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Petitioner: SARDA PLYWOOD INDUSTRIES LTD. VS Respondent: COMMISSIONER OF INCOME-TAX
Court Name: Calcutta High Court Judge(s): S. B. Sinha, R. Dayal Title: SARDA PLYWOOD INDUSTRIES LTD. vs COMMISSIONER OF INCOME-TAX Case No.: Income-tax Reference No.22 of 1994Income-tax Reference No.32 of 1996 Date of Judgment:2000-01-27 Reported As: 2000 PTD 3454 Result: Order accordingly
JUDGMENT
JUDGMENT S.B.SINHA, J---These two references made to this Court in terms of section 256(2) of the Income Tax Act, 1961, relate to the assessm ent years 1983-84, 1984-85, 1985-86 and 1986-87. Although two questions each for the aforementioned assessment years were referred to this Court, but two questions being question No.2 for the assessment years 1983-84 and 1984-85 were not pressed and the same are as follows; "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in confirming the addition of Rs.1,15,000 in respect of the alleged extra income earned from sales at Ahmedabad? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in, confirming the addition of Rs.1,35,627 in respect of the alleged extra income earned from the sales at Ahmedabad?" One of the questions for each of the assessment years is common which is question No.2 as mentioned hereinbelow. This Court, therefore, is required to answer the following four question: "(1) Whether, on the facts and in the circumstances of the case, the, Tribunal was justified in confirming the disallowance of Rs.1,07,570? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the transport subsidy granted under the Transport Subsidy Scheme, 1971, amounting to Rs.3,26,912 was a revenue receipt? (3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the expenditure of Rs.87,249 was in the nature of entertainment expenditure as per Explanation 2 to section 37(2A) of the Income Tax Act, 1961?
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(4) Whether, on the facts and in circumstances of the case, the Tribunal was justified in holding that the expenditure of Rs.25,000 and Rs.25,000 incurred on horse race and golf competition, respectively, sponsored by the appellant company for publicity of its products was more for the prestigious post of the managing director than anything else and consequently disallowing the same?" Regarding 1: Question No. l: The appellant is a company registered and incorporated under the Companies Act. It manufactures plywood, the manufacturing unit wherefore has been set up in the State of Assam. It is admitted that the assessee held a dealers' conference wherein presentation of 180 boxes of silver was made to the dealers costing Rs.1,16,570. The Revenue treated the said expenditure to be entertainment expenses as laid down under section 37(2A) of the Act and allowed only a sum of Rs.50 per silver box stating that the said matter is governed by section 37(3) of the Act read with rule 6B of the Rules. The question, thus, which arises for consideration is as to whether the disallowance of a sum of Rs.1,07,570 towards the price of the silver box is justified treating the same to be an advertisement. Section 37(2A) which provides for as non-obstante clause states that notwithstanding anything contained in subsection (1) or (2) of section 37 of the Act no allowance shall be made in respect of so much of the expenditure in the nature of entertainment expenditure incurred by the assessee during any previous year in excess of the aggregate amount computed in the manner specified therein. It is not necessary to consider the provisions as they stood on April 1, 1979, as amendment in the year 1981 and as further amended in the year 1984 in great detail. Subsections (2B) and (3) of section 37 as they stood on April 1, 1979, read thus: "(2B) Notwithstanding anything contained in subsection (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party. (3) Notwithstanding anything contained in subsection (1), any expenditure incurred by an assessee after the 31st day of March, 1964, on advertisement or on maintenance of any residential accommodation including any accommodation in the nature of a. Guest-houses or in connection with travelling by an employee or any other person (including hotel expenses or allowances paid in connection with such travelling) shall be allowed only to the extent, and subject to such conditions, if any, as may be prescribed." Clause (vi) of subsection (3B) of section 37 reads thus: "Nothing contained in subsection (3A) shall apply in relation to any expenditure incurred by an assessee on-- (vi) the holding of, or the participation in, any press conference, sales conference, trade convention, trade fair or exhibition." With effect from April 1, 1981, the provisions of subsections (3A), (3B), (3C) and (3D) were omitted in terms of the Finance (No.2) Act, of 1980. By reason of the Finance Act (No. II of 1983), Explanation 2 was added to subsection (2A) of section 37 with retrospective effect from April 1, 1976, which is to the following effect: "For the removal of doubts, it is hereby declared that for the purposes of this subsection and subsection (2B), as it stood before the 1st day of April, 1977, 'entertainment expenditure' includes expenditure on provision of hospitality of every kind by the assessee to any person, whether by way of provision of food or beverages or in any other manner whatsoever and whether or not such provision is made by reason of any express or implied contract or custom or usage of trade, but does not include expenditure on food or beverages provided by the assessee to his employees in office, factory or other place of their work."
