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Excise duty and sales tax under section 80HHC(3)

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Court :
ITAT-SPECIAL BENCH,KOLKATA

Brief :
Excise duty and sales tax cannot form part of 'total turnover' u/s 80HHC(3), otherwise formula becomes unworkable : ITAT Special Bench

Citation :

KOLKATA, MAR 24, 2008 : THIS Special Bench has decided on as many as 16 grounds:- (1) CIT (A) has erred in deleting addition of Rs.38,64,109/- debited to year's revenue account as value of stores written off by holding that it is for the A.O. to prove that consumable stores had either not been used or individually costed less than Rs.5,000/- ignoring, in the process, the findings in assessment that claim could not be established on record. The Tribunal held: The assessee has not furnished any evidence to prove that the above consumable stores have become obsolete during the year under consideration. At the same time, considering the volume of the assessee's business wherein the assessee's turnover exceeded Rs.6000 crores, the possibility of some consumable stores becoming obsolete cannot be ruled out. Further, the obsolete stores would also have some realizable value. In the case of the assessee the items written off included 1246 M .T. of coal. Even if the coal is dust or rejected, it has some realizable value. The ld. counsel for the assessee has claimed that whenever consumable stores are sold, the amount realized are credited as other income in the assessee's books of account. However, the learned counsel for the assessee could not point out whether any amount on the realization of 1246 M .T. of coal and other consumable items written off in the year under consideration was shown as misc. income on its realization in this year or any of the subsequent years. Considering the totality of these facts and the arguments of both the sides, in our opinion, it would meet the ends of justice if the disallowance is sustained at 25% of the consumable stores written off by the assessee. We hold and direct accordingly. (2) CIT (A) has erred in deleting addition of Rs. 5,00,000/- on account of building, furniture, fixture & fittings thereby contravening enunciation by the jurisdictional High Court to the defect that prohibition against guest house expenses stipulated in section 37(4) is absolute. At the outset it was an agreed position between the parties that the above issue has to be decided in favour of the Revenue and against the assessee by virtue of the order of the Supreme Court in the case of Britannia Industries -vs.- CIT reported in (2005-TIOL-125-SC-IT). (3) CIT (A) has erred in deleting addition of traveling expenses disregarding the specific finding that assessee could not discharge the statutory onus of providing that the entire amount debited as expenses represented revenue expenditure laid out wholly and exclusively for purposes of business. The Tribunal held: In the present case, it has nowhere been brought on record by the A.O. that the expenditure was not incurred for the purpose of the business of the assessee-company. The sole basis for disallowance of the expenditure was that the expenditure was incurred by the persons other than employees of the assessee-company. In our opinion, the disallowance made by the A.O. was not justified and the ld. CIT (A) has rightly deleted the same. Accordingly, the order of the C.I.T.(A) on this point is sustained and ground No.3 of the revenue's appeal is rejected. (4) CIT (A) has erred in deleting addition of Rs.67,59,1041-without requiring the expenses to controvert the finding that the amount represented outgoings in the form of entertainment expenses. The Tribunal held: In our considered opinion, disallowance of 10% in case of each of the expenditure will meet the end of justice. We, therefore, direct the A.O. to disallow only 10% of expenditure incurred for lunch/ refreshment and for payment of club and then work out the disallowance under section 37(2). We hold and direct accordingly and accept the Ground No. 4 raised by the Revenue for statistical purposes. (5) CIT (A) has erred in deleting the addition of Rs.1,45,48,331/- under the sub-head of payments to clubs disregarding the finding that no part of the expenditure could be shown to have any direct and intelligible nexus with business of the company as such. The Tribunal held: The A.O. has not given any cogent reason for disallowing such expenditure. Hon'ble Delhi High Court in the case of Delhi Cloth & General Mills Co. has upheld the order of the Tribunal allowing the expenditure on Football tournament incurred by the assessee. No contrary decision is referred to by the Revenue. In view of the above, considering the facts of the case and the arguments of both the sides, in our opinion, the C.I.T.(A) has rightly deleted the disallowance of expenditure on sponsorship of the events made by the A.O. We uphold the order of the C.I.T.