Vildirect: IncomeTax-caselaws-1989-VIL-77-ITAT-DEL

1989-VIL-77-ITAT-DEL

Equivalent Citation: TTJ 035, 559,

Income Tax Appellate Tribunal DELHI

Date: 29.09.1989

INSPECTING ASSISTANT COMMISSIONER.

NUCHEM PLASTICS LTD.

BENCH

Member(s) : V. P. ELHENCE., J. KATHURIA.

JUDGMENT

The Departmental appeal (3311/84), assessee’s appeal (2741/84) and the assessee’s Cross Objection (190/884) arise out of the CIT(A) order dt.19th March, 1984and relate to asst. yr. 1981-82.

ITA No. 3311/84

2. We shall first take up the Revenue’s appeal. The first ground is against the deletion of addition of Rs. 75,40,682. The IAC (Assessment) made an addition of Rs. 75,40,682 representing aggregate of differential excise duty of U.F./M.F. Moulding Powder at Rs. 40,18,816 and excise duty on synthetic resins Presscol Glues at Rs. 35,39,284. The addition was made primarily on the ground that similar addition has been made for the asst. yr. 1980-81. The CIT(A) deleted the addition for the reasons mentioned by him in his order for the asst. yr. 1980-81. It was conceded by the learned Departmental Representative that, for the asst. yrs. 1980-81, the Tribunal, vide its decision dt. 23rd May, 1988 in ITA No. 3310/Del/84 had decided this issue against the Revenue in view of the Supreme Court decision in the case of Kedarnath Jute Mfg. Co. vs. CIT (1971) 82 ITR 363 (SC). It was, however, pointed out that the assessee had received the refund of Rs. 40,18,816 on6th March, 1984and of Rs. 35,39,284 some time in August, 1987. It was submitted that, in view of the fact that the assessee had received the refund, it was for consideration whether this liability of Rs. 75,40,680 should be allowed in the year relevant to the asst. yr. 1981-82.

3. The learned counsel for the assessee denied the assessee’s having received any refunds as alleged by the Departmental Representative. It was further submitted that, even assuming, though not admitting that such refunds had been received by the assessee later on, the liability for the year under consideration was a real liability and had to be allowed as a deduction from the total income of the assessee. In case the Department came to know that the assessee had received the refund, then it could take action under the provisions of the IT Ac, which existed in plenty. The learned counsel also placed reliance on the decision of the jurisdictional High court (Punjab and Haryana High Court) in the case of Sirsa Industries vs. CIT reported in (1989) 178 ITR 437 (P&H).

4. We have carefully considered the rival submissions. The liability of Rs. 75,40,682 has to be allowed as deduction to the assessee as per the decision of the Supreme Court in the case of Kedarnath Jute Manufacturing Co. and ofPunjaband Haryana High Court in the case of Sirsa Industries. Wherever an assessee follows the mercantile system of accounting, deduction is to be allowed only in the year in which sales-tax or excise duty liability accrued and not in the accounting year in which the liability in finalised or the amount is actually paid. The decision of the Tribunal in the case of the assessee from the asst. yr. 1980-81 is also in favour of the assessee on this point. We, therefore, hold that the CIT(A) had rightly deleted the addition of Rs. 75,40,680.

5. As regard of the refund of the entire amount to the assessee, as alleged by the learned Departmental Representative, no details have been produced before us to show, whether the assessee had, in fact, received the whole or any amount as refund in subsequent years. Be that as it may, so far as the asst. yr. 1981-82 is concerned, the entire liability is allowable as a deduction and as and when the assessee receives the refund of the excise duty, etc., the Department may taken action as per the provisions of law.