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Subsections (3A) and (3B) of section 37 as inserted by the Finance Act (No.11 of 1983), read thus: "(3A) Notwithstanding anything contained In subsection (1), where the expenditure or, as the case may be, the aggregate expenditure incurred by an assessee on any one or more of the items specified in subsection (3B) exceeds one hundred thousand rupees, twenty per cent. Of such excess shall not be allowed as deduction in computing the income chargeable under the head 'Profits and gains of business or profession'. (38) The expenditure referred to in subsection (3A) is that incurred on-- (i) advertisement; publicity and sales promotion; or, (ii) running and maintenance of aircraft and motor cars; or (iii) payments made to hotels. Explanation. ---For the purposes of subsection (3A) and (3B),-- (a) the expenditure specified in clause (i) to clause (iii) of subsection (3B) shall be the aggregate amount of expenditure incurred by the assessee as reduced by so much of such expenditure as is not allowed under any other provision of this Act; (b) expenditure on advertisement, publicity and sales promotion shall not include remuneration paid to employees of the assessee engaged in one or more of the said activities; (c) expenditure on running and maintenance of aircraft and motor cars shall include,-- (i) expenditure incurred on chartering any aircraft and expenditure on hire charges for engaging cars plied for hire; (ii) conveyance allowance paid to employees and, where the assessee is a company, conveyance allowance paid to its directors also." Rule 6B of the Income-tax Rules, inter alia, provides that the --allowance in respect of expenditure on advertisement shall not exceed Rs.50 in respect of articles intended for presentation. Mr. N.K. Poddar, learned counsel appearing, on behalf of the applicant, inter alia, submitted that keeping in view the meaning of the words "advertise" and "advertisement" as obtaining in different discoveries, it would be evident that the same inter alia, means a notice given in a manner designed to attract public attention and thus presentation to the dealers in recognition of their services cannot be said to be an expenditure on advertisement. According to learned counsel, dealers cannot be said to be the prospective buyers and, thus, it cannot be said that by reason of presentation of silver boxes to the dealers any expenditure on advertisement had been undertaken only because the name of the company was inscribed on the said boxes. Mr. Prodesh Malliak, learned counsel appearing on behalf of the Revenue, on the other hand, submitted that the question framed by the Tribunal is a pure question of fact. According to learned counsel as a finding of fact had been arrived at by the Tribunal to the effect that such expenses had been made by way of advertisement the same cannot be assailed before this Court. The findings of the learned Tribunal in relation to the aforementioned question are as follows: "Grounds Nos. 3 and 4 relate to disallowance of Rs.1,07,570 being expenditure incurred on 180 silver boxes given as reward to the delegates of the dealer's conference in recognition of services rendered by them. The Assessing Officer disallowed the above amount being excess cost above Rs.50 in respect of each item under section 37(2A) read with rule 6B of the Income-tax Rules. Before the Commissioner of Income-tax (Appeals) it was submitted on behalf of the appellant-company that the silver boxes given to the delegates were not in the nature of presentation of articles. They were given to the delegates in recognition of the services rendered by them in the appellant's sales. It was also stated that some rewards were also given to the appellant's employees. Rule 6B of the Income-tax Rules would not, therefore, be applied in the appellant's case. The Commissioner of Income-tax (Appeals) considered the facts of the case and the arguments advanced before him. He found that the name and address of the appellant-company were inscribed on the silver boxes. He, therefore, felt that the expenditure should be considered as advertisement expenditure-
