2012-VIL-948-ITAT-MUM

Income Tax Appellate Tribunal MUMBAI

I.T.A. No. 5181/Mum/2002 & I.T.A. No. 5452/Mum/2002

Date: 13.07.2012

TATA CHEMICALS LIMITED

Vs

THE ACIT CIR 2(2), MUMBAI & OTHERS

BENCH

SHRI DINESH KUMAR AGARWAL AND SHRI N.K. BILLAIYA, JJ.

JUDGMENT

PER DINESH KUMAR AGARWAL :

These cross appeals by the assessee and Revenue are directed against the order dtd. 18-07-2002 passed by the ld. CIT(A) – II, Mumbai for the A.Y. 1985-86. Both these appeals are disposed of by this common order for the sake of convenience.

2. Briefly stated facts of the case are that the assessee company is engaged in the business of manufacture and sale of Soda Ash and other inorganic chemicals. The return was filed declaring total income at Rs. 2,11,42,780/-.

This income was revised to Rs. 7,32,06,632/-. The revision was due to revising the decision for capitalization and the total interest payable on the borrowings for investment in fixed assets. However, the assessments after making various disallowances and additions was made at an income of Rs. 10,26,57,190/- vide order dtd. 22-3-1988 passed u/s 143(3) of the Income Tax Act, 1961 (the Act). On appeal, the ld. CIT(A), however, partly allowed the appeal.

3. Being aggrieved by the order of the ld. CIT(A) the assessee and the Revenue both are in appeal before us.

ITA No. 5181/Mum/2002 (Assessee’s appeal).

4. Ground No. 1(a to f) are against the sustenance of disallowance of Rs. 30,73,662/- u/s 37(3A) of the Act.

5. Brief facts of the above issue are that in the revised computation of income, the assessee disallowed u/s 37(3A) of the Act Rs. 3,02,842/- being 20% of Rs. 15,14,212/-. However, the A.O. found that the assessee has not included various expenses disallowable u/s 37(3A) of the Act and accordingly the A.O. after discussing the issue at pages 2 to 5 of the assessment order, disallowed Rs. 30,73,662/- being 20% of Rs. 1,53,68,309/- and added the same to the total income of the assessee. On appeal the ld. CIT(A) while agreeing with the views of the A.O. confirmed the disallowance made by the A.O.

6. At the time of hearing, the ld. Sr. Counsel for the assessee while stating that due to smallness of the amount of Rs. 6804/- being 20% of Rs. 34,020/- of rent paid for stall in showroom of Tata Exports Ltd. , he does not want to press the above ground further submits that there are factual mistakes in the amount of disallowance in respect of all other expenses, therefore, the issue may be set aside to the file of the A.O. to decide the same afresh in the light of the decisions of the Tribunal in assessee’s own case, the judgments of Hon’ble jurisdictional High Court and other High Courts.  

7. On the other hand, the ld. D.R. while relying on the order of the A.O. and ld. CIT(A) submits that she has no objection if the issue is set aside to the file of the A.O. to decide the same afresh.

8. We have carefully considered the submissions of the rival parties and perused the material available on record. At the time of hearing it was pointed out to the ld. Sr. Counsel for the assessee that there are mistakes in the amounts of disallowance made by the A.O. and the amounts mentioned in the facts sheet submitted by the assessee which requires clarification. It was, therefore, agreed by both the parties that the issue may be set aside to the file of the A.O. to decide the same afresh in the light of the decisions of the Tribunal in assessee’s own case, judgments of the Hon’ble jurisdictional High Court and other High Court. In this view of the matter we, in the interest of justice, consider it fair and reasonable that the matter should go back to the file of the A.O. and accordingly we set aside the orders passed by the Revenue Authorities on this account and send back the matter to file of the A.O. to decide the same afresh in the light of our observations hereinabove and according to law after providing reasonable opportunity of being heard to the assessee. The grounds taken by the assessee are, therefore, partly allowed for statistical purpose.

9. Ground No. 2 (a&b) are against the sustenance of disallowance of entertainment expenses.

10. Ground No. 3 is against the sustenance of disallowance of Rs. 1,13,284/- u/s 37(3) read with Rule 6D.

11. Brief facts of the issue in ground No. 2(a&b) are that the A.O. observed that the expenditure amount of Rs. 4,34,014/- is not for the advertisement for promotion of sale. In fact, it is in the nature of customary presents to customers, friends and business associates. Thus it is admittedly for advertisement and, therefore, even if it is not resulting in sales promotion, it is covered under the provisions of section 37(3A) of the Act because the very purpose of this expenditure is advertisement and accordingly he disallowed Rs. 86,803/- being 20% of Rs. 4,34,014/-. On appeal the ld. CIT(A) upheld the disallowance made by the A.O.

12. Brief facts of the issue in ground No. 3 are that the A.O. observed that the assessee while working out the disallowance under Rule 6D has taken into consideration only lodging, boarding and daily allowance but has excluded other expenses such as conveyance, tips, coolie charges etc. The A.O. was of the view that the stand of the assessee cannot be accepted because the expression used in Rule 6D is “expenditure incurred in connection with traveling” which will include all expenses in connection with traveling other than fare. Undoubtedly the expenses not considered by the assessee are in connection with the travelling and hence are to be taken into account while working out disallowance and accordingly the A.O. made a disallowance of Rs. 2,96,950/-. On appeal, the ld. CIT(A) while relying on the decision of Hon’ble jurisdictional High Court in the case of CIT vs. Chemet (1999) 240 ITR 624 (Bom) wherein it has been held that miscellaneous expenses and local conveyance expenses incurred by the employees on tour for conducting assessee’s business have to be excluded from the purview of Rule 6D, held that the expenses on tips and coolie charges cannot be said to have been incurred on conducting the business of the assessee. The ld. CIT(A) after considering the provisions of section 37(3) r.w.r. 6D directed the A.O. to work out the disallowance after obtaining the break-up of conveyance expenses from the assessee.

13. At the time of hearing, the ld. Sr. Counsel for the assessee while admitting that there are factual mistakes in the amount of disallowances of the impugned expenses, therefore, both the issues may be set aside to the file of the A.O. to decide the same afresh in the light of the decisions of the Tribunal in assessee’s own case, the judgments of Hon’ble jurisdictional High Court and other High Courts.

14. On the other hand, the ld. D.R. while relying on the order of the A.O. and ld. CIT(A) submits that she has no objection if both the issues are set aside to the file of the A.O. to decide the same afresh.

15. We have carefully considered the submissions of the rival parties and perused the material available on record. At the time of hearing it was pointed out to the ld. Sr. Counsel for the assessee that there are mistakes in the amount of disallowance made by the A.O. and the amounts mentioned in the facts sheet submitted by the assessee which requires clarification. It was, therefore, agreed by both the parties that the issue may be set aside to the file of the A.O. to decide the same afresh in the light of the decisions of the Tribunal in assessee’s own case, judgments of the Hon’ble jurisdictional High Court and other High Courts. In this view of the matter, we in the interest of justice, consider it fair and reasonable that the matter should go back to the file of the A.O. and accordingly we set aside the orders passed by the Revenue Authorities on this account and send back the matter to file of the A.O. to decide the same afresh in the light of our observations hereinabove and according to law after providing reasonable opportunity of being heard to the assessee. The grounds No. 2 (a&b) and 3 taken by the assessee are, therefore, partly allowed for statistical purpose.

16. Ground No. 4 is against the sustenance of disallowance of guest house expenses Rs. 14,24,078/-.

17. Brief facts of the above issue are that the A.O. noted that basically the guest house expenditure are intimately related to the maintenance of guest house covered u/s 37(4) of the Act. He further held that this expenditure is not incurred at the place of and during the course of the working hours in the office and factory and accordingly he disallowed the same. On appeal the ld. CIT(A) while observing that this issue is covered against the assessee, confirmed the disallowance made by the A.O.

18. At the time of hearing the ld. Sr. Counsel for the assessee very fairly submits that the amount of Rs. 14,24,078/- consists of three items namely (a) salaries & wages to staff Rs. 4,12,247/-, (b) repairs and renovation expenses Rs. 2,17,675/- and (c) food expenses (net of recoveries) Rs. 7,94,156/- aggregating to Rs. 14,24,078/-. He further submits that on the disallowance of salary & wages to staff Rs. 4,12,247/- and repairs and renovation expenses Rs. 2,17,675/-, he has no case. As regards the disallowance of food expenses Rs. 7,94,156/-, he submits that this issue is covered in favour of the assessee by the order of the Tribunal in assessee’s own case in the case of Tata Chemicals vs. DCIT and vice versa in ITA No. 2658 & 3082/Mum/2002 for A.Y. 1995-96 order dtd. 26-7-2006 wherein the Tribunal vide para 6 of its order has restored the issue to the file of the A.O. He, therefore, submits that in view of the said order of the Tribunal, the issue may be set aside to the file of the A.O.

19. On the other hand the ld. D.R. while relying on the order of the A.O. and the ld. CIT(A) submits that she has no objection if the disallowance of food expenses of Rs. 7,94,156/- is restored back to the file of the A.O. for verification and to decide the same in the light of the decision of the Tribunal (supra).  

