1992-VIL-167-ITAT-JAI
Equivalent Citation: ITD 043, 292,
Income Tax Appellate Tribunal JAIPUR
Date: 12.02.1992
MANGALAM CEMENT LIMITED.
Vs
DEPUTY COMMISSIONER OF INCOME-TAX.
BENCH
Member(s) : V. P. ELHENCE., J. K. VERMA.
JUDGMENT
Per Shri V.P. Elhence, J.M. ---- The assessee is aggrieved of the order dated 30-11-1989 of the learned Commissioner of Income-tax (Appeals), Rajasthan-II, Jaipur for the assessment year 1986-87.
2. The assessee is a limited company which derives its income from the manufacture and sale of cement (both levy and non-levy cement). Some of the non-levy cement is sold from the site of the works and the remaining through handling agents/depots in several major centres of North and West India. The sale of levy cement is, however, controlled by the Government. In the assessment year in question, the assessee declared to have produced 3,43,781.52 MT of cement (1,31,344 MT being sold under levy and balance of 2,12,437 MT as non-levy). Out of the non-levy sales, 29,301.15 MT was sold directly from the works and the balance of 1,83,135 MT was sold through agents/depots. The assessment order gives the figures in the form of a chart. The Assessing Officer observed that the agents had sold an excess amount of 8,320 MT whose receipt was not recorded or accounted for. The Assessing Officer observed that though the sales had been suppressed, the expenditure incurred thereon was not suppressed. He took the view that there was unaccounted for production and sales. He observed that in the accounting years 1985 to 1987 the yield of clinker from raw meal was fixed, namely, for every 1.57 MT of raw meal, 1 MT of clinker was produced. The consumption of coal was 18 per cent to 23 per cent per MT of clinker. The Assessing Officer purported to undertake a stagewise scrutiny of the production records from which he inferred that the figures of production of the crushing machine (lime stone is crushed to an optimum size for 'raw meal') did not tally with the stock records of lime stone --- the quantity of stone crushed in the machine was not the same as the crushed lime stone received in the stocks, but was excessive. The assessee-company had prepared a chart to this effect which was filed before the Assessing Officer. The Assessing Officer found that the quantity of stone crushed as per the crusher production register was 4,69,156 MT whereas the quantity of crushed lime stone received in the books was 4,52,838 MT giving at difference of 16,318 MT of lime stone. The explanation of the assessee was that the crushing was only a process ; that the overall quantity of material purchased/produced remained the same ; the weights given in the records were by estimate as the stock could not be physically weighed at the end of each stage and that the difference was due to re-crushing of over-size lime stone and hardened china-clay. However, this explanation was considered by the Assessing Officer to be vague, non-specific and general. He drew the inference that the difference in the quantity of crushed lime stone was utilised for production out of the books. He, therefore, inferred that the books of account of the assessee were incorrect and unreliable and, therefore, the provisions of section 145(2) were applied. He rejected the production records accordingly. He estimated the undisclosed sales at 28,320 MT (8,320 MT + 20,000 MT between two/three dealers). Finding that cement had been sold by the assessee @ Rs. 430.917 per MT, he made the trading addition of Rs. 1,22,04,569.44.
3. Before the learned CIT (Appeals) it was submitted on behalf of the assessee that the Assessing Officer had considered the sale of 20,627.09 MT of cement twice i.e., once in the name of Kota office and another time in the name of factory Works and that in fact the sale of 29,302.15 MT shown under the head " Works " included the sale of 20,627.08 MT under the, head " Kota Office ". It was also explained that out of the undisclosed sales taken at 28,320 MT the quantity to the extent of 20,627.08 MT therefore got explained as above. Next it was pointed out that the Assessing Officer had taken the figure of 20,000 MT in the Assessment order in round figure as against the figure of 20,627.08 MT. Regarding the figure of 8,320 MT taken in the assessment order and included in 28,320 MT, it was said that this production was worked out having regard to the excess quantity of lime stone found recorded in the Stock Register but that in fact there was no difference and that the figure had been wrongly worked out because the Assessing Officer adopted the weight of the lime stone crushed at 4,69,156 MT wrongly (it being the combined figure for lime stone, china-clay and high grade lime i.e., 3,95,037 MT, 11,965 MT and 62,153 MT respectively). The weight of the lime stone after crushing process was said to be 4,52,835 MT including high grade lime stone at 62,153 MT and, therefore, the actual weight of crushed Morak lime stone came to 3,90,685 MT and the excess crushing as per the Stock Register came to 4,352 MT only and not 16,318 MT taken in the assessment order. It was also said that the excess weight had been recorded because sometimes during the crushing process over-size pieces are thrown out of the jaws of the crusher which were to be again put into the crusher and crushing done again. It was also said that the process being continuous over weight could not be recorded. The assessee's counsel was asked to give the working of the suppression of production on the above basis and the following figures were submitted by him as also appearing from page 2 of the assessee's first paper Book :----
" Qty. consumed Amount
(Tons) (Rs.)