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within the meaning of rule 6B of the Income-tax Rules. The expenditure incurred being extended for presentation to the delegates and the cost of each article exceeded Rs.50, the Assessing Officer was justified in the disallowance made by him being the amount in excess of Rs.50 in each case. Learned counsel for the assessee objected to the order of the. Commissioner of Income-tax (Appeals). The facts of the case and the arguments advanced before the Commissioner of Income-tax (Appeals) were reiterated. On the other hand, the learned departmental representative supported the order of the Commissioner of Income-tax (Appeals). Having considered the facts of the case, the order of the Commissioner of Income-tax (Appeals) and the arguments advanced by both the sides, we are of the opinion that the appeal on this point cannot be allowed. It is common ground that the assessee presented 180 silver boxes to the delegates who attended the dealers' conference in Calcutta. All that was stated was that the silver boxes were given in recognition of the services rendered by the delegates is the appellant's claim. The finding of the Commissioner of Income-tax (Appeals) that the name and address of the appellant-- company were inscribed on the boxes is not controverted. It is also not disputed that the disallowance made by the Assessing Officer and confirmed by the Commissioner of Income- tax (Appeals) was only the amount in excess of Rs.50 in each case on the basis of rule 6B(1)(a) of the Income-tax Rules. In view of the above we find that the Commissioner of Income-tax (Appeals) is justified in upholding the disallowance made by the Assessing Officer. In this connection, reliance may be placed on the decision of the Andhra Pradesh High-- Court in the case of CIT v. Raj Brothers (1988) 171 ITR 249, wherein it has been held that expenditure on advertisement, publicity, etc., is subject to the limits specified in section 37(3A) of the Act as per qualifications made under rule 6B of the Income-tax Rules. In view of the above, the appeal on this point is rejected." The question which, thus, arises for consideration of this Court is as to whether the Tribunal was justified on the admitted facts in coming to the conclusion as to whether presentation of 180 silver boxes to the delegates who attended the dealer's conference in Calcutta would be an expenditure on advertisement in terms of section 37(2B) of the Act read with rule 6B of the aforementioned rules. The question raised herein necessarily gives rise to another question as to what is an advertisement. Similar meaning has been assigned in the Dictionary of English Law, Eal Jowitt, (1959) edition. The question, therefore, is whether any presentation to its dealers by a manufacturer can be said to be an advertisement keeping in view the aforementioned dictionary meaning, the answer to the said question must be rendered in the negative. Whether, an expenditure incurred by an assessee is a business expenditure or not, although a question of fact; but it is well settled that when on admitted facts the inference drawn by the Tribunal is an erroneous one, a mixed question of fact and law would arise and in such a situation the reference of such a question in terms of section 256(2) of the Act cannot be said to be not maintainable. A question with regard to the interpretation of rule 6B would essentially be question of law. Similarly whether any distribution of silver boxes, said to be meant for keeping dry fruits to its dealers amounts to an advertisement, would essentially be a question of law. As noticed hereinbefore, the dictionary meaning of advertisement as also the decisions of the various High Courts make the position absolutely clean that any presentation made to the delegates, directors or shareholders who essentially are not members of the public and thus, being not a potential buyer, the same would not amount to 'advertisement". An argument has been sought to be advanced before us that such presentation made amount to "entertainment" but as the said question had not been raised by the Revenue before the Tribunal, we are of the opinion that the same cannot be allowed to be raised for the first time in this reference.