20. We have carefully considered the submissions of the rival parties and perused the material available on record. We find merit in the plea of the ld. Sr. Counsel for the assessee that the expenses incurred by the assessee on (a) salaries & wages to staff Rs. 4,12,247/-, (b) repairs and renovation expenses Rs. 2,17,675/- are in the nature of guest house expenses and the same are not allowable in view of the decision of the Hon’ble Supreme Court in the case of Britannia Industries Ltd. vs. CIT (2005) 278 ITR 546 (SC) and accordingly we uphold the disallowance made by the A.O. and confirmed by the ld. CIT(A). With regard to the food expenses Rs. 7,94,156/- we find that the Tribunal in assessee’s own case (supra) has restored the issue to the file of the A.O. to decide the same afresh in view of the decision of the Tribunal in the case of Tata Engineering & Locomotive Co. Ltd. vs. DCIT in ITA No. 5449/Mum/1998 for A.Y. 1993-94 order dtd. 28-3-2006. Respectfully following the same, we set aside the issue of disallowance of food expenses of Rs. 7,94,156/- to the file of the A.O. to decide the same afresh in the light of the decision of the Tribunal (supra) and according to law after allowing reasonable opportunity of being heard to the assessee. The ground taken by the assessee is, therefore, partly allowed for statistical purpose.

21. Ground No. 5 is against the sustenance of disallowance of liability of bonus of Rs. 11,21,865/- due for the year but not provided.

22. At the time of hearing the ld. Sr. Counsel for the assessee submits that he does not want to press the above ground being otiose as in the subsequent assessment year the A.O. has allowed the same on payment basis which was not objected to by the ld. D.R.

23. That being so and in the absence of any other supporting material placed on record by the ld. Sr. Counsel for the assessee, the ground taken by the assessee is, therefore, rejected being not pressed/survived.

24. Ground No. 6 is against the sustenance of disallowance of incentive bonus of Rs. 1,90,743/- paid to the workers for exceeding fixed targets.

25. Brief facts of the above issue are that the A.O. observed that the assessee has debited Rs. 1,90,747/- towards incentive bonus paid to the workers which is over and above the bonus payable under The Payment of Bonus Act as well as under the existing agreement between the assessee and employees/workers. He further observed that it is also not covered under the provisions of section 36(1)(ii) of the Act. He further observed that on similar facts an amount of Rs. 1,58,830/- was disallowed in A.Y. 1984-85, therefore, for the same reason he disallowed Rs. 1,90,747/-. On appeal the ld. CIT(A) while agreeing with the views of the A.O., confirmed the disallowance made by the A.O.

26. At the time of hearing the ld. Sr. counsel for the assessee submits that this amount is allowable u/s 37(1) of the Act since it is remuneration to workers for extra work done which partakes the character of salary and it is not bonus as provided under the Payment of Bonus Act, 1965. He further submits that similar disallowance was deleted by the Tribunal in assessee’s own case for A.Y. 1984-85 vide para 5.4.2 of the order dtd. 27-12-2007 and, therefore, the disallowance made by the A.O. and sustained by the ld. CIT(A) be deleted.

27. On the other hand the ld. D.R. supports the order of the A.O. and the ld. CIT(A).

28. We have carefully considered the submissions of the rival parties and perused the material available on record. We find merit in the plea of the ld. counsel for the assessee that similar disallowance was deleted by the Tribunal in assessee’s own case in ITA No. 4194 and 4237/Mum/2001 for A.Y. 1984- 85 order dtd. 27-12-2007 wherein it has been held vide para 5.4.2 as under:-

“After considering the submissions and orders of High Court in reference No. 95 of 1988 dated 04/07/05, we find that similar issue has been decided in favour of the assessee. Accordingly, we direct the A.O. to modify his order.”

In the absence of any distinguishing feature brought on record by the Revenue, we respectfully following the order of the Tribunal hold that the disallowance of incentive bonus made by the A.O. and confirmed by the ld. CIT(A) is not sustainable in law and accordingly we delete the same. The ground taken by the assessee is, therefore, allowed.

29. Ground No. 7 is against the sustenance of disallowance of Rs. 27,650/- u/s 80VV of the Act.  

30. Facts of the above issue are that the A.O. noted that the following payments were claimed to have been made for consultations, conferences and appearances relating to proceedings before the Income-tax authorities:-

Name of the person	Amount (Rs)
Ajay I. Thakore	8,500/-
Ajay I. Thakore	450/-
K.N. Desai	600/-
N.M. Raiji & Co.	4,000/-
-do-	9,100/-
B.A. Palkhiwala	5,000/-
	27,650/-

According to the A.O., these amounts do not represent any fees paid in respect of any proceedings before the Income-tax Authorities, Tribunal or any Court relating to any liability under the Act, therefore, these payments are not covered u/s 80VV of the Act and hence he disallowed the same. On appeal the ld. CIT(A) while holding that there is no infirmity in the disallowance made by the A.O., confirmed the same.

31. At the time of hearing the Sr. ld. counsel for the assessee submits that the above amount represent fees paid to various Advocates and consultants in connection with the conferences, advice and consultation pertaining to Income-tax matters. These payments do not represent any fees paid in respect of any proceedings before the Income-tax Authorities and, therefore, not covered u/s 80VV of the Act and hence the same are allowable. The reliance was also placed in CIT v. Hayward Waldia Refinery Ltd. (1995) 78 Taxmann 558 (Cal), Lakhanpal National Ltd. vs. ITO (1994) 69 ITD 9 (SB) and CIT v. United Commercial Bank Ltd., (1991) 189 ITR 57 (Cal).

32. On the other hand the ld. D.R. supports the order of the A.O. and the ld. CIT(A).

33. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute inasmuch as it is also not in dispute that the above amount of Rs. 27,650/- was paid by the assessee to various Advocates and Consultants in relation to conferences, advice and consultation pertaining to Income-tax matters, therefore, the said payments do not fall within the purview of section 80VV of the Act. The said section restricts deduction in respect of expenses incurred by an assessee in respect of any proceedings before any Income-tax Authority or the Appellate Tribunal or any Court relating to the determination of any liability under the Income-tax Act by way of tax, penalty or interest. In other words Section 80VV of the Act seeks to restrict the allowance in respect of expenditure incurred by an assessee in respect of a specific proceeding under the Act. Therefore, the said section has no application on the above expenses incurred by the assessee.

34. In CIT v. Hayward Waldia Refinery Ltd. (1995) 78 Taxman 558 (Cal) it has been held vide para 6 & 7 as under:-

" 6. On a second appeal before the Tribunal, the entire claim was allowed in full by the Tribunal with the following observations:

“We have considered the rival submissions and the facts and circumstances of the case. We are of the view that the remuneration paid by the company to Sri Nadar does not fall within the purview of section 80VV of the Act. The said section restricts deduction in respect of expenses incurred by an assessee in respect of any proceedings before any Income-tax authority or the Appellate Tribunal or any court relating to the determination of any liability under the Income-tax Act by way of tax, penalty or interest. In other words, section 80VV seeks to restrict the allowance in respect of expenditure incurred by an assessee in respect of a specific proceeding under the Income-tax Act. Therefore, the said section has no application in relation to remuneration or fees paid by an assessee to a tax consultant or other adviser for giving general advice in relation to taxation matters. We also see no justification in the order of the Commissioner of Income-tax (Appeals) restricting the allowance to Rs. 4,000 only. He has not given any valid reason in support of the view that Sri Nadar’s services would have been pertinent to only income-tax representation. He has also not given any reason for holding that the value of Sri Nadar's services to the company even in relation to income-tax consultations would be only Rs. 4,000 per annum. We, therefore, see no merit in the disallowance and direct that the entire remuneration paid to Sri Nadar should be allowed as deduction in computing the taxable profits of the company. However, as a corollary to our direction, the separate deduction of Rs. 5,000 allowed by the Income-tax Officer under section 80VV of the Act shall stand withdrawn."

7. The Revenue, in this question, has not assailed the finding of fact by the Tribunal. The Tribunal has found as a fact that the remuneration in excess of Rs. 5,000 paid to Sri Nadar is not for any services rendered by him of the nature referred to in section 80VV and the remuneration was paid by the assessee to Mr. Nadar in his capacity as a tax consultant or adviser for giving general advice in relation to taxation matters. This finding has gone unchallenged. Therefore, we cannot but answer the second question in the affirmative and in favour of the assessee.”

35. Similar view has been taken in Lakhanpal National Ltd. (supra) and United Commercial Bank Ltd., 189 ITR 57 (Cal) (supra).  

36. In the absence of any distinguishing feature brought on record by the Revenue, we respectfully following the above decisions and the consistent view, hold that the above expenses claimed by the assessee do not fall within the purview of Section 80 VV of the Act and accordingly the disallowance of Rs. 27,650/- made by the A.O. and sustained by the ld. CIT(A) is deleted. The ground taken by the assessee is, therefore, allowed.

