Kerala H.C : Whether, on the facts and in the circumstances of the case, the bank guarantee commission of Rs. 51,883 is revenue expenditure liable to be allowed as deduction ?

High Court Of Kerala

CIT vs. Mahavir Plantations (P) Ltd.

Sections 35B, 36(1)(ii), 37(1), 256

Asst. Year 1978-79, 1979-80, 1980-81, 1981-82,

S. Sankarasubban & K. Padmanabhan Nair, JJ.

IT Ref. Nos. 155 to 164 of 1996

3rd September, 2002

Counsel Appeared

P.K.R. Menon & George K. George, for the Applicant : Antony Dominic & Anil D. Nair, for the Respondents

JUDGMENT

S. SANKARASUBBAN, J. :

These references relate to the asst. yrs. 1978-79 to 1981-82. The questions of law referred to this Court are as follows : Asst. yr. 1978-79 :

Whether, on the facts and in the circumstances of the case, the bank guarantee commission of Rs. 51,883 is revenue expenditure liable to be allowed as deduction ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in allowing weighted deduction under s. 35B of 75 per cent of the expenditure on salary and bonus and 50 per cent of the other. Whether, on the facts and in the circumstances of the case, the assessee is entitled to weighted deduction on the interest paid on the shipping loan and in respect of a portion of the banking charges as expenditure incurred in India ?

Whether, on the facts and in the circumstances of the case, the assessee is entitled to weighted deduction on the expenditure incurred on packing materials and printing and if weighted deduction is allowable whether the Tribunal was justified in allowing it on 50 per cent of the expenses ?

Whether, on the facts and in the circumstances of the case, the assessee is entitled to weighted deduction in respect of the items relating to prospect estate and warehousing charges and that too fully in respect of warehousing charges ?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee was entitled to claim deduction of the commission paid to Tara Agencies ?

Asst. yr. 1979-80 : Whether, on the facts and in the circumstances of the case, the Tribunal was right in allowing weighted deduction under s. 35B of 75 per cent of the expenditure on salary and bonus and 50 per cent of the other expenditure and motor-car expenses ?

Whether, on the facts and in the circumstances of the case, the assessee is entitled to weighted deduction on the interest paid on shipping loan and in respect of a portion of the banking charges as expenditure incurred in India ?

Whether, on the facts and in the circumstances of the case, the assessee is entitled to weighted deduction on the expenditure incurred on packing materials and printing and if weighted deduction is allowable whether the Tribunal was justified in allowing it on 50 per cent of the expenses ?

Whether, on the facts and in the circumstances of the case, the assessee is entitled to claim deduction under s. 35B in respect of any portion of the godown rent ? Whether, on the facts and in the circumstances of the case, the assessee is entitled to claim deduction of the commission paid to M/s Tara Agencies and M/s Bhansali Brothers ?

Asst. yr. 1980-81: Whether, on the facts and in the circumstances of the case, the Tribunal was right in allowing weighted deduction under s. 35B of 75 per cent of the expenditure on salary and bonus and 50 per cent of the other expenditure and motor-car expenses ?

Whether, on the facts and in the circumstances of the case, the assessee is entitled to weighted deduction on the interest paid on the shipping loan and in respect of a portion of the banking charges as expenditure incurred in India ?

Whether, on the facts and in the circumstances of the case, the assessee is entitled to weighted deduction on the expenditure incurred on packing materials and printing and if weighted deduction is allowable, whether the Tribunal was justified in allowing it on 50 per cent of the expenses ?

Whether, on the facts and in the circumstances of the case, the assessee is entitled to claim deduction under s. 35B in respect of any portion of the godown rent ?

Whether, on the facts and in the circumstances of the case, the assessee is entitled to weighted deduction under s. 35B in respect of special chest and that too on 50 per cent of the expenditure incurred ?

Whether, on the facts and in the circumstances of the case, the assessee is entitled to claim deduction of the bonus payment in excess of the limits specified in s. 36(1)(ii) ?

