General Sales Ltd. vs Assistant Commissioner Of ...
1997 Latest Caselaw 548 Del

ORDER

B. S. SALUJA, J.M. :

The assessee has filed these three appeals in relation to the asst. yrs. 1985-86 to 1987-88 against separate orders of CIT(A)-XIII, New Delhi, raising various common issues. Since the appeals involved common grounds and have been heard together, the same are being disposed of by this consolidated order for the sake of convenience.

2. The learned counsel for the assessee Sh. Pradeep Dinodia has filed a chart of grounds of appeal raised in the three years under consideration and we are proceeding to deal with the grounds mentioned therein.

3. Ground No. 1 urged by the assessee for asst. yrs. 1985-86 and 1986-87 mentions that the learned CIT(A) did not adjudicate on ground No. 1 raised before him for the reason that the ground was general in nature.

4. The learned counsel has urged that the CIT(A) should have disposed of the said ground reducing taxable income to the income returned.

5. It is observed from the ground raised before the learned CIT(A) that the returned income was enhanced and the assessee contested the said enhancement and sleeked (sought) refund of tax as against the enhancement. We feel that the ground is too wide and general. We, therefore, confirm the view taken by the learned CIT(A).

6. Ground No. 2 urged by the assessee in relation to all the three assessment years relates to disallowance of car perquisite under s. 40A(5).

7. The AO noted that the assessee had offered certain amounts as disallowable under s. 40A(5). He also observed that the said amounts had been calculated by treating cash allowance as part of salary and by treating the perquisite value of car as per r. 3(c) of the IT Rules. The AO however, declined the claim of the assessee for working out value of perquisite for car with reference to the IT Rules and observed that the said Rules were meant for quantifying perquisite for the assessment of employees and cannot be invoked for the purpose of s. 40A(5). The AO disallowed 50 per cent of the actual expenditure incurred by the assessee. He relied on the decisions 124 ITR 535 (sic), CIT vs. Forbes Ewarts Figgis (P) Ltd. (1982) 138 ITR 1 (Ker) and Bombay Burmah Trading. Corpn. vs. CIT (1984) 145 ITR 793 (Bom).

8. On first appeal, the learned CIT(A) observed that 50 per cent disallowance was on the higher side and he, therefore, directed the AO to reduce the disallowance to 30 per cent.

9. The learned counsel has urged that the issue is now covered by the decision of the Bombay High Court in the case of Geoffery Manners & Co. vs. CIT (1996) 221 ITR 695 (Bom) 169 : (1996) 221 ITR 695 (Bom) holding that r. 3(c)(ii) is also applicable for determining the perquisite value under s. 40 A(5) because it has been framed by the CBDT for getting over the difficulties that may arise in determining the value of perquisites for use of car for personal purposes. He has also relied on the decision of the Tribunal dt. 23rd August, 1992, in the case of ITO vs. Industrial & Allied Sales (P) Ltd. In the alternative, the learned counsel claimed that disallowance of 30 per cent is highly excessive and should be reduced.

10. The learned Departmental Representative relied on the orders.

11. We have carefully considered the rival submissions on this issue and in view of the aforesaid decisions, we feel that the perquisite value should be worked out in accordance with the provisions of r. 3(c)(ii). The AO is directed to allow appropriate relief to the assessee on the said basis.

12. The next ground raised by the assessee in relation to asst. yrs. 1986-87 and 1987-88 relates to disallowance of salary and perquisite under s. 40A(5) in respect of employees stay abroad.

13. The assessee had claimed that for arriving at the salary/perquisites disallowable under s. 40 A(5), the amounts paid for period of stay of employees abroad should be excluded as provided under s. 40A(5)(b)(i). The said contention was, however, turned down by the tax authorities.

14. The learned counsel for the assessee relied on the decision of the Honble Delhi High Court in the case of Continental Construction Ltd. vs. CIT (1990) 185 ITR 178 (Del), wherein it has been held that remuneration in respect of employment outside India is to be excluded from the limit prescribed in s. 40 A(5). The learned counsel further submitted that the provisions of s. 35B were not in force during the years under consideration. He also submitted that there was no direct decision on the issue before the Tribunal.

15. The learned Departmental Representative relied on the orders of the tax authorities.

16. It is observed that the AO while interpreting the provisions of s. 40A(5)(b) held that the concerned persons were employed in India, their salary accrued and arose in India and it was also paid in India and that the employment of the concerned persons could not be said to be out of India. He, therefore, held that the salary/perquisite paid to the employees for the period of their stay outside India could not be excluded from the total salary/perquisite paid to them for working out the amount disallowable under s. 40A(5). On first appeal, the learned CIT(A) agreed with the reasoning of the AO. He, observed that tour is a part of employment within the country even though it may be a foreign tour. The decision of the Honble Delhi High C 185 ITR 178 (supra) has been carefully seen by us. The Honble High Court were examining the provisions of s. 40(c) and s. 40A(5)(b) and observed that if there is a general provision and there is also a special provision, then it is the special provision which will prevail and in the circumstances, the only conclusion possible is that the case of remuneration to employee-directors employed outside India falls under the provisions of s. 40A(5) and not s. 40(c).