Lime stone 4352.00 2,23,736
Laterite 19.58 1,393
Iron Ore 50.48 9,531
-------------- ----------
Raw mix 4422.06
Coal 609.72 2,79,355
--------------
Clinker produced 2816.61
Gypsum 165.81 25,459
China Clay 339.46 44,521
Brick bats 6.96 566
-------------- ----------------
3328.84 5,84,561
Other expenses 8,49,859
-----------------
14,34,420
(Rate 430.917) "
The learned Commissioner had associated the then DC (Asstt.) who conceded on 9-11-1989 that in fact his predecessor had wrongly considered the sale of 20,627.08 MT twice. Regarding the working given on behalf of the assessee and as extracted above, the learned DC (Asstt.) had nothing to say. The findings of the learned CIT (Appeals) were the following :
(1) The sale of cement to the extent of 20,627.08 MT had been considered twice and, therefore, the addition to the extent of Rs. 86,18,340 was erroneous.
(2) The suppressed production of cement worked out at 8,320 MT was wrong. It was in fact 4,352 MT (excess lime stone crushed).
(3) There was suppression of cement production having regard to the excess lime stone crushed and the contention that it was on account of recrushing of over-size lime stone pieces was to be rejected. The actual crushed lime utilised for cement production was 3,95,037 MT as against the figure of 3,90,685 MT (3,90,685 + 4,352 MT).
(4) Excess production was 3,328.84 MT and its selling value came to Rs. 33,99,145 rounded to Rs. 35 lakhs taking into account the possibility of a little more production and taking into account marginal errors.
(5) No adjustment was to be given for cost of material, manufacturing expenses, excise duty, contribution to CRA, packing expenses, selling and distribution expenses. The trading addition was, therefore, reduced by Rs. 86,04,569. The learned CIT (Appeals) held that in this case there being a reasonable cause for some extra production not being-recorded, such record being incomplete and incorrect, the provisions of section 145(2) applied and, therefore, the declared trading results were bound to be rejected.
4. We have considered the rival submissions. Firstly no specific defects were pointed out in the records maintained by the assessee either by the Assessing Officer or by the learned CIT (Appeals). In this connection it also requires to be noticed that there is excise control on the manufacture and that the assessee pays Sales-tax and also royalty. The assessment order is not categoric on the question of suppression of production. Another factor which requires to be noticed is that the Assessing Officer said that " the assessee-company apparently forgot to suppress the expenditure incurred on those sales ". The process of manufacture or production of cement is a closed process. The Assessing Authority was not able to controvert the fact that the overall quantity of material purchased/produced by the assessee-company had remained the same and that the weights given in the records were by estimate as the stocks could not be physically weighed at the end of each stage. It was also not controverted that re-crushing was done of over-size lime-stone and hardened china-clay.
