of doubt that doctor Kothari while practising in Bombay was available for treatment of the employees of the assessee company who numbered about ten every month. Doctor Kothari also gave the names of some of those employees. In view of the categorical statement of doctor Kothari to the effect that she was functioning as the medical consultant of the assessee company in accordance with the said agreement, there is no reasons to disbelieve the case set up by the assessee. The retainer fee deduction of Rs. 7200 should be allowed in full and so also of the motor car maintenance expenses. In reply the Departmental Representative has relied on the order of the tax authorities.

14. We have given consideration to the above arguments. We have also gone through the statement of doctor Kothari recorded on 4th Sep., 1978 and 10th Feb., 1977, at pp. 27, 28 and 31 to 33 of the paper book, filed by the assessee. The bio-data of Dr. Kothari is at paper Nos. 29 and 30 of the said paper book and aforesaid agreement dt. 24th Nov., 1972 is at pp. 25 and 26. On going through the statements of Dr. Kothari as also the aforesaid agreement dt. 24th Nov., 1972, we are satisfied the Dr. Mithu Kothari was engaged as medical consultant by the assessee company for their staff at Bombay and that she had in that capacity treated the staff member of the assessee company. Doctor Kothari in her statement has given the names of the employees of the assessee company who were treated by her. In the case the persons concerned were not the employees of the assessee company as sought to be the case of the Department the ITO should have examined the employees concerned, or from some one from the assessee company to prove that the persons concerned were not the employees of the assessee company. Doctor Mithu Kothari though a gynaecologist having foreing's qualification was basically a doctor having M.B.B.S. degree. She had just returned from abroad when she was engaged by the assessee company vide agreement dt. 24th Nov., 1972 to act as a medical consultant for a period of ten years. Naturally a person coming from abroad tries to have some foot hold before he or she can take fully advantage of the foreign qualification with him or her. She is a doctor, though gynaecological specialist, rendered those services to the assessee company by treating their employees. From her statement we find that she stood the test of cross-examination. The questions turned by the tax authorities cannot take the place of proof as assumed by the tax authorities. Doctor Kothari was in Bombay. She entered into the witness box dt. 25th Nov., 1972. She has rendered the services as a medical consultant. She has been paid for the services rendered. As such we on the basis of the facts and circumstances of the case and the material on record are satisfied that the expenses of Rs. 7,200 incurred by the assessee by way of retainer fee and the entire expenditure of Rs. 25,000 on the maintenance of the car have been laid out wholly and exclusively for the purpose of the business of the assessee of the assessee. This dispose of ground Nos. 4 and 5 by the assessee.

15. Admittedly the assessee owns a flat in the building known as Sterling apartment, Poddar Road, Bombay, the same having been purchased in 1969. Until 14th Mary, 1971 the said flat was being utilised as the residence of Mr. J.R. Taverner who was the vice president and Director of the assessee company. Mr. Taverner was also the vice president and Director of another company known as Indofil Chemicals Ltd. With effect from 14th May, 1971 Mr. Taverner shifted his residence from Sterling Apartment to another building known as Elcid Building. The ITO following his assessment orders for the asst. yrs. 1972-73 and 1973-74 disallowed the expenditure pertaining to the said flat on the ground that the same was being used as guest house and so the said expenditure was disallowable under s. 37(3) of the Act. The expenditure involved total Rs. 75,055 consisting of the expenditure of Rs. 48,971 and the depreciation of Rs. 26,084. The ITO while so holding disagreed with the stand of the assessee that the said flat was not being used as a guest house. The CIT (Appeals) has agreed with the ITO. In the appeal before the Tribunal the ld. counsel for the assessee Mr. O.P. Vaish has urged that the said flat was not being used as a guest house as has been held by the Tribunal (Delhi Bench (D) New Delhi in ITA NO. 1402/1977-78 for the asst. yr. 1972-73), decided on 21st April, 1983. In reply the Departmental Representative has relied on the orders of the tax authorities.

16. We have considered the above arguments of the parties. The factual position in the year under consideration is the same as in asst. yr. 1972-73. The arguments canvassed by the parties are on the same lines which were canvassed before the Tribunal on the earlier occasion. The said order of the Tribunal has been followed for asst. yr. 1973-74 being I.T.A. No. 822/Del/1978-79. We have perused the aforesaid order of the Tribunal. For the reasons stated in the aforesaid earlier orders of the Tribunal with which were agree with the assessee that the expenditure claimed by the assessee was allowable revenue expenditure and not disallowable under s. 37(3) or (4) of Act. The assessee company is maintaining a cottage at Marve Malad, Bombay. According to the assessee the said accommodation was being used exclusively by the employees as a holiday home for them. During the year under consideration the assessee incurred an expenditure of Rs. 14,220 on the maintenance of the said accommodation. Both the ITO and the CIT(Appeals) have held that the assessee had failed to prove that the said accommodation was being used as the holiday home for its employees and so the deduction claimed of Rs. 14,220 was disallowed.

17. We have heard both the ld. counsel for the assessee Mr. O.P. Vaish and the Departmental Representative. The factual position for the year under consideration is the same as was in asst. yr. 1972-73 and 1973-74, the appeals for which came up for consideration of the Tribunal, Delhi Bench 'D', New Delhi in I.T.A. Nos. 1582/Del/1977-78 (asst. yr. 1972-73) and ITA No. 882Del/1978-79 (asst. yr. 1973-74). For the reasons stated therein with which we agree, we hold that the said accommodation was maintained by the assessee as a holiday home for its employees and so the expenditure of Rs. 14,220 incurred by it in the year under consideration was allowable revenue expenditure. We hold likewise.

18. The assessee in the year under consideration had engaged export market/management services private limited on a retainership fee of Rs. 10,000 half of which had been paid in the preceding year and the balance in the year under consideration. The assessee claimed that it was entitle to weighted deduction under s. 35B in respect of the said payment of Rs. 5,000 made in the year under consideration. Though, the ITO allowed the deduction of the said expenditure under s. 37 of the Act, he rejected the claim of the assessee under s. 35B of the Act. The said order of the ITO has been upheld by the CIT(A).

19. We have heard both the ld. counsel for the assessee Mr. O.P. Vaish and the Departmental Representative. At the hearing it was an admitted position that the claim of the assessee for weighted deduction under s. 35B of the Act was allowed by the AAC for asst. yr. 1973-74 and that there was no appeal by the Departmental against that order. The reasons given by the AAC are in paragraphs 63-64 of his order dt. 17th Feb., 1978. For the reasons stated by the AAC with which we agree we hold that the assessee is entitled to weighted deduction under s. 35B of the Act in respect of this expenditure. Since the assessee has allowed deduction under s. 35B of the Act it would not be entitled to the deduction of Rs. 5,000 under s. 37 of the Act. We hold likewise.

20. The assessee claimed deduction of Rs. 864 on account of expenses incurred in connection with the seminar organised by the Textile Association of Ahmedabad. The ITO disallowed the said expenditure on the ground that it was not necessary for the assessee to incur the said expenditure and further the expenditure being in the nature of the entertainment expenditure was to be disallowed in view of the decision of the Allahabad High Court in Brijraman Dass & Sons vs. CIT 1975 CTR (All) 223 : (1976) 104 ITR 541 (All). This view of the ITO has been upheld by the CIT (A).

21. We have heard both the ld. counsel for the assessee and the Department representative. For the reasons stated by the CIT (A) with which we agree and respectfully following the decision of the Allahabad High Court in Brijraman Dass & Sons we uphold the order of the CIT(A).

22. Ground No. 10 is reproduced as under:

"That the learned CIT(A) on the facts and in the circumstances of the case and in law, erred in upholding the disallowance of Rs. 695 incurred for travelling expenses of share broker".

At the hearing the same was not pressed by the ld. counsel for the assessee. Even otherwise for the reasons stated by the tax authorities with which we agree we uphold the order of the CIT(A) on the point at issue.

23. In the year under consideration the assessee incurred an expenditure of Rs. 2,374 for providing soft drinks and snack during the course of business meetings and discussions held by the assessee company's representatives with dealers and customers at Bombay. The said expenditure also included petty express and small sums totalling Rs. 1,114. The ITO had disallowed the entire expenditure by holding the said expenditure in the nature of the entertainment expenses and disallowable under s. 37(2B) of the Act.

24. Aggrieved by the said disallowance the assessee brought the matter by way of appeal before the CIT (Appeals), who restricted the disallowance to Rs. 1781 in view of the ratio of the decision of the Allahabad High Court in the case of Brijraman Dass & Sons, the balance expenditure being the one incurred on account of the employees of the assessee company.

25. We have heard both the ld. counsel for assessee Mr. O.P. Vaish and the Departmental Representative. Respectfully following the ratio of the decision of the Allahabad High Court in the case of Brijraman Dass & Sons which is biding on the assessee, being from Allahabad, we uphold the order of the CIT(Appeals).

26. While scrutinising vouchers for expenses, the ITO noticed that Voucher No. 1304 dt. 28th Dec., 1974 related to the debiting of the sum of Rs. 2,19,644 under the held "Rebates 'B' Unit". When called upon by the ITO to explain the nature of this debit, the stand taken by the assessee was that he said amount represented a provision made on the advice of Mr. I.T. Gupta, Sales Secretary and covered provision for discount upto the period ending 28th Feb., 1974; that the assessee had been charging Rs. 4 per kg. over the agreed price which was being disputed and a provision of Rs. 2,19,640 had been made for meeting the contingencies that could possibly arise on account of refund of price demanded by the customers relating to the extra price paid by them. The assessee, however, admitted by the ITO that no payment out of the said amount had been made in the year under consideration nor was it demanded during the year. The ITO by treating the provision as a provision and in view of the ratio of the decision of the Supreme Court in CIT vs. Swadeshi Cotton and Flour Mills Ltd. (1964) 53 ITR 134 (SC) and other decision disallowed the claim of the assessee for the deduction of the said amount, claimed by the assessee. This view of the ITO has been upheld by the CIT (A).

