Hind Samachar Ltd. vs Deputy Commissioner Of Income ...
1997 Latest Caselaw 213 Del

ORDER

R. M. MEHTA, A.M. :

Both these appeals were heard together and are disposed of by means of a consolidated order.

2. Taking up for consideration the assessees appeal the first ground pertains to a disallowance of Rs. 15,000 out of Shagan expenses. This was in fact the disallowance made by the AO on the ground that the same had not been incurred in connection with the business of the company, but was more in the nature of personal expenditure of the directors. On further appeal, the CIT(A) confirmed the disallowance on more or less identical grounds.

3. Before us the learned counsel, at the outset, stated that he was pressing the ground only in respect of an expenditure of Rs. 4,606 as detailed on p. 26 of the paper-book. According to him the payments were no doubt to individuals, but those who were intimately connected with the company in one capacity or the other. A perusal of the details shows that some of them are related as advertisers, others as bankers and one of them in the position of a statutory auditor. It was the argument of the learned counsel before us that good relations had to be maintained with these persons strictly in the interest of the companys business and no personal element was involved. In support of these arguments, he placed reliance on the judgment of the Honble Supreme Court in the case of Sri Venkata Satyanarayana Rice Mill Contractors Co. vs. CIT (1997) 223 ITR 101 (SC). The alternative submission was to the effect that the disallowance be proportionately reduced by two amounts of Rs. 500 each vide serial numbers 4 and 7 of the list at p. 26 since these persons had subsequently returned back the amounts. The learned Departmental Representative, on the other hand, supported the orders passed by the tax authorities. According to her the expenditure was not connected with the assessees business and the claim in question was rightly rejected.

4. After examining the rival submissions, we are of the view that there is ample merit in the arguments advanced by the learned counsel on behalf of the assessee. The individuals mentioned in the list are connected with the company in one capacity or the other and even going on the ground that the directors, etc. participated in the marriages and other functions the ultimate aim was to benefit the company in one way or the other. We, therefore, accept the arguments of the assessees counsel and allow the modified claim i.e., Rs. 4,606 subject to necessary adjustment in respect of the two amounts which were not accepted and entries to that effect reversed in the books of accounts.

5. The only other ground in the assessees appeal pertains to the disallowance of a sum of Rs. 4,32,865 being the interest on "agents securities". The AO made the impugned disallowance on the short ground that the amount in question had not been provided for in the books of accounts. On further appeal the CIT(A) confirmed the action of the AO observing in the process as under :

"Interest on Agents Security :- A claim of Rs. 4,32,865 was made on account of interest payable on agents security in the year under consideration. The AO did not allow this claim observing perusal of the auditors report shows that a sum of Rs. 4,32,865 on this account has not been provided in the books of account. This amount is, therefore, not allowable."

The counsel of the appellant-company submitted that this sum of Rs. 4,32,865 pertains to liability towards interest on agents security. The appellant-company maintained accounts on mercantile basis and this liability pertains to the year under consideration. Therefore, the same should have been allowed. As regards the observation of the AO referring to auditors report it was pointed out that auditors have simply pointed out that a sum of Rs. 17,79,041 had been provided as interest of agents security. This observation in no way affects the further claim of Rs. 4,32,865 which was made at the time of filing of return of income. In view of these facts, it was argued that the same should be allowed.

The relevant facts are that an additional claim of Rs. 4,32,865 was made while filing the return of income. The claim was stating that this amount was payable as interest on security of agents which though not provided in the books of account but was admissible being an ascertained liability. It may be mentioned here that a sum of Rs. 17,79,041 had been provided as interest on agents security in the books of account and claimed in the P&L a/c. It has been observed that payment of interest on security deposit of agents is regulated through Terms of Agency. Sub-cl. 13 of the said Terms of Agency reads as under :

"The security deposit with the company will carry interest as may be fixed by the Co. from time to time."

From the language of this sub-clause it is clear that rate of interest for payment of security is to be fixed by the company from time to time. Accordingly, the liability for payment of interest would arise only when such rate of interest is fixed for a particular period and the interest is provided in the books of account. Normally the payment of interest in such circumstances is authorised through a Boards Resolution at the end of the accounting period. Thereafter the rate of interest to be given to the agents on their security deposit is fixed. As regards this claim of Rs. 4,32,865 there is no information on record as to when the rate of interest was fixed and how this liability has been ascertained. The fact that the same has not been provided for in the books of account shows that the same had not been ascertained at the time of closing of the books of account. As the liability on account of payment of interest to this account was not an ascertained liability during the year under consideration, the same was not an admissible deduction. Therefore, I hold that the AO was justified in not allowing this claim of Rs. 4,32,865. The same is accordingly upheld."

6. We have heard both the parties in respect of the aforesaid ground raised by the assessee the main thrust of the argument of the learned counsel being to the effect that the disallowance had resulted in a complete reversal of the method of accounting which had been followed by the assessee in the preceding assessment years and the same having been accepted by the Department. In explaining to us the system followed the learned counsel stated that there was no dispute between the parties on the question of paying interest on the amounts received as security from the agents and what the assessee did was to enter in the P&L a/c. for a particular assessment year the amount which related to an earlier year, but reversing the same at the time of filing the return and claiming as a deduction the quantum of interest which pertained to the previous year under consideration, but not provided for in the books of accounts. He further went on to state that the rate of interest did not remain static from year to year and the same varied as would be apparent from the chart appended at p. No. 1 of the compilation. It was pointed out that in asst. yr. 1986-87 interest had been provided at 18 per cent whereas in asst. yr. 1987-88 the rate was 20 per cent but in the year under appeal only 4 per cent had been provided. The learned counsel also invited our attention to the copy of Boards resolution pertaining to asst. yr. 1987-88 for the proposition that such a resolution was passed and the rate of interest fixed only after ascertaining the financial position of the company towards the end of the previous year in question.

