Delhi High Court

Dy. Commissioner Of Income Tax vs P. U. R. Polyurethene Products (P) ... on 14 August, 1998

Equivalent citations: (1999) 64 TTJ Del 507

ORDER

AMS Moksh Mahajan, AM

These two appeals filed both by the Revenue as well by the assessee are consolidated and disposed of by a single order. Appeals containing common issues relate to assessment year 1989-90.

2. At the outset it may be pointed out that none appeared on behalf of the assessee despite notice having been sent through registered post. On perusal of the order sheet we further find that the appeals have been fixed right from the year 1996 onwards. Considering the several opportunities allowed, we proceed to dispose of appeals ex parte qua assessee but on merits. The submissions of the learned departmental Representative and the paper book submitted by the assessee are taken into consideration while disposing of the appeals.

3. Taking up the Revenue's appeal in ITA No. 599/Del/1992 first, we filed that the first contention raised relates to disallowance of loss of Rs. 30,000 claimed by the assessee. The facts in brief are that the assessee- company who is having its factory at Kohl Industrial Area Phase-II, New Delhi maintains its bank account with M/s Indian Bank, defense Colony Branch. One Mr. Rawat, an employee of the company is stated to have carried Rs. 30,000 in his car to be deposited in the bank. On the way the amount was stolen when the employee had to stop the car in order to save a child who came before it. The theft came to be noted when the amount was to be deposited in the bank. A FIR was duly lodged with the police. The police was also reminded of the complaint filed with them. The assessing officer did not believe the assessee's version on the ground that there was no evidence to show as to the purpose for which the money was carried by Mr. Rawat. Secondly that the police had not closed the complaint in the year under appeal because of which it could not be said that the money had become irrecoverable. Thirdly, it was not proved that the loss was incurred in the course of business. Reliance was placed on the decision of Madhya Pradesh High Court in the case of CIT v. Durga Jewellers (1988) 68 CTR (MP) 5 : (1988) 172 ITR 134 (MP). The learned Commissioner (Appeals) on the other hand, allowed the claim after following the decision in CIT vs. Sarya Sugar Mills (P) Ltd. (1968) 70 ITR 109 (All), wherein a distinction was made between the embezzlement and the theft occurring at the end of the assessee. The decision of the Hon'ble Madhya Pradesh High Court was distinguished on the ground that it was a case where there was no admitted liability on the part of any party which was uncertain.

4. We have carefully considered the submissions of t4e learned departmental Representative. We have also gone through the decisions of the Madhya Pradesh High Court in the case of Durga Jewellers (supra) and that of the Allahabad High Court in the case of CIT v. Saiya Sugar (P) Ltd. (supra). The assessee's version of loss of Rs. 30,000 on account of theft on the way to the bank was not controverted by the learned departmental Representative by way of any evidence brought on record. On the other hand, the lodging of FIR showed that the assessee did incur loss which occurred in the business hours. Deposit of money in the bank is a part of the operation of the business of the assessee. In the circumstances, there is little doubt that the loss arose out of the carrying on of the assessee's business and is incidental to it. Accordingly, the same is allowable. The question however, is whether the same is to be allowed in the year under appeal or for that matter in the year when the police finally closes the complaint of the assessee. Since the copy of FIR is not available before us, we are not aware of the contents of the same. However, from the submissions made before the learned Commissioner (Appeals) it is clear that the assessee is not aware of the party who had stolen the money from the pocket of the employee. In the circumstances, as held by the learned Commissioner (Appeals) there was little hope of recovery in absence of the name of the person who is alleged to have stolen the amount. For the reasons given in the order of the Commissioner (Appeals) in our considered view the loss is allowable in the year in which it has been claimed. This is after following the decision of the Hon'ble Allahabad High Court in the case of Sarya Sugar (P) Ltd. (supra). The facts available in the case of Durga Jewellers (supra) are distinguishable. Accordingly we would uphold the order of the learned Commissioner (Appeals) on the issue.

