HINDUSTAN CIBA-GEIGY LTD, MUMBAI V. DCIT SP RG 23, MUMBAI

CO 105/MUM/1996

• Counselvise Citation: [2010] 122 COUNSELVISE.COM (IT) 5428 (ITAT-MUMBAI)
• Duration Of Justice: 14 year(s) 4 month(s) 22 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 04-11-2010
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 12-08-2010
• Assessment Year: 1991-1992
• Appeal Filed On: 12-06-1996
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SANJIV DUTT
• Assessee Lawyers: J D MISTRY
• Keywords: Capital asset; Gift; Business income; Depreciation; Business expenditure; Speculation loss; Deemed dividend; Revenue expenditure; Capital expenditure
• Section: 244A; 80HHC; 37(1); 32; 37; 28; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH I BEFORE SHRI N.V. VASUDEVAN (JM) & SHRI R.K. PANDA ( AM) I.T.A.NO. 9566/MUM/95 (ASSESSMENT YEAR : 1991-92) DCIT SPECIAL RANGE-23 AAYAKAR BHAVAN M.K. ROAD MUMBAI-400 020. VS. HINDUSTAN CIBA GEIGY LTD. ROYAL INSURANCE BUILDING 14, JAMSHEDJI TATA ROAD CHURCHGATE MUMBAI-400 020. APPELLANT RESPONDENT I.T.A.NO. 9679/MUM/95 (ASSESSMENT YEAR : 1991-92) HINDUSTAN CIBA GEIGY LTD. ROYAL INSURANCE BUILDING 14, JAMSHEDJI TATA ROAD CHURCHGATE MUMBAI-400 020. VS. DCIT SPECIAL RANGE-23 AAYAKAR BHAVAN M.K. ROAD MUMBAI-400 020. APPELLANT RESPONDENT C.O.NO. 105/MUM/96 IN I.T.A.NO. 9566/MUM/95 (ASSESSMENT YEAR : 1991-92) HINDUSTAN CIBA GEIGY LTD. ROYAL INSURANCE BUILDING 14, JAMSHEDJI TATA ROAD CHURCHGATE MUMBAI-400 020. VS. DCIT SPECIAL RANGE-23 AAYAKAR BHAVAN M.K. ROAD MUMBAI-400 020. CROSS OBJECTOR RESPONDENT PAN/GIR NO. : 43-002-CZ-6281 ASSESSEE BY : SHRI J.D. MISTRY DEPARTMENT BY : SHRI SANJIV DUTT ORDER PER BENCH :- ITA NO.9566/MUM/94 IS AN APPEAL BY THE REVENUE WHI LE ITA NO. 9679/MUM/04 IS AN APPEAL BY THE ASSESSEE AND BOTH T HESE APPEALS ARE DIRECTED AGAINST THE ORDER OF THE CIT(A)-XXIII, MUM BAI, RELATING TO 2 A.Y.91-92. THE ASSESSEE HAS ALSO FILED A CROSS OBJ ECTION AGAINST THE VERY SAME ORDER OF THE CIT(A). 2. FIRST WE SHALL TAKE UP FOR CONSIDERATION THE AP PEAL BY THE REVENUE. GROUND NO. 1 RAISED BY THE REVENUE READS AS FOLLOWS :- ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, LEARNED CIT(A) ERRED IN DELETING THE DISALLOWANCE AMOUNTING TO RS. 16,63,780/- MADE BY THE ASSESSING OFFICER UNDER RUL E 6D BY HOLDING THAT INCIDENTAL EXPENSES CONNECTED TO TOUR SHOULD NOT BE INCLUDED WHILE COMPUTING THE DISALLOWANCE UNDER PRE SCRIBED RULES. 3. IN COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESS ING OFFICER CALLED UPON THE ASSESSEE TO FURNISH FULL AND COMPLETE DETA ILS REGARDING TRAVELLING EXPENSES. UNDER SUB-SECTION 3 TO SECTION 37 OF THE ACT AS IT EXISTED UP TO A.Y. 1997-98, ANY EXPENDITURE INCURRE D BY AN ASSESSEE IN CONNECTION WITH TRAVELING BY AN EMPLOYEE OR ANY OTH ER PERSON INCLUDING HOTEL EXPENSES OR ALLOWANCE PAID IN CONNECTION WITH SUCH TRAVELING, SHALL BE ALLOWED AS A DEDUCTION IN COMPUTING TOTAL INCOME ONLY TO THE EXTENT AND SUBJECT TO SUCH CONDITION, IF ANY, AS MAY BE PR ESCRIBED. RULE 6D OF THE INCOME TAX RULES IMPOSED RESTRICTION ON TRAVELI NG EXPENSES, INSIDE INDIA AND OUTSIDE THE HEADQUARTERS CLAIMED AS DEDUC TION IS LIMITED TO TRAVELLING EXPENSES ACTUALLY INCURRED AND DAILY AL LOWANCE NOT EXISTING A SPECIFIED LIMIT AND DEPENDING UPON WHETHER THE BOAR DING OR LODGING FACILITIES ARE AVAILABLE TO THE EMPLOYEES OR TO THE OTHER PERSONS. IN VIEW OF THE AFORESAID PROVISIONS, ASSESSEE HAD ON ITS OWN S UBMITTED THAT A SUM OF RS. 23,36,220/- IS LIABLE TO BE DISALLOWED AND T HE SAID SUM WAS OFFERED FOR TAXATION IN THE ASSESSEES RETURN OF INCOME. IN REPLY TO THE QUERY OF THE ASSESSING OFFICER REGARDING DETAILS OF TRAVELIN G EXPENSES, THE ASSESSEE SUBMITTED THAT THERE WERE LARGE NUMBER OF VOUCHERS AND THEREFORE THOSE VOUCHERS COULD NOT BE PRODUCED BEFORE THE ASSESSING OFFICER. THE ASSESSING OFFICER MADE A REFERENCE TO THE DECISION OF HON'BLE KARNATAKA HIGH COURT IN THE CASE OF M/S. STUMPP SCHUELLE & SH OMAPPA LTD., VS. CIT, 192 ITR 152 AND EXPRESSED THE OPINION THAT THE DISALLOWANCE MADE 3 BY THE ASSESSEE ON ITS OWN WAS NOT SUFFICIENT. THE ASSESSING OFFICER THEREFORE DISALLOWED A SUM OF RS. 40,00,000/- OUT O F DOMESTIC TRAVELLING EXPENSES UNDER RULE 6D(II) OF THE RULES. 4. BEFORE LEARNED CIT(A), THE ASSESSEE SUBMITTED T HAT DECISION OF HON'BLE KARNATAKA HIGH COURT REFERRED TO BY THE ASSESSING O FFICER WAS A CASE WITH REFERENCE TO EXPENSES ON TRAVELING WHEN NO BUS INESS OF THE ASSESSEE IS CONDUCTED AND WAS THEREFORE NOT RELEVANT TO THE CASE OF THE ASSESSEE. THE ASSESSEE RELIED ON THE DECISION OF HON'BLE CALC UTTA HIGH COURT IN THE CASE OF CIT VS. VIDYUT METALLICS LTD., 203 ITR 779 (CAL), WHEREIN IT WAS HELD THAT RULE 6D OF THE I.T. RULES READ WITH SECTI ON 37(3) OF THE ACT, LIMITS TO EXPENDITURE INCURRED ON TOUR TO THE EXTEN T OF STAY IN HOTELS CONFINING IT TO DAILY ALLOWANCE REFERRED TO IN RULE 6D AND DOES NOT EXTENT TO ANY OTHER EXPENSES INCURRED PROVIDED THOSE EXPEN SES ARE WHOLLY AND EXCLUSIVELY MADE OUT FOR THE PURPOSE OF BUSINESS. F URTHER REFERENCE WAS MADE TO THE DECISION OF SPECIAL BENCH OF THE ITAT I N THE CASE OF SUNDARAM FINANCE LTD., 7 ITD 845, WHEREIN IT WAS HE LD THAT RULE 6D DOES NOT COVER EXPENSES LIKE TELEPHONE BILLS, SECRE TARIAL ASSISTANCE ETC. THE ASSESSEE THEREFORE SUBMITTED THAT DISALLOWANCE MADE BY THE ASSESSEE WAS AFTER TAKING INTO CONSIDERATION RATIO LAID DOWN IN THE AFORESAID DECISION. FURTHER IT WAS SUBMITTED THAT A DHOC ADDITION OF RS. 16,63,780/- (RS. 40,00,000 MINUS RS. 23,36,220) IS WITHOUT ANY BASIS AND TOTALLY UNREASONABLE. ON A CONSIDERATION OF THE ABOVE SUBMISSIONS, LEARNED CIT(A) DELETED THE ADDITION MADE BY THE ASS ESSING OFFICER OBSERVING AS FOLLOWS :- AFTER DUE CONSIDERATION I FIND SUFFICIENT FORCE IN THE SUBMISSIONS OF THE LEARNED COUNSEL OF THE APPELLANT. AFTER CONSIDE RING THE RELEVANT FACTS AND CIRCUMSTANCES OF THE CASE I AGREE WITH TH E APPELLANT THAT DECISION OF KARNATAKA HIGH COURT IN THE CASE OF STU MPP, SCHUELLE & SOMAPPA LTD. VS. CIT REPORTED IN 190 ITR 152 CANNOT BE MADE APPLICABLE IN THE CASE OF THE APPELLANT ON ACCOUNT OF DISTINGUISHING FACTS AS POINTED OUT BY LEARNED A/R OF THE APPELLAN T. THE CASE OF THE APPELLANT IN MAY VIEW GETS FULL SUPPORT BY THE FOLLOWING JUDICIAL PRONOUNCEMENTS RELIED UPON BY THE APPELLANT : 4 CIT VS. GANNON DUNKERLY & CO. REPORTED IN 69 TAXMAN 563 (BOM) CIT VS. VIDYUT METALLICS LTD. REPORTED IN 203 ITR 779 (CAL) DECISION OF SPECIAL BENCH OF THE MADRAS ITAT IN THE CASE OF SUNDARAM FINANCE LTD. VS. IAC REPORTED IN 7 ITD 845 . THE ADDITIONAL DISALLOWANCE OF RS. 16,63,780/- HAS BEEN MADE BY THE DC(IT) WITHOUT POINTING OUT A SINGLE INADMISSIB LE ITEM ON PRESUMPTION ON ADHOC BASIS. THE ADDITION DISALLOWAN CE OF RS. 16,63,780/- MADE BY THE DC(IT) IS THEREFORE DELETED BEING UNJUST. 5. AGGRIEVED BY THE AFORESAID ORDER OF LEARNED CIT (A), THE REVENUE HAS RAISED GROUND NO. 1 BEFORE THE TRIBUNAL. 6. BEFORE US, LEARNED DR RELIED ON THE DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. AOROW INDIA LTD., 229 ITR 325, WHEREIN HON'BLE BOMBAY HIGH COURT HAS HELD THAT CEILING OF EXPENDITURE BY AN EMPLOYEE ON TRAVELING AS LAID IN RULE 6D HAS TO BE COMPUTED ON PER TRIP BASIS AND NOT ON PER PERSON BASIS. ACCORDING TO HIM , THE ASSESSING OFFICER SHOULD BE DIRECTED TO RECOMPUTE THE DISALLO WANCE IN THE LIGHT OF HON'BLE BOMBAY HIGH COURT DECISION REFERRED TO ABOV E. 7. THE LEARNED COUNSEL FOR THE ASSESSEE ON THE OTH ER HAND SUBMITTED THAT THE ISSUE UNDER CONSIDERATION IN THIS GROUND O F APPEAL IS TOTALLY DIFFERENT FROM WHAT WAS DECIDED BY HON'BLE BOMBAY H IGH COURT IN THE CASE OF AOROW INDIA LTD. (SUPRA). IT WAS SUBMITTED BY HIM THAT THE DECISION OF HON'BLE CALCUTTA HIGH COURT IN THE CASE OF VIDUT METALLICS LTD. (SUPRA) SQUARELY COVERS THE ISSUE IN FAVOUR OF THE ASSESSEE. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. RULE 6D OF THE INCOME TAX RULES 1962 READ WITH SECTION 37(3) OF THE INCOME TA X ACT , LIMITS OF EXPENDITURE INCURRED ON TRAVELING TO THE EXTENT OF STAY IN HOTEL CONFINING IT TO DAILY ALLOWANCE REFERRED TO IN RULE 6D AND DO ES NOT EXTEND TO ANY OTHER EXPENDITURE INCURRED PROVIDED EXPENDITURE WHO LLY AND EXCLUSIVELY LET OUT FOR THE PURPOSE OF BUSINESS. THE ASSESSEE H AD MADE THE DISALLOWANCE ON ITS OWN BY TAKING INTO CONSIDERATIO N THE ABOVE PRINCIPLES. THE DISPUTE, AS RIGHTLY POINTED OUT BY LEARNED COUNSEL FOR THE 5 ASSESSEE, IS NOT AS TO WHETHER DISALLOWANCE HAS TO BE COMPUTED ON A PER TRIP BASIS OR PER DAY BASIS. IN THE CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE LEARNED CIT(A) WAS RIGHT IN DELETING THE ADDITI ON MADE BY THE ASSESSING OFFICER. WE THEREFORE CONFIRM THE ORDER O F LEARNED CIT(A) AND DISMISS GROUND NO. 1 RAISED BY THE REVENUE. 9. GROUND NO. 2 HAS BEEN DECIDED WHILE DECIDING GR OUND NO. 4 OF THE ASSESSEES APPEAL. FOR THE REASONS STATED THEREIN, THIS GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 10. GROUND NO. 3 RAISED BY THE REVENUE READS AS FO LLOWS :- ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, LEARNED CIT(A) ERRED IN DELETING THE ADDITION TO THE CLOSIN G STOCK ON ACCOUNT F MODVAT CREDIT AMOUNTING TO RS. 1,16,35,000/-. 11. THE ASSESSING OFFICER ADDED A SUM OF RS. 1,16, 35,000/- TO THE CLOSING STOCK ON ACCOUNT OF MODVAT CREDIT. THE MAIN REASON FOR DOING SO WAS THAT THE CLOSING STOCK HAD TO BE VALUED AT COST AND COST INCLUDES ALL PAYMENTS MADE BY THE ASSESSEE INCLUDING ALL INDIREC T TAXES. THE ASSESSEE WAS FOLLOWING EXCLUSIVE METHOD OF ACCOUNTI NG, WHEREBY ALL THE COMPONENTS OF INVENTORY ARE VALUED EXCLUDING ALL FO RMS OF INDIRECT TAXES. THE ASSESSING OFFICER, HOWEVER, WAS OF THE VIEW THA T THIS WAS NOT A PROPER METHOD AND HE THEREFORE MADE THE AFORESAID A DDITION. 12. ON APPEAL BY THE ASSESSEE, LEARNED CIT(A) DELE TED THE ADDITION MADE BY THE ASSESSING OFFICER ACCEPTING ASSESSEES CONTE NTION THAT METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE TO DEBIT PURCHA SE OF RAW MATERIALS NET OF EXCISE DUTY AND THEREFORE CLOSING STOCK WAS ALSO TO BE REQUIRED TO BE VALUED AT COST NET OF EXCISE DUTY. THE ASSESSEE ALSO POINTED OUT THAT IF EXCISE DUTY IS ADDED TO THE PURCHASE AS WELL AS CLO SING STOCK, EFFECT ON PROFIT WILL BE NIL. THE DECISION OF CALCUTTA HIGH COURT IN THE CASE OF BERGER PAINTS INDIA LTD. VS. CIT, 44 ITR 573 WAS AL SO RELIED UPON BY THE ASSESSEE. ACCEPTING THE CONTENTIONS RAISED BY THE ASSESSEE, THE LEARNED CIT(A) DELETED THE ADDITION MADE BY THE ASSESSING O FFICER. 6 13. BEFORE US, IT IS NOT IN DISPUTE THAT THE ISSUE RAISED BY THE REVENUE IN GROUND NO. 3 HAS TO BE DISMISSED IN VIEW OF THE DEC ISION OF HON'BLE SUPREME COURT IN THE CASE OF INDO NIPPON CHEMICAL C O. LTD., 261 ITR 275 (SC). IN THE AFORESAID DECISION, HON'BLE SUPREM E COURT HAS HELD THAT WHETHER THE NET METHOD OF VALUATION OF INVENTORY OR GROSS METHOD OF VALUATION OF INVENTORY IS FOLLOWED BY THE ASSESSEE, THAT WILL NOT HAVE ANY IMPACT ON THE ULTIMATE PROFITS OF THE ASSESSEE AND THEREFORE ADDITION TO THE VALUE OF CLOSING STOCK BY INCLUDING EXCISE DUTY WAS NOT PROPER. IN VIEW OF THE ABOVE, THERE IS NO MERIT IN GROUND NO. 3 RAISED BY THE REVENUE AND THE SAME IS DISMISSED. 14. GROUND NO. 4 RAISED BY THE REVENUE READS AS FO LLOWS :- ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, LEARNED CIT(A) ERRED IN HOLDING THAT CAPITAL EXPENDITURE OF RS. 5,00,000/- INCURRED ON COMPUTER SOFTWARE AND SUPPORT CHARGES S HOULD BE ALLOWED UNDER REVENUE HEAD REGARDING THE REASONS AS SIGNED IN THE ASSESSMENT ORDER . 15. THE ASSESSING OFFICER DISALLOWED A SUM OF RS. 5,00,000/- IN RESPECT OF COMPUTER SOFTWARE AND SUPPORT CHARGES AND SOFTWA RE CHARGES. ACCORDING TO THE ASSESSING OFFICER, EXPENDITURE WAS CAPITAL EXPENDITURE. BEFORE LEARNED CIT(A), ASSESSEE POINTED OUT THAT AL L THE DETAILS OF COMPUTER SOFTWARE SUPPORT CHARGES AND SOFTWARE CHAR GES WERE FILED BEFORE THE ASSESSING OFFICER. IT WAS POINTED OUT TH AT SOFTWARE SUPPORT CHARGES FOR WANG VS/65 WERE RETAINERSHIP FEES PAID FOR TECHNICAL MAINTENANCE OF THE WANG VS/65 SYSTEMS AND ARE AKIN TO ANY OTHER MAINTENANCE CHARGES. IT WAS ARGUED THAT PAYMENTS WE RE NOT MADE FOR UPGRADATION OR ENHANCEMENT OF COMPUTER SYSTEM. AS R EGARDS LIKE LOTUS, MACRO LIBRARIES, IT WAS SUBMITTED THAT DUE TO TECHN OLOGICAL ADVANCES, THESE BECOME OUTDATED AND HAD TO BE REPLACED BY MOD ERN VERSION AND THEREFORE THE SAME CANNOT BE TREATED AS CAPITAL EXP ENDITURE. IT WAS ALSO POINTED OUT THAT SUCH EXPENDITURE HAS BEEN ALLOWED AS REVENUE 7 EXPENDITURE IN THE PAST. THE LEARNED CIT(A) DELETED THE ADDITION MADE BY THE ASSESSING OFFICER ACCEPTING THE CONTENTIONS ON BEHALF OF THE ASSESSEE. 16. BEFORE US, LEARNED DR SUBMITTED THAT QUESTION AS TO WHETHER SOFTWARE EXPENSES SHOULD BE CAPITAL OR REVENUE HAS TO BE TESTED BY THE ASSESSING OFFICER IN THE LIGHT OF THE SPECIAL BENCH DECISION IN THE CASE OF AMWAY INDIA LTD., 111 ITD 112 (SB)(DEL) AND THE ISS UE SHOULD BE REMANDED TO THE ASSESSING OFFICER FOR THIS PURPOSE. THE LEARNED COUNSEL FOR THE ASSESSEE ON THE OTHER HAND REITERATED THE S TAND AS WAS TAKEN BEFORE LEARNED CIT(A). 17. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE AR E OF THE VIEW THAT THE ORDER OF LEARNED CIT(A) HAS TO BE UPHELD. GOING BY THE NATURE OF EXPENSES INCURRED BY THE ASSESSEE AS EXPLAINED BEFORE LEARNE D CIT(A), THERE WAS NO JUSTIFICATION TO TREAT EXPENSES AS CAPITAL EXPENDIT URE. MOREOVER, ADHOC DISALLOWANCE CANNOT BE MADE IN A CASE OF THIS NATUR E. IN THESE CIRCUMSTANCES, WE ARE SATISFIED THAT THE ACTION OF LEARNED CIT(A) IN DELETING THE ADDITION MADE BY THE ASSESSING OFFICER WAS CORRECT AND CALLS FOR NO INTERFERENCE. 18. GROUND NO. 5(A) RAISED BY THE REVENUE READS AS FOLLOWS :- ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, LEARNED CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS. 25 ,00,000/- OUT OF AN AMOUNT OF RS. 3,91,82,174/- ATTRIBUTABLE TO THE EXPENDITURE CLAIMED FOR BUYING TIME ON TELEVISION FOR RELEASING THE ADVERTISEMENT FILMS ETC. DISREGARDING THE FACT THAT ASSESSEE HAD NOT SUBMITTED THE DETAILS BEFORE THE ASSESSING OFFICER. THIS GROUND CAN BE CONVENIENTLY DECIDED ALONG WITH GROUND NO. 9 OF ASSESSEES APPEAL WHICH READS AS FOLLOWS :- 9(1) LEARNED CIT(A) ERRED IN CONFIRMING THE DISALLO WANCE OF RS. 85,47,046/- BEING THE EXPENDITURE INCURRED ON PROMO TION FILMS, SLIDES AND TV FILMS PRODUCTION BY TREATING IT AS A CAPITAL EXPENDITURE ON THE GROUND THAT THE FILMS AND SLIDES HAVE REPEAT VALUE AND ARE UTILIZED FOR A CONSIDERABLY LONG TIME . 