In fact, this appears to be the main basis for the addition, ultimately sustained by the learned CIT (Appeals). Before us it was pointed out on behalf of the assessee that in November 1986 the assessee had installed a tertiary crusher which was in the nature of a third degree crusher in order to ward off excess crushing figure. It was explained that it has a sieve which only lets the proper sized pieces to pass on for further process. The optimum size was said to be 25 mm. Sri D.P. Maloo, the whole-time Managing Director of the assessee had explained before us the entire process. There is also nothing said by the Income-tax Authorities that the proportion of the user of other raw materials was excessive. In the closed system of manufacture, no intermediary product could be taken out and all weighment was external. The crusher operation included re-crushing of the material if the size of the lime stone pieces was more than 25 mm. The high grade lime purchased by the assessee from outside and the purchase bills were there. The stock entries of all receipts were available and so was the record of consumption. The only difference was between the crushed and un-crushed material. In case crushed material was in excess, the un-crushed material had to be short as the total was to remain the same. The total record of the material in the opening stock, receipt and consumption has tallied. This would prima facie suggest that whatever material was purchased, had been utilised for the production of cement. The working done on behalf of the assessee was on a hypothetical basis and it cannot be said that the assessee had thereby admitted the suppression of any production. In fact the calculation of 1,91,455.23 MT have been arrived by the Assessing Officer on the basis of commission paid and not as per the commission due. As already mentioned above, cement is an excisable item for which total records were maintained by the assessee and the quantities were verifiable. The assessee has given the dates when the various excise registers were checked by the Excise Department. The assessee had explained the cement processing by means of a " map " i.e., chart before the learned CIT (Appeals). There were a number of points where it was checked by Weigh Metres and Volume. The assessee uses lime stone, high grade lime stone, laterite, coal, china-clay & gypsum for manufacturing cement. They are not weighed but measured on estimate for the purposes of consumption and production, the estimate being ascertained by volume in the carrying equipment like trolley, hopper and trolley on the crane, dumpers, tippers, etc. There was no reduction in the total weighment of the material i.e., although the position of raw lime and crushed lime may be different but the total remains the same. The item processed does not move out of the assessee's factory but is utilised in the next process. There is, therefore, only a Processing Register and not a Production Register. We were shown a specimen of the production Report, Bale Passing Register, Stock Register and other records of which the specimens were given in the assessee's paper books. The assessee's manufacture/production is in operation since 1981 and it has not been shown that any addition had been made earlier. This is relevant because nothing specific has been detected in the assessment year in question to make the addition and the excess crushing figure of 4353 M.T. stands duly explained due to the over-size lime stone pieces. Therefore, though the figure of addition was reduced by the learned CIT (Appeals), there was no basis for making the addition because there was no evidence of any suppressed sale or suppressed production. The addition sustained on the basis of mere suspicion can, therefore, not be upheld as there is no basis. We also find that it is only on account of the excess crushing that the correctness and regularity of the records maintained by the assessee was doubted and the provisions of section 145(2) applied and upheld. Having regard to the entirety of the facts and material on record as also to the actual working and the processing of the manufacture of cement, we are of the view that there was no warrant or justification for resorting to the provisions of section 145(2) or for taking that there was any suppression of sales or production. The reference in the order of the learned CIT (Appeals) to the possibility of a little more production on the possibility of marginal error is also not justified. In case the suppressed production figure as arrived at by the learned CIT (Appeals) was to be considered, we were told that it would be enough to fill 435 trucks. There had to be lot of evidence at each stage for taking out such a quantity of so-called suppressed production leaving aside various other incongruities which remain absolutely unexplained. Therefore, we are of the view that no addition whatsoever is warranted on facts.
5. The next ground relates to the disallowance of Rs. 2,78,896 (Rs. 1,52,829 + Rs. 1,26,067) against expenditure of Rs. 2,29,171 by treating the same as entertainment expenses. The details of the amount of Rs. 2,78,896.58 are as follows :
(i) Debited as sales promotion expenses and as shown in the Tax Audit Report (Cotton sarees, Wall clocks and suit lengths). Rs. 49,385
(ii) Other presentation articles under the head
" Charges General Account " (claimed to be not in the nature of advertisement) Rs. 2,18,959.98
(iii) Presentations other than articles debited in the Charges General Account. Rs. 10,551.60
---------------------------
Total : Rs. 2,78,896.58
---------------------------
The Assessing Officer observed that vide clause 4(iv) of the Tax Audit Report in Form No. 3CD, it had been stated that out of a total expenditure of Rs. 49,385 on articles presented, an amount of Rs. 32,885 was to be disallowed being the excess over Rs. 50 as per rule 6B of the IT Rules, 1962. Keeping that ratio in mind the Assessing Officer estimated the disallowance out of the amount of Rs. 2,29,511.58 at Rs. 1, 19,945. Thus he made a total disallowance of Rs. 1,52,829.56 (Rs. 1,19,945 + Rs. 32,885).