They, therefore, held that the remuneration to directors in respect of their employment outside India had to be excluded from consideration for purposes of the limit of Rs. 72,000. It is observed that the Honble High Court have not interpreted the meaning of the expression "employment outside India". It is observed from p. 18 of the Annexure to the chart filed by the learned counsel and where the details of employment outside India in respect of various employees is given, that the concerned employees had remained outside India for a maximum of 14 to 16 days at a time and that they had been going outside India on various occasions. We feel that the nature of stay outside India of the said employees for short period ranging from 6 to 16 days during each visit cannot be treated as "employment outside India" for the purpose of s. 40A(5) as the concept of employment denotes some continuity over a period of time. Further, it has not been controverted before us that the salary of the said employees was paid in India as observed by the tax authorities. On the facts and in the circumstances, we decline to interfere with the orders of the learned CIT(A).

17. The next ground raised by the assessee in relation to all the three years relates to disallowance of salary paid to Smt. Santosh D. Shriram and Smt. Urmila Dongre.

18. The AO disallowed payments of Rs. 27,138 and Rs. 26,938 made by the assessee-company to Smt. S. D. Shriram and to Smt. Urmila Dongre, respectively on account of salary and other perquisites. The AO asked the assessee to lead evidence regarding services rendered by Smt. Santosh and Smt. Urmila Dongre. In its reply, the assessee stated that the said matter was explained during the course of assessment proceedings for asst. yr. 1984-85. The AO observed that the assessee repeated and reiterated the submissions made in that year. The AO held that though an elaborate list of services to be rendered by Smt. Santosh and Smt. Urmila Dongre was furnished, no evidence was produced to prove that such services were actually being rendered. He, therefore, disallowed the said amount.

19. On first appeal, the learned CIT(A) observed that during the asst. yr. 1984-85, the matter was decided against the assessee and, therefore, he confirmed the disallowance.

20. The learned counsel for the assessee invited our attention to the order of the Tribunal dt. 4th October, 1995, in ITA No. 5336/Del/88 placed at pp. 3 to 20 of paper-book 1 and submitted that the issue is covered in favour of the assessee.

21. The learned Departmental Representative relied on the orders of the tax authorities.

22. We have carefully considered this issue in the light of submissions made by both the parties and have also perused the orders of the tax authorities as also the order of the Tribunal relied upon by the learned counsel. It is observed that the Tribunal held in para. 6 of the said order that the claim made by the assessee is genuine and the salaries have not been paid on extraneous considerations. They held that the deduction on account of salaries paid to Smt. Santosh and Smt. Urmila Dongre is legitimate and should be allowed. Since the facts during the years under consideration are same and the tax authorities had relied on their orders in the case of the assessee for asst. yr. 1984-85, respectfully following the aforesaid order of the Tribunal, we direct the AO to allow the claim of the assessee. The addition of Rs. 27,138 and Rs. 26,938 is, therefore, deleted.

23. The next ground urged by the assessee in relation to the three assessment years relates to disallowance of entertainment expenses/business gifts.

24. The AO had disallowed amounts of Rs. 2,92,214 Rs. 2,42,251 and Rs. 2,61,772 under s. 37(2A). The said disallowances for the three years were confirmed on appeal by the learned CIT(A). The assessee had claimed that 50 per cent of the said amounts should be allowed on account of employees participation.

25. The learned counsel for the assessee submitted that out of the aforesaid expenses considered as entertainment expenses by the tax authorities, an amount of Rs. 1,27,566 was spent in the accounting period relevant to the asst. yr. 1985-86 on business gifts, hiring taxis, air tickets, tickets for Uday Utsav, Republic Day and sports matches for foreign buyers and that the same would not constitute entertainment expenses so as to be disallowed under s. 37(2A). He further submitted that similarly expenses of Rs. 13,861 during the accounting period relevant to asst. yr. 1986-87 on hiring of rooms in hotels, football match tickets and Republic Day tickets would not fall under s. 37(2A). In this connection, he referred to the decision of the Tribunal dt. 28th January, 1987, in the case of Tyagi Anand & Co. (P) Ltd. vs. ITO (pp. 22-26 to paper-book 1). He further referred to the decision of the Honble Delhi High Court in the case of CIT vs. Expo Machinery Ltd. (1991) 190 ITR 576 (Del), wherein it was held that in the case of composite expenditure incurred in hotels in entertaining customers, it was necessary to resort to an estimate in ascertaining that part of the expense incurred on food and beverages of the employees which is excluded from the purview of s. 37(2A) and that the Tribunals estimate of such part of the expenses would be a question of fact. In the said case, the Tribunal had estimated such expenses at 35 per cent of the total expenditure on entertainment. He, therefore, urged in the alternative that the Tribunal may allow 35 per cent of the total expenses on account of employees participation.