8 THE APPELLANT SUBMIT THAT THESE EXPENSES HAVE BEEN INCURRED ON THE YEARLY ADVERTISEMENT CAMPAIGNS OF THE COMPANY F OR THEIR VARIOUS PRODUCTS. THE MARKETING STRATEGIES ADOPTED BY THE COMPANY, WHICH ARE ALSO IN LINE WITH CORPORATE POLI CIES AND STRATEGIES ADOPTED BY COMPETITION IN THE MARKET REQ UIRE THESE FILMS AND SLIDES TO BE CHANGED FREQUENTLY IN ORDER TO KEE P ADAPTING TO CURRENT DEVELOPMENTS AND ADVERTISEMENTS OF COMPETIT ORS. THE SPOTS ARE ALSO PULLED OUT AFTER SOME TIME AS THEY TEND TO LOSE APPEAL AND EFFECT ON CONSUMERS AFTER REPEATED VIEWING. THE APPELLANTS THEREFORE PRAY THAT THE DCI BE DIREC TED TO ALLOW THEM THE ABOVE EXPENDITURE AS A REVENUE ITEM. WITHOUT PREJUDICE TO THE ABOVE, THE APPELLANTS SUBM IT THAT THE ENTIRE EXPENDITURE ON ADVERTISEMENT AND PUBLICITY IS ALLOW ABLE UNDER SECTION 37(3) IRRESPECTIVE OF WHETHER IT IS CAPITAL OR REVENUE IN NATURE. THE APPELLANT THEREFORE PRAY THAT THE DCI BE DIRECT ED TO ALLOW THEM THE ABOVE EXPENDITURE U/S. 37(3). WITHOUT PREJUDICE TO THE ABOVE, THE APPELLANTS PRAY S THAT THE DCI BE DIRECTED TO ALLOW THEM A DEDUCTION OF THE ABOVE EXP ENDITURE IN THE ABOVE YEAR AS THE PERIOD OF ONE OR TWO YEARS CANNOT BE SAID TO RESULT IN A BENEFIT OF AN ENDURING NATURE ASSUMING THAT THE CIT(A) WAS RIGHT THAT THE BENEFIT WAS FOR A PERIOD OF AROU ND 52 WEEKS. WITHOUT PREJUDICE TO THE ABOVE, LEARNED CIT(A) ERRE D IN NOT GIVING DIRECTIONS TO THE DCI TO ALLOW DEPRECIATION ON THE ABOVE EXPENDITURE, AS PER WITHOUT PREJUDICE CONTENTION OF THE APPELL ANT. THE APPELLANTS PRAY THAT THE DCI BE DIRECTED TO ALL OW THEM DEPRECIATION ON RS. 85,47,046/- 19. THE ASSESSEE HAD INCURRED AN EXPENDITURE OF RS . 85,47,046/- IN CONNECTION WITH PRODUCTION OF FILMS AND VIDEO CASSE TTES AND SLIDES. ABOVE FILMS, VIDEO AND SLIDES WERE PRODUCED AS ROUTINE YE ARLY ADVERTISEMENT CAMPAIGN FOR THE ASSESSEES PRODUCTS. ACCORDING TO THE ASSESSING OFFICER, BY PRODUCING FILMS, THE ASSESSEE ACQUIRED ADVANTAGE OF ENDURING NATURE AND THEREFORE EXPENDITURE WAS CAPITAL EXPENDITURE. THE ASSESSING OFFICER IN THIS REGARD REFERRED TO THE DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF PATEL INTERNATIONAL FILMS LTD. , 102 ITR 219; WHEREIN IT WAS HELD THAT EXPENDITURE INCURRED ON FILM PURCH ASED PROCESSED FOR ADVERTISING PURPOSE WAS CAPITAL EXPENDITURE. 9 20. THE LEARNED CIT(A) CONFIRMED THE ORDER OF THE ASSESSING OFFICER ON THIS ISSUE. AGAINST THIS DISALLOWANCE ASSESSEE HAS RAISED GROUND NO. 9 BEFORE THE TRIBUNAL. 21. APART FROM THE ABOVE, THE ASSESSEE ALSO INCURR ED A SUM OF RS. 25,00,000/- FOR GETTING TIME SLOT AND TO RELEASE A DVERTISEMENTS IN VARIOUS MEDIA. THIS WAS DISALLOWED BY THE ASSESSIN G OFFICER BECAUSE IN HIS OPINION THE EXPENDITURE WAS CAPITAL EXPENDITURE AND NOT REVENUE EXPENDITURE. THE LEARNED CIT(A), HOWEVER, ALLOWED THE CLAIM OF THE ASSESSEE FOR DEDUCTION HOLDING THAT THE EXPENDITURE WAS REVENUE EXPENDITURE. AGAINST THE ORDER OF LEARNED CIT(A), T HE REVENUE HAS RAISED GROUND 5(A). 22. WE HAVE HEARD THE RIVAL SUBMISSIONS. IN ASSESS EES OWN CASE, THIS ISSUE HAD COME UP FOR CONSIDERATION IN A.Y. 1996-97 . THE TRIBUNAL IN ITA NO. 2189/MUM/03 FOR A.Y. 1996-97 HELD THAT THE AFOR ESAID EXPENDITURE WAS REVENUE EXPENDITURE AND HAD TO BE ALLOWED AS A DEDUCTION. THE TRIBUNAL ALSO TOOK INTO CONSIDERATION THE DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF PATEL INTERNATIONAL FILMS LTD. (SUPRA) REFERRED TO BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER IN THIS ASSESSMENT YEAR. IT IS FURTHER NOTICED THAT AS AGAINST THE AFO RESAID ORDER OF THE TRIBUNAL, THE REVENUE FILED AN APPEAL BEFORE HON'BL E HIGH COURT AND SUCH APPEAL WAS DISMISSED BY HON'BLE HIGH COURT IN NOTIC E OF MOTION NO. 3114 OF 2007 IN INCOME TAX APPEAL NO. 1644 OF 2007 BY ORDER DATED 26.2.2008. IN VIEW OF THE ABOVE, WE ARE OF THE VIEW THAT THE ORDER OF THE CIT(A) IN SO FAR AS IT RELATES TO TREATING THE EXPE NDITURE ON MAKING ADVERTISEMENT FILMS, VIDEOS AND SLIDES AS CAPITAL E XPENDITURE CANNOT BE SUSTAINED. CONSEQUENTLY, GROUND NO. 9 RAISED BY THE ASSESSEE IS ALLOWED. 23. AS FAR AS GROUND NO. 5(A) RAISED BY THE REVENU E IS CONCERNED, WE ARE OF THE VIEW THAT THE SAID EXPENDITURE IS PURELY REV ENUE IN NATURE, THEY WERE RIGHTLY ALLOWED BY LEARNED CIT(A). WE FIND NO GROUNDS TO INTERFERE 10 WITH THE ORDER OF LEARNED CIT(A) ON THIS ISSUE. CON SEQUENTLY, GROUND NO. 5(A) RAISED BY THE REVENUE IS ALSO DISMISSED. 24. GROUND NO. 5(B) READS AS FOLLOWS :- ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, LEARNED CIT(A) ERRED IN DELETING THE ADDITION OF ` 1,43,498/- U/S. 6B BY HOLDING THAT THE ADHOC DISALLOWANCE OF ` 5,00,000/- OUT OF ADVERTISEMENT AND PUBLICITY EXPENSES AMOUNTING TO ` . 6,79,35,710/- IS INCLUSIVE OF ENTERTAINMENT EXPEN DITURE. 25. THE ASSESSING OFFICER MADE AN ADDITION OF RS. 1,43,498/- BEING EXPENSES INCURRED TOWARDS ADVERTISEMENTS WHICH ACCO RDING TO THE AO ARE NOT PERMISSIBLE AS DEDUCTION IN VIEW OF PROVISIONS RULE 6B OF THE I.T. RULES. 26. BEFORE LEARNED CIT(A), THE ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN INVOKING PROVISIONS OF RULE 6B OF THE I.T. RULES READ WITH SECTION 37(3) OF THE ACT. THE ASSE SSEE SUBMITTED THAT THE GIFT ARTICLES GIVEN DID NOT BEAR NAME OR LOGO O F THE COMPANY AND IN SUCH CASES, RULE 6B(1) HAS NO APPLICATION. THE AS SESSEE RELIED ON THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. INDIAN ALUMINIUM CABLES LTD., 183 ITR 611. 27. THE LEARNED CIT(A), HOWEVER, WAS OF THE VIEW T HAT AS LAID DOWN BY HON'BLE HIMACHAL PRADESH HIGH COURT IN THE CASE OF CIT VS. MOHAN MEAKIN BREWERIES LTD., 192 ITR 134, EXPENSES INCURR ED FOR PRESENTATION ITEMS FOR SUPPLIERS AND CUSTOMERS AMOUNTED TO ENTER TAINMENT EXPENDITURE WITHIN THE MEANING OF SECTION 37(2(B) O F THE ACT. THE LEARNED CIT(A) THEREAFTER FOUND THAT THE ASSESSEE DEBITED A SUM OF RS. 7,74,175 IN RESPECT OF GIFT ARTICLES UNDER THE HEAD ADVERTI SEMENT AND PUBLICITY EXPENSES AND THE ASSESSING OFFICER HAD MADE ADHOC DISALLOWANCE OF ` . 5,00,000/- OUT OF THE AFORESAID EXPENSES. THE LEA RNED CIT(A) THEREFORE THOUGHT IT FIT TO EXAMINE THE AFORESAID ADHOC DISAL LOWANCE OF ` . 5,00,000/-. THE LEARNED CIT(A) DEALT WITH THE ISS UE OF DISALLOWANCE OF 11 ` . 5,00,000/- AT PARAGRAPH 44 OF HIS ORDER. IN PARAG RAPH 44, LEARNED CIT(A) HELD THAT THE DISALLOWANCE OF ` . 5,00,000/- ALSO INCLUDED DISALLOWANCE OF RS. 1,43,498/- MADE ON ACCOUNT OF I NVOCATION OF RULE 6B OF THE I.T. RULES. THE LEARNED CIT(A) RESTRICTED TH E ADHOC DISALLOWANCE OF ` . 5,00,000/- MADE BY THE ASSESSING OFFICER TO ` . 1,62,598/-. SINCE, DISALLOWANCE OF RS. 1,43,498/- IS ALREADY INCLUDED IN THE AMOUNT OF ` . 1,62,598/- SUSTAINED BY LEARNED CIT(A), THIS ADDI TION WAS DELETED BY LEARNED CIT(A). IT MAY BE MENTIONED HERE THAT IN GR OUND NO. 3(B) OF THE ASSESSEES APPEAL, THE ASSESSEE HAS CHALLENGED THE ACTION OF LEARNED CIT(A) IN SUSTAINING THE DISALLOWANCE OF ` . 1,62,598/- INCLUDED ADVERTISEMENT AND PUBLICITY EXPENSES. IN OUR VIEW , GRIEVANCE PROJECTED BY THE REVENUE IN THIS APPEAL CANNOT BE SUSTAINED I N THE LIGHT OF THE FINDINGS OF LEARNED CIT(A) THAT SUM OF ` . 1,43,498/- IS ALREADY INCLUDED IN DISALLOWANCE SUSTAINED BY LEARNED CIT(A) OF ` . 1,62,598/-. WE THEREFORE DISMISS THIS GROUND OF REVENUE AS FINDING S OF LEARNED CIT(A) COULD NOT BE CONTROVERTED. 28. GROUND NO. 6 RAISED BY THE REVENUE CAN BE CONV ENIENTLY DECIDED ALONG WITH GROUND NO. 10 OF THE ASSESSEE, WHICH REA D AS FOLLOWS : GROUND NO. 6 RAISED BY THE REVENUE :- ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, LEARNED CIT(A) ERRED IN HOLDING THAT THE DEDUCTION OF ` . 10,00,000/- OUT OF THE DIVIDEND INCOME SHOULD BE REDUCED TO ` . 1,23,584/- FOR THE PURPOSE OF ALLOWING DEDUCTION U/S. 80M DISREGARDING THE FACT THAT IT INCLUDES ADMINISTRATIVE AND MANAGEMENT EXPENSES, IN TEREST ON INVESTMENT ETC. AS ASSIGNED THE ASSESSMENT ORDER. GROUND NO. 10 RAISED BY THE ASSESSEE READS AS FOLLO WS :- THE LEARNED CIT(A) ERRED IN UPHOLDING THE DEDUCTION FROM DIVIDEND INCOME MADE BY DCI TO THE EXTENT OF 2% OF DIVIDEND INCOME ON ACCOUNT OF ESTIMATED ADMINISTRATIVE AND MANAGEMENT EXPENDITURE, FOR THE PURPOSE OF CALCULATING CLAIM UNDER SECTION 80M. THE APPELLANT SUBMIT THAT NO ADMINISTRATIVE OR MANA GEMENT EXPENSES WERE INCURRED BY THEM ON THE DIVIDEND INCO ME OF ` . 91,79,225/- RECEIVED BY THEM FROM CIBATUAL LIMITE D AND UTI 12 DURING THE YEAR. ONLY SEVEN DIVIDEND CHEQUES/WARRAN TS WERE RECEIVED WHICH WERE DEPOSITED ALONG WITH THE OTHER CHEQUES AND THEREFORE NO EXPENDITURE WAS INCURRED ON THIS ACCOU NT. FURTHER, NO ESTIMATE CAN BE MADE ON THIS ACCOUNT AND ONLY THE A CTUAL EXPENDITURE INCURRED CAN BE DEDUCTED FROM THE DIVID END INCOME FOR THE PURPOSE OF WORKING OUT THE CLAIM U/S. 80M. THE APPELLANT THEREFORE PRAYS THAT THE DCI BE DIREC TED TO ALLOW THEM DEDUCTION U/S. 80M ON THE ENTIRE AMOUNT OF DIVIDEND RECEIVED DURING THE YEAR OF ` . 91,79,225/- 29. THE GROUNDS OF APPEAL ARE AGAINST THE ACTION OF ASSESSING OFFICER IN DEDUCTING AN ADHOC AMOUNT OF ` . 10,00,000/- FROM THE DIVIDEND INCOME OF ` . 91,79,225/- RECEIVED BY THE ASSESSEE ON ACCOUNT O F ALLEGED ADMINISTRATIVE AND INTEREST CHARGES ON COST OF FUND S AND ALLOWING DEDUCTION UNDER SECTION 80M OF THE I.T. ACT ON THE BALANCE AMOUNT. THE ABOVE ISSUE HAS BEEN DISCUSSED IN PARA 22 OF THE AS SESSMENT ORDER. THE ASSESSEE CONTENDED BEFORE LEARNED CIT(A) THAT DETAI LS OF THE DIVIDEND RECEIVED IN RESPECT OF WHICH DEDUCTION HAS BEEN CLA IMED U/S. 80M ARE AS UNDER :- CIBATUAL FINAL DIVIDEND 1989-90 ` . 6,60,000/- CIBATUAL INTERIM DIVIDEND ` . 3,85,000/- CIBATUAL DIVIDEND 1989-90 ON 10 ` . 25/- EQUITY SHARES OF ` . 10/- EACH UNIT TRUST OF INDIA 1964 SCHEME 45,19,000 UNITS @ ` . 1.60 PER UNIT ` .81,34,200/- ` .91,79,225/- 30. THE ASSESSEE SUBMITTED THAT SHARES OF CIBATUAL LIMITED ARE OLD HOLDINGS AND THERE WAS NO INTEREST CHARGE ON THE SA ME. IT WAS ALSO SUBMITTED THAT NO ADMINISTRATIVE OR MANAGEMENT EXPE NSES WERE INCURRED ON RECEIVING THE SAID DIVIDEND. IT WAS POINTED OUT THAT EXCEPT 9,00,000 UNITS ALL THE OTHER UNITS WERE PURCHASED DURING THE EARLIER ASSESSMENT YEARS. THE 9,00,000 UNITS WHICH WERE PURCHASED DURI NG THE A.Y. UNDER REFERENCE WERE PURCHASED OUT OF ACCUMULATED SALES P ROCEEDS AND NOT OUT OF ALLEGED BORROWINGS. THUS, THERE WAS NO JUSTIFICA TION FOR ESTIMATING ANY EXPENDITURE IN THE NATURE OF INTEREST ON ALLEGED BO RROWED FUNDS. THE 13 ASSESSEE ALSO FURNISHED COPY OF BANK STATEMENT AS P ER ANNEXURE 23 TO SHOW THAT THE UNITS WERE NOT PURCHASED OUT OF BORRO WED FUNDS. THE ASSESSEE CONTENDED THAT UNITS OF UTI AND SHARES OF CIBATUAL LIMITED WERE NOT PURCHASED OUT OF BORROWED FUNDS. THE ASSESSEE D ID NOT INCUR ANY ADMINISTRATIVE CHARGES FOR EARNING THE DIVIDEND INC OME. THUS, THERE WAS NO JUSTIFICATION FOR MAKING THE IMPUGNED ADDITION O F ` . 10,00,000/. THE SAME SHOULD THEREFORE BE DELETED. 31. THE LEARNED CIT(A) HELD THAT THE SHARES OF CIB ATUAL LIMITED WERE OLD HOLDINGS AND THEREFORE THERE WAS NO INTEREST CHARGE ON THESE SHARES. SIMILARLY, THE UNITS WERE ALSO PURCHASED OUT OF ACC UMULATED FUNDS AND NOT OUT OF BORROWINGS. THUS, THERE WAS NO JUSTIFICA TION FOR REDUCING THE DIVIDEND INCOME WHILE ALLOWING DEDUCTION U/S. 80M O F THE I.T. ACT ON ACCOUNT OF ALLEGED INTEREST CHARGES. HOWEVER, LEARN ED CIT(A) DID NOT AGREE WITH THE ARGUMENTS OF THE LEARNED AR THAT NO ADMINI STRATIVE OR MANAGEMENT EXPENSES WERE REQUIRED TO BE INCURRED FO R EARNING OF REALIZING THE DIVIDEND ON UNITS AND SHARES. ACCORDI NG TO THE LEARNED CIT(A) IT WAS NOT A CASE OF ONLY REALIZING THE CHEQ UES FOR DIVIDEND ON UNITS OR SHARES AS CLAIMED BY THE ASSESSEE. THE ENT IRE PROCESS OF EARNING DIVIDEND INCOME IS NOT SO SIMPLE AS THE ASSESSEE HA S TRIED TO ESTABLISH. ACCORDING TO THE CIT(A), VARIOUS ACTIVITIES ARE INV OLVED FOR EARNING THE DIVIDEND INCOME, SUCH AS HANDLING AND PRESERVING OF SHARES AND UNIT CERTIFICATES, MAINTENANCE OF PROPER AND RELEVANT FI LES, FOLLOW UP ACTION, COLLECTION AND DEPOSIT OF DIVIDEND ETC. ALL THESE A CTIVITIES ARE NOT AUTOMATIC. THE GENERAL STAFF IS UTILIZED FOR ALL TH ESE PURPOSES. THUS, A REASONABLE ESTIMATE REGARDING EXPENDITURE ATTRIBUTA BLE TO EARNING OF DIVIDEND INCOME IS REQUIRED TO BE MADE. AFTER CONSI DERING ALL THE RELEVANT FACTS AND CIRCUMSTANCES OF THE CASE AND VARIOUS ACT IVITIES INVOLVED IN EARNING OF THE DIVIDEND INCOME, THE CIT(A) WAS OF T HE VIEW THAT IT WOULD BE REASONABLE TO ESTIMATE ADMINISTRATIVE AND MANAGE MENT EXPENDITURE AT 2% OF THE DIVIDEND INCOME. THE ADMINISTRATIVE AN D MANAGEMENT 14 EXPENDITURE WAS THEREFORE ESTIMATED AT 2% OF THE DI VIDEND INCOME AS AGAINST ` . 10,00,000/- ESTIMATED BY THE ASSESSING OFFICER. 32. AGGRIEVED BY THE RELIEF GIVEN BY LEARNED CIT(A ), THE REVENUE HAS PREFERRED GROUND NO. 6 BEFORE THE TRIBUNAL. AGGRIE VED BY THE ACTION OF LEARNED CIT(A) IN REDUCING 2% ADMINISTRATIVE AND MA NAGEMENT EXPENDITURE FROM THE DIVIDEND ELIGIBLE FOR DEDUCTIO N U/S. 80M OF THE ACT, THE ASSESSEE HAS RAISED GROUND NO. 10 BEFORE THE TR IBUNAL. 33. WE HAVE HEARD THE RIVAL SUBMISSIONS. A PERUSAL OF THE ORDERS OF THE AUTHORITIES SHOWS THAT THE DISALLOWANCE HAS BEEN MA DE PURELY ON ADHOC BASIS. IT HAS BEEN HELD BY HON'BLE BOMBAY HIGH COUR T IN THE CASE OF CIT VS. GENERAL INSURANCE CORPORATION OF INDIA, 254 IT R 203 (BOM) THAT ONLY EXPENSES THAT ARE DIRECTLY RELATABLE TO EARNING OF DIVIDEND HAVE TO BE REDUCED FOR THE PURPOSE OF COMPUTING DEDUCTION U/S. 80M OF THE ACT. AS ALREADY STATED THERE HAS BEEN NO IDENTIFICATION OF EXPENSES DIRECTLY RELATABLE TO EARNING OF DIVIDEND. THE DISALLOWANCE ON THE BASIS OF ESTIMATE CANNOT BE SUSTAINED. WE THEREFORE DIRECT THAT THE DEDUCTION U/S. 80M AS CLAIMED BY THE ASSESSEE BE ALLOWED. GRO UND NO. 10 OF THE ASSESSEES APPEAL IS ACCORDINGLY ALLOWED WHILE GROU ND NO. 6 RAISED BY THE REVENUE IS DISMISSED. 34. GROUND NO. 7 RAISED BY THE REVENUE READS AS FO LLOWS :- ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, LEARNED CIT(A) ERRED IN HOLDING THAT SPECULATION LOSS ON SA LE OF UNITS AMOUNTING TO ` . 14,62,500/- ASSESSED UNDER EXPLANATION TO SECTION 73 OF THE I.T. ACT SHOULD BE ALLOWED AS SHORT TERM CAPITAL LOSS WHICH IS CONTRARY TO THE PROVISION OF SECTION 32 READ WIT H SECTION 32(II)(2)(A) OF THE U.T. I. ACT WHICH CLARIFIES THE UNITS OF UTI SHARES FOR THE PURPOSE OF I.T. ACT. 35. THE ASSESSING OFFICER TREATED THE LOSS OF ` . 14,62,500/- ON SALE OF UNITS AS SPECULATIVE LOSS. THE ASSESSING OFFICER HA S DISCUSSED THIS ISSUE IN PARA 23 OF ASSESSMENT ORDER READ WITH ANNEXURE 4 THEREOF. MAINLY THE ASSESSING OFFICER HAS DISALLOWED THE LOSS ON THE GR OUND THAT THE 15 PROVISIONS OF SECTION 73 ARE APPLICABLE TO THE TRAN SACTION AND UNITS OF UTI ARE SHARES. BEFORE CIT(A), THE ASSESSEE CONTEND ED THAT THE LOSS WAS CORRECTLY WORKED OUT BY THE ASSESSEE AS UNDER :- PURCHASE OF 9,00,000 UNITS OF UTI ON 28.5.90 @ RS. 14.86 PER UNIT ` . 13374000 ADD : STAMP CHARGES AS ON 9,00,000 UNITS ` . 67500 ------------------ ` . 13441500 LESS : PROCEEDS OF 9,00,000 UNITS OF UTI ` . 11979000 SOLD ON 28.7.90 LOSS ` . 