Vildirect: IncomeTax-caselaws-1986-VIL-67-ITAT-

1986-VIL-67-ITAT-

Equivalent Citation: ITD 016, 574, TTJ 025, 028,

Income Tax Appellate Tribunal BOMBAY

Date: 19.02.1986

INCOME TAX OFFICER.

HINDUSTAN PETROLEUM CORPORATION LIMITED.

BENCH

Member(s) : I.S. NIGAM., R. L. SANGANI.

JUDGMENT

Per Shri I.S. Nigam, Accountant Member ---- These appeals relating to the assessment years 1975-76 to 1979-80 filed by the revenue against the consolidated order of the Commissioner (Appeals) deal with some common issues and are, therefore, for the sake of convenience, disposed of by a consolidated order.

2. The assessee is a wholly-owned Government company engaged in the business of refining and marketing of petrol and petroleum products. The first grievance common to all the appeals is against the direction of the Commissioner (Appeals) that the assessee-company is entitled to depreciation at the higher rate of 15 per cent on its plant and machinery since it comes into contact with crude oil and reduced crude oil, which were corrosive chemicals. The learned departmental representative, Shri Srivastava, submitted to us that there was no definition of 'corrosive chemicals' under the Income-tax Act, 1961 ('the Act') and, therefore, what are corrosive chemicals have to be understood by what is known in common parlance. Viewed in this context, according to Shri Srivastava, crude oil and reduced crude oil cannot be considered corrosive chemicals. On the other hand, the assessee's learned counsel, Shri Mehta, referred to the expert's opinion, which was before the lower authorities, according to which crude oil consisted mainly of a mixture of hydrocarbons of many chemical types and of varying degrees of molecular complexities and also contained small proportions of compounds of oxygen, nitrogen and sulphur as a result of which both crude oil and reduced crude oil were corrosive chemicals. Shri Mehta vehemently argued before us that what is a corrosive chemical has to be determined by experts and not by the laymen and, therefore, in the absence of any definition of 'corrosive chemicals' in the Act, what are corrosive chemicals have to be decided by the experts. On this basis, Shri Mehta submitted that the direction of the Commissioner (Appeals) to allow higher rate of depreciation at the rate of 15 per cent on the assessee's plant and machinery, which came in contact with crude oil and reduced crude oil, which were corrosive chemicals, was perfectly justified.

3. We have carefully considered the rival submissions. We agree with the learned counsel for the assessee-company, Shri Mehta, that what are corrosive chemical have to be decided by experts and not by the laymen, We have also gone through the expert's opinion, which is based on Science of Petroleum by Dunstan, Nash, Brooks and Tizard, Chemistry of Petroleum Derivates by Carlton Ellis, Petroleum Refinery Engineering by W.I. Nelson, and Condensed Chemicals Dictionary by G.C. Hawley. Considering all this, we have no hesitation in coming to the conclusion that the Commissioner (Appeals) was justified in his view that the machinery and plant of the assessee-company comes into contact with crude petroleum and reduced crude petroleum, which are corrosive chemicals and is consequently, entitled to depreciation at higher rate of 15 per cent as prescribed by Appendix I, Part I of rule 5 of the Income-tax Rules, 1962 ('the Rules').

4. The next grievance again common to all the years is against the direction of the Commissioner (Appeals) to add Rs. 21,42,815 to the written down value of the assets of Lube India Ltd. taken over by the assessee-company on amalgamation for the purpose of working out the depreciation on those assets. This amount of Rs. 21,42,815 represents depreciation worked out on the assets of Lube India Ltd. in the assessment orders of that company prior to its amalgamation with the assessee-company, which was allowed to be carried forward under sub-section (2) of section 32 of the Act. The learned departmental representative, Shri Srivastava, invited our attention to Explanation 3 of clause (6) of section 43 of the Act, which lays down that any allowance in respect of any depreciation carried forward under section 32(2) shall be deemed to be depreciation actually allowed. He, therefore, submitted that there was no justification for this depreciation not being taken into consideration for working out the written down value of the assets of Lube India Ltd. taken over by the assessee-company on amalgamation.

5. On the other hand, the assessee's learned counsel, Shri Mehta, submitted that what is the written down value of the assets of a company, which is amalgamated with another company is to be governed by Explanation 2A of section 43(6) and not by Explanation 3, which was wrongly invoked by the ITO. Elaborating on his argument, Shri Mehta pointed out that Explanation 3 of section 43(6) was with a view to prevent double benefit of set off of depreciation allowed to be carried forward and its exclusion for the purpose of written down value and consequently, terminal allowance on sale, which is not the case here. According to Shri Mehta, the assessee-company should not be put to the double disadvantage of the carried forward depreciation in the case of Lube India Ltd. not being available to it and this carried forward depreciation also being deducted for the purpose of working out the written down value on which depreciation will be admissible to the assessee-company on the assets of Lube India Ltd. taken over by the assessee-company on amalgamation.

