Deputy Commissioner of Income-tax v. Udaipur Distillery Co. Ltd.

S.R. Chauhan, J.M.—As the above appeals are interrelated so we are disposing them of by this common order for the sake of convenience.

2. ITA No. 1546/Jp/1995 is an appeal by Revenue for assessment year 1992-93 and is directed against the order of CIT(A), Udaipur dated 22-5-1995, whereby he deleted the disallowance made by Assessing Officer in respect of late payment of ESI, P.F., etc. under section 43B.

3. ITA No. 1561/Jp/1995 is an appeal by assessee for assessment year 1992-93 directed against the order of CIT(A), Udaipur, dated 22-8-1995 hereby be confirmed the disallowance of Rs. 6 lacs on account of unpaid bottle fees, disallowance of Rs. 3,58,097 in respect of depreciation of R&D assets and confirmed the action of Assessing Officer in treating the expenditure of Rs. 2,77,867 as capital expenditure.

4. ITA No. 2072/Jp/1992 is an appeal by assessee for assessment year 1991-92 and is directed against the order of CIT(A), Ajmer, dated 9-9-1992 whereby he confirmed the disallowance of Rs. 6 lacs made by Assessing Officer under section 43B, disallowance of Rs. 2,86,070 being depreciation on R&D assets, sustained the addition of Rs. 8,889 under section 40A(2)(b ) and disallowance of Rs. 97,350 and Rs. 30,000 out of public relation expenses, and staff welfare expenses respectively.

5. We have heard the arguments of both the sides and also perused the record and have also gone through the written submission furnished by the learned authorised representative of assessee.

5.1 First we take up ITA No. 1546/Jp/1995 being Revenue's appeal for assessment year 1992-93. The sole ground raised by Revenue disputes the deletion of disallowances under section 43B, the learned Departmental Representative of Revenue has contended that the Assessing Officer had rightly disallowed the deductions in respect of contributions by the assessee-employer in respect of P.F., EPF, DLI and DSI, etc. as the same were made beyond due date. He has contended that the due date in respect of ESI contribution was 21st of next month while the due date in respect of other contributions was 15th of next month. He has contended that the omission of the words "during the previous year", from second proviso w.e.f. 1-4-1989, the rigour has become more effective. He has thus supported the Assessing Officer's order and contended that the Assessing Officer's order in assessment year 1990-91 and CIT(A)'s order in assessment year 1991-92 are quite elaborate in this regard and so that same may be gone through and has furnished the copies thereof. He has contended that the learned CIT(A) has deleted the disallowances without proper basis. As against this, the learned authorised representative of assessee contended that he has furnished chart of payment of P.F., etc. made in cash. He has contended that the Assessing Officer disallowed the deduction for the reason that the payments were made beyond the due date but the disallowance is not proper for the reason that all these payments which the Assessing Officer has disallowed were made within the accounting year. He has cited the following decisions :

(1)Hunsur Plywood Works Ltd. v. Commissioner Of Income Tax [1996] 54 TTJ (Bang.) 260;

(2)Madras Radiator & Pressings v. Dy. CIT [1996] 56 TTJ (Mad.) 662; and

(3)Fluid Air (India) Ltd. v. Dy. CIT [1997] 63 ITD 182 (Mumbai).

6. We have considered the rival contentions and also the material on record including the written submissions of the learned authorised representative of assessee as also the cited decisions, copies of which have been furnished before us. In [1996] 56 TTJ (Mad.) 662 (supra) Tribunal, Madras has held that because of the omission of the expression "during the previous year" in second proviso to section 43B, so long as the payments were made within the previous year the payments are to be allowed as deduction under the main section even though the payments are made a few days later than the due date is reckoned qua the month for which the salary has been paid. It has also been held that in respect of contribution recovered on the last date of the previous year or any other subsequent date, under the second proviso deduction has to be allowed if the payment had been made within the due date prescribed under the Act. It has also been held that there is some ambiguity over the expression "15 days from the close of the month" inasmuch as it is not clear as to whether the term "month" is to be reckoned as the month for which the salary is payable or the month in which the contribution has been received. In [1996] 54 TTJ (Bang.) 260 (supra ) also similar view has been taken. It has been held therein that if the employer makes payment of employee's contribution within the period of grace then he is not treated to be in default under the Employees' P.F. Scheme and the relevant Act. Similarly [1997] 63 ITD 182 (Mumbai) (supra) is also supportive of the assessee in this respect. No contrary decision has been cited by the other side. Considering the legal position as emanating from the above cited decisions and also considering the facts and circumstances of the case including the fact that the payments have been made within the accounting year we find no fault with the impugned order of the learned CIT(A) in deleting the disallowances made by Assessing Officer. We, therefore, decline to interfere with the same.