26. The learned Departmental Representative relied on the orders. He further referred to the decision of the Honble Supreme Court in the case of CIT vs. Patel Brothers & Co. Ltd. (1995) 215 ITR 165 (SC).

27. We have carefully considered the submissions made by both the parties and have also seen the case law and the decisions of the Tribunal relied upon by both the parties. It is observed that the decision of the Tribunal in the case of Tyagi Anand & Co. (P) Ltd. (supra) relates to an assessee-company which was carrying on business of exhibition of films and it was held that the cost of free tickets was not an entertainment expenditure under s. 37(2A). The said case is, therefore, distinguishable on facts and cannot be applied in the case of the assessee. However, keeping in view the decision of the Honble Delhi High Court in (1992) 190 ITR 576 (supra) as also the decision of the Honble Supreme Court, we feel that it will be just and fair to allow 30 per cent of the total expenses on account of employees participation.

28. The next ground raised by the assessee in relation to the asst. yr. 1985-86 relates to disallowance under s. 37(3A) of advertisement/sales promotion expenses.

29. In this case, the AO noted that the assessee had offered an amount of Rs. 24,791 for disallowance under s. 37(3A). He further noted that for working out the said disallowance, advertisement expenses, sales promotion expenses, motor car expenses and car allowance totaling to Rs. 2,26,705 had been considered. He further observed that the car expenses disallowed under s. 40A(5) had been reduced and after claiming statutory allowance of Rs. 1,00,000, 20 per cent of the balance of Rs. 1,23,955 had been offered for disallowance at Rs. 24,791. He further observed that an amount of Rs. 17,900 was relatable to advertisement out of recruitment expenses. He held that s. 37(3A) covered advertisement of every nature without providing for any bifurcation of advertisement in various categories. He further observed that out of the car expenses of Rs. 1,77,508, an amount of Rs. 34,384 out of conveyance expenses was also relatable to car expenses. He also held that the drivers salary at Rs. 11,000 and car insurance at Rs. 1,520 were also to be covered for disallowance under s. 37(3A). He also held that expenses on running and maintenance of motor car would include the salary paid to the driver. In this connection, he referred to the explanation to s. 37(3A). The AO also included hotel payments to the extent the same had not been disallowed under s. 37(2A) and the sample expenses of Rs. 47,207 as relatable to advertisement and sales promotion expenses.

30. On first appeal, the assessee challenged the disallowance of Rs. 47,743 under s. 37(3A). The assessee also contended that various items of expenses taken by the AO for calculating disallowance under s. 37(3A) were not covered under that section. In this connection, the assessee referred to the expenses of Rs. 17,900 on account of advertisement for recruitment and submitted that the said expenses had nothing to do with any sales promotion activity. The assessee further referred to the expenses in respect of three wheelers included in car expenses and submitted that the same are not covered under s. 37(3A). The assessee further referred to the drivers salary at Rs. 11,000 and car insurance at Rs. 1,520 and submitted that the said expenses could not be covered under s. 37(1) and thus could not be considered for disallowance under s. 37(3A). The assessee also referred to the sample expenses of Rs. 47,207 and submitted that the samples were provided for introducing the product and hence were not intended for sales promotion. The learned CIT(A) for the reasons recorded in para. 6 of his order rejected the contentions of the assessee and upheld the disallowances.

31. The learned counsel invited our attention to the decision of the Honble Calcutta High Court in the case of CIT vs. Orient Paper & Industries Ltd. (1995) 214 ITR 473 (Cal), wherein it has been held that expenses on repairs and insurance of motor cars are not disallowable under s. 37(3A) of the IT Act. The Honble Calcutta High Court followed its decision in the case of CIT vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal). The learned counsel further referred to the decision of the Tribunal, Madras Bench C in the case of R. K. Swamy Advertising Associates (P) Ltd. vs. IAC (1993) 44 ITD 99 (Mad) wherein it is mentioned at p. 103 that the amount of salary paid to the drivers employed for running the car could not be regarded as a wasteful expenditure incurred for running the car so as to be considered for disallowance under s. 37(3A). In the said decision, it is further mentioned that the expenditure incurred on insurance of vehicle could not be taken into account in applying the provisions of s. 37(3A) but was allowable under s. 31. The learned counsel further referred to the decision of the Tribunal Madras Bench A in the case of Dy. CIT vs. Addison & Co. Ltd. (1996) 53 ITD 514 (Mad), wherein it has been held that the salary to driver does not fall within the expression running and maintenance of cars accruing in s. 37(3B). He further invited our attention to the decision of the Honble Calcutta High Court in the case of CIT vs. Hindustan Motors Ltd. (1991) 192 ITR 619 (Cal) wherein it has been held that commission and brokerage paid to agents could not be disallowed as it was not an expenditure on sales promotion. The Honble High Court have also observed that sales promotion must be considered ejusdem generis with the earlier two expressions advertisement and publicity. In view of the foregoing the learned counsel urged that expenses on advertisement for recruitment of staff, conveyance on scooters/autorickshaw, salary of driver, car insurance and sample expenses should not be included for disallowance under s. 37(3A).