6. This also disposes of ground No. 1 in the assessee’s Cross Objection, which merely supports the order of the CIT(A).

7. The next ground is against the reduction of Rs. 95,122 made under s. 40(c)/40A(5) by the CIT(A) out of the total disallowance of Rs. 1,15,122. It was pointed out by the learned Departmental Representative that a disallowance on similar grounds was made for the asst. yrs. 1980-81 by the AO and the Tribunal vide its order dt.23rd May, 1988directed the AO to reconsider the disallowance by applying the provisions of s. 40(c). It was, therefore, submitted that this matter may be set aside to the AO to be determined afresh.

8. The learned counsel for the assessee, however, submitted that the Punjab and Haryana High Court in the case of the assessee reported in CIT vs. Nuchem Plastics Ltd. (1989) 179 ITR 196 (P&H), has held that as the value of perquisite of free car provided to an employee should be taken at Rs. 150 per month as per r. 3(c)(ii) of the IT Rules, 1962 in the assessment of the employer company, the ceiling for disallowance under Rs. 40(c) of the It Act, 1961 should be worked out accordingly. It was submitted that, in the case of the Managing Director, the value of the perquisite in respect of car taken at Rs. 55,127 has not been worked out in accordance with the aforesaid decision of the jurisdictional High Court. It was also submitted that in respect of the Managing Director, 50 per cent telephone expenses were treated as personal, but in respect of other employees, full expenses have been disallowed with was not proper. It was pointed out in particular that, in the case of Shri G.S. Chadha, who was the sales manager of the company, payment in respect of telephone expenses was Rs. 34,028. The reason for such higher expenditure was that the Sales Manager was carrying on business of the assessee-company even from his residence. It was stated that he was not related to the Directors of the Company. It was submitted that no company would allow incurring of such a higher expenditure if it were not for business purposes. Reliance was also placed on the Board’s Circular F. No. 35/5/65-IT(AI) dt.1st July, 1965, appearing at pages 1430 and 1431 of the Income-tax Law, 3rd Edition Volume 2 by Chaturvedi and Pithisaria. It was further submitted that no disallowance in respect of telephone charges was justified and if at all some disallowance was necessary, it should be of a reasonable amount. As regards the disallowance on account of interest on concessional loans treated as perquisite in the hands of the employees as per the details available at page 247 of the assessee’s paper book, it was submitted that the IAC (Asst) has not taken the figures correctly and there was a factual discrepancy. Instead of taking the amounts which ought to be charged, the AO has taken the amounts as actually charged. it was submitted that the loans had been advanced at the rate of interest of 11 per cent per annum which was not a very concessional rate of interest. It was claimed that, in the case of Govt. Corporations, particularly the banks, the employees were getting loans at highly concessional rates of interest. Reliance was placed on the decision of the Andhra Pradesh High Court in the case of CIT vs. Vazir Sultan Tobacco Co Ltd. reported in (1988) 73 CTR (AP) 176 : (1988)173 ITR 290 (AP). It was submitted that, while setting aside the matter on this point to the AO, it should be made clear that he must taken into consideration the above submissions of the assessee before arriving at a correct disallowance to be made under s. 40(c)/40A(5) of the IT Act.

9. We have carefully considered the rival submissions. As decided by the Tribunal in the assessee’s own case for the asst. yr. 1980-81, the matter has got to go back to the AO because the same has not been processed properly by the lower authorities. We, however, direct the AO to take into consideration the submissions of the learned counsel for the assessee, which we have reproduced above in extenso before arriving at the correct amount of disallowance under s. 40(c)/40A(5) of the IT Act.

10. This also dispose of Ground No. 2 in the assessee’s Cross Objection, according to which the correct disallowance should be made at Rs. 8,873.

11. Ground No. 3 is against the CIT(A)’s action in directing the AO to allow reduction under s. 80G in respect of the expenditure of Rs. 10,000 (paid to Shri Jeevan Jagan Charitable Trust) and Rs. 5,000 (paid to Vaish Samaj,Faridabad). It was submitted by the learned Departmental Representative that the ITO has originally disallowed a sum of Rs. 47,453. It appears that the claim of the assessee had been accepted in respect of the other additions because the Department was agitating only about the two items of additions referred to above. On a similar point, the matter had been set aside by the Tribunal for the asst. yr. 1980-81. The learned Departmental Representative, therefore, submitted that, for this year also, the matter may go back to the AO for re-examination with reference to the receipts issued in favour of the assessee and the matter may be considered afresh.