37. Ground of appeal No. 8 is against the sustenance of disallowance of leave salary paid to Mr. P.V. Gadedar Rs. 29,883/-, Lovedale Flat Expenses Rs. 92761, Maint. exp. of Harbour Heights Flats Rs. 2,04,275/- and Soft Furnishing expenses Rs. 93,490/- u/s 40A(5) read with 40(c) of the Act.

38. At the time of hearing the ld. Sr. Counsel for the assessee submits that he does not want to press the above ground and the same may be treated as withdrawn which was not objected to by the ld. D.R.

39. That being so and in the absence of any supporting material placed on record by the ld. Sr. Counsel for the assessee, the ground taken by the assessee is, therefore, rejected being not pressed.

40. Ground No. 9 is against the sustenance of disallowance of Bhanwad Prospecting Survey expenses of Rs. 1,00,670/-, repair expenses of Rs. 1,66,150/-, traveling expenses of Rs. 7,23,268/-, conversion of convertible debentures/bonds expenses Rs. 6,86,000/- and expenses on Bond issue Rs. 1,62,846/- as capital expenditure.  

41. Brief facts of the above disallowance of Rs. 1,00,670/- are that it was inter alia observed by the A.O. that the assessee has claimed that Bhanwad Prospecting and Survey expenses were incurred for searching limestone deposits in the land. Limestone is used by the assessee as basic raw material for production of Soda Ash, which is excavated from mines. However, the A.O. did not accept the stand taken by the assessee because according to him the expenditure is for finding out the areas from where the limestone can be excavated and such area will be in the nature of asset of the assessee and, therefore, the said expenditure is directly related to acquisition of asset or getting advantage of enduring nature. Therefore following the stand taken in the earlier years, the A.O. disallowed the expenditure of Rs. 1,00,670/- and treated the same as capital expenditure.

42. As regard the repairs to building and machinery, the A.O. noted that the assessee has incurred Rs. 59,594/- for construction of pipe culvert, Rs. 74,422/- on the work for proposed stacking area and Rs. 32,134/- for construction side wall and flooring in the shed of fisheries office aggregating to Rs. 1,66,150/-. According to the A.O., the commercial production of fish had not been started, therefore, the above expenses are not related to repairs but in the nature of capital expenditure.

43. As regards the disallowance of foreign travel expenses, the A.O. observed that the assessee has not filed the details to prove that the foreign tour was in connection with the business of the assessee. The expenditure relates to the discussion about the purchase/manufacture of plant and machinery required for setting up of fertilizer complex for Tata Fertilizers which is a subsidiary company and, hence, not allowable in the hands of the assessee and other expenses are related to the discussion with the supplier which are also not allowable, therefore, the A.O. treated the expenses of Rs. 7,23,268/- as capital expenditure.

44. As regards the disallowance of expense of Rs. 6,86,000/- on convertible debentures, the A.O. noted that Rs. 6,86,000/- was incurred on conversion of convertible debentures into shares related to expansion of capital base and, hence, he treated the same as capital expenditure.

45. As regards the Bond issue expenses of Rs. 1,62,846/-, the A.O. observed that convertible debentures were issued in the accounting year 1983-84 but the relevant bills were received in this year. In the A.Y. 1984-85, the expenditure on the issue of Bonds have been treated as capital expenditure, therefore, following the same stand, the A.O. treated the same as capital expenditure.

46. On appeal the ld. CIT(A) while agreeing with the views of the A.O., confirmed the above disallowances made by the A.O.  

47. At the time of hearing the ld. Sr. Counsel for the assessee submits that in the assessment years 1993-94 to 1996-97, 1/10th of the expenses in respect of Bhanwad Prospecting and Survey expenses has been allowed by the Tribunal in the assessee’s own case, therefore, the issue may be decided accordingly.

48. As regards the repairs to building and machinery, the ld. Sr. Counsel for the assessee submits that this expenditure was incurred in connection with the repairs and renovation for existing culverts, temporary construction and expenses incurred in existing premises for remodeling and re-designing without bringing into existence any assets or advantage of enduring nature. He further submits that on identical facts, the Tribunal in assessee’s own case for A.Y. 1983-84 has allowed such expenses as revenue expenditure.

49. As regards the disallowance of foreign travel expenses, the ld. Sr. Counsel for the assessee submits that in ground No. 10 the assessee is claiming depreciation on the items treated as capital expenditure including item of foreign travel expenses Rs. 7,23,268/-, therefore, he does not want to press the above ground.

50. As regards the expenses incurred on convertible debentures to shares, and expenses on bond issue the ld. Sr. counsel for the assessee submits that he does not want to press the above grounds.  

51. On the other hand the ld. D.R. relied on the order of the A.O. and the ld. CIT(A) in respect of disallowance of Bhanwad Prospecting Survey expenses and repairs to building and machinery. For the balance item of disallowance, the ld. D.R. submits that since the ld. Sr. Counsel for the assessee is not pressing the above, she has no objection for the same.

52. We have carefully considered the submissions of the rival parties and perused the material available on record. We find merit in the plea of the ld. Sr. Counsel for the assessee that in respect of disallowance of Bhanwad Prospecting Survey expenses, it has been consistently held by the Tribunal in ITA No. 2803/M/2000 for A.Y. 1993-94 order dtd. 21-4-2004 and in ITA No. 5728/M/2004 for A.Y. 1996-97 order dtd. 17-8-2007 that the assessee is entitled to the deduction u/s 35E of the Act. Respectfully following the same, we direct the A.O. to follow the orders of the Tribunal (supra) and allow the same accordingly. We hold and order accordingly. The ground No. 9(i) is, therefore, partly allowed.

53. As regards the disallowance of repairs to building and machinery, we find merit in the plea of the ld. Sr. Counsel for the assessee that the Tribunal in assessee’s own case in ITA No. 4242/M/1999 for A.Y. 1983-84 order dtd. 9- 5-2006 has treated the similar expenses as revenue expenditure vide finding recorded in para 19 of order which is reproduced as under:-

“19. We have considered the matter in detail. First let us examine the nature of expenses incurred by the assessee. The expenses were incurred by the assessee in renovating callendria, hydrator civil engineering works, extension of structure of hydrator civil engineering works, civil work foundations, renovation of kiln shade, renovation of drag elight conveyor, conversion of AV pumps, platform shed, emergency staircase from lime stols, etc. etc. All these renovation and repairs were carried out by the assessee in its facilities available at the salt pans of the assessee. These are all essential repair and maintenance expenditure. The assessee is renovating and repairing the vast paraphernalia of its manufacturing facilities from time to time depending upon the exigencies. The assessee has spent the money to retain the status quo of the existing operational system. Nothing is procured and embedded as new. The assessee has not extended its operational facilities area or plant. Therefore, these expenditures are to be treated as revenue in nature.

The ITAT, Cuttack Bench while camp at Bombay has held in assessee’s own case for the assessment year 1977-78 in ITA No. 2083/Bom/1982 through its order dated 19-05-1984 that similar expenses are revenue in nature. The same view was taken by ITAT, Mumbai bench “A” again in assessee’s own case for the assessment year 1980-81 in ITA No. 1673/Bom/1985 through its order dated 30-08-1989. In view of this matter we hold that these expenditures are to be treated as revenue expenditure and to be allowed in computing the taxable income of the assessee. We direct the assessing officer to do so……” In the absence of any distinguishing feature brought on record by the Revenue, we respectfully following the above decision and the consistent view, hold that the expenditure claimed by the assessee are revenue in nature and are allowable u/s 37(1) of the Act. The A.O. is directed to allow the same after withdrawing depreciation if any allowed by him. The ground No. 9(ii) is, therefore, allowed.

54. As regards the disallowance of other expenses, the ld. Sr. Counsel for the assessee did not press the same which was not objected to by the ld. D.R. and in the absence of any other supporting material placed on record by the ld. Sr. Counsel for the assessee, the ground No. 9(iii), (iv) & (v) are, therefore, rejected being not pressed.

55. Ground No. 10 is against the claim of depreciation on the items of expenditure treated as capital expenditure.  

56. At the time of hearing both the parties have agreed that since the foreign travel expenses Rs. 7,23,268/- has been treated as capital expenditure, therefore, on the said amount the assessee is entitled to the depreciation.

57. That being so and in the absence of any contrary material placed on record by the Revenue, we direct the A.O. to allow depreciation on foreign travel expenses of Rs. 7,23,268/- treated as capital expenditure. We hold the order accordingly. The ground taken by the assessee is, therefore, allowed.

58. Ground No. 11 is against the sustenance of disallowance of Rs. 1,35,633/- u/s 40A(3) of the Act.

59. Facts of the above issue are that the A.O. observed the details of payments exceeding Rs. 2500/- are shown in Exit-A of the Tax Audit Report. According to the A.O. since the payment on LTA Rs. 63,699/-, salary advance Rs. 13,600/- travel and entertainment etc. Rs. 26,781/-, foreign exchange payment Rs. 6,435/-, medical expenses Rs. 5000/-, advance payment to workers Rs. 4,000/-, taxi hire charges Rs. 8,596/- and maternity allowance Rs. 2,532/- aggregating to Rs. 1,35,633/- are exceeding Rs. 2,500/-, therefore, he disallowed the same u/s 40A(3)of the Act. On appeal the ld. CIT(A) while observing that the appellant has furnished nothing to indicate that the payments were made in exceptional or unavoidable circumstances and genuineness of the payment and identity of the payee are also not proved, confirmed the disallowance made by the A.O.