6. When the matter went up in appeal before the learned CIT (Appeals), he imagined that the amount of Rs. 32,885 had been offered for disallowance by the assessee and, therefore, he considered the amount of Rs. 1,19,945. So far as the amount of Rs. 1,19,945 is concerned, the expenditure had been incurred on the presentation of articles like, suit lengths, flask, tea set, lemon set, " til patti ", sweets to customers of business which were not covered under rule 6B because they were not in the nature of advertisement but had been incurred on the gifts for attracting new customers. The assessee had relied before the learned CIT (Appeals) on the Special Bench decision of the Bombay Bench 'B' in the case of First ITO v. French Dyes & Chemicals (I) (P.) Ltd. [ 1984] 10 ITD 240 (SB). However, the learned CIT (Appeals) did not accept that submission. The learned CIT (Appeals) had in fact given a notice dated 11-10-1989 to the assessee to show cause why the entire amount of Rs. 2,78,896.58 in respect of presentation items be not disallowed fully in terms of section 37(2A) treating it as an expenditure in the nature of entertainment observing that it was a clear case of extending hospitality to customers and in fact was a better hospitality than providing a cup of tea, coffee, or a meal. He, therefore, disallowed the entire amount of Rs. 2,78,986. It thus resulted in an additional disallowance of Rs. 1,26,067 (Rs. 2,78,896 ---1,52,829). He also held that the disallowance of Rs. 1,58,829 made by the Assessing Officer was justified under rule 6B as the presentations were made by the assessee with a view to advertise or publicise its name and business activities to other potential customers through the recipients of these articles.
7. Before us, on behalf of the assessee reliance was placed on the following decisions :
(i) CIT v. Patel Bros. & Co. Ltd. [1977] 106 ITR 424 (Guj.)
(ii) Mysodet (P.) Ltd. v. CIT [1987] 163 ITR 848 (Kar.)
(iii) CIT v. Indian Aluminium Cables Ltd. [1989] 47 Taxman 64 (Delhi).
Shri Vaish, learned counsel for the assessee dwelt at length on the meaning of the expressions " entertainment ", " hospitality " and " entertainment expenditure ". He also pointed out the question of attracting rule 6B of IT Rules, 1962 did not arise as the presentation articles did not amount to any advertisement or publicity. He categorically stated that the articles presented did not carry any " emblem ", " logo ", " mark ", " name " or " sign " of the assessee so as to operate as advertisement or publicity. He submitted that the expenditure was fully allowable under section 37 as an expenditure laid out or expended wholly and exclusively for the purposes of the business of the assessee and which did not amount to either entertainment expenditure or expenditure relating to advertisement, publicity or sales promotion in terms of section 37(3A) as operative before its omission by the Finance Act, 1985 with effect from 1-4-1986. On the other hand Shri S.K. Kundra, the learned Departmental Representative strongly supported the order of the learned CIT (Appeals). He also submitted that the expenditure in question squarely fell within the expression " entertainment expenditure " which had been defined under Explanation 2 to section 37(2A) as including expenditure on the provision of hospitality of every kind by the assessee to any person whether by way of provision of food or beverages or in any other manner whatsoever and whether or not such provision was made by reason of any express or implied contract or custom or usage of trade. He also pointed out that the only exclusion provided under the Explanation was the expenditure on food or beverages provided by an assessee to his employees in office, factory or other place of their work, which was not the case here. He submitted that the purposes of the gift items was important and not the motive. Reliance was placed by him on the following decisions :---
(i) Odhams Press Ltd. v. Cook [1941] 9 ITR (Suppl.) 92 (HL).
(ii) IRC v. Korner [1969] 74 ITR 584 (HL).
(iii) Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261 at 273 (SC).
(iv) CIT v. Raj Bros. [1988] 171 ITR 249 (AP).
Shri Kundra submitted that the gifts in question amounted to entertainment i.e., they fell under the expression " hospitality of every kind by the assessee to any person ".
8. We have carefully considered the rival submissions as also the decisions referred to above. As we have already seen, the gifted articles for which the expenditure aggregates to Rs. 49,385 consisted of 25 cotton sarees, 55 wall clocks, 250 suit lengths. The details appear at page 25 of the assessees Paper Book.