5. The second ground of appeal relates to the relief allowed on account of addition made under s. 43B of the Act. Before us it was conceded by the learned departmental Representative that the issue is to be decided in the light of the decision of the Hon'ble Supreme Court in the case of Allied Motors (P) Ltd. vs. CIT (1997) 139 CTR (SQ) 364: (1997) 224 ITR 677 (SQ). In this connection we would however, mention that while the assessing officer did not entertain the claim of the assessee on the ground that the same was not debited to the P&L a/c and that a necessary challans in respect of the payments were not filed along with the return, the learned Commissioner (Appeals) allowed the relief to the extent the same was deposited by the assessee which was to the tune of Rs. 25,001. Thus it is a relief in respect of an amount of Rs. 25,001 which is being contested by the department. As mentioned earlier since the payment has been made by the assessee in view of the decision of the Hon'ble Supreme Court in the case of Allied Motors (P) Ltd. (supra) we would uphold the order of the learned Commissioner (Appeals) on the issue. This is also for the reason that no material was placed before us to controvert the finding of the learned Commissioner (Appeals) in this regard.

6. Third ground of appeal relates to relief of Rs. 60,000 allowed on account of research and development expenses. The assessee has also contested the confirmation of addition of Rs. 61,020 on account of research and development expenses as claimed. Both the points are taken together for decision.

7. The facts in brief are that the assessee claimed research and development expenses at Rs. 1,38,128. The assessing officer disallowed a sum of Rs. 1,21,020. The consisted of two amounts namely Rs. 60,000 and Rs. 61,020. The claim of the assessee was not accepted on the ground that when asked to adduce evidence and justify the deductibility of amount, the assessee only produced debit note issued by the sister concern M/s P.U.R. Accessories in respect of Rs. 60,000. Similar was the case in respect of bill of Rs. 36,000 from Feed Back Management Services and Rs. 25,030 received from S. K. Kapoor. According to the assessing officer there was no further material placed in support of the services rendered by the parties. This apart, the expenditure was stated to have been incurred on the business of developing anti-freeze and coolant. Since the business of the assessee consisted of manufacture and production of cushions, pillows and head-rest, the expenditure being unconnected with the same, the same was held to be not allowable by him. The assessing officer was also of the view that the issue of debit note was not sufficient for allowance of claim in absence of any proof for expenditure having been incurred for the purposes of business. Certain discrepancies were pointed out as mentioned on p. 12 of the assessment order. The learned Commissioner (Appeals) allowed the payment made to M/s Feed Back Management Services as the aforesaid expenditure was stated to have been incurred for conducting a market survey on behalf of the assessee for coolant which is one of its products. She however, confirmed the disallowance in respect of the payment made to P.U.R. Accessories which was for developing anti-freeze coolant being a new line of business. According to the learned departmental Representative, the learned Commissioner (Appeals) committed an error in mentioning that the development of coolant was in the line of business of the assessee. In fact it was in no way connected with the business of the assessee and the reasons which were sufficient for disallowance of claim in respect of P.U.R. Accessories also were valid for disallowance of expenses in respect of M/s Feed Back Management Services. The discrepancies as pointed out by the assessing officer were highlighted to emphasise that the disallowance made was caned for.