14,62,500/- THE ABOVE UNITS WERE PURCHASED ON 28.5.1990 AS EVID ENCED BY THE PURCHASE CONTRACT FROM CITIBANK. THESE UNITS WERE S ENT FOR TRANSFER TO THE UTI ON 29.5.1990. A COPY OF ACKNOWLEDGMENT RECE IVED FROM UTI WAS ENCLOSED AS ANNEXURE 23. THE ASSESSEE CONTENDED BEF ORE LEARNED CIT(A) THAT THE UNITS WERE TRANSFERRED IN THE NAME OF HIND USTAN CIBA GEIGY LTD. AS CAN BE EVIDENCED FROM THE DIVIDEND COUNTERFOIL F OR DIVIDEND RECEIVED ON 9,00,000 UNITS BY THE ASSESSEE COMPANY. IT WAS A RGUED THAT THE ASSESSEE HAD MADE FULL PAYMENT FOR THE PURCHASE OF UNITS AND ALSO TAKEN PHYSICAL DELIVERY THEREOF. THUS THE ABOVE TRANSACTI ON WAS NOT A SPECULATIVE TRANSACTION AND THE LOSS IS A SHORT TER M CAPITAL LOSS. THE EXPLANATION TO SECTION 73 OF THE ACT WAS NOT APPLIC ABLE SINCE THE ASSESSEE WAS NOT IN THE BUSINESS OF PURCHASE AND SALE OF SHA RES. THE EXPLANATION TO SECTION 73 IS APPLICABLE ONLY TO PURCHASE AND SA LE OF SHARES AND DOES NOT APPLY TO UNITS OF UTI AS THEY ARE NOT SHARES. I N THIS CONNECTION, A REFERENCE WAS ALSO MADE TO THE PROVISIONS OF SECTIO N 32(3) OF THE UTI ACT, 1963. THE SAID PROVISIONS, ACCORDING TO THE ASSESSE E MAKES IT IS CLEAR THAT A UNIT HOLDER WAS A MERE INVESTOR AND NOT A SH AREHOLDER OF THE UTI. THE ASSESSEE ALSO SUBMITTED THAT SIMILAR ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE APPELLATE AUTHORITIES IN THE FOLLOWING CASES:- 1. APPOLLO TYRES LTD., 43 ITD 464 2. AGRO CHEMICALS LTD. 3) ASEA BROWN BOVERI LTD. 4) ETERNIT EVEREST LTD. 16 IT WAS FURTHER SUBMITTED THAT THE UNIT HOLDER IS A MERE INVESTOR AND IS NOT A SHAREHOLDER OF THE UTI AND THIS POSITION IN L AW FURTHER SUBSTANTIATED BY THE AMENDMENT TO THE PROVISO TO SE CTION 2(42A) OF THE I.T. ACT, 1961 VIDE FINANCE ACT, 1964 WHICH CLEARLY BRINGS OUT THE FACT THAT UNITS OF UTI ARE NOT SHARES. THE ASSESSEE SUBM ITTED THAT IN VIEW OF THE ABOVE FACTS AND THE DECISION OF THE ITAT IN THE CASE OF APPOLLO TYRES LTD. (SUPRA), THE ASSESSING OFFICER WAS NOT JUSTIFI ED IN APPLYING PROVISIONS OF EXPLANATION TO SECTION 73 IN THE CASE OF THE ASS ESSEE BY HOLDING THAT UNITS OF UTI WERE SHARES. IT WAS PRAYED THAT THE AS SESSING OFFICER SHOULD THEREFORE BE DIRECTED TO ALLOW THE LOSS OF ` . 14,62,500/- AS CLAIMED BY THE ASSESSEE. 36. THE LEARNED CIT(A) HELD THAT 9,00,000 UNITS OF UTI WERE PURCHASED ON 28.5.1990 AS EVIDENCED BY THE PURCHASE CONTRACT FROM CITIBANK. THE PAYMENT OF STAMP DUTY HAS ALSO BEEN CONFIRMED BY TH E BANK. FULL PAYMENT FOR PURCHASE OF THESE UNITS WAS MADE AND TH E ASSESSEE HAD ALSO TAKEN PHYSICAL DELIVERY THEREOF. THESE UNITS WERE A LSO SENT FOR TRANSFER TO UTI ON 29.5.1990. THE UNITS WERE TRANSFERRED IN THE NAME OF HINDUSTAN CIBA GEIYGY LTD., WHICH IS EVIDENT FROM THE DIVIDEN D COUNTERFOIL FOR DIVIDEND RECEIVED OF 9,00,000 UNIT BY THE ASSESSEE COMPANY. THE SAID UNITS WERE SOLD ON 28.7.1990 FOR ` . 1,19,79,000/-. THESE FACTS ARE NOT DISPUTED. THE CIT(A) FOUND THAT THE CONTROVERSY WA S THEREFORE IN A VERY NARROW COMPASS, VIZ., WHETHER OR NOT PURCHASE AND S ALE OF UNITS OF UTI BY THE ASSESSEE COMPANY CAN BE TREATED AS PURCHASE AND SALE OF SHARES OF OTHER COMPANIES SO AS TO APPLY THE DEEMING PROVI SIONS CONTAINED IN EXPLANATION TO SECTION 73 OF THE I.T. ACT. IN THIS CONNECTION, LEARNED CIT(A) AGREED WITH THE SUBMISSIONS OF THE LEARNED C OUNSEL FOR THE ASSESSEE THAT SECTION 32(3) OF THE UTI ACT, 1963 ME RELY STATES THAT FOR THE PURCHASES OF THE I.T. ACT, 1961; (A) THE DISTRIBUTI ON OF INCOME RECEIVED BY THE UNIT HOLDER SHALL BE DEEMED TO BE INCOME FROM D IVIDENDS AND (B) THE TRUST SHALL BE DEEMED TO BE A COMPANY. THE SAID DEE MING SECTION IS RESTRICTED IN SCOPE AND DOES NOT DEEM UNITS TO BE S HARES, FOR ALL PURPOSES 17 UNDER THE I.T. ACT. THE CIT(A) HELD THAT LEGAL FICT IONS ARE ONLY FOR A DEFINITE PURCHASE AND THEY ARE LIMITED TO THE PURPO SES FOR WHICH THEY ARE CREATED AND THE LEGAL FICTION SHOULD NOT BE EXTENDE D BEYOND THEIR LEGITIMATE FIELD. THE CIT(A) IN THIS REGARD RELIED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. AMARCH AND SHROFF, 48 ITR 59 (SC), WHICH HAS CONSISTENTLY BEEN FOLLOWED IN 75 ITR 174 (SC), 86 ITR 2(SC) AND 155 ITR 711 (SC). IN THE OPINION OF THE LEARNED CIT(A) THE PURPOSE OF THE DEEMING PROVISION IN SECTION 32(3)(A ) AND (B), WAS WITH A VIEW TO REGULATE THE TAXABILITY OF INCOME BY WAY OF DISTRIBUTION RECEIVED BY A SPECIFIED UNIT HOLDER FROM THE UTI. HE WAS OF THE VIEW THAT THE LEGAL FICTION HAS NOT BEEN EXTENDED TO THE UNITS AS SUCH FOR ALL PURPOSES. THE CIT(A) FOUND SUFFICIENT FORCE IN THE SUBMISSIONS OF THE ASSESSEE THAT THE SHARE HOLDERS ARE NOT UNIT HOLDERS ON ACCOUNT OF TH E DIFFERENT RIGHTS VESTED AND ENJOYED BY THEM. MERELY BECAUSE INCOME F ROM UNITS OF THE UTI ARE CALLED DIVIDEND IT WOULD NOT MEAN THAT IT I S AN INCOME FROM THE SHARES OF A COMPANY. THE EXPLANATION ANNEXED TO SEC TION 73 OF THE I.T. ACT CREATES ONLY A LEGAL FICTION TO THE EFFECT THAT LOSS FROM SHARE DEALING BY CERTAIN COMPANIES SHALL BE DEEMED TO BE LOSS FRO M SPECULATION BUSINESS. IN THE CASE OF THE ASSESSEE COMPANY THE L OSS HAS ARISEN ON PURCHASE AND SALE OF UNITS AND NOT FROM DEALINGS IN SHARES OF OTHER COMPANIES. THE CIT(A) THEREFORE HELD THAT THE ASSES SING OFFICER WAS NOT JUSTIFIED IN APPLYING EXPLANATION TO SECTION 73 OF THE I.T. ACT. ACCORDINGLY THE LOSS WAS DIRECTED TO BE TREATED AS A BUSINESS L OSS. 37. BEFORE US, IT IS NOT IN DISPUTE THAT THIS ISSU E HAS NOW BEEN DECIDED BY THE DECISION OF HON'BLE SUPREME COURT IN THE CAS E OF APOLLO TYRES LTD. VS. CIT, 255 ITR 273. THE HON'BLE SUPREME COURT HEL D THAT EVEN THOUGH SECTION 32(3) OF THE UTI ACT, 1963 CREATES A FICTIO N TO MAKE THE UTI A DEEMED COMPANY AND DISTRIBUTION OF INCOME RECEIVED BY THE UNIT HOLDER A DEEMED DIVIDEND FOR THE PURPOSES OF THE I.T. ACT, BY VIRTUE OF THOSE PROVISIONS IT CANNOT BE SAID THAT SECTION ALSO MAKE S THE UNIT OF THE UTI A DEEMED SHARE. THE DEEMING PROVISION IN SECTION 32( 3) SHOULD BE CONFIRMED ONLY TO DEEMING THE UTI A COMPANY AND THE INCOME FROM UNITS 18 A DIVIDEND. IN THE ABSENCE OF ANY SPECIFIC DEEMING PROVISION IN REGARD TO THE UNITS AS SHARES IT WOULD BE ERRONEOUS TO EXTEND THE PROVISIONS OF SECTION 32(3) FOR THE PURPOSE OF HOLDING THE UNIT S HARES. IT WAS ACCORDINGLY HELD THAT BUYING AND SELLING OF UNITS B Y THE ASSESSEE COMPANY COULD NOT BE TREATED AS A SPECULATIVE BUSIN ESS. THE EXPLANATION TO SECTION 73 OF THE I.T. ACT DID NOT APPLY. LOSS I N BUYING AND SELLING OF UNITS OF THE UTI WAS BUSINESS LOSS NOT SPECULATION LOSS. THE DECISION OF LEARNED CIT(A) IS IN CONSONANCE WITH DECISION OF SU PREME COURT . WE THEREFORE DO NOT FIND ANY GROUND TO INTERFERE IN TH E ORDER OF LEARNED CIT(A). CONSEQUENTLY GROUND NO. 6 RAISED BY THE REV ENUE IS ALSO DISMISSED. 38. IN THE RESULT, APPEAL BY THE REVENUE IS PARTLY ALLOWED. 39. WE SHALL NOW TAKE UP FOR CONSIDERATION, THE AP PEAL BY THE ASSESSEE. GROUND NO.1 RAISED BY THE ASSESSEE READS AS FOLLOWS : THE CIT(A) ERRED IN UPHOLDING THE DISALLOWANCE MAD BY THE DCIT, SPECIAL RANGE 23, BOMBAY IN RESPECT OF DEPRECIATION AMOUNTING TO ` . 16,18,554/- CLAIMED BY THE APPELLANTS ON TECHNICA L KNOW-HOW FEES ON THE GROUND THAT SEPARATE DEDUCTION U/S 35AB OF THE I T ACT, 1961 WAS ALLOWED THEREON. THE APPELLANTS SUBMIT THAT EXPENDITURE ON TECHNICAL KNOW-HOW FEES CONSTITUTES PLANT, AND THEY ARE THEREFORE ENTITLED TO DEPRECIATION THEREON. THE APPELLANTS FURTHER SUBMIT THAT NEITHER SEC. 32 NOR SEC. 35AB PROHIBITS THE CLAIM FOR DEPRECIATION IN A CASE WHERE DEDUCTION U/S 35AB IS ALSO ALLOWABLE. THE APPELLANTS PRAY THAT THE DCI BE DIRECTED TO ALL OW THEM THE DEPRECATION OF ` `. 16,18,554/- CLAIMED BY THEM ON TECHNICAL KNOWHOW FEES. 40. IT WAS FAIRLY SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE AFORESAID GROUND HAS TO BE DECIDED AGAINST THE ASSESSEE IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CA SE OF ESCORTS LTD; GODREJ SOAPS LTD; J K SYNTHETIC LTD AND HINDUSTAN C OMPUTERS LTD VS UNION OF INDIA REPORTED IN 199 ITR 43 (SC). IN VIE W OF THE ABOVE, GROUND NO.1 IS DISMISSED. 19 41. GROUND NO.2 RAISED BY THE ASSESSEE READS AS FO LLOWS: THE CIT(A) ERRED IN CONFIRMING THE DCIS ACTION OF DISALLOWANCE OF ` . 2,54,844/- BEING THE EXPENDITURE INCURRED ON TRAN SIT HOUSES MAINTAINED BY THE APPELLANTS AT GOREGAON AND GOA, A S AGAINST CONTENTION THAT ONLY ` 11,012/- IS DISALLOWABLE. IN THIS CONNECTION, THE APPELLANTS SUBMIT AS UNDER: I) EXPENSES ALLOWABLE U/S 28 TO 36 OF THE ACT ARE OUTSIDE THE PURVIEW OF SEC. 37(4) AND HENCE CANNOT BE DISALLOWED U/S 37(4). II) EXPENDITURE RELATING TO CANTEEN SUPPLY MATERIALS ET C., ARE OUTSIDE THE PURVIEW OF SEC.37(4) SINCE THEY DO NOT RELATE TO MAINTENANCE TO TRANSIT HOUSES. III) IN VIEW OF THE ABOVE, THE APPELLANTS SUBMIT THAT TH E DISALLOWANCE MADE BY THE DCI ON THIS ACCOUNT BE DELETED. 42. THE DETAILS OF THE EXPENSES INCURRED AT THE TR ANSIT HOUSE AT GOREGOAN AND GOA ARE AS FOLLOWS: PARTICUALRS GOREGAON( ` `` ` ) GOA ( ` `` ` ) ELECTRICITY, FUEL, WATER, ETC 25,000 20,130 OTHER EXPENSES 814 0 SALARIES 12,906 0 TOTAL 38,720 20,130 TOTAL EXPENDITURE ON TRANSIT HOUSE ( 38,720 + 20,130) 58,850 LESS: AMOUNTS RECOVERED FROM THE USERS OF THE TRANSIT HOUSE 47,838 11,012 OTHER EXPENSES INCURRED CONTENDED NOT TO BE DISALLOWABLE U/S 37(4) RENT/LEASE EXPENSES 3,468 0 INSURANCE 2,193 317 CANTEEN SUPPLY MATERIALS 3,244 147,512 REPAIRS 1,293 2,401 SERVICE CHARGES/DOCUMENTATION CHARGES 5,133 0 DEPRECIATION AS PER I T RULES 10,803 19,630 26,134 169,860 TOTAL 64,854 189,990 43. THE WHOLE OF THE ABOVE EXPENSES WERE DISALLOWE D BY THE REVENUE AUTHORITIES ON THE GROUND THAT THEY WERE EXPENSES I N CONNECTION WITH MAINTENANCE OF GUEST HOUSE AND THEREFORE HIT BY THE PROHIBITION 20 CONTAINED IN SEC.37(4) OF THE ACT. IT IS NOT IN DI SPUTE BEFORE US THAT IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT I N THE CASE OF BRITTANIA INDIA LTD. VS. CIT 278 ITR 546 (SC), ANY EXPENDITUR E ON MAINTENANCE OF A GUEST HOUSE CANNOT BE ALLOWED AS A DEDUCTION. TH E LEARNED COUNSEL FOR THE ASSESSEE HOWEVER SUBMITTED THAT THE EXPENSES TO THE EXTENT IT RELATES TO PROVISION OF FOOD TO EMPLOYEES WOULD NOT FALL WI THIN THE MEANING OF THE EXPRESSION EXPENDITURE INCURRED IN MAINTENANCE OF THE GUEST HOUSE (SEE CANTEEN SUPPLY MATERIALS IN THE CHART GIVEN AB OVE) WITHIN THE MEANING OF SEC.37(4) OF THE ACT AND TO THAT EXTENT THE DISALLOWANCE HAS TO BE DELETED. IN THIS REGARD HE RELIED ON THE DEC ISION OF THE ITAT MUMBAI IN THE CASE OF M/S.TATA ENGINEERING & LOCOMO TIVE CO. LTD. VS. DCIT ITA NO.7061/MUM/98 DATED 19-4-2006 WHEREIN IDE NTICAL ISSUE HAS BEEN CONSIDERED. THE LEARNED D.R. HOWEVER SUBMITTE D THAT EXPENDITURE INCURRED ON PROVIDING FOOD WOULD ALSO BE EXPENDITUR E INCURRED IN MAINTENANCE OF A GUEST HOUSE. 44. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE ITAT MUMBAI IN THE CASE OF M/S.TATA ENGINEERING & LOCOMOTIVE CO.LTD. ( SUPRA) HELD AS FOLLOWS: 7. THE GROUND NO.2 PERTAINS TO DISALLOWANCE SUSTAIN ED BY THE LD CIT(A) IN RESPECT OF EXPENDITURE INCURRED BY THE AS SESSEE ON STAFF INSPECTION HOUSE TREATING THE SAME TO BE GUESTHOUSE EXPENSES. THE FIST ITEM PERTAINS TO DISALLOWANCE4 OF TELEPHONE EX PENSES OF ` . 4,79,617/-. THE LD COUNSEL FOR THE ASSESSEE WAS F AIR ENOUGH TO CONCEDE THAT THIS ISSUE IS TO BE DECIDED AGAINST TH E ASSESSEE IN VIEW OF THE SUPREME COURT DECISION IN THE CASE OF B RITANNIA (INDIA) LTD VS CIT 278 ITR 546 ACCORDINGLY, THE DISALLOWANC E ON ACCOUNT OF TELEPHONE EXPENSES STANDS CONFIRMED. 8 THE SECOND ITEM PERTAINS TO EXPENDITURE ON FOOD A MOUNTING TO ` 39,35,002/- BOTH THE SIDES AGREED THAT THIS ISSUE IS COVERED IN ASESSEES FAVOUR BY THE ITATS ORDER FOR THE AY 93- 94 REFERRED TO ABOVE. WE FIND THAT THIS ISSUE HAS BEEN DECIDED BY THE TRIBUNAL AT PARA 13 OF THE ORDER IN THE FOLLOWING MANNER: WE AGREE WITH THIS PROPOSITION THAT IF EXPENDITURE ARE INCURRED ON THE STAFF EMPLOYEE TO MAINTAIN THE GUES THOUSE, IT IS NOT ALLOWABLE EXPENDITURE, AS IT IS HIT BY THE P ROVISIONS OF SEC.47(4) OF THE I T ACT. BUT, THE EXPENDITURE INCU RRED ON FOOD AND BEVERAGES OF INHABITANTS WHO STAYED IN THE INSP ECTION 21 HOUSE, CANNOT BE CALLED TO HAVE BEEN INCURRED TO MA INTAIN THE GUESTHOUSE, THOUGH ITS ALLOWABILITY CAN BE EXAM INED IN THE LIGHT OF PROVISIONS OF SEC.37(2) OF THE ACT. WE ARE, THEREFORE, OF THE VIEW THAT THE DISALLOWANCE MADE B Y THE REVENUE AUTHORITIES ARE NOT PROPER. WE, HOWEVER, RE STORE THIS ISSUE TO THE FILE OF THE AO TO EXAMINE IN THE LIGHT OF PROVISIONS OF SEC. 37(2) OF THE I T ACT AND IF THE ASSESSEE SU CCEEDS IN PROVING THAT THESE EXPENSES ON FOOD AND BEVERAGES O N ITS EMPLOYEES WERE INCURRED AT THE WORK PLACE, IT MAY B E ALLOWED AS PER EXPLANATION 2 OF SEC. 37(2) OF I T A CT. FROM THE ABOVE, IT MAY BE SEEN THAT THE TRIBUNAL HE LD THAT EXPENDITURE ON FOOD AND BEVERAGES IN RESPECT OF STA FF EMPLOYED FOR MAINTENANCE OF GUESTHOUSE WILL BE IN THE NATURE OF EXPENDITURE ON MAINTENANCE OF GUESTHOUSE AND WILL BE HIT BY SEC. 3 7(4) OF THE ACT. HOWEVER, THE EXPENDITURE ON INHABITANTS WILL NOT BE COVERED UNDER THE EXPENDITURE FOR MAINTENANCE OF GUESTHOUSE EVEN THOUGH THE SAME CAN BE CONSIDERED U/S 37(2) OR U/S 37(2A). THI S ISSUE IS, THEREFORE, RESORTED BACK TO THE ASSESSING OFFICER T O BE CONSIDERED AND DECIDED IN THE LIGHT OF THE OBSERVATIONS MADE B Y THE TRIBUNAL, WHICH HAVE BEEN REPRODUCED ABOVE. WE ARE OF THE VIEW THAT THE ISSUE IN SO FAR AS IT R ELATES TO EXPENDITURE ON PROVIDING FOOD AND BEVERAGES HAS TO BE DECIDED AFRE SH BY THE ASSESSING OFFICER ON THE BASIS OF THE DIRECTIONS AS GIVEN ABO VE BY THE TRIBUNAL. WE ACCORDINGLY ALLOW GROUND NO.2 PARTLY FOR STATISTICA L PURPOSES. 45. GROUND NO.3(A), 3(B) AND 3(C) RAISED BY THE AS SESSEE READS AS FOLLOWS: 3A. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE CIT(A) ERRED N HOLDING THAT AN AMOUNT OF ` 9,00,000/- WAS IN THE NATURE OF ENTERTAINMENT EXPENDITURE INCLUDED IN SALES CONF ERENCE, BUSINESS MEETING EXPENSES AND CANTEEN EXPENSES. IN THIS CONNECTION, THE APPELLANTS SUBMIT AS UNDER : 1. THE ABOVE AMOUNT INCLUDES AN AMOUNT OF ` 2,20,000/- OUT OF THE TOTAL CANTEEN EXPENDITURE. THE APPELLANTS SUBMI T THAT THE EXPENDITURE IS NOT ON ENTERTAINMENT AND THEREFORE N O DISALLOWANCE SHOULD BE MADE. IN ANY EVENT, THE ESTI MATE IS HIGHLY EXCESSIVE. 2. WITHOUT PREJUDICE TO THE ABOVE, THE CIT(A) ERRED IN CONSIDERING ` . 92,85,039/- AS TOTAL CANTEEN EXPENSES WHEREAS THE CORRECT AMOUNT IS `80,41,642/-. THEREF ORE, THE 22 APPROXIMATE DISALLOWANCE ON THIS ACCOUNT AT THE RAT E OF 2.5% APPLIED BY THE CIT(A) OUGHT TO BE ` ` 2,00,000/- ONLY. 3. THE EXPENDITURE ON BUSINESS MEETING EXPENSES AND CONFERENCE EXPENSES RELATES ALMOST ENTIRELY TO IN-H OUSE CONFERENCES OF FIELD STAFF TO DISCUSS MARKETING STR ATEGIES, SALES TARGETS, CONSUMER RESPONSES AND OTHER ALLIED MATTERS. THE PURPOSE OF SUCH CONFERENCES THUS RELATES TO THE SALES AND MARKETING POLICES AND THEREFORE NO PORTION THER EOF CAN BE DISALLOWED AS ENTERTAINMENT EXPENDITURE. 4. WITHOUT PREJUDICE TO (3) ABOVE, THE DISALLOWANCE OF THE ENTIRE AMOUNT INCURRED ON BUSINESS MEETINGS AND CONFERENCE S IS TOTALLY UNWARRANTED. 5. WITHOUT PREJUDICE THE TOTAL OF THE AMOUNTS LISTED B Y THE CIT(A WORKS OUT TO ` ` 8,76,276/- WHEREAS HE HAS DIRECTED THAT ` 9 LAKHS BE DISALLOWED. THE EXTRA AMOUNT OF ` 23,734/- SHOULD IN ANY EVENT BE DELETED. 6. WITHOUT PREJUDICE TO ANY OF THE ABOVE, THE ESTIMATE D DISALLOWANCE OF ` 9,00,000 IS HIGHLY EXCESSIVE AND UNREASONABLE. THE APPELLANTS PRAY THAT THE DCI BE GIVEN SUITABLE DIRECTIONS IN THIS REGARD. B. THE CIT(A) ERRED IN UPHOLDING THE DISALLOWANCE MADE BY THE DCI TO THE EXTENT OF ` ` 1,62,596 BEING THE ALLEGED ENTERTAINMENT EXPENDITURE INCLUDED IN ADVERTISEMENT AND PUBLICITY EXPENSES. IN THIS CONNECTION, THE APPELLANTS SUBMIT AS UNDER: 1. ` 1,62,598/- REPRESENTS THE TOTAL EXPENDITURE ON GIF T ARTICLES WHICH COST MORE THAN ` 200/- EACH. OUT OF THIS, ONLY ONE ITEM AMOUNTING TO ` 2,740/- BEAR THE COMPANYS LOGO. THE DISALLOWANCE ON THIS ITEM AMOUNTING TO ` ` 2,540/- HAS BEEN MADE BY THE APPELLANTS THEMSELVES. 2. THE BALANCE OF ` 1,59,858/- REPRESENTS ITEMS NOT BEARING THE COMPANYS LOGO AND HENCE DO NOT RESULT IN ANY ADVERTISING/ENTERTAINMENT. 