Porritts and Spencer (Asia) Ltd. vs Commissioner of Income Tax

Following questions of law have been referred for the opinion of this Court by the Income Tax Appellate Tribunal, Delhi Bench, E Delhi, in ITA No. 1146 (Delhi)/1980 for the assessment year 1977-78 and ITA Nos. 1146 & 2051 (Delhi)/1980 for the assessment year 1977-78, arising out of its order dated 28-1-1981 in the revenues appeal and dated 6-2-1981 in the assessees appeal:

(i) Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that sum of Rs. 77,21 contributed by the assessee-company to the Staff Superannuation Fund was not allowed as deduction in the assessment under consideration? (At the instance of assessee).

(ii) Whether on the facts and circumstances of the case, Tribunal was right in law in holding that sum of Rs. 44,194 contributed by the assessee-company to the Staff Provident Fund was not allowable as deduction in the assessment under consideration? (At the instance of assessee).

(iii) Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that value of the perks provided to director, Shri Tapedar in the form of user of assessee-companys car had to be estimated independently and irrespective of the provisions of Rule 3, Income Tax Rules? (At the instance of assessee).

(iv) Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that the value of perks provided to Shri Tapedar in the form of personal user of assessees car should be reduced from Rs. 21,500 to Rs. 13,000 (inclusive of car expenses and car depreciation) on account of such personal use of the car having been there only for five months during the previous year under consider- ation? (At the instance of revenue).

(v) Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that business promotion expenses were to the extent of Rs. 37,078 in the nature of the entertainment expenditure and as such disallowable u/s 37(2 A)? (At the instance of assessee).

(vi) Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that the legal expenses under consideration were subject to the ceiling laid down in Section 80VV, Income Tax Act? (At the instance of assessee).

(vii) Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that in respect of the assessees excise duty liability deduction was allowable in the assessment under consideration only to the extent of Rs. 16,36,386? (At the instance of assessee).

(viii) Whether on the facts and circumstances of the case, the Tribunal was right in law in allowing deduction on account of Excise Duty on doubled yarn amounting to Rs. 10,66,306 claimed to be payable by the assessee but not actually paid? (At the instance of revenue).

(ix) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in sustaining the disallowance of two sums of Rs. 9,000 and Rs. 4,500 paid to Shri N. Nath and Shri K.C. Tapedar respectively as commission? (At the instance of assessee).

(x) Whether on the facts and circumstances of the case, the Tribunal was right in law in deleting the addition of Rs. 81,000 which amount had been claimed by the assessee as commission payable to Executive staff of the company? (At the instance of revenue).

(xi) Whether on the facts and circumstances of the case, the Tribunal was right in law in directing that the commission payable to Executive Staff be treated as salary for the purposes of Section 40A(5)? (At the instance of assessee).

(xii) Whether on the facts and circumstances of the case, the Tribunal was right in law in allowing the relief of Rs. 8,30,444 to the assessee-company on account of sales-tax? (At the instance of revenue).

(xiii) Whether on the facts and circumstances of the case, the Tribunal was right in law in allowing deduction on account of contribution towards Employees Provident Fund? (At the instance of revenue).

(xiv) Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that the provision and expenses on telephones installed at the residences of Directors and other Senior Executives of the company were not perquisites and those did not result into any benefit or amenity to them? (At the instance of revenue).

(xv) Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that only half of the expenses on telephones installed at the residences of the Executives of the company can be treated as perquisite/facility for the purpose of Section 40A(5)? (At the instance of revenue).

(xvi) Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that the actual expenditure on providing facilities to the Directors/Employees should not be taken into consideration and the disallowance should be worked out on the basis of Boards Circular dated 12-1-1970? (At the instance of revenue).

(xvii) Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that reimbursement of medical expenses amounting to Rs. 38,649 should not be treated as a perquisite for the purpose of Section 40A(5)? (At the instance of revenue).

(xviii) Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that the rents of garages and servant quarters hired at residence of the directors is not a perquisite for the purpose of Section 40A(5)? (At the instance of revenue).

(xix) Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 27,340 being interest-free loan to director, Shri N. Nath be not treated as a remuneration, amenity or benefit for the purpose of Section 40(c)? (At the instance of revenue).