7. Now we take up ITA No. 1561/Jp/1995 for assessment year 1992-93. Ground No. 1 disputes the disallowance of Rs. 6 lacs under section 43B on account of unpaid bottling fees. The learned authorised representative of assessee has contended that it was not the fees as contemplated under section 43B(a). He has contended that in order that it should be a fee, there should have been a character of tax or duty etc. He has cited Commissioner Of Income-Tax v. Varas International (P.) Ltd. [1997] 142 CTR (Cal.) 369 : [1997] 225 ITR 831 (Cal.) and Udaipur Distillery Co. Ltd. v. Dy. CIT 21 Tax World 805 (Jp.). It has been contended in the written submission of the learned authorised representative of assessee that the bottling fee is in the nature of licence charge/fee being received by the Government for parting which is exclusive right to manufacture or vend in toxicant and accordingly this bottling fee is not the tax duty or cess or fee so as to attract the provision of section 43B. It has also been contended that in this case bottling fee was substantially enhanced and on a writ petition filed in the Hon'ble High Court the same was stayed subject to the furnishing of bank guarantee by the assessee. It has been contended that the assessee obtained bank guarantee on actual payment of the equal amount to the bank and the bank guarantees thus obtained from the bank was furnished to the excise authorities of the State. It has been also contended that thus furnishing of the bank guarantee tantamounts to actual payment. The learned authorised representative of assessee has cited 22 Tax World 321 and Nuchem Plastics Ltd. v. CIT [1992] 44 TTJ (Del.) 261 and contended that thus the case is covered thereby. As against this the learned Departmental Representative of Revenue has contended that the orders of the authorities below are quite elaborate in this regard which may be gone through. He has also contended that furnishing of bank guarantee is not actual payment because the assessee gets on earning interest on that amount. He has cited Asstt. Collector of Central Excise v. Dunlop India Ltd. [1985] 154 ITR 172 (SC). He has contended that the decision of Jaipur Tribunal, cited by the learned authorised representative of assessee relates to assessment year 1985-86 in the assessee's own case, but the assessment year under appeal is 1992-93 and that the words 'fee' and 'cess' had been inserted into the statutory provisions of section 43B w.e.f. 1-4-1989.

8. We have considered the rival contentions as also the relevant material on record and have also gone through the cited decisions [1985] 154 ITR 172 (SC) (supra), cited by learned Departmental Representative of Revenue is on a different issue. The point involved in that decision before the Hon'ble Supreme Court was the issuance of stay against recovery of demand. It was in that context that the emphasis of liquid cash being needed by the Government was laid. The said decision has been considered by Tribunal, Delhi in [1992] 44 TTJ (Delhi) 261, and the same has been dealt with on p. 287 of the reporting in para 29 wherein Tribunal Delhi has observed that "there is no suggestion in the Supreme Court judgment that furnishing of bank guarantee by paying full amount of duty does not amount to payment of duty". As such the said citation is distinguishable on facts. It has also been held by Tribunal, Delhi in the aforesaid case of Nuchem Plastic Ltd. v. Dy. CIT (supra) that the fact that interest on FDRs pledged with bank was assessed in assessee's hand does not militate against the view that the expression 'actually paid' used in section 43B stood satisfied when assessee paid money to bank for bank guarantee. In Tribunal, Jaipur has also held that furnishing of bank guarantee for the unpaid amount of customs duty in compliance of the order of the Hon'ble Supreme Court has to be treated as amount actually paid under section 43B. As such considering all the facts and circumstances of the case as also the legal position emanating from the above quoted judicial pronouncement, we are of the view that the unpaid amount of bottling fee has, on furnishing of the bank guarantee, to be treated as actual payment and accordingly the deduction in respect of the same is allowable and cannot be denied under section 43B. Accordingly we delete the disallowance of Rs. 6 lacs.