3. WITHOUT PREJUDICE TO THE ABOVE, OUT OF ` 1,59,858/- ` 19,200/- BEING THE AMOUNT ALLOWABLE PER RULES 6B OUGHT TO BE ALLOWED. THE APPELLANTS SUBMIT THAT THE DCI BE GIVEN SUITABL E DIRECTIONS IN THIS MATTER. C. THE CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE MADE BY THE DCI OF ` 87,000/- BEING THE SUBSCRIPTION PAID TO THE CRICKE T CLUB OF INDIA FOR CORPORATE MEMBERSHIP ON THE GROUND THAT IT IS A N EXPENDITURE ON ENTERTAINMENT. 23 THE APPELLANTS SUBMIT THAT THE SUBSCRIPTION HAS BEE N MADE TO MAINTAIN, ESTABLISH, DEVELOP AND STRENGTHEN BUSINES S CONTACTS, CONNECTIONS ETC., WITH A VIEW TO INCREASING THE VOL UME OF BUSINESS. THERE IS NO ELEMENT OF ENTERTAINMENT EXPENDITURE IN THE MEMBERSHIP SUBSCRIPTION FEES PAID. FURTHER, THE CIT (A) ERRED IN NOT CONSIDERING THE F OLLOWING DECISIONS WHICH WERE HANDED OVER TO HIM AT THE TIME OF THE HEA RING AND WHICH ARE DIRECTLY ON THIS ISSUE THAT THE LIFE MEMB ERSHIP FEE/ENTRANCE FEE PAID FOR MEMBERSHIP TO THE CLUBS I S AN ALLOWABLE EXPENDITURE: I) ASIAN ADVERTISING V/S ITO ITAT, BOMBAY REPORTED I N 26 BCAJ 877 II) GUJARAT STATE EXPORT CORPORATION LTD VS CIT GUJAR AT HIGH COURT REPORTED IN 209 ITR 649 THE APPELLANTS PRAY THAT THE DCI BE DIRECTE4D TO DE LETE THIS DISALLOWANCE. 46. THE ASSESSEE HAD CLAIMED UNDER THE HEAD SALES CONFERENCE AND BUSINESS MEETING EXPENSES A SUM OF ` `. 13.04 LACS, UNDER THE HEAD ADVERTISEMENT AND PROMOTIONAL EXPENDITURE AND SUBS CRIPTION TO CCI, THOUGH FOR GRANT OF MEMBERSHIP AS DEDUCTION. THE A O FOUND THAT ONLY A SMALL AMOUNT OUT OF THE ABOVE WAS CONSIDERED AS INV OLVING AN ELEMENT OF ENTERTAINMENT AND DISALLOWED BY THE ASSESSEE ON ITS OWN. THE AO NOTICED FROM THE PAST RECORDS, THAT THE ASSESSEE HA S NOT BEEN DISCLOSING THE REAL QUANTUM OF THE EXPENDITURE THAT IS OF A DI SALLOWABLE NATURE TOWARDS ENTERTAINMENT. CONSIDERING THE PAST RECORD S AND THE DETAILS SUBMITTED BY THE ASSESSEE AND TAKING NOTE OF THE AS ESSEES INABILITY TO GIVE FULL AND COMPLETE DETAILS OF TEA, COFFEE AND P LEASANTRIES TO THE OUTSIDERS WHO VISITS OFFICE, THE AO WAS OF THE VIEW THAT IT WOULD BE REASONABLE TO MAKE ESTIMATED DISALLOWANCE UNDER VAR IOUS HEADS. THE AO ALSO OBSERVED THAT THERE ARE EXPENSES ON SYMPOSI UM, OTHER PROMOTIONAL EXPENDITURE AND LOCAL SALES PROMOTION D EBITED TO ADVERTISEMENT AND PROMOTION ACCOUNT EXPENDITURE, SA LES CONFERENCE AND BUSINESS MEETINGS, AMOUNT DEBITED TO MISC. EXPENDIT URE A/C. ACCORDINGLY, THE FOLLOWING AMOUNTS WERE DISALLOWED BY THE AO. 24 I) OUT OF SALES CONFERENCE AND BUSINESS MEETING OUT OF THE TOTAL AMOUNT OF ` `. 13.04 LACS, A AMOUNT OF ` 10 LACS. II) OUT OF THE ADVERTISEMENT AND PROMOTIONAL EXPEND ITURE REFERRED TO ABOVE AN AMOUNT OF ` 5 LACS WAS DISALLOWED. III)SUBSCRIPTION TO CCI, THOUGH FOR GRANT OF MEMBER SHIP BUT THE SAME IS ESTIMATED AND RELATED EXPENDITURE, THE EXPENDITU RE OF ` 87,000/ WAS DISALLOWED. 47. BEFORE CIT(A) THE ASSESSEE SUBMITTED AND EXPLAI NED THAT THE EXPENDITURE OF RS.13,04,404/- REFERRED TO BY THE AS SESSING OFFICER IN PARA 20 OF HIS ORDER CONSTITUTED OF THE FOLLOWING I TEMS: I) BUSINESS MEETING EMPLOYEES ` 1,08,647/- II) BUSINESS MEETING EXPENSES ` 2,26,531/- III) CONFERENCE EXPENSES ` 4,29,745/- IV) BUSINESS MEETING BUSINESS ASSOCIATES DISALLOWED AS ENTERTAINMENT EXPENSES IN ROI BY THE APPELLANTS ` 1,67,633/ V) BUSINESS MEETING DISALLOWED U//R 6D IN THE ROI BY THE APPELLANTS. ` 27,240/- VI) CONFERENCE EXPENSES DISALLOWED U/R 6D IN THE ROI BY THE APPELLANTS ` 3,44,608/- ---------------- ` `13,04,404/- =========== 47.1 THE ASSESSEE CONTENDED THAT THE ITEMS APPEARIN G AT SR.NO.4, 5 & 6 AGGREGATING TO ` .5,39,341/- HAVE ALREADY BEEN OFFERED BY THE APPELLANT AS ENTERTAINMENT EXPENDITURE IN THE COMPU TATION OF INCOME. THUS, BY MAKING AD-HOC DISALLOWANCE OF ` 10,00,000/- THE ASSESSING OFFICER HAS MADE AN EFFECTIVE DISALLOWANCES OF ` 15,39,841/- WHEREAS THE TOTAL EXPENDITURE UNDER THIS HEAD WAS ` 13,04,404/- ONLY. THE ASSESSEE SUBMITTED THAT THIS ACTION BY ITSELF WOULD SHOW THAT THE ENTIRE ADDITION HAS BEEN MADE IN A MOST ARBITRARY AND CASU AL MANNER WITHOUT ANY BASIS. THE ASSESSEE FURTHER CONTENDED THAT AS P ER ACCOUNTING PROCEDURES FOLLOWED BY THE COMPANY INADMISSIBLE AMO UNT UNDER VARIOUS SECTION OF THE I T ACT WERE IDENTIFIED AT THE TIME OF BOOKING THE ENTRIES 25 ITSELF IN ORDER TO OBVIATE THE NECESSITY OF UNDERTA KING A MASSIVE EXERCISE SUBSEQUENTLY. UNDER THE ACCOUNTING PROCEDURES FOLLO WED BY THE COMPANY EXPENSES ON ENTERTAINMENT OF BUSINESS ASSOCIATES, C LIENTS, CUSTOMERS ETC., ARE BOOKED UNDER BUSINESS MEETING - BUSINESS ASSOCIATES AND DISALLOWED AS ENTERTAINMENT EXPENSES. EXPENSES RELA TABLE TO EMPLOYEES OR PURELY ON ACCOUNT OF EMPLOYEES WERE NOT BOOKED U NDER THIS HEAD. SIMILARLY TRAVEL EXPENSES WHICH WEE DISALLOWABLE UN DER RULE 6D AMOUNTING TO ` 3,71,808/- WERE IDENTIFIED AND ADDED IN THE COMPUT ATION OF INCOME. THE CONFERENCE EXPENSES RELATED ALMOST E NTIRELY TO FIELD STAFF TO DISCUSS SALES AND MARKETING POLICIES AND THEREFO RE, IT WAS NOT IN THE NATURE OF ENTERTAINMENT EXPENDITURE. THE ASSESSEE T HUS SUBMITTED THAT THE ENTIRE DISALLOWANCE OF ` 10,00,000/- MADE BY THE ASSESSING OFFICER THEREFORE DESERVES TO BE DELETED. 47.2 AS REGARDS DISALLOWANCE OF RS. 5,00,000/- OUT OF ADVERTISEMENT AND PUBLICITY EXPENSES ON ESTIMATE BASIS THE ASSESS EE SUBMITTED THAT THE DISALLOWANCE OUT OF ADVERTISEMENT AND PUBLICITY EXPENSES HAVE BEEN MADE AT VARIOUS PLACES FOR EXAMPLE DISALLOWANCE OF ` 85,37,046/- HAS BEEN MADE VIDE PARA 17 OF THE ASSESSMENT ORDER WHIC H HAS BEEN AGITATED IN GROUND NO.16 OF THE APPEAL BEFORE CIT(A). SIMILA RLY, A SUM OF ` 25,000/- HAS BEEN DISALLOWED OUT OF ADVERTISEMENT AND PUBLICITY VIDE PARA 17OF PAGE 12 OF THE ASSESSMENT ORDER WHICH HA S BEEN AGITATED IN GROUND NO.17 OF THE APPEAL BEFORE CIT(A). IT WAS S UBMITTED THAT CONSIDERING THESE DISALLOWANCES, WHICH HAVE BEEN SE PARATELY AGITATED, THERE WAS NO JUSTIFICATION FOR MAKING FURTHER DISAL LOWANCE OF ` .5,00,000/- AND THEREFORE THE DISALLOWANCE SHOULD T HEREFORE BE DELETED. THE ASSESSEE FURTHER ARGUED THAT THERE WERE ONLY 4 PROMOTIONAL EXPENSES LIKE PROMOTIONAL EXPENSES INVOLVING CHARGES FOR PUT TING IN TOOTH PASTE BOXES, FREE OFFERS, SCHEMES AND DISCOUNTS TO TRADE, TEMPO AND VAN HIRE CHARGES, DISPLAY COSTS, DOOR TO DOOR SELLING COSTS, LEAFLETS, ARTWORKS, SLIDES AND OTHER ITEMS OF SIMILAR NATURE. LOCAL SAL ES PROMOTION EXPENSES ARE IN THE NATURE OF SHELF HIRE CHARGES, DISPLAY CH ARGES, BANNERS, PAINTING 26 CHARGES ETC. IT WAS POINTED OUT THAT IN THE SUBSEQ UENT ASST. YEAR FULL DETAILS OF THESE EXPENSES WERE ALSO SPECIFICALLY CA LLED FOR BY THE DC(IT) AND THESE WERE FURNISHED BY THE ASSESSEE TO THE SA TISFACTION OF THE DC(IT). EVEN IN THE EARLIER ASST. YEAR THE ASSESSIN G OFFICER HAS ALLOWED THE ENTIRE EXPENDITURE AS ADMISSIBLE REVENUE DEDUCT ION. 47.3 AS REGARDS DISALLOWANCE OF `. 87,000/- PAID TO CRICKET CLUB OF INDIA CORPORATE MEMBERSHIP, THE ASSESSEE CONTENDED THAT THE AMOUNT PAID TO CRICKET CLUB OF INDIA IS NOT ENTERTAINMENT EXPENDITURE AS HELD IN THE FOLLOWING CASES: I) ITAT DECISION IN CIT VS MAKER DEVELOPMENT SERVICES LTD 25 BCAJ 1230 II) ITAT DECISION IN THE CASE OF AMERICAN BUREAU OF SHIPPING (AY 91-82, 82-93 AND 83-84) THE AR ARGUED THAT IN VIEW OF ABOVE FACT AND CIRCUM STANCES OF THE CASE AND JUDICIAL PRONOUNCEMENTS INVOLVED IN FAVOUR OF T HE ASSESSEE THE ENTIRE ADDITION OF `. 15,87,000/- MADE BY THE ASSESSING OFFICER DESERVES TO BE DELETED. 48. THE CIT(A) HELD AS FOLLOWS: 42 I HAVE CONSIDERED THE ENTIRE MATTER CAREFULLY. THERE IS SOME FORCE IN THE PLEA OF THE LD COUNSEL OF THE APPELLAN T THAT BY MAKING AN ADHOC DISALLOWANCE OF ` 10,00,000/- OUT OF TOTAL SALES, CONFERENCE AND BUSINESS MEETING EXPENSES AMOUNTING TO ` 13,0 4,404/-, THE ASSESSING OFFICER HAS MADE AN EFFECTIVE DISALLOWANC E OF ` 15,39,841/-.THIS DISCREPANCY HAS ARISEN BECAUSE TH E APPELLANT HAS ITSELF OFFERED DISALLOWANCE ON ACCOUNT OF ENTER TAINMENT EXPENSES AMOUNTING TO ` 1,67,633/- IN THE COMPUTATION OF INCOME FILED. BESIDES THAT, IT HAS BEEN STATED BY THE APPE LLANT THAT IN THE COMPUTATION OF INCOME FILED, THE APPELLANT HAS ALSO OFFERED DISALLOWANCE OF ` 3,71,848/ UNDER RULE 6D IN RESPECT OF ITEM NO.5 & 6 APPEARING ON PAGE NO.45 OF THE PRESENT APPELLA TE ORDER. AS THE ASSESSING OFFICER HAS PROCEEDED TO COMPUTE THE TOTA L INCOME IN 27 ANNEXURE 5 ANNEXED TO THE ASST ORDER BY TAKING BUSI NESS INCOME AS SHOWN IN THE COMPUTATION OF INCOME, THE ADDITION OF ` 1,67,633/- AND ` 3,71,848/- AGGREGATING TO ` 5,39,481/- OFFERED BY THE APPELLANT HAVE ALREADY BEEN TAKEN INTO CONSIDERATI ON AND THEREFORE, ADHOC DISALLOWANCE OF ` 10,00,000/- CANNOT BE JUSTIFIED AS DISALLOWANCE ONLY OUT OF SALES, CONFERENCES AND BUSINESS MEETING EXPENSES. HOWEVER, WHILE MAKING THIS DISAL LOWANCE IN PARA 20 OF THE ASST. ORDER, THE ASSESSING OFFICER HAS OBSERVED THAT THE ABOVE DISALLOWANCE WAS MADE CONSIDERING THE PAS T RECORD AND FOR WANT OF FULL AND COMPLETE DETAILS IN RESPECT O F TEA, COFFEE AND PLEASANTRIES OFFERED TO THE OUTSIDERS WHO VISIT OFF ICES. THE DISALLOWANCE OF ` 10 LACS MADE BY THE ASSESSING OFFICER IS THEREFORE, TO BE EXAMINED IN WIDER PERSPECTIVE WIT H REFERENCE TO OVERALL ENTERTAINMENT EXPENDITURE IN THE CASE OF TH E APPELLANT. THE ASSESSING OFFICER HAS ALSO MADE THE ABOVE DISALLOWA NCES UNDER THE HEAD ENTERTAINMENT. THE DISALLOWANCE WAS MADE, ALSO TO COVER, ENTERTAINMENT EXPENDITURE ON SYMPOSIUMS AND OTHER P ROMOTIONAL EXPENDITURE DEBITED TO MISCELLANEOUS EXPENDITURE AC COUNT. THE APPELLANT HAS NOT MAINTAINED ANY SEPARATE ACCOUNT I N RESPECT OF TEA, COFFEE AND PLEASANTRIES OFFERED TO THE OUTSIDE RS WHO VISIT OFFICE. OBVIOUSLY, THE ABOVE EXPENDITURE IS MET OUT OF CANT EEN EXPENSES. THE FACT THAT NO SUCH SEPARATE ACCOUNT HAS BEEN MAI NTAINED BY THE APPELLANT IS NOT DISPUTED. IN THE PAST, A PART OF C ANTEEN EXPENDITURE HAD BEEN DISALLOWED BY TREATING THE SAME AS ENTERTA INMENT EXPENDITURE. FOR EXAMPLE, FOR THE ASST YEAR 1990-91 , DISALLOWANCE OF ` ` 1,00,000/- WAS MADE OUT OF CANTEEN EXPENDITURE TO COVER THE ELEMENT OF ENTERTAINMENT EXPENDITURE FOR PROVIDING TEA, COFFEE ETC., TO CUSTOMERS. THE ABOVE DISALLOWANCE WAS CONFIRMED BY THE CIT(A) VIDE ORDER DATED 11.11.1994 IN THE CASE OF THE APPE LLANT. AFTER EXAMINING THE RELEVANT FACTS AND CIRCUMSTANCES OF T HE CASE IN THE SUBSEQUENT YEAR ALSO THE DC(IT) HAS MADE DISALLOWAN CE OF ` 4,64,252/- AS ENTERTAINMENT EXPENDITURE WHICH WORK S OUT TO ABOUT 5% OF THE TOTAL CANTEEN EXPENDITURE. THE FACT S AND CIRCUMSTANCES FOR THE ASSESSMENT YEAR UNDER REFEREN CE ARE ALSO THE SAME. THE AR WAS THEREFORE GIVEN A SPECIFIC OPPORTU NITY TO SHOW AS TO WHY PART OF CANTEEN EXPENDITURE SHOULD NOT BE CO NSIDERED FOR DISALLOWANCE AS ENTERTAINMENT EXPENDITURE AS THE AP PELLANT HAS NOT MAINTAINED ANY SEPARATE ACCOUNT FOR OFFERING TEA, C OFFEE AND PLEASANTRIES TO THE OUTSIDERS WHO VISIT OFFICE. IT WAS ALSO MADE CLEAR TO THE LD COUNSEL OF THE APPELLANT THAT THE ASSESSI NG OFFICER HAS NOT SEPARATELY QUANTIFIED ANY SPECIFIC AMOUNT IN THIS C ONNECTION BY THE RELEVANT OBSERVATIONS HAVE BEEN MADE IN THE ASSESSM ENT ORDER 28 WHILE MAKING THE IMPUGNED DISALLOWANCE. IN THIS CO NNECTION, IT WAS ARGUED BY THE AR THAT THE EXPENDITURE ON TEA AN D REFRESHMENTS SERVED TO CONSTITUENTS OF THE BUSINESS CANNOT BE TREATED AS ENTERTAINMENT EXPENDITURE. THE DISALLOWA NCE MADE IN THIS CONNECTION U/S 37(2A) OF THE I T ACT IN THE CA SE OF ITO VS UTTAM ROAD WAYS PVT LTD WAS DELETED BY THE HONBLE ITAT B OMBAY BENCH D BY FOLLOWING THE DECISIONS OF GUJARAT AND BOMBAY HIGH COURTS DELIVERED IN THE CASE OF CIT VS PATEL INTERNATIONAL FILM LTD REPORTED IN 101 ITR 219. 43 AFTER DUE CONSIDERATION, I AM NOT INCLINED TO AC CEPT THE PLEA OF THE LD COUNSEL OF THE APPELLANT THAT EXPENDITURE INCURRED FOR OFFERING TEA AND COFFEE ETC., TO THE OUTSIDERS/CUST OMERS SHOULD NOT BE TREATED AS ENTERTAINMENT EXPENDITURE. DURING THE ASST YEAR UNDER REFERENCE, THE APPELLANT HAS CLAIMED EXPENDIT URE OF ` 92,85,039/- UNDER THE HEAD CANTEEN EXPENDITURE AS AGAINST ` 80,41,642/- CLAIMED DURING THE EARLIER YEAR. IN VI EW OF ABOVE DISCUSSION, IN MY OPINION, IT WOULD BE REASONABLE I F A SUM OF ` 2,20,000/-, WHICH IS APPROX. 2.5% OF THE TOTAL CA NTEEN EXPENDITURE, IS DISALLOWED OUT OF CANTEEN EXPENSES ON ACCOUNT OF EXPENDITURE FOR ENTERTAINMENT OF CUSTOMERS. IN VIE W OF ABOVE DISCUSSION, THE TOTAL ENTERTAINMENT EXPENDITURE WOU LD WORK OUT AS UNDER: BUSINESS MEETING EXPENSES ` 2,26,531/- CONFERENCE EXPENSES ` 4,29,745/- CANTEEN EXPENSES ` 2,20,000/- ` 8,76,276/- WHILE CONSIDERING THE ABOVE ITEMS, I HAVE NOT TAKEN INTO ACCOUNT THE BUSINESS MEETING EXPENDITURE OF ` 1,08,647.- WHICH HAS BEEN SHOWN BY THE APPELLANT SPECIFICALLY FOR THE EMPLOYE ES. HOWEVER, THERE ARE ITEMS OF EXPENDITURE DEBITED UNDER THE HE AD ADVERTISEMENT AND PUBLICITY EXPENSES LIKE SYMPOSIUM AND PROMOTIONAL EXPENSES ETC. IN ORDER TO COVER THE MIS CELLANEOUS INADMISSIBLE ITEMS OF EXPENDITURE IN THE NATURE OF ENTERTAINMENT, IN MY OPINION, IT WOULD BE REASONABLE IF THE TOTAL DIS ALLOWANCE IS ESTIMATED AT ` 9,00,000/- (SPECIFIC ITEMS AGGREGATING TO ` `. 8,76,276/ BY THE DC(IT) 44. OUT OF ADVERTISEMENT AND PROMOTIONAL EXPENDITUR E AN AMOUNT OF ` 5,00,000/- HAS BEEN DISALLOWED AS ENTERTAINMENT EX PENDITURE. IN ADDITION TO ABOVE DISALLOWANCE, THE DC(IT) HAS ALSO MADE DISALLOWANCE OF ` ` 1,43,498/ BY INVOKING PROVISIONS OF RULE 6B OF 29 THE I T RULES READ WITH SECTION 37(3) OF THE I T AC T. THE DISALLOWANCE OF ` 1,43,498/- HAS BEEN AGITATED BY THE APPELLANT IN G ROUND NO.3 OF THE APPEAL. THEE DISALLOWANCES ARE APPARENTLY OV ERLAPPING. A PERUSAL OF THE DETAILS OF ADVERTISEMENT AND PUBLICI TY EXPENSES RECALL THAT A SUM OF ` . 7,74,175/- WAS SPENT BY THE APPELLANT COMPANY ON GIFT ARTICLES. THE TOTAL OF GIFT ITEMS COSTING M ORE THAN ` 200/- EACH HAS BEEN GIVEN BY THE APPELLANT AT ` 1,62,598/-. IN MY OPINION, IN VIEW OF THE DECISION OF THE HONBLE HIMACHAL PRADE SH HIGH COURT IN THE CASE OF CIT VS MOHAN MEAKING BREWERIES LTD REP ORTED IN 192 ITR 134, THE PRESENTATION ITEMS COSTING MORE THAN ` 200/- EACH AGGREGATING TO ` 1,62,598/ COME WITHIN THE AMBIT OF ENTERTAINMENT EXPENDITURE. IN THIS CONNECTION, IT IS RELEVANT TO NOTE THAT THE GIFT ITEMS INCLUDED GOLD CHAIN ETC., WORTH ` 1,18,318/. THESE GIFTS WERE GIVEN TO CUSTOMERS AND BUSINESS ASSOCIATES FOR WHIC H SPECIFIC DETAILS HAVE NOT BEEN FURNISHED. CONSIDERING THESE FACTS AND CIRCUMSTANCES OF THE CASE, IT WOULD BE REASONABLE I F THE DISALLOWANCE OUT OF ADVERTISEMENT AND PROMOTIONAL E XPENDITURE IS RESTRICTED TO ` 1,62,598/- AS AGAINST ` 5,00,000/- MADE BY THE ASSESSING OFFICER. THE EXCESS THEREOF STANDS DELETE D. THE ABOVE REFERRED DISALLOWANCES OF ` ` 1,62,598/- IS OBVIOUSLY INCLUSIVE OF DISALLOWANCE OF ` 1,43,498/-. THUS, THERE IS NO NEED OF MAKING SEPARATE ADDITION OF ` 1,43,498/-. THE DISALLOWAN CE OF ` 1,43,498/- WHICH HAS BEEN AGITATED BY THE APPELLAN T IN GROUND NO.3 IS THEREFORE, DELETED. FOR THE EARLIER ASST YE AR SIMILAR DISALLOWANCE MADE BY THE ASSESSING OFFICER U/R 6B O F THE I T RULES WAS DELETED AS THE DECISION OF THE HONBLE HIMACHAL PRADESH HIGH COURT IN THE CASE OF CIT VS MOHAN MEAKING BRAVERIES LTD REPORTED IN 192 ITR 134 WAS NOT AVAILABLE AT THAT TIME. AS RE GARDS PAYMENT OF ` . 