27. We have heard the ld. counsel for the assessee MR. O.P. Vaish and the Departmental Representative. From the facts as stated above it is not disputed that no actual liability had occurred in the year under consideration on account of any claim for refund in respect of extra price said to have been charged by the assessee from its customers over and above the prices stipulated in the agreement with them. As such the debit in question of Rs. 2,19,644 represents a mere provision and did not constitute a provision for an actual liability. Another thing to be noticed is that the assessee has surrendered the said amount in the accounting period relevant to the asst. yr. 1977-78 and this action of the assessee supports the view taken by the tax authorities that no liability had actually accrued against the assessee on this account. Since the amount was debited in the accounts in the year under consideration, and addition on this amount is to be made in this very year, we hold likewise.

28. The ITO in the course of the assessment noticed that a sum of Rs. 1,30,820 was debited under the head "boarding expenses" out of which the assessee had surrendered a sum of Rs. 3,673 for assessment. The ITO went into the details of the said expenditure of Rs. 1,27,127 which was admitted incurred on lunches, dinners, tea, coffee etc. at the time of the discussions held by the Executive of the assessee company with its customers. The ITO disallowed the entire expenditure of the Rs. 1,27,127 in view of the ratio of the decision of the Allahabad High Court in the case of Brijraman Dass & Sons, which is admittedly binding on us, the assessee being under the jurisdiction of that High Court.

29. Aggrieved by the said disallowance the assessee brought the matter by way of appeal before the CIT (Appeals) who following the decision of the Tribunal in the case of the assessee in I.T.A. Nos. 2194 and 2195/Del/1975-76 for asst. yr. 1971-72, decided on 9th Jan., 1981, and following the decision of the Allahabad High Court in Brijraman Dass & Sons allowed a relief of Rs. 32,000 to the assessee on account of expenses estimated to have been incurred in respect of staff members of the assessee and the balance of Rs. 98,820 was disallowed.

30. We have heard bot the ld. counsel for the assessee Mr. O.P. Vaish and the Departmental Representative. For the reasons stated by the CIT (Appeals), with which we agree and respectfully following the decision of the Allahabad High Court in Brijraman Dass & Sons, we uphold the order of the CIT (Appeals) on the point at issue.

31. The assessee had incurred an expenditure of Rs. 11,340 on tea, coffee, snacks etc. at its Delhi Office. The ITO disallowed the entire said expenditure on the ground that the same was an expenditure in the nature of entertainment. The CIT (Appeals) restricted the disallowance to Rs. 9,386, the balance being the expenditure pertaining to the staff members of the assessee.

32. We have heard both the ld. counsel for the assessee MR. O.P. Vaish and the Departmental Representative. For the reasons stated in paragraph 30 above, we uphold the order of the CIT (Appeals) on this point also.

33. In the year under consideration the assessee incurred an expenditure of Rs. 11,658 pertaining to petty items including amounts spent by the employees while on tour etc. in connection with the business of the assessee company including Rs. 42 in respect of punchsheel bungalow upto 15th June, 1973. Since the details of the expenditure so incurred were not available, the ITO disallowed Rs. 5,000 out of the said expenditure. The CIT (Appeals) has upheld the said disallowance by observing that full details of the said expenditure were not available nor was the said expenditure verifiable.

34. We have heard both the ld. counsel for the assessee and the Departmental Representative. We have gone through the entry which is a consolidated entry of the expenditure incurred. The details of the said expenditure are not available nor can those details be made available. It is, therefore, not possible to verify the correctness of the expenditure in question. The disallowance of Rs. 5,000 on the facts and in the circumstances of the case appears to be fair and reasonable calling for no interference.

35. The assessee had claimed a deduction of Rs. 37,170 on account of buiness promotion expenses. The details of the said expenditure are at pp. 55 to 59 of the paper book, filed by the assessee. The said expenditure as is clear from those details, was incurred on providing meals, cold drinks at Modinagar and other places including certain expenses incurred by the employees. The ITO specifically required the assessee as to whether the said expenditure had been incurred on account of employees. In reply the stand of the assessee was that the said expenditure was incurred on account of visitors and not on account of the employees of the assessee company. The ITO, therefore, disallowed the entire expenditure of Rs. 37,170 being expenditure in the nature of entertainment. The said disallowance has been upheld by the CIT (Appeals).

36. We have heard both the ld. counsel for the assessee Mr. O.P. Vaish and the Departmental Representative. Respectfully following the ratio of the decision of the Allahabad High Court in Brijraman Dass & Sons and for the reasons stated in paragraph 30 above, we uphold the order of the CIT (Appeals) on this point also.

37. In the year under consideration the assessee had incurred an expenditure of Rs. 57,013 on account of repairs of nala and kuccha road. According to the assessee the said expenditure was of revenue nature, though the assessee is not the owner of the said road or nala. The ITO keeping in view the extent of expenditure came to the conclusion that he said expenditure was of capital nature inasmuch as it resulted in enduring benefit to the assessee. This view of the ITO has been upheld by the CIT (Appeals).

38. We have heard both the ld. counsel for the assessee Mr. O.P. Vaish and the Departmental Representative. The details of the expenditure in question are at pp 60 to 64 of the paperbook filed by the assessee. Admittedly the nala and the road did not belong to the assessee. The expenditure as is clear from the details are nothing but of repairs and maintenance. Merely because an amount of Rs. 57,000 has been spent on these repairs, it cannot be said that any endeavour benefit has accrued to the assessee. The repairs in question were effected to secure a proper discharge of the affluent from the plant of the assessee. The said expenditure is, therefore, laid out wholly and exclusively for the purpose of the business of the assessee. It may be added that in the appeal of the assessee for asst. yr. 1972-73 the Tribunal in I.T.A. No. 1402/Del/1977-78 had restored a similar matter to the ITO to verify the nature of the ownership of the nala, and the ITO after the matter went back, had allowed the said expenditure as a revenue expenditure. This decision of the ITO r/w the order of the Tribunal support our above view. We hold likewise.

39. The assessee company had floated a public issue of its shares, part of which had been under-written by U.P. State Industrial Development Corporation, hereinafter referred to as UPSIDC, who in turn had entered into an agreement with M/s Patiala Flour Mills, whereby the later had agreed to purchase from the former certain shares. Subsequently a dispute arose between UPSIDC and Patiala Flour Mills, regarding the sale of the shares of the assessee company in terms of the agreement mentioned hereinbefore dt. 18th April, 1976 between Patiala Flour Mills and UPSIDC. The assessee in that litigation was roped in as a defendant. In connection with the said litigation the assessee incurred legal expenditure totalling Rs. 4,400 in the year under consideration. The claim of the assessee for deduction of the said amount as revenue expenditure has been rejected both by the ITO and the CIT (Appeals).

40. The ld. counsel for the assessee Mr. O.P. Vaish basing himself on the ratio of the decision of the Supreme Court in Shri Minaxi Mills Ltd. vs. CIT (1967) 63 ITR 207 (SC) and CIT vs. Modi Spinning & Weaving Mills Co. Ltd. (1973) 89 ITR 304 (All) has urged that the said expenditure was allowable revenue expenditure inasmuch as the said expenditure was not a voluntary expenditure not did it derive any benefit therefrom. The said expenditure was incurred because the Patiala Flour Mills, which had filed the suit against UPSIDC had arrayed the assessee as a defendant to the suit. The assessee being a pary to the suit had to incur the said expenditure in its capacity or character as a trader, the shares involved being of the assessee company. These arguments are controvered by the Departmental Representative who has relied on the orders of the tax authorities. In CIT vs. Modi Spinning Mills Co. Ltd. (1973) 89 ITR 304 (All), an amount of Rs. 3,000 was paid to a lawyer for advising amendments in the Articles of Association and for drafting a special resolution. The Articles of Association had to be amended in order to bring it into accord with changes brought about in the law relating to companies. The said expenditure was held to be allowable revenue expenditure under s. 37, as it was incurred in order that the company should continue the function in accordance with law. This decision, as rightly argued by the Departmental Representative, is distinguishable on the facts. In Sree Meenakshi Mills Ltd. vs. CIT, Madras (1967) 63 ITR 207 (SC), the litigation expenses were incurred by the company to obtain an order from the Court enabling the business to be carried on without interference and so was allowable revenue expenditure. The law laid down by the Supreme Court regarding the deductibility of the expenditure incurred in prosecuting a civil proceeding is as to the nature and purpose of the legal proceeding in relation to the assessee's business and could not be affected by the final outcome of that proceeding. If the expenditure was laid out for the purpose of the business wholly and exclusively, that is reasonably and honestly incurred to promote the interest of the business, the same is to be allowed. Applying the law laid down by the Supreme Court to the facts of the present case we find that the assessee had to incur the expenditure because it was arrayed as a defendant in a dispute pertaining to the shares of the assessee company. To protect the name of the assessee the said expenditure was incurred honestly and reasonably with the object of promoting the interest of the business of the assessee, inasmuch as the shares of the assessee company were involved. The said expenditure is, therefore, allowable as revenue expenditure.

