GATEWAY TERMINALS INDIA P.LTD,NAVI MUMBAI vs. DCIT 5(1), MUMBAI

आदेश / O R D E R PER RAMIT KOCHAR, Accountant Member

ITA 3595/Mum/2016 2

“Ground I: Addition of provision of slow moving / obsolete stock to the book profit of the Appellant while computing the tax liability under Section 115JB of the Act: Rs. 1,51,33,620

1.1 The learned CIT(A) has erred in law and facts of the case in confirming the action of the AO by treating the provision for slow moving / obsolete stock as an unascertained liability and adding it to the book profit of the Appellant while computing the tax liability under Section 115JB of the Act.

1.2 The learned CIT(A) fails to appreciate that such provision for slow moving / obsolete stock was made to record the closing stock at net realizable value which is in accordance with Accounting Standard-2 (Valuation of Inventory)

1.3 Without prejudice to the above, if the action of CIT(A) on this ground is confirmed then the Appellant should be allowed reduction for reversal made in the year under appeal of the provision made in the immediately preceding year.

Ground II: Disallowance of corporate social responsibility expenses ('CSR'): Rs. 38,82,316

2.1 The learned Commissioner of Income-tax (Appeals) - 10, Mumbai ['CIT(A)'] has erred in law and on facts in confirming the action of the Income Tax Officer 5(1 )(2), Mumbai (' AO') by disallowing Rs. 38,82,316 debited under the head "CSR expenses"

2.2 The learned CIT(A) fails to appreciate that such expenses include business promotion expenses of Rs. 22,95,302 erroneously included under the head 'CSR expenses' and such business promotion expenses were incurred wholly and exclusively for the purpose of business

2.3 The learned CIT(A) ought to have appreciated that actual CSR expenses of Rs. 15,87,014 incurred for providing various medical facilities cannot be regarded as wholly outside the ambit of business of the appellant.

ITA 3595/Mum/2016 3

Ground III: Add-hoc disallowance of 25% of business promotion expenses - Rs. 881,280/-. 3.1 The learned CIT(A) has erred in law and facts of the case in confirming the action of the AO making ad-hoc disallowance of 25% of business promotion expenses.”

4.The A.O. observed during the course of assessment proceedings u/s 143(3) r.w.s. 143(2) of 1961 Act that the assessee had claimed miscellaneous expenses to the tune of Rs. 49,88,230/-. The assessee was asked by the AO to furnish details of miscellaneous expenses. Based upon the reply of the assessee, it was observed by the AO that the assessee had debited an amount of Rs.38,82,316/ - towards sponsorship of Corporate Social Responsibility (CSR). The assessee was asked to explain as to why the said amount expended towards CSR should not be disallowed. In reply, the assesee submitted as under:-

“The company is located very far off from the main city and is surrounded by many villages. Many inhabitants of such villages are employees of the Company. These villages lack medical facilities and for the well being of the family of the employees, the Company provides ambulance services, paramedical services and medical supplies to villagers in the vicinity of its business premises. Further providing of such facilities enhances the ITA 3595/Mum/2016 4 corporate image of the company. Also such expenses were incurred on the welfare of its employees as they were directly or indirectly benefited by it. Such expenses have been incurred out of commercial expediency and should be treated as an allowable business expense u/s. 37(1) of the Act."

The A.O. rejected the contention of the assessee and observed that Sec.37(1) of the Act specifically states that the assessee shall be allowed only those expenses that have been wholly & exclusively incurred for the purpose of business of the assessee. The A.O. observed that CSR expenses are in the nature of donation and the same cannot said to have been incurred for the purposes of business of the assessee. The A.O. observed that the assessee is in the business of developing bulk terminal of Jawaharlal Nehru Port into a new container terminal, operating and maintaining the same, while the expenses were incurred towards ambulance services, paramedical services and medical supply to villages which can in no way be said to have been even connected with the business activity of the assessee company. The contention of the assessee that it enhances image of the assessee was also rejected by the AO , as then in that situation it was held that then it will be capital expenditure which shall not be allowable u/s 37(1) of 1961 Act. It was observed by the AO that the assessee has not furnished any documentary evidence in support of its claim. Further, in assessee's own case, the AO observed that similar addition were made in assessment year 2008-09 while the assessee has not filed any appeal before learned CIT(A) and the additions made had attained finality for assessment year 2008-09.