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As regards the contention of Mr. Mallick that the question referred to this Court is essentially a question of fact, suffice it to say that a wrong interpretation on a provision of law vis-a-vis the admitted fact cannot be said to- be a pure question of fact. The learned Judges further held that a wrong conclusion drawn on an admitted fact is not binding on the High Court and in such an event, the High Court can examine the correctness of such conclusion and interfere with the finding of the Tribunal it is shown that the criteria adopted by the Tribunal for determining the character of the land was erroneous. "It is true that in the absence of a specific question raised with regard to the correctness of any finding of fact, the High Court in a reference is not to interfere with the finding of fact by the Tribunal and the High Court has to proceed to answer the question on the facts found by the Tribunal. The finding of the C.B.R. In the instant case that the properties are the personal properties of the deceased Mahant cannot, in the facts and circumstances of this case, be considered to be a finding of fact. The C.B.R. In coming to its conclusion that the properties were the personal properties of the deceased Mahant had considered the nature of the grant by the Firman and also the judgment of the District Judge in the title suit. The conclusion of the Board of Revenue that the properties are the personal properties of the Mahant on an interpretation of the grant and on a consideration of the judgment of the District Judge is not a pure finding of fact." Yet again in Seth Keshrichand Khaitan Education and Welfare Trust v. CIT (1982) 138 ITR 351 (Cal), Sabyasachi Mukharji, J. (as the learned Chief Justice then was), speaking for a Division Bench of this Court, while considering a contention as to whether a trust had been created bona fide or not, would be a pure question of fact held that when the fact and the case were not disputed nor the application of funds of the trust or the object thereof or the date of its creation was not disputed and in the absence of any finding that the creation of such trust was a colorable one, there is hardly any scope for challenging any finding of fact merely because the Tribunal had arrived at a conclusion that in order to prove bona fides it was required to consider the subsequent conduct and also the application of funds and on that principle has rested its conclusion and, thus, the same is not a finding of fact. It was observed (page 358): "A conclusion about the intention, arrived at on undisputed basic facts, by applying a certain test, would be a question of law. The question would be whether the test applied was the appropriate test under the section. " Re: Question No. 2, for the assessm ent year---s 1983-84 and 1985-86 and question No. l for 1986-87: Although the question raised appears to be covered by three Division Bench decisions of this Court, viz., Jeewanlal (1929) Ltd. v. CIT (1983) 142 ITR 448, Merinoply and Chemicals Ltd. v. CIT (1994) 209 ITR 508 as also kesoram Industries and Cotton Mills Ltd. v. CIT (1991) 191 ITR 518, Mr. Poddar appearing on behalf of the applicant submitted that the said decision require a reconsideration in view of the decision in CIT v. P.J. Chemicals Ltd. (1994) 210 ITR 830 (SC), CIT v. Orissa Industries Ltd. (1992) 198 ITR 251 (Orissa), CIT v. Assam Asbestos Ltd. (1995) 215 ITR 847(Gauhati) and CHIT v. Anand & Co. (1998) 233 ITR 18 (Cal.). Learned counsel for the parties, however, have also referred to various other, decisions on the aforementioned question. However, it may be recorded that the principle of law which is applicable for consideration as to whether a subsidy granted by the Government would be a capital receipt or a revenue receipt would depend upon the nature thereof in so far as a subsidy granted for development purpose would be a capital receipt; whereas that granted by way of reimbursement of the tax paid or expenses incurred would be revenue receipt is not in dispute. The law on this point is no longer res integra in view of the decision of the Supreme Court of India in Sahney Steel and Press Works. Ltd. v. CJT (1997) 229 ITR 253; (1997) 7 SCC 764; wherein, it was held (page 237);
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"The important point to note is that all the incentives are production incentives in the sense that the company will be entitled to these incentives only after it goes into production. The scheme was not to make any payment directly or indirectly for the setting up of the industries. It is only after the industries had been set up and production had been commenced that the incentives were to be given. The second important thing to note is that the manner in which the incentives were given is of no consequence of determination of- the question raised in this case. Incentives were given by way of refund of sales tax on raw material, machinery and finished goods. Similarly, subsidy on power was confined to 'power consumed for production'. In the other words, if power is consumed for any other purpose like setting up the plant and machinery, the incentives will not be given. Refund of sales tax will also be in respect of taxes levied after commencement of production and up to a period of five years from the date of commencement of production. It is difficult to hold these subsidies as anything but operational