Rama Associates (P.) Ltd. vs Inspecting Assistant ...
1989 Latest Caselaw 565 Del

ORDER

Per V. P. Elhence, Judicial Member - The assessed is aggrieved of the order dated 4-2-1987 of the learned Commissioner of Income-tax (Appeals)-V, New Delhi for the assessment year 1983-84.

2. The assessed is a private company. For the assessment year in question the assessed had exported rice to Russia. It is an exporter of Basmati rice. The first four grounds of appeal relate to the disallowance of Rs. 7,534 representing interest. The disallowed amount represented interest on a deposit of Rs. 2 lakhs. It appears that no details thereof were given in the assessment order and the only observation made by the Inspecting Asst. Commissioner (Assessment) was that "Interest on deposit of Rs. 2 lakhs which is treated as income from undisclosed sources in assessment year 1982-83."

3. In appeal, the learned Commissioner of Income-tax (Appeals) observed that the assessed had surrendered an amount of Rs. 5 lakhs as against the addition of Rs. 7,53,000 made in the assessment year 1982-83 vide order dated 26-6-1986 of the IAC (A) and since the addition of Rs. 5 lakhs was made on account of unexplained deposits, the addition was confirmed.

4. After hearing the learned representatives on both the sides, it appears that the basis for the addition is not established. During the assessment year 1982-83 originally the return had been filed by the assessed on 30-6-1982 disclosing loss of Rs. 2,19,366. Latter on revised return was filed on 11-3-1985 disclosing a loss of Rs. 2,01,469. The IAC (A) in his original assessment order passed on 7-3-1986, completed the assessment on a total income of Rs. 5,30,990. That addition was made for inflation of purchases. The learned Commissioner vide his order dated 10-4-1986 for assessment year 1982-83 under sec. 264 directed the ITO to examine the disclosure/surrender of Rs. 1,60,00,000 (made by the assessed for the assessment years 1982-83 to 1985-86 under the Disclosure Scheme) and to make a fresh assessment. In the light of the said directions the IAC (Asst.) vide his order dated 26-6-1986 made the addition of Rs. 7,53,000 in place of Rs. 5 lakhs. We therefore, see no basis whatsoever for the addition which has to be deleted.

5. The next ground relates to the disallowance of Rs. 55,912 under sec. 37(2A) as expenses in the nature of entertainment. The IAC (Asst.) considered them as entertainment expenses. He no doubt allowed Rs. 30,000 as the maximum allowance under section 37(2A).

6. The learned CIT (Appeals) confirmed the disallowance on the same basis.

7. We have heard the learned representatives on both the sides. We find that the details of the expenses appeared at pages 32 & 33 of the assesseds paper book. However, the following expenses cannot be said to amount to expenses in the nature of entertainment :-

Date Foreign guests

Particulars

Others

31-10-1981

Amount paid to M/s. Silhouette, -18-Lok Nayak Bhawan, Khan Market as per bills Nos. 981 & 1368 dt. 29-10-1981 for processing

Rs. 1,415.00  

7-11-1981

Purchase of sweets on the -occasion of `Diwali vide cheque No. 749183 on State Bank of India (OB).

Rs. 8,820.00  

12-11-1981

Paid to M/s. Mehta & Co. 59-M -Block, Connaught Place, New Delhi as per Bill No. 1460 for purchase of 5 albums.

Rs. 317.00  

21-12-1981

Cost of 11 colour photos paid to -M/s. Photo Film Services, Jiwan Lodge, L-1 Connaught Circus, New Delhi as per bill No. 2213 dt. 6-12-1981.

Rs. 136.00  

3-2-1982

Cost of leather handgloves.

Rs. 100.00 -

6-2-1982

Cost of 83 post card size photos -paid to Pram Studio 634, Main Road, Jheel Kurenja, Delhi-51, as per cash memo No. 2919 dated

Rs. 900.00  

5-2-1982.

Total :

Rs.11,552.00

Rs. 136.00

Grand Total : Rs. 11,552 + Rs. 136 = Rs. 11,688.

For the rest of the expenses the learned counsel for the assessed did not advance any arguments. Therefore, they cannot be interfered with. We are, therefore of the view that the disallowance to the extent of the aforesaid amount of Rs. 11,688 should be deleted.

8. The next ground relates to the disallowance of Rs. 1,700 out of miscellaneous expenses. Their details appeared at pages 34 to 36 of the assesseds paper book. The IAC (Asst.) had disallowed the entire amount of Rs. 14,460.58 saying that no details had been filed thereof.

9. In appeal, the learned Commissioner of Income-tax (Appeals) after going through the details, restricted the disallowance to an amount of Rs. 1,700 only.

10. We have heard the learned representatives on both the sides on this point. The order of the learned CIT (A) does not detail as to how the amount of Rs. 1,700 was arrived at by him.

As rightly pointed out on behalf of the assessed by Shri Sapra, the disallowance could possibly relate to the following two items :-

Sl.No.

Date

Particulars

Amount

1.

30-6-1982

Spent by Lamina Packers, Bombay on behalf of the assessed at Bombay for assesseds guests arranging lunch, breakfast, dinner, etc.

Rs. 492

2.

30-6-1982

Amount transferred from traveling expenses account spent by the office staff for stationery and getting photostat copies, etc. during their tour

Rs. 1,217

Total:

Rs. 1,709

So far as the first item is concerned, it is an item which pertains to sec. 37(2A) and its disallowance whether it is considered here or under sec. 37(2A) has to be upheld. However, second amount of Rs. 1,217 does not appear to be a disallowable expenditure. The disallowance in that regard is deleted. The assessed, therefore, gets relief of Rs. 1,217.