60. At the time of hearing the ld. Sr. Counsel for the assessee submits that these payment are made to employees whose identity is well established and the payments are made at the factory site i.e Mithapur which is far away from the main city, therefore, the disallowance made by the A.O. and sustained by the ld. CIT(A) be deleted. In alternative, he submits that he has no objection if the issue is set aside to the file of the A.O.

61. On the other hand the ld. D.R. while relying on the order of the A.O. and the ld. CIT(A) submits that she has no objection for setting aside the issue to the file of the A.O.

62. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the issue has not been properly examined. The disallowance has been made on the basis of Tax Audit Report. The payments to employees cannot be said that the assessee has failed to establish the identity of the payees. This being so and keeping in view that it has not been examined by the A.O. as to whether the payments were made at the factory site of the assessee for business exigency. It has also not been examined by the A.O. as to whether there is any single payment not exceeding Rs. 2,500/- in view of the decision of CIT vs. Aloo Supply Co. (1980) 121 ITR 680 (Orissa) wherein it has been held that the statutory limit of Rs. 2500/- u/s 40A(3) of the Act applies to payment made to a party at a time and not to the aggregate of the payments made to a party in the course of the day as recorded in the cash book. Accordingly we set aside the order passed by the Revenue Authorities on this account and restore this issue back to the file of the A.O. to decide the same afresh in the light of our observations hereinabove and according to law after providing reasonable opportunity of being heard to the assessee. The ground taken by the assessee is, therefore, partly allowed for statistical purpose.

63. Ground No. 12 is against the sustenance of disallowance of contribution to Scientific Research Association u/s 35(1)(iii) of the Act.

64. At the time of hearing the ld. Sr. Counsel for the assessee submits that he does not want to press the above ground which was not objected to by the ld. D.R.

65. That being so and in the absence of any supporting material placed on record by the ld. Sr. Counsel for the assessee, the ground taken by the assessee is, therefore, rejected being not pressed.

66. Ground No. 13 is against the sustenance of disallowance of expenses on fish and prawn culture Rs. 1,66,610/-.

67. Brief facts of the above issue are that the A.O. noted that the assessee has debited an amount of Rs. 13,159/- and Rs. 1,74,458/- under the head community welfare and general expenses respectively. These expenses are on fish and prawn culture. The assessee was carrying on the research and development work for the development of fish and prawns with the intention that it could take up the activities of fish and prawns culture on commercial basis. The assessee has credited in profit and loss account under the head sundry receipts by an amount of Rs. 21,008/-. Therefore, the A.O. disallowed the net receipt of Rs. 1,66,610/- as according to him it does not relate to the business of the assessee and it is for the development of the new line of business and also for the reason that the similar disallowance was made in the past year. On appeal the ld. CIT(A) while agreeing with the views of the A.O. upheld the disallowance made by the A.O.

68. At the time of hearing the ld. Sr. Counsel for the assessee submits that the expenses incurred by the assessee are not for the new line of business but part of the existing business. He further submits that this issue has been decided in favour of the assessee by the Tribunal in assessee’s own case for assessment years 1981-82, 1982-83 and 1983-84, therefore, the ld. CIT(A) was not justified in sustaining the disallowance made by the A.O. and the same be allowed.

69. On the other hand the ld. D.R. supports the order of the A.O. and the ld. CIT(A).  

70. We have carefully considered the submissions of the rival parties and perused the material available on record. We find merit in the plea of the ld. Sr. Counsel for the assessee that the issue is covered in favour of the assessee by the order of the Tribunal in assessee’s own case for the assessment years 1981-82 and 1982-83 in ITA No. 1579/M/98 and Others order dtd. 24-5-2005 wherein the Tribunal has held that the maintenance of fish ponds does not constitute any separate business but it is an essential part of the business carried on by the assessee in the normal course. The above order has been followed by the Tribunal in assessee’s own case in ITA No. 4242/M/99 for A.Y. 1983-84 order dtd. 9-5-2006. In the absence of any distinguishing feature brought on record by the Revenue, we respectfully following the consistent view of the Tribunal hold that the disallowance made by the A.O. and sustained by the ld. CIT(A) is not sustainable and accordingly we delete the same. The ground taken by the assessee is, therefore, allowed.

71. Ground No. 14 is against the sustenance of disallowance of interest on outstanding electricity duty Rs. 11,53,066/-, Central Sales Tax Rs. 40,000/- and Gujarat Sales Tax Rs. 16,88,000/-.

72. Brief facts of the above issue are that the A.O. noted that there is outstanding liability in respect of Central Sales Tax Rs. 40,000/- and Gujarat Sales Tax Rs. 16,88,000/- which remained unpaid on the last date of the previous year. The A.O. for the reasons discussed in the assessment order for A.Y. 1984-85 treated the same as trade receipts. Besides, the A.O. also noted that there is an outstanding amount of electricity duty Rs. 11,53,066/-. The A.O. for the reasons discussed in A.Y. 1984-85 also disallowed the same u/s 43B of the Act. Thus total disallowance was worked out to Rs. 35,74,052/-.

Since out of it, the assessee has paid Rs. 16,43,812/- which had been disallowed in earlier year, therefore, the net disallowance of Rs. 19,30,240/- was made u/s 43B of the Act. On appeal the ld. CIT(A) upheld the disallowance made by the A.O.

73. At the time of hearing the ld. Sr. Counsel for the assessee submits that the issue relating to interest on outstanding electricity duty amounting to Rs. 11,53,066/- is neither tax nor duty, hence, does not fall within the ambit of section 43B of the Act. He further submits that this issue is covered in favour of the assessee by the order of the Tribunal in assessee’s own case for A.Y. 1984-85. As regards the issue of Central Sales Tax and Gujarat Sales Tax, he submits that the Tribunal in assessee’s own case for 1984-85 has restored this issue back to the file of the A.O. to verify the payment and if it is found that the payments are made within the time as provided under the law, then, the deduction should be allowed.

74. On the other hand the ld. D.R. supports the order of the ld. A.O. and the ld. CIT(A).

75. We have carefully considered the submissions of the rival parties and perused the material available on record. We find merit in the plea of the ld. Sr. Counsel for the assessee that the Tribunal in assessee’s own case for A.Y. 1984-85 (supra) vide para 13.1.1. of the order dtd. 27-12-2007 on the issue of interest on outstanding electricity duty while observing that the interest on electricity deposit is neither duty nor tax, therefore, it is out of the scope of the section 43B of the Act, directed the A.O. to delete the addition. We further find that with regard to the disallowance of Central Sales Tax and Gujarat Sales Tax, the Tribunal by the same order vide para 13.2.1. has restored the issue back to the file of the A.O. to verify the payment and if it is found that the payments are made within the time as provided under the law, then, it should be allowed. In absence of any distinguishing feature brought on record by the Revenue, we respectfully following he order of the Tribunal (supra) restore back to the entire issues to the file of the A.O. to allow the same in the light of the direction of the Tribunal (supra) after considering the deduction of Rs. 16,43,812/- already allowed by the A.O. and according to law after providing reasonable opportunity of being heard to the assessee. The ground taken by the assessee is, therefore, partly allowed for statistical purpose.

76. Ground No. 15 is against the sustenance of disallowance of Royalty of Rs. 5,91,281/-.

77. Ground No. 16 is against the sustenance of disallowance of sundry contributions totalling to Rs. 17,000/-.  

78. At the time of hearing the ld. Sr. Counsel for the assessee submits that he does not want to press the above grounds which was not objected to by the ld. D.R.

79. That being so and in the absence of any supporting material placed on record by the ld. Sr. Counsel for the assessee, the above grounds taken by the assessee are, therefore, rejected being not pressed.

80. Ground No. 17 is against the sustenance of disallowance of Rs. 2 lacs paid to Tata Services Ltd.

81. Brief facts of the above issue are that on verification of the assessee’s contribution towards common service expenses paid to Tata Services Ltd., the A.O. noted that certain items of are of the nature which are not allowable under the Act in the line of entertainment expenditure and guest house expenses and accordingly the A.O. following the stand taken in A.Y. 1984-85 disallowed Rs. 2 lacs. On appeal the ld. CIT(A) while observing that in the first appeal the disallowance made in A.Y. 1984-85 was confirmed, sustained the disallowance made by the A.O.

82. At the time of hearing the ld. Sr. Counsel for the assessee submits that the A.O. was not justified in making adhoc disallowance of Rs. 2 lacs out of the total payment of Rs. 23,74,597/- to Tata Services Ltd. He further submits that this issue is also covered in favour of the assessee by the order of the Tribunal in assessee’s own case for assessment years 1983-84 and 1984-85.