32. The learned Departmental Representative, however, relied on the orders of the tax authorities.

33. We have carefully considered the rival submissions on these issues and have also perused the orders of the tax authorities. We have also seen the case law relied upon by the learned counsel. It is clear from the decisions of the Calcutta High Court in (1995) 214 ITR 473 (supra) and the decision of the Tribunal in (1993) 44 ITD 99 (supra) and (1996) 53 ITD 514 (supra) that the drivers salary and car insurance are not covered under the provisions of s. 37(3A). We also feel that the expression advertisement and publicity will not cover the activity of the assessee for recruitment of staff as any advertisement for recruitment of staff has to be distinguished with the advertisement and publicity relating to business of the assessee. We, therefore, feel that even the expenses incurred by the assessee on advertisement for recruitment of the staff will have to be excluded for disallowance under s. 37(3A). With reference to the expenses on scooters/three wheelers, it is observed from p. 12 of the order of learned CIT(A) that the AO had allowed the assessees claim of conveyance expenses in respect of scooters at Rs. 8,107. He also observed that the learned counsel conceded at the time of hearing that the assessee had not made any submissions before the AO with reference to the expenses pertaining to three wheelers as having been included within the conveyance expenses. We, therefore, declined to entertain any plea of the learned counsel with reference to the said expenses at the appellate stage. No fresh material has been placed before us to establish that the car expenses included expenses relating to three wheelers. The details at p. 41 of paper-book 1 only mention the figure of Rs. 34,384 on account of conveyance expenses paid to various persons wrongly treated as car expenses. The said figure is not clear on this issue. We, therefore, decline to interfere. With reference to claim of the assessee regarding sample expenses, we agree with the conclusion of the learned CIT(A) that the samples would serve, the purpose of advertisement and publicity and ultimately lead to sales promotion. We feel that the decision of the Honble Delhi High Court in (1991) 192 ITR 619 (Cal) (supra) as relied upon by the learned counsel is distinguishable on facts. In view of the foregoing decision, the AO is directed to allow appropriate relief to the assessee and recompute the disallowance under s. 37(3A).

34. The next ground urged by the assessee in relation to asst. yr. 1985-86 relates to disallowance of Rs. 5,000 paid to Mantec consultants for preparing feasibility report for setting up an industrial unit.

35. The AO disallowed the expenditure of Rs. 5,000 in connection with preparation of feasibility report by treating the expenditure as capital in nature.

36. On first appeal, the learned CIT(A) observed that it was conceded before him that a copy of the report was not given to the AO to enable her to find out whether it was in connection with existing line of business or a new and unopened line of activity. The learned CIT(A), therefore, upheld the view of the AO and observed that the AO was justified in taking the said view in the light of decision of the Honble Delhi High Court in the case of DCM Ltd.s 2 Taxman 577.

37. The learned counsel for the assessee invited our attention to p. 46 of paper-book 1 where the bill relating to the feasibility report is placed. The bill is from Mantec consultants (P) Ltd. and mentions professional fees towards the assessment on assistance in deciding location for putting up an industrial unit, as per details given below i.e., confirmation of the assignment and submitting three copies of the report. The learned counsel further submitted that the AO had wrongly relied upon the decision of the Honble Delhi High Court which was on capitalisation of expenditure with reference to cost of imported machinery. He further referred to the decision of the Tribunal dt. 27th February, 1987, in ITA No. 2463/Del/85 in the case of General Tube Co. Ltd. vs. ITO for the asst. yr. 1982-83 whereby the Tribunal has allowed expenditure on preparation of market survey reports treating the said expenditure as revenue in nature. He also referred to the decision of the Honble Delhi High Court in the case of CIT vs. Modi Industries Ltd. (No. 3) (1993) 200 ITR 341 (Del).

38. The learned Departmental Representative relied on the orders and submitted that the report is relatable to capital expenditure.

39. We have carefully considered the rival submissions on this issue and have also seen the case law relied upon by the learned counsel. We feel that the expenses of Rs. 5,000 incurred by the assessee are not allowable as revenue expenses as the aforesaid decision of the Tribunal as also the ratio of the decision of the Honble Delhi High Court in (1993) 200 ITR 341 (Del) (supra) are distinguishable on facts. Further, it is seen from the bill placed at p. 46 that the feasibility report is with reference to putting up an industrial unit and deciding the location thereof which cannot be deemed an expansion of the existing line of activity of the assessee.

40. The next ground raised by the assessee in relation to the three years under consideration relates to disallowance of ex gratia payment made to employees at Rs. 14,400 during the asst. yr. 1985-86, Rs. 10,000 during 1986-87 and Rs. 23,000 during 1987-88.