(xx) Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that the expenditure incurred by the assessee-company on Shri H.S. Ingham, chairman of the company while he was in Delhi cannot be made subject to the limits laid down in Rule 6D(2)(b)? (At the instance of revenue).

(xxi) Whether on the facts and circumstances of the case, the Tribunal was right in law in deleting the additional/disallowance of Rs. 8,605 by holding that payment to Gratuity Fund is allowable whenever made u/s 36(1)(iv) notwithstanding the fact that it pertained to earlier years? (At the instance of revenue).

(xxii) Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 21 ;675 paid to employees as House Rent Allowance cannot be treated as perquisite u/s 40A(5)? (At the instance of revenue).

(xxiii) Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that the assessee was entitled to depreciation on technical know-how capitalized by the assessee at Rs. 10,00,000 in the assessment year 1972-73? (At the instance of revenue).

(xxiv) Whether on the facts and circumstances of the case, the Tribunal was right in law in allowing a deduction of Rs. 40,826 on account of contribution to Gratuity Fund? (At the instance of revenue).

The assessee derives income from manufacture and sale of industrial felts used in paper making industry. It filed its return for the assessment year 1977-78 on 29-7-1977. The accounting year of the assessee was up to 30-9-1976.

The assessing officer disallowed certain claims of the assessee. Details thereof are as under:

(i) Re: Excise Duty - It debited the amount to profit and loss account as excise duty payable but the amount was not actually paid till the date of assessment. The assessee took the plea before the authorities that the excise duty was not payable. The assessing officer disallowed deduction following judgments of the Honble Supreme Court in Chowringhee Sales Bureau (P.) Ltd. v. CIT (1975) 87 ITR 542 (SC) and Sinclaire Murray and Co. (P) Ltd. Vs. The Commissioner of Income Tax, Calcutta, . It was held that deduction could not be allowed unless the amount was actually paid. The judgment of the Honble Supreme Court in The Kedarnath Jute Mfg. Co. Ltd. Vs. The Commissioner of Income Tax, (Central), Calcutta, was held to have been modified on the ground that judgments in Chowringhee Sales Bureau (P.) Ltd. s case (supra) and Sinclair Murray & Co. (P.) Ltd. s case (supra) were later.

(ii) Re: Sales Tax - The assessee also claimed deduction in respect of sales tax payable. Out of the said amount, sales tax for the fourth quarter was actually paid after close of the year. The assessee was contesting the matter and on 3-9-1973, the Honble Supreme Court decided in assessees favour and the sales tax already paid was held to be refundable. The assessing officer disallowed the claim for deduction. The plea of the assessee that the amount was to be refunded to the customers was also rejected on the ground that the assessee had not actually refunded the said amount to the customers and if refund was made, the same could be allowed in the year in which it is actually refunded.

(iii) Re: Contributions to provident fund/superannuation fund/gratuity fund - The assessee also made a claim in respect of contributions to provident fund/superannuation fund/gratuity fund. EPF was set up with effect from 1-4-1973 but had not been approved by the Commissioner. The Staff Superannuation Fund was set up on 1-12-1976 with effect from 1-10-1975 and was approved with effect from 1-12-1976 i.e., after the close of the accounting period in question. The Staff Provident Fund was set up on 9-9-1971 with effect from 1-10-1970 which was approved but approval was later cancelled. The Gratuity Fund was set up with effect from 29-12-1975 which enjoyed approval of the Commissioner for the year. The assessing officer required the assessee to state whether effective arrangement for deduction of tax at source u/s 40A(5) of the Act had been made but the assessee did not reply to the said query, stating that all the conditions had been complied with. The assessing officer held that in trust deeds of the four funds, there was no mention of deduction of tax out of payments made from the said funds. It was held that since the assessee failed to comply with the provisions of Section 40(a)(iv), contributions to the funds during the year could not be allowed as deduction. It was further held that funds other than gratuity funds had not been approved for the year under consideration. Since the said funds were dealt with u/s 36(1)(iv) and (v), general provision of Section 37 could not be invoked.