9. Ground No. 2 disputes the disallowance of depreciation of Rs. 3,58,097 on R&D asset that is on research and development building, plant and machinery, and laboratory equipment. The learned authorised representative of assessee has contended that the concept of block of asset having been introduced w.e.f. assessment year 1988-89 the individual asset loses its identity and the depreciation has to be allowed on the block of asset as such and the same will not depend upon any individual asset having been used or not during the year. He has also referred to Board Circular 469 dated 23-9-1986, in this regard. He has also contended that the Assessing Officer has discussed all the assets in his order. He has contended that the assessee has furnished chart of depreciation giving various details on pp. 47 and 48 of the assessee's paper book. He has contended that the assets in question are part of the block. He has also contended that earlier the provisions of section 41(2) was in respect of individual asset but now for allowing depreciation it is no more the requirement of law as to whether an individual asset has been used or not during the year. He has cited Packwell Printers v. Asstt. CIT [1996] 59 ITD 340 (Jab.). It has also been contended in the written statement furnished by assessee before learned CIT(A) placed on pp. 1 to 8 of the assessee's paper book that the company has not closed down the R&D Division and it has got complete establishment at its disposal. It has also been contended that R&D activities are not confined to fast food division/unit only, but it is also meant for the liquor business, and hence even if fast food division has been closed there is no justification for this disallowance. As against this, learned Departmental Representative of Revenue has contended that the utilisation of asset is missing in this case. He has referred to p. 4 of the Assessing Officer's order. He has contended that the fast food division having been sold/closed during assessment year 1988-89 and the research and development building, plant and machinery and laboratory equipment being part of the said division, the question of using of the said assets after the close of the said unit does not arise and so the depreciation is not allowable. He has contended that even if a part of block is not utilised then depreciation on that part of block will not be available.

10. We have considered the rival contentions, the material on record as also the cited decision. From the perusal of depreciation chart, placed on pp. 47 and 48 of paper book we find that these assets have been included in the block of assets and the depreciation of Rs. 3,45,401 in respect of building is mentioned in the above chart (p. 47 of paper book) under the Head B—'Building' at serial No. 9 column Nos. 6 and 8. Similarly the depreciation of Rs. 7,416 in respect of plant and machinery as mentioned in the chart (pp. 47 and 48) under the Head C-last item in columns 6 and 8, and depreciation of Rs. 5,280 in respect of laboratory equipment under the head 'H' Laboratory in column Nos. 6 and 8. The amendment regarding depreciation which became operative w.e.f. 1-4-1988 is applicable to the assessment year 1988-89 onwards and so the same will apply to assessment year 1992-93 involved in this appeal also. This amendment has introduced the concept of "block of assets" as contained in section 32(1)(ii). Again section 43(6)(c) speaks of the W.D.V. of block of assets. The term 'block of assets' has been defined in section 2(11). As seen above the R & D asset, has neither been closed nor discarded as yet and the same is also stated to have been used for liquor. Be that as it may, considering all the facts and circumstances of the case and the ratio of [1996] 59 ITD 340 (Jab.) (supra) the R & D asset having been included in the block of assets, and the asset having not been discarded away or closed as yet as revealed from the contention of the learned authorised representative of assessee, we are of the view that the disallowance of depreciation on R & D asset for assessment year 1992-93 is not justified and is unwarranted. We, therefore, delete the disallowance.

