M/S NEWAGE HOSE MFG. CO.,,SURENDRANAGAR vs. THE DY. COMMR. INCOME TAX, SURENDRANAGAR CIRCLE,, SURENDRANAGAR

The assessee has raised the following grounds of appeal:

The learned Commissioner of Income Tax has erred in law and on facts confirmed, the disallowance out of employee’s food expenditure of Rs,2,29,167/- is not correct.

Briefly stated facts are that the assessee in the present case is a partnership firm and engaged in the business of manufacturing of Hose pipes and other equipment of firefighting. The assessee in the year under consideration has claimed expense of Rs. 1,91,435/- which were incurred on the dinner organized on monthly basis at the religious place. However, the AO was of the view that such expenditure is not connected with the business, therefore he disallowed the same by adding the sum of Rs. 1,91,435/- to the total income of the assessee.

Aggrieved assessee preferred an appeal to the Ld. CIT(A). The assessee before the Ld. CIT(A) submitted that there is a shrine and a temple adjacent to its business premises where the public and employee of the assessee gather for prayer to get the blessings. The assessee on the gathering of the employees provides dinner facility on monthly basis which is nothing but for the welfare of the staff. Therefore, the assessee incurred such expense only and exclusively for the purpose of the business. However, the Ld. CIT(A) disregarded the contention of the assessee by observing as under: 4.2 I have carefully considered the assessment order, facts of the case and the submissions made by the appellant. It is seen from the same that the appellant has incurred these expenses for religious purpose in relation to a temple near to its business premises on account of pooja, etc. the appellant's relied on several case-laws and claimed that these expenses are in the nature of welfare expenses for the staff. However, the appellant's argument cannot be accepted. The temple/shrine is not even located within the business premises of the appellant's firm. Thus, it cannot be said that these expenses have been incurred for the welfare of employees for the purpose of the appellant's business and the addition of Rs.1,91,435/-made by the Assessing Officer is therefore confirmed. Ground of appeal No. 1 is dismissed.

Being aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us. The Ld. AR before us filed a paper book running from pages 1 to 68 and contended that the expenditure was incurred exclusively for the employee’s dinner so as to encourage and gain their confidence. Thus, such expenditure should be regarded as staff welfare in nature and therefore the same are eligible for deduction u/s 37(1) of the Act.

On the other hand, the Ld. AR vehemently supported the order of the authorities below.

We have heard the rival contentions of both the parties and perused the materials available on record. The provision of section 37 of the Act, provides the deduction of those expenses which are not personal/capital in nature and incurred wholly and exclusively for the purpose of the business. Such deduction is available to the assessee subject to various conditions specified under the provisions of section 37 of the Act, but the same are not in dispute. As such the controversy before us is limited to the extent whether the expenditure, on the dinner, incurred by the assessee in the temple is wholly and exclusively for the purpose of the business. The word wholly and exclusively for the purpose of business as nowhere been defined under the statue but same has been interpreted by Hon’ble Courts in the series of the judgement. The principles laid down in those judgment propound the theory that what expenditure is wholly and exclusively for the purpose of the business is the prerogative of the assessee. As such, the AO cannot sit on the armchair of the assessee to decide the affairs of the business which are wholly and exclusively for the purpose of the business. The word wholly and exclusively also includes the expenditure incurred voluntarily provided it has ingredient of commercial expediency. Even in the process of incurring voluntarily expenditure, if the benefit is extended to the third party, the AO cannot deny the deduction. In the present case, there is no doubt that the money has been spent which is sufficient enough for allowing deduction even in a situation where there was no A.Y. 2013-14 4 necessity of such expenditure as long as principle of commercial expediency are fulfilled. In the present scenario, it is very common in the business organization to celebrate birthday of the employees for the purpose of creating a feeling in the mind of the employees of belongingness to the organization. Though such expenditure is not necessary for running business, but such expenditures is incurred to provide the boost to the employees who relate to business of the assessee. Thus, we are of the view that the expenditure incurred by the assessee in providing dinner to the employees in temple located within the vicinity of the premises of the assessee cannot be denied on the reasoning that such expenditures were not incurred for the purpose of the business. Accordingly, we set-aside the finding of the Ld. CIT(A) and direct the AO to delete the addition made by him. Hence, the ground of appeal of the assessee is allowed.

Aggrieved assessee preferred an appeal to the Ld. CIT(A). The assessee before the Ld. CIT(A) submitted that interest free loan has been given to the employee who was attached with the organization since last 25 years. Furthermore, the own generated funds were given to the employee and therefore it cannot be said that borrowing fund has been attributed for non-business A.Y. 2013-14 5 purpose. However, the Ld. CIT(A), disregarded the contention of the assessee by observing as under: 5.2 I have carefully considered the assessment order, facts of the case and the submissions made by the appellant. It is seen from the same that the appellant advanced the amount of Rs.11 lakhs to Shri Dilip Dhanani out of his funds as interest free loan on account of services rendered to the appellant. The appellant has however, not given any details in respect of the kind of work that Shri Dilip K. Dhanani has been doing for the appellant to warrant such a loan and to establish that the loan was given on the grounds of commercial expediency. In view of these facts, the disallowance of Rs.1,32,000/- made by the Assessing Officer is confirmed. Ground of appeal

On the other hand, the Ld. DR vehemently supported the order of the authorities below.