(iv) Re: Perquisites u/s 40A(5) - The assessing officer also disallowed expenditure on employees which was considered to be perquisites for Section 40A(5), following its order in respect of assessment year 1976-77 which had been affirmed by the Commissioner (Appeals). The said items are rent paid for housing of servants of the directors, house maintenance expenses of directors, value of perquisites in the hands of employees, expenditure incurred on running/maintenance of one car in the hands of directors which had been given for personal use, wages paid to personal servants of employees, rent of garage of the car used for personal use, depreciation on assets used for personal use of the directors/employees, reimbursement of medical expenses and house rent paid to employees. In respect of house rent allowance, it was observed that the assessees appeal was allowed by Commissioner (Appeals) but the revenue had carried the matter to Income Tax Appellate Tribunal.

(v) Re: Commission paid to employees - The assessing officer also disallowed the claim for deduction in respect of commission paid to employees on the ground that the same could not be treated as part of salary for disallowance u/s 40A(5). The said amount was ex gratia payment without any commercial expediency.

(vi) Re: Cost of interest-free loan to director - Cost of interest-free loan provided to director Shri N. Nath was treated as perquisite.

(vii) Re: Telephone for personal use- Expenditure on telephones provided to employees of the company for personal use was disallowed u/s 40A(5)(a)(ii).

(viii) Re: Tiffins to workers and lunches to officers and Travelling expenses beyond Rule 6D - The assessing officer also disallowed amount spent for providing tiffins to workers and lunches to officers of the Delhioffice and factory. It was held that the expenditure was not for any commercial expediency. Part of the amount claimed for travelling expenses was disallowed, following assessment order for the previous year, beyond Rule 6D. This item included expenses on fare which was not for business expenses, on tour to Delhi though the HQ was at London, expenses on per trip basis.

(ix) Re: Payment to Chartered Accountant - The assessing officer also disallowed deduction in respect of payment made to AF Ferguson and Co., New Delhi, in connection with presentation of Income Tax return and case before Income Tax authorities in excess of statutory limit.

(x) Re: Travelling expenses - The claim of assessee for Rs. 10,000 towards travelling expenses was also disallowed in absence of details of travelling expenses incurred and time spent.

(xi) Re: Advertisement expenses - The claim of the assessee towards advertisement in souvenir of Indian National Congress and similar other expenditure on advertisement was disallowed in absence of production of souvenir or other proof.

The Commissioner (Appeals) partly allowed the appeal of the assessee in the following manner:

(a) Expenditure on maintenance of cars provided to S/Shri N. Nath and Tapedar was partly allowed to the extent of Rs. 8,500 on the ground that Shri Tapedar had used the car only for five months.

(b) Expenditure related to refreshments etc. to employees and staff was partly allowed to the extent of Rs. 6,000 on the ground that the said amount was referable to refreshments to business constituents. Reliance was placed on judgment of this Court in CIT v. Gheru Lal Bal Chand (1978) 111 ITR 134.

(c) Claim of the assessee for professional fees and expenses was partly allowed.

(d) Deduction in respect of excise duty and sales tax was allowed following judgments in Kedarnath Jute Mfg. Co. Ltds case (supra) and other judgments.

(e) Claim was partly allowed with regard to commission paid to S/Shri N. Nath and Shri Tapedar up to the limit u/s 40(c)/ Section 40A(5).

(f) Half of expenditure in connection with telephones installed at residence was allowed in absence of evidence that the telephones were used only for business and not for personal use.

(g) Claim of House Rent Allowance was allowed.

(h) Claim of the assessee for depreciation in respect of technical know- how was allowed.

The revenue as well as assessee preferred appeals before the Tribunal.

Dealing with the appeal of the revenue, the Tribunal partly set aside claim for deduction of excise duty to the extent it was beyond the provision made. Relief granted in respect of expenditure incurred on the car was also partly reduced.

Dealing with the appeal of the assessee, the Tribunal made following modifications:

(i) The assessee was entitled to deduction in respect of contribution as governed by the Employees Provident Fund Act.

(ii) The Tribunal allowed the claim of the assessee on expenditure on telephones on the ground that the phones were installed to enable the staff to attend to business after office hours and personal advantage was incident.

(iii) Claim for medical reimbursement was allowed.

(iv) The Tribunal allowed deduction on account of rent of garages and servant quarters.

