The Commissioner of Income Tax-3 vs Indian Rayon and Industries Ltd.

D.Y. Chandrachud, J.—The registry is directed to number the appeal. Upon the Notice of Motion for restoration being allowed, the appeal has been taken up for admission by consent and at the request of the learned Counsel. The appeal is accordingly called out for hearing. The office objections are waived.

In this appeal by the Revenue u/s 260A of the Income Tax Act, 1961 eight questions of law have been formulated, these being as follows:

A. Whether in the facts and circumstances of the case and in law the ITAT was right in upholding deletion of the disallowance / addition of Rs. 6,86.186/- under Rule 6B r/w Section 37(1), in respect of expenditure on gift & presentation articles;

B. Whether in the facts and circumstances of the case and in law the ITAT was right in upholding the deletion of the disallowance / addition of Rs. 3,56,541/being 25% of total entertainment expenditure of Rs. 14,26.165/-, incurred on Hotels in entertaining visitors accepting the assessee''s claim for the aforesaid 25% expenditure as the same pertaining to employees who accompanied the visitors;

C. Whether in the facts and circumstances of the case and in law the ITAT was right in upholding the deletion of the disallowance of assessee''s claim for deduction of pro-rata / proportionate premium on redemption of non-convertible debentures, issued during AY 88-89, to the extent of Rs. 44,44,444/- (being 1/9th of Rs. 4 Crores);

D. Whether in the facts and circumstances of the case and in law the ITAT was right in upholding the deletion of the disallowance of assessee''s claim for investment allowance of Rs. 43,380/-, being 20% of Rs. 2,16,900/-, the valuation of computer system, installed in AY 90-91 but put to use in AY 91-92;

E. Whether in the facts and circumstances of the case and in law the ITAT was right in upholding deletion of the disallowance / addition of Rs. 1,88,579/-, being 25% of total entertainment expenditure of Rs. 7,54,316/-, incurred on Sales Dealers Conference/ Press Conference, u/s 37(2A), accepting the assessee''s plea that the said 25% pertained to employees who accompanied the visitors;

F. Whether in the facts and circumstances of the case and in law the ITAT was right in deleting the disallowance of expenditure of Rs. 2,23,400/-, incurred by assessee on payment to Indrayon School, made by AO u/s 40A(9) of IT Act;

G. Whether in the facts and circumstances of the case and in law the ITAT was right in deleting the disallowance of Rs. 6,89,881/-, being roll over charges/ expenditure paid to banks in respect of repayment of principal amount of foreign exchange loans taken for capital investments;

H. Whether in the facts and circumstances of the case and in law the ITAT was right in deleting the disallowance of deduction for and addition back of Rs. 18,08,295/-, being unclaimed credit balances unilaterally written back (credited to Profit & Loss Account);

The appeal in this case arises out of a common order passed by the Income Tax Appellate Tribunal for Assessment Years 1991-92 and 1992-93.

Each of the questions as formulated can be taken up for discussion separately. Question G is taken up initially since for the reasons indicated hereafter, the appeal would have to be admitted and allowed only qua that question.

Re-question G:

During the course of the hearing of the appeal, the attention of the Court has been drawn to the judgment of the Supreme Court in Assistant Commissioner of Income Tax, Vadodara v. Elecon Engineering Co. Ltd. 2010 (2) Scale 653. It is common ground between counsel appearing on behalf of the Revenue and counsel appearing on behalf of the assessee that the assessee had paid a sum of Rs. 6.89 lacs to the bank as roll over charges for repayment of the principal amount of foreign exchange loans taken for capital investments in its High Tech division. This statement of fact also appears in the original order of assessment dated 30th March, 1994, pertaining to Assessment Year 1991-92. In view of the factual position, the issue would be covered against the assessee by the judgment of the Supreme Court in the case of Elecon Engineering. This position is fairly not disputed on behalf of the assessee. In view of the aforesaid position, the contention of the Revenue insofar as this ground is concerned would have to be accepted and the Appeal would have to be allowed to that extent. The question of law raised in question G is accordingly answered in favour of the Revenue and against the assessee.

Re-question A:

The Tribunal has answered the issue which is raised by the Revenue by following the judgment of this Court in the case of Commissioner of Income Tax Vs. Allana Sons Pvt. Ltd., . Besides this the Tribunal had also adopted the same view in favour of the assessee for Assessment Year 1990-91. In these circumstances, question A does not raise any substantial question of law.

Re-questions B and E:

The CIT (A) held that 25% of the expenses incurred in hotels on entertainment is a reasonable percentage which could be considered to be pertaining to the employees of the assessee company. The Tribunal noted that this was the consistent view taken by the Tribunal itself and in view thereof found no reason to interfere with the order of the CIT(A).

Sub-section 2A of Section 37 provides inter alia that no allowance shall be made in respect of so much of the expenditure in the nature of the entertainment expenditure incurred by any assessee during any previous year expiring on 30th September or after 30th September, 1967 as is in excess of the aggregate amount stipulated therein. Explanation 2 came to be inserted into the provisions of Section 37 with effect from 1st April, 1977 in order to provide that entertainment expenditure includes expenditure on the provision of hospitality of every kind by the assessee to any person whether by way of provision of food or beverages or in any other manner whatsoever whether it is by reason of a contract express or implied or a custom or usage of trade. However, that would not include expenditure on food or beverages provided by the assessee to his employees in an office, factory or "other place of their work".