It was also observed by the AO that the assessee while filing return of income with Revenue had added an amount of Rs.l,51,33,620/- on account of provision for obsolete stock, while determining Book Profits u/s 115JB of 1961 Act. But while revising the return of income with Revenue, assessee had ITA 3595/Mum/2016 5 withdrawn the provision for obsolete stock while determining book profit u/s 115JB of 1961 Act. The assessee was asked to explain as to why the provision for obsolete stock originally added to the book profit and disallowed in computation vide original return of filed with Revenue was subsequently withdrawn from MAT computation in the revised return of income filed with Revenue , and why the same should not be added to the Book Profit u/s 115JB of 1961 under MAT provisions as the same is provision for uncertain liability. In reply the assessee submitted as under:-

“In the original ROI, the company had erroneously treated recording of inventory at reduced market value for the purpose of Management Information System (MIS) as provision for obsolete stock and added the same to the book profit. However, since the provision is in the nature of business loss/risk rather than diminution in the value of assets, the adjustment towards the same was not warranted for computing tax under Section 115JB of the Act.”

The A.O. observed that the assessee has not submitted any supporting document in support of its claim of the said loss on account of obsolescence and hence all provisions are in the nature of uncertained liability which needed to be added back while determining book profit. The AO observed that the assessee itself accepted the book profit treating the provision of obsolete stock as taxable under book profit while filing the original return of income with Revenue . The A.O., accordingly disallowed an amount of Rs. 1,51,33,620/~ treating the same as not allowable to arrive at book profit, while framing assessment vide orders dated 25-03-2013 u/s 143(3) of 1961 Act.

The A.O. further observed that the assessee has incurred business promotion expenses and accordingly details were called for. In the opinion of the A.O. these expenses were not incurred wholly and exclusively for the purpose of business. The details of the expenses are as under:-

ITA 3595/Mum/2016 6 (i) Corporate Gift Rs.2,07,808 (ii) Event Work for help management of customer Rs.24,13,196

(iii) Board Meeting expenses Rs.l,30,713 (iv) Air Ticket for Copola Lungi Rs.7,73,005 _______________ TOTAL Rs.35,24,722 ________________ The assessee submitted that these are revenue expenses while the A.O. observed that corporate gift to valued customers on special occasions, festivals are to increase the goodwill of the assessee in the minds of customer and are in the nature of brand building expenditure to maintain good relations with the customers which cannot be treated as revenue expenses. These were held to be in the nature of brand building which in the opinion of the AO are to be treated as capital expenditure and not fully allowable. The A.O. relied on the decision of Hon’ble Supreme Court in the case of Brooke Bond India Limited, (1997) 225 ITR 798 (SC) wherein the Hon’ble Supreme Court held that if benefits of an expenditure are of enduring in nature, it should be treated as capital expenditure.

Similarly, with respect to expenditure of Rs. 24,13,196/- claimed on account of event work for helping management of customer, the assessee claimed that event was organized at a group level and was aimed at building relations with top customers of each of the Terminal entities. The same was again treated as expenses for building relations with the customers and benefits were held to be enduring in nature. The AO also held the same to be in the nature of ITA 3595/Mum/2016 7 capital expenditure and not fully allowable , relying upon decision of Hon’ble Supreme Court in the case of Brooke Bond India Limited(supra).

With respect to the expenses of air ticket and meeting expenses to the tune of Rs.9,03,718/- , the A.O. held that these expenses are not fully allowable as business expenditure .