6. We have carefully considered the rival submissions. Explanations 2A and 3 of clause (6) of section 43 are as follows:

"Explanation 2A: Where, in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated company, and the amalgamated company is an Indian company, the written down value of the transferred capital asset to the amalgamated company shall be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purposes of its business.

Explanation 3 : Any allowance in respect of any depreciation carried forward under sub-section (2) of section 32 shall be deemed to be depreciation 'actually allowed'."

A combined reading of these Explanations shows that in a scheme of amalgamation the written down value of the capital assets of the amalgamating company in the hands of the amalgamated company will be the same as it would have been in the case of the amalgamating company if it had continued to hold the capital assets for its business and for this purpose any allowance in respect of depreciation carried forward shall be deemed to be depreciation actually allowed. This means that the depreciation actually worked out in the assessment orders but which, instead of being deducted in working out the income, was carried forward will be depreciation actually allowed and will have to be deducted from the actual cost or written down value for the purpose of working out the written down value on which depreciation is allowed in the subsequent years. This position, which would obtain in the case of the amalgamating company, will be the same in the case of the amalgamated company, which had taken over the capital assets of the amalgamating company, on amalgamation. It is by now settled law as laid down by the Hon'ble Supreme Court in the case of CIT v. Shahzada Nand & Sons [1966] 60 ITR 392 that the meaning and intention of a statute must be collected from the plain and unambiguous expression used therein rather than from any notions, which may be entertained as to what is just or expedient. Considering all this, there was no justification for the Commissioner (Appeals) to hold that the unabsorbed depreciation of Rs. 21,42,815, which was already deducted by Lube India Ltd. in working out the written down value of its capital assets taken over by the assessee-company on amalgamation should be added back for the purpose of working out the written down value of these very capital assets in the hands of the assessee-company for the purpose of depreciation admissible on these capital assets. On this issue, therefore, the order of the Commissioner (Appeals) is reversed.

7. The next grievance again common to all the years under appeal before us is against the direction of the Commissioner (Appeals) that the gratuity exempt under section 10(10) of the Act, should not be taken into consideration for the purpose of working out the disallowance under section 40A(5) of the Act. Both the learned departmental representative, Shri Srivastava, as well as the assessee's learned counsel, Shri Mehta, submitted to us that this very issue also cropped up before the Special Bench of the Tribunal in the case of IAC v. Kodak Ltd. [1983] 3 SOT 517 (Bom.) and the arguments of both the sides were the same as were before the Tribunal in the case of Kodak Ltd.

8. We have carefully considered the rival submissions. Following, with respect, the order of the Special Bench of the Tribunal in the case of Kodak Ltd., we hold that gratuity to the extent to which it is exempt under section 10(10) should not be considered for the purpose of making the disallowance under section 40A(5). We would, however, like to make it clear that if gratuity exceeds the amount exempt under section 10(10), the excess only would have to be considered for the purpose of disallowance under section 40A(5) and not the entire amount of gratuity. It was brought to our notice by the assessee's learned counsel, Shri Mehta, that even though this ground of appeal had been taken up also for the assessment year 1977-78, this does not arise out of the order of the Commissioner (Appeals) for the assessment year 1977-78. We find from the order of the Commissioner (Appeals) that this ground relates only to the assessment years 1975-76, 1976-77, 1978-79 and 1979-80 and not to the assessment year 1977-78. Our order, therefore, on this issue will apply only to the assessment years 1975-76, 1976-77, 1978-79 and 1979-80 and not to the assessment year 1977-78.

9. The next common grievance in these appeals is against the directions of the Commissioner (Appeals) on the issue of depreciation and investment allowance on roads and culverts within the factory compound. The Commissioner (Appeals) held that roads and culverts were plant or machinery. The directions of the Commissioner (Appeals), which are objected to in the appeals before us, are against the grant of extra shift allowance on roads and culverts for the assessment years 1975-76 and 1979-80 and against the grant of investment allowance on these roads and culverts for the assessment years 1978-79 and 1979-80. In addition, for the assessment year 1979-80 there is another grievance against the direction of the Commissioner (Appeals) to grant depreciation on these roads and culverts at the higher rate of 10 per cent applicable to plant and machinery.

