STADMED PRIVATE LIMITED,KOLKATA vs. DCIT, CIRCLE - 10, KOLKATA, KOLKATA

These cross-appeal by the assessee and Revenue are against the common order of Commissioner of Income Tax (Appeals)-XII, Kolkata dated 27.10.2009. Assessment was framed by DCIT, Circle-10, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 10.12.2007 for assessment year 2005-06.

Both the appeals are heard together and are being disposed of by way consolidated order for the sake of convenience.

Briefly, the facts are that assessee is a Private Limited Company and engaged in manufacturing of allopathic medicines. The assessee for the year under consideration has filed its return of income declaring total income of ₹34,15,360/-. Subsequently, the case was selected under scrutiny and accordingly notice u/s. 143(2)/142(1) of the Act was issued upon assessee. The assessment was framed u/s 143(3) of the Act vide order dated 10.12.2007 at a total income of ₹1,20,28,390/- after making certain additions / disallowance to the total income of the assessee.

First we take up assessee’s appeal in . First issue is general in nature and does not require any adjudication.

Second issue raised by assessee in this appeal is that Ld. CIT(A) erred in confirming the order of Assessing Officer by sustaining the disallowance of ₹20,000/- out of travelling expense on account of non-availability of external supporting evidence for verification. & 200/Kol/2010 A.Y. 2005-06 Stadmed Pvt. Ltd. Vs. DCIT, Cir-10, Kol. Page 3 7. The assessee for the year under consideration has claimed travelling expenses for ₹ 63,27,475/-. During the scrutiny proceedings, AO observed that several travelling expenses were claimed on the basis of self-made vouchers. Therefore the genuineness and reasonableness of expenditure were not verified. Accordingly the AO disallowed a sum of ₹ 50,000/- and added to the total income of assessee. 8. Aggrieved, assessee preferred an appeal before Ld. CIT(A) who reduced disallowance to ₹20,000/- by observing as under:- “I have considered the submissions of the appellant. It is a fact that there are self-made vouchers and this kind of expenditure is generally seen under ‘local travelling’. However, the AO has segregated such expenditure. Instead he made an ad-hoc disallowance. Though an element of self made vouchers do exist, the proposition of such expenditure could not be very substantial. As such the disallowance made at Rs.50,000/ is on a higher side. I feel it would be reasonable to disallow Rs.20,000/- instead of Rs.50,000/- to meet the ends of justice. Accordingly, I direct the AO to restrict the disallowance to Rs.20,000/-. The appellant gets a partial relief on this count.”

Before us the ld. DR fully supported the orders of the Authorities Below.

We have heard the ld. DR and perused the materials available on record before us. The main issue before us is that the assessee claimed the travelling expenses amounting to Rs.63,27,475/- out of which some expenses were claimed on the basis of self made vouchers. Therefore the AO on ad-hoc basis disallowed a sum of Rs. 50,000/- which was subsequently restricted to Rs. 20,000/- by the Ld. CIT(A). Now, we have to see whether the Ld.CIT(A) was justified in his action. On careful examination of the findings of both the lower authorities, we notice that both of them have disallowed the expenses on the ground that many vouchers were self made for the travelling expenses. But none of them have pointed out that the expenditure were not incurred for the purpose of the business. In our view, it is very pertinent fact that collecting the external documentary evidence for each and every travelling cost is not & 200/Kol/2010 A.Y. 2005-06 Stadmed Pvt. Ltd. Vs. DCIT, Cir-10, Kol. Page 4 realistic. It is because the nature of such expenses cannot be organized or systematically incurred for the purposes of the business. In such a situation, the reliance is placed to see the purpose for which it was incurred. If the purpose of travelling is found having nexus with the business and amount of such expenditure is reasonable then the issue of disallowance is not warranted. There is no specific section for allowing deduction for expenses relating to business tours. The claim has to be preferred in terms of section 37(1) of the Act under which the following conditions are required to be satisfied for claiming deduction namely—

During the course of assessment proceedings, AO observed that several expenses were claimed on the basis of self-made vouchers. Therefore the AO disallowed a sum of Rs.50,000/- and added to the total income of assessee. 13. Aggrieved, assessee preferred an appeal before Ld. CIT(A) who reduced the said disallowance to Rs.20,000/- by observing as under:- “The AO has given a finding that due to self made vouchers he could not verify the genuineness and reasonableness of entire expenditure. For the reasons given in earlier is directed to restrict the disallowance to Rs.20,000/-. The appellant gets a partial relief on this count.”

