TaxTMI 
TaxTMI 
2006 (7) TMI 260
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....rt, export, lease or distribution, license, design, manufacture of any computer machines, etc. During the previous year relevant to the assessment year under consideration, the assessee filed return of its income declaring loss of Rs. 1,43,30,330. The return was filed on30th Nov., 1997. It was processed under s. 143(1)(a) vide intimation dt.30th July, 1998. The case was, thereafter, selected for scrutiny assessment. While completing the assessment under s. 143(3), the AO worked out the income at Rs. 7,73,98,544 after making certain additions and disallowances. The additions/disallowances made by the AO were challenged before the learned CIT(A). On some items the learned CIT(A) sustained the disallowances and on others he gave some relief. The order of the learned CIT(A) is dt.24th Oct., 2000. On the items on which the learned CIT(A) sustained the disallowance, the assessee has preferred appeal for challenging the same whereas against the items on which the learned CIT(A) gave relief, the Department has come in appeal for challenging the deletion of additions. In the setting of above background, we proceed to decide the issues involved in these two appeals. Ground No. 1 of assess....
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....capital expenditure, is also spread over the estimated period over which the benefit is likely to last. Accordingly, the expenditure is spread over five years for the reasons discussed above and in detail in the assessment order for asst. yr. 1996-97. This will result in disallowance of Rs. 1,39,65,037 on this account. This has been calculated after taking into consideration the expenditure attributable to advertisement and publicity, trade shows and literature aggregating at Rs. 1,74,56,291.Disallowance: Rs. 1,39,65,033." 4.2. The assessee challenged the addition of Rs. 1,39,65,033 before the learned CIT(A). On going through the assessment order and other record, the learned CIT(A) felt that neither the assessee nor the AO has properly worked out the details of the expenses under the head "Advertisement and publicity, trade shows", etc. He also blamed the auditors for not taking pains in identifying the expenses under various heads properly. After making detailed reference to the directions for asst. yr. 1996-97 and after producing paras 5.2, 5.3 and after reproducing para 5 of his order for asst. yr. 1996-97, he undertook the exercise of identifying expenses and for that purpo....
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....nbsp; 9,60,936" --------- 4.6.1 So far as the disallowance of Rs. 1,39,65,033 made by the AO in view of his observations, reproduced above, is concerned, the learned CIT(A) did not find any basis for the same and deleted the same. However, he clarified that the disallowance out of entertainment expenses made by the AO at Rs. 5,68,610 is not included in the disallowance of Rs. 9,60,936 sustained by him. We consider it proper to reproduce the observations and directions of the learned CIT(A) on this issue which are as under: "On examining the details of other expenses filed by the assessee, which were called for as per the notice under s. 251(2), I have not been able to identify any further disallowance expenses. It is clarified that in para 5.1.3, i.e., on p. 8 of the assessment order....
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....other expenditure for business promotion was also incurred. He also pointed out that the AO neither doubted the genuineness of the expenditure nor required the assessee to verify the same. The AO, according to him, had accepted that the expenditure was allowable being revenue expenditure but, under a wrong notion, he thought that the assessee was likely to derive the benefit of this huge expenditure over a number of years and thus mechanically concluded that it was deferred revenue expenditure. 4.10 The learned counsel also assailed the working of the learned CIT(A). According to him, the learned CIT(A) took pains in identifying the expenditure under the head "Entertainment expenses", but in fact he pointed out that these expenses were not for entertainment and were really for promoting the business of the assessee because the assessee had incurred the expenditure for promoting its business and for promoting sales, etc. In support of his submissions, the learned counsel placed heavy reliance" on the ratio of decision of Hon'ble Punjab & Haryana High Court in the case of CIT vs. Indo Asian Switch gears (P) Ltd. (1997) 137 CTR (P&H) 9 : (1996) 222 ITR 772 (P&H). He also made refer....
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....per cent of the gross expenses as per the decision of Delhi High Court in the case of CIT vs. Expo Machinery Ltd. (1992) 107 CTR (Del) 4 : (1991) 190 ITR 576 (Del)." 4.13 The learned counsel for the assessee further pointed out that in asst. yr. 1996-97 while carrying out the similar directions of the learned CIT(A), the AO had recomputed the entertainment expenses and. had considered this plea of the assessee. In this regard our attention was invited to the assessment order for asst. yr. 1996-97 passed under s. 250 and s. 143(3) of the IT Act dt.24th Nov., 2000, available at pp. 138 to 140 of the paper book. 4.14 We have carefully considered the entire material on record and the rival submissions. So far as the act of identification of entertainment expenses is concerned, we find that the learned CIT(A) issued a detailed notice to the assessee in which he has even made reference to the expenses under the head "Trade shows" and expenditure incurred on sponsoring various events. The assessee in compliance to the notice submitted the details which have also been examined by the learned CIT(A). Thus, the learned CIT(A) has adopted a very scientific and systematic approach in ide....