12. The learned counsel for the assessee submitted that the IT authorities had accepted the claim of the assessee on all matters except the claim of Rs. 15,000 in respect of two donations referred to above. Our attention was drawn to page 259 of the assessee’s paper book on which is passed a copy of the assessment order for the asst. yr. 1981-82 in the case of Shri Jeevan Jagan Charitable Trust,Faridabad. It was submitted that the receipt of donation by the said trust has been accepted as genuine by the ITO and as such relief under s. 80G may be allowed in respect of the donation of Rs. 10,000 without verification.

13. We have carefully considered the submissions made before us. For the asst. yr. 1980-81, the matter was sent back to the AO for fresh examination. For the assessment year under consideration also, we send the matter back to the AO with the direction that he shall look into the relevant record including the assessment order in the case of Shri Jeevan Jagan Charitable Trust and the receipts issued by both the charitable institutions and then determine the claim of the assessee.

14. This also disposes of Ground No. 3 in the assessee’s Cross Objection.

15. The next ground is against allowing the expenditure of Rs. 13,000 under s. 80VV by the CIT(A) to the assessee. The assessee-company paid a sum of Rs. 24,000 to D.S. Talwar & Co. The IAC (Assessment) disallowed a sum of Rs. 18,000 before giving basic exemption of Rs. 5,000. The CIT(A) deleted the disallowance. It was submitted that a sum of Rs. 10,000 had been paid for consultation fee, another sum of Rs 10,000 was paid for preparation of returns and estimates, etc., and only a sum of Rs. 4,000 was paid in respect of proceedings before the IT authorities. In view of this break-up, we find that there is no ground for making any disallowance under s. 80VV and we, accordingly, uphold the order of the CIT(A) in this regard. It may also be mentioned that for the asst. yr. 1980-81 also, the Tribunal had accepted the claim of the assessee in this behalf.

16. This also dispose of Ground No. 4 in the assessee’s cross objection.

17. The next ground is against the allowance or relief of Rs. 2,082 by the CIT(A) on account of Sales Promotion Expenses.

18. The assessee-company spent a sum of Rs. 4,080 in respect of sales meeting held at Taj Mahal Hotel,Bombay. The entire expenditure was treated as expenditure in the nature of entertainment by the IAC (Assessment). The CIT(A) reduced the disallowance to Rs. 2,000 thereby granting relief of Rs. 2,082 to the assessee. While the Department has contested the deletion of Rs. 2,082 by the CIT(A), the assessee in Ground No. 7 of his appeal, has challenged the reduction of disallowance of Rs. 2,000. It was submitted by the learned Departmental Representative that the assessee had not submitted any details of these expenses except for producing a copy of the bill evidencing payment of Rs. 4,082. The learned counsel for the assessee, however, submitted that the employees of the assessee-company had also participated in the conference and the expenditure incurred on them would be allowable as business expenditure and could not be treated as expenditure in the nature of entertainment. Reliance in this regard was placed on the decision of the Tribunal, Delhi Bench ‘D’ in the case of Kelvinator of India Ltd. vs. IAC (1989) 34 TTJ (Del) 80 : (1989) 29 ITD 469 (Del). The learned counsel for the assessee also placed reliance on the Delhi High Court’s decision in the case of CIT vs. Supreme Motors (P) Ltd. (1984) 41 CTR (Del) 75 : (1984) 147 ITR 48 (Del).