We have heard the Ld. DR and perused the materials available on record before us. The main issue before us is that the assessee claimed the general expenses for Rs. 22,06,322/-. But out of said expenditure some expenses were claimed on the basis of self made vouchers. Therefore the AO on ad-hoc basis disallowed a sum of Rs.50,000/- which was subsequently reduced to Rs.20,000/- by the ld. CIT(A). Now we have to see whether the Ld. CIT(A) was justified in his action. After considering the relevant records, we are inclined to disagree with the view taken by the lower authorities for the reasons set out in para No. 10 in ground no. 2 in this appeal. We, therefore, reverse the action of the ld. CIT(A) and allow the ground of appeal

Being aggrieved the assessee carried the matter before Ld. CIT(A) and submitted that advance to other for Rs.41,42,250/- represents the money advance to the suppliers and therefore it was given for the purpose of assessee’s business. As regards the advance to directors, the assessee submitted that it was given out of the current account of assessee and no borrowed fund was utilized in making such advance payment to the directors. The assessee further submitted that the advance to the directors has been given out of its own fund of the assessee-company. Accordingly, Ld. CIT(A) deleted the addition made on account of advance to others for Rs.41,42,250/- but confirmed the interest pertaining to the advance to the directors for Rs.15,06,514/- by observing as under:- “I have considered the submissions of the appellant. As regards ‘advances to others’, the appellant stated that these advances were given to suppliers as in earlier years. The relevant schedule of advances has been filed. The AO commented that the advances given are not for the purpose of business. The AO has not elaborated the reasons/ observations on which he came to that conclusion. In any business, it is normal practice to give advances to suppliers. The AO has not brought on record any material evidence to say that these advances are not paid. The only point raised is that these advances are not for the purpose of business. This view of the AO is without any basis and hence not reasonable. Accordingly, I direct the AO to delete the interest portion disallowed relating to the advances to suppliers. As regards loans given to directors, the appellant stated that the loan advanced to directors was not from borrowed funds but from current account. This kind of argument is not tenable. The point to be seen here is whether such loans are given for the purpose of business and are in the nature of & 200/Kol/2010 A.Y. 2005-06 Stadmed Pvt. Ltd. Vs. DCIT, Cir-10, Kol. Page 7 commercial expediency. Moreover the loans given from out of current account also affect the overall picture of thee business as sizable amounts are diverted to non-business purposes. The Ld. AR also brought to my notice the Karnataka High Court decision in the case of CIT vs. Sridev Enterprises & Ors. (1991) 192 ITR 165 in support of the view that it sums are advanced from own funds then the interest should not be disallowed. The facts of this case are different from the present case. As such the disallowance of interest made proportionate to loans given to directors is upheld. In the result the appellant gets a partial relief.”

Being aggrieved by this, both assessee and Revenue have come up in appeal before us. The Revenue has raised the issue in ground no. 3 in its appeal ITA 200/Kol/2010 as follows. 3. That the facts and in the circumstances of the case, Ld. CIT(A) has failed to appreciate that advance of Rs.41,42,250/- given to others was not for business purpose and no benefit was derived out of such advance.”

Before us Ld. DR vehemently relied on the order of lower authorities in the appeal filed by the assessee. However in the appeal filed by the Revenue the Ld. DR has supported the stand of the AO by reiterating the arguments contained in the respective orders, which we have already adverted to in the Para-15 above and are not being repeated for the sake of brevity.

We have heard the Ld. DR perused the materials available before us especially the impugned order. It was observed that the assessee has given advance to the directors amounting to Rs.15,06,514/- and to others for Rs.41,42,250.00 without any business purposes. Thus, the AO disallowed the interest expenses claimed by the assessee on pro rata basis to the total amount of loan as it was not used for business purposes. The Ld CIT(A) declined to interfere in the order of the AO in the case of the advance given to the directors but deleted the disallowance of interest in the case of the advances given others. The reasons for confirming the addition and deleting the additions have already been explained in the above paragraphs and are not being repeated for the sake of brevity. & 200/Kol/2010 A.Y. 2005-06 Stadmed Pvt. Ltd. Vs. DCIT, Cir-10, Kol. Page 8 The controversy arises in cases where funds are pumped out of business without any commercial purposes. And the funds of the business comprise both type of funds namely borrowed as well as own funds. In all such cases where mixed funds are used for both business and other than business purposes, there is no presumption that moneys used for other purposes came out of borrowed funds. It can be said that interest free funds given are out of own funds to the extent of capital and reserves, and this proposition is supported by the decision of Hon'ble Andhra Pradesh High Court in the case of CIT Vs. Gopikrishna Murlidhar, 47 ITR 469 (AP) and in the said case their Lordships accepted the contention that the assessee is entitled to withdraw from capital. The Facts of that case are that the assessee is a Hindu undivided family carrying on business on an extensive scale with a capital of nearly Rs. 20,00,000 (twenty lacs). During the year ended 9th November, 1950, the assessee made large borrowings for purposes of his business and paid interest amounting to Rs. 93,611/- on said borrowings. During the course of that year, the assessee withdrew from the business from time to time amount of Rs.1,77,984/- for his personal expenses. The Income-tax Officer disallowed a sum of Rs.13,500/- on pro rata, representing the interest element relating to Rs.1,77,984/-, since he was of view that amount of Rs.1,77,984/- withdrew was made in the name of the business but used for his personal purposes. According to him, money was withdrawn from the books of account to meet the personal expenditure of the assessee and, as this sum of money was not actually used for the business, the interest paid thereon could not be allowed as permissible deduction. However the Hon’ble Court in that case i.e. Gopikrishna Murlidhar, (Supra) has taken a contrary view. The relevant finding of the Court is reproduced below:-