8.1 So far as the items aggregating to Rs. 10,551.60 are concerned, they consisted of gift cheques of various amounts aggregating to Rs. 9,208 as per the details appearing at page 29 of the assessee's paper book. They were given as marriage gifts to persons connected with the assessee. These are, therefore, of a type different from presentation articles. There was an amount of Rs. 1,343.60 also included in the amount of Rs. 10,551.60 which is mentioned as " tips to waiters, room boys, peons, watchman etc. In our view, so far as the gift cheques and tips etc. are concerned, they could not be disallowed in terms of section 37 and could well be regarded as expenditure incurred in order to stir or maintain goodwill of the assessee. They would, therefore, qualify under the expression " laid out or expended wholly or exclusively for the purpose of business " in terms of section 37(1) since they would be neither advertisement, publicity or sales promotion nor in the nature of " entertainment expenditure ".
8.2 So far as the amount of Rs. 2,18,959.98 is concerned, it is the aggregate of expenditure regarding articles presented. Their details appear at pages 26 to 28 of the assessee's Paper Book. A perusal thereof shows that the items mentioned there are suit lengths, diaries, cards, brass items, wooden coasters, books, shawl, sarees, executive bag, photo frames, furnishing, quilts (silk as well as cotton), pillows, bed cover and bed sheets, wooden frame, pottery item, toys, water filters, statue, flowers, silk tie, garlands, agarbatti stand, casserole, dinner set, glass set, crockery set, paintings, pant piece, pen set, shirt piece, lemon set, tea set, flask and miscellaneous gift items.
8.3 Here we would like to mention that Sl. Nos. 102 to 120 pertain to fruits, sweets, " til patti " packets etc. which aggregate to Rs. 4,756.28. Having regard to the definition of " entertainment expenditure " under Explanation 2 to section 37(2A) and since there is no evidence to show that expenditure on these items of fruits, sweets etc. were made by the assessee to his employees in office, factory or other place of their work, they would be very much includible as " entertainment expenditure ". The allowance of such expenditure will have to be dealt with by the Assessing Officer in terms of section 37(2A) accordingly and disallowance made if the total entertainment expenditure exceeds the statutorily allowable limits.
8.4 Therefore, the important question which requires to be examined relates to the presentation articles to which reference has been made by us above. Here one point which we would like to deal with first is clause 4(iv) of the Tax Audit Report referred to in para 7 of the assessment order. The disallowance was sought to be made by the Assessing Officer under rule 6B which deals with expenditure on advertisement. He purported to proceed on the basis that the disallowance was to be made in respect of articles intended for presentation having a value of more than Rs. 50 (the value has been raised to Rs. 200 by the Income-tax 10th Amendment Rules, 1990). The Assessing Officer had also purported to make a total disallowance of Rs. 1,52,229.56 extending the application of rule 6B to other items also, The expression " advertisement " has not been defined in the Act or the Rules. However, there is absolutely no material on the record to show that any of these articles were meant for advertisement or publicity of the assessee's business. We have already noticed the contention raised on behalf of the assessee that none of the articles had the assessee's " emblem ", " logo ", " mark ", " name " or " sign " on them. It is also not possible to find any material on the basis of which it could be said that any amount of Rs. 32,885 had been offered by the assessee voluntarily for disallowance under rule 6B as per the Tax Audit Report. Therefore, we are of the clear view that no disallowance could be made by treating these articles of presentation as or by way of advertisement.
8.5 Generally speaking, gifts or presentations (other than food or beverages) could be given to any of the following :---
(i) Employees
(ii) Customers (existing or prospective)
(iii) Persons in position.
So far as presentation to employees are concerned, the purposes may be to keep them satisfied or to maintain trade or industrial relations. Such presentation may also be made on festive or other particular occasions relating to the employees, like, birthdays, anniversaries, marriages etc. The expenditure on such presentations would definitely fall under section 37(1). So far as gifts or presentations to customers (existing or prospective) are concerned, the gifts could be by way of advertisement or publicity or they could be in order to create or foster goodwill for the assessee in which sense it would be expedient in the interest of the assessee in business. The gifts or presentations made to the Third category i.e., to the persons in position may be in order to ensure smoothness and with a view to facilitate the day to day dealings. Such expenditure would also be expedient in the interest of the business.