(v) The Tribunal allowed the claim of the assessee on account of cost of interest-free loan on the ground that the same constituted negligible percentage of total borrowings of the assessee.

(vi) The Tribunal allowed the claim in respect of travelling expenses.

(vii) The Tribunal allowed the claim towards contribution to gratuity fund u/s 36(1)(iv).

(viii) The Tribunal allowed the expenditure on advertisement.

(ix) The Tribunal allowed the claim for contribution to gratuity fund which had been approved by the Commissioner.

We have heard learned Counsel for the parties and perused the record. Learned Counsel for the parties have also filed written notes, which we have perused. We now proceed to deal with the questions referred serial-vise.

Re: Q. No. (i)

Learned Counsel for the assessee submitted that the Staff Superannuation Fund was established vide trust deed dated 1-12-1976 with effect from 1-10-1975 which was granted recognition by the Commissioner vide order dated 30-12-1978 with effect from 1-10-1970. The deed was amended on 8-5-1980 inserting Rule 15A providing for deduction of tax at source and the said amendment was approved by the Commissioner vide order dated 21-7-1980 and thus, all statutory conditions of the Act were fulfilled.

Learned Counsel for the revenue relies on judgment of this Court in Commissioner of Income Tax Vs. Jamuna Auto Industries, wherein it was held that if approval of the Commissioner was subsequent, the deduction was not permissible for the period prior thereto. In the present case, the Commissioner granted recognition on 30-12-1978 with effect from 1-12-1976 i.e., after expiry of the period in question. The previous year of the assessee ended on 30-9-1976. Moreover, provision for deduction at source was made only on 8-5-1980. We may refer to the relevant finding recorded by the Tribunal in this regard, which is as under:

Having carefully considered the facts and the rival contentions, we hold that there is no merit in the assessees objection. The contribution cannot, in our view, come within the specific provisions contained in Section 36(1)(iv) of the Income Tax Act which speak of sums paid by an assessee as an employer by way of contribution towards a recognized provident fund or an approved superannuation fund, as stated therein except the Staff Provident Fund, and Employees Provident Fund, if it comes under the Employees Provident Fund Act, 1952. On the question as to whether the contributions are eligible for deduction notwithstanding the fact that the concerned funds do not stand approved or recognized, as required by Section 36(1)(iv), there is apparently conflict of view between the Madras High Court in CIT v. Carborandum Universal Ltd. relied on by die department in support of its stand and the Karnataka High Court decision in Additional CIT v. Karnataka State Ware-housing Corporation, relied on by the assessee in support of its stand. We might have accepted the assessees contention on the principle that if two views are reasonable on a question of law, the view that favours the assessee should be accepted but we find, that the provisions of Section 40(d)(iv) clearly stand in the way of the assessee. The provisions of this section are clear and specific and apply notwithstanding anything to the contrary in Sections 30 to 39. According to the provisions in this section, there is a ban on the deduction in computing the income chargeable under the head Business of any payment to a provident or other fund established for the benefit of the employees of the assessee, unless the assessee has made effective arrangements to secure that tax shall be deducted at source from any payments made from the fund which are chargeable to tax under the head Salaries. Admittedly, there was no provision made in the trusts as originally drawn up and which governed the fund during the relevant previous year. The subsequent amendment or modification of the trust deed cannot operate retrospectively and there was clearly no mechanism provided in the trust deed to secure deduction of tax at source in respect of payment chargeable to it. In the course of hearing, it was suggested that as there was an obligation under the Income Tax Act itself for deduction of appropriate tax from any payment chargeable to tax by the trustees of the fund, it must be assumed that effective arrangements were there. But this contention has no force and is repelled by the decision in HINDUSTAN COMMERCIAL BANK LTD. Vs. COMMISSIONER OF Income Tax, U.P., . Before parting with this ground, however, we would observe that so far as any of the contributions or any part thereof are governed by the Employees Provident Fund Act under which there is a statutory obligation to make the contributions irrespective of any fund by the assessee being established, the consideration stated above will not govern to defeat the claim for deduction and it would be, therefore, necessary for the departmental authorities to ascertain the extent of the contributions governed by the Employees Provident Fund Act and allow the deduction in respect thereof. Subject to these observations, we uphold the disallowance in respect of these items.