Next issue raised by Revenue in this appeal is that Ld. CIT(A) erred in directing the AO to treat the subsidy received from Government of West Bengal as capital receipt.

During the year, assessee has received subsidy from the Govt. of West Bengal for ₹29,53,161/- under Industrial Promotion Assistance Scheme and said subsidy was given for the expansion of capacity, modernization and improving the marketing capability of assessee-company. The AO called upon the assessee to explain why the said amount should not be added to the total income by treating the subsidy as revenue in nature. In compliance thereto, assessee submitted that the Co-ordinate Bench in assessee’s own case for AYs 1997-98, 1998-99 and 2001-02 as treated capital receipt. However, AO treated the subsidy as revenue in nature because option was given to the assessee to adjust the subsidy with the commercial taxes. The AO also observed that the subsidy amount has not been reduced from the capital asset. In view of above, AO treated the subsidy as revenue in nature and added to the total income of assessee. 24. Aggrieved, assessee preferred an appeal before Ld. CIT(A) whereas assessee submitted that the subsidy was given for the purpose of expansion and modernization of its unit and nowhere it was connected with revenue receipt. The assessee also submitted that similar issue was decided by the Co-ordinate Bench in favour of assessee for AYs 1996-97 to 1998-99 and 2001-02. Similarly, Ld. CIT(A) also decided the issue in favour of assessee for AYs 1999-00, 2001-2002 and 2003-04 respectively. Accordingly, Ld. CIT(A) deleted the addition made by AO by observing as under:- “The fact of the case and the issue involved in the present case is similar to facts of the cases decided by the jurisdictional Kolkata Tribunal and High Court. I find in the earlier years in the appellant’s own case my predecessor following the jurisdictional ITAT decisions [Rasoi Ltd. Mendine Pharm. Ltd. (supra)] held the WBIPA as capital receipt. I am also of the view that the sole & 200/Kol/2010 A.Y. 2005-06 Stadmed Pvt. Ltd. Vs. DCIT, Cir-10, Kol. Page 12 purpose behind the grant of assistance is to tide over the financial crisis and promotion of industries and that both these activities are related to capital field and cannot be linked up with day to day operations of the appellant in any manner. Respectfully following the jurisdictional Kolkata ITAT and High Court decisions discussed earlier, I treat WBIPA as a capital receipt and direct the AO to delete the addition of Rs.29,53,161/-“ Being aggrieved by this, Revenue has come up in appeal before us.

Before us Ld. DR vehemently relied on the order of AO.

We have heard the Ld. DR and perused the records available. The assessee has received grant from the West Bengal Government amounting to Rs.29,53,161/- under the Industrial Promotion Scheme of W.B. The AO has treated the same as revenue in nature and accordingly added the same to the total income of the assessee. However the Ld. CIT(A) has allowed the same based on the facts which is already discussed above. Now the main crux of the controversy is as to whether the grant received by the West Bengal Government is Capital or Revenue in nature. At the outset we find that the issue is already covered in favour of assessee in its own case in for the AY 2001-02 vide order dated 26-082005. The relevant operative portion of the said order is reproduced below:- “18. We have given our careful consideration to the rival submissions made before us and have perused the orders of tax authorities. We have also considered the case law cited by both the parties and the appellate orders earlier passed by the Coordinate Bench of ITAT, Kolkata as referred above. We find that the same issue came up for consideration before the ITAT ‘C’ Bench, Kolkata in the case of Mendine Pharmaceutical (P) Ltd. for assessment year 1997-98 in ITA No. 2403/Kol/2003. In its order dated 26th March, 2004, the Tribunal recorded the following material finding.:- ‘We have perused the orders of the Tribunal placed on record. We find that the scheme under which the assessee before us received the financial assistance, has been examined in detail in those earlier orders by the Tribunal. The Tribunal in those cases has observed that there is nothing in the scheme which would be considered to help the industries in carrying on their operations on day to day basis. When financial crisis is faced by some business, pumping in of fresh capital is required to help the business to tide over such financial crisis. The financial help, in this regard has, therefore, got to be considered as having an enduring effect of dragging the business out of poor financial & 200/Kol/2010 A.Y. 2005-06 Stadmed Pvt. Ltd. Vs. DCIT, Cir-10, Kol. Page 13 conditions being faced by the industries. The scheme of the West Bengal Gov. does not an all envisage giving any subsidy in respect of specific items of expenses like sales-tax, power, water, etc. and hence the same cannot be regard to be of revenue nature. Since the assessee has received the financial assistance under the same scheme, in our view, the CIT(A) was justified in following the earlier order of the Tribunal and hence we uphold the same.’ Since the facts and circumstances of the present case are identical to the facts in assessee of M/s Medine Pharmaceutical (P) Ltd (supra), we see no reason to differ from the view earlier taken by the Bench. Respectfully following the aforesaid order, we decide the issue in favour of assessee and against the Revenue.”