10. The learned departmental representative, Shri Srivastava, cited before us the ruling of the Hon'ble Bombay High Court in the case of CIT v. Sandvik Asia Ltd. [1983] 144 ITR 585, wherein their Lordships laid down that the roads constructed within the factory compound would not constitute 'plant' and have to be treated as 'buildings' for the purpose of depreciation. On the other hand, the assessee's learned counsel, Shri Mehta, pointed out that the departmental authorities have been taking contradictory positions inasmuch as, e.g., the ITO herself allowed depreciation on roads and culverts treating it as 'plant' for the assessment year 1975-76 and there is no grievance of the revenue to roads and culverts being treated as 'plant' for the assessment year 1978-79. He also cited before us a decision of the Hon'ble Andhra Pradesh High Court in the case of CIT v. Coromandel Fertilisers Ltd. [1985] 156 ITR 283, wherein their Lordships laid down that the determination of whether roads within the factory compound constitute buildings or plant depends upon the particular situation of the roads, the use to which they are put and in particular whether they were an integral part of the factory in which the business was carried on and considering these tests the roads there amounted to 'plant'. He, therefore, justified the order of the Commissioner (Appeals) on this issue.

11. We have carefully considered the rival submissions. With very great respect to the decision of the Hon'ble Andhra Pradesh High Court in the case of Coromandel Fertilisers Ltd., which was considering the facts of that case, we are inclined to follow the ruling of the Hon'ble Bombay High Court in the case of Sandvik Asia Ltd. with which we respectfully agree and which is also a binding authority for us. We may also point out that even if the ITO for some assessment years has herself treated the roads and culverts as 'plant' or the Commissioner (Appeals) treated them as 'plant' and the revenue did not come up in appeals before us, this will not act as estoppel to our coming to a decision on this issue on merits in the light of the ruling of the Hon'ble Bombay High Court in the case of Sandvik Asia Ltd. We have, therefore, no hesitation in coming to the conclusion that roads and culverts within the factory compound can only be treated as 'buildings' and not 'plant'. This means that for the assessment year 1979-80 depreciation on these roads and culverts was wrongly allowed at the higher rate of 10 per cent applicable to 'plant' instead of at the rate applicable to 'buildings'. This also means that extra shift allowance on these roads and culverts for the assessment years 1975-76 and 1979-80 and investment allowance on these roads and culverts for the assessment years 1978-79 and 1979-80 were wrongly allowed by the Commissioner (Appeals). On this issue, therefore, the order of the Commissioner (Appeals) is reversed.

12. The next grievance common to the assessment years 1976-77 to 1978-79 is against the direction of the Commissioner (Appeals) to allow the claim of deduction of guest house expenses. The assessee-company had maintained two guest houses, one at the head office in Bombay and another at the regional office at Delhi. The learned departmental representative, Shri Srivastava, cited before us the ruling of the Hon'ble Karnataka High Court in the case of N.G.E.F. Ltd. v. CIT [1985] 153 ITR 197 wherein their Lordships laid down that on a reading of section 37 of the Act, after its amendment with effect from 1-4-1970 and rule 6C of the Rules, which was omitted with effect from 1-4-1972, it was clear that the Legislature deliberately deleted the provisions relating to the allowance of expenditure incurred on maintenance of guest houses with effect from 1-4-1972. Their Lordships further laid down that the only exception to this disallowance was where the guest house was intended to be a holiday home for the employees and was intended for the exclusive use of the employees while on leave. He, therefore, vehemently argued before us that the direction of the Commissioner (Appeals) to allow the claim of deduction of expenses on the guest houses for the assessment years 1976-77 to 1978-79 was erroneous.

13. On the other hand, the assessee's learned counsel, Shri Mehta, submitted to us that the guest houses were meant for use by the employees. In these circumstances, according to Shri Mehta, for the assessment years prior to the assessment year 1979-80, which was covered by the clarificatory sub-section (5) of section 37 inserted by the Finance Act, 1983 with retrospective effect from 1-4-1979, the expenses on the guest houses under consideration here were admissible and were rightly allowed by the Commissioner (Appeals).

14. We have carefully considered the rival submissions. There is no evidence either before the lower authorities or even before us at the time of hearing of the appeals that the guest houses were intended for the exclusive use of the whole-time employees while on leave. On the other hand, in response to a specific query by the Bench it was admitted that the guest houses were used by persons who were not employed in the assessee-company as well. In these circumstances, considering the ruling of the Hon'ble Karnataka High Court in the case of N.G.E.F. Ltd. and the totality of the facts and circumstances, we have no hesitation in coming to the conclusion that the claim of deduction of guest house expenses was not admissible and was wrongly allowed by the Commissioner (Appeals). On this issue, therefore, again, the order of the Commissioner (Appeals) is reversed.