19. We have carefully considered the rival submissions. In the case of Kelvinator of India Ltd. relied upon by the assessee’s counsel, the facts were that the entertainment expenses included the expenses on the employees who participated in business meetings and expenses in respect of refreshments served to the employees during office hours. On these facts, the Tribunal considered 25 per cent expenditure referable to the employees as reasonable. The entire expenditure in the present case is in respect of conference at Taj Mahal Hotel,Bombay. No details as to the number of employees present and the number of visitors who participated in the conference have been placed before us. The ITAT Benches atDelhihas been allowing expenses at the rate of 10 per cent as reasonable in this regard because that could be the expenditure in respect of the participation of the employees. In the absence of details we hold 10 per cent of the expenses, namely, Rs. 408 as allowable business expenditure on account of the employee participation. The balance of the expenditure shall be disallowed. It may be mentioned that the Delhi High Court decision in the case of Supreme Motors was for the asst. yr. 1972-73 when Expln. 2 to s. 37(2A) had not been inserted and that case, therefore, is distinguishable from the assessee’s case.

20. This disposes of Ground No. 7 of the assessee’s appeal also.

21. The next ground is against the allowance of relief of Rs. 8,965 by the CIT(A) out of a total disallowance of Rs. 11,965 being expenditure on Dinner sets. This ground is common with Ground No. 8 of the assessee’s appeal, in which the assessee has challenged the reduction of disallowance of Rs. 3,000 by the CIT(A). It was submitted by the learned Departmental Representative that before the IAC(Asst), the case of the assessee was that the expenditure of Rs. 11,965 represented the expenditure on Dinner Sets presented to the customers. Since each item was of more than Rs. 50, the claim was disallowable under r. 6B of the IT Rules 1962 and had been rightly disallowed by AO. The learned counsel for the assessee, no the other hand, submitted that the assessee was manufacturing raw material for the use of crockery units. For this purpose and with a view of promoting proliferation of such units, the assessee had given certain crockery items to the customers and the expenditure was, therefore, allowable in toto being business expenditure.

22. We have carefully considered the arguments of both the sides. The details of the expenses incurred are given in the body of the IAC (Assessment)’s order. The assessee had given the IAC (Asst) to understand that the expenditure of Rs. 11,965 was in respect of presentation of dinner sets. The AO found that the cost of each dinner set and purse was more than Rs. 50. He, accordingly, disallowed the entire amount. It was later on pleaded before the CIT(A) that the cost of single time of plate, cup, etc., was less than Rs. 50 and so the entire amount should be allowed as business expenditure. We asked the assessee’s counsel whether it would be possible for the assessee to give details of the customers to whom the goods were presented and the nature of goods presented. The learned counsel expressed his inability and submitted that it may not be possible to given any details to the Tribunal or to the assessing authority because the same would not be available to the assessee after such a lapse of time. In the absence of the details, it is not possible to appreciate what the assessee wants to convey. It does not look probable that the assessee would be presenting only a cup or plate to the customers while it was purchasing dinner sets and costly purses. Any item to be presented would normally consist of dinner sets or purse and not of parts of the dinner set. We, therefore, do not see any merit in the assessee’s contention and uphold the entire disallowance of Rs. 11,965.

23. This disposes of Ground No. 8 of the assessee’s appeal as well.

24. The last ground in the Revenue’s appeal is regarding the relief of Rs. 6,276 allowed by the CIT(A) out of total entertainment expenditure of Rs. 21,276. In the assessee’s appeal, the assessee has challenge the relation of disallowance of Rs. 15,000 vide Ground No. 6. The assessee has also supported the relief of Rs. 276 allowed by the CIT(A) in Ground No. 5 of its Cross Objection.

25. The learned Departmental Representative referred to para 7.3 of the order of the IAC(Asst) and submitted that a sum of Rs. 21,276 was in the nature of entertainment expenditure and had been rightly disallowed by the IAC (Asst). The learned counsel for the assessee relied upon the decision of the Delhi High Court in the case of Supreme Motors (P) Ltd. and submitted that, as against the sales of more than Rs. 9 crores, the sale promotion expenses amounting to Rs. 52,495 were reasonable.