(A) in this regard and reject ground No.5 of the Revenue appeal. (6) CIT (A) has erred in deleting addition of Rs. 13,30,000/-claimed as advertisement expenses when clearly the expenditure in question did not qualify to be treated as admissible revenue expenses of the company's business. The Tribunal held: We find that the assessee has showed the expenditure of Rs.172.60 crores on account of advertisement expenses which includes Rs. 133 lakhs as sales promotion expenses as evident from the details of advertisement expenses available at page 62 of the paper book. We find that the assessee-company has made an expenditure on the sponsorship of various events like golf, polo, football, cricket, racing, badminton, etc. for the purpose of advertisement of its product. We have also noted down the fact that the Department has not disputed the identical expenditures in any of the previous year and the auditors have also not pointed out that any such expenses was not related or incidental to the business needs of the assessee and, therefore, in our considered opinion, the action of A.O. in disallowing 10% of such expenditures without bringing any material evidence on record was not justified and the ld. CIT (A) has rightly deleted the addition. We, therefore, uphold the order of ld. CIT (A) in this regard and reject the ground raised by the Revenue. (7) CIT (A) has erred in deleting addition of 'Repairs' when the order of assessment showed that material evidence to establish the claim had been omitted to be made available for A.O.'s scrutiny. The Tribunal held: the A.O. in this case has accepted the repair expenditures to the extent of 75% incurred by the assessee on the flats of Company and disallowed 25 % of such expenditure observing that personal element in the expenditure incurred in connection with residential flats cannot be ruled out. The flats were owned by the assessee-company and were utilised by the Directors or employees of the assessee-company for their residence. The expenditure incurred on the maintenance of the assets (flats) owned by the assessee-company cannot be said to be the personal expenditure merely because these assets have been utilised by the Directors/ Senior Executives for their residence. When a residential accommodation is provided to the Directors/Executives of a company, the expenditure incurred thereon would be an allowable expenditure in the hands of that company. It would be perquisite in the hands of the Directors/Executives. The assessee is a company and any benefit and facility provided to the Directors/Executives even for their personal benefit cannot be said to be personal expenditure of the assessee-company because the company and the employees are two different entities. Such facility, benefit or amenities would be perquisites in the hands of the employees. But so far as the company is concerned, it would be allowable as business expenditure because those facilities or benefits have been provided to the employees to retain their services for the purpose of business of the company. Furthermore, providing such facility to the employees is necessary to attract/retain the skilled and experienced human resources. In view of above, we are of the opinion that C.I.T.(A) was justified in deleting the disallowance of Rs. 92,75,000/- made by the A.O. (8) CIT (A) has erred in deleting addition of Rs. 1,77,05,366/- basing his analysis on method of accounting thereby ignoring the fact that the provision represented purely contingent expenditure. The Tribunal held: in the case of Sutlej Cotton Mills Ltd., the Supreme Court held: "It is now well settled that the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee may, by making entries which are not in conformity with the proper principles of accountancy, conceal profit or show loss and the entries made by him cannot, therefore, be regarded as conclusive one way or the other. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee ". Such action of assessee cannot be held either bogus or illegal in nature keeping in view the fact that the assessee itself reversed such entry in the immediately following year and avails the deduction only which is being claimed by the dealers. Rejected the Ground No. 8 raised by the Revenue. (9) the CIT (A) has erred in deleting addition of Rs.55,00,000/- by ascertaining capital or revenue nature of the expenses solely with reference to composition of the amount rather than the purpose each component of the expenditure was expected to serve. The Tribunal held: Coming to the disallowance of expenditure of Rs. 55,00,000/- for re-installation of a loga machine, we find that such re-installation expenditures were incurred in connection with shifting of machinery from Saharanpur and installing the same at Bangalore unit of the assessee. The A.O. has disallowed such shifting and re-installation expenses of such machinery