The expression "other place of their work" has been construed in several judgments including of a Division Bench of the Calcutta High Court in Commissioner of Income Tax Vs. Chemcrown (India) Ltd., . The Calcutta High Court held that this expression would include any place where an employee of the assessee is asked to perform his work in connection with the business of the employer. In other words, the expression is not limited to expenditure on food and beverages provided to employees including any expenses either in the regular course or at the normal place of work or by way of the terms of employment or otherwise. A seminar which was held at a place outside the office or the factory for the business of the assessee, for demonstrating or imparting training to the employees to acquire skill and expertise for sales promotion was regarded as a seminar held at work.

In the present case, the contention of the Revenue was that the entire expenditure that was incurred represented entertainment expenditure and hence had to be disallowed. The Tribunal has restricted the disallowance to 75% of the expenditure incurred by the assessee treating the balance of 25% as a reasonable estimate of what was incurred by the assessee for its own business. As a matter of principle no fault can be found with the order of the Tribunal in view of the fact that Explanation 2 to Section 37 specifically excludes expenditure on food or beverages provided by the assessee to employees inter alia at an office, factory or other place of work. The expenditure incurred by the assessee to the extent of 25% of the overall expenditure in question could legitimately be regarded as a fair estimate of what was incurred by the assessee for its employees at a place of work. Thus construed, the finding of the Tribunal would not raise any substantial question of law.

Re-question C:

Counsel appearing on behalf of the Revenue has fairly stated that the issue stands covered against the Revenue by the judgment of the Supreme Court in M/s. Madras Industrial Investment Corporation Ltd. Vs. The Commissioner of Income Tax, Tamil Nadu-I, Madras, . As a matter of fact, the Tribunal has followed the aforesaid decision. Consequently, no substantial question of law arises.

Re-question D:

Counsel appearing on behalf of the Revenue has stated that the issue is covered against the Revenue by the judgment of this Court in Commissioner of Income Tax Vs. Emirates Commercial Bank Ltd. (now known as Abu Dhabi Commercial Bank Ltd.), . In view of the statement, no substantial question of law would arise.

Re-question F:

The Tribunal has followed its judgment in the case of the assessee for Assessment Year 1990-91. The judgment of the Tribunal for Assessment Year 1990-9 1 in turn relies upon the Tribunal''s judgment in the case of the assessee for Assessment Year 1988-89. In its decision rendered on 14th February, 2006 for Assessment Year 1988-89, the Tribunal noted that the assessee had contributed to a school at Veraval which existed mainly for children of the staff and workers of the assessee. During the course of Assessment Year 1987-88 the assessee stated that a note had been furnished to the Assessing Officer pertaining to this claim. The Tribunal had remitted the issue to the Assessing Officer for fresh consideration. In his order dated 29th January, 2004 the Assessing Officer allowed the claim of the assessee. In view of the factual background which has been noted earlier, a finding of fact has been recorded for Assessment Year 1988-89 which has now attained finality. In that view of the matter, we do not consider that this issue would raise any substantial question of law.

Re-question H:

The appeal would have to be admitted on the question of law framed by the Revenue under this head. The appeal is admitted on this question alone.

The Tribunal has followed its order for Assessment Year 1990-91. That apart, in Commissioner of Income Tax, Calcutta Vs. Sugauli Sugar Works P. Ltd., , the Supreme Court affirmed the law laid down in a judgment of this Court in J.K. Chemicals Ltd. Vs. Commissioner of Income Tax, Bombay City-II, where the Division Bench has held as follows:

The transfer of an entry is a unilateral act of the assessee, who is a debtor to its employees. We fail to see how a debtor, by his own unilateral act, can bring about the cessation or remission of his liability. Remission has to be granted by the creditor. It is not in dispute, and it indeed cannot be disputed, that it is not a case of remission of liability. Similarly, a unilateral act on the part of the debtor cannot bring about a cessation of his liability. The cessation of the liability may occur either by reason of the operation of law, i.e., on the liability becoming unenforceable at law by the creditor and the debtor declaring unequivocally his intention not to honour his liability when payment is demanded by the creditor, or a contract between the parties, or by discharge of the debt- the debtor making payment thereof to his creditor. Transfer of an entry is neither an agreement between the parties nor payment of the liability....

The Supreme Court held that the principle that the expiry of the period of limitation prescribed under the Limitation Act would not extinguish the debt but, would only prevent the creditor from enforcing the debt, has been well settled. If that principle were to be applied, a mere entry in the books of account made unilaterally without any act on the part of the creditor was held not to entitle the debtor to say that the liability has been extinguished. In the circumstances, Section 41(1) was held not to be attracted.

Counsel appearing on behalf of the Revenue has sought to place reliance on an earlier judgment of the Supreme Court in Commissioner of Income Tax, Madurai Vs. T.V. Sundaram Iyengar and Sons Ltd., . The decision in Sundaram Iyengar''s case is distinguishable. In that case, monies were received by the assessee in the course of carrying on its business. Although the receipt of these monies was treated as a deposit and was of a capital nature when it was received, the money had by efflux of time become the assessee''s own money. What remained after making adjustments had not been claimed by the customers. The claims of the customers had become barred by limitation. In these circumstances, the assessee having treated the money as its own money and having transferred it to the profit and loss account, the Supreme Court held that the amount representing unclaimed credit balances would be treated as the assessee''s income and was liable to be taxed. The decision in Sundaram Iyengar''s case consequently rested on these specific facts. On the other hand the subsequent decision in Sugauli Sugar Works specifically deals with the issue in hand and would cover the case against the Revenue. Hence, no substantial question of law would arise.

The appeal shall stand allowed to the aforesaid extent confined to question G which is answered in favour of the Revenue and against the assessee.

In the circumstances, there shall be no order as to costs.