87,000/- MADE TO CRICKET CLUB OF INDIA FOR CORPOR ATE MEMBERSHIP, I AM OF THE VIEW THAT THE SAME CANNOT B E TREATED AS AN ADMISSIBLE REVENUE EXPENDITURE. IT WAS ONETIME PAYM ENT FOR OBTAINING CORPORATE MEMBERSHIP. THE ASSESSING OFFIC ER WAS THEREFORE, FULLY JUSTIFIED IN MAKING THE IMPUGNED D ISALLOWANCES. THIS DISALLOWANCE IS THEREFORE, CONFIRMED. IN THE R ESULT THE DISALLOWANCE OF ` . 10,00,000/- IS REDUCED TO ` 9,00,000/- AND ANOTHER ADDITION OF ` 5,00,000/- IS REDUCED TO ` 1,62,598/. THE DISALLOWANCE OF ` 1,43,498/- (AGITATED IN GROUND NO3 OF THE APPEAL) IS DELETED AS THIS AMOUNT S INCLUDED IN THE ABOVE DISALLOWANCE OF ` 1,62,598/-. THE RESULTANT RELIEF MAY BE COMPUTED ACCORDINGLY. 30 49. AGGRIEVED BY THE ORDER OF THE CIT(A) SUSTAININ G PART OF THE DISALLOWANCE MADE BY THE AO, THE ASSESSEE HAS PREFE RRED GROUND NO.3 (A) TO (C) BEFORE THE TRIBUNAL. 50. WE HAVE HEARD THE SUBMISSIONS OF THE LEARNED C OUNSEL FOR THE ASSESSEE WHO REITERATED THE STAND AS PUT FORTH BEFO RE REVENUE AUTHORITIES AND FURTHER RELIED ON CERTAIN JUDICIAL PRONOUNCEMEN TS AND ORDERS OF ITAT. THE LEARNED D.R. RELIED ON THE ORDER OF THE AO. 51. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. AS FAR AS THE DISALLOWANCE OF ` .9,00,000/- SUSTAINED BY THE CIT(A) IS CONCERNED, T HE BREAKUP OF THE SAME IS AS FOLLOWS: BUSINESS MEETING EXPENSES ` .2,26,531 CONFERENCE EXPENSES ` .4,29,745 CANTEEN EXPENSES ` .2,20,000 ----------------- TOTAL ` .8,76,276 ----------------- THE BUSINESS AND CONFERENCE MEETING WAS NOT WITH TH E EMPLOYEES. THERE WERE BUSINESS MEETING WITH THE EMPLOYEES FOR WHICH THE ASSESSEE INCURRED EXPENDITURE OF ` .1,08,647/-. ACCORDING TO THE CIT(A) THERE WERE SOME EXPENDITURE UNDER THE HEAD ADVERTISEMENT AND P UBLICITY EXPENSES LIKE SYMPOSIUM AND PROMOTION EXPENSES INCLUDED IN T HE ABOVE EXPENDITURE AND THEREFORE CONSIDERING ALL FACTS, TH E CIT(A) SUSTAINED ADDITION OF ` .9,00,000/-. IN OUR VIEW THE DISALLOWANCE OF EXPEN SES ON BUSINESS MEETING AND CONFERENCE EXPENSES CANNOT BE DISALLOWED AS LAID DOWN IN THE FOLLOWING DECISIONS ON WHICH RELIANCE W AS PLACED BY THE LEARNED COUNSEL FOR THE ASSESSEE. LAKHANPAL NATIONAL LTD. VS. ITO 69 ITD 9 (AHD.) (SB ) ASSOCIATE MARKETING AGENCIES VS. ITO 43 ITD 543 (MA D) SHARADA PLYWOOD INDUSTRIES LTD. VS. CIT 238 ITR 354 (CAL) CIT VS. KIRLOSKAR OIL ENGINES LTD. 157 ITR 762 (BOM ) 31 THE TRIBUNAL HAS CONSIDERED ALL THESE DECISIONS IN THE CASE OF CADBURY INDIA LTD. VS. DCIT ITA NO.9910/MUM/92 ORDER DATED 18-10-2001 AND HAS HELD THAT EXPENDITURE ON CONFERENCE AND MEETING S CANNOT BE DISALLOWED AS THEY ARE FOR THE PURPOSES OF BUSINESS AND THERE IS NO ELEMENT OF ENTERTAINMENT TO ANY OUTSIDER. IN VIEW OF THE AFORESAID DECISIONS, THE DISALLOWANCE SUSTAINED, IN SO FAR AS IT RELATES TO EXPENDITURE ON CONFERENCE AND BUSINESS MEETING IS D ELETED. 52. AS FAR AS CANTEEN EXPENSES DISALLOWED AS ENTER TAINMENT EXPENDITURE IS CONCERNED, THE SAME HAS BEEN MADE BY THE CIT(A) FOR THE REASON THAT THE ASSESSEE HAS NOT MAINTAINED COMPLETE RECORDS RE GARDING THE EXPENDITURE INCURRED UNDER THIS HEAD TO EMPLOYEES A ND OUTSIDERS AND HAS ALSO TAKEN NOTE OF THE PAST HISTORY OF THE ASSE SSEES CASE. WE ARE OF THE VIEW THAT AN ADHOC DISALLOWANCE OF ` .1,00,000/- ON THIS COUNT WOULD BE JUST AND FAIR. 53. REGARDING THE DISALLOWANCE OF ` .1,62,598 INCLUDED IN ADVERTISEMENT AND PUBLICITY EXPENSES AS ENTERTAINMENT EXPENSES, W E FIND THAT THE ADDITION SUSTAINED BY THE CIT(A) RELATES TO TOTAL V ALUE OF GIFT ITEMS THE DETAILS OF THE GIFT ITEMS ARE GIVEN AT PAGE-24 AND 25 OF THE PAPER BOOK. OUT OF THE ABOVE THE ASSESSEE ON ITS OWN HAD ADMITT EDLY NOT CLAIMED EXPENDITURE TO THE TUNE OF ` .1,43,498/-. THE ASSESSEE CLAIMED DEDUCTION OF ONLY RS.19,100/- AND HAS FURTHER JUSTIFIED ITS C LAIM ON THE GROUND THAT THE ITEMS OF GIFTS WERE OF SMALL VALUE AND DID NOT CONTAIN THE COMPANYS LOGO. THUS CIT(A) PROCEEDED UNDER AN ERRONEOUS ASS UMPTION THAT THE ENTIRE EXPENDITURE OF ` .1,62,598/- HAD BEEN CLAIMED AS DEDUCTION. WE THEREFORE FIND NO BASIS FOR THE ORDER OF CIT(A) IN SUSTAINING PART OF THE DISALLOWANCE MADE BY THE AO AND THEREFORE DIRECT TH AT THE ADDITION SUSTAINED BY CIT(A) BE DELETED. 54. AS FAR AS DISALLOWANCE OF SUBSCRIPTION FEE PA ID TO CRICKET CLUB OF INDIA FOR CORPORATE MEMBERSHIP IS CONCERNED, WE ARE OF THE VIEW THAT THE 32 SAME IS REVENUE EXPENDITURE FOLLOWING THE PRINCIPLE S LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF OTIS ELEVA TOR BHC 195 ITR 695 (BOM) AND HONBLE GUJARAT HIGH COURT IN THE CASE OF GUJARAT STATE EXPORT CORPORATION LTD. 209 ITR 649 (GUJ). ADMITT EDLY THE MEMBERSHIP WAS A CORPORATE MEMBERSHIP AND ENSURES TO THE BENEF IT OF THE ASSESSEE AND THERE IS NO PERSONAL ELEMENT INVOLVED WHATSOEVE R. THUS GROUND NO.3(A) IS PARTLY ALLOWED WHILE GROUND NO.3(B) AND 3(C) ARE ALLOWED. 55. GROUND NO.4 (A) TO 4(C) READS AS FOLLOWS: 4(A) THE CIT(A) ERRED IN UPHOLDING THE DISALLOWANCE IN RESPECT OF FOREIGN TRAVEL EXPENSES TO THE EXTENT OF ` . 12,87,799/- BEING 20% OF THE TOTAL FOREIGN TRAVEL EXPENSES OF ` 64,38,993/- INCURRED BY THE APPELLANTS, ON THE GROUNDS THAT SOME OF THE FO REIGN VISITS WERE MAINLY FOR FURTHERANCE OF THE INTERESTS OF THE GROU P AND SOME WERE ALSO FOR STARTING NEW BUSINESS. IN THIS RESPECT, TH E APPELLANTS SUBMIT THAT THE ENTIRE DURATION OF ALL THE FOREIGN VISITS HAVE BEEN DEVOTED TO TRAVELLING FOR THE COMPANYS BUSINESS AN D WERE NOT IN CONE4NCTION WITH ANY NEW BUSINESS OR FOR ANY OTHER PURPOSE. THE TRAVELS HAVE BEEN UNDERTAKEN FOR DISCUSSIONS WITH P ARENT COMPANY AND OTHER AFFILIATE COMPANIES REGARDING WORLDWIDE T RENDS, FORECASTS, EXPORTS, GENERAL MANAGEMENT TRAINING (CE MTRAK), TECHNICAL DISCUSSIONS, CONFERENCES, EXPANSION OF TH E COMPANYS EXISTING LINES OF BUSINESS, MARKETING STRATEGIES, M ANAGEMENT DEVELOPMENT ISSUES (HRD) ETC. THE APPELLANTS SUBMIT THAT THE EXPENSES HAD BEEN INCURRED WHOLLY AND EXCLUSIVELY F OR THE PURPOSES OF THEIR BUSINESS AND THEREFORE OUGHT TO B ALLOWED. THE APPELLANTS PRAY THAT THE DCI BE DIRECTED TO ALLOW H EM THIS AMOUNT OF ` ` 12,87,799/-. (B) WITHOUT PREJUDICE TO THE ABOVE, THE APPELLANTS SUBMIT THAT THE DISALLOWANCE OF 20% OF TOTAL FOREIGN TRAVEL EXPENSE S IS EXCESSIVE AND UNREASONABLE. AS PER THE APPELLANTS CALCULATION S, THE TOTAL AMOUNT SPENT ON ALL THE TRAVEL IDENTIFIED BY THE DC I IN ANNEXURE 1 OF HIS ORDER WORKS OUT TO ` 7,43,829/- AND THEREFORE PRAY THAT THE DISALLOWANCE ON THIS ACCOUNT SHOULD NOT EXCEED 20% OF ` 7,43,829/- I.E. ` 1,48,766/- UNDER ANY CIRCUMSTANCES. 33 WITHOUT PREJUDICE TO THE ABOVE, THE APPELLANTS SU BMIT THAT FULL DETAILS OF FOREIGN TRAVEL EXPENSES HAD BEEN FURNISH ED TO THE DCI AND THE CIT(A) AND DISALLOWANCE IF ANY, SHOULD BE MADE ON ITEMIZED BASIS AND NOT ON AD-HOC BASIS. THE APPELLANTS PRAY THAT THE DCI BE GIVEN SUITABLE DIRECTIONS IN THIS REGARD. THE ABOVE GROUNDS OF APPEAL ARE CONNECTED TO GROUND NO.2 RAISED BY THE REVENUE IN ITS APPEAL, WHICH READS AS FOLLOWS: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) ERRED IN PARTLY DELETING THE DISALLOWANCE OUT OF FOREIGN TRAVEL EXPENSE AMOUNTING TO ` . 7,12,282/- DISREGARDING THE DETAILED REASONS ASSIGNED IN THE ASSESSMENT ORDER. 55.1 THE AO MADE A DISALLOWANCE OF AN ADHOC AMOUNT OF ` 20,00,000/- OUT OF FOREIGN TRAVEL EXPENSES INCURRED BY THE ASSE SSEE. THE IMPUGNED DISALLOWANCE OF ` 20,00,000/- HAS BEEN MADE BY THE ASSESSING OFFICER ON THE GROUND THAT THE EXPENSES WERE NOT FULLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF THE BUSINESS OF THE COMPANY BES IDES BEING DISALLOWABLE UNDER RULE 6D(1) OF THE I T ACT. IT WA S FURTHER SEEN BY THE ASSESSING OFFICER THAT THE ASSESSEE COMPANY WAS AN AFFILIATE OF THE MULTI NATIONAL M/S CIBA GEIGY LTD AND MOST OF THE VISITS WERE AT THE INSTANCE OF PARENT COMPANY OF FOREIGN SHARE HOLDERS. THE VIS ION 2000 PROGRAMME WAS ALSO THAT OF CIBA GEIGY FOR WHICH A NUMBER OF D ISCUSSIONS HAD TAKEN PLACE ABROAD. BESIDES THIS THERE WERE EXPENSES ON F OREIGN VISITORS. THE ASSESSING OFFICER WAS OF THE OPINION THAT IF THE OB JECT OF UNDERTAKING OF TOUR WAS DOMINANTLY COMMERCIAL THEN ONLY THE EXPEND ITURE SHOULD QUALIFY FOR DEDUCTION. IF THE ADVANTAGE GAINED FOR THE ASSESEES BUSINESS, PROFESSION OR VOCATION WAS SECONDARY AND WAS A REMO TE CONSEQUENCE, THE EXPENDITURE WOULD NOT COME WITHIN THE EXEMPTION PRO VISIONS. IN THIS CONNECTION THE ASSESSING OFFICER HAS PLACED RELIANC E ON CIT VS DR B V RAMAN (59 ITR 20). THE ASSESSING OFFICER ALSO FOUND THAT IN SOME CASES THE EXPENDITURE WAS INCURRED FOR FOREIGN TRAVELLIN G FOR STARTING MANUFACTURE OF A NEW PRODUCT WHICH WAS NOT ALLOWAB LE AS PER THE DECISION OF GUJARAT HIGH COURT IN CIT VS MCGAW RAVI NDRA LABORATORIES 34 (INDIA) LTD., REPORTED IN 132 ITR401. A DETAILED DISCUSSION IN THIS CONNECTION HAS BEEN MADE BY THE ASSESSING OFFICER O N THE BASIS OF DETAILS SUBMITTED IN ANNEXURE I TO THE ASSESSMENT O RDER. THE ASSESSING OFFICER AFTER CONSIDERING THE ABOVE REFERRED FACTS AND CIRCUMSTANCES AS MENTIONED IN THE ASSESSMENT ORDER AND ANNEXURE I, M ADE ADHOC DISALLOWANCE OF ` 20,00,000/- OUT OF TOTAL EXPENDITURE ON FOREIGN TR AVEL AMOUNTING TO ` 64,38,993/-. 55.2. IT HAS BEEN ARGUED BY THE ASSESSEE BEFORE CI T(A) THAT FULL DETAILS OF EXPENSES INCURRED ON FOREIGN TRAVEL HAVE BEEN FURNI SHED VIDE ANNEXURE 28 TO THE RETURN OF INCOME. THE ASSESSEE ALSO SUBMI TTED COPIES OF LETTERS AND SUPPORTING SUBMITTED TO THE RBI SEEKING ITS AP PROVAL AND ALSO APPROVAL RECEIVED FROM THE RBI IN CONNECTION WITH A LL THE FOREIGN TRAVEL VIDE THEIR LETTER DATED 18.3.1994 TOGETHER WITH ANN EXURE. THE ASSESSEE ALSO SUBMITTED THE OBJECTIVE OF THE VARIOUS FOREIGN TRAVEL UNDERTAKEN WHICH COSTED THE COMPANY A SUM OF ` 7,43,829/-. THE ASSESSEE POINTED OUT THAT THE PURPOSE OF THESE VISIT HAVE BEEN ENUME RATED ON PAGE 3 OF THE ANNEXURE I TO THE DC(IT)S ORDER. A PERUSAL OF THESE DETAILS WOULD REVEAL THAT ALL THE VISITS WERE ENTIRELY IN CONNECT ION WITH THE PURPOSE OF THE COMPANYS BUSINESS AND WERE NOT IN CONNECTION W ITH THE PURCHASE OF PLANT AND MACHINERY OR DEVELOPMENT OF A NEW LINE OF BUSINESS AND WERE NOT FOR THE BENEFIT OF THE PARENT COMPANY OF THE FO REIGN SHAREHOLDERS AND FURTHER THAT THE ENTIRE DURATION WAS DEVOTED TO TRA VELLING OR ON COMPANYS BUSINESS. IT WAS POINTED THAT ON A PERUSA L OF THE DETAILS FURNISHED IN RESPECT OF FOREIGN TRAVEL SUBMITTED IT CAN BE SEEN THAT NO TRAVEL WAS UNDERTAKEN FOR VISION 2000. THE VISION 2 000 WAS NOTHING BUT MERELY A STATEMENT OF VALUES TO EMPLOYEES. IT WAS A RGUED THAT THE DC(IT) HAS MADE A GENERAL OBSERVATION THAT THE EXPENSES WE RE CAPITAL IN NATURE OR NOT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF TH E BUSINESS WITHOUT SPECIFICALLY STATING THAT WHICH ITEMS WERE CAPITAL IN NATURE AND NOT FOR THE PURPOSE OF THE BUSINESS. IT WAS POINTED OUT TH AT FROM THE DETAILS FILED BY THE ASSESSEE IT WAS CLEAR THAT ALL THE EXP ENSES WERE INCURRED FOR 35 THE PURPOSE OF THE BUSINESS AND WERE NOT OF A CAPIT AL NATURE. THE ASSESSEE FURTHER CONTENDED THAT FOR THE ASSESSMENT YEARS 1982-83 AND 1983-84 THE ASSESSING OFFICER HAS MADE ADHOC DISALL OWANCE OF 15% OF FOREIGN TRAVEL EXPENSES WHICH WAS DELETED BY THE CI T(A) IN APPELLATE PROCEEDINGS. NO SUCH ARBITRARY OR ADHOC DISALLOWANC E WAS MADE BY THE DC(IT) FOR THE ASSESSMENT YEARS 1984-85 TO 1990-91. IT WAS THEREFORE SUBMITTED THAT THERE IS ABSOLUTELY NO JUSTIFICATION WHATSOEVER FOR SUCH AN ARBITRARY AND ADHOC DISALLOWANCE FOR THE ASST.YAEAR 1991-92. THE IMPUGNED DISALLOWANCE OF ` 20,00,000/- MADE BY THE ASSESSING OFFICER THEREFORE DESERVES TO BE DELETED. WITHOUT PREJUDICE TO THE ABOVE THE ASSESSEE FURTHER CONTENDED THAT IN ANY EVENT DISALL OWANCE OF ` 20,00,000/- IS MOST ARBITRARY AND UNSUSTAINABLE AS THE TOTAL AMOUNT SPENT ON THE TRAVEL ENUMERATED IN ANNEXURE-I TO THE ASSESSMENT ORDER WORKS OUT TO ONLY ` 7,43,829/-. 55.3. ON A CONSIDERATION OF THE ABOVE SUBMISSIONS, THE CIT(A) HELD AS FOLLOWS: I HAVE CONSIDERED THE ENTIRE MATTER CAREFULLY. TH E ISSUE REGARDING EXPENDITURE ON FOREIGN TRAVEL HAS BEEN DISCUSSED IN PARA 10 OF THE ASSESSMENT ORDER AND TE RELEVANT FACTORS AND DETAIL S HAVE BEEN GIVEN IN ANNEXURE I ENCLOSED TO THE ASST ORDER OF T HE DC(IT).A PERUSAL OF THE DETAILS FOR THE PURPOSE OF FOREIGN V ISITS ENUMERATED ON PAGE 3 OF ANNEXURE I ANNEXED TO THE DC(IT)S ORDER REVEALED THAT CERTAIN VISITS UNDERTAKEN BY THE EMPLOYEES OF THE A PPELLANT COMPANY WERE FOR STARTING MANUFACTURE OF A NEW PRO DUCT. SIMILARLY THE NATURE OF SOME OTHER VISITS UNDERTAKEN BY THE O FFICIAL OF THE COMPANY DO REVEL THAT IT WAS MAINLY FOR PROVIDING B USINESS ADVANTAGE TO THE PARENT COMPANY. FOR EXAMPLE, AS PE R SR NO.9 THE VISIT UNDERTAKEN BY SHRI S G MALE, WHICH COSTED THE APPELLANT COMPANY A SUM OF ` 61,860/- WAS UNDERTAKEN IN RESPECT OF NEW TINOPAL CBD-X PROJECT. SIMILARLY AS PER SR. 12 ANOT HER VISIT WAS UNDERTAKEN BY MR H A MONTEIRO WHICH COSTED THE APPE LLANT COMPANY A SUM OF ` 76,055/- WAS UNDERTAKEN IN RESPECT OF LATEST DEVELOPMENTS IN VARIOUS BUSINESS SEGMENTS AND THEIR INFLUENCES ON PARENT COMPANYS BUSINESS IN INDIA. THIS VISIT WAS MAINLY UNDERTAKEN FOR THE DEVELOPMENT OF THE BUSINESS OF T HE PARENT COMPANY. THE NARRATION GIVEN IN RESPECT OF VISIT OF MRS P RAM, 36 APPEARING ON SR NO.14 ALSO DOES NOT INDICATE THAT T HE VISIT WAS FOR CONDUCTING BUSINESS OF THE APPELLANT COMPANY. IN VI EW OF ABOVE FACTS AND VARIOUS OTHER FACTORS AS MENTIONED BY THE ASSESSING OFFICER IN THE ASST ORDER AND ALSO IN ANNEXURE I AN NEXED TO THE PRESENT ASST. ORDER SOME DISALLOWANCE WAS DEFINITEL Y WARRANTED OUT OF FOREIGN TRAVEL EXPENDITURE. I ALSO DO NOT FI ND ANY FORCE IN THE ALTERNATE PLEA OF THE APPELLANT THAT AS THE TOTAL A MOUNT SPENT ON THE TRAVEL ENUMERATED ABOVE WORKS OUT TO ` 7,43,829/-, THE DISALLOWANCE OF ` 20,00,000/- MADE BY THE DC(IT) IS UNSUPPORTABLE. IN THIS CONNECTION, I AGREE WITH AR OF THE APPELLAN T ONLY TO THE LIMITED EXTENT THAT THE ESTIMATION OF DISALLOWANCE M ADE BY THE ASSESSING OFFICER WAS ON THE HIGH SIDE BUT THE DISA LLOWANCE IS NOT TO BE RESTRICTED WITH REFERENCE TO ONLY A SUM OF ` .7,43,829/- AS IT WAS ONLY A TEST CHECK. IN THE PRESENT CASE THE OVE RALL ESTIMATION OF DISALLOWANCE IS REQUIRED TO BE MADE WITH REFERENCE TO FOREIGN TRAVEL EXPENDITURE WHICH IS CLAIMED AT ` 64,38,993/-. THE DETAILS GIVEN ON PAGE 3 OF THE ANNEXURE I OF THE ASST ORDER CLEAR LY REVEAL THE INADMISSIBLE NATURE OF FOREIGN VISITS IN CERTAIN CA SES. SOME OF THE VISITS WERE MAINLY FOR FURTHERANCE OF THE INTERESTS OF THE GROUP AS SUCH AND SOME VISITS WERE ALSO FOR STARTING NEW BUS INESS WHICH CANNOT BE ALLOWED AS A REVENUE EXPENDITURE. ALL THE REQUIRED DETAILS WERE NOT FURNISHED BY THE APPELLANT BEFORE THE ASSE SSING OFFICER. FOR EXAMPLE, THE ACTUAL BUSINESS CONDUCTED DURING T HE ENTIRE PERIOD OF STAY ABROAD. I AGREE THAT DETAILS IN RESPECT OF DAY-TO-DAY BUSINESS CONDUCTED ABROAD CANNOT BE POSSIBLY FILED BUT WHEN GLARING INSTANCES OF INADMISSIBLE EXPENDITURE DEBIT ED UNDER THIS HEAD HAVE BEEN NOTICED SOME FAIR AND REASONABLE EST IMATION REGARDING DISALLOWANCE OF EXPENDITURE IS ESSENTIAL LY WARRANTED. AFTER TAKING INTO CONSIDERATION THE RELEVANT FACTS AND TOTALITY OF THE CIRCUMSTANCES I AM OF THE VIEW THAT IT WOULD BE REA SONABLE IF THE DISALLOWANCE OUT OF TOTAL FOREIGN TRAVEL EXPENDITUR E IS RESTRICTED TO 20% OF THE TOTAL EXPENDITURE CLAIMED BY THE APPELLA NT UNDER THIS HEAD. THE EXCESS THEREOF STANDS DELETED. THE ASSESS ING OFFICER IS THEREFORE DIRECTED TO COMPUTE THE RESULTANT RELIEF BY RESTRICTING THE DISALLOWANCE TO 20% OF THE TOTAL FOREIGN TRAVEL EXP ENDITURE CLAIMED BY THE APPELLANT. 