15. The next grievance common to the assessment years 1977-78 to 1979-80 is against the direction of the Commissioner (Appeals) to allow the claim of deduction of annuity and lump sum benefits to the employees on actuarial basis, which were disallowed by the ITO. At the outset it was pointed out to us that the ground of appeal by the revenue for the assessment year 1978-79 actually pertains to the assessment year 1976-77 and a rectification application in this connection is pending before the Commissioner (Appeals). The learned departmental representative, Shri Srivastava, submitted to us that the actual payments on account of pension and other lump sum benefits were claimed and allowed from year to year in the past and, therefore, there was no reason for any departure from the practice for these years. It was also pointed out by him that for the payment of pension or annuity, no fund was created and there was also no provision in the account books for this liability. It was also mentioned by him that the actuarial calculations for claim of liability on account of annuity and lump sum benefits on actuarial basis were filed not before the ITO but for the first time before the Commissioner (Appeals). Reference was also made by him to the provisions of section 40A(7), which laid down that no deduction shall be allowed in respect of any provision for payment of gratuity to the employees on their retirement or on the termination of their employment unless the conditions laid down by clause (b) of section 40A(7) were met. It was further pointed out by him that the conditions laid down by clause (b) of section 40A(7) have not been met in the present case.

16. On the other hand, the assessee's learned counsel, Shri Mehta, submitted that while it was true that the actual payments during the year were charged to the revenue account, the reserve for annuities and lump sum retirement benefits was created in the balance sheet. Reference was also made by him to the order of the Tribunal in the case of Caltex Oil Refining (India) Ltd. v. ITO [IT Appeal Nos. 3570 and 3182 (Bom.) of 1977-78] where a similar claim was allowed. He, therefore, vehemently argued before us that the claim of deduction of annuity and lump sum benefits to employees on actuarial basis was admissible and was rightly allowed by the Commissioner (Appeals).

17. We have carefully considered the rival submissions. At the outset it will be necessary to point out that one of the assessment years in the case of Caltex Oil Refining (India) Ltd., considered by the Tribunal in the order cited by the assessee's learned counsel, Shri Mehta, related to the assessment year 1971-72, which is not covered by section 40A(7), which was inserted by the Finance Act, 1975 with retrospective effect from 1-4-1973. The language of section 40A(7) clearly lays down that unless the conditions prescribed by clause (b) of section 40A(7) are fulfilled, no deduction shall be allowed in respect of any provision whether called as such or by any other name made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason. It is not under dispute that the conditions laid down by clause (b) of section 40A(7) have not been met in the present case. This means that the lump sum benefits paid to the employees on their retirement or on the termination of their employment, which is another name for gratuity, is hit by the provisions of section 40A(7). Coming to the payment of annuity, again to the employees on their retirement, the past practice has been, as mentioned by the learned departmental representative, Shri Srivastava, and not controverted before us by the assessee's learned counsel, Shri Mehta, to charge the actual payments from year to year on revenue account. When this method was followed year after year any change in this method for the years under appeal will only mean confusion because each year the income-tax authorities will have to see what are the payments charged to the revenue account, which have already been allowed in an earlier year on actuarial basis and, hence, cannot be allowed even though charged to the revenue account in the year concerned. This will be particularly so because as claimed by the learned departmental representative before us, no fund has been created for payment of pension or annuity. Besides, even the actuarial calculations, which form the basis of the claim of deduction of liability on actuarial basis, were not filed before the ITO but were filed for the first time before the Commissioner (Appeals). Considering all this and looking to the totality of the facts and circumstances, we are of the view that the annuity and lump sum benefits paid by the assessee-company to its employees are admissible only on actual payment basis as charged to revenue account and claimed and allowed in the earlier years. The Commissioner (Appeals), therefore, in our view, wrongly came to the conclusion that the liability on account of annuity and lump sum benefits should be allowed on actuarial basis instead of on the actual payment basis as was the method adopted by the assessee-company in the past. On this issue, therefore, the order of the Commissioner (Appeals) appears to be incorrect and is reversed. The ITO will, however, verify what was brought to our notice that the ground of appeal on this issue taken for the assessment year 1978-79 was a mistake for the assessment year 1976-77 for which an application for rectification was pending before the Commissioner (Appeals) and give effect to our order on this issue accordingly.