In Jamuna Auto Industries case (supra), the question for consideration was whether the assessee was entitled to deduction in respect of contribution to gratuity fund. The question was answered in favour of the revenue and against the assessee. It was held that provision for future use by the assessee was not allowable unless the case was covered u/s 40A(7) which required approval of the fund and other statutory conditions are fulfilled. In that case, the conditions were fulfilled after the assessment which could not relate back to the assessment year in question.

Following the judgment of this Court in Jamuna Auto Industries case (supra) we answer the question in favour of the revenue and against the assessee.

Re: Q. No. (ii)

Learned Counsel for the revenue submitted that reasoning applicable to question No. (i) is applicable to question No. (ii).

Submission on behalf of the assessee is that the trust deed was established on 9-9-1971 and was granted recognition vide order dated21-2-1972 which was withdrawn on 31-10-1979. The trust deed was amended by adding Rule 17A for deduction of tax at source and thereafter, recognition was granted on 14-3-1980.

We find merit in the contention raised on behalf of the revenue. Recognition to the fund had been withdrawn and having regard to these facts, the Tribunal decided the issue against the assessee for the reasons already quoted.

Accordingly, this question is answered against the assessee and in favour of the revenue.

Re: Q. No. (iii)

On behalf of the assessee, it has been conceded that value of perks provided to the director in the form of user of companys car was required to be valued as per Rule 3(c)(ii) of the Income Tax Rules, 1962 which had not been done. In view of judgment of the Honble Supreme Court in Commissioner of Income Tax, Bombay City-III, Bombay Vs. British Bank of Middle East, this question is answered against the assessee and in favour of the revenue.

Re: Q. No. (iv)

Contention raised on behalf of the revenue is that the Tribunal erred in permitting deduction for user of the car for personal use without recording any finding about the period the car was used for business purpose.

Finding of the Tribunal is as under:

...On the facts stated above there can be no objection to the relief of Rs. 8,500 allowed by the learned Commissioner since the disallowance of Rs. 30,000 on the basis that Shri Tapedar used the car for the entire year was obviously incorrect. There is nothing wrong in the order of the learned Commissioner as he has, on his own calculation held that the disallowance should be taken at Rs. 21,500 against Rs. 30,000 for the entire year. This is,however, subject to the decision in quantum that may be taken in the assessees appeal.

We are of the view that the finding of the Tribunal is a finding of fact and though, it has not been expressly so stated, the assumption underlying the finding that to the extent deduction was allowed, the car was used for business purposes. This question is, thus, answered against the revenue and in favour of the assessee.

Re: Q. No. (v)

On behalf of the assessee, it has been fairly stated that this question has to be answered against the assessee in view of Explanation II to Section 37(1) of the Act inserted by Finance Act, 1983 with effect from 1-4-1976.

21.Accordingly, the question is answered against the assessee and in favour of the revenue.

Re: Q. No. (vi)

This question has not been pressed on behalf of the assessee and the same is, thus, answered against the assessee and in favour of the revenue.

Re: Q. Nos. (vii) & (viii)

Learned Counsel for the revenue submitted that the Tribunal erred in following the judgment of the Apex Court Kedarnath Jute Mfg. Co. Ltd. s case (supra) by assuming that excise duty had accrued while no liability had accrued towards excise duty. Reliance has been placed inter alia on judgment of the Honble Bombay High Court in Commissioner of Income Tax Vs. Morarji Goculdas Spinning and Weaving Co. Ltd., .

It has been stated on behalf of the assessee that to put an end to litigation, question Nos. (vii) and (viii) may be answered against the assessee and in favour of the revenue.

Accordingly, we answer question Nos. (vii) and (viii) against the assessee and in favour of the revenue.

Re: Q. No. (ix)

This question has not been pressed on behalf of the assessee and the same is, thus, answered against the assessee and in favour of the revenue.