26. We have carefully considered the rival submissions. The IAC (Asst) has disallowed specific expenses of Rs. 21,276 incurred for providing lunch, etc., to the customers. From the details, it appears that there were sale meetings also no which the presence of the assessee’s employees would have been inevitable. Some expenditure would, therefore, have been incurred in respect of the employees also. In the absence of details, we consider the expenditure of 10 per cent of the total as having been incurred in respect of the employees. As such, out of the claim of Rs. 21,276, we allow a sum of Rs. 2,128 as business expenses and the balance-sheet be treated as expenditure in the nature of entertainment expenses. It may be mentioned that the Delhi High Court decision was rendered before the insertion of Expln. 2 to s. 37(2A) and as such would not apply to the facts of the instant case.

ITA No. 2741 (Del) 84 (Assessee’s appeal)

27. The first ground in against the CIT(A)’s action in disallowing the claim of Rs. 72,475 under s. 35(1)(iv). The IAC (Asst) found that the assessee had purchased a car valued at Rs. 72,475. This was claimed as a deduction under s. 35 of the IT Act along with the other investments made in the Research and Development Units. The IAC (Asst) disallowed the claim on the ground that the assessee had not furnished any evidence in support of its contention that the car was purchased for R & D Unit and was utilised for research and development purchases. Even otherwise, the expenditure on the purchase of car, according to the IAC (Asst) cannot be termed as expenditure on scientific research. The CIT(A), on the basis of his order for the asst. yr. 1980-81 and looking to the reasons given by the IAC (Asst) upheld the disallowance.

28. The learned counsel for the assessee submitted that for the asst. yr. 1980-81, the assessee had purchased a motor car which was also being used by the Managing Director. On the other hand, in the year under consideration the assessee had purchased a Matador, which was exclusively used for carrying on research work. It was also pointed out that, for the asst. yr. 1980-81, a similar disallowance was made and the Tribunal, vide its order dt.23rd May, 1988allowed the assessee’s claim subject to verification of satisfaction of s. 35(1)(iv). It was submitted that, in the year under consideration, there were stronger reasons for allowing the assessee’s claim because the matador was used for scientific purpose.

29. The learned Departmental Representative relied upon the orders of the authorities below.

30. We have carefully considered the rival submissions. The assessee’s claim was accepted for the asst. yr. 1980-81 by the Tribunal. This year, the assessee’s claim rests on a stronger footing in the sense that, instead of a car, the assessee had purchased Matador and it is nobody’s case that this was being used by the Managing Director as well. We, therefore, allow the assessee’s claim of Rs. 72,475 subject to verification of satisfaction of s. 356 (1)(iv) of the IT Act.

31. The next ground is against the dismissal by CIT(A) of the assessee’s claim regarding contribution of Rs. 10,000, made to the building fund of PHD Chamber of Commerce and Industry.

32. The assessee contributed an amount to of Rs. 10,000 towards the construction of building of PHD Chamber of Commerce and Industry,New Delhi. The assessee claimed the expenditure under s. 37(1) of the IT Act. The ITO, however, disallowed the claim on the ground that it was for capital expenditure and could not be treated as revenue expense. The learned CIT(A) sustained the disallowance.