18. This brings us to the only remaining issue relating to the appeal for the assessment year 1975-76 against the direction of the Commissioner (Appeals) to allow the unabsorbed relief under section 80J of the Act in the case of Lube India Ltd. against the profits of the assessee-company which was the amalgamating company.

19. The learned departmental representative, Shri Srivastava, submitted to us that there was no provision in section 80J for unabsorbed deduction in the case of an amalgamating company being considered and allowed against the profit of the amalgamating company and, therefore, the direction of the Commissioner (Appeals) to this effect was against the provisions of law.

20. On the other hand, the assessee's learned counsel, Shri Mehta, referred to the Board's Circular Letter F.No.15/5/63-IT (A-I) dated 13-12-1963 (see Taxmann's Direct Taxes Circulars, Vol. 1, 1985 edn., p. 535) where the Board agreed with the view that the benefit of section 84 of the Act (corresponding to section 80J under consideration here) attaches to the undertaking and not to the owner thereof and, consequently, the successor will be entitled to the benefit for the unexpired period of five years provided the undertaking is taken over as a running concern. Shri Mehta on the authority of the decisions of the Hon'ble Supreme Court in the cases of Navnit Lal C. Javeri v. K.K. Sen, AAC [1965] 56 ITR 198 and Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913 submitted to us that the circulars issued by the Board are binding on the revenue authorities.

21. We have carefully considered the rival submissions. In view of the rulings of the Hon'ble Supreme Court cited by the assessee's learned counsel, Shri Mehta, there is lot of merit in his argument that the Board's circulars are binding on the revenue authorities. Viewed in this context, it is obvious that the benefit of section 84 (corresponding to section 80J) attaches to the undertaking and not to the owner thereof and, therefore, will be available to the successor provided the undertaking is taken over as a running concern. It is not under dispute that the business of Lube India Ltd. on amalgamation with the assessee-company was taken over by the assessee-company as a running concern. It follows, therefore, that the deduction under section 80J as admissible in the case of Lube India Ltd. will also be admissible to the assessee-company with whom Lube India Ltd. amalgamated as a running concern. The direction of the Commissioner (Appeals), therefore, to allow the unabsorbed deficiency under section 80J in the case of Lube India Ltd. against the profits of the assessee-company for the assessment year 1975-76, therefore, appears to be correct and is upheld.

22. The only ground that remains in the appeal relating to the assessment year 1977-78 is against the cancellation by the Commissioner (Appeals) of the interest charged under section 216 of the Act for underestimate of the first two instalments of advance tax payable. The learned departmental representative, Shri Srivastava, submitted that the assessee-company by underestimating the advance tax payable in the first two instalments had deferred the amount of advance tax rightly payable till the third instalment fell due and, therefore, the charge of interest under section 216 by the ITO was perfectly justified. It was, therefore, claimed that this interest under section 216 charged by the ITO was wrongly cancelled in appeal by the Commissioner (Appeals).

23. On the other hand, the assessee's learned counsel, Shri Mehta, referred to the affidavit of the Financial Controller (Corporate) of the assessee-company filed before the ITO wherein the basis of the estimate of income and, consequently, advance tax based thereon for the first two instalments due on 15-6-1976 and 15-9-1976 was the forecast for the year 1976 prepared in May 1976 forecasting a taxable income of Rs. 460 lakhs and in September 1976 forecasting a taxable income of Rs. 700 lakhs, which was based on various components constituting the business, objectives, targets and budgets prepared by the various segments of the business for the key result areas, the various controls exercised by the Government of India on prices and profits, the numerous directions issued by the Government from time to time and all the other relevant facts and circumstances. It was also pointed out by Shri Mehta that the assessee was a Government-owned company and, therefore, there could be no intention of the company to deliberately underestimate the estimate of income and the advance tax payable based thereon in the first two instalments. He, therefore, justified the order of the Commissioner (Appeals) on this issue.

24. We have carefully considered the rival submissions. It is not under dispute that the assessee-company is a wholly-owned Government company. There is, therefore, merit in the argument of the assessee's learned counsel, Shri Mehta, that there could be no deliberate intention on the part of the assessee-company to underestimate its income and advance tax payable based thereon in the first two instalments with any motive whatsoever. Considering this, the affidavit of the Financial Controller (Corporate) of the assessee-company filed before the ITO, which explains in detail how the estimates of income and advance tax based thereon filed for the instalments due on 15-6-1976 and 15-9-1976 were worked out and on the totality of the facts and circumstances, we have no hesitation in coming to the conclusion that the charge of interest under section 216 by the ITO was not justified and was rightly cancelled in appeal by the Commissioner (Appeals).