41. The ITO on perusal of the seized documents notices that goods worth Rs. 6,33,334 had been imported from LURGI of West Germany as per S. S. Alkama. Out of the total consignment so import, goods worth Rs. 1,52,923 constituted classified items, the imports of which was restricted. As the assessee had imported the banned items, a penalty of Rs. 76,000 was imposed by the customs authorities, which was on appeal reduced to Rs. 10,000. Admittedly, the penalty so levied was not debited to the P & L A/c, but to the value of the stores. The ITO in view of the penalty levied of Rs. 76,000 dissolved the entire amount of Rs. 76,000. By this, the appeal by the assessee against the said penalty order had been decided by the Central Board of Excise & Custom, by the time the appeal by the CIP (Appeals) came to be decided. The Central Board of Excise & Custom had reduced the penalty amount of Rs. 10,000 vide its order dt. 29th April, 1978. Since the amount of the fine was not debited to the P & L A/c but to the value of the stock, it was urged that the disallowance should be restricted to Rs. 4000 or so in respect of the stocks used in the year under consideration. Reliance was placed on the decision of the Kerala High Court in the case of CIT vs. T.M. Chacko & Partners 1978 CTR (Ker) 180 : (1978) 115 ITR 40 (Ker). This was not acceptable to the CIT (Appeals), who has, however, upheld the order of the ITO disallowing Rs. 76,000.

42. We have heard both the ld. counsel for the assessee Mr. O.P. Vaish and the Departmental Representative. Admittedly, the penalty amount of Rs. 76,000 was not debited to the P & L A/c. It was only added to the value of the stock. It is also a fact that the said penalty amount stands reduced from Rs. 76,000 to Rs. 10,000. As such the value to be considered for being added to value of the store should be taken at Rs. 10,000 and not Rs. 76,000. The value of the stock in question at the beginning of the year under consideration should be revoked accordingly. The ITO should thereafter find out the extent of the stocks actually used by the assessee in the year under consideration. The amount will have to be disallowed because the penalty amount is not debited to the P & L A/c but added to the stock. Since the said amount of penalty was not debited to the P & L A/c, it does not reflect in the profit of the assessee for the year for being consideration for disallowance. The disallowances has to be only to the extent of the stocks actually consumed in the year under consideration, because to that the extent the relevant amount will be reflected in the P & L A/c. The penalty to that extent which gets reflected in the P & L A/c is not a business loss in the commercial sense and being penalty for a infraction of law is not a normal incident of the business. We draw force for our above view from the ratio of decisions reported as Hari Aziz & Abdul Shakoor Bros. vs. CIT (1961) 41 ITR 350 (SC), CIT vs. Mihir Textiles Ltd. (1976) 104 ITR 167 (Guj) and in the case of Raghubir Prasad Gupta vs. CIT (1979) 120 ITR 789 (Cal). We, therefore, set aside the impugned orders of the CIT (Appeals) and the ITO in this behalf and restore the matter to the file of the ITO to decide the matter afresh in accordance with law and in the light of our above observations and after permitting the assessee to lead evidence, if any, in this behalf.

43. Ground No. 20, read as under, will be dealt with ground No. 8, in the appeal by the revenue bearing I.T.A. No. 447/Del/82 in the later part of this order:

"That the learned CIT(A), on the facts and in the circumstances of the case and in law, erred in holding that estimated rent be computed where the quarters are given rent free to employee of Government and other agencies whose presence near the factory premises is essential for the purpose of business of the appellant."

44. The ITO disallowed Rs. 1,119 on account of daily allowance on the basis of each journey separately and not on the basis of total number of days, sent by the directors on travelling. This view of the ITO has been upheld by the CIT (Appeals).

45. We have heard both the ld. counsel for the assessee Mr. O. P. Vaish and the Departmental Representative. We find that the aforesaid disallowance has been made under r. 6D of the IT Rules, 1962. Details of the expenditure involved are at p. 78 of the paper book. We find that a simple issue had come up for the consideration of the Tribunal (Delhi Bench 'D', New Delhi), in the case of the assessee for the asst. yr. 1971-72 in ITA Nos. 2195/Del and 2194/Del/1975-76 and Cross Objection No. 250/Del/1975-76, decided on 9th Jan., 1981. For the reasons stated in aforesaid earlier order of the Tribunal, with which were agree, we hold that the disallowance, if any, is to be calculated by reference to the total number of days during the year spent on travel and not day to day basis. We hold likewise.

46. The ITO had noticed that the travelling expenditure included a debit of Rs. 4,980 on account of visit of some of the employees of its foreign collaborators. The ITO disallowed the said expenditure as the assessee was unable to establish the nexus between the incurring of the expenditure and business.

47. In the appeal filed by the assessee before the CIT(Appeals) the addition of Rs. 1,375 out of the said sum of Rs. 4,980 was accepted. The dispute pertained to Rs. 3,623 and not Rs. 2,623 as stated by the CIT (Appeals). The CIT (Appeals) has agreed with the ITO in the mater of disallowance as according to him no evidence has been produced to show that the employees of the foreign collaborators had rendered some kind of services to the assessee. These employees according to the CIT (Appeals) were visiting India as tourists.

48. We have heard both the ld. counsel for the assessee, Mr. O.P. Vaish and the Departmental Representative. We find that as in asst. yr. 1973-74, these foreign technicians were invited by the assessee for helping the assessee in working in its plant and machinery. They, however, came on tourist visits, as their visit was short. During their stay they visited no doubt some places of interest like Agra etc. as in asst. yr. 1973-74. At the same time the entire expenditure so incurred in connection with the travelling of the foreign technicians and visitors, was met by the assessee. To say in other words the factual position in the year under consideration it similar to that in asst. yr. 1973-74, which came up for consideration of the Tribunal (Delhi Bench 'D', New Delhi) in ITA No. 822/Del/1978-79, asst. yr. 1973-74. For the reasons stated therein with which we agree, we hold that the expenditure of Rs. 3,623 actually disallowed by the CIT (Appeals) (wrongly mentioned by him at Rs. 2,623) has been laid out wholly and exclusively for the purpose of the business of the assessee. It is, therefore, allowable revenue expenditure. We hold likewise.

49. The assessee had incurred a total expenditure of Rs. 20,046 including Rs. 2,931 incurred on account of directors' participation in M.B.O. seminar held at Ashoka Hotel on 18/19th Jan., 1974. The ITO allowed a sum of Rs. 11,082 as permissible business expenditure and assessed the balance amount of Rs. 8,964 because in his opinion the said expenditure was in the nature of entertainment expenditure. The said sum of Rs. 8,964 consisted of Rs. 8,923 incurred on lunches and a sum of Rs. 250 was paid for a liquor licence. The said disallowance has been upheld by the CIT (Appeals).

50. We have heard both the ld. counsel for the assessee and the Departmental Representative. The paper relating to these expenditure are at pp. 83 and 83A of the paper book, filed by the assessee. Admittedly the said seminar was conducted by the representative of the assessee's foreign collaborator M/s Rohm & Hass exclusively for 40 senior executive of the assessee company. The said seminar was conducted regarding the application of modern techniques to the conduct of the assessee's business. Since the seminar was exclusively for the employees of the assessee and the subject matter of the seminar pertained to the business carried on by the assessee, the expenditure on lunches which was part and partial of the said seminar of Rs. 8,293 is to be allowed as revenue expenditure. The element of entertainment is secondary and not primary. The primary object was to educate the executive and the directors of the assessee company who participated in the said seminar for the efficient conduct of the business carried on by the assessee. The expenditure to the extent is held to be allowable revenue expenditure. We hold likewise.

51. The ITO said depreciation chart, Annexure 'C' at pp. 134, 146 to 149 of the assessment order, disallowed depreciation on W.D.V. of a sum of Rs. 11,51,260 by relying on the assessment order for the earlier years. The said view of the ITO has been upheld by the CIT (Appeals) by relying on the earlier orders of the AAC, ITAT referred to in paragraph 50.02 of the paperbook. We have heard both the ld. counsel for the assessee and the Departmental Representative. We find that a similar issue had come up for consideration before the Tribunal in the case of the assessee for asst. yr. 1970-71, decided on 31st Oct., 1979 in ITA No. 1993/Del/1975-76. For the reasons stated therein, with which we agree, we uphold the order of the CIT(Appeals) in this behalf.

52. Ground No. 25 reads as under:

"That the learned CIT(A) on the facts and in the circumstances of the case an in law, erred in not considering loss of Rs. 80,650 incurred by the appellant due to embezzlement by its employee as the same was not allowed by the ITO in earlier assessment then holding that the same was immature."

At the hearing the said ground was not pressed by the ld. counsel for the assessee. As such and for the reasons stated by the CIT (Appeals), with which we agree, we uphold the order of CIT (Appeals) on the point at issue.

53. The claim of the assessee for deduction on sales-tax liability of the order of Rs. 5,41,238 has been disallowed both by the ITO and the CIT (Appeals), who in support of his view has relied on the Special Bench decision of the Tribunal at Bombay in ITA No. 3643/Bom/1974-75 in the case of M/s Amar Dye Chemicals Ltd. vs. ITO reported in (1983) 3 SOT 384 (Bom) (SB).

54. We have heard both the ld. counsel for the assessee Mr. O. P. Vaish and the Departmental Representative. For the reasons stated in the aforesaid Special Bench of the Tribunal in the case of M/s Amar Dye Chemicals Ltd. and the decision of the Calcutta High Court in 1983, Tax Law Reporter, 1075, we uphold the order of the CIT (Appeals) on the point of issue.