Asst. yrs. 1981-82 : Whether, on the facts and in the circumstances of the case, the assessee is entitled to weighted deduction on the commission paid by it abroad ?

Whether, on the facts and in the circumstances of the case, the assessee is entitled to claim deduction of the bonus payment in excess of the limits specified in s. 36(1)(ii) ?

At the time of argument, it was agreed that the questions of law can be classified into seven categories : (1) weighted deduction under s. 35B of 75 per cent of the expenditure on salary and bonus and 50 per cent of other expenditure including godown rent and motor-car expenses, (2) weighted deduction under s. 35B of 50 per cent of the expenditure incurred on packing materials and printing, (3) weighted deduction under s. 35B in respect of interest paid on shipping loan and bank charges, (4) weighted deduction under s. 35B of commission paid to agent abroad, (5) deduction of bank guarantee commission as revenue expenditure, (6) deduction under s. 37 of bonus paid in excess of the limit specified in s. 36(1)(ii) of the IT Act, and (7) deduction under s. 37 of the commission paid to Tara Agencies and Bhansali Brothers.

2. First question is regarding the weighted deduction under s. 35B of 75 per cent of the expenditure on salary and bonus and 50 per cent of other expenditure including godown rent and motor-car expenses. The Tribunal in this case relied on the decision of the Special Bench of the Tribunal in the case of J. Hemchand & Co. vs. ITO (1982)

1 SOT 150 (Bom) (SB) while allowing the claim of the assessee for weighted deduction under s. 35B, to the extent of 35 per cent (sic-75%) of the expenditure on salary and bonus and 50 per cent of the other expenditure and motor-car expenses. The eligibility of the expenditure on salary, office expenses, gratuity and motor-car expenses for the benefit of weighted deduction has been accepted by the Tribunal. This is discussed in para. 7.2 of the judgment of the Tribunal. It merely stated as follows : “Following the ratio laid down by the Special Bench of the Tribunal in the case of Mr. J. Hemchand & Co. we are of the opinion that the assessee is entitled to claim weighted deduction at 75 per cent of the expenditure of salary and bonus and 50 per cent of the expenditure”. Learned counsel for the Revenue contended that the Tribunal has not looked into the facts, which will entitle a person to claim deduction. Learned counsel relied on the decision of CIT vs. Hero Cycles (P) Ltd. & Ors. (1997) 142 CTR (SC) 122 : (1997) 228 ITR 463 (SC). At p. 475 of the above decision, it is stated as follows : “There is other expenditure in regard to salary director’s remuneration, rent, printing and stationery, postage and telegram, etc. which have not been proved to wholly or exclusively incurred for the purpose of any of the sub-clauses mentioned in cl. (b) of s. 35B(1). These will have to be disallowed”. Again in the same decision at p. 474, it is stated as follows : “The allowances in this case relate to: (a) payment to Hosiery Exporters Association, (b) payment to HHEC, (c) contribution to Hosiery Exporters Association, and (d) charges paid to ECGC : and also expenditure on (e) establishment, (f) bonus, (g) leave with wages, (h) salary to directors, (i) postage, telephone and telegram, and (j) printing and stationery”. Learned counsel submitted that the Tribunal has not looked into the question whether it was wholly or exclusively incurred for the purposes of any of the sub-clauses mentioned in cl. (b) of s. 35B(1).

On the other hand, learned counsel for the respondent submitted that the decision of the Supreme Court was on the fact that it is not established that the expenses in question were wholly or exclusively incurred for the purposes of any of the sub-clauses mentioned in cl. (b) of s. 35B(1). When we read the judgment of the Tribunal, we find that the Tribunal has not looked into the question whether the expenditure was wholly or exclusively incurred for the purposes of any of the sub-clauses mentioned in cl. (b) of s. 35B(1).

In the above view of the facts, this matter has to be examined by the Tribunal to determine the proportionate deduction depending upon the number of persons working in the exports division.