41. During the course of hearing, the learned counsel submitted that the said payments were made to certain employees on account of good work done by them as a reward and that the same ought to have been allowed. He referred to the decision of the Honble Supreme Court in the case of Shahzada Nand & Sons vs. CIT (1977) 108 ITR 358 (SC), wherein it has been observed that the reasonableness of the payment has to be judged not from the point of view of the AO but from the point of view of commercial expediency of the assessee. It is further observed that the requirements of commercial expediency must be judged not in the light of the 19th century doctrine of laissez faire which regarded man as an economic being, but in the context of current socio-economic thinking which places the general interest of the community above the personal interest. It further observed that the business or undertaking is the product of the combined efforts of the employer and the employees and where there is sufficiently much profit after providing for the salary or remuneration of the employer and employees, it should in all fairness go to the employee. He further referred to the decision of the Honble Delhi High Court in the case of CIT vs. Autopins (India) (1991) 192 ITR 161 (Del) whereby it was held that production bonus and incentive bonus are paid for the purpose of business expediency and are allowable. He also referred to the decision of the Honble Calcutta High Court in the case of CIT vs. Piasco Ujjain Pipes & Foundry Co. Ltd. (1992) 196 ITR 707 (Cal) wherein it was held that incentive bonus paid for motivating employees to achieve higher production is an admissible deduction. The learned counsel also pointed out that Shri Anupam Bharat who was an employee-director is not related to any shareholder nor he is himself a shareholder of the company. He also submitted that the total salary including ex gratia payment of Rs. 10,000 paid to Shri Anupam Bharat and Rs. 23,000 paid to Sh. Vinod Singhania during the asst. yrs. 1986-87 and 1987-88 respectively were below the prescribed limits under s. 40A(5). In view of the foregoing, he urged that the said payments ought to be allowed.

42. The learned Departmental Representative relied on the orders of the tax authorities.

43. We have carefully considered the rival submissions on this issue and have also seen the case law relied upon by the learned counsel and the documents filed in the paper-book. It is observed from the copies of the office orders that an ex gratia payment was paid to S/Sh. V. Singhania, S. K. Sharma, R. P. Agrawal, R. Gulati and R. Brar. during the asst. yr. 1985-86 amounting to Rs. 14,400. Similarly, a reward of Rs. 10,000 was sanctioned in the case of Sh. Anupam Bharat during the asst. yr. 1986-87. An ex gratia payment of Rs. 23,000 was sanctioned to Sh. V. K. Singhania for the good work done. It is also observed that the payments made to Sh. Anupam Bharat and Sh. Vinod Singhania were below the limit prescribed in s. 40A(5). In view of the aforesaid decisions of the Honble Supreme Court and the High Courts, we feel that the said payments made by the assessee during the assessment years under consideration are allowable. The AO is, therefore, directed to allow appropriate relief to the assessee with reference to the said payments.

44. The next ground urged by the assessee in relation to asst. yr. 1985-86 relates to disallowance of provision for expenses at Rs. 3,89,300.

45. The assessee had also moved for admission of additional ground for claim of Rs. 4,10,000 but the said ground has been withdrawn on the basis that the said liability has been provided in the accounting year ending March, 1993, and the same has been allowed. The additional ground is, therefore, rejected as withdrawn.

46. The AO noted that an amount of Rs. 3,40,000 had been debited in the accounts of the assessee on account of stock due for replacement. In response to the letter dt. 20th January, 1988 from the AO, the assessee submitted that the provision of Rs. 3,40,000 was made towards liabilities for replacement of defective goods. The assessee also pointed out that the provision was made in respect of 683 folding tables valued at Rs. 197 each. The assessee also pointed out that as per terms with the buyers, the assessee is required to provide free replacement of goods reported to be defective within the guarantee period. The AO asked the assessee to lead evidence regarding the claim received from Usha International Ltd. i.e., the buyer and also to produce the correspondence files in respect of goods received back. The AO discussed the matter in detail and ultimately noted the claim of the assessee that the goods were destroyed as the assessee did not want to bring into the market substandard goods. He asked the assessee to furnish evidence of destroying the goods. The assessee only stated that the goods were burnt. The AO observed that not a single voucher regarding the alleged destruction of goods was produced. He, therefore, disallowed the amount of Rs. 3,40,000. While disallowing the said amount, the AO also observed that the liability of the assessee was only for replacement of the goods and the replacement cost for the assessee was Rs. 235 for folding table and Rs. 144.50 for base and cover and that the total replacement cost worked out to Rs. 2,28,709 and by adding the freight and other direct/indirect expenses, the replacement cost will not be more than Rs. 2,70,000.

47. On first appeal, the learned CIT(A) for the reasons given in the order upheld the disallowance at Rs. 3,20,000. He observed in the process that the AO had rightly estimated possible liability in the accounting period at Rs. 20,000 which was allowed.