33. It was submitted before us by the learned counsel for the assessee that no asset was created in the hands of the assessee. It was argued that the assessee was having a lot of work through the Chamber of Commerce and Industries, which was working for the interests of its constituents. If the Chamber constructed the building of its own, then the assessee was to be benefited directly or indirectly because the meetings of the Chabmer could be held more efficiently and properly in its own building. It was further submitted that the whole building was to cost considerable sums of money amounting to more than Rs. 20 crores and the assessee’s contribution was a mere sum of Rs. 10,000. Reliance was also placed on the decision of the Supreme Court in the case of CIT vs. Associated Cement Companies Ltd. (1988) 70 CTR (SC) 28 : (1988) 172 ITR 257 (SC), of the Karnataka High Court in the case of Hindustan Machine Tools Ltd. vs. CIT (1988) 71 CTR (Karn) 166 : (1989) 175 ITR 221 (Karn) and of Allahabad High Court in the case of ITO vs. B. Hill & Co. (P) Ltd. (1982) 29 CTR (All) 301 : (1983) 142 ITR 185 (All). It was submitted that the expenditure was actuated by commercial expediency and was allowable as a deduction.

34. The learned Departmental Representative submitted that, in the casesrelied upon by the assessee, there was a close and direct nexus between the expenditure incurred and the benefit that accrued. in the instant case, there is no such nexus. At best, the contribution made could be treated as donation to the Chamber of Commerce and Industry, but could not be allowed as a deduction under s. 37(1).

35. We have carefully considered the rival submissions. We find considerable merit in the arguments of the learned counsel for the assessee. The total expenditure incurred on the building of the Chamber of Commerce and Industries was a staggering amount of more than Rs. 20 crores and the assessee’s contribution was only a sum of Rs. 10,000. The assessee’s contribution did not create any asset for itself. The assessee indisputably was having dealings with the Chamber of Commerce and Industry and the construction of a building would have facilitated the conduct of such activities. In that way, the assessee was to benefit from this contribution and there would, therefore, be a nexus between he expenditure incurred and the benefit that may accrue to the assessee-company. Having regard to the totality of circumstances and the case-law cited, we allow the claim of the assessee in this regard.

36. The next ground is against the disallowance of claim of Rs. 1,000 in respect of payment to Faridabad Industries Association and of Rs. 151 to United Bank of India Employees Association under s. 37.

37. It was submitted by the learned counsel for the assessee that the payments of the above amounts did not result in the creation of any asset to the assessee. These payments were made out of business expediency and deserved to be allowed in toto. The learned Departmental Representative submitted that there was no direct nexus between the expenditure and the benefit that accrued to the assessee.

38. For the reasons mentioned by us while dealing with the contribution of Rs. 10,000 to PHD Chamber of Commerce and Industry we regard these payments of Rs. 1,000 and Rs. 151 as allowable under s. 37(1). We hold accordingly.

39. The next ground is against the sustaining of addition of Rs. 6,60,949 being interest on FDRs. The IAC (Assessment) found from the balance-sheet of the assessee that interest of Rs. 4,39,478 had accrued on FDRs pledged to the bankers for guarantee given to the Excise Department for excise duty liability. Similarly, it was found that another amount of Rs. 2,21,471 was received by the assessee as interest on the Fixed Deposits pledged to the bankers for guarantee given to the excise Deptt. for the payment of excise duty. Both these amounts were not offered for assessment by the assessee. The plea taken by the assessee was that the ownership even in respect of the principal amount was in dispute and hence there was no question of assessing interest on such a principal amount in the hands of the assessee. The IAC (Assessment) made the addition of Rs. 6,60,949 and his action was upheld by the CIT(A). It was further mentioned by the CIT(A) that, for the asst. yr. 1980-81, similarly addition had been upheld.

40. We find that, on identical grounds, the assessee’s appeal for the asst. yr. 1980-81 was dismissed on this point vide Tribunal’s order dt.23rd May, 1988. The FDRs are in the name of the assessee-company. Respectfully following the order of the Tribunal in the assessee’s own case for the asst. yr. 1980-81, with which we agree, we uphold the addition of Rs. 6,60,949.