subsidies. These subsidies were given to encourage setting up to industries in the State of Andhra Pradesh by making the business of production and sale of goods in the State more profitable." The apex Court upon taking into consideration the decisions of the English Court as also various High Courts including this Court in Kesoram Industries and Cotton Mills Ltd. v. CIT (1991) 191 ITR 518-, held (page 262): "That precisely is the question raised in this case. By no stretch of imagination can be subsidies whether by way of refund of sales tax or relief of electricity charges or water charges be treated as an aid to the setting up of the industry of the assessee. As we have seen earlier, the payments were to be made only if and when the assessee commenced its production. The said payments were made for a period of five years calculated from the date of commencement of production in the assessee's factory. The subsidies are operational subsidies and not capital subsidies." Repelling an argument advanced on behalf of the assessee that the refund of salestax on purchase of machinery must be treated as capital, the apex Court observed (page 262): "This argument, though attractive at first blush, does not bear close scrutiny. This argument, overlooks the basic principle laid down in-- the cases discussed above. It is not the source from which the amount is paid to the assessee, which is determinative of the question whether the subsidy payments are of revenue or capital nature. " Clause (2) provides for commencement and duration, which reads thus: "It comes into effect from July 15, 1971, for selected areas (A) with effect front September 24, 1973, for selected area (B) with effect from December 1, 1976, -for selected areas (C) and with effect from December 5, 1977, for selected areas (D) and will remain in operation till May 31, 1979." Clause (6) provides for details of the scheme. Sub-clauses. (i), (iv)--and (x) of clause (6) reads thus: "(i) A transport subsidy will be given to the industrial units located in the selected areas in respect of raw materials which are brought into and finished goods which are taken out of such areas. (iv)In the case of North Eastern Region comprising the States of Assam, Meghalaya, Nagaland, Manipur, Tripura and the Union Territories of Arunachal Pradesh and Mizoram, the transport subsidy be given on the transport costs between Siliguri and the location of the industrial unit in these States/Union territories. While calculating the transport costs of raw materials the cost of movement by railway from Siliguri to the railway station nearest to the location of the industrial unit and thereafter the cost of movement by road to the location of industrial unit will be taken into account. Similarly, while calculating the transport costs of finished goods, the cost of movement by road from the location of industrial unit to the nearest railway station and thereafter the cost of movement by rail to Siliguri will be taken into account: In the case of North Eastern Region, for raw materials moving entirely by road or other mode of transport, the transport cost will be limited to
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the amount which the industrial unit might have paid had the raw materials moved from Siliguri by rail up to the railway station nearest to the location of the industrial unit and thereafter by road. Similarly, in the case of movement of finished goods moving entirely by road or other mode of transport in the North Eastern Region, the transport cost will be limited to the amount which the industrial unit might have paid, had the finished goods moved -from, the location of the industrial units to the nearest railway station by road and thereafter by rail to Siliguri: (x) Existing industrial units in the selected areas are also eligible for transport subsidy in respect of the additional transport costs of raw materials and finished goods arising as a result of substantial expansion of diversification effected by them after the commencement of the scheme. Transport subsidy in such cases will be restricted to 50 per cent of the transport costs of the additional raw materials required and finished goods produced as result of the substantial expansion or diversification." Although the aforementioned scheme was for promoting growth of industries, which is the prime concern for grant of subsidy that by itself is not conclusive. A document, as is well-known, must be construed upon reading the --same in its entirety. The object in framing a subsidy scheme cannot, in the opinion of this Court, be deciphered only from the preamble thereof. "Webster's New World Dictionary, 1962 a grant of money, specifically (a)----------- (b) a Government grant to a private enterprise considered of benefit to the public. Shorter Oxford English Dictionary: 'Help, aid, assistance----Financial aid furnished by a State or a public corporation in furtherance of an undertaking or the upkeep of a thing. Chamber's Twentieth Century Dictionary, revised edition: 'assistance, aid in money. A grant of public money in aid of some enterprise, industry, -etc., or to keep down the price of a commodity... The Reader's Digest Great Encyclopedic Dictionary, Vol.II (M-Z): '2 Financial aid given by Government towards expenses of an undertaking or institution held to be of public utility, money paid by Government to producers of…
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