48. The learned counsel for the assessee invited our attention to the copies of relevant documents placed at pp. 77 to 85 and 89 to 94 of paper-book 1. The details of materials despatched and received back as rejected goods have been given. He further invited our attention to p. 114 of paper-book 1 where details of utilisation of provision of Rs. 3,40,000 on account of defective goods supplied to Usha International Ltd. have been given. The total amount utilised for rectification/repair of defective goods upto 30th June, 1986, has been shown at Rs. 3,37,809. In the note given on that page, it is mentioned that the amount of Rs. 3,37,809 has not been debited in the P&L a/c in any year and hence no deduction thereof has been claimed. This is so because the said amount has been debited directly to the provision a/c. He invited our attention to the arbitration award (copy placed at pp. 109 to 113 of the paper-book) and submitted that the assessee had to pay an additional amount of Rs. 4,10,000 as per the said award. He further referred to the letter dt. 3rd February, 1988 (copy at pp. 86-88) addressed to the AO wherein it was mentioned that there was no realisable value of the goods and the same had to be burnt to avoid duplicate items being introduced in the market. He further submitted that several cases were going on in the Courts as people had been using Usha name and floating duplicate items in the market. He referred to the case of Usha (India) Group where the Honble Delhi High Court have restrained from using the name in any form either in their product or in the name of the companies. He, therefore, submitted that the assessee acted with extra precaution and burnt/destroyed the broken/defective pieces and, therefore, no value was attached to them. He relied on the judgment of the Honble Supreme Court in the case of CIT vs. Kalinga Tubes Ltd. (1995) 215 ITR 165 (SC) for the proposition that the aforesaid liability is allowable in the asst. yr. 1985-86 having accrued and become payable in that year. He also relied on the decision of the Honble Madras High Court in the case of CIT vs. Gemini Pictures Circuit (P) Ltd. 81 Taxman 500 (copy at pp. 71-74 of the paper-book). He also relied on the decision of the Honble Rajasthan High Court Jaipur Bench in the case of Madhira Kraya Vikaraya Sang vs. CIT (1993) 116 CTR 540 (Raj) (copy placed at p. 74-78 of the paper-book). In the said decisions, it has been held that where the assessee is following mercantile system of accounting, the liability is allowable in the year of accrual. In view of the foregoing, the learned counsel urged that the aforesaid liability ought to be allowed.

49. The learned Departmental Representative relied on the orders of the tax authorities.

50. We have carefully considered the rival submissions on this issue and have also perused the orders of the tax authorities. We have also perused the various documents placed in the paper-book to which our attention was invited during the course of hearing. We have also seen the case law relied upon by the learned counsel. We feel that the submissions made by the counsel have force and that the same are supported by the aforesaid case law of the Honble Supreme Court and the High Courts of Madras and Rajasthan. The ground raised by the assessee relating to provision of Rs. 3,89,300 is, therefore, allowed and the AO is directed to allow appropriate relief to the assessee.

51. The next ground raised by the assessee in relation to the three years under consideration relates to disallowances made under s. 43B.

52. The AO disallowed sales-tax of Rs. 16,885 on the ground that the payment was made after the accounting year. He also disallowed an amount of Rs. 10,225 paid by the assessee during the asst. yr. 1985-86 which had been disallowed earlier in the asst. yr. 1984-85. Similarly he disallowed the sales-tax of Rs. 3,383 in the asst. yr. 1986-87 and sales-tax of Rs. 7,003 in 1987-88.

53. The learned counsel referred to the decision of the Tribunal in ITA No. 5336/Del/88 in the case of the assessee for asst. yr. 1984-85 whereby the Tribunal directed the AO to allow the deduction in the year of payment.

54. The learned Departmental Representative relied on the orders of the tax authorities.

55. We have carefully considered the rival submissions on this issue and we feel that the amount of Rs. 10,226 paid by the assessee during the asst. yr. 1985-86 which was disallowed in the asst. yr. 1984-85, is allowable. The other amounts have been paid after the accounting year. In view of the decision of the Honble Supreme Court in the case of Allied Motors (P) Ltd. vs. CIT (1997) 224 ITR 677 (SC), the deduction has to be allowed in relation to the amounts paid before the furnishing of the report under s. 139(1). The AO is, therefore, directed to verify the dates of payment of the amounts during the asst. yrs. 1985-86 to 1987-88 and allow appropriate relief to the assessee in the light of the said decision of the Honble Supreme Court.

56. The next ground in relation to the three assessment years relates to exemption of export incentives. The said grounds were not pressed and the same are, therefore, rejected.

57. The next ground raised by the assessee in relation to asst. yr. 1985-86 relates to disallowance of Rs. 3,200 out of foreign travelling expenses.

58. The AO noted that an amount of $ 265 was relatable to entertainment allowance as per exchange utilisation report submitted to the RBI. He, therefore, treated the amount of Rs. 3,200 as entertainment expenses out of the foreign travelling expenses and disallowed the same.

59. On first appeal, the learned counsel for the assessee contended that the said expenditure was incurred out of foreign exchange allowed by the RBI and would fall under s. 37(1) and not under s. 37(2A). He, therefore, urged that the AO had made the disallowance on wrong terms. The learned CIT(A) rejected the contentions and observed that entertainment expenditure incurred by an assessee anywhere would fall under s. 37(2A) and was liable to be disallowed.

60. The learned counsel submitted that the disallowance was not called for as the expenditure had been incurred out of the amount sanctioned by the RBI. In the alternative, he submitted that in case it was to be treated as entertainment, 35 per cent should be allowed on account of employees participation.