55. In the result, the appeal of the assessee is partly allowed for statistical purpose.

I.T.A. No. 447 (Del)/1982

56. As already stated this appeal is by the revenue. The assessee company manufactured crimped yarn during the year under consideration. The Excise Department, it appears, has ordered that excise duty was payable by the assessee on Nylon Filament Multiple Dock Yarn as soon as the Single Filament Yarn was manufactured and that the levy of excise duty could not be deferred to a later stage. A notification to this effect had been issued by the Government of India vide Notification No. 51/72-CE dt. 17th Feb., 1972. The Assistant Collector, Central Excise, Ghaziabad, had informed the assessee company vide letter dt. 12th Oct., 1972 that excise duty was chargeable on Nylon Filament Yarn of 152 denier (76 x 2 ply) at the rate of Rs. 25 per kg. under Tariff Item No. 18(1a)(3)(iii) and 210 denier (105 x 2 ply) at the rate of Rs. 20 per kg. under Tariff No. 18(1a)(3)(iv). The Superintendent, Custom and Central Excise, Modinagar, had also informed the assessee, vide his letter dt. 13th March, 1973, the duty on Nylon Single Filament Yarn (hereinafter called as NSFY) was to be levied in terms of the aforesaid Notification and collected before such yarn was taken for further manufacture of crimped yarn.

57. This stand of the Excise Department was not acceptable to the assessee, which ultimately led to the Civil Writ No. 360/73 filed by the assessee before the Hon'ble Delhi High Court contesting the levy of the excise duty on NSFY as proposed. A stay order dt. 23rd May, 1973 came to be issued by the Hon'ble High Court. Thereunder, the payment of the duty demanded was stayed subject to the assessee furnishing the bank guarantee.

58. As the assessee company was maintaining its accounts on mercantile basis, the liability which, according to the assessee on the basis of the above Notification of the Central Government and the letter of the Excise Duty Authorities for the year, came to be of Rs. 33,80,958. Though the levy was in dispute and the payment thereof was not made in view of the stay order of the Hon'ble High Court, the assessee in their assessment for the year under consideration, claimed deduction of the said amount of Rs. 33,80,958.

59. This claim of the assessee was negative by the ITO on the ground that the Central Excise authorities had not issued any demand notice against the assessee for the payment of the above amount, nor had the assessee made any payment of the said amount, more so no duty, as contended by the assessee company before the Hon'ble High Court, was leviable on Double Ply crimped yarn. Though there were orders of the other High Courts in favour of the assessee on the point at issue, there was, according to the ITO, no decision of the Allahabad High Court to support it.

60. Aggrieved by the said disallowance, the assessee brought the matter by way of appeal before the CIT(Appeals), who after referred to the ratio of the decision of the Supreme Court in the case of Kedar Nath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC), which was followed by the Allahabad High Court in J.K. Synthetics Ltd. vs. CIT 256 : (1976) 105 ITR 864 (All) and of the Calcutta High Court in CIT vs. Century Enka Ltd. (1981) 130 ITR 267 (Cal) has held that the assessee was entitled to the deduction of Rs. 33,80,958. The excise duty, according to the CIT (Appeals), on NSFY had became payable in terms of the letter dt. 13th March, 1973 of the Superintendent, Customs & Excise, which was received in the year under consideration. The assessee maintained its account on mercantile basis. The fact that the assessee was disputing the said levy, which would be only the material when the dispute is finally settled in favour of the assessee and until such a decision was available, the claim for deduction of the liability in question as business expenses could not be denied.

61. In the appeal before the Tribunal, the Departmental Representative, Mr. Chakraborty has urged that since the assessee had not produced before the ITO the relevant evidence pertaining to the raising of the demand and since, according to the assessee, no excise duty was liveable on NSFY, as contended in the Writ filed before the Hon'ble Delhi High Court, wherein the stay stood granted, the liability in respect of the said amount of the Rs. 33,80,958 cease to exist. The decision of the Supreme Court in the case of Kedar Nath Jute Mfg. Co. Ltd. was distinguishable, as in that case the assessee had not approached the Hon'ble High Court for stay of demand as was done by the assessee in present case. In support of his arguments, the Departmental Representative relied on the ratio of the decision of the Supreme Court in CIT vs. M/s Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC), CIT vs. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC) as also in (1961) 41 ITR 190 (sic) at 195 and Raja Textiles Ltd. vs. ITO (1973) 87 ITR 539 (SC) and urged that the deduction in respect of the expenditure claimed was not allowable, because the liability claimed was not allowable, because the liability of the assessee to pay the said excise duty has been set at naught. By virtue of the order of the Hon'ble Delhi High Court, the liability in the matter of the excise duty in in question had ceased to crystallised. These arguments are controverted by the ld. counsel for the assessee, Mr. O.P. Vaish, who has relied not only on the order of the CIT (Appeals) in this behalf, but also the earlier decision of the Tribunal (Delhi Bench 'D' New Delhi) in ITA no. 1582(Del)/77-78 and Cross Objection No. 166(Del)/77-78 (Asst. yr. 1972-73) in the case of the assessee decided on 9th Aug., 1983.

62. We have given consideration to the above arguments. Admittedly the assessee follows mercantile system of accounting. The liability to pay the excise duty in question accrued as soon as the Assistant Collector of Excise Duty/Superintendent of Customs & Excise issued their respective letters dt. 12th Oct., 1979 and 20th March, 1973. On the basis of those letters, wherein the said Customs and Central Excise authorities intimated the assessee about the chargeability of the excise duty in question, which is a statutory liability, the assessee, even though it was contesting the said liability in the aforesaid Writ, has provided for the said liability. It is not necessary that a regular demand notice should be issued for the aforesaid amount of Rs. 33,80,958. The fact that he assessee was challenging the validity of the liability in the Writ petition and the Hon'ble High Court has granted the stay will not make any difference in the assessee claiming the deduction of the statutory liability in question as business expenses. The assessee could still legitimately claim deduction in respect of the said business liability, even if such liability had not been quantified or paid or even if such liability was being disputed. This is clear from the ratio of the decision of the Supreme Court in the case of Kedar Nath Jute Mfg. Co. Ltd. and of the Allahabad High Court in the case of J.K. Synthetics Ltd.. The view taken by us also find support from the aforesaid earlier decision of the Tribunal in the case of the assessee for asst. yr. 1972-73. It is not correct to urge that s. 43B added w.e.f. 1st April, 1984 is procedural and so has retrospective effect for the year under consideration. The said provision is in sum and substance a substantive provision. We, therefore, on the facts and in the circumstances of the case uphold the order of the CIT(Appeals) on the point at issue.

63. The ITO in the assessment of the assessee for the year under consideration disallowed a sum of Rs. 2,02,560 out of the interest paid on borrowed funds, as according to him, the assessee in the year under consideration had advanced interest free loans to the following parties:

The first two parties are the dealers of the assessee company and the third party is stated to be a medical consultant. The advances to the dealers reflected the price of the goods sold through them, which was not remitted by them immediately. Under the terms of their dealership, no period of credit was allowed to them and as interest was not charged on the amounts outstanding with them, the assessee, according to the ITO, has utilised the funds that it had borrowed for allowing payment of amounts on credit to the aforesaid parties without charging interest. The stand taken by the assessee before the ITO, vide their letter dt. 7th May, 1976, was that the assessee did not charge any interest on the amounts due from the customers to whom the goods had been supplied by the assessee company. This explanation according to the ITO, was not correct, because the assessee was charging interest from its customers as well as the dealers. It was also explained before the ITO that the assessee has raised loans for acquiring capital assets. The ITO was, however, of the view that various amounts of loans obtained by the assessee having been merged with the running capital of the assessee, it was not possible to distinguish the amounts borrowed for capital purpose from the amounts utilised for giving advance to the dealers. It was also stated before the ITO by the assessee that if interest was charged from the dealers, the sale price would have to be suitably reduced. This stand of the assessee, in the absence of any evidence to corroborate it, was rejected by the ITO. He also noticed that one of the dealers, namely, Sain Sales Corporation, had been given discounts and rebate etc, to the tune of Rs. 7,63,000 during the year under consideration. The ITO, in view of what we have stated hereinbefore, came to the conclusion that the assessee has utilised its borrowed funds for advancing loans to the aforesaid parties without charging any interest. He estimated the interest on the sums advanced to the aforesaid three parties at 12-1/2per cent and on the basis he made the impugned addition of Rs. 2,02,560.

64. Aggrieved by the said disallowance the assessee brought the matter by way of appeal before the CIT (Appeals), who after referring to various decisions, including that of the Bombay High Court in CIT vs. Bombay Samachar Ltd., Bomay (1969) 74 ITR 723 (Bom) noticed that the facts with regard to the impugned disallowance of deduction on account of interest were exactly similar to those obtaining in the case of the assessee for asst. yr. 1973-74 and the CIT (Appeals) deleted the above addition made by the ITO by observing as under:

"The facts with regard to the impugned disallowance of deduction on account of interest are exactly similar to the facts which had obtained in this behalf in the asst. yrs. 1973-74. From the details of the interest paid during the year, as furnished on behalf of the appellant, it is seen that interest paid on bank overdrafts amounted to Rs. 10,839 only and the rest of the interest had been paid to parties from whom long-term borrowings had been effect or on security deposit from dealers. The appellant has also substantial bank deposits. It cannot, therefore, be said that monies borrowed during the year had been utilised in granting advances without interest. Such a bifurcation was not seen to be possible. The ratio of the cases referred to above, both by Sh. Vaish, the learned representative for the appellant, as well as the learned representative for the Department. Shri C.V. Gupta, virtually points to the same conclusion, that is, interest paid on borrowed funds would be allowed as a deduction, only if the borrowed funds are used for the purposes of business. In this case there appears to be no doubt that the borrowed funds were utilised for the purposes of the appellant's business. In this view of the matter and following the reasoning by the learned AAC in the earlier years for allowing the appellant's claim, it has to be held that the interest claimed to have been paid on borrowings was an allowable deduction."