11. The last ground relates to weighted deduction under sec. 35B. The IAC (Asst.) noticed that the assessed had claimed weighted deduction on export inspection fee amounting to Rs. 34,20,750 under sec 35B (1) (b) (ix) read with rule 6AA (c) which reads as follows :-

"(c) Maintenance of a laboratory or other facilities for quality control or inspection of such goods".

The IAC (Asst.) noticed that the assessed had paid the inspection fee to certain agencies which had carried out the inspection. Holding that since the assessed had not maintained any laboratory or other facility itself, the claim was disallowed. However, the IAC (Asst.) accepted the assesseds submission that the inspection was compulsory in export.

12. In appeal, the disallowance was confirmed by the learned Commissioner of Income-tax (Appeals) on the same basis.

13. Before us, initially on behalf of the assessed Shri O. P. Sapra sought to argue that not only weighted deduction under sec. 35B was allowable on the amount of Rs. 34,20,750 (representing export inspection fee paid to the Export Inspection Agency, Delhi) but also in respect of the following two items of expenses as per the assesseds profit & loss account, namely :-

(i) Fumigation charges paid to M/s. Pest Control (I) Pvt. Ltd. and M/s. Mysodet Pvt. Ltd.

Rs. 10,83,432.29

(ii) Paid to Geo Chem Lab. P. Ltd. for issue of quality certificate, supervision of loading etc.

Rs. 76,869

The details of these items were also given at pages 49 to 51 of the assesseds paper book. However when the learned counsel for the assessed was asked as to how these two additional claims could be considered at the stage of the Appellate Tribunal, without any application of the assessed for raising additional grounds, when the IAC (Asst.) as well as the CIT (Appeals) had considered only the claim for Rs. 34,20,750, Shri O. P. Sapra, the learned counsel for the assessed submitted that he would not press the other two claims and that only the claim in regard to the amount of Rs. 34,20,750 be considered as adjudicated upon. We are, therefore considering only that claim.

14. So far as the claim in regard to Rs. 34,20,750 is concerned, the argument of Shri Sapra was that the case of the assessed was covered under Rule 6AA (c) even though it did not have a laboratory or other facility of its own for quality control or inspection of rice. In this connection, reliance was placed by him on the decision of Bombay Bench A of Appellate Tribunal in the case of Kantilal & Co. v. First ITO [1989] 33 TTJ 292. On the other hand, Shri Satish Khosla, the learned Departmental Representative strongly relied upon the orders of the Income-tax authorities.

15. We have considered the rival submissions as also the decision referred to above. In terms of section 35B (1) (b) (ix) read with Rule 6AA (c) what falls to be considered is whether the laboratory or other facility for quality control or inspection of goods should be owned by the assessed itself or it would suffice if the assessed made the payment to an agency for this purpose. Export Inspection Agency was established by the Government of India under section 7 of the Export (Quality Control and Inspection) Act, 1963. Another agency similarly established is the Agricultural Marketing Adviser, Government of India. This is clear from the letter dated 10-3-1981 of the Export Inspection Agency, Delhi addressed to all exporters of Basmati rice (copy at page 38 of the assesseds paper book). Certain instructions were issued in pursuance of Rule 4 of the Export of Basmati Rice (Inspection) Rules, 1980, containing the scheme for compulsory quality control and pre-shipment inspection of Basmati rice. Detailed Executive Instructions were issued in that regard (copy of which appears on the assesseds paper book). They show that the samples of Basmati rice received in the laboratory were to be analysed for different characteristics mentioned in the specification and that a fee 25p. per 10 kg. or part thereof was to be paid by the exporter to the Export Inspection Agency as inspection fee in advance. It is therefore clear that in the nature of business the assessed could not maintain a laboratory or other facility for quality control or inspection of rice and that this could be done only by means of a statutory notification by the Government under section 7 of the Export (Quality Control and Inspection) Act, 1963. The quality control and pre-shipment inspection of Basmati rice introduced with effect from 19-4-1980 in pursuance of the Ministry of Commerce and Civil Supplies Notification S. O. Nos. 1025 and 1026, was compulsory. Therefore, if the assessed was obliged to avail of the statutorily appointed Export Inspection Agency and to pay the Inspection Fee, it would amount to the assessed maintaining "other facilities for quality control or inspection of such goods". This view would also accord with the purpose behind Rule 6AA (c). A similar view was taken by Bombay Bench A in the case of Kantilal & Co. (supra) where it was held that the utilisation of the facilities provided by the Government analysing department tan amounted to maintenance of laboratory or other facilities for quality control as contemplated under Rule 6AA. It had relied upon the earlier decision of the Appellate Tribunal in the case of Kothari Carpets v. ITO [1984] 9 ITD 357 (All.). In that case the Tribunal considered the provisions of sec. 35B (1) (b) (iv) where the expression "maintain" was used. It was held that in connection with an agency maintenance implied the keeping of the latter in working order or to carry it on. We in respectful agreement, give the said view. We accordingly hold that the Income-tax authorities were not at all justified in denying to the assessed the claim of sec. 35B with reference to the aforesaid amount. The weighted deduction claimed will now be allowed to the assessed in respect of the aforesaid amount of Rs. 34,20,750.

16. In the result, the appeal is partly allowed.