61. The learned Departmental Representative relied on the orders of the tax authorities.

62. We have carefully considered this issue in the light of submissions made by both the parties. It is observed that the assessee had shown the said amount of Rs. 3,200 as relatable to entertainment in the report submitted to the RBI. We, therefore, see nothing wrong in the treatment of the said expenditure as entertainment expenditure. Insofar as the alternative plea of the assessee is concerned, nothing has been placed before us to indicate employees participation with reference to the said expenditure. We, therefore, decline to interfere with the orders of the learned CIT(A) on this issue.

63. The next ground in relation to the asst. yr. 1985-86 relates to disallowance of Rs. 8,662 on the ground that the expenses pertain to earlier years.

64. The AO noted that the assessee had debited an amount of Rs. 8,662 in the P&L a/c on account of expenditure of earlier years as identified by the auditor in his report under s. 44AB. On an enquiry by the AO, the assessee submitted that these liabilities accrued in the year. The AO held that the claim of the assessee was not verifiable as no evidence had been produced in support thereof. He also referred to the nature of expenditure being on freight and cartage, printing and stationery, legal expenses, motor car and telephone expenses, etc. and observed that the expenses were not such that the liability could not be ascertained. He, therefore, disallowed the claim of assessee.

65. On first appeal, the learned CIT(A) confirmed the view of the AO. In the process, he observed that the services in respect of which the expenses were incurred were received by the assessee in the accounting period and it is difficult to understand as to how the assessee could not claim deduction for the same in the earlier years because the accounts are audited few months after the end of the accounting period and till then a deduction for these type of liabilities can be easily claimed, after ascertaining the position from the concerned suppliers and this was obviously not done by the assessee and, therefore, he would not be entitled to claim the same against the profits of the assessment year under consideration.

66. The learned counsel submitted that the provision was made on the basis of the date on which the liability was known. In this connection, he invited our attention to the details given at p. 117 of the paper-book 1. He, therefore, urged that the claim may be allowed in this year. In the alternative, he submitted that directions may be given to the AO for allowing the same in the relevant year.

67. The learned Departmental Representative relied on the orders.

68. We have carefully considered the rival submissions on this issue and have also perused the details of various expenses known at p. 117. We feel that the submissions made by the learned Departmental Representative have force and that in the circumstances, no interference is called for.

69. The next ground in relation to the three years under consideration relates to disallowance of deduction under s. 80M.

70. The AO noted that the assessee had claimed deduction under s. 80M at 60 per cent of the gross dividend income of Rs. 1,13,133 at Rs. 67,873. He further observed that the assessee had made investment in shares of various companies amounting to Rs. 18,80,391. He further observed that deduction under s. 80M is to be allowed after reducing from the gross dividend the expenses attributable to earning of dividend income. He further observed that an estimate of expenses allocable to the income from dividend will have to be made. He relied on the order of the Tribunal in the case of Madan Mohan Lal Shriram (P) Ltd. in ITA No. 597/Del/84 for the asst. yr. 1978-79. He, therefore, estimated the expenses at Rs. 2,74,289 for asst. yr. 1985-86, Rs. 1,783 for 1986-87 and Rs. 1,908 for asst. yr. 1987-88.

71. On first appeal, the learned CIT(A) confirmed the orders of the AO on this issue.

72. The learned counsel invited our attention to the decision of the Honble Calcutta High Court in the case of CIT vs. United Collieries Ltd. (1993) 203 ITR 857 (Cal), wherein it was held that only the actual expenditure incurred by the assessee in earning the dividend income shall be deducted from the dividend income and there is no scope for any estimate of expenditure being made and no notional expenditure can be allocated for the purpose of earning income, unless the facts of a particular case warrant such allocation. The learned counsel urged that in view of the said decision, the said expenses should not be allowed to be deducted.

73. The learned Departmental Representative relied on the orders.

74. We have carefully considered the rival submissions on this issue and have also perused the orders of the tax authorities. We have also seen the case law relied upon by the counsel. It is observed that in the said case, the High Court had held that the actual expenditure incurred by the assessee for earning of dividend shall be deducted from the dividend income. It observed at p. 859 that as a matter of principle, it cannot be held that only the gross dividend in all cases shall be included in the assessment. The Honble High Court, therefore, reframed the question and asked the Tribunal to find out the expenditure, if any, actually incurred in earning the dividend and to that extent, the dividend income should be reduced and relief under s. 80M should be allowed. In the circumstances, we feel that it will be just and fair to restore this issue for the three assessment years under consideration to the file of the AO who may find out the expenditure, if any, actually incurred by the assessee in earning the dividend. In doing so, he may allow reasonable opportunity of being heard to the assessee and thereafter allow appropriate relief to the assessee in the light of the aforesaid decision.

75. The next ground in relation to asst. yr. 1985-86 relates to deduction in respect of trading loss.

76. The said ground was not pressed by the learned counsel and the same is, therefore, rejected.

77. The next ground in relation to asst. yrs. 1985-86 and 1986-87 relates to double taxation on payment received from Usha International Ltd.