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.... of employees' participation shall be reduced from the total amount of Rs. 18,96,440 and thereafter the statutory deduction, etc. shall be allowed. In view of the above, we set aside the finding of the learned CIT(A) on this point and direct the AO to recompute the disallowance of entertainment expenses under the head 'Trade shows' and 'advertisement' in the light of our observations made above. While doing so, the AO shall give full opportunity to the assessee of being heard and shall decide the matter as per law. Ground is allowed for statistical purposes and is disposed of as above. 4.16 So far as the grievance of the Department in its ground No.2, as reproduced above, is concerned, the Department has challenged the deletion of disallowance of Rs. 1,39,65,037. We have already reproduced the observations of the learned CIT(A) in para 5.6 of his order. 4.17 The learned Departmental Representative has challenged the approach of the learned CIT(A). His main contention was that the learned CIT(A) was not justified in calling the details from the assessee at the appellate stage and in deciding the matter on the basis of such details. The learned Departmental Representative, ther....
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.... in the nature of entertainment but on account of business necessity and expediency. The assessee had shown these expenditures under two heads namely, "Dealers' conference expenditure" and "Sales promotion expenditure" in the asst. yr. 1975-76 and under the second head, as aforesaid, in the next two years. Obviously, such expenditures do not fall within the ambit of s. 37(2A) of the Act. The nature and purpose of expenditure distinctly establish that expenditure on food and light refreshment was for the advancement of business and for advertisement and publicity of the goods manufactured by the assessee. Question No. 3 in the asst. yr. 1975-76 and question No. 2 in the next two assessment years are answered in the negative and in favour of the assessee." 4.20 In the case of Associated Marketing Agencies vs. ITO, the Madras Bench of the Tribunal has observed that since the main purpose of the conference is for retaining the presence of the dealers throughout the conference, provision of lunch and dinner is to be made perforce and therefore such expenditure will not call for disallowance. 4.21 In the case of Ravi Marketing (P) Ltd. vs. CIT, the Hon'ble Calcutta High Court has o....
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.... expenditure, which was incurred by the assessee was not high or lavish. The expenditure having not been incurred for giving any lavish parties, it could not be considered to be an expenditure incurred for entertainment. It was therefore, admissible." 4.25 In another case, i.e., Sarda Plywood Industries Ltd. vs. CIT, the Hon'ble Calcutta High Court has gone to the extent of observing that it is not for the Department to consider whether commercial expediency justified the expenditure. In that case disallowance of Rs. 25,000 out of expenditure incurred on sponsoring a horses race and of Rs. 25,000 out of expenditure on sponsoring a golf competition by the appellant-company for publicity of its products was held to be justified. 4.26 In the case of CIT vs. Eskaps (I) Ltd., the same Hon'ble High Court has also observed that where hospitality is undertaken solely with the object of promoting the business, the expenditure was not disqualified because the nature of the activity necessarily involved some other result. It was held that it is not in the nature of entertainment expenditure within the meaning of s. 37(2B) of the IT Act. 4.27 The Hon'ble Kerala High Court in the case ....
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....ts and customers of the company and the expenditure which is incurred on food, etc. of the employees is expressly excluded by virtue of the provisions of s. 37(2A), Expln. 2, it is a finding of fact as to whether any part of the expenditure of Rs. 1,55,003 was incurred on the food, etc. of the employees. This finding of fact has been answered in favour of the assessee. It is necessary in such a case that certain amount of estimate has to be resorted to. The Tribunal has estimated such expense as 35 per cent which cannot be said to be unreasonable and, in any case, this estimate is also a question of fact. The expense on the eatables of the employees which is excluded from the purview of s. 37(2A) includes expense which is incurred, inter aha, at the place of work of the employees. When the employees are having their food along with the company's customers in a hotel, in discharge of their official duties, the employees are taking food while at work because it is their work and duty to entertain the customers of the company. Therefore, wherever any expenditure is incurred on the food and beverages of the employees at the time when they are working would obviously be excluded from th....