7. In support of the argument that similar claims had been allowed in the two preceding assessment years, the learned counsel invited our attention to the copies of the statement of taxable income for the asst. yr. 1987-88 along with the assessment order for the same period as also that for asst. yrs. 1988-89 and 1989-90. The relevant extracts from the audit report for asst. yrs. 1987-88 and 1988-89 were also placed on record with specific reference to note No. 6 in both the assessment years.

8. In summing up his arguments, the learned counsel contended that the system of accounting followed by the assessee brought out a position where the claim pertaining to a particular previous year only had been made and the entries on account of interest made in the books of accounts in respect of the interest for an earlier previous year were reversed in the sense that in the statement of taxable income the latter amount was added as income and it was only the former amount i.e., the interest pertaining to the previous year in question which was claimed as a deduction. He, therefore, urged that the same system having been followed in the assessment year under appeal the claim on account of interest be allowed. On the question of not making an entry in the books of account, the argument of the learned counsel was to the effect that this was not a relevant factor especially when the assessee was not claiming anything over and above to what it was entitled during the previous year relevant to the assessment year under consideration. It was also stated that the quantification was made before the close of the subsequent previous year. In support of the various arguments advanced, the learned counsel placed reliance on the following decisions :

(i) Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC);

(ii) CIT vs. Indian Metals & Carbide Ltd. (1992) 198 ITR 444 (Ori) and

(iii) ITO vs. Andhra Pradesh Paper Mills Ltd. (1991) 38 ITD 1 (SB).

9. The learned Departmental Representative, on the other hand, strongly supported the orders passed by the tax authorities and the subsequent arguments advanced by her were a reiteration of the reasons recorded by the said authorities in rejecting the assessees claim.

10. After considering the rival submissions, we are of the view that there is substantial merit in the arguments advanced by the learned counsel for the assessee in support of the claim made as also the view-point canvassed. No doubt the entries for the amount claimed in the year under consideration had not been made in the books of accounts, but it is nobody's case that the same does not pertain to the previous year relevant to the assessment year under consideration. It is also not disputed before us by the Revenue that the sum of Rs. 17,79,041 debited to the P&L a/c. was not claimed as a deduction, but was added to the income of the company in the statement of taxable income which accompanied the return and it was the sum of Rs. 4,32,865 which was claimed as a deduction. The decision of the Honble Supreme Court (supra) relied upon by the learned counsel and which was followed by their Lordships of the Orissa High Court in the decision cited by the learned counsel (supra) does support the stand that entries in the books of accounts in a given case may not be a relevant factor. That apart, the assessee is consistently following the same method in the two preceding assessment years and this has been accepted by the Department as the assessment orders for these years would show. If a subsequent assessment year is looked at i.e., 1989-90 the assessee has appended the statement of taxable income at p. 19 of the compilation and the sum of Rs. 4,53,485 which according to the learned counsel includes the sum of Rs. 4,32,865 claimed in the year under appeal has been added to the profit and there apparently being no claim for deduction on the same account as would be apparent once again from the same statement.

11. In view of the discussion aforesaid and in the light of the decisions cited which we respectfully follow the disallowance on account of interest is deleted.

12. In the Revenues appeal, the following two effective grounds have been raised :

1. On the facts and in the circumstances of the case learned CIT(A) has erred in allowing relief of Rs. 6,966 out of the total addition of Rs. 8,862 made on account of disallowances of entertainment expenses by relying upon the decision of Tribunal order dt. 26th June, 1991 for the asst. yr. 1984-85 which has not been accepted by the Department.

2. "On the facts and in the circumstances of the case the learned CIT(A) has erred in deleting the addition of Rs. 25,245 made on account of inadmissible expenses under the head "Sale promotion and Advertisement expenses" by relying on the order of the learned Tribunal for the asst. yrs. 1986-87 and 1987-88 which have not been accepted by the Department."

13. We have heard both the parties and have also perused the orders passed by the tax authorities. As the grounds themselves denote the Revenue has filed an appeal only to keep the matter alive and it is not disputed that both the issues are covered in favour of the assessee by earlier orders of the Tribunal. We would only like to mention one aspect of the matter i.e. the relief to the assessee at 50 per cent on account of staff participation in the expenses which include outsiders as well since the balance 50 per cent is treated as expenditure on account of entertainment to be considered under s. 37(2A). This 50 per cent has been accepted on the facts of the assessees case by the Tribunal in an earlier year when the total amount involved was Rs. 5,603 and after allowing statutory deduction the disallowance stood at Rs. 5,603 only. In the light of the discussion in the preceding portion, the two grounds in the Revenues appeal stand rejected.

14. In the result, assessees appeal is partly allowed whereas that of the Revenue is dismissed.