11. Ground No. 3 disputes the treating of expenditure of Rs. 2,77,867 on replacement of transformer as capital expenditure. The learned authorised representative of assessee has contended that the earlier transformer had become damaged and unusable and so the same was replaced by a new transformer. He has contended that the transformer was the part of main channel distribution board of electrical circuit. He has contended that this asset was only a part of plant and machinery and it was with the purpose of running the main plant and machinery efficiently and smoothly that the old transformer was replaced by a new one. He has contended that the Assessing Officer's objection regarding the purchase of the transformer by single bill has no relevance herein. He has also contended that the Assessing Officer's objection that the old transformer still exist in the block has no weight in the relevant context for the reason that the accounts and depreciation chart entries can be made only on the real sale of assets and that the old transformer is lying in the scrap. He has contended that no new asset has come into existence. He has also requested for admitting the certificate placed on p. 46 of paper book as additional evidence on record. A petition under rule 29 has also been furnished by learned authorised representative of assessee. It has been contended in the petition that it is only with a view to bring out the facts on record more clearly that this document is being brought on record although the submissions to this effect are already on record. He has contended that in the circumstances of the case the expenditure on replacement of transformer is a revenue expenditure. He has cited Commissioner Of Income-Tax, Lucknow v. Kanodia Cold Storage. [1975] 100 ITR 155 (All.). He has also relied on various decisions cited in his written submission in this regard. As against this the learned Departmental Representative of Revenue has contended that the order of Assessing Officer is quite elaborate. He has also referred to para 3 on p. 3 of CIT(A)'s order. He has relied on the orders of the authorities below.

12. We have considered the rival contentions, the material on record as also the cited decisions. In [1975] 100 ITR 155 (All.) (supra) the Hon'ble Allahabad High Court has held as under :

"Replacement of worn out parts does not by itself bring in a new asset. In considering the nature of an expenditure one should consider the productive unit as a whole and not pick out parts therein which are new. If the productive unit to the assessee remains the same but a part of it which has become unsuitable for its use is replaced by something which makes it possible for the existing set up to function efficiently the cost incurred on such replacement would be revenue expenditure."

In Commissioner Of Income-Tax, Patiala v. Bharat Cinema. [1980] 15 CTR (P&H) 283 : [1980] 121 ITR 165 (P&H) the expenditure incurred on repairs/replacement of false ceiling in cinema building was treated as revenue expenditure. In Commissioner Of Income-Tax, Delhi V v. Eagle Theatres [1985] 48 CTR (Delhi) 226 : [1987] 165 ITR 93 (Delhi) expenditure on replacement of electric wiring in cinema building was treated as revenue expenditure. In CIT v. Sree Bhagwati Textiles Ltd. [1994] 120 CTR (Ker.) 414 : [1994] 207 ITR 826 (Ker.) the expenditure on renovating/replacing parts of machinery necessitated by modernisation was held to be revenue expenditure. In *Vanaja Textiles Ltd. v. Commissioner Of Income-Tax. [1994] 118 CTR (Ker.) 372 : [1994] 208 ITR 161 (Ker.) expenditure on modernisation of machines aimed at mere efficient carrying of business and updating of facilities were held to be revenue expenditure. In Cultural Enterprises Corporation v. Commissioner Of Income-Tax. [1992] 196 ITR 488 (Cal.) expenditure on replacement of sanitary fitting was held to be revenue expenditure. All these decisions have been extracted in the written submissions of the learned authorised representative of assessee. Considering all the facts of the case the assessee's petition for admitting the additional evidence by way of certificate placed on p. 46 of paper book is allowed for the reason that the same is considered as essentially required for the ends of justice. Considering all the facts and circumstances of the case, the material on record and the legal position as emerging from the judicial pronouncement discussed above we are of the view that the expenditure incurred on purchase of new transformer for replacement of the old transformer for efficient and smooth running of the assessee's channel distribution board of electrical circuit to be revenue expenditure the same is accordingly allowable as revenue expenditure. However in such a situation the depreciation already allowed treating the same as capital expenditure may be withdrawn. We order accordingly.

13. ITA No. 2073/Jp/1992 : The learned authorised representative assessee has filed revised ground so now we will be considering the revised grounds alone.