The next question is with regard to weighted deduction under s. 35B of 50 per cent of the expenditure incurred on packing materials and printing. The weighted deduction was allowed on printing expenses. However, weighted deduction was not allowed on packing materials and special chest. The assessee had contended before the Departmental authorities that printing cannot be done save on a medium and in the instant cases, the medium of printing was the packing material and special chest. The Tribunal found in favour of the assessee because the packing materials and special chest had special marking on them to indicate that they were meant for the foreign market. Hence, the assessee claimed that it is entitled to claim weighted deduction. So far as this aspect is concerned, the Division Bench decision of this Court in Kesaria Tea Co. Ltd.—ITA No. 444/Coch/81, dt. 3rd April, 1983, was cited. As per the decision in Kesaria Co. Ltd. vs. CIT (1991) 189 ITR 374 (Ker), weighted deduction is not allowable on packing materials and allowable on printing expenditure. Thus, the assessee is not entitled to deduction on packing materials.

The next is the weighted deduction under s. 35B in respect of interest paid on shipping loan and bank charges. This issue is answered in favour of the Revenue in view of the decision in CIT vs. Coromandel Agro Products Oil Ltd. (1998) 146 CTR (AP) 520 : (1998) 230 ITR 335 (AP) and other decisions.

The next is the weighted deduction under s. 35B of commission paid to agent abroad. This also has to be answered in favour of the Revenue in view of the decisions in Aravinda Paramila Works vs. CIT (1999) 153 CTR (SC) 205 : (1999) 237 ITR 284 (SC) and CIT vs. Assam Frontier Tea Ltd. (2002) 172 CTR (SC) 451 : (2002) 253 ITR 549 (SC).

The next question is with regard to the deduction of bank guarantee commission as revenue expenditure. So far as this aspect is concerned, it is to be answered in favour of the assessee on the basis of the decision in Addl. CIT vs. Akkamamba Textiles Ltd. (1998) 144 CTR (SC) 172 : (1997) 227 ITR 464 (SC) and Dy. CST (Law), Board of Revenue (Taxes) vs. B.G. Narayana Bhat (1997) 227 ITR 613 (Ker). [sic–this should be CIT vs. G.T.N. Textiles Ltd. (1997) 137 CTR (Ker) 338 : (1997) 227 ITR 713 (Ker)—Ed.]

9. The next issue is regarding the deduction under s. 37 of bonus paid in excess of the limit specified in s. 36(1)(ii) of the IT Act. For the asst. yr. 1981-82, the ITO disallowed a part of the provision for bonus amounting to Rs. 6,83,850 being the excess of the maximum bonus payable under the Bonus Act. The ITO has also disallowed certain cash payments made during the year by way of bonus for the asst. yrs. 1979-80. The Tribunal held that the payment of bonus in excess of the limit is a practice in the tea industry and it is allowable. Even though learned counsel for the Revenue asked for a remand, we don’t think, it is necessary, since according to us, the bonus paid has to be deducted even though it is made in excess of the limit.

The next is regarding the deduction under s. 37 of the commission paid to Tara Agencies and Bhansali Brothers. So far as this aspect is concerned, the deduction was granted by the Tribunal. Learned counsel for the Revenue, at the time of argument contended that the assessee cannot claim any deduction in view of the provisions under s. 40A(2)(a). The assessee contended that all the points raised before the Tribunal was considered by the Tribunal.

But learned counsel for the Revenue contended that the Revenue is entitled to raise the above legal contention though raised for the first time before this Court. All the necessary findings required to consider the question have been found by the Tribunal and the same are before this Court. The following observation of the Supreme Court in Salem Co-operative Central Bank Ltd. vs. CIT (1993) 111 CTR (SC) 394 : (1993) 201 ITR 697 (SC) at 701 and 703 would support the contention of the Revenue. The observations of the Supreme Court read thus : “This Court cannot look on helplessly with reference to an error which is manifested in the contention of both sides before the Tribunal. This Court has jurisdiction to correct an error in the order of the Tribunal so long as the point arose out of its order, whoever be the author of the mistake or error in taking up a particular contention. Having regard to the nature of the issue that was before the Tribunal and having regard to what we have stated above, we think it proper to set aside the order of the Tribunal and direct the Tribunal to consider the case on all the points that require consideration of the question whether additional surcharge was attracted. The reference is returned unanswered.