The AO disallowed 25% of the total expenses of Rs. 35,24,722/- , which comes to Rs. 8,81,180/- which stood disallowed u/s 37(1) of the Act and were added to the total income of the assessee by the AO, vide assessment order dated 25th March, 2013 passed by the AO u/s 143(3) of the Act.

The ld. CIT(A) considered the submissions of the assessee and observed that the assessee had debited sponsorship/CSR expenditure to the extent of Rs. 38,82,316/- under the head miscellaneous expenses in the P&L account. The ld. CIT(A) observed that the assessee has claimed during appellate proceedings that Rs. 22,95,302/- pertained to business promotion expenses ITA 3595/Mum/2016 8 like presentations, dinner, sponsorship of maps, cost of kits etc and only the balance of Rs. 15,87,014/- was shown by the assessee under CSR expenses, during appellate proceedings. The learned CIT(A) observed that the assessee submitted following explanations before the A.O. with respect to the CSR expenditure:-

“The company is located in a very far of place from the main city and is surrounded by many villages. Many inhabitants of such villages are employees of the company. These villages lack medical facilities and for the well-being of the family of the employees, the company provides ambulance services, paramedical services and medical supplies to villagers in the vicinity of its business premises. Further providing of such facilities enhances the corporate image of the company. Also such expenses were incurred on the welfare of its employees as they were directly or indirectly benefited by it, Such expenses have been incurred out of commercial expediency and should be treated as an allowable business expenditure u/s 37 of the Act.” .

The ld. CIT(A) observed that the expenses incurred towards ambulance services, paramedical services and medical supplies to villages can in no way be said to have been even connected with the activity of the assessee, hence, CSR expenses cannot be allowed as business expenses as they are not going to help the business of the assessee. Accordingly, the ld. CIT(A) confirmed the addition made by the A.O. by confirming the disallowance of CSR expenses to the tune of Rs. 15,87,014/- , vide appellate order dated 29-02-2016 passed by learned CIT(A).

With regard to the business promotion expenses of Rs. 22,95,302/-, the ld. CIT(A) observed that the assessee has not submitted any evidence even during appellate proceedings to show that this amount had been incurred wholly and exclusively for the purpose of business, hence, the ld. CIT(A) confirmed the additions made by the A.O. by disallowing the expense to the ITA 3595/Mum/2016 9 tune of Rs. 22,95,302/- , vide appellate order dated 29-02-2016 passed by learned CIT(A).

With respect to the issue of disallowance of business promotion expenses of Rs.8,81,180/- u/s 37(1) of the Act debited in the P&L account, the assessee submitted that the A.O. erred in making ad-hoc disallowance of 25% of the business promotion expenses incurred by the assessee during the year by concluding that all the expenses incurred by the assessee were not in the nature of revenue expenses and not allowable as business expenses. The A.O. held that such expenses were capital in nature as the benefits are of enduring nature , relying on Hon’ble Apex Court decision in the case of Brooke Bond India Limited(supra). The assessee submitted before learned CIT(A) that such expenses were routine business expenses incurred by the assessee in the normal course of business, wholly and exclusively for the purpose of business and hence allowable u/s 37(1) of 1961 Act.

The ld. CIT(A), however, rejected the contentions of the assessee and held that the A.O. disallowed 25% of the expenses by treating the same as not relating to business and not of revenue in nature. The learned CIT(A) observed that the A.O. duly verified the accounts and applied his discretion and disallowed 25% of the expenditure debited in the books of accounts , thus as per the ld. CIT(A), no interference is required in the assessment order of the A.O., which addition of the learned AO was upheld by learned CIT(A) , vide appellate order dated 29-02-2016 passed by learned CIT(A).