He, therefore, submits that the disallowance made by the A.O. and sustained by the ld. CIT(A) be deleted.

83. On the other hand the ld. D.R. supports the order of the A.O. and the ld. CIT(A).

84. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute inasmuch as it is also not in dispute that similar disallowance was also made in A.Y. 1984-85. The Tribunal in assessee’s own case in ITA No. 4194 and 4137/M/2001 for A.Y. 1984-85 order dtd. 27-12-2007 following the Tribunal order in A.Y. 1983-84 allowed the deduction to the assessee. In the absence of any distinguishing feature brought on record by the Revenue, we respectfully following the order of the Tribunal (supra) hold that the A.O. was not justified in making adhoc disallowance of Rs. 2 lacs and accordingly we delete the disallowance of Rs. 2 lacs sustained by the ld. CIT(A). The ground taken by the assessee is, therefore, allowed.

85. Ground No. 18 is against the sustenance of disallowance of Rs. 39.50 lacs being provision for revision in salary payable to the employees.

86. At the time of hearing the ld. Sr. Counsel for the assessee submits that he does not want to press the above ground being otiose as in the subsequent assessment year the A.O. has allowed the same on payment basis which was not objected to by the ld. D.R.

87. That being so and in the absence of any other supporting material placed on record by the ld. Sr. Counsel for the assessee, the ground taken by the assessee is, therefore, rejected being not pressed/survived.

88. Ground No. 19 is against the sustenance of disallowance of payment of Tata Sons Rs. 1,27,337/-, Cess charges Rs. 1,80,022/- and out of various items individually costing less than Rs. 1 lac, Rs. 5,22,453/- aggregating to Rs. 8,29,812/-.

89. Brief facts of the above issue are that the A.O. held that Sales Tax for coal amounting to Rs. 1,80,022/- is not allowable because on verification it was found that the same is related to the accounting year 1983-84 and hence it cannot be said that the liability for this expense became known or arose during the previous year. He further held that an amount of Rs. 1,27,337/- paid to Tata Sons is not allowed since complete details in this regard have not been produced. He further observed that certain items of expenses totalling to Rs. 5,22,455/- are also not allowable as necessary details have not been furnished by the assessee. On appeal the ld. CIT(A) for the same reasons upheld the disallowance made by the A.O.  

90. At the time of hearing, the ld. Sr. Counsel for the assessee, at the outset, submits that the liability of the above expenses has been crystallized during the year and, hence, it is allowable in the year under consideration. He further submits that the ld. CIT(A) has not considered the detail note submitted by the assessee appearing at page 19 to 21 of the statement of facts filed before the ld. CIT(A), therefore, in the interest of justice, the issue may be set aside to the file of the A.O.

91. On the other hand, the ld. D.R. while relying on the order of the A.O. and the ld. CIT(A) submits that she has no objection if the issue is set aside to the file of the A.O.

92. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that there is no dispute that the impugned disallowance was made by the A.O. on the ground that the assessee has failed to file relevant material before him. However, before the ld. CIT(A) the assessee has filed detail note (supra) and the ld. CIT(A) without considering the same has decided the issue against the assessee. Since this issue has not been properly examined by the A.O. and the ld. CIT(A), therefore, we are of the view that, in the interest of justice, the issue should be restored back to the file of the A.O. and accordingly we set aside the order passed by the Revenue Authorities on this account and send back the matter to the file of the A.O. to decide the same afresh in the light of our observation hereinabove and according to law after providing reasonable opportunity of being heard to the assessee. The ground taken by the assesse is, therefore, partly allowed for statistical purpose.

93. Ground No. 20 is against the sustenance of disallowance of Rs. 23,33,000/- out of interest paid on borrowings.

94. Brief facts of the above issue are that the A.O. noted that the assessee had advanced an amount of Rs. 2 crores on 31-7-1984 to M/s Senegal Investments and Trading Co. Ltd. on which no interest has been charged. Another advance of Rs. 1,63,10,000/- was made on 27-3-1985 and further an amount of Rs. 25,000/- on 28-3-1985. The A.O. after considering that the assessee has received back an amount of Rs. 4,25,000/- worked out the interest @ 17 ½ % Rs. 23,33,000/- on the interest free amount of Rs. 2 crores and added to the income of the assessee. On appeal the ld. CIT(A) after following the decision in the case of Phaltan Sugar Works Ltd. v. CIT, 215 ITR 582 (Bom) based on Phaltan Sugar Works Ltd. v. CWT 208 ITR 989 (Bom) confirmed the disallowance made by the A.O.

95. At the time of hearing the ld. Sr. Counsel for the assessee, at the outset, submits that there is no provision under the Act for notional addition of interest income. He further submits that Senegal Investment and Trading Co. Ltd. which is 100% subsidiary has taxable income and has paid taxes on its income, therefore, there is no diversion of income. He further submits that the assessee company has used its own funds for interest free advances. As on April 1, 1984, i.e. at the start of the year, the share capital, free reserves and depreciation reserves stood at Rs. 125.64 crores and at the close of the year i.e. as on March 31, 1985, the same were at Rs. 160.73 crores. The cash profit earned during the year i.e. before depreciation and after taxes was of Rs. 31.47 crores. As against this, the advance was of just Rs. 3.58 crores. Since the assessee has utilized its own funds, the question of disallowance of interest should not arise. He further submits that the issue is covered in favour of the assessee by the decision of the Tribunal in assessee’s own case for the assessment years 1981-82, 1982-83, 1983-84 and 1984-85. Reliance was also placed on the judgment of Hon’ble Bombay High Court in Reliance Utilities and Power Ltd. 313 ITR 340 (Bom).

96. On the other hand the ld. D.R. supports the order of A.O. and the ld. CIT(A).

97. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute inasmuch as the assessee’s contention that the assessee company was having its own funds aggregating to Rs. 160.73 crores as on 31-3-1985 and out of it, the assessee has advanced Rs. 3.58 crores, was not controverted by the Revenue even at this stage.

98. In CIT vs. Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Bom) it has been held (Headnotes):

“ Held, dismissing the appeal, that if there were funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption was established considering the finding of fact both by the Commissioner (Appeals) and the Tribunal. The interest was deductible.”

99. In Munjal Sales Corporation vs. CIT (2008) 298 ITR 298 (SC) it has been held (Headnote):  

Held, also, that since the opening balance of the profits of the assessee-firm as on April 1, 1994, was Rs. 1.91 crores, and the profits were sufficient to cover the loan given to a sister concern of Rs. 5 lakhs only, the Appellate Tribunal ought to have held that the loan given was from the assessee’s own funds”.

100. Respectfully following the above decisions and keeping in view that the assessee’s own funds were sufficient to cover the loan given to Senegal Investments and Trading Co. Ltd., we are of the view that the ld. CIT(A) was not justified in sustaining the disallowance of interest of Rs. 23,33,000/- and accordingly we delete the same. The ground taken by the assessee is, therefore, allowed.

101. Ground No. 21 is against the sustenance of disallowance of forfeiture of security deposits/performance guarantee deposit of Rs. 50 lacs.

102. Brief facts of the above issue are that the A.O. noted that in the return of income, the assessee has claimed an amount of Rs.50,00,000/- being performance guarantee forfeited which has been credited to the P & L account is not in the nature of income and hence not liable to tax. He observed that the company entered into an agreement with Hindustan Lever Ltd. Under the terms of agreement Hindustan Lever Ltd. agreed to lift a certain quantity of Soda Ash from the assessee purely on returnable basis. To secure its interest the assessee received a sum of Rs.50,00,000/- as guarantee money.

Hindustan Lever Ltd. failed to return on stipulated dates 5000 M.T. at Soda Ash which the company had supplied on loan basis. Therefore, as per the terms of agreement the assessee forfeited the deposit amounts to Rs.50,00,000/-. The breach of contract occurred during the previous year. In support of the claim, the assessee has submitted as under:-

(1) The agreement dt. 31.1.1985 was for giving material purely on loan and on a returnable basis. This Agreement was not a contract of sale.

(2) The amount of Rs.50 lakhs was received as deposit towards performance of contract, viz. to guarantee the return of material on or before 31st March, 1985.

(3) The deposit was not adjustable against the price of 5000 tonnes of Soda Ash, nor was it to be even reduced in the event of partial return of Soda Ash by Hindustan Lever Ltd.

(4) As per the terms of contract, the entire amount of Rs. 50 Lakhs was required to be forfeited if HLL failed to perform their part of the arrangement, viz., to return the full quantity by 31 March.