8.6 The next point which requires to be examined is whether the expenditure on gifts or presentation which are not made to employees and which are not by way of advertisement or publicity can still be included in the expression " entertainment expenditure ". Here it is interesting to note that in Patel Bros. & Co. Ltd.'s case Gujarat High Court had observed [prior to the insertion of the definition of Entertainment Expenditure vide Explanation 2 to section 37(2A)] that the terms " Entertainment " or " Entertainment Expenses " were not defined in the Act and that the term " Entertainment " was of a very wide import. Now that the term " Entertainment Expenditure " has been defined to include expenditure on the provision of hospitality of every kind by the assessee to any person whether by way of provision of food or beverages or in any other manner whatsoever. It is necessary to see whether the presentation of gifts as aforesaid could be said to amount to hospitality. In the decision of Gujarat High Court in Patel Bros. & Co. Ltd.'s case at page 438 reference is made to Finance Act, 1965 passed by the British Parliament wherein sub-section (8) had been added to section 15 of the Finance Act, 1965 to apply it to the provision of all gifts (other than inexpensive gifts incorporating an advertisement) not being gifts of food, drink, tobacco or a token or voucher exchangeable for goods. In the definition of " Entertainment Expenditure " under Explanation 2 to section 37(2A) no reference is made to gifts though the definition includes provision of food or beverages or in any other manner whatsoever. That is why the important question to be examined is whether the presentation of gifts can be said to amount to hospitality of every kind given by the assessee to any person in any manner whatsoever. This brings us to the question as to what is meant by hospitality. This term has not been defined under the Act. Fortunately for us, the following definitions have been mentioned in the aforesaid decision of the Gujarat High Court in the case of Patel Bros. & Co. Ltd. :---
Hospitable --- " Receiving and entertaining strangers with kindness and without reward ; kind to strangers and guests ; pertaining to the liberal entertainment of guests " (page 433).
(As per New Webster Encyclopaedic Dictionary of the English Language, at page 410).
Hospitality --- Webster's New (i)" ....... the act, practice or quality of
Twentieth Century Dictionary, page receiving and entertaining strangers
879. or guests in a friendly and generous
way ". (pp. 432)
New Webster Encyclopaedic (ii) "...... the kind and generous
Dictionary of the English Language reception of strangers or guests ;
page 410. hospitable treatment or disposition ".
(pp. 433)
Random House Dictionary of the (iii) " 1. the friendly reception and English Language (College Edition), treatment of guests or strangers
Page 640. 2. the quality or disposition of receiving and treating guests and strangers in a warm, friendly, generous way ". (pp. 433)
Oxford English Dictionary Volume (iv) " 1. The act or practice of being
1, page 1336. hospitable, the reception and entertainment of guests, visitors or strangers with liberality and goodwill.
2. Hospitableness - Obs.
3. A hospitable institution or foundation, a hospital (sense 2) ".
8.7 It would be clear from the meaning of the expression " hospitality " that the idea involves an act, practice or quality of entertaining strangers or guests in a kind and generous way or their hospitable treatment. They are the requirements of hospitality. We have given deep thought to this requirement and we are of the considered view that the presentation of articles or gifts in question would not amount to hospitality within the meaning of the expression as per these definitions. These presentations were obviously given to persons by way of goodwill or to ensure smoothness and facility in dealings and in that sense of the term such expenditure was expedient in the interest of assessee's business and could be said to have been laid out or expended wholly and exclusively for the purposes of assessee's business without amounting to entertainment expenditure. The expression " any person " and the expression " any other manner whatsoever " in the definition of " entertainment expenditure " under Explanation 2 to section 37(2A) would have meaning only if what is provided can be said to amount to hospitality. As we have already said, the giving of gifts or presentations cannot amount to " hospitality of every kind ". If the intention of the Legislature were to also include within the tax net, it would have included it also while defining " entertainment expenditure ". In fact it appears that it is in view of the decision of the Gujarat High Court in the case Patel Bros. & Co. Ltd. that the Legislature thought of inserting the said Explanation by the Finance Act, 1983 with retrospective effect from 1-4-1976. We are, therefore, of the view that the expenditure incurred on the aforesaid gifts or presentations could not be disallowed or considered for disallowance as entertainment expenditure as done by the learned CIT (Appeals).