65. We have heard both the Departmental Representative and the ld. counsel for the assessee. It is an admitted position that the order of the Tribunal (Delhi Bench 'D', New Delhi) in the case of the assessee for asst. yr. 1973 74, bears ITA No. 822 (Del)/78-79 and was decided on 10th Aug., 1983. Therein the Tribunal, on the facts similar to those in the year under consideration, has held that the ITO was not justified in disallowing any part of the interest paid by the assessee in respect of the borrowed funds which, according to them, stood utilised for the purpose of the business of the assessee. We do not agree with the Departmental Representative that the onus was on the assessee to prove that the entire interest paid on borrowed funds was allowable as revenue expenditure. As rightly argued by the ld. counsel for the assessee, Mr. O.P. Vaish, which find support from various decision cited by the assessee before the CIT(Appeals), including of the Bombay High Court in the case of Bombay Samachar Ltd., the onus was on the ITO to prove that any part of the borrowed funds was disallowable having been diverted to a non-business use. The said onus, as rightly argued by the ld. counsel for the assessee, has not been discharged by the ITO in the present case. Further, as rightly pointed out by the CIT (Appeals), the interest paid on overdrafts by the assessee amounted to Rs. 8,839 only and that the rest of the interest paid by the assessee on the borrowed funds pertain to long term borrowings effected or by way of security deposit from dealers. The assessee had also substantial bank deposits. It cannot, therefore, be said that the monies borrowed during the year had been utilised in grating advances to the aforesaid three parties without charging interest. As stated hereinbefore there appears to be no doubt that the borrowed funds were utilised for the purposes of the assessee's business. We, therefore, on the facts and in the circumstances of the case, agree with the CIT(Appeals) that no part of the interest paid on borrowed funds can be disallowed in the assessment of the assessee for the year under consideration.

66. Admittedly, the assessee was charging as "charity" one rupee per carton of the yarn sold. The amount so collected during the year stood at Rs. 1,87,677, which was accounted for in a separate charity account. The said amount, according to the assessee, did not form part of its sale proceed. This was, however, not acceptable to the ITO, who relying on the ratio of the decisions of the Allahabad High Court in Kanpur Agencies Pvt. Ltd. vs. CIT (1968) 70 ITR 337 (All) and CIT vs. Meerut Bidi Factory (1977) 107 ITR 543 (All) has held that the said amount formed part of the trading receipts. He, therefore, added Rs. 1,87,677 to the total income of the assessee for the year under consideration.

67. Aggrieved by the said addition, the assessee brought the matter before the CIT(Appeals), who after referring to the ratio of the decision of the Supreme Court in CIT vs. Bijli Cotton Mills Pvt. Ltd. (1979) 8 CTR (SC) 1 : (1979) 116 ITR 60 (SC) and the decision of the Tribunal (Delhi Bench 'D' New Delhi) in ITA No. 858 (Del)/1978-79 (asst. yr. 1973-74), has held that the collection of the amount in question as Dharmada/charity did not constitute a part of the trading or revenue receipt. The customers of the assessee paid the amounts earmarking them for Dharmada. Those payments were validly earmarked for charity and right from the inception those amounts were received and held by the recipient under an obligation to spend them for charitable purposes only. The said amount did not represent a trading receipt.

68. In the appeal before the Tribunal, the Departmental Representative, Mr. Chakraborty has argued that the ratio of the decision of the Supreme Court in the case of Bijli Cotton Mills (P) Ltd. vs. CIT was distinguishable on facts. The entry made by the assessee in the books of the accounts is irrelevant. We should look to the nature of the receipt in question and it is clear that it was nothing, but a trading receipt. In support of his arguments, the Departmental Representative relied on the ratio of the following decision:

(1) Punjab Distilling Industries Ltd. vs. CIT (1959) 35 ITR 519 (SC).

(2) Chowringhee Sales Bureau P. Ltd. vs. CIT (1973) CTR (SC) 44 : (1973) 87 ITR 542 (SC).

(3) Sinclair Murray & Co. P. Ltd. vs. CIT 1974 CTR (SC) 283 : (1974) 97 ITR 615 (SC). In reply the ld. counsel for the assessee has relied on the order of the CIT(Appeals).

69. We have given consideration to the above arguments. The facts in the year under consideration are similar to those which were before the Tribunal in the case of the assessee for asst. yr. 1973-74. The arguments canvassed before the Tribunal on the earlier occasion. We have perused the aforesaid earlier order of the Tribunal. For the reasons stated therein,with which we agree, we uphold the order of the CIT(Appeals) on the point at issue. This view of ours finds support from the ratio of the decision of the Supreme Court in the case of Bijli Cotton Mills (P) Ltd..

70. The ITO in the assessment of the assessee has disallowed Rs. 3,17,204 on account of contribution made by the assessee to the Staff Superannuation Fund. The said disallowance was made on the ground that the assessee had not given any calculations to show that the said contribution had been made in accordance with the rules.

71. Aggrieved by the said disallowance, the assessee brought the matter by way of appeal before the CIT(Appeals), who following the order of the Tribunal in the case of the assessee for asst. yr. 1971-72 and of the AAC for asst. yr. 1973-74 dt. 17th Feb., 1978 has deleted the above addition made by the ITO.

72. In the appeal before the Tribunal, the Departmental Representative has urged that the above amount represented the provision and not the payment made to the said Superannuation fund. The deduction claim can be allowed if it falls within the four corners of s. 36 (1) (iv) of the Act r/w r. 88 of the IT Rules, 1962 or in case the assessee fulfils all the conditions laid down in s. 40-A(7) of the Act. These provisions were not attracted the present case, as the conditions precedent thereto are not satisfied. No actuarial valuation has been made in the present case. No calculations as required in Sch. IV of the Act, has been made. The above provisions of ss. 36 (1) (iv) and 40-A(7) of the Act come in the way of the assessee. These arguments are controverted by the ld. counsel for the assessee, Mr. O.P. Vaish, who has relied on the order of the CIT(Appeals).

73. We have given consideration to the above arguments. The factual position in the year under consideration is similar to that which was before the AAC in the case of the assessee for asst. yr. 1973-74. By his order dt 17th Feb., 1978, the AAC had allowed the claim for deduction of Rs. 3,71,024 on account of contribution to the superannuation fund in that year. The said decision of the AAC was accepted by the Department. We also find that a similar issue had come up for consideration of the Tribunal (Delhi Bench 'D' New Delhi) in ITA Nos. 2194 & 2195 and Cross Objections No. 250 (Del)/1975-76 (Asst. yr. 1971-72) in the case of the assessee decided on 9th Jan., 1981. The factual position in the year under consideration in similar to that which came up for consideration of the Tribunal on the earlier occasion in this connection. We find from this decision of the Tribunal that the CIT had granted approval w.e.f. 27th Feb., 1971 in respect of the said superannuation fund vide his letter dt. 28th Sep., 1977. We have perused the aforesaid earlier orders of the Tribunal and the AAC. For the reasons stated therein, with which we agree, we uphold the order of the CIT(Appeals) on this point also.

74. The assessee had received a sum of Rs. 16,96,150 by way of security deposits for cops. The said amount was treated by the ITO as a trading receipt, because the said deposits which were not refunded back by it to the customers were appropriated by the assessee company towards the sale proceeds. In support of this stand, the ITO relied on the decision of the Supreme Court in CIT vs. Punjab Distilling Industries Ltd. (1964) 53 ITR 75 (SC) and Chowringhee Sales Bureau P. Ltd. vs. CIT.

75. Aggrieved by the said addition, the assessee brought the matter by way of appeal before the matter by way of appeal before the CIT(Appeals), who following the decision of the Tribunal (Delhi Bench 'D' New Delhi) in ITA Nos. 1956 & 1823 (Del)/78-78 (asst. yr. 1971-72) decided on 20th Jan., 1981) has deleted the above addition made by the ITO. The CIT(Appeals) has also noticed that the facts in the case of the assessee are similar to that which were in the case of the assessee's sister concern M/s Modi Industries Ltd., wherein also deletion like the one made by the ITO in the present case, was deleted.

76. In the appeal before the Tribunal, the Departmental Representative has urged that the CIT(Appeals) has erred in deleting the above addition rightly made by the ITO which is duly supported by the decisions relied upon by him. In reply, the ld. counsel for the assessee has relied on the order of the CIT(Appeals).

77. We have given consideration to the above arguments. The facts relating to dispute involved in this ground are that the assessee in the course of manufacture wind the yarn on cops attached to the plant. The yarn is solid as such on the cops with the stipulation that the cops would remain the property of the assessee company. The purchasers are under the obligation to return them within 8 weeks from the date of invoice. The damaged cops are rejected by the assessee company and the purchaser has to pay for the damaged cops in accordance with the rate of recover fixed by the assessee company. To ensure the return of the cops, the assessee company either obtained a bank guarantee or an indemnity bound or obtained a fixed sum by way of security deposit per cop in the invoice. The security deposit was based on per cop in the invoice received during the year and amounted to Rs. 16,96,550. The factual position as stated hereinbefore was also before the Tribunal in the case of the assessee for asst. yr. 1971-72. The augments canvassed before the Tribunal on the earlier occasion were on the same lines which have been canvassed before the Tribunal for the year under consideration. We have perused the aforesaid earlier order of the Tribunal dt. 20th Jan., 1981. Therein, the Tribunal after distinguishing the ratio of the decisions relied upon by the Departmental Representative by pointing out that the price over there charged from the purchaser included the price of the bottle etc., which could be returned and a particular amount on that score was refundable, were different from the facts in the present case. Here the property in the cops vested in the assessee. The assessee obtained the security deposits to ensure the return of the cops. The present case, therefore, is clearly a case of security deposit and not of any price charged for cops along with the sale of yarn. That being the position, we, for the reasons stated by the Tribunal in its aforesaid earlier order, with which were agree, uphold the order of the CIT(Appeals) on this point also.