8. We have considered the arguments of the learned departmental Representative and have also gone through the submissions made by the assessee before the learned Commissioner (Appeals). On p. 4 of the paper book it was mentioned that M/s Feed Back Management Services conducted the market survey on behalf of the assessee for one of its products namely coolants. As regards PUR Accessories it was pointed out that the same was claimed in respect of the staff support and registration of trade marks. The payment to S. K. Kapoor at Rs. 25,030 was for the services rendered for development of anti-freeze coolants. In support the details on research and development were filed in the paper book. These include the debit notes and the details in respect of the expenses claimed at Rs. 1,38,128. On going through p. 15 of the paper book it is found that various expenses as claimed relate to search and development as well staff support provided by the third party. However, there is no other material available in the paper book in support of the fact that the expenses incurred on research and development related to the product connected with the assessee's business or otherwise. As per order of the assessing officer, the assessee is engaged in manufacture and production of cushions, pillows and head-rest and the company was found to manufacture cycle saddle, scooter saddle and other auto parts. If it be so, the expenditure incurred on development of anti-freeze and coolant in no way connected with the business of the assessee. Nonetheless the point needs clarification. There is sufficient data available on record for the decision to be rendered either way. As the expenses have been claimed by the assessee onus lays on the assessee to prove that the expenses were wholly and exclusively incurred for the purposes of business. The same had to be for the existing business or for the expansion of the same. It could not be for development of a new line of business. As regards support service provided by the sister concern, some material had to be placed to show that the same was necessitated for the purposes of the business of the assessee. In absence of detailed facts on record and insufficient material available, we have no other option but to restore the matter back to the file of the assessing officer to decide the issue afresh in accordance with law after providing opportunity to the assessee to lead evidence in support of its claim.

9. The fourth ground of appeal relates to relief allowed on account of interest disallowed for non-business purposes. In this context, we find that the assessing officer made the disallowance on the ground that the assessee could not prove that there was a direct nexus between the interest free funds available with the assessee and the ones given to the parties other than for business purposes.

According to the assessing officer the assessee had debited sum of Rs. 7,89,203 on account of interest paid to the banks. The total loans raised were Rs. 40 lakhs. The company and made advances and loans to the tune of Rs. 27,62,473, on major part of which no interest was charged. On these facts the assessing officer disallowed interest to the tune of Rs. 1,72,370 being an expenditure claimed for non business purposes. The learned Commissioner (Appeals) found that the total advances were to the tune of Rs. 26 lakhs out of which Rs. 4 lakhs was withdrawn from Vijaya Bank and deposited in the Indian Bank which was utilised for paying the amount to Kamal Chopra. On the aforesaid amount no interest was stated to have been paid. Then a sum of Rs. 8,67,000 was paid directly from overdraft account with the Indian Bank in respect of which interest paid had to be disallowed as it was not shown that the same was for business purposes. Another sum of Rs. 3,50,000 was received from Overseas Services on which again no interest was paid. Rs. 3 lakhs was paid from Indian Bank overdraft account on which interest paid was to be disallowed. Similar was the case in respect of Rs. 1 lakh paid from Indian Bank overdraft account. Further, in respect of Rs. 3 lakhs transferred from the consolidated overseas services which were fund of the assessee no interest was to be disallowed.

10. The aforesaid finding of the learned Commissioner (Appeals) was not controverted by the learned departmental Representative. In this context, we find that while the assessing officer had proceeded to disallow interest on general discussion, the learned Commissioner (Appeals) linked the specific advances to the specific purposes for which they were given. The nexus were also established with the interest-free funds or interest-bearing funds. The finding of the learned Commissioner (Appeals) being specific and there being no material to controvert the same, we would uphold the order of the learned Commissioner (Appeals) on the issue.

11. Coming to the assessee's appeal in ITA No. 64/Del/1992 the first ground relates to loss on chit of Rs. 66,947. The assessing officer disallowed the claim. of the assessee on the ground that the participation in the chit fund did not constitute the business of the assessee and the disallowance made in this regard was called for in view of the decision of the Punjab & Haryana High Court in the case of Soda Silicate & Chemical Works v. CIT (1989) 179 1TR 588 (P&H). The learned Commissioner (Appeals) confirmed the finding of the assessing officer on the same reasoning as given by the assessing officer. In this context, we find that the assessee was a regular subscriber to the chit fund. It participated in the auction of the chit and in that process received a fixed money which was used for the purposes of business. In the process a loss was incurred by him which was claimed as a deduction. Kind of a loss claimed by the assessee was held to be not allowable by the Punjab & Haryana High Court in the case of Soda Silicate & Chemical Works (supra). However, in terms of Board's circular in case the funds so raised are used for the purposes of business, the loss is held to be allowable. The same view has been reiterated by them after considering the judgment of Punjab & Haryana High Court in the case of Soda Silicate & Chemical Works (supra). This was as per Instructions F. No. 169121/72-IT(A1) dt. 16th May, 1978. Thus as per department's own instructions the loss so suffered has been held to be allowable. The aforesaid view has also been taken by the Andhra Pradesh High Court in the case of CIT v. Kovur Textile Co. (1982) 136 ITR 61 (AP). Considering the beneficial circular as well as the judgment of the Andhra Pradesh High Court in favour of the assessee, we would hold that the chit fund loss claimed by the assessee is allowable and would accordingly direct the assessing officer to allow the same.