55.4. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASS ESSEE HAS RAISED THE AFORESAID GROUNDS BEFORE THE TRIBUNAL. 37 56. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE DISA LLOWANCE HAS BEEN MADE ON THE BASIS THAT THE FOREIGN TRAVEL WAS FOR T HE BENEFIT OF THE PARENT COMPANY AND THAT SOME OF THE VISITS PERTAINED TO AC QUISITION OF CAPITAL ASSETS. THE DETAILS GIVEN BY THE AO IN THIS REGARD AND THE EXPLANATION OF THE ASSESSEE REGARDING THE SAID ITEMS ARE AS FOLLOW S: SR. NO NAME AMOUNT PURPOSE 1 MR R C HARTLAND ` 24,423/- GROUP COMPANY HEADS MEET TO DISCUSS LATEST IMPLICATIONS & REPERCUSSIONS OF EVENTS AND THE GULF CRISES. 2 MR A M YERI ` 38,843/- LINE MANAGERS MEETING WORKSHOP 3 DR (MRS) P RAM ` 35,091/- GENERAL MANAGEMENT TRAINING KIT. (TRAINING PROGRAMME) & DISCUSSIONS RELATING TO CORPORATE COMMUNICATIONS. 4 MRS K SINGH & MR G V V SARMA & MR N SUKMAR ` 63,455/- ` 63,055/- ` 64,015/- GENERAL MANAGEMENT TRAINING KIT SEMINAR FOR SENIOR MANAGERS 5 DR A B VAIDYA ` 570/- EXCHANGE RELEASED BY RBI WAS SUBJECT TO REPATRIATION OF THE EXCHANGE AND PRODUCTION OF FIRC IN DUE COURSE WHICH WAS DONE. 6 DR D S NAG ` 50,912/- PARTICIPATING IN REGIONAL LEADERSHIP WORKSHOP & DIVISIONAL MANAGERS MEETING. 7 SHRI S S PATEL ` 42,649/- ORGANIZATIONAL & HRD ISSUES & MANAGEMENT DEVELOPMENT 8 MR R C HARTLAND ` 64,729/- PENDING PROJECTS & BUSINESS PLAN 9 SHRI S G KALE ` 61,860/- TINOPAL CBS-X PROJECT. 10 MR A K BAHL & MR J M SMITH - TRAVEL NOT UNDERTAKEN 11 MR F QUADROS - TRAVEL NOT UNDERTAKEN 12 DR H A MONTEIRO ` 76,055/- LATEST DEVELOPMENTS IN VARIOUS BUSINESS SEGMENTS AND THEIR REPERCUSSION ON INDIAN BUSINESS. 13 DR A B VAIDYA - EXCHANGE RELEASED BY RBI WAS SUBJECT TO REPATRIATION OF THE EXCHANGE & PRODUCTION OF FIRC IN DUE COURSE WHICH WAS DONE. 14 MR R RAM ` 79,299/- CONFERENCE COVERING EMPOWERMENT TO NEGOTIATIONS, COMMUNICATING DURING CORPORATE RESTRICTING, ETHICAL COMMUNICATION, THE NEW CONSUMER ACTIVISM. 15 MR H P PUNWANI ` 78,893/- MEETING OF HEADS OF AGRL.DIVN. 38 56.1 PERUSAL OF THE ABOVE DETAILS SHOWS THAT NONE O F THE VISIT WAS FOR STARTING MANUFACTURE OF A NEW PRODUCE. THE ALLEGAT ION THAT THE VISITS WERE FOR BENEFITING THE PARENT COMPANY IS AGAIN NOT CORRECT. NEW TINOPAL CBS-X IS NOT A NEW PROJECT BUT THE NAME OF EXISTING PRODUCT OF THE ASSESSEE. THE DISALLOWANCE HAS BEEN MADE ON ASSUMP TIONS AND PRESUMPTIONS. THE VERY BASIS ON WHICH THE DISALLOW ANCE HAS BEEN MADE IS FOUND TO BE NOT CORRECT. IN FACT IN AY 74-75, 6 4-65 76-77 AND 77-78 SIMILAR DISALLOWANCE OF EXPENSES HAS BEEN DELETED B Y THE TRIBUNAL. COPIES OF THE SAID ORDERS ARE IN THE PAPER BOOK. I N VIEW OF THE ABOVE, WE DIRECT THAT THE DISALLOWANCE SUSTAINED BY THE CIT(A ) BE DELETED. GROUND NO.4(A) IS ALLOWED AND THEREFORE GROUND NO.4(B) AND (C) DO NOT REQUIRE ANY ADJUDICATION. GROUND NO.2 OF THE REVENUE IS DI SMISSED. 57. IN GROUND NO.5(A), THE ASSESSEE HAS PROJECTE D ITS GRIEVANCE ON THE ACTION OF THE REVENUE AUTHORITIES IN EXCLUDING INTE REST INCOME FROM THE PROFITS OF THE BUSINESS WHILE COMPUTING DEDUCTION U /S.80-HHC OF THE ACT. THE DETAILS OF THE INTEREST INCOME IN DISPUTE ARE AS FOLLOWS: PARTICULARS ` `` ` INTEREST ON IDBI DEPOSIT 1,576,875 INTEREST ION HOUSING LOANS 820,508 INTEREST ON OVERDUE ACCOUNTS 10,585,684 INTEREST ON EXTENDED CREDIT 825,333 INTEREST ON LOANS TO PERSONAL 160,467 OTHER INTEREST (DETAILS ATTACHED) 4,042,398 18,011,265 SUNDRY INTEREST RECIEVD 3 1.3.1991 INCOME TAX INTEREST U/S 244A AY 1989-90 3,766,290 MARUTI GYPSIES CLASSIC 8,614 MSEB SECURITY DEPOSIT INTEREST BHANDUP 17,848 PREMIER AUTO 4,529 INTEREST ON OLD DUES GOA: MANDOVI PLAST ` 870 MANDOVI PLAST ` 435 MANDOVI PLAST ` 435 1,740 INCOME TAX INTEREST U/S 244(1A)RECEIVED ON RECTIFICATION/ 154 AY 1976/77 72,298 39 INCOME TAX INTEREST U/S 244(1A) RECEIVED ON RECTIFICATION/S 154 AY 1985-86 151,362 INCOME TAX INTEREST U/S 214 RECEIVED AY 1988-89 19 ,717 4,042,398 58. BEFORE US, THE LEARNED D.R. RELIED ON THE DECIS ION OF THE HONBLE BOMBAY HIGH COURT IN CIT VS. DRESSER RAND INDIA (BOMBAY HIGH COURT) ORDER DATED APRIL 29TH, 2010, WHEREIN IT WAS HELD THAT RECEIPTS WITH NO NEXUS TO EXPORTS HAVE TO BE EXCLUDED FOR S. 80HHC D EDUCTION THE COURT HELD THAT EXPLANATION (BAA) TO S. 80HHC DEFINES THE TERM PROFITS OF THE BUSINESS TO MEAN BUSINESS PROFITS AS REDUCED BY 90 % OF .. RECEIPTS BY WAY OF BROKERAGE, COMMISSION, INTEREST, RENT, CHARG ES OR ANY OTHER RECEIPT OF A SIMILAR NATURE. THE HONBLE COURT NOT ICED THAT THE TRIBUNAL TOOK THE VIEW, ON THE BASIS OF BANGALORE CLOTHING 260 ITR 371 (BOM) THAT RECEIPTS TOWARDS RECOVERY OF FREIGHT, INSURANCE, PA CKING RECEIPTS, SALES TAX SET OFF/REFUND AND SERVICE INCOME WERE OPERATIONAL INCOME AND NOT LIABLE TO BE EXCLUDED UNDER EXPL (BAA) TO S. 80HHC. ON APPEAL BY THE REVENUE, THE HONBLE BOMBAY HIGH COURT HELD REVERSI NG THE TRIBUNAL: (I) THE RATIO OF RAVINDRANATHAN NAIR 295 ITR 228 (SC) IS THAT EXPLANATION (BAA) TO S. 80HHC REQUIRED RECEIPTS CONSTITUTING IN DEPENDENT INCOME HAVING NO NEXUS WITH EXPORTS TO BE REDUCED FROM BUSINESS PROFITS UNDER CLAUSE (BAA) SO AS TO AVOID DISTORTION IN THE COMPU TATION OF EXPORT PROFITS;(II) IN BANGALORE CLOTHING CO 260 ITR 371 (BOM) IT WAS HELD THAT IF AN ITEM OF INCOME IS CLOSELY LINKED WITH BUSINESS O PERATIONS AND CONSTITUTES OPERATIONAL INCOME, IT CANNOT BE EXCL UDED UNDER EXPLANATION (BAA) TO S. 80HHC. THIS PROPOSITION IS INCONSISTENT WITH THE LAW IN RAVINDRANATHAN NAIR AND IS NO LONGER GOOD LAW. THE SUBMISSION THAT BANGALORE CLOTHING WAS IMPLIEDLY APPROVED IN B ABY MARINE EXPORTS 290 ITR 323 (SC) IS NOT ACCEPTABLE BECAUSE THAT JUD GMENT TURNED ON THE FACT THAT THE EXPORT HOUSE PREMIUM WA S AN INTEGRAL PART OF THE CONSIDERATION FOR THE SALE REALIZED BY THE ASSE SSEE, A SUPPORTING MANUFACTURER. 40 59. FURTHER RELIANCE WAS PLACED ON THE DECISION IN THE CASE OF CIT VS. ASIAN STAR, BY THE HONBLE BOMBAY HIGH COURT IN WHI CH THE HONBLE COURT WAS DEALING WITH THE QUESTION, WHETHER ON TH E FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE T RIBUNAL WAS CORRECT IN HOLDING THAT NET INTEREST ON FIXED DEPOSITS IN BANK S RECEIVED BY THE ASSESSEE COMPANY SHOULD BE CONSIDERED FOR THE PURPO SE OF WORKING OUT THE DEDUCTION U/S.80HHC AND NOT THE GROSS INTEREST? THE HONBLE COURT HELD THAT FOR EXPLN.(BAA) TO S. 80HHC, NETTING OF INCOME FROM EXPENDITURE IS NOT ALLOWED. IN THAT CASE T HE ASSESSEE CLAIMED DEDUCTION U/S 80HHC ON PROFITS WHICH INCLUDED INTER EST INCOME OF RS. 3.25 CRORES. UNDER EXPLANATION (BAA) TO S. 80HHC, 9 0% OF THE SAID INTEREST INCOME HAS TO BE REDUCED FROM THE PROFITS. THE ASSESSEE CLAIMED THAT THE INTEREST EXPENDITURE INCURRED BY IT HAVING A NEXUS WITH THE SAID INTEREST INCOME HAD TO BE NETTED OFF AND ONLY THE BALANCE, IF ANY, COULD BE SUBJECTED TO THE 90% REDUCTION. THE ASSESSEE PRO VED THAT THERE WAS A NEXUS BETWEEN THE INCOME AND THE EXPENDITURE. THE C LAIM WAS REJECTED BY THE AO THOUGH IT WAS ACCEPTED BY THE CIT (A) AND THE TRIBUNAL RELYING ON LALSONS ENTERPRISES 89 ITD 25 (DEL) (SB). ON APPEAL BY THE REVENUE, THE HONBLE BOMBAY HIGH COURT HELD REVERSING THE TR IBUNAL:(I) EXPLANATION (BAA) TO S. 80HHC REQUIRES THAT NINETY PER CENT OF RECEIPTS BY WAY OF BROKERAGE, COMMISSION, INTEREST, RENT, CH ARGES OR ANY OTHER RECEIPT OF A SIMILAR NATURE HAVE TO BE REDUCED FROM THE PROFITS. THE REASON WHY ITEMS LIKE BROKERAGE ETC HAVE TO BE EXCL UDED IS BECAUSE THEY DO NOT POSSESS ANY NEXUS WITH EXPORT TURNOVER AND THEIR INCLUSION IN PROFITS WOULD RESULT IN A DISTORTION O F THE FIGURE OF EXPORT PROFITS . HOWEVER, AS SOME EXPENDITURE MIGHT HAVE BEEN INCU RRED IN EARNING THESE INCOMES, AN ADHOC DEDUCTION OF TEN PER CENT FROM SUCH INCOME IS ALLOWED;(II) ONCE PARLIAMENT HAS LEGISLATED BOTH IN REGARD TO THE NATURE OF THE EXCLUSION AND THE EXTENT OF THE E XCLUSION, IT WOULD NOT BE OPEN TO THE COURT TO ORDER OTHERWISE BY REWR ITING THE LEGISLATIVE PROVISION . THE TASK OF INTERPRETATION IS TO FIND OUT THE TRU E INTENT OF A LEGISLATIVE PROVISION AND IT IS CLEARLY NOT OPEN TO THE COURT TO LEGISLATE BY SUBSTITUTING A FORM ULA OR PROVISION OTHER THAN WHAT 41 HAS BEEN LEGISLATED BY PARLIAMENT. IT IS NOT OPEN T O SAY THAT SOMETHING MORE THAN THE 10% STATUTORILY PROVIDED SH OULD ALSO BE ALLOWED . IN SHRI RAM HONDA POWER EQUIP 289 ITR 475 THE DELHI HIGH COURT HAS NOT ADEQUATELY EMPHASIZED THE ENTIRE RATI ONALE FOR CONFINING THE DEDUCTION ONLY TO THE EXTENT OF NINETY PER CENT OF THE EXCLUDIBLE RECEIPTS AND IT CANNOT BE FOLLOWED ; (III) AS REGARDS THE JUDGEMENT OF THE SPECIAL BENCH IN LALSONS ENTERPRISES WE ARE AFFIRMATIVELY OF THE VIEW THAT THE TRIBUNAL HAS TRANSGRESSED THE LIMITATI ONS ON THE EXERCISE OF JUDICIAL POWER AND . HAS IN EFFECT LEGISLATED BY P ROVIDING A DEDUCTION ON THE GROUND OF EXPENSES OTHER THAN IN THE TERMS WHIC H HAVE BEEN ALLOWED BY PARLIAMENT. THAT IS IMPERMISSIBLE. 60. THE LEARNED COUNSEL FOR THE ASSESSEE MADE A PR AYER THAT IN SO AS FAR AS THE INTEREST ON OVERDUE ACCOUNT RECEIVABLE FROM CUSTOMERS OF ` 1,05,85,684/- IS IN RESPECT OF SALES EFFECTED BY TH E ASSESSEE, AND THEREFORE THE SAME HAS TO BE CONSIDERED AS PROFITS OF BUSINESS. IN THIS REGARD, THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE DECISION OF THE ITAT MUMBAI IN THE CASE OF SILVASA INDUSTRIES PVT. LTD. VS. DCIT ITA 462/MUM/02 ORDER DATED 10/5/02 WHEREIN THE TRIBUNAL HAS TAKEN THE VIEW THAT INTEREST ON OVERDUE PAYMENT FROM CUSTOMER S HAS THE SAME CHARACTER AS SALE PROCEEDS AND THEREFORE HAS TO FOR M PART OF THE PROFITS OF THE BUSINESS FOR ALLOWING DEDUCTION U/S.80-HHC OF T HE ACT. 61. WE HAVE HEARD THE RIVAL SUBMISSIONS. IT IS NO T CLEAR FROM THE DETAILS OF INTEREST INCOME AS TO WHETHER THE INTEREST ON OV ERDUE AMOUNTS RELATES TO THE EXPORT SALES. ON THE PRINCIPLE LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF DRESSER RAND (SUPRA), INT EREST INCOME CANNOT BE CONSIDERED AS PART OF THE BUSINESS INCOME FOR TH E PURPOSE OF ALLOWING DEDUCTION U/S.80-HHC OF THE ACT. HOWEVER IF THE IN TEREST ON OVERDUE AMOUNTS RELATE TO EXPORT SALES THEN THEY MAY BE CON SIDERED AS PART OF BUSINESS PROFITS. THE AO IS DIRECTED TO VERIFY THI S ASPECT AND ALLOW RELIEF ACCORDINGLY. IN RESPECT OF OTHER INTEREST INCOME, WE DO NOT FIND ANY 42 GROUNDS TO INTERFERE IN THE ORDER OF THE CIT(A). T HUS GROUND NO.5(A) IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 62. THE GRIEVANCE PROJECTED BY THE ASSESSEE IN GRO UND NO.5(B) AND GROUND NO.12 REGARDING EXCLUSION OF SALES TAX AND E XCISE DUTY FROM THE TOTAL TURNOVER AND EXPORT TURNOVER RESPECTIVELY HAS TO BE DECIDED IN FAVOUR OF THE ASSESSEE IN VIEW OF THE DECISION OF T HE HONBLE BOMBAY HIGH COURT IN THE CASE OF SUDARSHAN CHEMICALS LTD. 245 I TR 769 (BOM) AND HONBLE SUPREME COURT IN THE CASE OF LAKSHMI MACHIN E WORKS 290 ITR 667 (SC). GROUND NO.5(B) AND 12 ARE ACCORDINGLY AL LOWED. 63. GROUND NO.6(A) TO 6(C) READS AS FOLLOWS: 1. THE CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE MADE BY THE DCI OF ` 5,50,000/- PAID TO M/S SHARAD SHILEDAR &ASSOCIATES ON THE GROUND THAT THE EXPENDITURE INCURRED INCREASED THE VALUE OF THE LAND AND WAS OT INCIDENTAL TO THE BUSINESS OF THE A PPELLANTS. IN THIS CONNECTION, THE APPELLANTS SUBMIT THAT THE ABOVE PROFESSIONAL CHARGES WERE PAID BY THEM IN CONNECTION WITH THE RE TURN STATUTORILY REQUIRED TO BE FILED BY THEM UNDER SECTION 6(1) OF THE URBAN LAND (CEILING ®ULATIONS) ACT, 1976 (ULC ACT) AND OBTA INING CLEARANCE AND ORDER U/S 8(4) OF THE SAID ACT. A COPY OF THE R EVISED ORDER U/S 8(4) OF THE ULC ACT AND A NOTE BRIEFLY EXPLAINING T HE RELEVANT PROVISIONS OF THE ULC ACT WERE SUBMITTED TO THE CIT (A) WHICH CLEARLY BRINGS OUT THE FACT THAT THE ABOVE EXPENDITURE WAS INCURRED SOLELY FOR MEETING THE COMPANYS STATUTORY OBLIGATIONS AND HENCE ARE FOR THE PURPOSE OF ITS BUSINESS. FURTHER, THE APPELLANT S SUBMIT THAT THE ABOVE EXPENDITURE HAS NOT RESULTED IN ANY ACQUISITI ON OR IMPROVEMENT OF AN ASSET OR IN PERFECTING THE TITLE OR GETTING RID OF A DEFECT IN THE TITLE OF ANY ASSET BUT HAS BEEN INCUR RED FOR SUCCESSFULLY PRESERVING AND PROTECTING THE COMPANYS PROPERTY FR OM GETTING DISSIPATED. THEREFORE, IT HAS NOT INCREASED THE VAL UE OF LAND. MERELY BECAUSE THE BHANDUP FACTORY HAS SUBSEQUENTLY CLOSED DOES NOT MEAN THAT THE EXPENDITURE IS CAPITAL IN NATURE. THE APPELLANTS PRAY THAT THE DCI BE DIRECTED TO DEL ETE THE DISALLOWANCE OF ` 5,50,000/- 43 B) THE CIT(A) FURTHER ERRED IN NOT CONSIDERING THE APPELLANTS WITHOUT PREJUDICE CONTENTION THAT DEDUCTION U/S 35(1) OUGHT TO BE ALLOWED IN RESPECT OF THE EXPENDITURE PERTAINING TO GOREGAON W HERE THE APPELLANTS RESEARCH CENTRE IS LOCATED. C) THE CIT(A) OUGHT TO HAVE DIRECTED THE DCI TO CON SIDER THE ABOVE AMOUNT IN WORKING OUT THE PROFIT/CAPITAL GAINS ARIS ING WHEN THE LAND IS SOLD. THE APPELLANTS PRAY THAT THE DCI BE GIVEN SUITABLE DIRECTIONS IN THE MATTER. 63.1 THE ASSESSEE INCURRED EXPENDITURE OF A SUM OF ` 5,50,000/- WHICH WAS PAID TO M/S SHARAD SHILEDAR &ASSOCIATES. THE SAID PAYMENT WAS MADE BY THE ASSESSEE TO THE ABOVE FIRM OF PROFE SSIONALS WHO RENDERED PROFESSIONAL SERVICES IN CONNECTION WITH T HE RETURN STATUTORILY REQUIRED TO BE FILED BY THEM UNDER SECTION 6(1) OF THE URBAN LAND (CEILING ®ULATIONS) ACT, 1976 (ULC ACT) AND OBTAINING CLE ARANCE AND ORDER U/S 8(4) OF THE SAID ACT. PURSUANT TO THEIR RENDERING P ROFESSIONAL SERVICES A REVISED ORDER U/S 8(4) OF THE ULC ACT WAS OBTAINED. THE ASSESSEE CLAIMED THAT THE ABOVE EXPENDITURE WAS INCURRED SOL ELY FOR MEETING THE COMPANYS STATUTORY OBLIGATIONS AND HENCE ARE FOR T HE PURPOSE OF ITS BUSINESS. FURTHER, THE ASSESSEE SUBMITTED THAT THE ABOVE EXPENDITURE HAS NOT RESULTED IN ANY ACQUISITION OR IMPROVEMENT OF AN ASSET OR IN PERFECTING THE TITLE OR GETTING RID OF A DEFECT IN THE TITLE OF ANY ASSET BUT HAS BEEN INCURRED FOR SUCCESSFULLY PRESERVING AND P ROTECTING THE COMPANYS PROPERTY FROM GETTING DISSIPATED. THEREFO RE, IT HAS NOT INCREASED THE VALUE OF LAND. MERELY BECAUSE THE BHA NDUP FACTORY (WHICH WAS IN EXISTENCE ON THE LAND IN QUESTION) HAS SUBSE QUENTLY CLOSED DOES NOT MEAN THAT THE EXPENDITURE IS CAPITAL IN NATURE. THE AO DID NOT ALLOW THE CLAIM OF THE ASSESSEE FOR DEDUCTION AS ACCORDIN G TO HIM THE EXPENDITURE BEING ONE IN CONNECTION WITH A CAPITAL ASSET WAS ALSO CAPITAL IN NATURE. 44 63.2 AFTER CONSIDERING THE RELEVANT FACTS AND CIRC UMSTANCES, CIT(A) ALSO DID NOT ACCEPT THE PLEA OF THE APPELLANT THAT A SUM OF ` 5,50,000/- PAID TO M/S SHARAD SHILEDAR & ASSOCIATES FOR THE WORK RE LATING TO URBAN LAND CEILING ACT U/S 8(4) FOR THE LAND AT GOREGAON AND B HANDUP WAS A REVENUE EXPENDITURE. ACCORDING TO HIM THE ABOVE EXP ENDITURE WAS INCURRED ON ACCOUNT OF PROFESSIONAL CHARGES IN RESP ECT OF WORK RELATING TO URBAN LAND CEILING ACT U/S 8(4) WITHOUT WHICH THE S ALE OF LAND WAS NOT POSSIBLE. ACCORDING TO HIM THE EXPENDITURE INCURRED HAS INCREASED THE VALUE OF LAND AND WAS NOT INCIDENTAL TO THE BUSINES S OF THE ASSESSEEE. HE THEREFORE HELD THAT THE ASSESSING OFFICER WAS THERE FORE FULLY JUSTIFIED IN NOT ALLOWING THE EXPENDITURE AS A REVENUE EXPENDITU RE RELATING TO THE BUSINESS OF THE APPELLANT. 