78. The assessee had provided office accommodation to Synfibre Sales Corporation, hereinafter referred to as "SSC", its sole selling agents and had received from them a sum of Rs. 6,000 as rent for the same. The said income was shown by the assessee as business receipt. The ITO following his assessment order for the earlier year estimated the ALV for the said space at Rs. 36,000 and after allowing 1/6th for the repairs assessed the balance sum of Rs. 30,000 under the head "Income from property".

79. Aggrieved by the assessment, the assessee brought the matter by way of appeal before the CIT(Appeals), who following the decision of the Tribunal dt. 9th Jan., 1981 in the case of the assessee for asst. yr. 1971-72 bearing ITA Nos. 2194 & 2195/75-76 and C.O. No. 250 (Del)/1975-76, as also the ratio of the decision of the Punjab & Haryana High Court in Nauharchand Chananram vs. CIT (1971) 82 ITR 189 (P&H), of the Supreme Court in New Savan Sugar and Gur Refining Co. Ltd. vs. CIT (1969) 74 ITR 7 (SC) and of the Madhya Pradesh High Court in CIT vs. National Newsprint & Paper Mills Ltd. 1978 CTR (MP) 106 : (1978) 114 ITR 388 (MP) has directed the ITO to assessee the income of Rs. 6,000 as business income as disclosed by the assessee and to make consequential adjustment to the computation of the assessee's income with regard to the deduction for repairs, depreciation etc.

80. We have heard both ld. counsel for the Departmental Representative and the ld. counsel for the assessee, Mr. Vaish. The factual position in the year under consideration is the same as came up before the Tribunal on the earlier occasion for asst. yr. 1971-72. The arguments by the parties are on the same lines which were canvassed before the Tribunal on the earlier occasion. We have perused the aforesaid earlier order of the Tribunal. For the reasons stated therein, with which we agree, uphold the order of the CIT(Appeals) on this points also.

81. The assessee had constructed few shops known as "Alok Market". The ITO has assessed the rental income from the said property under the head "Income from property" by following his assessment orders in the case of the assessee for the earlier years, which were upheld by the AAC of the IT for asst. yrs. 1970-71, 1972-73 and 1973-74.

82. Aggrieved by the above assessment, the assessee brought the matter by way of appeal before the CIT(Appeals), who following the decision of the Madhya Pradesh High Court in CIT vs. National Newsprint & Paper Mills Ltd. and of the Tribunal (Delhi Bench 'B' New Delhi) bearing ITA No. 1993 (Del)/75-76 (asst. yr. 1970-71) has held that it was difficult to say that the rental income derived by the assessee from the said shops had no nexus with the business carried on by the assessee and so the income was to be taxed under the head "Income from business".

83. In the appeal before the Tribunal, the Departmental Representative ahs urged that the tenants are not the employees of the assessee, who are dealing with the business carried on by assessee. The rent in realised on account of its being intimately connected as owner with the property. The assessee being the owner thereof, the income was correctly taxed under the head "Income from property". There was no nexus between the business carried on by the assessee and the utilisation of the shop in question by the persons occupying it. In support thereof, the Departmental Representative relied on the ration of the decision of the Delhi High Court in Punjab National Bank Ltd. vs. CIT (1983) 141 ITR 886 (Del). In reply, the ld. counsel for the assessee, Mr. O.P. Vaish relied on the aforesaid decision of the Full Bench of the Tribunal.

84. We have given consideration to the above arguments. The factual position in the year the under consideration is the same which had come-up for consideration of the Special Bench of the Tribunal in the case of the assessee for asst. yr. 1970-71. The arguments canvassed by the parties are similar to those canvassed before the Tribunal on the earlier occasion. We have perused the aforesaid earlier order of the Special Bench of the Tribunal. For the reasons stated therein, with which we agree, and which view also find support from the ratio of the Madhya Pradesh High Court in the case of the National Newsprint & Paper Mills Ltd., we uphold the order of the CIT(Appeals) on this point also.

85. We now come to the next ground raised by the revenue which is intimately connected with Ground No. 20 in the appeal by the assessee bearing ITA No. 446 (Del)/1982. The assessee has built a number of quarters. Most of these are allotted by the assessee to its employees. In the year under consideration, "A" Type quarter was allotted to employee of Hydle Department of the Government of Uttar Pradesh. Three "B" Type quarters were also allotted to the employees of the said Hydle Department. One such quarter was allotted to an employee of the Telephone Department. 10 other quarter of Type-C were allotted to the Hydle Department and one to the Telephone Department. The stand of the assessee was that no rent was charged from these Government employees, because the presence of these employees in these quarters made available to them the facility of utilising their services at all odd times. The letting out of these quarters to these persons, without charging any interest, was for the furtherance of the business of the assessee company. This was not acceptable to the ITO, who following the assessment order in the case of the assessee for the earlier years, as also the rent recoverable in respect of these quarters, which stood at Rs. 150 for A-Type quarter, Rs. 40 for B-Type quarter and Rs. 20 for C-Type quarter, estimated the income of the assessee from these quarters let out to persons other than the assessee's employees, at Rs. 10,000 though at the above rates the notional rent came to Rs. 7,320.

86. Aggrieved by the aforesaid addition, the assessee brought the matter by way of appeal before the CIT(Appeals), who has agreed wit the ITO that the national income in respect of the aforesaid quarters in question was to be assessed in the hands of the assessee, because the assessee was under no obligation to provide rent free accommodation to the persons concerned, which are not the employees of the assessee. In so far as the amount to be added as notional income in respect of the said quarters is concerned, the CIT(Appeals) directed the ITO to recompute the income from such quarters, which would be assessable as income from business on the basis of the ratio of the decision of the Tribunal discussed in para 37 of the order of the CIT(Appeals) and referred to in paras 81 & 82 above (Ground No. 6) and to make consequential adjustment in computation of the assessee's income with regard to the repairs, depreciation etc. The revenue is aggrieved by the aforesaid directions of the CIT(Appeals). The assessee is aggrieved by the addition directed by the CIT(Appeals) to be made to the total income of the assessee.

87. In the appeal before the Tribunal, the Departmental Representative firstly urged that the CIT(Appeals) has erred in treating the income from those quarters as income under the head "Income from business". Secondly, it is urged that the income in question is to be taxed under the head "Income from property" and that has to be on notional basis the addition made by the ITO was correct in view of the ratio of the decision of the Delhi High Court in Punjab National Bank vs. CIT (1983) 141 ITR 886 (Del). In reply, the ld. counsel for the assessee, Mr. Vaish basing himself on the ratio of the decisions of the Madhya Pradesh High Court in CIT vs. National Newsprint & Paper Mills Ltd. 1978 CTR 106 : (1978) 114 ITR 388 (MP) and of the Karnataka High Court in Addl. CIT vs. Hindustan Machine Tools Ltd. (1979) 12 CTR (Kar) 316 : (1981) 121 ITR 798 (Kar) as also the decision of the (Delhi Bench 'C' Delhi) in ITA Nos. 1993/Del/75-76 (asst. yr. 1970-71) has urged that the dominant purpose of letting out of the accommodation was to enable the assessee to carry on its business more efficiently and smoothly and the activity of letting had a definite nexus with the business that the assessee was carrying on. The income, if any, was business income it could not be income under the head "Income from house property". As such, no notional income as required to be assessed under that head, can be taxed in the hands of the assessee. Since the income, if any, from letting out could be business income and in fact and practice no interest has been charged, nothing can be added to total income of the assessee under the head "Income from business".

88. We have given consideration to the above arguments. The quarters in question were constructed by the assessee for and letting out to its employees alone. As such the income therefrom being incidental to the assessee's business had to be treated as business income, the dominant purpose being to enable the assessee to carry on its business more efficiently and smoothly and in this way, there was a definite nexus with the business carried on by the assessee and the letting out of the quarters. So would be the position when the accommodation was given to the government employees, as the object of allotting the accommodation to them was for providing certain facilities in the aid of the business carried on by the assessee. The location of those employees in the quarters was motivated so as to their service being available to facilitate carrying on of the business. There can be no distinction in principle between the letting out by the assessee of the two classes of accommodation, one to its own employees and the other to the government employees on the facts of the case. Since the income from the quarters, whether let out to the employees of the assessee or to the government employees, is to be taxed as "business income" and not on notional basis under the head "Income from property", the rent, if any, actually recovered from letting out these quarters, has to be taxed in the hands of the assessee. Since these quarters were let out by the assessee to government employees without charging any rent, nothing on that score can be taxed in the hands of the assessee under the head "business income". Notional income does not happen to be there for being so taxed. We, therefore, while upholding the order of the CIT(Appeals) that the income in respect of these quarters is to be taxed under the head "Income from business" further hold that no addition on this score can be made to the total income of the assessee.