Re: Q. No. (x)

The finding of the Tribunal on the said question is as under:

13 Referring to these facts, it was urged that the payment was made to the Sr. Executive Officers, over and above, the contractual salary and it was admissible in view of Supreme Court decision in the case of Shahzada Nand and Sons Vs. Commissioner of Income Tax, Patiala, since the genuineness of the payment to the various employees had not been doubted. The learned Commissioner found force in the argument of the assessees counsel and except for Rs. 13,500 paid to the two Directors which could not be allowed in view of Section 40(c) and Section 40A(5), the remaining amount of Rs. 81,000 was allowed as a deduction. The position remains the same before us. It does appear that the commission of Rs. 81,000 was paid to the Sr. Executive Staff, over and above, the salary payable to them. It was thus a payment made by the employer to the employees in consideration of the services rendered. As held in Shahzada Nands case Section 36(1)(ii) of the Income Tax Act, 1961 does not postulate that there should be any extra services rendered by an employee before payment of commission to him can be justified as an allowable expenditure. If the services were, in fact rendered by the employee, it is immaterial that the services rendered by the employee was in no way greater or more onerous than the services rendered by him in the earlier years. This being the position and the reasonableness of the amount not having been doubted by the authorities below and the genuineness of the payment having been accepted, we feel that the learned Commissioner (Appeals) rightly allowed the assessees claim for Rs. 81,000. Before closing, it must be mentioned that the payment was clearly for commercial expediency since it was made to the Sr. Executive Staff in order to compensate them for the bonus which was being paid in the earlier years so that no hardship is caused to these responsible officials of the company as a result of the fall in their total emoluments. We uphold the decision of the learned Commissioner on this point.

For the reasons given by the Tribunal, we are of the view that the assessees claim was rightly allowed. The question is, thus, answered against the revenue and in favour of the assessee.

Re: Q. No. (xi)

Finding of the Tribunal on this issue is as under:

On a consideration of the facts and the rival contentions, we are satisfied that the order of the Commissioner (Appeals) does not require interference. Undisputedly, the amounts under dispute are clearly beyond the overall limit of Rs. 72,000 governed by Section 40(c) of the Income Tax Act, which, it is not disputed, would govern the payment of remuneration to the two directors. It is not the assessees case that these amounts of commission were due to the two directors on account of any technical or professional or other services rendered in any totally different capacity, from the capacity of a director. The term remuneration in our view, clearly contemplates all payments by way of salary, bonus etc., due for services as a director and it includes commission as well. The limit prescribed by Section 40(c) governs the totality of all payments by whatever name called in respect of services contemplated or required to be rendered in the capacity of director. We, therefore, reject the assessees contention in this connection.

On behalf of the assessee, it is pointed out that the said question was gone into by this Court for the earlier assessment year in judgment Commissioner of Income Tax Vs. Porrits and Spencer (A) Ltd., .

On behalf of the revenue, it is pointed out that in that case, there was no finding of the Tribunal that the commission paid to the employees was in the nature of salary and thus covered by Section 40A(5). In the present case, the Tribunal has recorded a finding against the assessee which finding has not been shown to be perverse. Moreover, it has not been disputed on behalf of the assessee that in Gestetner Duplicators (P.) Ltd. v. CIT (1979) 117 ITR 12 (SC), the Honble Supreme Court held that the commission paid to an employee is to be treated as salary for purposes of Section 40A(5).

Accordingly, we hold that the Tribunal was right in directing that the commission paid to executive staff be treated as salary for purposes of Section 40A(5).

Accordingly, the question is answered in favour of the revenue and against the assessee.

Re: Q. No. (xii)

Learned Counsel for the revenue referred to amendment made vide Act 10 of 1981 to the Haryana General Sales Tax Act, whereby Entry XIV of Schedule B was amended and the product was added as taxable retrospectively with effect from 26-4-1971 up to 6-9-1978. Though, the Honble Supreme Court had earlier given a different interpretation by which the assessee was held not liable to sales tax and the amount of sales tax was not liable to sales tax but the Tribunal still allowed the assessee to deduction in respect of the assessment year in question on the ground of liability having accrued but in view of amendment, liability of the assessee having been duly crystallised, the finding of the Tribunal has to be upheld and the question has to be answered against the revenue and in favour of the assessee.

Accordingly, we decided the question in favour of the assessee and against the revenue.