63.2 THE ASSESSEE HAD RAISED AN ALTERNATIVE PLEAS THAT D EDUCTION U/S 35(1) OUGHT TO BE ALLOWED IN RESPECT OF THE EXPENDI TURE PERTAINING TO GOREGAON WHERE THE ASSESSEES RESEARCH CENTRE IS LO CATED AND THAT THE EXPENDITURE SHOULD BE ADDED TO THE COST OF THE CAPI TAL ASSET AS AND WHEN THE PROPERTY IS SOLD AND CAPITAL GAIN IN COMPUTED O N SUCH SALE. THE CIT(A) HELD ON THIS ALTERNATIVE PLEA OF THE ASSESSE E THAT IN CASE THE EXPENDITURE IS TREATED AS A CAPITAL EXPENDITURE THE SAME SHOULD BE ALLOWED AS A DEDUCTION IF THE LAND IS SOLD IN FUTUR E IN COMPUTING THE CAPITAL GAINS/LOSS, THAT THE CLAIM WAS A PREMATURE RELIEF SOUGHT BY THE ASSESSEE WHICH CANNOT BE ALLOWED IN THE PRESENT APP EAL. 64. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE DECISION OF THE HOUSE OF LORDS IN THE CASE OF IN MORGAN (INSPECTOR OF TAXES) V. TATE & LYLE LTD. 26 I.T.R. 195 . THE HOUSE OF LORDS IN T HE AFORESAID CASE HELD THAT EXPENDITURE INCURRED BY A COMPANY ENGAGED IN S UGAR REFINING, IN A PROPAGANDA CAMPAIGN TO OPPOSE THE THREATENED NATION ALIZATION OF THE INDUSTRY WAS A SUM WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF THE COMPANY'S TRADE AND WAS AN ADMISSIBLE DEDUCTION FRO M ITS PROFITS FOR INCOME- TAX PURPOSES. A MAJORITY OF THE HOUSE HELD THAT THE OBJECT OF THE 45 EXPENDITURE BEING TO PRESERVE THE ASSETS OF THE COM PANY FROM SEIZURE AND SO TO ENABLE IT TO CARRY ON AND EARN PROFITS, T HE EXPENDITURE WAS A PERMISSIBLE DEDUCTION UNDER R. 3(A) OF THE RULES AP PLICABLE TO CASES (1) & (2) OF SCH. D OF THE INCOME-TAX ACT, 1918. THE OBJE CT OF THE PETITION FILED BY THE COMPANY WAS TO SECURE A DECLARATION THAT THE ORDER DATED FEBRUARY 20, 1946 INSOFAR AS IT SOUGHT TO PUT RESTR ICTIONS UPON THE RIGHT OF THE COMPANY TO CARRY ON ITS BUSINESS IN THE MANN ER IN WHICH IT WAS ACCUSTOMED TO DO WAS UNAUTHORIZED AND TO PREVENT EN FORCEMENT OF THAT ORDER: THEREBY THE COMPANY WAS SEEKING TO OBTAIN AN ORDER FROM THE COURT, ENABLING THE BUSINESS TO BE CARRIED ON WITHO UT INTERFERENCE. EXPENDITURE INCURRED IN THAT BEHALF WOULD WITHOUT D OUBT BE EXPENDITURE LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OF THE COMPANY. 65. FURTHER RELIANCE WAS PLACED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE REPORTED IN 1967 AIR 444, SHREE M EENAKSHI MILLS LTD., MADURAI VS. COMMISSIONER OF INCOME-TAX, MADRAS WHE REIN THE HONBLE SUPREME COURT APPROVED ITS VIEW IN THE CASE OF COM MISSIONER OF INCOME-TAX, KERALA V. MALAYA LAM, PLANTATIONS LTD. 53 I.T.R. 140 WHEREIN IT WAS OBSERVED: 'THE EXPRESSION 'FOR THE PURPOSE OF THE BUSINESS' I S WIDER IN SCOPE THAN THE EXPRESSION 'FOR THE PURPOSE OF EARNING PRO FITS'. IT'S RANGE IS WIDE: IT MAY TAKE IN NOT ONLY THE DAY TO DAY RUNNIN G OF A BUSINESS, BUT ALSO THE RATIONALIZATION OF ADMINISTRATION AND MODERNIZATION OF ITS MACHINERY: IT MAY INCLUDE MEASURES FOR THE PRES ERVATION OF THE BUSINESS OR FOR THE PROTECTION OF ITS ASSETS AND PR OPERTY FROM EXPROPRIATION COERCIVE PROCESS OR ASSERTION OF HOST ILE TITLE: IT MAY ALSO COMPREHEND PAYMENT OF STATUTORY DUES AND TAXES IMPOSED AS A PRECONDITION TO COMMENCE OR FOR CARRYING ON OF A BUSINESS; IT MAY COMPREHEND MANY OTHER ACTS INCIDENTAL TO THE CARRYI NG ON OF A BUSINESS.' EXPENDITURE INCURRED TO RESIST IN A CIVIL PROCEEDIN G THE ENFORCEMENT OF A MEASURE -LEGISLATIVE OR EXECUTIVE, WHICH IMPOSES RE STRICTIONS ON THE CARRYING ON OF A BUSINESS, OR TO OBTAIN A DECLARATI ON THAT THE MEASURE IS INVALID WOULD, IF OTHER CONDITIONS ARE SATISFIED, B E ADMISSIBLE, IN OUR 46 JUDGMENT, UNDER S. 10(2)(XV) AS A PERMISSIBLE DEDUC TION IN THE COMPUTATION OF TAXABLE INCOME. 66. THE LEARNED D.R. RELIED ON THE ORDER OF THE CI T(A). WE ARE OF THE VIEW THAT THE EXPENDITURE HAS TO BE ALLOWED AS A DEDUCTI ON ON THE BASIS OF THE PRINCIPLES LAID DOWN IN THE AFORESAID TWO JUDICIAL PRONOUNCEMENTS OF THE HONBLE SUPREME COURT. THE EXPENDITURE CANNOT BE S AID TO MERELY INCREASE THE VALUE OF THE LAND. THE EXPENDITURE HA D TO BE INCURRED TO ENSURE THAT THE LAND IS NOT DECLARED SURPLUS AND AC QUIRED UNDER THE URBAN LAND CEILING LAWS. WE THEREFORE DIRECT THAT THE EXPENDITURE IN QUESTION BE ALLOWED AS A DEDUCTION. THUS GROUND NO .6(A) IS ALLOWED. GROUND NO.6(B) AND (C) DO NOT REQUIRE ADJUDICATION AS THEY ARE ALTERNATE GROUNDS. 67. GROUND NO.7 (1) TO 7(4) RAISED BY THE ASSESSEE READS AS FOLLOWS: 1.THE CIT(A) ERRED IN UPHOLDING THE DISALLOWANCE MA DE BY THE DCI TO THE EXTENT OF ` 5,00,000/- BEING THE ALLEGED CAPITAL EXPENDITURE INCURRED BY THE APPELLANTS ON THE VISION 2000 PROGR AMME. IN THIS CONNECTION, THE APPELLANTS SUBMIT THAT THE VISION 2000 PROGRAMME IS A CORPORATE IS A CORPORATE STRATEGY TA ILORED TO EFFECTIVELY MEET THE CHALLENGE OF CHANGE IN AN INCR EASINGLY COMPETITIVE AND DEMANDING BUSINESS AND SOCIAL ENVIR ONMENT. THE EXPENDITURE INCURRED IN CONNECTION WITH THIS PROGRA MME IS PARTLY ON EMPLOYEE TRAINING AND GEARING THEM UP FOR FULFILLIN G THE COMPANYS GOAL/VISION. PART OF IT IS ON ADVERTISEMENT E.G PRI NTING OF BROCHURES ETC. THUS IT IS EVIDENT THAT NO PART OF THE EXPENDI TURE INCURRED ON THE VISION 2000 PROGRAMME IS OF A CAPITAL NATURE. THE APPELLANTS THEREFORE PRAY THAT THE DCI BE DIREC TED TO DELETE THE DISALLOWANCE OF ` 5,00,000/- 2. IN ANY EVENT THE AMOUNT PERTAINING TO ADVERTISEMENT IS ALLOWABLE U/S 37(3) IRRESPECTIVE OF WHETHER IT IS C APITAL OR REVENUE IN NATURE. 3. WITHOUT PREJUDICE TO THE ABOVE, THE APPELLANTS SUBM IT THAT THE DISALLOWANCE OF ` . 5,00,000/- IS EXCESSIVE. 4. WITHOUT PREJUDICE TO THE ABOVE, THE APPELLANTS PRAY THAT THE DCI BE DIRECTED TO ALLOW THEM DEPRECIATION ON T HE 47 AFORESAID AMOUNT OR ANY PAT THEREOF WHICH IS CONSID ERED TO BE CAPITAL IN NATURE. THE APPELLANTS PRAY THAT THE DCI BE GIVEN SUITABLE DIRECTIONS IN THE MATTER. 68 THE AO DISALLOWED A SUM OF ` 10,00,000/- ON ACC OUNT OF ALLEGED ADVERTISEMENT AND PUBLICITY EXPENDITURE ON VISION 2 000 PROGRAMME. THE ASSESSING OFFICER WAS OF THE OPINION THAT THE EXPEN DITURE INCURRED BY THE ASSESSEE ON CIBA-GEIGYS VISION 2000 PROGRAMME WAS TO BUILD UP THE CORPORATE IMAGE OF THE COMPANY AND THEREFORE, THE E XPENDITURE IN THE NATURE OF OVERALL FRAMEWORK OF THE BUSINESS OF THE COMPANY, THE SAME WAS THEREFORE NOT TO BE ALLOWED AS A REVENUE EXPEND ITURE. IN THE OPINION OF THE ASSESSING OFFICER THE ABOVE EXPENDITURE WAS NOT INCURRED IN THE ORDINARY COURSE OF BUSINESS BUT AS PART OF THE IMAG E BUILDING EXERCISE OF THE ASSESSEE COMPANY. THE SAME WAS THEREFORE NOT AD MISSIBLE. ON AN ESTIMATED BASIS OUT OF PROMOTION AND ADVERTISEMENT EXPENSES AN AMOUNT OF ` ` 10,00,000/- WAS DISALLOWED BY THE ASSESSING OFFIC ER BESIDES THE DISALLOWANCE THAT WAS MADE IN THE CASE OF FOREIGN T RAVEL EXPENSES ON THIS ACCOUNT. 68.1 BEFORE CIT(A), IT WAS ARGUED BY THE ASSESSEE T HAT VISION 2000 IS MERELY A CORPORATE POLICY AND STRATEGY STATING THE GUIDING PHILOSOPHY OF THE COMPANY TO ITS EMPLOYEES. IN THIS CONNECTION A NOTE ON VISION 2000 BY THE MANAGER, COMMUNICATIONS WAS ALSO FILED BY TH E ASSESSEE. THE ASSESSEE ALSO SUBMITTED A COPY OF THE BROCHURE OF T HE VISION. THE ASSESSEE FURTHER ARGUED THAT IT CAN BE OBSERVED FRO M THE ENCLOSED NOTE THAT THE EXPENDITURE WAS PARTLY ON EMPLOYEE TRAININ G AND GEARING THEM UP FOR FULFILLING THE COMPANYS GOAL/VISION. PART O F THE EXPENDITURE ON BROCHURES COULD FALL WITHIN THE AMBIT OF EXPENDITUR E ON ADVERTISEMENT AND WOULD BE AN ALLOWABLE DEDUCTION. THE ASSESSEE F URTHER SUBMITTED THAT IT WAS SELF EVIDENT THAT THE EXPENDITURE INCUR RED ON VISION 2000 WAS NOT A CAPITAL EXPENDITURE. IN ANY EVENT THE AMOUNT OF ` 10,00,000/- ESTIMATED BY THE DC(IT) WAS ABNORMALLY EXCESSIVE A ND UNREASONABLE. THE ASSESSEE FURTHER CONTENDED THAT HONBLE HIMACHA L PRADESH HIGH 48 COURT IN THE CASE OF MOHAN MAKIN BREWERIES REPORTED IN 118 ITR 101 HAS HELD THAT U/S 37(3), EXPENDITURE ON ADVERTISEMENT W AS ALLOWABLE AS A DEDUCTION IRRESPECTIVE OF THE FACT WHETHER SUCH EXP ENDITURE IS OF CAPITAL OR REVENUE NATURE. THE ASSESSEE CONTENDED THAT IN V IEW OF ABOVE FACTS AND DECISION OF THE HIMACHAL PRADESH HIGH COURT IN THE CASE OF MOHAN MEAKIN BREWERIES REPORTED IN118 ITR 10Q THE EXPENDI TURE OF ` 10,00,000/-INCURRED BY THE ASSESSEE WAS PERMISSIBL E AS A DEDUCTION. 68.2 AFTER CONSIDERING THE SUBMISSIONS OF BOTH SIDE S, THE CIT(A) HAS GIVEN RELIEF TO THE ASSESSEE BY OBSERVING AS FOLLO WS :- 30. AFTER DUE CONSIDERING I FIND SOME FORCE IN THE SUBMISSIONS OF THE LD COUNSEL OF THE APPELLANT BUT THE SAME CANNOT BE ACCEPTED IN ITS ENTIRETY. ALTHOUGH THE EXPENDITURE WAS INCURRED FOR ADVERTISEMENT AND PUBLICITY BUT VISION 2000 PROGRAM ME WAS NOT AN ORDINARY ADVERTISEMENT. IT CANNOT BE ALTOGETHER DEN IED THAT VISION 2000 PROGRAMME WAS IN THE NATURE OF BUILDING UP THE CORPORATE IMAGE OF THE COMPANY FOR A LONG TERM PERIOD. THIS W AS AN ORDINARY EXPENDITURE INCURRED BY THE APPELLANT COMPANY IN TH E COURSE OF DAY TO DAY BUSINESS BUT A PARTLY IT ALSO RELATED TO THE IMAGE BUILDING EXERCISE OF THE ASSESSEE COMPANY CONSIDERING THESE FACTS THE ENTIRE EXPENDITURE INCURRED BY THE APPELLANT ON ADVERTISEM ENT AND PUBLICITY ON THE VISION 2000 PROGRAMME CANNOT BE TR EATED AS REVENUE EXPENDITURE. HOWEVER, I FIND FORCE IN THE S UBMISSIONS OF THE LD COUNSEL F THE APPELLANT THAT THE DISALLOWANCE ES TIMATED AT ` 10,000/- APPEARS TO BE ON THE HIGH SIDE. AFTER CON SIDERING THE EXPENDITURE INCURRED BY THE APPELLANT AND ALL THE O THER FACTS AND CIRCUMSTANCES OF THE CASE, I AM OF THE VIEW THAT IT WOULD BE REASONABLE IF THE DISALLOWANCE IS REDUCED TO ` 5,00,000/- BY TREATING THE EXPENDITURE TO THAT EXTENT AS CAPITAL EXPENDITURE. THE EXCESS THEREOF STAND DELETED. IN THE RESULT, THE A PPELLANT GETS RELIEF OF ` 5,00,000/- ON THIS SCORE. 69. STILL AGGRIEVED, THE ASSESSEE HAS RAISED GROUN D NO.7 BEFORE THE TRIBUNAL. THE LEARNED COUNSEL FOR THE ASSESSEE DRE W OUR ATTENTION TO THE NOTE ON VISION 2000 A COPY OF WHICH IS PLACED AT PA GE 109-110 OF THE PAPER BOOK. OUR ATTENTION WAS DRAWN TO THE BROCHUR E BROUGHT OUT IN THIS REGARD A COPY OF WHICH IS AT PAGE 111-116 OF T HE PAPER BOOK. HE 49 ARGUED THAT THE EXPENDITURE WAS INCURRED AS A ROUTI NE TRAINING OF THE EMPLOYEES. IT WAS SUBMITTED THAT BROCHURE WAS BROU GHT OUT AND THE COST OF SUCH BROCHURE CANNOT BE TREATED AS CAPITAL EXPEN DITURE IN VIEW OF THE DECISION OF THE HONBLE H.P. HIGH COURT IN THE CASE OF MOHAN MEAKIN'S CASE [1979] 118 ITR 101. IN THE AFORESAID CASE IT WAS CONTENDED THAT THE TRIBUNAL HAD FALLEN INTO AN IDENTICAL AND SIMILAR E RROR IN THE MATTER OF THE ASSESSEE, A PUBLIC LIMITED COMPANY, CARRYING ON THE BUSINESS OF MANUFACTURE AND SALE OF BEER, INDIAN MADE FOREIGN L IQUOR AND OTHER BEVERAGES. THE TRIBUNAL HAD TAKEN THE VIEW THAT THE EXPENDITURE INCURRED BY THE ASSESSEE ON THE INSTALLATION OF NEO N-SIGNS BEING AN EXPENDITURE OF CAPITAL NATURE WAS NOT ALLOWABLE AS A DEDUCTION UNDER SECTION 37 OF THE ACT. IT IS IN THIS CONTEXT THE HI MACHAL PRADESH HIGH COURT OBSERVED THAT THE QUESTION WHETHER IT IS OF R EVENUE OR CAPITAL NATURE WOULD NOT BE THE RELEVANT CONSIDERATION; BUT THE RELEVANT CONSIDERATION WOULD BE THE CONDITIONS AND RESTRICTI ONS CONTEMPLATED BY SECTION 37(3) ITSELF. THE USE OF THE NON-OBSTANTE C LAUSE CLEARLY EXCLUDES THE CONSIDERATIONS WHICH ARE CONTEMPLATED BY SECTIO N 37(1) OF THE ACT AND, THEREFORE, WHEN ONCE IT IS FOUND THAT A PARTIC ULAR DEDUCTION CAN BE CONSIDERED ON ACCOUNT OF EXPENDITURE, THE SAID DEDU CTION SQUARELY FALLS WITHIN SUB-SECTION (3), LEAVING THE SITUATION AS TO WHETHER THE EXPENDITURE IS OF A CAPITAL NATURE OR OF A REVENUE NATURE AS WHOLLY IRRELEVANT FOR CONSIDERATION IN THE CONTEXT. IN OUR JUDGMENT, THE SITUATION WOULD NOT BE DIFFERENT IF THE SAME NON-OBSTANTE CLA USE IS TAKEN UP FOR CONSIDERATION AS TO BE FOUND IN SECTION 37(3A) OF T HE ACT. THE LEARNED D.R. RELIED ON THE ORDER OF THE CIT(A). 70. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IN OUR VIEW THE EXPENDITURE IN QUESTION CANNOT BY ANY STRETCH OF IM AGINATION TERMED AS CAPITAL EXPENDITURE. A PERUSAL OF THE CONTENTS OF VISION 2000 BROUGHT OUT BY THE ASSESSEE SHOWS THAT IT WAS A REINSTATEME NT OF THE CORPORATE VALUES. IT TEACHES THE WORK FORCE OF THE ORGANIZAT ION LEADERSHIP QUALITIES, RESPONSIBILITY FOR ENVIRONMENT, SOCIAL RESPONSIBILI TY, CUSTOMER RELATIONSHIP, QUALITY AND OTHER ASPECTS. IN OUR VI EW THE PLEA OF THE 50 ASSESSEE THAT IT IS AN EXPENDITURE IN THE NATURE OF EMPLOYEE TRAINING AND MOTIVATING THEM TO FULFILL THE ASSESSEES GOAL AND VISION HAS TO BE ACCEPTED. THE SAME HAS TO BE TREATED AS REVENUE EX PENDITURE. WE DIRECT ACCORDINGLY. GROUND NO.7(1) IS ALLOWED. IN VIEW O F THE ABOVE, GROUND NO.7(2) TO (4) DO NOT REQUIRE ANY ADJUDICATION. 72. GROUND NO.8 RAISED BY THE ASSESSEE READS AS FO LLOWS: THE CIT(A) ERRED IN UPHOLDING THE FOLLOWING DISALL OWANCES BY TREATING THEM AS DONATIONS E BY THE DCI OUT OF CORP ORATE DEVELOPMENT EXPENSES: NAME OF THE PARTY AMOUNT ( ` `` ` `) 1. EMBASSY OF SWITZERLAND 1,29,000 2. NEUROLOGICAL SOCIETY OF INDIA 50,000 3. VASCO ENVIRONMENT 20,000 TOTAL 1,99,000 IN THIS CONNECTION, THE APPELLANTS SUBMIT AS UNDER: (I) ` `1,29,000/- WAS PAID TO THE EMBASSY OF SWITZERAND TO DEVELOP AND MAINTAIN CORDIAL AND HARMONIOUS WORKING RELATIONS WITH THE COUNTRY WHICH HOUSES THE HEADQUARTERS OF T HE GROUP. IN THE ABSENCE OF AN INDO-SWISS CHAMBER OF COMMERCE, I T IS THE EMBASSY WHICH REPRESENTS THE INTEREST OF THE INDO S WISS BUSINESS RELATIONSHIPS AND THE EXPENDITURE IS AKIN TO PAYMENTS MADE BY OTHER CORPORATE BODIES TO VARIOUS CHAMBERS OF COMMERCE. THE APPELLANTS PRAY THAT THE DCI BE DIRECTED TO ALL OW THEM THE SUM OF ` 1,29,000/- AS A DEDUCTION. (II) ` 50,000/- WAS PAID TO THE NEUROLOGICAL SOCIETY OF I NDIA TOWARDS THE INSTITUTION OF A HINDUSTAN CIBA-GEIGY G OLD MEDAL FOR THE BEST PAPER ON EPILEPSY. THE APPELLANTS ARE A LEADING MANUFACTURER OF PHARMACEUTICAL PRODUCTS FOR EPILEPS Y. THIS PAYMENT WAS MADE TO PUBLICIZE THE NAME OF THE COMPA NY AND ITS PRODUCTS AMONGST THE MEDICAL FRATERNITY AND IS THEREFORE, IN THE NATURE OF ADVERTISEMENT EXPENDITURE. THE APPELLANT THEREFORE PRAY THAT THE DCI BE DIRECT ED TO ALLOW THEM THE DEDUCTION OF ` . 