89. In the year under consideration, the assessee had purchased cops of the value of Rs. 20,48,403. The stand of the assessee before the ITO was that the said cops constitute an integral part of its plant & machinery and, therefore, development rebate ought to have been allowed thereon, apart from 100per cent of the cost incurred on this account allowed by the ITO because depreciation on items costing Rs. 750 each is not allowable separately.

90. It appears that the auditors of the assessee company had raised a question in the accounting period relevant to the asst. yr. 191-72 as to whether the cost of the cops constituted a capital or revenue expenditure, although no note to this effect was appended to the printed accounts for that year.

91. Taking a cue from the Auditor's said query, the ITO came to the view that the expenditure involved constituted revenue expenditure. He, therefore, allowed the entire amount as a deduction, but declined to allow development rebate thereon as, in his opinion, the said expenditure was revenue expenditure.

92. Aggrieved by the aforesaid assessment order, the assessee brought the matter by way of appeal before the CIT(Appeals). It was urged before him by the assessee that the cops, constituted an integral part of the assessee's plant and machinery, because its manufacturing process could not, in the absence of the said cops being attached to the drawtwist machines, be carried on so as to take on the yarn coming out of the extruders. It was also pointed out of the assessee that the cops had been held to be capital asset and development rebate was allowed thereon in the assessee's own assessments up to asst. yr. 1972-73. On that very same basis development rebate should be allowed on cops purchased in the year under consideration also. Support was sought by the assessee from the decision of the Gujarat High Court in Amrut Mills Ltd. vs. CIT (1966) 59 ITR 507 (Guj) and the decision dt. 1st Nov., 1980 in the order of the Tribunal (Delhi Bench 'D', Delhi) bearing ITA No. 2193 (Del)/1975-76 for asst. yr. 1970-71 in the case of the assessee and of the Allahabad High Court in CIT vs. Swadeshi Cotton Mills Co. Ltd. (1979) 10 CTR (All) 278 : (1979) 117 ITR 321 (All). These contentions prevailed with the CIT(Appeals).

93. In the appeal before the Tribunal, the Departmental Representative urged that the manner in which the assessee deals with the cops is immaterial. The cops being a separtable item was not an integral part of the plant & machinery set upto by the assessee. The cops, according to the Departmental Representative, can be said to the instrument essential for selling of the goods by the assessee. The purchasers were not under any legal obligation to return the cops. They can do away with as they like. Since the cops are detachable and are not sold with the goods of the assessee so they do not form part of the plant and machinery of the assessee. Support was sought from the ratio of the decision of the Supreme Court in Punjab Distilling Industries Ltd. vs. CIT (1959) 35 ITR 519 (SC). In reply, the ld. counsel for the assessee, Mr. Vaish relied on the order of the CIT(Appeals) as also the decisions of the Tribunal in favour of the assessee for asst. yr. 1970-71 and 1971-72 respectively at pp. 372 and 314 of the paper book filed by the assessee.

94. We have given consideration to the above arguments. The photography of the cops as fitted to the plant & machinery of the assessee as also of the cops with the yarn would round them are at pp 103 and 104 of the paper book. We have already held above in the appeal of the assessee that the property in the goods of these cops vests in the assessee. These cops are detachable. The yarn is sold by the assessee to the customers who are under the legal obligation to return the cops for which adequate security is taken by the assessee. Admittedly, the filament which goes out of the plant & machinery of the assessee to be wound round these cops is very thin. The object of these cops is to pull filament yarn and to wind it around it. But for the cops the yarn produced by the assessee would be in a jumble and cannot be collected in any container for being would up later on. The plant & machinery is so designed to have these cops fitted with them with the required rotation to pull the filament and to would the yarn round these cops. These cops are, therefore, on the facts and circumstances of the integral part of the plant & machinery of the assessee company Independently, these cops are also cover by the definition of the expression "plant" appearing in s. 43(5) of the Act. This view of ours finds supports from the ratio of the following decisions;

CIT vs. Jai Drinks (Pvt.) Ltd. (1980) 15 CTR (Raj) 17 : (1980) 125 ITR 662 (Raj).

CIT vs. National Air Products Ltd. (1980) 18 CTR (Del) 300 : 126 ITR 196 (Del).  Therefore the expenditure to purchase the cops in the year under consideration is capital expenditure and the assessee is entitled to the development rebate on the cost of these cops. This view of ours finds support from the aforesaid decisions of the Tribunal in the case of the assessee for asst. yr. 1970-71 and 1971-72 respectively dt. 1st Nov., 1980 and 20th Jan., 1981 in ITA No. 2193 (Del)/75-76 and ITA No. 1823 (Del) 1977-78. We, therefore, uphold the order of the CIT(Appeals) on this point also.

95. The next ground raised by the revenue pertains to the deduction allowed to the assessee under s. 80J of the Act in regard to Unit-B, which was installed by the assessee company in the accounting period relevant to the asst. yr. 1973-74 and in which further expansions were effected in the year under consideration. The ITO, following his assessment order in the case of the assessee for asst. yr. 1973-74, rejected the claim of the assessee for deduction under s. 80-J. According to him, Unit-B was not a separate industrial undertaking, because no separate books of account or other records had maintained in regard thereto. It only constituted an expansion of the existing plant and machinery.

96. Aggrieved by the assessment order the assessee brought the matter by way of appeal before the CIT(Appeals), who following the order of the AAC in the case of the assessee for asst. yr. 1973-74, as modified by the order dt. 13th Aug., 1980 of the CIT(Appeals), Delhi VIII, New Delhi directed the ITO to work out and to allow to the assessee deduction under s. 80J of the Act in respect of the said Unit-B in accordance with the said order and the provisions of law as they stand in this regard.

97. In the appeal before the Tribunal, the arguments both by the Departmental Representative and the ld. counsel for the assessee, M. O.P. Vaish have proceeded on the same lines which were canvassed before the Tribunal (Delhi Bench 'D' New Delhi) earlier in ITA No. 858 (Del) 78-79 asst. yr. 1973-74) decided on 10th Aug., 1983. We have perused the said earlier order of the Tribunal. For the reasons stated therein, with which we agree, we uphold the order of the CIT(Appeals) on this point also.

98. The stand of the assessee before the ITO was that the Nylon Yarn manufactured at its plant was covered by Entry No. 18 of Sch. V of the Act and, therefore, the assessee was entitled to the allowance of the development rebate at the higher rate. This claim of the assessee was rejected by the ITO by following his earlier assessment orders in the case of the assessee.

99. Aggrieved by the said assessment, the assessee brought the matter by way of appeal before the CIT(Appeals), who following the decision of the Tribunal for asst. yr. 1970-71 holding that Nylon-6 yarn was a petro chemical covered by Entry No. 18 of Sch. V of the Act, as also the ratio of the decision of the Supreme Court in CIT vs. Nirlon Synthetcs Fibres & Chemicals Ltd. (1981) 22 CTR (SC) 130 : (1981) 130 ITR 14 (SC) and J.K. Synthetics Ltd. vs. CIT (1981) 24 CTR (SC) 357 : (1981) 130 ITR 23 (SC) respectively, has agreed with the assessee.

100. We have heard both the sides. For the reasons stated in the aforesaid earlier order of the Tribunal in the case of the assessee, with which we agree, and respectfully following the ratio of the aforesaid decisions of the Supreme Court, relied upon by the CIT(Appeals), we uphold the order of the CIT(Appeals) on this point also.

101. Ground No. 12 by Departmental reads as under:

"On the facts and in the circumstances of the case, the CIT(Appeals)-VIII, New Delhi has erred in directing the ITO to verify the cost of 'Plant & Machinery' of other items on which development rebate has been claimed, and to allow the development rebate thereon in accordance with the law".

102. We have heard both the Departmental Representative and the ld. counsel for the assessee. The ground raised by the Revenue is a general ground. The direction by the CIT(Appeals), which is challenged by the revenue, is to allow development rebate in accordance with the earlier order of the Tribunal. The allowance of development rebate on item of Rs. 68,609 the cost of each of which was less than Rs. 750 and or items of Rs. 7,83,866 the cost of each of which exceeded Rs. 750, See in this connection para 9 of the order of the Tribunal dt. 1st Nov., 1980 in I.T.A. Nos. 2193 (Del)/75-76. We, therefore, uphold the directions of the CIT(Appeals), which are challenged by this ground.

103. It was claimed by the assessee before the ITO that a sum of Rs. 34,63,607 paid during the year on account of fluctuation in the foreign currency exchange rate. As such, the said amount should be added to the cost of the imported machinery in terms of the provisions of s. 43 A of the Act and depreciation on such assets should be worked out on the basis of the cost so revised. This was not acceptable to the ITO.

104. Aggrieved by the said assessment order, the assessee brought the matter by way of appeal before the CIT(Appeals), who has agreed with the assessee.

105. We have heard both the Departmental Representative and the ld. counsel for the assessee, Mr. O.P. Vaish. As rightly argued by the Departmental Representative, the order of the CIT(Appeals) in this behalf is to be reversed. See in this connection, the Special Bench decision of the Tribunal in the case reported as Poysha Industrial Co. Ltd. vs. ITO (1982) 1 SOT 206 (Bom) (SB) as also the ratio of the decision of the Madras High Court in CIT vs. South India Viscose Ltd. (1979) 120 ITR 451 (Mad). We, therefore, reversing the order of the CIT(Appeals) restore that the ITO in this behalf.