With respect to the addition of provision of slow moving/obsolete stock to the book profits u/s 115JB of 1961 Act, the learned CIT(A) observed that the assessee had added back Rs. 1,51,33,620/- in the computation of income on above account and offered it for taxation while working out book profit u/s 115JB of 1961 Act in the return of income originally filed with the Revenue , ITA 3595/Mum/2016 10 but in the revised return of income filed with Revenue, the assessee had withdrawn the above provision on the basis that the said amount is not provision or unascertained liability. It was submitted that the said amount was correctly reduced by the assessee as value of slow moving inventories which is determined on scientific basis consistently over several years and hence the same should be allowed to the assessee. The ld. CIT(A) after considering the contentions of the assessee held that going by the provisions of the Act, any provision made without the actual payment of the amount during the year will become unascertained liability and the same is not to be allowed while working out book profit u/s 115 JB of the Act. The learned CIT(A) held that the assessee has not furnished any details with regard to the computation of the obsolete stock which really become obsolete and same required to be reduced. The learned CIT(A) also observed that the assessee has itself reversed the entry for the next assessment year. The ld. CIT(A) accordingly confirmed the additions made by the A.O., vide appellate order dated 29-02-2016 passed by learned CIT(A).

With respect to ground No. 2, it is submitted that the assessee has incurred CSR expenses of Rs. 15,87,014/- during the year which should be allowed as a deduction u/s 37(1) of the Act. The ld. Counsel drew our attention to the assessment order of the A.O. and argued that these are normal business expenses. It is submitted that the assessee is engaged in the business of developing bulk terminal of Jawaharlal Nehru Port into a bulk ITA 3595/Mum/2016 12 container terminal which is located in a remote area and the villages lack medical facilities and for the well-being of the family of the employees, the company provides ambulance services, paramedical services and medical supplies to villagers in the vicinity of its business premises. Further providing of such facilities enhances the corporate image of the company and such expenses were incurred on the welfare of its employees as they were directly or indirectly benefited by it. It is submitted that out of Rs. 38,82,316/- debited under the head CSR expenses to the P&L account for the year under consideration, Rs. 22,95,302/- pertained to business promotion/sponsorship expenses while the balance of Rs. 15,87,014/- pertained to CSR expenses. It is submitted that these are normal business expenses as the turnover of the company is around Rs. 500 crores . The ld. Counsel drew our attention to paper book page No. 1-5 and 18 to 25 whereby the replies given before the authorities below were placed along with the invoices in respect to these expenses. It was submitted that these are not capital expenditure and no enduring benefit has been obtained by the assessee. The assessee relied upon decision of tribunal in the case of JCIT v. ITC Ltd. (2008) 112 ITD 57 (kol. Trib.).

With respect to ground No. 3, it is submitted that the A.O. disallowed 25% of total expenses on ad-hoc basis which is not sustainable in law. The learned counsel drew our attention to the orders of the authorities below. It was submitted that corporate gifts to the tune of Rs. 2,07,808/- were incurred for giving gifts to clients on special occasions and festivals. The ld. Counsel drew our attention to paper book page No. 8 and contended that all the details were given. It was submitted that some expenses were incurred at Bahrain towards event cost for top management of the assessee’s customers to the tune of Rs. 24,13,196/- , out of total expenses of Rs. 35,24,782/-. It was submitted that detailed list of the customers belonging to shipping companies and also employees of the assessee company who visited Bahrain ITA 3595/Mum/2016 13 has been placed at paper book /page 10. It was submitted that these expenses to the tune of Rs. 24,13,196/- were reimbursed to parent company who is its AE.It was submitted that there were 6 to customers of the assessee who participated in the event at Bahrain who contributed more than 25% of turnover of the assessee along with 3 employees of the assessee company and the event took place at Bahrain. It is submitted that these are international transactions and the AO has referred t international transactions with AE for making transfer pricing adjustment to TPO who has accepted international transactions to be at ALP and no TP adjustment was proposed by TPO . The ld. Counsel invited our attention to the assessment order page 2 whereby the computation of ALP recommended is given:-

“4. Computation of Arms Length Price:

It is seen from the details in Form NO.3CEB filed along with the return of income that the assessee has entered into international transaction with associate enterprises of more than Rs.15 crores. As per CBDT's Instruction No.3 of 2003 dated 20.05.2003, reference u/s.92CA(1) of the I.T. Act for computation of Arms Length Price was made to Transfer Pricing Officer on 16.08.2011. Addl. Commissioner of Income Tax, Transfer Pricing-I(3), Mumbai vide his order dated 31.08.2012 has passed order ujs.92CA(3) of the I.T. Act, 1961 wherein he has made no adjustment to the value of the international transactions entered into by the assessee.”