We have heard the rival contentions of both the parties and perused the materials available on record. The Hon’ble Karnataka High Court in the case of Sridev Enterprise (Supra) has observed as under: 4. We are in agreement with the view expressed by the Tribunal. The status of the amount standing as outstanding due from Nalanda on the first day of the accounting year is the amount that stood outstanding on the last day of the previous accounting year; therefore, its nature and status cannot be different on the 1st day of the current accounting year, from its nature and status as on the last day of the previous accounting year. Regarding the past years, the assessee claims for deductions were allowed in respect of the sums advanced during those years; this could be, only on the assumption that those advances were not out of borrowed funds of the assessee. This finding during the previous years is the very basis of the deductions permitted during the past years, whether a specific finding was recorded or not. A departure from that finding in respect of the said amounts advanced during the previous year, would result in a contradictory finding; it will not be equitable to permit the revenue to take a different stand now, in respect of the amounts which were the subject-matter of previous years’ assessments; consistency and definiteness of approach by the revenue is necessary, in the matter of recognising the nature of an account maintained by the assessee so that the basis of a concluded A.Y. 2013-14 6 assessment would not be ignored without actually reopening the assessment. The principle is similar to the cases where it has been held that a debt which had been treated by the revenue as a good debt in a particular year cannot subsequently be held by it to have become bad prior to that year. 14.1 Going to the fact of the case on hand, admittedly the loan was advanced by the assessee without charging any interest in the earlier year and no disallowance on account of interest attributable to such loan was made. Accordingly, we hold that there cannot be any dis-allowance of interest expense in the year under consideration in view of the principles laid down by Hon’ble High Court represented above. Hence, we set aside the findings of the Ld. CIT(A) and direct the AO to delete the addition made by him.

The assessee in the year under consideration has incurred expense of Rs. 11,45,833/- towards welfare of the employees. These expenses were consistently incurred in cash. The assessee in support of such expenses has furnished the ledger copy but the AO was not satisfied on the reasoning that the expenses should be supported by bills/vouchers. The AO also observed that there is no clarity whether food was given to the employee as per part of their pay package. Thus, the AO in the absence of sufficient documentary evidence but after considering the commercial expediency treated 1/5 of the expenditure being Rs. 2,29,617/- as for non-business purpose and added to the total income of the assessee.

Aggrieved assessee preferred an appeal to the Ld. CIT(A). The assessee before the Ld. CIT(A), submitted that expenses were incurred in providing food to the employee which represents staff welfare expenses and therefore the same are allowable u/s 37 of the Act. The assessee has also submitted the bills of the food items amounting to Rs. 8,80,186/- in support of its expenses.

However, the Ld. CIT(A), disregarded the contention of the assessee by observing as under: 6.2 I have carefully considered the assessment order, facts of the case and the submissions made by the appellant. It is seen from the same that the appellant has simply stated that the sald amount was spent for the purpose of business and on food provided to employees as staff welfare expenses. However, the appellant has simply furnished unsigned ledger account and coples of receipts: While it is true that some expenditure must have been 'Incurred on staff welfare, but since each and every item cannot be verified, I am of the considered opinion that a disallowance of 1/5 of the total expenses was reasonable. Thus, the disallowance of Rs.2,29,167/- made by the Assessing Officer is confirmed. Ground of appeal

The Ld. AR before us submitted that all the bills of food expenses along with the ledger were produced before the Ld. CIT(A) which are placed on pages 36 to 66 of the paper book. As per the Ld. AR the disallowance has been made without pointing out any defect in the bills produced before the Ld. CIT(A). Accordingly, to the Ld. AR submitted that the expenses were incurred wholly and exclusively for the purpose of the business and therefore the same should be allowed.

On the other hand, the Ld. DR vehemently supported the order of the authorities below.

We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion, we note that the bills of the employee’s food expenses were filed before us Ld. CIT(A) as evident from paper book. The Ld. CIT(A) in his order has not pointed out any defect in the bills produced by the assessee. Accordingly, we hold that the allegation of the AO that the expenses were incurred without any supporting documents is not correct. Admittedly, there is no doubt that the employee’s food expenses are the expenses wholly and exclusively for the purpose of the business. It is pertinent to note that A.Y. 2013-14 8 the expenses claimed by the assessee amounting to Rs. 11,85,833/- towards employee’s food expenses constitute only 0.34% of the turnover. Accordingly, we set-aside the findings of the Ld. CIT(A) and direct the AO to delete the addition made by him. Hence, the ground of appeal of the assessee is hereby allowed.

In the result, the appeal filed by the assessee is allowed.