The Commissioner of Incoem Tax vs. Sri sarvaraya Sugars Ltd.,

Heard Mr. Das, learned counsel for the appellant and Mr. Satpathy, learned Standing Counsel for the Income Tax Department.

“Whether the Income Tax Appellate Tribunal would have come to a different conclusion on the disallowance of 5% of the expenses claimed under the head “marketing expenses and provisions “if the Tribunal had considered the documents/ agreements produced by the appellant before the Tribunal.”

“……In view of the aforesaid reasons 1/10th of the daily marketing greens totaling to Rs.2,87,600/- and purchase of provision totaling to Rs.1,84,400/- are disallowed on estimate. It is also relevant to point out that although the learned CIT(A) had reduced such addition last year, yet the department has gone in appeal before the Tribunal against the order of the learned CIT (Appeals).”

Learned counsel for the appellant has taken us to the addition of Item nos.1 and 2 in the assessment order, which were challenged before learned Appellate Authority. ITA No.150 of 2004

“3.1. In course of hearing of appeal, A/R Sri G.N. Naik, Advocate appeared and argued the case.

The disallowances made under daily marketing expenses and provision were vehemently opposed. It was submitted that the date-wise purchases in respect of major provisions and daily marketing expenses involving vegetables and food materials were submitted before the A.O. and the expenses are vouched and verifiable. It was contended that the books of account of the appellant are audited and the A.O. has arbitrarily proceeded to disallow a major portion of expenses in both the years. The observations of the A.O. as regards to the non-maintenance of proper vouchers was contested. It was contended that it was not practicable to maintain day to day stock of the daily marketing, greens and purchases of provisions where more than 100 items are required to be purchased. It was further submitted that consumption of food materials includes free food supplied to staff members of about 118 persons and company’s guests associated in the course of the business of the appellant. The A/R stated that in some of corporate clients like Coal India Ltd., Bank of Baroda, who use the hotel as their holiday home, no separate bill is raised towards fooding as food is supplied to them free of charge and composite rent is collected from them. In support of the said claim a copy of agreement between the appellant and Coal India Ltd. was submitted. It was argued that the appellant’s tariffs for food items are lower compared to many other hotels of similar class and the loss in restaurant sales is made up by receipt of higher room rent. The room rent received during assessment year 1995-96 was stated to be Rs.94.21 lakhs as against Rs.44.46 lakhs received towards restaurant sale. The cost of provision of food was claimed to be due to

3 provision of free food to employees and workers and on account of lower tariff in the restaurant. The order of the Commissioner of Income Tax (Appeals) in the case of the appellant for assessment year 1993-94 was relied wherein similar additions have been deleted substantially.

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4.1. On consideration of the ground on disallowance of daily marketing expenses and provisions, I find the appellant has to purchase number of items like vegetables, groceries and other food materials on a sustained basis. In view of largeness of items, maintenance of day to day stock account is difficult in such a situation. However, the fact remains that many items of expenditure are not properly vouched and are proportionately high when compared with sale of food. The total marketing expenditure and provision is also higher than the price obtained by sale of food. Under similar situations in the appellant’s own case for assessment year 1993- 94, Commissioner of Income Tax (Appeals), Orissa, Cuttack, in his order dt.18.10.1996 in ITA No.95/CO/96-97 has sustained the addition of Rs.60,000/- out of the total disallowance of Rs.8,64,822/-. During the year the total expenditure incurred under daily marketing and provisions are much more than that of assessment year 1993-94 and the non-verifiable nature of the expenses still continued during these two years for which disallowance are called for. However, considering the claim of the appellant in the previous assessment years which has been discussed in the appellate order as referred above and keeping in view the type of expenditure incurred, the disallowance made by the A.O. is found to be at a higher side. In view of unverifiable nature of expenses, it will be reasonable to restrict the disallowances at Rs.1,10,000/- for assessment year 1994-95 and Rs.1,25,000/- for the assessment year 1995-96.”

The Commissioner of Income Tax (Appeals) has allowed the appeal completely by passing a reasoned order in

4 favour of the appellant. However, the Department has preferred second appeal before learned Tribunal. Learned Tribunal while considering the appeal has observed at paragraphs-2.2 and 2.3 that it would be fair and reasonable to restrict the disallowance to 5% of the expenses claimed under the Head ‘Marketing Expenses and Provisions. Paragraphs-2.2. and 2.3 of the order of learned Tribunal reads as under:

“2.2. During the course of hearing it was submitted by the ld. DR that the assessing officer had disallowed a part of the expenses under valid reasons. It was also contended that the disallowance made by the AO was fair and reasonable and therefore the CIT(A) was not justified to drastically reduce the disallowance. On the other hand ld. AR of the assessee reiterated arguments advanced before the CIT(A) and submitted that the additions sustained by the CIT(A) was fair and reasonable and therefore his order should be upheld. Ld. AR also filed a copy of the order of this Bench in assessee’s own case for the assessment year 1993-94 in which the Tribunal has upheld the disallowance of Rs.60,000/- made by the CIT(A) while dismissing the departmental appeal.

2.3. We have carefully considered the submissions made by the rival parties and the facts of the case. We find that the expenses claimed by the assessee are not properly vouched and verified. Therefore there is justification for some disallowance. We agree with the view of the CIT(A) that the disallowance made by the AO in both the years are high and excessive at the same time we are also of the view that the disallowance sustained by the ld. CIT(A) is on lower side. In our considered view it would be fair and reasonable to restrict the disallowance to 5% of the expenses claimed under the Head “Marketing Expenses and Provisions”. Calculated at this rate the disallowance will work out to Rs.2,37,800/- in assessment year 1994-95 and Rs.2,56,000/- in assessment year 1995-96.”

Accordingly, this appeal stands disposed of.

Urgent certified copy of this order be granted on proper application.

……..…………………

K.S. JHAVERI

(CHIEF JUSTICE)

……..……………………

K.R. MOHAPATRA

(JUDGE)

bks/jm