Re: Q. No. (xiii)

On behalf of the assessee, it was submitted that the Employees Provident Fund was established vide trust deed dated 1-4-1973 but the Commissioner refused to accord recognition vide letter dated 29-12-1979. Subsequently, recognition was granted vide order dated 27-2-1980/6-3-1980 with effect from 7-6-1979. Thereafter, the rules were amended on 2-4-1980 providing of deduction of tax at source and on 25-8-1981, direction to grant recognition with effect from 1-4-1973 was issued and recognition was granted on 28-11-1981 with effect from 1-4-1973.

Learned Counsel for the revenue submitted that during the accounting year in question, provision for deduction at source did not exist and approval granted subsequently could not relate back.

Since we have dealt with the issue in question No. (i), applying the same reasons, this question is also answered in favour of the revenue and against the assessee.

Re: Q. No. (xiv)

Learned Counsel for the revenue submitted that the answer to this question depends on the question whether expenses on telephone were incurred for business purposes or otherwise.

The Tribunal has not recorded any express finding that the expenditure was for business purposes. The finding of the Tribunal is as under:

27.... In the absence of any material before us to show that either the assesseewas obliged to provide telephone facility to the executive for their personaluse under the terms of their agreement of employment or that the telephones were so provided only to benefit the employees and not for the purpose of the assessees business, we must uphold the claim of the assessee. We, accordingly, delete the disallowance in this connection.

We have dealt with an identical issue while adjudicating upon question No. (iv) and for the reasons given therein, we decide this question against the revenue and in favour of the assessee.

Re: Q. No. (xv)

On this issue, the finding of the Tribunal is as under:

17-- Before the learned Commissioner (Appeals) it was urged that the learned Inspecting Assistant Commissioner was not right in law in treating the said expenditure as a perquisite since the telephone was installed at the residence of the Directors and the senior employees for the purpose of business and further more it was not an asset belonging to the assessee-company and hence, the provisions of Section 40A(5)(a)(ii) could not be applied. The learned Commissioner, however, could not agree as he noticed that the aforementioned provision of Section 40A(5) had two limbs. Firstly, it covered expenditure resulting directly or indirectly in the provision of any perquisite to an employee and secondly it covered expenditure incurred directly or indirectly in respect of any asset of the assessee used by the employee wholly or partly for his private purpose. The second limb, the learned Commissioner found, did not apply in the present case since the telephone was not an asset belonging to the company but the first limb became applicable as provision of the telephone, even if it was not the companys asset, was a benefit or amenity provided to the Director or the employee and, therefore, it could be treated as a perquisite and the value thereof could be included in the perquisites for the purpose of Section 40A(5). On estimate the learned Commissioner held that 50 per cent of the expenditure could be treated as perquisite. We have no reason to disturb the estimate of the learned Commissioner. This is subject to the decision in quantum that may be taken in the assessees appeal.

Following our decision on question No. (xiv), we answer this question in favour of the assessee and against the revenue.

Re: Q. No. (xvi)

Learned Counsel for the assessee fairly stated that the matter is covered in favour of the department by judgment of the Honble Supreme court in British Bank of Middle Easts case (supra) and judgment of this Court in the case of the assessee in Commissioner of Income Tax Vs. Porritts and Spencer (Asia) Ltd., .

Accordingly, this question is answered against the assessee and in favour of the revenue.

Re: Q. No. (xvii)

Learned Counsel for the assessee relies upon judgment of the Honble Supreme Court in Commissioner of Income Tax, Bombay, etc. Vs. M/s. Mafatlal Gangabhai and Co. (P) Ltd., , wherein it was held that reimbursement to an employee was not covered u/s 40A(5) providing for disallowance in respect of payment made to third party to discharge any obligation of the employee.

Learned Counsel for the revenue has not been able to distinguish the said judgment or its applicability to the present case.

Accordingly, we decide this question against the revenue and in favour of the assessee.

Re: Q. No. (xviii)

On this issue, the finding of the Tribunal is as under:

... So far as the provision of garage is concerned, we agree with the assessee that it would not result in any benefit or perquisite to the employees concerned so as to attract the disallowance of Section 40A(5) if the car is the property of the employer or owned by it and, therefore, it is in its own interest that the garage is provided for keeping the car. So far as their accommodation personal servants of the executives are concerned, here also, we do not think the provision of any accommodation to them would result in any perquisite or benefit to the executives if the servants are employees of the employer-company and not employed by the executives themselves as the own servants....