The ld. Counsel submitted that with respect to board meeting and air ticket expenses to the tune of , for verification purposes the matter can be sent back to the A.O..

10 The learned counsel for the assessee submitted that the additions have been made to book profits u/s 115JB of 1961 Act for which only book results were relevant. The assessee has duly made entries in books of accounts and the same cannot be tinkered in view of decisions relied upon by the assessee.

With respect to CSR expenses of Rs. 15,87,014/- claimed by the assessee, we have observed that the assessee is in the business of developing bulk terminal of Jawaharlal Nehru Port into a new container terminal, operating and maintaining the same which includes loading and unloading of containers from shore to ship and from ship to shore; reefer services; container storage facilities; handling over-dimensional and hazardous containers etc.. As per the contention of the assessee, the villages in the immediate vicinity of the container terminal of the assessee lacks medical facilities and for the well being of the villagers as well family of the employees living in these villages around assessee’s business terminal, the assessee provides ambulance services, paramedical services and medical supplies to villagers in the vicinity of its container terminal. However, we find that the assessee could not prove that these expenses are incurred wholly and exclusively for the purpose of the business which is mandate of Section 37(1)

ITA 3595/Mum/2016 17 of 1961 Act. There may be a remote nexus of the assessee’s business with these CSR expenses as the villages are situated in vicinity of the assessee’s container terminal but that is not sufficient to claim an expense as business expense as mandate of Section 37(1) of the Act is that expenses are to be incurred wholly and exclusively for the business of the assessee, which in the instant case we are of considered view that the assessee could not demonstrate that how said expenses are incurred wholly and exclusively for the purposes of business of the assessee. These expenses no doubt have been incurred for the betterment of villages and people living around assessee’s container terminal which in turn will help creating goodwill and conducive environment among local inhabitants for assessee to do business but the nexus is remote and does not satisfy the mandate of Section 37(1) of 1961 Act. It is relevant to refer here to the decision of Hon’ble Delhi High Court in the case of State Trading Corporation of India Limited v. CIT (1974) 94 ITR 496(Del. HC) , wherein Hon’ble Delhi High Court held as under :

“Taking up the second question, it is necessary to find out the proper connotation of the expression "for the purposes of business". This expression occurs in section 10(2)(xv) of the Indian Income-tax Act, 1922, under which, while computing the profits or gains of business, profession or vocation, the expenditure which will be allowed as a permissible deduction, must be laid out or expended wholly or exclusively for the purpose of such business, profession or vocation. According to Mr. Sharma, the learned counsel for the assessee, this expression has a fairly wide import, so as to include any expense, which would have any connection with the business. He relied on Commissioner of Income-tax v. Malayalam Plantations Ltd. [1964] 53 ITR 140 ; [1964] 7 SCR 693 (SC), where the Supreme Court held that this expression is wider in scope than the expression "for the purpose of earning profits". He submitted that the sum of Rs. 2,00,000 was paid to the Maharashtra Government for the development of roads and the port of Redi which were seriously damaged during the rains and floods and for providing facilities to the labourers in the village working in ITA 3595/Mum/2016 18 the mines, in order to ensure regular supplies of iron ore which was to be exported by the assessee. The learned counsel also relied upon State of Madras v. G.J. Coelho [1964] 53 ITR 186 ; [1964] 8 SCR 60 (SC), where payment of interest on the amount borrowed by the purchaser of the plantation was held to be closely related to the plantation and the expenditure was held to be laid out or expended wholly or exclusively for the purpose of the plantation. Mr. Sharma further submitted that if the said payment had not been made, the assessee's business would have suffered not only for want of regular supplies owing to discontentment amongst the village labourers but also on account of the roads and the port not being in a capacity to handle the requisite volume of export. He also pointed out that in subsequent years the assessee had to pay a levy of fifty paise per tonne export from this port.