50,000/- (III) ` 20,000/- WAS PAID TO VASCO ENVIRONMENT TOWARD THE ENVIRONMENT PROTECTION WEEK HELD AT GOA WHERE THE M AIN PLANTS OF THE COMPANY ARE SITUATED. IN LINE WITH GOVT. POL ICY, THE 51 COMPANY LAYS GREAT EMPHASIS ON PROTECTION OF THE EN VIRONMENT. THE EXPENDITURE WAS ALSO INCURRED TO PUBLICIZE THE NAME OF THE COMPANY. THE APPELLANT THEREFORE PRAY THAT THE DCI BE DIRECT ED TO ALLOW THEM THE DEDUCTION OF ` 20,000/- 73 THE AO DISALLOWED A SUM OF ` 4,99,000/- BEING THE ENTIRE AMOUNT DEBITED TO CORPORATE DEVELOPMENT ACCOUNT. DE TAILS OF THESE EXPENSES ARE REPRODUCED AS UNDER: SL.NO VENDOR DESCRIPTION AMOUNT 1 ASSOCN. OF BASIC MFGS OF PESTICIDES SHARE OF PRODUCTION COST OF VIDEO CASSETTE ON SAFETY IN TRANSPORTATION OF PESTICIDES 50,000 2 EMBASSY OF SWITZERLAND 129 3 B V PATEL PHARMACEUTICAL EDUCATION RESEARCH CENTRE DONATION (EXEMPT U/S35) 250,000 4 NEUROLOGICAL SOCIETY OF INDIA INSTITUTION OF HINDUSTAN CIBA-GEIGY FOR BEST PAPER ON EPILEPSY 50,000 5 VASCO ENVIRONMENT ENVIRONMENTAL PRODUCTION WEEK 20,000 TOTAL 4,99,000 WHILE MAKING THE IMPUGNED DISALLOWANCE THE AO ON PA GE 11 OF THE ASST ORDER HAS STATED THAT THE ASSESSEE SPENT AN AMOUNT OF ` 4,99,000/- TOWARDS CONTRIBUTION TO CORPORATE DEVEL OPMENT. THE SAME WAS NOT ALLOWABLE AS REVENUE EXPENDITURE BECAUSE EX PENDITURE APPEARING AT SRL.NO.1 WAS TOWARDS SHARE OF PRODUCTION COST OF VIDEO CASSETTE ON SAFETY IN TRANSPORTATION OF PESTICIDES. THE DC(IT) ALSO OBSERVED THAT OUT OF THESE AN AMOUNT OF ` 2,50,000/ WAS EXEMPTED U/S 35(1)(II) WHICH WOULD BE SEPARATELY ALLOWABLE SUBJECT TO FILING OF RECEIPT ETC. HENCE, THE IMPUGNED DISALLOWANCE WAS MADE. 73.1 BEFORE CIT(A), IT WAS THAT A SUM OF ` 50,000/- WAS PAID TO THE ASSOCIATION OF BASIC MANUFACTURERS OF PESTICIDES RE PRESENT THE SHARE PAYABLE BY THE COMPANY TO THE ASSOCIATION OF WHICH IT IS A MEMBER, FOR PRODUCING A VIDEO CASSETTE ON SAFETY IN TRANSPORTAT ION OF PESTICIDES. THE APPELLANT COMPANY IS A MEMBER OF THE ASSOCIATION WH ICH LIKES A MINI 52 CHAMBER OF COMMERCE, PROTECTS AND DEFENDS THE INTER EST OF MANUFACTURERS OF PESTICIDES AND TOOK UP THEIR CASE WITH THE GOVT FORUMS ETC. AS THE NEED MAY ARISE FROM TIME TO TIME. AS A MEMBER OF ASSOCIATION THE APPELLANT WAS BOUND TO PAY SUCH DUES AS THE MAN AGEMENT OF THE ASSOCIATION MAY DEEM NECESSARY FOR THESE PURPOSES. IT WAS FURTHER SUBMITTED BY THE ASSESSEE THAT THE ADVERTISING CUM GENERAL PUBLIC AWARENESS CAMPAIGN HIGHLIGHTS THE SAFETY MEASURES INVOLVED AND T BE FOLLOWED IN TRANSPORTING HAZARDOUS PESTICIDES. THE EXPENDITURE IS A NORMAL DAY-TO-DAY RUNNING EXPENDITURE/ADVERTISEMENT EXPENDITURE AND SHOULD THEREFORE BE ALLOWED. AS REGARDS A SUM OF ` 1,29,000/- PAID TO EMBASSY OF SWITZERLAND, THE ASSESSEE SUBMITTED THA T IT WAS TO DEVELOP AND MAINTAIN CORDIAL AND HARMONIOUS WORKING RELATI ONS WITH THE COUNTRY WHICH HOUSES THE HEADQUARTERS OF THE GROUP. IN THE ABSENCE OF AN INDO-SWISS CHAMBER OF COMMERCE, IT WAS THE EMBAS SY WHICH REPRESENTS THE INTEREST OF THE INDO SWISS BUSINESS RELATIONSHIPS AND THE EXPENDITURE WAS AKIN TO PAYMENTS MADE BY OTHER COR PORATE BODIES TO VARIOUS CHAMBERS OF COMMERCE AND SHOULD THEREFORE B E ALLOWED. AS REGARDS ITEM NO.3, THE DONATION CERTIFICATE HAS SUB SEQUENTLY BEEN FURNISHED TO THE DC(IT) IN ORDER TO ENABLE HIM TO R ECTIFY THE ORDER AND THIS HAS BEEN DONE. AS REGARDS A SUM OF ` 50,000/-, WHICH WAS THE PAYMENT TO THE NEUROLOGICAL SOCIETY OF INDIA TOWARD S THE INSTITUTION OF HINDUSTAN CIBA-GEIGY GOLD MEDAL FOR THE BEST PAPER ON EPILEPSY. THE ASSESSEE CONTENDED THAT IT WAS A LEADING MANUFACTUR ER OF PHARMACEUTICAL PRODUCTS FOR EPILEPSY. THIS PAYMENT WAS TO PUBLICIZE THE NAME OF THE COMPANY AMONGST MEDICAL AND PHARMACEUTI CAL FRATERNITY AND IS OF THE NATURE OF RECURRING ADVERTISEMENT AND PUBLICITY EXPENDITURE WHICH SHOULD BE ALLOWED AS BUSINESS EXPENDITURE. A S REGARDS PAYMENT OF ` 20,000/- TO VASCO ENVIRONMENT TOWARDS THE ENVIRONM ENTAL PROTECTION WEEK, THE ASSESSEE EXPLAINED THAT THE PU RPOSE OF THE ENVIRONMENTAL WEEK TO BE HELD IN GOA WHERE THE MAIN PLANTS WERE SITUATED, WAS TO EXPLAIN ECOLOGICAL IMPORTANCE TO T HE COMMUNITY AND WAS IN THE NATURE OF ADVERTISEMENT AND PUBLICITY. IN T HIS CONNECTION THE 53 ASSESSEE PLACED RELIANCE ON THE DECISION OF THE HIM ACHAL PRADESH HIGH COURT IN THE CASE OF MOHAN MEAKIN BREWERIES REPORTE D IN 118 ITR 101. THE ASSESSEE ALSO PLACED RELIANCE ON THE ORDER OF T HE CIT(A) IN THE APPELLANTS OWN CASE FOR THE ASST YEAR 1984-85 WHER EIN THE EXPENDITURE OF THE SAME NATURE DISALLOWED BY THE DC(IT) AS BEIN G IN THE NATURE OF DONATION WAS ALLOWED AS A DEDUCTION. 73.2 THE CIT(A) HELD AS FOLLOWS: 32 I HAVE CONSIDERED THE ENTIRE MATTER CAREFULLY. A SUM OF ` ` 50,000/- WAS PAID BY THE APPELLANT TO THE ASSOCIA TION OF BASIC MANUFACTURERS OF PESTICIDES WHICH WAS THE SHARE PAY ABLE BY THE APPELLANT COMPANY TO THE ASSOCIATION. THE PAYMENT W AS MADE FOR MAKING THE VIDEO CASSETTES FOR ADVERTISING CUM GENE RAL PUBLIC AWARENESS CAMPAIGN HIGHLIGHTING THE SAFETY MEASURES INVOLVED. THE SAME WAS THEREFORE, AN ADMISSIBLE EXPENDITURE. THE DISALLOWANCE TO THE EXTENT OF ` 50,000/- IS THEREFORE DELETED. A SUM OF ` 1,29,000/- PAID TO THE EMBASSY OF SWITZERLAND IS APPARENTLY IN THE NATURE OF DONATION. THE PAYMENT I S NOTHING TO DO WITH THE BUSINESS OF THE APPELLANT COMPANY. THE APP ELLANT COMPANY CANNOT BE ALLOWED TO CLAIM ANY PAYMENT MADE TO EMBA SSY OF SWITZERLAND AS AN ADMISSIBLE BUSINESS EXPENDITURE S IMPLY BECAUSE THE HEADQUARTERS OF THE GROUP ARE SITUATED AT SWITZ ERLAND. THE EXPENDITURE INCURRED WAS IN THE NATURE OF DONATION. THE SAME WAS THEREFORE, RIGHTLY DISALLOWED BY THE ASSESSING OFFI CER. SIMILARLY, THE OTHER PAYMENTS MADE TO THE NEUROLOGICAL SOCIETY OF INDIA AND VASCO ENVIRONMENT AMOUNTING TO ` 50,000/- AND ` . 20,000/- RESPECTIVELY WERE ALSO IN THE NATURE OF DONATION. THE FACTS OF T HE PRESENT CASE BEING DIFFERENT THE EARLIER DECISION OF CIT(A) FOR THE ASST. YEAR 1984- 85 AND THE DECISION OF THE HIMACHAL PRADESH HIGH CO URT IN THE CASE OF MOHAN MEAKIN BREWERIES REPORTED IN 118 ITR 101CA NNOT BE MADE APPLICABLE IN THE CASE OF THE APPELLANT. THESE DISALLOWANCES ARE THEREFORE, CONFIRMED. IN THE RESULT THE APPELLA NT GETS RELIEF OF ONLY ` 50,000/- WITH REFERENCE TO GROUND NO.15 OF THE APP EAL. 74. AGGRIEVED BY THE ACTION OF CIT(A) IN SUSTAININ G PART OF THE DISALLOWANCE MADE BY THE AO, THE ASSESSEE HAS RAISE D THE AFORESAID GROUNDS BEFORE THE TRIBUNAL. BEFORE US THE LEARNED COUNSEL FOR THE 54 ASSESSEE RELIED ON THE FOLLOWING OBSERVATIONS OF TH E TRIBUNAL IN THE CASE OF M/S.GLAXO LABORATORIES (I) LTD. VS. IAC ITA 694/ MUM/1986: THE NEXT GROUND OF APPEAL IS THAT THE CIT(A) ERRED IN UPHOLDING THE DISALLOWANCE OF ` 19,991/- BEING SCHOLARSHIPS AMOUNTS PAID BY THE ASSESSEE ON THE GROUND THAT THE EXPENDITURE WAS NOT RELATED TO THE NORMAL BUSINESS ACTIVITIES OF THE ASSESSEE. I H AVE HEARD THE PARTIES TO THE DISPUTE AND IN OUR OPINION THE CLAIM OF THE ASSESSEE IS NOT OPEN TO SERIOUS CHALLENGE. THE EXPENDITURE IN Q UESTION HAS BEEN INCURRED IN THE COURSE OF BUSINESS CARRIED ON BY TH E ASSESSEE. THOUGH THE MOTIVE COULD BE ALTRUISTIC OR PHILANTHRO PIC, THAT WILL NOT GO TO CHANGE THE CHARACTER OF THE EXPENDITURE. WE A RE NOT INCLINED TO SUBSCRIBE T THE VIEW OF THE REVENUE AUTHORITIES THA T BEFORE A DEDUCTION COULD BE ALLOWED THERE SHOULD BE A DIRECT NEXUS BETWEEN THE EXPENDITURE AND THE BUSINESS ACTIVITIES CARRIED ON BY THE ASSESSEE. IF THE EXPENDITURE IS LEAD OUT IN THE COU RSE OF BUSINESS THE SAME WILL HAVE TO BE ALLOWED AS A DEDUCTION EVEN IF THE NEXUS IS NOT PROXIMATE. THE FINDINGS OF THE CIT(A) ARE REVERSED. FURTHER OUR ATTENTION WAS ALSO DRAWN REGARDING THE CORRESPONDENCE IN RESPECT OF THE AFORESAID DONATIONS WITH THE AFORESA ID ENTITIES COPIES OF WHICH ARE AVAILABLE AT PAGES 117 TO 134 OF THE PAPE R BOOK. THE LEARNED D.R. RELIED ON THE ORDER OF THE CIT(A). 75. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE PAYMENT OF ` .1,29,000 TO SWISS EMBASSY IS TOWARDS SWISS CULTURA L PROGRAMME ORGANIZED IN INDIA IN 1991. THE EVENTS WERE ALPINE CULTURE EXHIBITION, COLLEGIUM ACADEMICISM AND AN EXHIBITION OF PRODUCTS MADE IN SWITZERLAND. IT HAS BEEN THE STAND OF THE ASSESSEE THAT SINCE THERE WAS NO INDO-SWISS CHAMBER OF COMMERCE, THE EMBASSY WOUL D REPRESENT THE INTEREST OF THE INDO-SWISS BUSINESS RELATIONSHIP AN D HENCE THE PAYMENT WAS MADE. THE HEADQUARTERS OF THE ASSESSEES PAREN T COMPANY WAS IN SWITZERLAND. WE ARE OF THE VIEW THAT THE AFORESAID EXPENDITURE HAS NO NEXUS WITH THE BUSINESS OF THE ASSESSEE OR EARNING OF PROFIT AND CANNOT BE ALLOWED AS A DEDUCTION. AS FAR AS THE REMAINING ITEMS OF EXPENDITURE ARE CONCERNED, THE PAYMENT TO NEUROLOGICAL SOCIETY OF INDIA WAS A 55 SPONSORSHIP FOR A GOLD MEDAL FOR BEST PAPER ON EPIL EPSY. IT IS CONNECTED WITH THE BUSINESS OF THE ASSESSEE WHICH IS IN THE M ANUFACTURE AND SALE OF MEDICINES. THE PAYMENT TO VASCO ENVIRONMENT IS TO SUPPORT A PROJECT ON PRESERVATION OF ENVIRONMENT. EVEN THIS PAYMENT HAS TO BE CONSIDERED AS PAYMENT IN CONNECTION WITH THE BUSINESS OF THE A SSESSEE WHICH HAS A SOCIAL RESPONSIBILITY TO SEE THAT THE ENVIRONMENT I S CLEAN. WE THEREFORE DIRECT THAT THE DEDUCTION CLAIMED TO THE ABOVE EXTE NT BE ALLOWED. GROUND NO.8 IS THUS PARTLY ALLOWED. 76. GROUND NO.9 AND 10 HAVE ALREADY BEEN DECIDED W HILE DECIDING THE GROUNDS OF APPEAL OF THE REVENUE. 77. GROUND NO.11 (1) AND 11(2) RAISED BY THE ASSES SEE READS AS FOLLOWS: 11(1) THE CIT(A) ERRED IN UPHOLDING THE DCIS STAND F NOT ALLOWING SET OFF OF SHORT TERM CAPITAL LOSS OF ` 6,00,670/- ARISING ON SALE OF CHN ANALYZERS, AGAINST THE BUSINESS INCOME. IN THIS CONNECTION, THE APPELLANTS SUBMIT THAT THEY HAD PURCHASED THESE ANALYZERS IN NOVEMBER 1988 FOR ` 1100,413/ FOR THEIR BUSINESS. THESE ASSETS HAD NOT BEEN INSTALLED AND NO DEPRECIATION HAD BEEN CLAIMED THEREON THESE ANALYZERS WERE SOLD IN MAY 1990 FOR ` 4,99,743/-. THUS, A SHORT TERM CAPITAL LOSS OF ` . 6,00,670/- AROSE. UNDER THE PROVISIONS OF SEC. 71 AS THEY STOO D AT THE RELEVANT TIME, THE APPELLANTS ARE ENTITLED TO SET OF THIS LO SS AGAINST THEIR BUSINESS INCOME. THE APPELLANTS PRAY THAT THE DCI BE DIRECTED TO ALL OW THEM SET OFF OF THE SHORT TERM CAPITAL LOSS OF ` 6,00,670./- AGAINST THEIR BUSINESS INCOME. (2) WITHOUT PREJUDICE, THE APPELLANTS SUBMIT THAT T HE LOSS OF ` ` 6,00,670/- IS A BUSINESS LOSS AND SHOULD THEREFOR E BE ALLOWED AS A DEDUCTION AGAINST THEIR BUSINESS INCOME. THE APPELLANT PRAY THAT THE DCI BE GIVEN SUITABLE D IRECTIONS IN THIS REGARD. 77.1 THE ABOVE GROUND OF APPEAL IS AGAINST THE ACTI ON OF THE REVENUE AUTHORITIES IN NOT ALLOWING SET OFF OF SHORT TERM C APITAL LOSS OF ` ` 6,00,670/-. WHILE MAKING THE IMPUGNED DISALLOWANC E THE DC(IT) IN PARA 23 ON PAGE 15 OF HIS ASST. ORDER HAS DISCUSSE D THAT IT WAS A SHORT 56 TERM CAPITAL LOSS OF ` 6,00,670/- ON PURCHASE AND SALE OF CHN ANALYZERS. THIS PARTICULAR TRANSACTION HAS ALSO TO BE SEEN FRO M THE ANGLE THAT THE ASSESSEE COMPANY WAS NOT A TRADER IN CHN ANALYZERS OR OTHER SCIENTIFIC INSTRUMENTS. THESE ITEMS OF PLANT & MACHINERY WERE SOLD BY THE APPELLANT COMPANY EVEN BEFORE INSTALLATION OF THE S AME. THE PURPOSE OF BUYING THESE ITEMS IS ONLY FOR EITHER &D LAB OR THE PRODUCTION UNITS. THE LOSS INCURRED ON THS ACCOUNT WAS THEREFORE CREATED AS A LOSS OF CAPITAL AND WAS NOT ALLOWED AS A CHARGE AGAINST INCOME OF T HE YEAR. 77.2 BEFORE CIT(A), THE ASSESSEE CONTENDED THAT TH E ASSESSEE HAD PURCHASED CHN ANALYZERS FOR ` 11,00,413/ IN NOVEMBER, 1988. AS THE SAME HAS NOT BEEN INSTALLED THE AMOUNT OF ` 11,00,413/- WAS NOT CAPITALIZED IN THE BOOKS OF ACCOUNT. AS THE ASSETS WERE NEVER INSTALLED OR CAPITALIZED NO DEPRECIATION ON THE SAME WAS CLAIMED BY THE ASSESSEE. THE CHN ANALYZERS WERE ULTIMATELY DISPOSED OF BY TH E ASSESSEE IN MAY 1990 FOR ` 4,99,743/-. THE ASSESSEE DID NOT CLAIM THIS LOSS A S A TRADING LOSS BUT HAVE CLAIMED IT AS A SHORT TERM CAPITAL LO SS AS THE SAME HAD ARISEN ON THE TRANSFER OF CAPITAL ASST HELD FOR LES S THAN 36 MONTHS AND ON WHICH NO DEPRECIATION WAS EVER CLAIMED OR ALLOWED. THE SET OFF OF SUCH LOSS WAS CLEARLY PERMISSIBLE U/S 71 OF THE I T ACT, AS IT THEN STOOD, WHICH PERMITTED SET OFF OF SUCH LOSS AGAINST THE BUSINESS INCOME. IN VIEW OF THE SPECIFIC PROVISIONS OF SEC.71, IT WAS ARGUED THAT T HE DC(IT) SHOULD BE DIRECTED TO ALLOW SET OFF OF SUCH LOSS AGAINST THE BUSINESS INCOME. 77.3. THE CIT(A) HOWEVER REJECTED THE CLAIM OF THE ASSESSEE AND HELD AS FOLLOWS: 55 AFTER DUE CONSIDERATION I DO NOT FIND ANY FORCE IN THE SUBMISSIONS OF THE LD COUNSEL OF THE APPELLANT. IT IS AN ADMITTED FACT THAT THE CHN ANALYZERS WHICH WERE PURCHASED BY THE APPELLANT IN NOV 1988 FOR ` 11,00,413/ WERE SOLD SUBSEQUENTLY WITHOUT EVEN INSTALLING THE SAME. THE ASSESSEE WAS ALSO NOT DEA LING IN CHN ANALYZERS OR OTHER SCIENTIFIC INSTRUMENTS AS A TRAD ER. THE CHN ANALYZERS WERE SOLD EVEN BEFORE INSTALLATION WHICH SHOWS THAT THESE WERE NOT BUSINESS ASSETS AND HAD NOTHING TO D O WITH THE 57 BUSINESS OF THE APPELLANT. IN VIEW OF THE ABOVE FAC TS AND CIRCUMSTANCES OF THE CASE, I AM UNABLE TO ACCEPT TH E PLEA OF THE APPELLANT THAT THE ABOVE SHORT-TERM CAPITAL LOSS IS ADMISSIBLE TO THE APPELLANT AGAINST THE BUSINESS INCOME. SHORT TERM C APITAL LOSS CAN BE ALLOWED AGAINST SHORT TERM CAPITAL GAIN. IN THE CASE OF THE APPELLANT THERE WAS NO INCOME UNDER THE HEAD SHORT TERM CAPITAL GAIN AND THE TRANSACTION INVOLVED DID NOT RELATE TO THE BUSINESS OF THE APPELLANT. THE ASSESSING OFFICER WAS THEREFORE, FULLY JUSTIFIED IN DISALLOWING THE CLAIM OF THE APPELLANT IN RESPECT O F SET OFF OF SHORT TERM CAPITAL LOSS OF ` 6,00,670/ THIS GROUND OF APPEAL IS THEREFORE, DECIDED AGAINST THE APPELLANT. 77.4. BEFORE US, THE SAME SUBMISSIONS AS WERE MADE BEFORE CIT(A), WERE REITERATED. WE HAVE CONSIDERED THE SAME AND FIND N O GROUNDS TO INTERFERE WITH THE ORDER OF THE CIT(A). SHORT TERM CAPITAL LOSS COULD NOT BE SET OFF AGAINST BUSINESS INCOME AS PER THE PROVI SIONS OF LAW AS IT EXISTED AT ALL TIMES. WE THEREFORE CONFIRM THE ORD ER OF CIT(A) ON THIS ISSUE. 78. GROUND NO.12 HAS ALREADY BEEN DECIDED WHILE DE CIDING GROUND NO. 5(B). 79. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS PA RTLY ALLOWED. C.O. NO.105/MUM/96. 80. THE GROUNDS OF CROSS OBJECTION READ AS FOLLOWS: 1. THE RESPONDENTS SUBMIT THAT IN THE EVENT IT IS HELD THAT FOREIGN TRAVEL EXPENSES OF ` 7,12,202/ IS DISALLOWABLE, DEPRECATION AT THE APPROPRIATE RATE BE ALLOWED THEREON. 2. THE RESPONDENTS SUBMIT THAT IN CASE THE DCIS ACTIO N OF ENHANCING THE VALUE OF CLOSING STOCK BY ` 1,16,35,000/- ON ACCOUNT OF MODVAT CREDIT IS UPHELD, THEN THE DCI SHOULD BE DIR ECTED TO INCREASE THE VALUE OF THE OPENING STOCK OF THE SUBS EQUENT ASSESSMENT YEAR I.E. ASSESSMENT YEAR 199293 BY A SI MILAR AMOUNT. 3. THE RESPONDENTS SUBMIT THAT IN CASE THE DCIS ACTIO N OF ENHANCING THE VALUE OF CLOSING STOCK ON ACCOUNT OF MODVAT CRE DIT IS UPHELD, 58 THEN THE DCI SHOULD BE DIRECTED TO INCREASE THE VAL UE OF THE OPENING STOCK BY ` 1,03,27,000/-BEING THE ADDITION THAT HE HAD MADE T O THE CLOSING STOCK OF THE EARLIER ASSESSMENT YEAR I. E. ASSESSMENT YEAR 1990-91 ON THIS ACCOUNT. 4. THE RESPONDENTS SUBMIT THAT IN CASE IT IS HELD THAT ` 5,00,000/- INCURRED ON COMPUTER SOFTWARE AND SUPPORT CHARGES I S A CAPITAL EXPENDITURE, THEN THE DCI SHOULD BE DIRECTED TO ALL OW DEPRECIATION @ 25% THEREON. 81. IN VIEW OF THE DISMISSAL OF THE RELEVANT GROUND S RAISED BY THE REVENUE IN ITS APPEAL, THE GROUNDS RAISED IN THE CR OSS OBJECTION DO NOT REQUIRE ANY ADJUDICATION. CONSEQUENTLY, THE CROSS OBJECTION IS DISMISSED. 82. IN THE RESULT, APPEAL BY THE REVENUE AND ASSE SSEE ARE PARTLY ALLOWED AND THE CROSS OBJECTION BY THE ASSESSEE IS DISMISSED. ORDER WAS PRONOUNCED ON 4TH DAY OF NOV, 2010. SD/- ( N.V.VASUDEVAN ) JUDICIAL MEMBER SD/- ( R.K.PANDA ) ACCOUNTANT MEMBER PLACE: MUMBAI DATED : 4 TH , NOV, 2010 COPY TO : 1. THE ASSESSE 2. THE RESPONDENT 3. THE CIT(A)-CONCERNED. 4. THE CIT, CONCERNED. 5. THE DR CONCERNED, MUMBAI 6. GUARD FILE BY ORDER TRUE COPY ASSTT. REGISTRAR, ITAT, MUMBAI PS/RAJ