THE COMMISSIONER OF INCOME TAX -3, MUMBAI vs. M/S INDIAN RAYON AND INDUSTRIES LTD.

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 under Section 260­A of the CNR No : HCBM020103072008 Uploaded on - 21/08/2020 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   sec.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   pro­rata   /   proportionate   premium   on redemption of non­convertible debentures, issued during AY 88­89, 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 90­91 but put to use in AY 91­92; E. Whether in the facts and circumstances of the case and in law the ITAT was right in upholding deletion of Uploaded on - 21/08/2020 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 40 A(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 1991­92 and 1992­93. 4. Each of the questions as formulated can be taken up for Uploaded on - 21/08/2020 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. Re­question 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.1   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   1991­92. 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.

The Tribunal has answered the issue which is raised by the Revenue by following the judgment of this Court in the case of Allana Sons Pvt. Ltd.2  Besides this the Tribunal had also adopted the same view in favour of the assessee for Assessment Year 1990­91. In these circumstances, question A does not raise any substantial question of law. Re­questions B and E :

The CIT (A) held that 25% of the expenses incurred in hotels on entertainment is a reasonable percentage which could be 216 ITR 690. Uploaded on - 21/08/2020 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 Uploaded on - 21/08/2020 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  CIT v. Chemcrown (India) Limited3. 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 (2003) 262 ITR 177. Uploaded on - 21/08/2020 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. Re­question C :

Counsel   appearing   on   behalf   of   the   Revenue   has   fairly stated   that   the   issue   stands   covered   against   the   Revenue   by   the Uploaded on - 21/08/2020 judgment of the Supreme Court in  Madras Industrial Investment Corporation v.  CIT4. As a matter of fact, the Tribunal has followed the aforesaid decision.  Consequently, no substantial question of law arises. Re­question 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 CIT v. Emirates Commercial Bank Limited5. In view of the statement, no substantial question of law would arise. Re­question F :

The Tribunal has followed its judgment in the case of the assessee for Assessment Year 1990­91. The judgment of the Tribunal for   Assessment   Year   1990­91   in   turn   relies   upon   the   Tribunal’s judgment in the case of the assessee for Assessment Year 1988­89. In its decision rendered on 14th  February, 2006 for Assessment Year 4 225 ITR 802. (2004) 134 Taxman 682 (Bom). Uploaded on - 21/08/2020 1988­89, 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 1987­88 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 1988­89 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. Re­question 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. Uploaded on - 21/08/2020

The Tribunal has followed its order for Assessment Year 1990­91. That apart, in  Commissioner of Income Tax v. Sugauli Sugar Works (P) Limited6, the Supreme Court affirmed the law laid down in a judgment of this Court in J.K. Chemicals Limited v. CIT7 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....”

Counsel appearing on behalf of the Revenue has sought to place reliance on an earlier judgment of the Supreme Court in CIT v. T.V. Sundaram Iyengar & Sons Ltd.8   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 (1996) 88 Taxman 429 (SC). Uploaded on - 21/08/2020 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. (Dr. D.Y.Chandrachud, J.)