8.8 We may before concluding, also refer to the decisions cited on behalf of both the sides. In the case of Odhams Press Ltd. the House of Lords had held that whether a sum was wholly and exclusively laid out for the purposes of trade was a question of fact. In the case of Korner, the House of Lord was emphasising on the direct purpose. In the case of Sassoon J. David & Co. (P.) Ltd., the Supreme Court at page 273 emphasised that it is the purpose and not the motive which is important. In the case of Mysodet (P.) Ltd., Karnataka High Court held that hotel bills and other expenses were expenditure in the nature of entertainment and not as business promotion expenses. In the case of Raj Bros., Andhra Pradesh High Court was considering only the fact that the expenditure on advertisement, publicity and sales promotion was subject to the limits specified in section 37(3) and that the aggregate of such expenditure was further subject to the limits specified in section 37(3A). In the case of Indian Aluminium Cables Ltd., Delhi High Court was considering the deduction claimed by the assessee-company in respect of expenditure incurred on gifts and presents given on festivals, weddings etc. to its customers. It had been disallowed by the ITO by holding that it fell under rule 6B of the IT Rules, 1962. However, the High Court held that the finding of the Tribunal that the expenditure in question did not fall under rule 6B since it was not incurred for advertisement as none of the articles borne the name of the assessee or had any advertisement value, was a finding of fact. This is also our finding in the present case and, therefore, this decision goes to help the assessee. This decision is also in CIT v. Indian Aluminium Cables Ltd. (No. 2) [1990] 183 ITR 611 (Delhi). We accordingly maintain the view already expressed by us in para 8.7 above.
9. The next ground relating to the addition on account of increase of Rs. 2,400 in the Guest House Rent and of Rs. 4,000 in other items not having been pressed at the time of hearing of the appeal before us, no longer survives for our consideration.
10. The next ground relates to the disallowance of the following amounts under section 40A(9) :----
(i) subsidy for school Rs. 70,600
(ii) staff club Rs. 20,000
-------------------
(iii) Co-operative store Rs. 1,500
-------------------
The Assessing Officer found that these items had been recommended in clause 6(f) of the Tax Audit Report for disallowance. So far as the item of Rs. 70,600 is concerned, it represented subsidy to School in the staff colony for employees' children. The amount of Rs. 60,017 represented subsidy to staff club, employees' Co-operative consumer society, welfare centre and canteen. The Assessing Officer disallowed these two amounts.
11. In appeal, the disallowance was confirmed by the learned CIT (Appeals).
12. Before us it was submitted on behalf of the assessee by Shri O. P. Vaish that section 40A(9) was not attracted in this case. He also submitted that the School (Mangalam Vidyalaya) and Staff Club (Mangalam Club) were run by the nominees of the Management and that in order to reduce the expenditure, these amounts were given as subsidy. He also pointed out that a letter was given to the Assessing Officer by the assessee that the amount had been spent by the School and the Club and that the assessee made good to the School and the Club the shortfall, considering the actual expenditure. He submitted that to the extent of the actual expenditure, the amount could be allowed. He also pointed out that in the subsequent year such claims were allowed. On the other hand the learned Departmental Representative relied on the orders of the Income-tax Authorities.
13. After considering the rival submissions, we find that though apparently section 40A(9) does not seem to be attracted as the amounts do not represent payments made for the setting up or formation of or as contribution to any fund, trust, company, association of persons or body of individuals or society registered under the Societies Registration Act, 1860 or other institution for any purpose, however, the full details not being on the file and the assessing authority having made the disallowance merely on the basis of the Tax Audit Report, this matter requires to be restored to the Assessing Officer for a decision afresh in accordance with law after bringing the material on the record and after examining the exact nature of the claim and the details thereof.
13.1 So far as the amount of Rs. 1500 paid to Mangalam Karamchari Sahakari Upbhokta Bhandar Ltd. is concerned, since it was not pressed at the time of hearing of the appeal before us, it no longer survives for our consideration.
14. The last ground relates to the relief claimed on account of closing balance of Excise Duty paid (Rs. 9,60,481) looking to the provisions of section 43B. However, since this ground was also not pressed at the time of hearing of the appeal before us, it also no longer survives for our consideration.
15. In the result, the appeal filed by the assessee is partly allowed.
DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that VATinfoline Multimedia is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.