The A.O. did not accept the assessee’s stand. According to the A.O., the amount of Rs.50 lakhs was received by the assessee in the course of its business activities relating to trading. This amount of Rs. 50 lakhs was to secure its stock interest and was basically to ensure any loss as a result of rise in prices of Soda Ash in the market and non fulfillment of assessee’s commitments to its regular dealers. It is supported by the averments in the agreement itself. At clause 1 of the agreement dt. 31.1.85 it is mentioned,

“............... it being clearly understood that as soon as our own imported material arrives, this quantity of 5000 tonnes shall be returned to you, or upon your mandate to actual users at a price not exceeding the price prevailing then for Tata Soda Ash.” At a latter stage, the agreement at page 2 column 3 reads “in the event of a breach of this guarantee, the aforesaid sum of Rs.50 lacs shall stand forfeited”. It is, therefore, clear that receipt of Rs.50 lacs is during the course of trading activities of the assessee and has intimate nexus with normal business and hence is in the nature of trade receipts taxable as income. It may be worthwhile to mention that the ratio of Supreme Court’s decision in the case of Chowranghee Sales Bureau 87 ITR 542 and Sinclair Murrey & Co. 97 ITR 675. The Hon’ble Supreme Courts observation indicated that an amount received during the course of normal business activities of assessee is a trade receipt and taxable income. Therefore, the A.O. treated the amount of Rs.50 lakhs as taxable income. The A.O. supported his stand by the decision of Hon’ble Punjab & Haryana High Court in the case reported in 128 ITR 60 and 21 CTR 109.

103. On appeal, the ld. CIT(A) observed that it is settled law that the amount received as compensation for breach of trading contract or for the loss of earnings as distinct from the loss of source of earnings is a trading receipt.

Reliance in this regard was placed in CIT vs. Mannaji & Co. 86 ITR 29(SC) and CIT vs. Rai Bahadur Jairam Valji 35 ITR 148 (SC). He further observed that in the present case it cannot be imputed that the breach of contract affected the source of earnings and not merely caused loss of earnings of the appellant and, hence, it was clearly a trading receipt arising from a contract regarding disposal of its finished goods. He further observed that the fact that the contract was not for sale but for supply of goods on returnable basis does not alter the position because the money was forfeited towards the loss of finished goods which was like adjustment against sale. He further observed that the appellant has itself treated the amount as income by writing off the account of M/s Hindustan Lever Ltd. which was a trading account. The ld. CIT(A) following the decision in the case of CIT vs. T.S. Sundaram Iyengar & Sons, 222 ITR 344 (SC) and in Protosh Engineering Co. Pvt. Ltd. v. CIT 211 ITR 919 (Bom) held that the amount was assessable as income and accordingly upheld the order passed by the A.O.

104. At the time of hearing, the ld. Sr. Counsel for the assessee submits as under:-

“While filing the Return of Income, the Appellant Company claimed that an amount of Rs.50,00,000/- being performance guarantee deposit received from M/s Hindustan Lever Ltd. (HLL) and forfeited by the Company on account of non-performance of contract is a capital receipt and not chargeable to tax.

It was submitted that HLL, who used to import Soda Ash for its internal consumption approached Company to supply Soda Ash on loan basis so that it can maintain its export target. The Soda Ash was to be returned out of its imports on or before March 31, 1985. For this purpose, M/s. HLL gave guarantee of Rs.50,00,000/-.

HLL by March 31, could not receive its imported consignment and could not return Soda Ash taken on loan and Company forfeited the deposit for nonperformance and claimed it as capital receipt exempt from tax.

The Income-tax Officer discussed this issue in Assessment Order at Page 20 of the Assessment Order.  

The Appellant’s contentions were rejected on following grounds:-

> Rs.50,00,000/- was received by Appellant in the course of its business activity relating to trading.

> The amount of Rs. 50,00,000/- was to secure its interest in stock and was basically to ensure any loss as a result of a rise in price of Soda Ash in the market and non-fulfillment of Assessee’s commitments to its regular dealers.

> It is considered as trade receipt applying the ratio of Supreme Court’s decision in case of Chowringhee Sales and Sinclaire Murray & Co.

The CIT(A) confirmed the action of A.O. and stated in his order as under:

“It is settled law that the amount received as compensation for breach of trading contract or for the loss of earnings as distinct from the loss of source of earnings, is a trading receipt. Reliance is placed on the following case laws:

i) CIT V/S. Mannaji & Co. 86 ITR 29 (SC) — Money received on requisition of timber sheds on leasehold land as an award of compensation by the Civil Judge for loss of earnings was a revenue receipt.

ii) CIT V/s. Rai Bahadur Jairam Valji 35 ITR 148 (SC) — Payment received in settlement of rights under a trading contract, such as the money received as solatium for termination of the contract of supply of limestone and dolomite, was a revenue receipt.

In the present case, it cannot be imputed that the breach of contract affected the source of earnings and not merely caused loss of earnings of the appellant and hence it was clearly a trading receipt arising from a contract regarding disposal of its finished goods. The fact that the contract was not for sale but for supply of goods on returnable basis does not alter the position because the money was forfeited towards the loss of finished goods which was like adjustment against sale.

The appellant has itself treated the amount as income by writing off the account of M/s. Hindustan Lever Ltd. which was a trading account. Hence the amount was assessable as income in accordance with the ratio of the Supreme Court decision in the case of CIT V/s. T S Sundaram Iyengar & Sons 222 ITR 344 (SC) and the jurisdictional High Court decision in the case of Protosh Engineering Co. Pvt. Ltd. V/s. CIT 211 ITR 919, 923-24 (Bom). The disallowance was therefore in order.”  

The above 2 case laws relied upon by the CIT(A) are distinguishable in as much as in both the judgments as there was either loss of earnings or compensation on account of termination of trading contract. In our case there was no trading arrangement contract with HLL but merely supply of goods on loan / refundable basis.

Though the Learned Assessing Officer and CIT(A) has considered forfeiture of Performance Guarantee Deposit as revenue receipt, they ignored the following facts :

1. TCL was not having any business relationship with HLL.

2. TCL was not selling Soda Ash to HLL.

3. HLL was mostly importing Soda Ash and purchasing little quantity from local market.

4. HLL, a Multinational Company was exporting more than 50% of its production, hence was entitled to import Soda Ash at cheaper rates.

5. Because of non-availability of material in the local market and delay in receipt of imported Soda Ash, they approached TCL for supply of Soda Ash on loan basis so that they can keep their export targets.

In the given circumstances, it is not correct to say that forfeiture of security / performance guarantee deposit is a trade receipt. Since there was no trading arrangement between TCL and HLL, the deposit received and subsequently forfeited was on account of non-fulfilment of commitment, hence, the same is a capital receipt not chargeable to tax.

Apart from this, the mere fact that the assessee has made an entry of transfer in the accounts unilaterally will not enable the Department to say that Section 41(1) would apply. In this context, your attention is invited to explanation 1 to Section 41 which is applicable from 01.04.1997 whereas our issue pertains to A.Y. 1985-86. Your attention is also invited to the decision of Apex Court in CIT V/s. Sugauli Sugar 236 ITR 518.

The ld. Sr. Counsel for the assessee while distinguishing the decisions relied on by the A.O. and ld. CIT(A), relied on the following cases:-

(i) Omega Bright Steel, 11 ITD 404, page 388 Headnote

(ii) CIT vs. AVM Ltd. 146 ITR 355 (Mad) page 397 Headnote

(iii) State Trading Corporation 26 TTJ 506 (Jab) page 401 Headnote & 402 and

(iv) ACIT vs. Das & Co. (2010) 133 TTJ (Mum) 542.  

He, therefore, submits that since the receipt of Rs. 50 lacs did not bear the character of trading receipts, it cannot subsequently became a trading receipt and, therefore, the addition made by the A.O. and sustained by the ld. CIT(A) be deleted.

105. On the other hand, the ld. D.R. while relying on the order of the A.O. and the ld. CIT(A) also relied on the decision in the case of CIT vs. Rai Bahadur Jairam Valji (1959) 35 ITR 148 (SC), CIT vs. South India Pictures Ltd. (1956) 29 ITR 910 (SC) and CIT vs. Balaji Chitra Mandir (1985) 154 ITR 777 (A.P). She, therefore, submits that the addition made by the A.O. and sustained by the ld. CIT(A) be upheld.

106. In the rejoinder, the ld. Sr. Counsel for the assessee submits that all the decisions relied on by the ld. D.R. are in respect of compensation on settlement, compensation for loss of commission and for termination of contract, therefore, they are distinguishable and not applicable to the facts of the present case. He, therefore, submits that the addition of Rs. 50 lacs sustained by the ld. CIT(A) be deleted.

107. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute. We further find that it has been stated by the assessee that M/s Hindustan Lever Limited (HLL) who used to import Soda Ash for its internal consumption, approached the assessee company to supply 5000 MTs. of Soda Ash on loan basis so that it can maintain its export target. The Soda Ash was to be returned out its import on or before 31-3-1985. For this purpose, HLL gave guarantee of Rs. 50 lacs to the assessee company. A written offer in this regard was forwarded by HLL by their letter dated 31 January 1985 which, inter alia, provided that –

(i) Between 31 January 1985 and 21 March 1985, HLL will take from TCL, 5,000 tonnes of Soda Ash. This quantity of Soda Ash would be returned by HLL to TCL as soon as their import consignment was received.