In view of above finding, we decide the question against the revenue and in favour of the assessee.

Re: Q. No. (xix)

On this issue, the finding of the Tribunal is as under:

38.... It cannot, therefore, be held that the borrowing was not for the purpose of the assessees business but for advancing the loan to Shri Nath. Even otherwise it cannot be denied that small financial accommodation provided to a Director or employee can be considered to be in the interests of businessas a matter of commercial or business prudence and so can be treated as for the purpose of the assessees business. This is particularly because it is seen that the amount of loan advanced to Shri N. Nath is a negligible percentage of the total borrowings reflected in the month-wise figures of bank balances including the overdrafts detailed at page 184 of the paper book compilation filed by the assessee. There is, therefore, according to us, no basis for holding that any sum was borrowed by the assessee specially for the purpose of advancing loan to Shri N. Nath, a Director.

Learned Counsel for the assessee relied upon judgment of the Honble Supreme Court in V.M. Salgaocar and Bros. Pvt. Ltd. Vs. Commissioner of Income Tax, , wherein it was held that giving of interest-free loan to any employee was not covered by the provision of disallowance u/s 40A(5).

Learned Counsel for the revenue is unable to dispute the applicability of the judgment of the Honble Supreme Court. He, however, relied upon judgment of this Court in CIT v. Abhishekh Industries Ltd. (2006) 286 ITR 12 (P&H) wherein it was held that the assessee was not entitled to deduction for interest paid on loans taken by it to the extent the amount was given to sister concerns for non-business purposes. The said judgment is distinguishable in the context of the question referred i.e., applicability of Section 40(c) of the Act to the said benefit.

In view of judgment of the Honble Supreme Court in V.M. Salgaocar & Bros. (P.) Ltd. s case (supra), we answer the question against the revenue and in favour of the assessee.

Re: Q. No. (xx)

Learned Counsel for the revenue submitted that expenditure incurred by the assessee on travelling expenses was subject to the limit laid down in Rule 6D(2)(b). The Tribunal decided the issue against the revenue merely on account of finding in the earlier year which was not challenged. He submitted that not challenging finding in an earlier year was not always a bar unless such action was shown to be mala fide. He relied upon recent judgment of the Honble Supreme Court in C.K. Gangadharan and Another Vs. Commissioner of Income Tax, Cochin, .

Learned Counsel for the assessee submitted that in view of judgment of the Honble Supreme Court in Berger Paints India Ltd. v. CIT (2004) 266 ITR 994 (SC), the finding of the Tribunal is correct.

In view of subsequent judgment of the Honble Supreme Court in CK. Gangadharans s case (supra), we answer the question in favour of the revenue and against the assessee.

Re: Q. No. (xxi)

Finding of the Tribunal on this issue is as under:

On a consideration of the facts and the submissions of the parties, we find substantial merit in the assessees claim that the relevant provisions of Section 36(1)(iv) clearly authorize deduction on the basis of actual payment and as there is no dispute that the payment has been made during the relevant year, we direct deduction of the amount in computing the assessees income,...

In view of finding of the Tribunal, which has not been shown to be erroneous by the revenue, we decide the question against the revenue and in favour of the assessee.

Re: Q. No. (xxiii)

It was pointed out on behalf of the assessee that the said question is covered by judgment of this Court in the case of the assessee in the earlier assessment year Porritts & Spencer (Asia) Ltd. v. CIT 1999 180 ITR 211 (P&H), which has been further followed by this Court in the case of the assessee in Commissioner of Income Tax Vs. Porritts and Spencer (Asia) Ltd., .

In view of earlier judgments of this Court, the question is answered in favour of the assessee and against the revenue.

Re: Q. No. (xxiv)

On behalf of the assessee, it has been pointed out that the trust deed is dated 29-12-1976 with effect from 1-10-1973 and was granted recognition by the Commissioner on 29-12-1975. It has, however, not been disputed that the requirement of Section 40(a)(iv) was not involved as there was no provision of deduction of tax at source.

In view of finding recorded by us in reply to Question No. (i), this question is answered against the assessee and in favour of the revenue.

The reference will stand disposed of accordingly.