treating the same as capital expenditure and by relying on the decision of the Hon'ble Supreme Court in the case of Sitalpur Sugar Works Ltd. However, the ratio of decision of the Hon'ble Supreme Court in the case of Sitalpur Sugar Works Ltd. are not applicable to the facts of the present case as in the case of Sitalpur Sugar Works Ltd., the expenditures were incurred for shifting of entire factory. Whereas in the present case, the machinery from Saharanpur have been shifted to Bangalore unit and substituting is made for efficient utilization of the machinery apart from the fact that shifting of such machinery from one unit to another for its efficient use has not resulted into any addition in the assets of the assessee-company and, therefore, in our considered opinion, such expenditure cannot be treated as capital expenditure and in these circumstances, the ld. CIT (A) has rightly deleted the addition. Accordingly, we uphold the order of ld. CIT (A) on this ground and reject the Ground raised by the Revenue. (10) CIT (A) erred in law and on facts in summarily deleting addition u/s. 43B read with section 36(1) (Va) without appreciating that the statutory disallowance is essentially to be based on facts and that unlike the governmental liabilities of other nature covered by section 43B, option to claim deduction in the year of payment is not available under the law in regard to contribution to employees' provident & pension funds. The Tribunal held: Coming to the facts of the present case, we find that it has been contended by the learned counsel that all the payments either in respect of employer's contribution or in respect of employees' contribution have been made on or before the due date including the grace period. However, it has been contended by the Ld. Departmental Representative that such details were not furnished before the A.O. and it would require verification at the end of the A.O. whether the payment was actually made within due date, as claimed by the assessee. After considering the arguments of both the sides, we deem it proper to restore the matter back to the file of the A.O. for verification of actual date of payment in this regard and thereafter recalculate the disallowance u/s. 43B / 36(1)(va),. Needless to mention that the A.O. will allow adequate opportunity of being heard to the assessee. Accordingly, ground No. 10 of the Revenue's appeal is deemed to be allowed for statistical purposes. (11) CIT (A) has erred in deleting the addition disallowances of Rs.2.5 crores under the head other staff welfare business by holding that the although the assessee could not furnish details of such expenses before the assessing officer in course of assessment in deleting addition of Rs. 30,00,000/- on account of expenditure on fuel soft coke for staff and mill workers by holding the same as in nature of employees welfare expenses incurred on the basis of an agreement with workers in gross disregard to Rule 46A of the Income Tax Rules, 1962 as the assessee did not disclose the fact of the agreement with workers in course of assessment procedure & in deleting addition of Rs.4,00,000/- on account of school fees scholarship and educational tour expenses by holding that the expenditure were incidental to assessee's business. The Tribunal held: The assessee in this case has claimed these expenditures for organizing employees social and sports activities, cultural/ retiring gifts, long time service awards, school fees/ scholarship and educational tours expenses. The A.O. has disallowed these expenditures holding that same are not incidental to the business needs of the assessee. However, this is also not a case of revenue that the expenditures were either not incurred or if incurred then were incurred for other than business purpose or for acquiring any assets. From the details of such expenditures, it is evident that these expenditures were incurred for the purpose of maintaining healthy and cordial relationship with the staff and workers of the assessee-company, which in turn result in earning high profit and efficiency of the resources. The reimbursement of fuel/ soft coke for staff and mill workers has also been made as per contractual agreement with the staff and hence, purely incidental to the business. We, therefore, on the basis of aforesaid facts and documents placed on record, are of the opinion that such expenditures were necessary for commercial expediency and, therefore, are to be allowed as held by the Supreme Court in its landmark decision in the case of Shahzada Nand & Sons -vs.