We find it difficult to agree with Smt. Janaki Ramachandran, learned counsel for the assessee, that the High Court has exceeded its jurisdiction under s. 256 in making the above direction. As rightly observed by the High Court, if the Tribunal proceeds upon an assumption which is said that the High Court is bound by the terms of the question referred and cannot correct the erroneous assumption of law underlying the question. If such power is not conceded to the High Court, the result would be that the answer given by the High Court may equally be erroneous in law. Such a situation cannot certainly be countenanced. It would not be for any fresh investigation of facts in this case not that such power does not exist in the High Court in an appropriate case. All that the High Court has asked the Tribunal to do is to consider whether the liability of surcharge is not attracted even if the said sum of Rs. 19 is treated as income from business. The fact that the Revenue was also a party to the said erroneous assumption before the Tribunal cannot stand in the way of the Revenue resiling from an erroneous assumption of law…… The High Court was of the opinion that the legal submission urged by the Revenue before the High Court, no doubt for the first time, did call for serious consideration. This was done to arrive at a correct decision in law relating to the liability to additional surcharge. If really additional surcharge was chargeable according to the Finance Act even in case the said sum of Rs. 19 represented business income, the High Court cannot be called upon to act on the assumption that it is not so chargeable and answer the question stated. Such a course would neither be in the interest of law or of the justice. That the Revenue was also a party to the erroneous assumption of law makes little difference to the principle.”

After hearing both sides, we are of the view that the matter should be examined by the Tribunal. Hence, we pass the following orders : For the asst. yr. 1978-79 : Question No. 1 is answered in favour of the assessee and against the Revenue. Question No. 2 is remanded to the Tribunal. Question No. 3 is answered in favour of the Revenue and against the assessee. Question No. 4 is answered in favour of the Revenue and against the assessee. Question No. 5 is answered in favour of the Revenue and against the assessee. Question No. 6 is remanded to the Tribunal. For the asst. yr. 1979-80 : Question No. 1 is similar to question No. 2 for the asst. yr. 1978-79 and hence it is remanded. Question No. 2 is similar to question No. 3 for the asst. yr. 1978-79 and hence question No. 2 is answered in favour of the Revenue and against the assessee. Question No. 3 is similar to question No. 4 for the asst. yr. 1978-79 and hence question No. 3 is answered in favour of the Revenue and against the assessee. Question No. 4 is similar to question No. 5 for the asst. yr. 1978-79 and hence question No. 4 is answered in favour of the Revenue and against the assessee. Question No. 5 is similar to question No. 6 for the asst. yr. 1978-79 and hence it is remanded. For the asst. yr. 1980-81 : Question No. 1 is similar to question No. 2 for the asst. yr. 1978-79 and hence, it is remanded. Question No. 2 is similar to question No. 3 for the asst. yr. 1978-79 and hence, question No. 2 is answered in favour of the Revenue and against the assessee. Question No. 3 is similar to question No. 4 for the asst. yrs. 1978-79 and hence, Question No. 3 is answered in favour of the Revenue and against the assessee. Question No. 4 is similar to question No. 5 for the asst. yr. 1978-79 and hence, question No.

4 is answered in favour of the Revenue and against the assessee. Question No. 5 is similar to question No. 6 and hence, it is remanded. For the asst. yr. 1981-82 : Question No. 1 is answered in favour of the Revenue and against the assessee. Question No. 2 is similar to question No. 6 for the asst. yr. 1980-81 and, hence, it is remanded. Reference are answered accordingly.

[Citation : 260 ITR 233]

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