Mr. B.N. Kirpal, on behalf of the revenue, pointed out, on the other hand, a note made by the chairman of the assessee- Corporation to its board of directors on the basis of which the resolution was passed authorising the making of the said grant to the Government of Maharashtra. He contended that the amount had not been given in lieu of any levy on export, but had been given as an outright grant. It was not even connected with the price structure of the ore purchased by the assessee. Even the workers in the village to whom the amenities, according to the assessee, had been provided, were not the workers of the assessee. There was no connection between the said grant and the business carried on by the assessee. He, therefore, urged that the view of the Tribunal was correct and the said amount should not be regarded as an expenditure laid out wholly and exclusively for the purpose of the assessee's business.

While considering the true connotation of the expreesion "for the purpose of business", the Supreme Court in the case of Malayalam Plantation's case (Supra) examined the case law on the subject, both in England and in India. Broadly, the true tests applied by the English courts were found to be: (i)whether the expenditure was incurred for the purpose of carrying on of the business and for removing obstacles and impediments in the conduct of the business; and ITA 3595/Mum/2016 19

(ii)whether the assessee paid the amount in his capacity as businessman or in his personal capacity.

Examining the Indian decisions, reference was made, amongst other cases, to Tata Sons Ltd. v. Commissioner of Income-tax [1950] 18 ITR 460 (Bom.), where the share of bonus voluntarily paid by a company not to its own officers, but to some of the officers of a managed company, was held to be a permissible deduction, as the object was said to be increase the profits of the managed company and thereby increase its own share of the commission. Another case considered was Commissioner of Income-tax v. Royal Calcutta Turf Club [1961] 41 ITR 414 ; [1961] 2 SCR 729 (SC), where expenditure incurred by a race club for training its jockeys was allowed as a deduction as it was held to be wholly and exclusively for the purpose of the club's business, because if |the supply of jockeys of efficiency and skill failed, the business could no longer be possible. Reference was also made to Haji Aziz and Abdul Shakoor Commissioner of Income-tax [1961] 41 ITR 350 ; [1961] 2 SCR 651 (SC), where, disallowing deduction of penalty amount paid to release a consignment confiscated by the customs authorities on the ground that such penalty could not be said to be a commercial loss falling on the assessee as a trader, the test laid down was that expenses which enabled a person to carry on trade for making profits in the business are permitted, but not if they are merely connected with the business. Summing up, in Malayalam Plantation's case (Supra), the Supreme Court observed: "The expression 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits'. Its range is wide: it may take in not only the day-to-day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, ITA 3595/Mum/2016 20 its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it his capacity was a person carrying on the business."

Bombay Steam Navigation Co. ( 1953) P. Ltd. v. Commissioner of Income-tax [1965] 56 ITR 52 ; [1965] 1 SCR 770 (SC) was another case cited before us, where the Supreme Court was of the view that transaction of acquisition of assets was closely related to the commencement and carrying on of the assessee's business and interest paid on the unpaid balance of the consideration for the assets acquired had, in the normal course, to be regarded as expended for the purposes of the business which was carried on in the accounting periods. In Indian Steel & Wire Products Ltd. v. Commissioner of Income-tax [1968] 69 ITR 379 (Cal.) the Calcutta High Court disallowed the contribution made by the assessee to the Indian National Congress, which was a political party in power, for seeking its patronage for the preservation and furtherance of their business. The connection between expenditure and the business, even if any, was considered to be too remote.