12. The next contention relates to disallowance of Rs. 60,000 made under the head "staff welfare expenses". The assessing officer has discussed the issue on p. 13 of his order. The total expenses claimed were at Rs. 1,02,998. From the details it was noted that most of the expenses were incurred on the dinner club and hotels which were of entertainment nature and hence not allowable. Accordingly an addition of Rs. 60,000 was made in this regard. The learned Commissioner (Appeals) confirmed the addition for the reasons given by the assessing officer in his order.

13. We have gone through the details filed in respect of the staff welfare expenses at pp. 19 to 26 of the paper book. We find that out of the total expenses most of the expenses pertain to cold drinks, lunch meal, dinners club, hotels, coffee, sugar, tea, etc. The expenses have been incurred even on the staff of the assessee. Considering the major part of the expenses incurred on coffee, cold drinks, milk, etc. we would restrict the disallowance to Rs. 50,000 and allow a relief of Rs. 10,000 to the assessee.

14. The next ground of appeal relates to disallowance of Rs. 56,730 on account of repair and maintenance expenses. The disallowance has been made by the assessing officer treating the expenses as of capital nature which line of argument has been confirmed by the learned Commissioner (Appeals).

15. In this context we find that the assessee claimed a sum of Rs. 2,80,714 under the head "repair and maintenance expenses". These are stated to include expenses of capital nature as listed by the assessing officer on p. 14 of his order. The expenses as mentioned were on purchase of MS tubes, power cables, radiator, pressure pipes, etc. After discussing the issue at length the assessing officer made an addition of Rs. 1,03,830. The learned Commissioner (Appeals) while allowing the relief on account of other expenses upheld the disallowance to the tune of Rs. 56,730. Reference made to the paper book shows that the assessee has filed details in respect of the amount of Rs. 56,730 (available on pp. 27 to 31 of the paper book). On going through the bills we find that these relate to the labour charges for removal of old partition, whitewash, labour charges for repolishing, labour charges for repair of chairs and repaint of kitchen, sideboard, etc. These expenses being revenue in nature are allowable. Accordingly, we would allow the relief as sought by the assessee.

16. The final ground of appeal relates to disallowance of Rs. 15,144 made under the head "Foreign travelling expenses". The assessing officer found that the assessee had claimed a sum of Rs. 15,144 on account of foreign travelling expenses of one Mr. M.L. Gupta and Shri Vijay Chopra to Kathmandu. The purpose of the visit was to explore the possibilities of setting up a polythene plant in Nepal. The expenses so claimed were disallowed on the ground that Shri M.L. Gupta was neither a director nor an employee of a company and as such the expenditure incurred on him could not be allowed. The learned Commissioner (Appeals) confirmed the finding of the assessing officer for the reason that setting up a new plant was not in the line of business of the assessee and such expenditure incurred was not allowable. From the data available in the paper book, we find that the purpose of the visit was to set up polythene moulding unit in Nepal. It was not explained that this was in connection with the expansion of the existing business of the assessee. Considering that Shri M.L. Gupta was also not an employee of the assessee, the disallowance for the reasons as given by the Revenue authorities is upheld.

17. In the result, both the appeals are partly allowed.