14. Ground No. 1 disputes the disallowance of Rs. 6 lacs under section 43B on account of unpaid bottling fees. Both the sides have raised their same grounds as they raised as above for the similar ground in ITA No. 1561/Jp/1995. As the facts are identical we follow our own decision given above on issue No. 1 in ITA No. 1561/Jp/1995 wherein we have held that on furnishing bank guarantee of equal amount in respect of unpaid bottling fee amount the same shall be treated to have been actually paid and in turn there will be no disallowance under section 43B. Accordingly we delete this disallowance.

15. Ground No. 2 disputes the disallowance of Rs. 2,86,070 on research and development assets. The learned authorised representative of assessee has contended that this ground is common with the assessee's appeal No. 1561/Jp/1995 for assessment year 1992-93. He has contended that the chart of depreciation has been furnished on pp. 33 to 35 of paper book. In the written statement of learned authorised representative of assessee furnished before CIT(A) (pp. 1 and 2 of paper book of assessee) it has been contended that the company has not closed down R&D division and it has got complete establishment at its disposal to keep the entire assets in working condition. As against this the learned Departmental Representative of Revenue has reiterated his same arguments as raised by him on similar issue in ITA No. 1561/Jp/1995 discussed by us above.

16. We have considered the rival contentions as also the material placed on record. From the perusal of the record we find that these R&D assets and their depreciation stand included in the block of assets as is evident from the chart of depreciation placed on pp. 33 to 35 of paper book of assessee. As we have already decided a similar issue above in ITA No. 1561/Jp/1995 and the facts of the case in hand being similar to those of the aforesaid case, this issue stands covered therein. We, therefore follow our decision rendered above on similar issue in ITA No. 1561/Jp/1995 and accordingly hold the depreciation on R&D asset to be allowable, and in turn we delete this disallowance.

17. Ground No. 3 disputes the addition of Rs. 8,889 under section 40A(2)(b) @ 3 per cent as service charges on the packing material supplied by the assessee to M/s. Sona Distilleries Ltd. and in the assessee's written submission furnished before CIT(A) it has been contended that this ground is regarding the notional addition of service charges @ 3 per cent on some packing material supplied to M/s. Sona Distilleries Ltd. It has been contended therein that both the companies are working in combination for purchase of such material so as to effect economy. It has been mentioned therein that the companies have to depend on outsider for supply and by obtaining combined delivery for both effect economy. The learned authorised representative of assessee has contended that this issue is covered by decision of Tribunal, Jaipur in assessee's own case for assessment year 1986-87, a copy of which is placed on pp. 36 to 39 and the relevant discussion is in paras 19 to 21 on pp. 37 and 38 and the Tribunal has deleted such addition. He has cited CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC) and contended that Tribunal, Jaipur has relied on the aforesaid decision. He has also contended that the Assessing Officer has not brought any material on record to suggest that the assessees earned some income. He has contended that the Assessing Officer referred to section 40A(2)(b) but that provisions is regarding the disallowance thereunder but here it is a case of addition and not of disallowance and so the said provision is not applicable. As against this, the learned Departmental Representative of Revenue has not made any material argument in view of the decision of Tribunal Jaipur in assessee's case on the similar issue.

18. We have considered the rival contentions as also the material on record. The fact being identical we respectfully follow the decision of Tribunal, Jaipur given in assessee's own case for assessment years 1985-86 and 1986-87 in ITA Nos. 459 & 460/Jp/1990 and 1583/Jp/1989, copy of which is placed on pp. 36 to 39 of assessee's paper book Tribunal Jaipur has in its aforesaid decision followed to ratio decidendi of the Hon'ble Supreme Court decision in CIT v. Shoorji Vallabhdas & Co. (supra). The Tribunal has held that the sale by the assessee to M/s. Sona Distilleries Ltd. at cost price is based on business expediency and that the assessee was also purchasing some material from the said company cost price and that to effect economy during the year making bulk purchases a combined way the Tribunal has deleted such addition in the aforesaid judgment. We respectfully follow the aforesaid judgment and accordingly delayed the addition.