25. The next grievance relates only to the assessment year 1978-79 for which the previous year was 1-1-1977 to 31-3-1978, i.e., 15 months as permitted by the ITO. The grievance is against the direction of the Commissioner (Appeals) that the ceiling laid down under section 40A(5) should be at the rate of Rs. 5,000 for each month or part thereof comprised in the previous year and, therefore, out of the salary to the ex-employees only the excess over Rs. 75,000 and not Rs. 60,000 can be disallowed under section 40A(5). The learned departmental representative. Shri Srivastava, submitted to us that the provisions of section 40A(5) lay down a limit of Rs. 60,000 in the case of an ex-employee and, therefore, what could be allowed to an ex-employee could under no circumstance exceed Rs. 60,000.

26. On the other hand, the assessee's learned counsel, Shri Mehta, submitted that the ceiling is Rs. 5,000 for each month or part thereof comprised in the previous year. Proceeding further, he submitted that this was an unusual case where for this year the previous year under consideration was for a period of 15 months as permitted by the ITO and, therefore, the limit up to which salary could be allowed under section 40A(5) was Rs. 5,000 per month for each month or part thereof comprised in the previous year. It was also pointed out by him that a somewhat similar decision was also taken by the Special Bench of the Appellate Tribunal in the case of Kodak Ltd. He, therefore, vehemently argued before us that the direction of the Commissioner (Appeals) on this issue was correct and did not call for any interference.

27. We have carefully considered the rival submissions. Sub-clause (i) of clause (a) and sub-clause (i) of clause (c) of sub-section (5) of section 40A, so far as they are relevant to our purpose as they then stood, are as follows :

"(5)(a) Where the assessee---

(i) incurs any expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee, or

(i) in respect of the expenditure referred to in sub-clause (i) of clause (a), in the case of an employee, an amount calculated at the rate of five thousand rupees for each month or part thereof comprised in the period of his employment in India during the previous year, and in the case of a former employee, being an individual who ceases or ceased to be the employee of the assessee during the previous year or any earlier previous year, sixty thousand rupees:"

This clearly shows that two limits have been prescribed, one in the case of an employee where the limit is Rs. 5,000 for each month or part thereof comprised in the period of employment in India during the previous year and another in the case of an ex-employee for which the limit is Rs. 60,000 without any reference to the number of months for which the ex-employee was in employment. It follows, therefore, that in the case of an ex-employee the limit will be Rs. 60,000. The direction of the Commissioner (Appeals) on this issue, therefore, does not appear to be correct and is reversed.

28. We now deal with the grounds of appeal, which relate only to the assessment year 1979-80. The first ground is against the direction of the Commissioner (Appeals) in allowing the claim of deduction of Rs. 3,50,530 on account of provision for payment of pension. There is no mention of this issue in the assessment order. It, however, appears from the order of the Commissioner (Appeals) that there was a claim of deduction of Rs. 4,54,830 based on the certificate of an actuary on account of provision for payment of pension, etc., to the former employees of Caltex Oil Refining India Ltd., which had been amalgamated with the assessee-company. Here it will be necessary to point out that according to the certificate of the actuary, after taking into consideration the provisions allowed in the earlier year, the disallowance in this year should be limited to Rs. 1,04,300. The Commissioner (Appeals) held that there was no reason to disallow the clain in toto and the disallowance instead of Rs. 4,54,830 should be limited to only Rs. 1,04,300 being the amount certified by the actuary to have been allowed on provision basis in the earlier years. This meant that according to the order of the Commissioner (Appeals) there was a direction to the ITO to allow the balance of Rs. 3,50,530, which is objected to in this ground of appeal. The learned departmental representative, Shri Srivastava, submitted to us that his arguments on the issue of claim of deduction of annuity and lump sum benefits to the employees on actuarial basis, which were disallowed by the ITO but were allowed in appeal by the Commissioner (Appeals) will be equally applicable here. He further submitted that the system of accounting regularly employed should also be considered. On the other hand, the assessee's learned counsel, Shri Mehta, referred to his arguments on the claim of deduction of annuity and lump sum benefits to the employee on actuarial basis, which were disallowed by the ITO but were allowed in appeal by the Commissioner (Appeals) and the order of the Commissioner (Appeals) on this issue in support of his case.