106. The ITO had allowed depreciation as per chart marked Annexure C to the CIT(Appeals). In the appeal filed by the assessee, the CIT(Appeals) had directed the ITO to cal for the full particulars of the assessee's claim for the depreciation, as adduced during the course of the appellate proceedings, worked out the written down value of various assets and to allow depreciation thereon in accordance with the rule and the appellate orders of the earlier years.

107. We have heard both the sides. The ground arises by the revenue in this connection is a general one. The directions is to allow deprecation in accordance with the earlier orders of the Tribunal for the earlier years in the case of the assessee and in accordance with law. The revenue cannot have any grievance in this behalf. We hold likewise.

108. This brings us to ground No. 14. The facts in this connection are that the "capital reserve" as disclosed in Sch. II of the balance sheet of the assessee company for the year under consideration admittedly stood increased by a sum of Rs. 31,334 including Rs. 30,493 which related to the value of the appreciation in the foreign currency balance held by the company with the First National City Bank, Frankfurt, West Germany. This amount of Rs. 30,493 is the subject matter of ground No. 14. According to the ITO, the said current account was being utilised by the assessee company for the purchase of its stores. The balance amount in the said current account in the year under consideration was held by the assessee company for its current business needs. As such the increase on account of additional rupees arising from appreciation of the foreign currency balance in question was revenue receipt. The same could not go to increase the capital reserve.

109. Aggrieved by the said assessment order the assessee brought the matter by way of appeal before the CIT(Appeals). He has held that the said foreign currency account was kept by the assessee for the purpose of the purchasing plant & machinery and the spare part thereof. The said bank account was not being operated for carrying out any trading operation as such, because the company was not selling any of its products nor was it running any services in Germany or anywhere outside India. The transactions recorded in the said account did not constitute any receipts for goods sold or services rendered. The said company was utilised for the purchase of plant and machinery and its spare parts for running its own business. The increase in rupees on account of the count was rightly taken by the assessee to the capital reserve.

110. In the appeal before the Tribunal, the Departmental Representative has urged that there was no evidence before the CIT(Appeals) that said foreign current account was held by the assessee on capital account. The ITO was justified in not agreeing to the addition of Rs. 30,493 to the reserve account. In reply the ld. counsel for the assessee, Mr. Vaish has relied on the order of the CIT(Appeals). He further urged that if the foreign exchange was received as such in India it would result neither in gain nor loss.

111. We have given consideration to the above arguments. Admittedly, the assessee had taken the above increase to the capital reserve account. In case the ITO wanted the said increase to treated as revenue receipt, the onus in view of CIT's order was on him to prove that the amount in the said foreign exchange account was held for the purchase of stores or as a stock-in-trade. The said onus has not been discharged by the ITO. The CIT(Appeals) has recorded a finding of fact on the basis of the facts and circumstances of the case and the material on record that the said account was kept on capital account, because it was being utilised for the purchase of the plant and machinery used by the assessee in its business as also the spare part thereof. Nothing has been brought on record to displace the said findings of the CIT(Appeals). We, therefore, on the facts and in the circumstances of the case and the material on record uphold the said finding of the CIT(Appeals).

112. A sum of Rs. 58,483 was debited in the books of the assessee on account of fee payable to the Textile Committee. The ITO disallowed the said claim of the assessee holding that it was in the nature of a mere provision and did not constitute business expenditure.

113. Aggrieved by the said disallowance, the assessee brought the matter by way of appeal before the CIT(Appeals), who noticed that a similar claim was disallowed by the ITO in the case of the assessee for the immediately preceding two years. The nature of the claim in respect of the amount in question was like the claim on account of the excise duty, which the excise authorities have proposed to levy and which was being disputed. Like the excise duty payable, this amount on account of fee payable to the Textile Committee was allowable revenue expenditure.

114. We have heard both the Departmental Representative and the ld. counsel for the assessee. We find that a similar point had come up for consideration of the Tribunal (Delhi Bench 'D' New Delhi) in I.T.A. No. 1582 (Del)/77-78 (asst. yr. 1972-73). The factual position in the year under consideration is similar to that in asst. yr. 1972-73. The argument canvassed by the parties are on the same lines which were canvassed before the Tribunal on the earlier occasion. We have perused the aforesaid earlier order of the Tribunal. Its not in dispute that the Textile Committee has been constituted by the Government of India under the Textile Committee Act, 1963 and in terms of s. 12 of the said Act and item 4(b) of s. 21(1) made under the said Act, the said assessee was under the statutory liability to pay a sum of Rs. 58,483 to the Textile Committee by way of fees. Although the payment of the said fee is disputed by the assessee in Court proceedings, the liability to pay the amount in question is a statutory liability. Since the assessee is maintaining its accounts on mercantile system, the assessee is entitled to the deduction of Rs. 5,483. As such, and for the reasons stated by the Tribunal in its aforesaid earlier order, with which we agree, we uphold the order of the CIT(Appeals) on this point also.

115. In the year under consideration, the assessee paid a sum of Rs. 26,40,122 as commissions to its sole selling agents, M/s Synfibre Sales Corporation, hereinafter referred to as "SSC". The ITO by following his assessment orders in the case of the assessee for asst. yr. 1971-72 and 1973-74 has held that SSC was not a genuine entity and the same has bee used as a medium to reduce the tax liability of the assessee company. This finding was arrived at in the earlier year, because it was noticed that the so-called partners of SSC were closely related to the directors of the assessee company and also because the assessee company had its own sale office and there was no need to appoint any sole selling agent. According to the ITO, there were two additional facts over and above the ones noticed in the earlier years. First, the market being sellers' market, the assessee's manufactured goods were having a ready market and there was no need to pay commission for selling goods. Several other big manufacturers, like Century Enka, Nirlon etc. were not having any selling agents. The second point made out by the ITO was that SSC was operated more or less as a branch of the assessee company. This inference was drawn from certain reports, which was called by the assessee company from SSC's Bombay Office and certain correspondence to this effect which had come to the ITO's notice. It was also observed by the ITO that the so-called employees of the SSC were reporting directly to the executives and directors of the company. It was also noticed by the ITO that SSC functioned as an intermediary link for siphoning of the assessee's profits because the SSC in its own turn passed on the commission to another concern, namely, R.B. Gujarmal Modi & Bros. Pvt. Ltd., which in its own turn passed on a part of its own commission receipts to Shri K.K. Modi, who is the Managing Director of the assessee company. the ITO, however, considered the expenditure said to have been incurred by the SSC and reducing the same from the total commission payments, came to the conclusion that the balance sum of Rs. 26 lakhs and odd claimed to have been paid by the assessee to SSC was not a genuine payment and it was also hit by the provisions of s. 40A(2) of the Act.

116. Aggrieved by the said addition, the assessee brought the matter by way of appeal before the CIT(Appeals). He notice that the point at issue had come up for consideration before the Tribunal (Delhi Bench 'D', New Delhi) in the case of the assessee bearing that ITA No. 1956(Del)/1978-79 (asst. yr. 1971-72). The appeal was before the Tribunal against the reassessment order. He also noticed tat a similar point had come up for consideration of the AAC for asst. yr. 1973-74, which order on the point at issue, as in clear from the order of the Tribunal (Delhi Bench 'D', New Delhi) in I.T.A. No. 858 (Del)/78-79 for asst. yr. 1973-74, has been upheld. He also noticed, as brought out in the order, that the facts in the year under consideration were similar to those in the aforesaid asst. yr. 1971-72 and 1973-74. CIT(Appeals) has further stated that the ITO in spite of an opportunity given vide remand order dt. 16th April, 1980, has not brought any fresh evidence, if any, to establish that the sole selling agreement entered into the assessee company with SSC was not a genuine agreement and also to establish that SSC had rendered no services to the assessee and had, in reality, been functioning as its branch. A mere reiteration of the ITO's observation in the remand report of what he has stated in the assessment order, no fresh facts had been brought on record, nor nay evidence adduced to establish the correctness of the allegations made by the ITO. The CIT(Appeals) on the facts and in the circumstances of the case and earlier orders of the Tribunal has held that the agreement dt. 4th March, 1966 entered into by the assessee company with SSC was genuine and that services were rendered to the assessee in pursuant thereof. The commission paid to SSC was not hit by the provisions of s. 40A(2)(a) of the Act and that the amount paid as commission was reasonable. The payment made by M/s R.B. Gujarmal Modi & Bros. P. Ltd. to Mr. K.K. Modi, as held by the Tribunal vide their order dt. 31st Jan., 1976 in ITA No. 5005 (Del)/1974-75 in the case of M/s R.B. Gujarmal Modi & Bros. (P) Ltd., was held to be legitimate and genuine payment. Similar payment made by M/s R.B. Gujarmal Modi & Bros. (P) Ltd. in the subsequent years were apparently not questioned. The payments made by the said company to Mr. K.K. Modi were, thus, genuine payments. The CIT(Appeals) has, therefore, deleted the addition of Rs. 20 lakhs made by the ITO.

117. In the appeal filed by the revenue, the Departmental Representative has canvassed the same arguments which were advanced by the ITO to make the above addition of Rs. 26 lac and odd. In reply, the ld. counsel for the assessee, Mr. Vaish had relied on the order of the CIT(Appeals). He also highlighted that the IAC (Asst.) in the assessment order for asst. yr. 1973-74 had held that s. 40A(2)(a) was not attracted.

118. We have given consideration to the above arguments. For the reasons stated in the aforesaid earlier order of the Tribunal for asst. yr. 1971-72, with which we agree, and for the reasons stated by the CIT(Appeals), with which we also agree, we uphold the order of the CIT(Appeals) on this point also.

119. In the result, the appeal by the revenue is partly allowed.

 

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