19. Ground No. 4 disputes the disallowance of Rs. 97,350 out of public relating expenses, expenditure of Rs. 30,000 out of staff welfare expenses and treating both the amounts aggregating to Rs. 1,27,350 as an entertainment expenses as against Rs. 50,020 pointed by the auditors. The learned authorised representative of assessee has contended that the Assessing Officer has treated the total amount of public relation expenses being Rs. 97,350 as entertainment expenses. He has contended that the details of these expenses have been given on pp. 53 to 57 of paper book. He has contended that the Assessing Officer has treated a sum of Rs. 30,000 out of staff welfare expenses to be entertainment expenses. He has contended that the details of staff welfare expenses have been given on pp. 40 to 52 of paper book. He has contended that auditors have given details of expenses stated to be entertainment expenses on p. 63 of paper book and have treated a total of Rs. 50,020 to be the entertainment expenses. He has contended that the auditor has thoroughly examined the accounts and treated the above amount as entertainment expenses so the Assessing Officer's disallowance of public relation expenses at a total of Rs. 97,350 is not justified. He has contended that the details of staff welfare expenses have been given on pp. 40 to 52 of paper book and all these expenses were incurred on staff on working places, though work place is not mentioned on record but these are welfare nature activities and nothing of the kind of entertainment is involved except a few entries of which total comes to around Rs. 1,400. He has contended that when cost if entertainment then also one person is of assessee and so only 50 per cent of that expenditure will be entertainment and the rest 50 per cent expenditure will not be entertainment as assessee's person is there who is discharging official function in extending courtesy. As against this the learned Departmental Representative of Revenue has referred to paras 8 and 9 of CIT(A)'s order and has relied on the orders of the authorities. He has also contended that the public relation expenses involve expenditure on liquor and so it has rightly been disallowed as being entertainment expenditure under section 37(3A). In rejoinder the learned authorised representative of assessee has contended that summary of public relation expenses is given on p. 57 of paper book and that this entire expenditure is not on liquor.

20. We have considered the rival contentions as also relevant material on record. As regards staff welfare expenses, from the perusal of details as furnished on pp. 40 to 52 of paper book we find that a number of entries are of expenditure on guest. It is also revealed that the total staff welfare expenditure are of Rs. 5,31,078 and out of this a sum of Rs. 1,22,238 is on canteen bill only. Considering all the facts, the treating of Rs. 30,000 out of the total staff welfare expenses of Rs. 5.31 lacs, as entertainment expenses is found to be quite proper and reasonable.

20.1 As regards public relation expenses of Rs. 97,350 the details as placed on pp. 53 to 57 of assessee's paper book reveal that a sum of Rs. 45,501 is shown to have been spent on liquor and Rs. 2,438 on gifts. The plea of assessee in M/s. furnished before CIT(A) (pp. 3 and 4 of paper book) has been that the company has to distribute free samples of liquor and sometimes the bottles are given by way of gift, and so it should be considered as discount in the sale and not as an entertainment expenses. It has also been contended therein that the gift expenses are Rs. 2,438 and these are in the shape of discount to the customers and not to the public at large and by these gifts there is no entertainment to anybody. It has been contended that the expenses are towards gift of small items along with sale of liquor bottles. The above two amounts aggregate to Rs. 47,939 (Rs. 45,501 + 2,438). The above aggregate leaves the balance of about Rs. 49,411. As such considering all the fact and circumstances of the case we are of the view that out of total public relation expenses of Rs. 97,350 a sum of Rs. 50,000 may on estimate basis, be reasonably treated as entertainment expenses.

21. Thus, in our view a total sum of Rs. 80,000 (Rs. 30,000 + Rs. 50,000) should be treated as entertainment expenses instead of Rs. 1,27,350 as done by the authorities below. We, therefore, modify the orders of the authorities below accordingly.

22. In the result, the Revenue's appeal No. 1546/Jp/1995 for assessment year 1992-93 is dismissed, assessee's appeal No. 1561/Jp/1995 for assessment year 1992-93 is allowed and the assessee's appeal No. 2072/Jp/1992 for assessment year 1991-92 is partly allowed as indicated above.