In Orissa Cement Ltd. v. Commissioner of Income-tax [1969] 73 ITR 14 (Delhi), this court allowed the legal charges incurred for obtaining a loan from the Industrial Finance Corporation as permissible expenditure on the ground that it was irrelevant to consider the object with which the loan was obtained. It was observed that expenditure incurred need not directly benefit the business, yet it most be incidental to the business and must be necessitated or justified by commercial expediency. It must be directly or intimately connected with the business and must be laid out by the taxpayer in his character as a trader. An expenditure remotely connected with the trade was held to not qualify for permissible deduction. In Commissioner of Income-tax v. Bhanna Mal & Co. P. Ltd. [1971] 82 ITR 138 (Delhi) the expenses incurred towards salary of a pujari for invoking the blessings of Gods for the benefit of the aseessee were not considered by this court as incurred for carrying on the business of the assessee.

ITA 3595/Mum/2016 21

According to the tests laid down in the aforesaid judgments, the expenditure incurred by the assessee in paying the grant to the Maharashtra Government cannot be said to have been laid out wholly or exclusively for the purpose of the assessee's business. This amount, according to the Tribunal, had been given to the Government as an outright grant. The Tribunal has found that this amount was not connected at all with the price structure of the ore purchased by the assessee or the quantity exported. The workers who were said to be benefited by the amenities sought to be provided were not employees of the assessee. There is no finding or even suggestion that the road development in the village was in respect of any road leading from the assessee's premises or from where the ore was to be obtained to the port or as to how otherwise the said development could be of any benefit to the assessee's business. This payment was found by the Tribunal to have been made as a result of a note by the chairman to the board of directors of the assessee-Corpora- tion, who had passed a resolution on the basis thereof, authorising the grant of Rs. 2,00,000 to be made to the Maharashtra Government. According to the said note, the Chief Minister of Maharashtra requested that: in view of the serious damage suffered by the Konkan region due to the recent floods and heavy rains the State Trading Corporation should extend it’s most sympathetic consideration. After some discussion the Chief Minister agreed to a sum of Rs. 2,00,000 being given by the State Trading Corporation as outright grant and not to press the matter further. This note brings out the "sympathetic consideration" which prevailed with the assessee while making the grant. The payment thus had no connection with the business of the assessee. The Tribunal did notice the assessee's argument that its business would have suffered if his payment had not been made by it. But the Tribunal did not notice any material to support it and was unable to give a finding to that effect. The provision of amenities to the labour not of the assessee- Corporation but in the village in general and the development of the port and of the roads in the village were not found to have a connection with the assessee's business. In any case, even if there might have been a connection, it was too remote to be considered as relevant for our purpose. This expenditure in no case, can be said to be a holly and exclusively laid out for the purpose of the assessee's business. Even an incidental connection between it and the ITA 3595/Mum/2016 22 assessee's business has not been brought out on record. Nor can this expenditure be said to be laid out by the asseessee in its character as a trader. The Tribunal, therefore, was right in holding that the payment of Rs. 2,00,000 was not an expediture laid out wholly or exclusively for the purpose of the assessee's business. The answer to question No. 2, therefore, is in the negative, i.e., in favour of the revenue and against the assessee.”

Similar view has been taken by Hon’ble Bombay High Court in the case of Voltas Limited v. CIT (1994) 207 ITR 47 (Bom.) . The onus lie on the assessee to prove with cogent material to have substantiated its claim that the said expenses is incurred wholly and exclusively for the purposes of business of the assessee as required u/s 37(1) of 1961 as some remote connection with business is not sufficient to claim the expenses as business expenses, which in the instant case the assessee failed to prove the same. Hence, these expenses of Rs. 15,87,014/- incurred for CSR by providing ambulance services, paramedical services and medical supplies to villagers in the vicinity of its container terminal cannot be allowed as business expenses and hence, the appellate order of learned CIT(A) is hereby confirmed .We order accordingly.