(ii) In respect of 5,000 tonnes of Soda Ash taken over by HLL, they would pay to TCL the price ruling on the date of despatch FOR Mithapur.

(iii) HLL further irrevocably guaranteed to return 5,000 tonnes of imported Soda Ash on or before 31 March 1985. In order to prove their bonafides and good faith, they agreed to deposit a sum of Rs. 50 Lakhs as irrevocable guarantee for performance of their commitment to return the Soda Ash. This guarantee was irrevocable and effective, operative and valid under all circumstances. They further confirmed that in the event of breach of this guarantee, the deposit of Rs.50 Lakhs would stand forfeited.

(iv) The amount deposited was to be treated as a lump sum, and was not to be reduced in the event of there being any partial delivery by way of return of Soda Ash.

Immediately on receipt of letter dated 31 January 1985 from HLL, TCL confirmed the arrangement by their letter of same date and thereafter HLL forwarded to TCL a sum of Rs. 50 Lakhs towards the guarantee deposit, and also sent two further cheques for an aggregate amount of Rs.1,41,51,0l0/-, towards the full value of 5,000 tones of Soda Ash, under cover of their letter dated 31 January 1985. TCL informed HLL by their letter dated 4 March 1985 that in terms of the arrangement they would have to return 5,000 tonnes of Soda Ash, latest by 31 March, and such quantity would have to be dispatched by HLL directly to various customers of TCL in Gujarat State. By their further letter dated 21 March 1985, TCL confirmed to HLL that as desired by them, TCL had dispatched 5,000 tonnes of Soda Ash to various HLL factories in India. HLL could not return the material by 31 March 1985, and accordingly, in terms of the Agreement dated 31 January 1985, TCL forfeited the guarantee deposit of Rs.50 Lakhs and the amount of Rs.1,41,51,010 was adjusted towards the value of Soda Ash supplied earlier, which was treated as a sale.

According to the assessee the amount of guarantee deposit of Rs. 50 Lakhs which was forfeited by TCL is a capital receipt, and is not chargeable to tax on the following grounds :

(i) The Agreement dated 31 January 1985 was for giving material purely on loan and on a returnable basis. This Agreement was not a contract of sale.

(ii) The amount of Rs. 50 Lakhs was received as deposit towards performance of contract, viz., to guarantee the return of material on or before 31 March 1985.

(iii) The deposit was not adjustable against ‘the price of 5,000 tonnes of soda ash, nor was it to be even reduced in the event of partial return of soda ash by HLL.

(iv) As per the terms of contract, the entire amount of Rs. 50 Lakhs was required to be forfeited if HLL failed to perform their part of the arrangement, viz., to return the full quantity by 31 March.  

108. However, the A.O. held that the receipt of Rs. 50 lacs is during the course of trading activities of the assessee and has intimate nexus with normal business and hence it is in the nature of trade receipts taxable as income. On appeal, the ld. CIT(A) while observing that the contract was not for sale but for supply of goods on returnable basis does not alter the position because the money was forfeited towards the loss of finished goods which was like adjustment against sale and keeping in view that the assessee itself treated the amount as income by writing off the account of HLL which was a trading account, upheld the addition made by the A.O.

109. It is settled law that it is only a receipt as income which can attract such levy. Receipts of a capital nature do not attract the levy.

110. In CIT vs. State Trading Corporation of India Ltd. (2001) 247 ITR 114 (Del) it has been observed and held as under (page 117):-

“Whether a particular receipt is capital or trading income from business has on many occasions engaged the attention of the apex court. It was observed by the apex court in Kettlewell Bullen and Co. Ltd. v. CIT [1964] 53 ITR 261 that broadly stated (page 270) “what is received for loss of capital is a capital receipt, what is received as profit in a trading transaction is taxable income. But the difficulty arises in ascertaining whether what is received in a given case is compensation for loss of a source of income or profit in a trading transaction.” In Oberoi Hotel Pvt. Ltd. v. CIT [1999] 236 ITR 903 (SC), it was held that the amount received by the assessee for giving up its right to purchase and/or to operate the property or for getting it on lease before it was transferred or let out to other persons was in the nature of a “consideration”. It was not for settlement of rights under a trading contract but the injury was inflicted on the capital asset of the assessee and giving up the contractual right on the basis of the principal agreement had resulted in loss of source of the assessee’s income and it was a capital receipt. Whether a payment of compensation for termination of an agency is a capital or revenue receipt has to be considered by finding out whether the agency was in the nature of a capital asset in the hands of the assessee or whether it was only part of his stock-in-trade (see CIT v. Rai Bahadur Jairam Valji [1959] 35 ITR 148 (SC)). Compensation for injury in trading operations, arising from breach of contract or in consequence of exercise of sovereign rights, is revenue. Such transactions are distinguishable from another class of cases where compensation is paid as a solatium for loss of office. Such compensation may be regarded as capital or revenue. It would be regarded as capital if it is for loss of an asset of enduring value to the assessee, but not where payment is received in settlement of loss in a trading transaction. Where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of contract being a normal incident of the business, and such cancellation leaves him free to carry on the trade (freed from the contract terminated) the receipt is revenue. Where by the cancellation of an agency, the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee’s income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt. The aforesaid principle, laid down in Kettlewell Bullen and Co. Ltd. v. CIT [1964] 53 ITR 261 (SC), was relied upon in the case of Karam Chand Thapar and Bros. P. Ltd. v. CIT [1971] 80 ITR 167 (SC).

In Travancore Rubber and Tea Co. Ltd. v. CIT [2000] 243 ITR 158 (SC), it was observed that (page 166) :

“In determining whether compensation received for breach of a contract is a capital or trading receipt, the relevant rule has been formulated by Diplock L.J., in London and Thames Haven Oil Wharves Ltd. v. Attwooll (Inspector of Taxes) [1968] 70 ITR 460 (CA) at page 488 as :

‘Where, pursuant to a legal right, a trader receives from another person compensation for the trader’s failure to receive a sum of money which, if it had been received, would have been credited to the amount of profits (if any) arising in any year from the trade carried on by him at the time when the compensation is so received, the compensation is to be treated for income-tax purposes in the same way as that sum of money would have been treated if it had been received, instead of the compensation’.”

The logic of the principle is that the assessee’s right to recover the compensation was to place the assessee in the same position as if the breach had not taken place. It all depends upon the factual position whether forfeiture related to a capital asset or was a part of the stock-in-trade en- compassed by trading activity.”

111. Under The Sale of Goods Act, 1881, “sale” means transfer of property from one person to another in consideration of the price paid or promise or other valuable consideration. Applying the above law we find that there is no dispute that the assessee has received Rs. 1,41,51,010/- towards full value of sale of 5000 MTs. of Soda Ash and has accounted for the same in the books of accounts as sales. However, there is no material on record to show the date of entry of consideration of the sale price recorded i.e. at the time of delivery of goods or receipt of sale value of Rs. 1,41,51,010/- or at a later stage i.e. on or before 31-3-1985. We further find that it has been agreed upon by the parties that Soda Ash was to be returned by the HLL to the assessee company out of its imported consignment. However, there is no material on record to show as to whether the HLL has received the imported consignment of Soda Ash on or before 31-3-1985. There is also no material on record as to whether any effort was made by the HLL to return the supply of 5000 MTs. of Soda Ash to the assessee by 31-3-1985 or has refused to return the goods or has sought extension of time to return the goods to the assessee. Under the Indian Contract Act, 1872 such contingent contracts are void. Under Section 32 of the Indian Contract Act, 1872 “Enforcement of contracts contingent on an event happening - Contingent contracts to do or not to do anything in an uncertain future event happens, cannot been forced by law unless and until that event has happened. If the event becomes impossible, such contracts become void”. We further find that in the agreement there is no mention about the refund of sale price of Rs. 1,41,51,010/- and security amount of Rs. 50 lacs if 5000 MTs. if imported Soda Ash is returned to the assessee by HLL on or before 31-3-1985. In the absence of all these relevant material on record, we are of the view that, in the interest of justice, the matter should go back to the file of the A.O. and accordingly we set aside the orders passed by the Revenue Authorities on this account and restore the matter back to the file of the A.O. to decide the same afresh in the light of our observations hereinabove and according to law after considering the relevant provisions of the Indian Contract Act, 1872 and the decisions cited in para 110 of this order and also the decisions cited by both the parties (supra), after providing reasonable opportunity of being heard to the assessee. The ground taken by the assessee is, therefore, partly allowed for statistical purpose.-

112. Ground No. 22 is against the sustenance of disallowance of extra shift depreciation on certain items of plant and machinery.

113. At the time of hearing the ld. Sr. Counsel for the assessee submits that he does not want to press the above ground which was not objected to by the ld. D.R.

114. That being so and in the absence of any supporting material placed on record by the ld. Sr. Counsel for the assessee, the ground taken by the assessee is, therefore, rejected being not pressed.

115. Ground No. 23 is against the sustenance of disallowance of investment allowance on certain items of plant and machinery.