- CIT which has been followed by the Special Bench, Chandigarh in the case of Punjab State Industrial Development Corporation Ltd. We, therefore, considering the facts and circumstances and relying on the above discussion, are of the opinion that the expenditures incurred by the assessee were necessary for commercial expediency and hence were incidental to the business needs and in these circumstances, the ld. CIT (A) was justified in deleting the addition made by the A.O. We, therefore, uphold the order of ld. CIT (A) and reject the ground No. 11 raised by the Revenue. (12) CIT (A) erred in law and on facts in deleting addition of miscellaneous expenses ignoring the trite law that a decision in regard to a different year cannot be taken as an authority on facts. Many ,miscellaneous matters – please read the text of order. (13) CIT (A) has erred in deleting addition by holding that the onus of proof is, not on the assessee, but on the A.O. During hearing, this ground was changed as “ CIT (A) has erred in deleting addition by the Assessing Officer of Rs.4.78 crores on account of advancing interest free loans to subsidiaries"'. The Tribunal held: revenue in this case has failed to make a case that borrowed funds were utilised for advancing interest free loan to sister concern whereas the assessee company has duly exhibited as to the availability of own fund to enable it to make interest free advance to its sister concern during the course of its normal business. The facts of this case are identical to the facts of their case of Britannia Industries Ltd. which has been decided in favour of assessee by the Hon'ble jurisdictional High Court. We, therefore, do not see any reason to interfere with such order of ld. CIT (A) in deleting the addition and accordingly uphold the same and reject ground no. 13 of revenue. (14) CIT (A) has erred in deleting addition applicable without appreciating that arm's length principle had been clearly shown to have been violated. Revenue has modified the Ground No. 14 which reads as under :- "On the facts and in the circumstances of the case, the ld. CIT (A) has erred in deleting the addition of Rs. 13,28,09,673/- made u/s. 40A(2)(a) of the Income Tax Act, 1961 without appreciating that Arms Length Principle had been violated in this transaction " The Tribunal held: The A.O. himself has recorded the finding that M/s. EEL had brought forward the opening stock which was at the rate of 62.52 per kg. which was sold to the assessee at the rate of 68.92 per kg. The sister concern has incurred the expenditure by way of godown charges and interest, etc. in keeping huge stock of tobacco and. therefore, the gross margin of approximately 10% charged by the sister concern to meet the cost of expenditure for carrying of stock and also for the profit for the services rendered by them cannot be said to be excessive or unreasonable. In view of the above factual position, we are unable to agree with the Revenue that the A.O. had a sufficient material to form an opinion that the payment to the sister concern for purchase of tobacco was unreasonable or excessive having regard to the fair market value of tobacco. Accordingly we uphold the order of the ld. CIT (A) in this regard and reject the ground raised by the Revenue. (15) CIT (A) erred in law and on facts in directing adoption of total turnover net of excise duty for purposes of computation of admissible amount of deduction u/s. 80HHC which directly contradicts the law. The Tribunal held: excise duty and sales tax also cannot form part of the "total turnover" under section 80HHC(3), otherwise the formula becomes unworkable. In our view, sales tax and excise duty also do not have any element of "turnover", which is the position even in the case of rent, commission, interest, etc. It is important to bear in mind that excise duty and sales tax are indirect taxes. They are recovered by the assessee on behalf of the Government. Therefore, if they are made relatable to exports, the formula under section 80HHC would become unworkable. Respectfully following the decision of the Supreme Court in the case of CIT -vs.- Lakshmi Machine Works, we decide the issue in favour of assessee and against the Revenue and accordingly reject the ground no. 15 raised by the Revenue. (16) CIT (A) has erred in directing the A.O. top allow deduction u/s. 80HHD of the Income Tax Act, 1961 as per computation made by the assessee's auditor without pointing out any defect in the computation made by assessing officer. The Tribunal held: the addition made by the A.O. in respect of notional income available to the assessee from dismantled fabrication material is not correct as the same will tantamount to double addition keeping in view the fact that the assessee is itself crediting such income available to it as soon as it realises the income from the sale of salvage material. We, therefore, in view of the above facts, do not see any reason to interfere with the order of ld. CIT (A) in this regard and uphold the same and reject the additional ground raised by the Revenue. (See 2008-TIOL-128-ITAT-KOL-SB in 'Income Tax' + 2008-TIOL-128-ITAT-KOL-SB in 'Legal Corner')
 

CA Praveen Chopra
on 24 March 2008
Published in Income Tax
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