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....were business expenses and not entertainment expenses. The learned counsel also placed reliance on the ratio of decision of Hon'ble Delhi High Court in the case of Expo Machinery Ltd. and submitted that a deduction of 35 per cent may be allowed against these expenses as being expenses incurred on food and beverages which were attributable to the participation of employees. The learned CIT(A) after making reference to the direction on similar issue in asst. yr. 1996-97 made disallowance of 50 per cent by observing as under: "As the facts are similar, to my mind, it would be in the fitness of things if 50 per cent of these expenses are attributed to providing food and beverages to the participants other than expenses incurred on food and beverages provided to the employees: Out of business promotion 99,570 Out of business conference 53,568 &n....
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....cted being not pressed. 7. Ground No. 4 (assessee's appeal): This ground challenges the disallowance of Rs. 5,13,000 on account of donations. The assessee had debited a sum of Rs. 5,13,000 on account of donations. The AO did not accept the claim of the assessee and disallowed the same. 7.1 In appeal, the learned CIT(A) has upheld the action of the AO by observing as under: "10.4. I have carefully considered the matter. I am afraid the learned Authorised Representative's arguments hold no water. I have perused the letter dt.17th Dec., 1996written by Shri R.K. Iyengar, Head of Maths Department of ITT,Delhi, to the appellant-company. From this letter it is clear that this amount of Rs. 5 lakhs is in the nature of a donation given for establishing a scholarship as mentioned above. Therefore, this is not covered under s. 37(1). Similarly, I find that the other donations of Rs. 10,000 and Rs. 3,000 given to Himalayan Environment Trust, Gangotri Conservation Project and to IGP Fund, respectively, do not qualify for deduction under s. 37(1). Accordingly, the disallowance of Rs. 5,13,000 made by the AO on account of donations is sustained." 7.2 Before us, the learned counsel ....
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....ame in appeal. It was contended before the learned CIT(A) that it was an allowable expenditure. Details of these expenses were also filed in appeal. The learned CIT(A) has given relief to the assessee to the tune of Rs. 58,462 by observing as under: "10.7. I have carefully considered the matter. From the details of the expenses filed it is noticed that in many cases the nature of expenditure has not been mentioned. There are number of entries which simply mention that petty cash expenses for the day have been incurred for such and such amount. No further details in this regard are available. Also there are several items of expenditure where it has simply been mentioned as follows: 'Expenses incurred during travelling.' No further details in this regard are available. To my mind, it would meet the ends of justice if out of a total disallowance of Rs. 1,58,462 a disallowance of Rs. 1 lakh is sustained for disallowable expenses in the absence of details. The appellant-company would be entitled to a relief of Rs. 58,462." 8.2 The learned counsel for the assessee submitted that since detail was filed before the learned CIT(A), the learned first appellate authority should hav....
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....ther hand, supported the order of AO. 9.6 On going through the orders of Departmental authorities it appears that full details have not been furnished or the same have not been examined. The above disallowance made by the learned CIT(A) is without any basis. In our opinion the matter should be decided after proper examination of details. Therefore, we consider it proper to set aside the finding of learned CIT(A) and restore the matter to the file of AO for fresh adjudication on the issue in question. Accordingly, orders of authorities below, on the issue in question, are set aside and the matter is restored to the file of AO for fresh adjudication, after providing full opportunity of being heard to the assessee and as per law. Grounds are allowed for statistical purposes only. 10. Ground Nos. 8, 9 and 10 of assessee's appeal: These grounds have not been pressed before us. Accordingly the same stand dismissed being not pressed. 11. Ground Nos. 11, 12 and 13 of assessee's appeal: These grounds are general in nature and require no specific adjudication. 12. Ground No. 1 of Revenue's appeal: This ground challenges the deletion of addition of Rs. 6,75,72,230 being c....
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....ssessee has failed to discharge the onus cast upon it of the substantiated claim made, the entire sum of Rs. 1,98,064 is disallowed." 13.2 The learned CIT(A) has considered the issue in paras 6 to 6.2 of his order. It was submitted before him that gifts were given on different occasions in the course of business, such as, new year, Diwali, marriage functions of business associates. It was specifically pointed out on behalf of the assessee that the articles of presentations did not bear the name or logo of the company and hence could not be said to be in the nature of advertisement and, disallowable under r. 6B of the IT Rules. 13.3 The learned CIT(A) has given relief of Rs. 99,000 to the assessee by observing as under: "I have carefully considered the matter. A similar issue had come up for adjudication before me in the appeal for asst. yr. 1996-97 in the appellant-company's case. The facts in this regard are similar. It is very clear that the appellant-company has hedged on providing complete details in this regard. Not only were those details not given to the auditors and the AO but the same have also not been filed in appeal. Only general statements are being made to ju....