29. We have carefully considered the rival submissions. It has not been shown to us that the claim of deduction of provision for payment of pension, etc., to the former employees of Caltex Oil Refining India Ltd., which had amalgamated with the assessee-company, based on the certificate of an actuary was made before the ITO. We have also dealt with the issue of the claim of deduction of annuity and lump sum benefits to the employees on actuarial basis instead of on actual payment basis in paragraphs 15 to 17 of our order and this will also be applicable to the claim of deduction of provision for pension to the former employees of Caltex Oil Refining India Ltd. Considering all this, the detailed discussion in paragraphs 15 to 17 of our order and the totality of facts and circumstances, we are of the view that the ITO was justified in disallowing the entire provision for payment of pension to the former employees of Caltex Oil Refining India Ltd., which had amalgamated with the assessee-company. The Commissioner (Appeals), therefore, in our view, was not justified in holding that out of the total provision of Rs. 4,54,830 only Rs. 1,04,300 should be disallowed and the balance of Rs. 3,50,530 should be allowed. On this issue, therefore, the order of the Commissioner (Appeals), in our view, appears to be incorrect and is reversed.

30. The next grievance again relating to the assessment year 1979-80 only is against the direction of the Commissioner (Appeals) that the expenses on sales and contests amounting to Rs. 1,57,393 should not be added to the expenditure on advertisements for the purpose of making the disallowance under section 37(3A). The learned departmental representative, Shri Srivastava, submitted to us that the details of the expenses on sales and contests amounting to Rs. 1,57,393 or even the break up of these expenses was not furnished either to the ITO or even to the Commissioner (Appeals) and, therefore, the exact nature of these expenses was not open to verification.

31. On the other hand, the assessee's learned counsel, Shri Mehta, pointed out to us that the assessee-company by letter dated 23-12-1981 had explained the break up of these expenses as dealer/customer programmes and dealer/consumer meetings and conferences, 50 per cent of the assistance towards cost of uniforms for service station attendants, training expenses for dealer/service salesmen and incentive/awards to dealer/service salesmen. It was also pointed out by him that out of these expenses Rs. 50,000 had been estimated by the ITO as expenses of the nature of hospitality and entertainment, which was not under dispute and it is only in respect of the balance amount of Rs. 1,07,393 that the issue of whether it can be added to the expenses on advertisements for the purpose of disallowance under section 37(3A) can arise. Adverting to the provisions of section 37(3A), Shri Mehta submitted that the expenses covered are advertisements, publicity and sales promotion in India and the expenses of the type as explained in the assessee-company's letter do not answer to any of these three heads.

32. We have carefully considered the rival submissions. As mentioned in the assessment order itself, out of the total expenses of Rs. 1,57,393 on sales and contests, Rs. 50,000 has been treated by the ITO as expenses of the nature of hospitality and entertainment, which is not under dispute. What remains, therefore, is only the balance of Rs. 1,07,393. Here it will be necessary to point out that the assessee is a Government company and the classification of these expenses was as mentioned in the assessment order itself as dealer/customer programmes, dealer/consumer meetings and conferences, 50 per cent of the assistance towards cost of uniforms for service station attendants, training expenses for dealer/service salesmen and incentive/awards to dealer/service salesmen. In a company of this magnitude with a turnover, which, during the previous year relevant to this assessment year was about Rs. 800 crores and disclosed income of more than Rs. 20 crores, it is unrealistic to expect details of every item comprising Rs. 1,57,393 on sales and contests. The classification of these expenses even according to the assessment order was given by the company by its letter dated 23-12-1981. It is further not under dispute that out of these expenses of Rs. 1,57,393, Rs. 50,000 were estimated by the ITO as expenses of the nature of hospitality and entertainment and there is no dispute on this issue. The balance that remains is only Rs. 1,07,393. There is nothing to suggest that the classification given by the assessee-company even after the estimate of Rs. 50,000 out of these expenses as representing the expenses of the nature of hospitality and entertainment, does not reflect the correct state of affairs. We are, therefore, of the view that the balance amount of Rs. 1,07,393 ought not to have been added to the expenses on advertisements for the purpose of working out the disallowance under section 37(3A). On this issue, therefore, the order of the Commissioner (Appeals) appears to be correct and does not call for any interference.

33. The next grievance again relating to the assessment year 1979-80 is against the direction of the Commissioner (Appeals) to delete the addition of Rs. 10,25,480 made by the ITO in respect of the stocks of Caltex Oil Refining India Ltd. taken over by the assessee-company on amalgamation of that company with the assessee-company. The method of valuation of the stocks taken over was according to the method of valuation of stocks employed by Caltex Oil Refining India Ltd., which, as already described, had amalgamated with the assessee-company, while the closing stock was valued according to the method of valuation adopted by the assessee-company for all its products including those products taken over from Caltex Oil Refining India Ltd. and remaining at the end of the year. Here it will be necessary to point out that even according to the letter of the assessee-company if there had been no change in the method of valuation of stocks of Caltex Oil Refining India Ltd. according to the method employed by Caltex Oil Refining India Ltd. at the time of take over and according to the method employed by the assessee-company at the end of the year and both the opening stock and closing stock were valued according to the method employed by the assessee-company, the opening stock, i.e., the stock of Caltex Oil Refining India Ltd. taken over would have been reduced in value by Rs. 10,25,480, which is the amount which has been added here.