With respect to business promotion expenses amounting to Rs. 22,95,302/- which are added in the CSR expenses and which were claimed by the assessee as business promotion /sponsorship expenses , details were submitted by the assessee which are placed in paper book /page 1-5,18 to 25 filed with tribunal. It is the contention of the authorities below that no details were submitted before them to show that the same was incurred wholly and exclusively for the purposes of business of the assessee . In our considered view, , this matter also need to go back to the file of the A.O. for denovo determination of the issue on merits wherein assessee is directed to produce all relevant evidences to prove before the AO that the said expenses were ITA 3595/Mum/2016 23 incurred wholly and exclusively for the purposes of business of the assessee and it satisfy the mandate of section 37(1) of 1961 Act. Accordingly, we direct the assessee to produce all the details relevant to the issue regarding business promotion/ sponsorship expenses of Rs.22,95,302/- claimed by the assessee before the A.O. for verification and examination by the AO on merits and to consider the claim on merits in accordance with law.Needless to say that proper and adequate opportunity of being heard shall be provided to the assessee by the AO in accordance with law. We order accordingly.

With respect to the third issue in respect of disallowance of 25% of Rs. 35,24,722/-, we have observed that the assessee spent an amount of Rs.24,13,196/- towards event organized in Bahrain and payments were made in the nature of reimbursement to Bahrain Terminals which is an AE and the transactions with AE were international transactions. The TPO has not proposed any TP adjustment w.r.t. international transactions entered into by the assessee with AE. The assessee has explained that these expenses were incurred for an event wherein 6 top customers (contributing more than 25% of its turnover) participated along with 3 employees of the assessee for which these costs were incurred by the assessee by reimbursing the same to Bahrain Terminal which is its AE. The assessee has claimed the said expenses as incurred for maintaining good relations with top 6 customers who are giving business of more than 25%. In our considered view, these expenses are business expenses which are incurred wholly and exclusively for the purposes of business of the assessee and satisfy the mandate of Section 37(1) of 1961 Act and in our considered view , the said expenses need to be allowed to the assessee and is hereby ordered to be allowed as business expenses u/s 37(1) of 1961 Act. Further, the assessee has claimed Rs. 2,07,868/- as expenses for purchase of cuff links being corporate gifts for distribution among customers, which in our considered view, is a normal business expenses and cannot be considered to be capital in nature as no ITA 3595/Mum/2016 24 enduring benefit is received by the assessee and hence are ordered to be allowed as normal business expenses u/s 37(1) of 1961 Act being revenue expenses. The assessee has also claimed board meeting expenses of Rs.1,30,713/- which is being reimbursed to CONCOR of whose nominees are on board of directors towards their travel and related costs to attend board meeting etc. and also the assessee has claimed to have spent Rs. 7,73,005/- which is paid to Benzy Tours and Travels for air tickets, which were considered by the A.O. as capital in nature. The assessee has claimed the same to be normal revenue expenses being paid to CONCOR whose nominees are on board of directors of the assessee for their travel and stays to attend board meetings as also for other travels. The assesssee has prayed that if the matter is restored to the file of the AO, all the details of these expenses along with evidences for having incurred these expenses shall be duly placed before the AO to prove that these expenses were incurred wholly and exclusively for the purposes of business of the assessee and it satisfy the mandate of Section 37(1) of 1961 Act. The learned DR fairly agreed that this matter can be set aside to the file of AO for de-novo adjudication on merits. Thus, we are inclined to set aside and restore this matter to the file of the AO for de-novo determination of the issue on merits and direct the assessee to produce cogent material and evidences in support of its claim before the A.O.to prove that the said expenses towards board meeting to the tune of Rs.1,30,713/- and air tickets for Copola Lungi (Benzy Tours and Travels) of Rs. 7,73,005/- were incurred wholly and exclusively for the purposes of business as required u/s 37(1) of 1961 Act. Accordingly, we set aside this matter back to the file of the A.O. and the A.O. is directed to verify the material produced by the assessee in support of its claim and these two issue’s be determined de novo on merits by AO. Needless to say that proper and adequate opportunity of being heard shall be provided to the assessee by the AO in accordance with principles of natural justice in accordance with law. We order accordingly.

ITA 3595/Mum/2016 25

Order pronounced in the open court on 6th April, 2017. आदेश क� घोषणा खुले �यायालय म� �दनांकः 06-04-2017 को क� गई ।