116. Brief facts of the above issue are that in revised return the assessee has claimed investment allowance of Rs. 6,90,85,818/-. It is due to the decapitalisation of future interest. It was further increased to Rs. 6,90,89,070/- as per letter dtd. 26-2-1988. The assessee company has enhanced its claim by Rs. 5,36,896/- which was claimed on exchange loss.

According to the A.O. since the exchange loss is not plant and machinery, the claim in this regard is not allowable. He further observed that certain items are related to the civil work nature which are not integral part of plant and machinery. Therefore, the A.O. disallowed the claim of investment allowance of Rs. 54,58,163/-. On appeal the ld. CIT(A) upheld the disallowance made by the A.O.

117. At the time of hearing the ld. Sr. Counsel for the assessee submits that the addition to various sections of plant/factory viz. salt work, power transmission lines in salt work, weighbridge and civil work for installation of machinery has been considered in the nature of civil work, not integral part of plant and machinery on which investment allowance was not allowed by the A.O. However, he submits that on the similar issue the Tribunal in assessee’s own case for A.Y. 1984-85 (supra) has set aside the issue to the file of the A.O., therefore, the issue may be set aside to the file of the A.O.

118. On the other hand the ld. D.R. supports the order of the A.O. and the ld.CIT(A).

119. We have carefully considered the submissions of the rival parties and perused the material available on record. As regards the disallowance of investment allowance on exchange loss, we find that the Tribunal in assessee’s own case for the A.Y. 1984-85 (supra) vide findings recorded in para 7.1 of the order dtd. 27-12-2007 has decided the issue in favour of the assessee. Respectfully following the same, we direct the A.O. to allow the investment allowance on exchange loss treated as capital expenditure.

120. As regards the disallowance of investment allowance on certain items treated in the nature of civil work and not integral part of the plant and machinery, we find merit in the plea of the ld. Sr. Counsel for the assessee that the Tribunal on the similar issue has upheld the order of the ld. CIT(A) who set aside the issue to the file of the A.O. vide finding recorded in para 7 of its order dtd. 27-12-2007 (supra). Respectfully following the same, we set aside the said issue to the file of the A.O. to decide the same afresh in the light of the direction given by the Tribunal in assessee’s own case (supra) and according to law after providing reasonable opportunity of being heard to the assessee. The ground taken by the assessee is, therefore, partly allowed for statistical purpose.

121. Ground No. 24 is against the levy of interest u/s 139(8) of the Act.

122. At the time of hearing the ld. Sr. Counsel for the assessee submits that this ground is consequential which was not objected to by the ld. D.R.  

123. That being so we direct the A.O. to allow consequential relief to the assessee in respect of levy interest u/s 139(8) after giving effect of this order. The ground taken by the assessee is, therefore, allowed.

124. Ground No. 25 is against the non-admission of additional ground of appeal by the CIT(A).

125. At the time of hearing the ld. Sr. Counsel for the assessee did not argue the above ground. This being so and in the absence of any supporting material placed on record by the ld. Sr. Counsel for the assessee, the ground taken by the assessee, therefore, rejected.

ITA 5452/M/2002 (By Revenue)

126. Ground No. 1 is against the deletion of addition made u/s 37(2A) of the Act Rs. 3,32,457/-.

127. Brief facts of the above issue are that the A.O. observed that the assessee has paid a sum of Rs. 3,32,457/- to various restaurants in Bombay towards food subsidy, The system in this regard is that coupons are issued to the employees who will give these coupons to the specified restaurants and have food, snacks etc. According to the A.O. the nature of expenditure remains expenditure on food etc. paid to the restaurants for the employees and, therefore, the amount is covered u/s 37(2A) of the Act because the expenditure is incurred not in the office nor in the factory nor at the place of working of the employee and, hence, he disallowed an amount of Rs. 3,32,457/- after allowing statutory deduction u/s 37(2A) of the Act. On appeal the ld. CIT(A) following the order for the assessment years 1994-95 and 1995-96, however, deleted the addition made by the A.O.

128. At the time of hearing the ld. D.R. supports the order of the A.O.

129. On the other hand, the ld. Sr. Counsel for the assessee submits that this issue is covered in favour of the assessee by the decision of the Tribunal in assessee’sown case for the assessment years 1995-96, 1996-97 and 1993- 94. He further submits that the Departmental appeal on the identical issue has been rejected by the Hon’ble jurisdictional High Court in Tata Sons (ITA No. 381 of 2009). He, therefore, submits that the order passed by the ld. CIT(A) in deleting the disallowance be upheld.

130. We have carefully considered the submissions of the rival parties and perused the material available on record. We find merit in the plea of the ld. Sr. Counsel for the assessee that the issue is covered in favour of the assessee by the consistent view of the Tribunal in assessee’s own case in ITA No. 3082/Mum/2002 for A.Y. 1995-96 order dtd. 26-7-2006 wherein the Tribunal following the earlier orders of the Tribunal in assessee’s own case vide para 25 of the order, upheld the order of the ld. CIT(A) in deleting the disallowance made by the A.O. Respectfully following the same and keeping in view that the rule of consistency, the ground taken by the Revenue is, therefore, rejected.  

131. Ground No. 2 is against the deletion of disallowance of Rs. 5 lacs in respect of expenditure on scientific research u/s 35(1)(ii) of the Act.

132. Brief facts of the above issue are that the A.O. observed that the assessee has claimed that Rs. 5 lacs was paid to Indian Institute of Chemical Engineers, Calcutta. This institution is covered under provisions of Section 35(1)(ii) of the Act. However, Receipt No. 4771 dtd. 11-5-1984 of the Institute shows that the contribution is towards building fund. According to the A.O. since the contribution is towards capital assets, hence, he disallowed the same. On appeal, the ld. CIT(A) while observing that there is no requirement u/s 35(1)(ii) that the association should incurred the contribution on revenue account, section 35(1)(ii) only speaks of “any sum paid to a scientific research association” and capital or revenue nature of expenditure on scientific research is relevant for section 35(1)(i) of the Act, directed the A.O. to allow the deduction after verifying the genuineness of the payment.

133. At the time of hearing the ld. D.R. supports the order of the A.O.

134. On the other hand, the ld. Sr. Counsel for the assessee submits that for claiming deduction u/s 35(1)(ii), the basic requirement is receipt and approval which is submitted and the relief is correctly allowed. Nature of expenditure whether capital or revenue is not relevant for section 35(1)(ii) of the Act. He, therefore, submits that the order passed by the ld. CIT(A) in deleting the disallowance be upheld.  

135. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute inasmuch as it is also not in dispute that the assessee has made payment of Rs. 5 lacs to the Indian Institute of Chemical Engineers, Calcutta which is covered under the provisions of section 35(1)(ii) of the Act. In the absence of any material to show that the expression u/s 35(1)(ii) that “any sum paid to a scientific research association” does not include the payment made by the assessee or such payment is not allowable, we are of the view that the ld. CIT(A) was fully justified in deleting the disallowance made by the A.O. The ground taken by the Revenue is, therefore, rejected.

136. Ground No. 3 is against the deletion of disallowance of Rs. 261500/- made on account of contribution to Institutions.

137. Brief facts of the above issue are that the A.O. noted that the assessee has debited the following amounts as sundry contributions:-

i)	Mithapur Nutan Bal Sikshan Sang	Rs. 1,60,000/-
ii)	Kindergarten Primary School	Rs. 1,00,000/-
iii)	Primary School, Mithapur	Rs. 1,500/-
	Total	Rs. 2,61,500/-

According to the A.O. similar disallowance has been made in A.Y. 1984-85. For the same reasons, he disallowed the above amount in this year also. On appeal, the ld. CIT(A) following the appellate order for the assessment years 1982-83 to 1984-85 and 1993-94 to 1995-96 and the Tribunal order for the A.Y. 1992-93, however, deleted the disallowance made by the A.O.

138. At the time of hearing the ld. D.R. supports the order of the A.O.

139. On the other hand, the ld. Sr. Counsel for the assessee submits that this issue is covered in favour of the assessee by the order of the Tribunal in assessee’s own case for the assessment years 1996-97, 1984-85, 1983-84, 1992-93, 1993-94,1994-95 and 1995-96, therefore, the order passed by the ld. CIT(A) in deleting the disallowance be upheld.

140. We have carefully considered the submissions of the rival parties and perused the material available on record. We find merit in the plea of the ld. Sr. Counsel for the assessee that the Tribunal in assessee’s own case in ITA No. 5728/M/2004 and in ITA No. 6496/M/2004 for A.Y. 1996-97 order dtd. 17-8-2007 vide para No. 16 of the order while observing that the issue is covered in favour of the assessee in its own case for the assessment years 1995-96, 1994-95 and 1993-94, upheld the order of the ld. CIT(A) in deleting the disallowance made by the A.O. In absence of any distinguishing feature brought on record by the Revenue, we respectfully following the consistent view of the Tribunal, decline to interfere with the order passed by the ld. CIT(A) on this account. The ground taken by the Revenue is, therefore, rejected.  

141. In the result, assessee’s appeal stands partly allowed for statistical purpose and the Revenue’s appeal stands dismissed.

 

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