34. The learned departmental representative, Shri Srivastava, submitted to us that it was by now well settled by a number of judicial pronouncements, e.g., of the Hon'ble Madras High Court in the case of CIT v. Sri Visweswardas Gokuldas [1946] 14 ITR 110 that the same method should be adopted for valuation of opening stock as the method adopted for the valuation of closing stock and it was not open to the assessee to value the opening stock by one method and the closing stock by another method. He, therefore, submitted that the addition of Rs. 10,25,480 resulting from the same method of valuation being applied to both the opening stock of products taken over from Caltex Oil Refining India Ltd. and the closing stock of those products at the end of the year made by the ITO was perfectly justified and was wrongly deleted in appeal by the Commissioner (Appeals).

35. On the other hand, the assessee's learned counsel, Shri Mehta, submitted to us that this was a peculiar case where Caltex Oil Refining India Ltd. merged in the assessee-company and, therefore, the goods and products of Caltex Oil Refining India Ltd. on its amalgamation with the assessee-company were taken over by the assessee-company at the value according to the books of Caltex Oil Refining India Ltd., while the closing stock was valued according to the assessee's method of accounting regularly employed year after year for all its products including the products taken over from Caltex Oil Refining India Ltd. and remaining at the end of the year. Amplifying his arguments, Shri Mehta submitted that the opening stock of the goods taken over from Caltex Oil Refining India Ltd. according to the value as shown in the books of Caltex Oil Refining India Ltd. was akin to the cost of acquisition of those goods on amalgamation of that company with the assessee-company. He, therefore, justified the direction of the Commissioner (Appeals) on this issue.

36. We have carefully considered the rival submissions. There can be no dispute on the principle that the assessee should value the opening stock of goods in the same manner as the stock at the end of the year. Viewed in this context, the stocks of goods of Caltex Oil Refining India Ltd. taken over by the assessee-company on amalgamation of that company with the assessee-company should have been valued in the same manner as was employed by the assessee for valuation of its other stocks and the closing stock year after year. If this was not done and on that account there was an understatement of income to the extent of Rs. 10,25,480, this addition made by the ITO was justified and was wrongly deleted in appeal by the Commissioner (Appeals). On this issue, therefore, the order of the Commissioner (Appeals) is reversed.

37. The last grievance in the appeal relating to the assessment year 1979-80 is against the allowance by the Commissioner (Appeals) of the claim of deduction of legal expenses amounting to Rs. 32,950 paid to Crawford Bailey & Co. in connection with legal formalities for amalgamation of Caltex Oil Refining India Ltd. with the assessee-company. The learned departmental representative, Shri Srivastava, submitted to us that these expenses were of the nature of capital and were, therefore, wrongly allowed as a deduction in working out the business income.

38. On the other hand, the assessee's learned counsel, Shri Mehta, submitted to us that this was not a case of voluntary merger of Caltex Oil Refining India Ltd. with the assessee-company but a merger under the Caltex Oil Refining India Ltd. and Hindustan Petroleum Corpn. Ltd. Amalgamation Order, 1978 issued pursuant to section 396(1) and (2) of the Companies Act, 1956. Reference was also made by him to two decisions of the Hon'ble Madras High Court in the cases of CIT v. Bush Boake Allen (India) Ltd. [1982] 135 ITR 306 and Madras Race Club v. CIT [1985] 151 ITR 675 wherein their Lordships laid down that the legal expenses incurred for amalgamation of another company with the assessee-company are allowable as a revenue expenditure in working out the business income.

39. We have carefully considered the rival submissions. Apart from the two decisions of the Hon'ble Madras High Court cited by the assessee's learned counsel, Shri Mehta, there is also an additional factor that this was a case of amalgamation by virtue of Caltex Oil Refining India Ltd. and Hindustan Petroleum Corpn. Ltd. Amalgamation Order, 1978 under section 396 by the Government. We have, therefore, no hesitation in coming to the conclusion that the claim of deduction of these expenses in working out the business income was admissible and was rightly allowed in appeal by the Commissioner (Appeals).

40. The appeals are partly allowed.

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