78. The aforesaid ground was not pressed by the learned counsel and the same is, therefore, rejected.

79. The next ground in relation to asst. yrs. 1986-87 and 1987-88 relates to deduction under s. 80HHC.

80. The AO had restricted the deduction under s. 80HHC at Rs. 7,10,000 during the asst. yr. 1986-87 as against deduction claimed at Rs. 7,43,123. Similarly, he restricted the deduction to Rs. 7,40,000 in the asst. yr. 1987-88 as against deduction claimed at Rs. 8,61,461. He restricted the deduction on the ground that the same was to be allowed only upto the extent of reserve created.

81. On first appeal, the learned CIT(A) upheld the orders of the AO.

82. The learned counsel for the assessee submitted that no opportunity has been given to the assessee for creating additional reserve for allowing deduction as per income assessed. He relied on the decision of the Honble Delhi High Court in the case of Continental Construction Ltd. vs. Union of India & Ors. (1990) 185 ITR 230 (Del), wherein it was held that the assessee should be given opportunity to comply with the conditions of s. 80HHB. In the said case, the assessee was under bona fide belief that concession under s. 80-O would be available. He further submitted that for the asst. yr. 1987-88, the total deduction allowable under s. 80HHC works out to Rs. 13,01,334 plus 50 per cent of export profit exceeding that amount and not Rs. 8,61,461 as shown at p. 4 of the statement of facts before the learned CIT(A). He, therefore, submitted that though this had been accepted by the AO in his appeal effect order, he had not worked out the amount allowable in view of the short reserve. A copy of the said order dt. 4th May, 1992, is placed at pp. 21-23 of the annexures to the chart.

83. The learned Departmental Representative relied on the orders.

84. We have carefully considered the rival submissions on this issue and have also perused the orders of the tax authorities and other documents placed in the paper-book to which our attention was invited during the course of hearing. We have also seen the case law relied upon by the learned counsel. We feel that the submissions made by the learned counsel have force in the light of the aforesaid decision of the Honble Delhi High Court in (1990) 185 ITR 230 (Del) (supra). The provision of s. 80HHC and s. 80HHB are alike insofar as the requirements of creation of reserve are concerned. Accordingly, we direct the AO to allow opportunity to the assessee to create additional reserve for the purposes of deduction admissible to the assessee in relation to the asst. yr. 1986-87 and 1987-88.

85. The next ground in relation to asst. yr. 1987-88 relates to sundry creditors returned back and claimed as not taxable under s. 41(1).

86. During the course of hearing, the learned counsel invited our attention to the decision of the Honble Supreme Court in the case of CIT vs. T. V. Sundaram Iyengar & Sons Ltd. (1996) 222 ITR 344 (SC) and submitted that the aforesaid judgment is against the assessee on this issue.

87. The learned Departmental Representative relied on the orders of the AO.

88. We have carefully considered the rival submissions on this issue and in view of the aforesaid decision of the Honble Supreme Court in (1996) 222 ITR 344 (SC) (supra), we decline to interfere with the orders of the learned CIT(A).

89. The next ground in relation to asst. yr. 1987-88 relates to chargeability of interest under s. 216.

90. During the course of hearing, the learned counsel submitted that interest under s. 216 is not chargeable as advance-tax was paid in June on an estimated basis and it was revised in September after the accounts were completed for the year ending June, 1986, and advance-tax was paid in September at Rs. 1,24,000 as against Rs. 19,000 paid in June. He also submitted that interest under s. 216 cannot be charged on the basis of a non-speaking order and such charging of interest was invalid and was liable to be quashed. He urged that the Tribunal should not give further opportunity to the ITO in this behalf. In this connection, he relied on the decision of the Honble Calcutta High Court in the case of CIT vs. Hindustan Sanitarywares and Industries Ltd. (1989) 180 ITR 21 (Cal). He also relied on the decision of the Honble Gujarat High Court in the case of CIT vs. Nagri Mills Ltd. (1987) 166 ITR 292 (Guj) wherein it was held that it is necessary for ITO to record a finding that the assessee had underestimated advance-tax payable by him and unless he records such a finding, the question of levy of interest would not arise.

91. The learned Departmental Representative relied on the orders.

92. We have carefully considered the rival submissions on this issue and have also perused the orders of the tax authorities. We have also seen the case law relied on by the learned counsel. We feel that the submissions made by the learned counsel have force and that the same are supported by the aforesaid decisions of the Honble Calcutta and Gujarat High Courts. In the circumstances, we hold that no interest under s. 216 is chargeable in the case of the assessee.

93. The next ground in relation to asst. yrs. 1986-87 and 1987-88 relates to charging of interest under s. 215.

94. During the course of hearing, the learned counsel submitted that charging of interest under s. 215 is consequential.

95. The learned Departmental Representative relied on the orders.

96. We have carefully considered the issue and we direct the AO to allow consequential relief to the assessee in the light of the decisions in these appeals.

97. In the result, these appeals are allowed in part.