During the course of assessment proceedings, AO observed that assessee has not included excise duty payable on the closing stock of finished goods lying in factory. The AO called upon the assessee for explanation in compliance thereto. Assessee submitted that the liability for making payment of excise duty arise at the time of removal of goods. Therefore the same was not included in the closing stock. However, AO disregarded the claim of assessee in view of provisions of Sec. 145A of the Act. Thus the excise duty for Rs.48,28,867/- was added to the total income of assessee.

Aggrieved, assessee preferred an appeal before Ld. CIT(A) whereas assessee submitted that it has been valuing its closing stock of finished goods without inclusion of excise duty consistently. Considering the same, Ld. CIT(A) deleted the addition made by AO by observing as under:- “The other argument of the appellant is that it neither paid nor incurred nor debited such excise duty. According to appellant, payment of excise duty arises on removal of finished goods from factory premises. The decisions of & 200/Kol/2010 A.Y. 2005-06 Stadmed Pvt. Ltd. Vs. DCIT, Cir-10, Kol. Page 14 Madras High Court in the case of CIT vs. English Electric Co. Ltd. (243 ITR 512) and CIT vs. Dyna Vision Ltd (267 ITR 600) support the appellant’s view wherein it was held that excise duty payable on closing stock did not form part of the valuation of closing stock. Following the above decisions, the Madras High Court in the case of CIT vs. Ashok Leyland Ltd. [2007] 294 ITR 380 held that “while calculating valuation of closing stock customs and excise duty component had to be excluded”. The court further held that ‘customs and excise duty were to be allowed u/s. 43B which were paid on goods manufactured though lying in stock’. The Bombay High Court in the case of Cartini India Ltd vs. ACIT & Ors (2007) 291 ITR 355 supported the above view, wherein it was held that ‘as far as exclusion of excise duty from closing stock is concerned, excise duty could not form part of the closing stock as the payment was not debited to the P&L a/c’. The court further observed that ‘if the amount was treated as the part of the closing stock then it should have been allowed for deduction u/s. 43B’ The Hon'ble ITAT, Allahabad Bench in the case of Shyam Biri Works Ld vs. ACIT (2006) 108 ITD 489 held that “Excise duty is payable either at the point of time of manufacture or at the time of removal of such manufactured goods kept at an approved place of storage. Sec. 145A clearly provides that excise duty is includible in closing stock only when it is actually paid. Since the assessee had not paid excise duty on goods kept in bonded warehouse, question of including it in the closing stock did not arise.” In view of the above detailed discussion and respectfully following the cited judicial decisions, I direct the AO to delete the addition made on account of excise duty to the value of closing stock.”

Heard Ld. DR and perused the materials available on record. We find that the AO has made the addition of the excise duty on the closing stock of finished goods as per the provisions of section 145A of the Act. However we find that the liability for the payment of the excise duty arises at the time of removal of the goods and in the instant case the finished goods are lying in the closing stock. Therefore there is question of including the excise duty in the closing stock of the finished goods. In this connection we rely in the case of CIT Vs. SVP Industries Limited reported in 228 taxman 104. The relevant extract is extracted below : “Section 145A of the Income-tax Act, 1961 - Method of accounting - In certain cases (Excise duty) - Assessment year 2004-05 - An addition was made to & 200/Kol/2010 A.Y. 2005-06 Stadmed Pvt. Ltd. Vs. DCIT, Cir-10, Kol. Page 15 income of assessee-company on account of non-inclusion of excise duty inclosing stock of finished products - On last date of accounting year, goods were lying in bonded warehouse – Neither excise duty was paid nor duty was incurred - Further, duty had not been included and did not form part of cost as it was not claimed in profit and loss account – Whether excise duty being payable at time of removal of goods and not at time of manufacture, duty would be payable only at time of unbonding and, thus, addition was to be deleted - Held, yes [Para 10] [In favour of assessee]”

In the result, Revenue’s appeal stands dismissed.