41. The next ground is against the CIT(A)’s action in sustaining the addition of Rs. 10,000 out of Rs. 16,248, made under the head "Repair and Replacement". While scrutinizing the case of the assessee, the IAC(Asst) notified that the assessee had incurred expenses of Rs. 4,815 on the purchase of exhaust fan and electric motor in the Chemical Division. Similarly, a sum of Rs. 11,433 was spent by the assessee on the purchase of 4 electric motors in the engineering division. The IAC (Asst) regarded the expenditure on these items capital in nature and made an addition of Rs. 16,238. This was restricted to Rs. 10,000 by the CIT(A) who granted a relief of Rs. 6,248.

42. The learned counsel for the assessee submitted that these expenses were in respect of replacement of exhaust fans and electric motors which were replaceable items and no asset of capital nature had, in fact, come into existence. Reliance was placed in this regard o the decision of Gujarat High Court in the case of Addl. CIT vs. Desai Bros. reported in (1977) 108 ITR 14 (Guj), in which the replacement of a petrol engine by a diesel engine was held to be an item of revenue nature. It was submitted that the expenditure in question constituted replacement of small obsolete times of machinery on account of wear and tear and the replacement could be termed as current repairs. The learned Departmental Representative relied upon the orders of the authorities below.

43, We have carefully considered the rival submissions. We find substantial merit in the submissions of the learned counsel for the assessee. The learned CIT(A) has restricted the disallowance to Rs. 10,000 on ad hoc basis without appreciating the nature of replacements made. We are satisfied that the expenditure in question was in respect of replacement of worn out and obsolete items and was allowable as current repairs in the hands of the assessee. We, therefore, delete the disallowance of Rs. 10,000.

44. Ground Nos. 6, 7 and 8 have already been delay with by us while dealing with the Revenue’s appeal.

45. Ground No. 9 is in respect of disallowance of Rs. 300 paid to Shri Ram Institute for Industrial Research. The IAC(Asst) made the disallowance with the remarks "payment of Shri Ram Institute is surrendered by the assessee". The CIT(A) confirmed the disallowance.

46. The learned counsel for the assessee has not been able to produce any evidence before us to show that the amount in question was not surrendered before the IAC (Asst). He has also not been able to show that any specific ground was taken before the CIT(A) against the IAC (Assessment’s) remark that the assessee had surrendered the amount. In view of the fact that the assessee had itself surrendered this amount before the IAC (Assessment), we decline to interfere. The disallowance is confirmed.

47. The next ground is against the disallowance of claim of Rs. 5,000 paid as penalty under s. 221(1).

48. The learned counsel for the assessee submitted that the matter may be decided by the Tribunal judicially. The learned Departmental Representative submitted that penalty represented infringement of law and even if it was considered as part of tax, it will not be allowable as a deduction.

49. We have carefully considered the submissions made on both the sides. Penalty under s. 221 is levied for infringement of law and cannot, therefore, be treated as a business expenditure. Various High Courts have held that even interest under s. 220(2) cannot be allowed as a deduction. These decisions are reported in Arun Mills Ltd. vs. CIT (1957) 31 ITR 153 (Bom), Balmer Lawrie and Co. Ltd. vs. CIT (1960) 39 ITR 751 (Cal), CIT vs. Oriental Carpet Manufactures (India) P. Ltd. (1973) 90 ITR 373 (P&H) (which is the jurisdictional High Court), CIT vs. International Instruments (P) Ltd. (1984) 39 CTR (Kar) 182 : (1983) 144 ITR 936 (Kar) and CIT vs. Ghatkopar Estate and Finance Corpn. (P) Ltd. (1989) 75 CTR (Bom) 124 : (1989) 177 ITR 222 (Bom) : (1989) 42 Taxman 179 (Bom). When interest under s. 220(2) is not allowable as business expenditure, the question of allowing penalty under s. 221 as business expenditure just does not arise.

50. The last ground is regarding the claim of deduction under s. 80G. No. arguments were addressed on this point and so this ground is treated as dismissed.

51. Both the appeals are partly allowed.

52. The Cross objection may be treated as partly allowed for statistical purposes.

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