ORDER
R.M. Mehta, Vice President
1. The following grounds are raised in the Revenue’s appeal, directed against the
order passed by the CIT(A) :
“On the facts and in the circumstances of the case, the learned CIT(A) has erred in :
1. Accepting the additional evidence in regard to disallowance of payment of club expenses under Rule 6B.
2. In directing to allow deprecation on items of furniture and fixture which are in the possession of employees.
3. In deleting the disallowance of guest-house expenses like rent, repairs and depreciation.
4. In directing to allow the expenses to the extent of subscription for membership and by accepting additional evidence.
5. Deleting the disallowance of Rs. 50,000 made under Rule 6B accepting the additional evidence.
6. In allowing the 1st claim of the assessee for deduction under Section 43B in respect of outstanding in respect of outstanding interest payable to various financial institution without making any payment. ”
2. We have heard both the parties at length and have also perused the orders passed by the tax authorities. Before we proceed to deal with each of the grounds we would, at the outset, refer to the preliminary objection taken by the learned Departmental Representative in respect of some of the grounds the stand taken being that the CIT(A) had accepted the additional evidence and decided certain issues in favour of the assessee. The learned Departmental Representative
vehemently contended that the assessee had ample opportunity before the AO and the CIT(A) should not have allowed it to file the additional evidence.
3. As against this, the stand of the learned counsel for the respondent was that no additional evidence as such had been placed on record and whatever had been tendered before the CIT(A) was only in support of the stand already taken before the AO. According to the learned counsel even if one went by the assumption that some additional evidence had been placed before the CIT(A) it was a matter of record and as clearly emerging from the order of the first appellate authority that an opportunity had been given to the AO to whom such additional evidence had been forwarded and his report obtained thereto. Both the parties cited certain authorities in support of their respective stands.
4. After considering the rival submissions, we are of the view that there is no merit whatsoever in the submissions made by the learned Departmental Representative on behalf of the Department. We have perused the order of the CIT(A) -and do note that whatever had been categorised as additional evidence had been forwarded to the AO and his report obtained and under these circumstances it was entirely up to the CIT(A) to admit or not admit, but on the facts of the present case he has taken into account said evidence and we decline to interfere with his judgment on the facts of the present case.
5. Coming to the various ground Nos. 1 and 4 are inter-connected since both of these pertain to the assessee’s claim for deduction on account of club expenses. A perusal of the order passed by the CIT(A) shows that a sum of Rs. 90,000 was disallowed out of the deduction claimed at Rs. 1,08,354. As noted by the CIT(A) the disallowance was made on ad hoc basis on the ground of non-availability of complete details as according to the AO it could not be ascertained as to how much of the expenditure was related to subscriptions only. Coming to the aspect of the additional evidence the assessee placed before the CIT(A) complete details and for their admission the stand taken was that such details had to be collected from various locations and the same could not be filed before the AO within the short time available. The further plea was that the tax auditors had certified in their report that the amount represented subscription to clubs only and did not contain any element of entertainment. The further explanation was that the expenditure related to subscriptions paid to various clubs for executives and it also included the yearly subscription for availing credit facilities to the dinners club.
6. In support of the stand taken, reliance was placed on Otis Elevator Co. Ltd. v. CIT (1992) 195 ITR 682 (Bom), Gujarat State Export Corporation v. CIT (1994) 209 ITR 649, 43 Taxman 292 (sic) and the decision of the CIT(A) in the case of a sister concern, the asst. yr. being 1989-90.
7. In considering the aforesaid facts with reference to the authorities cited, the CIT(A) directed the AO to allow the claim to the extent of subscription for membership only.
8. After hearing both the parties, considering the material on record as also the authorities cited we are of the view that the action of the CIT(A) is required to be upheld. Ground Nos. 1 and 4 in the Revenue’s appeal are, therefore, rejected.
9. As regards ground No. 2 in the Revenue’s appeal the brief facts are that the assessee-company purchased various items of household use such as telephones, refrigerators, music systems, etc., which in turn were provided for the use of certain employees in their houses depending upon their seniority and entitlement. The AO following the view taken in the assessments for asst. yrs. 1991-92 and 1992-93 disallowed the depreciation.
10. Before the CIT(A) it was submitted that the aforesaid arrangement of providing household goods was a part of the policy of the company and since the assets were owned and used by the assessee for purposes of its business the claim on account of depreciation was tenable. A reference was made to CBDT’s Circular dt. 12th Dec., 1966, dealing with the subject-matter in question. A reference was also made to the dictionary meaning of the term “furniture” and a reference was also made to Rule 3 of the IT Rules.
11. In accepting the stand taken aforesaid the CIT(A) directed the AO to allow depreciation on the items in question as per Rules.
12. After hearing both the parties, we are of the view that no interference is warranted in the order passed by the CIT(A) whereby he has directed the AO to allow depreciation on the assets in question. The learned Departmental Representative has not been able to show to us as to how the view expressed by the CIT(A) is erroneous in law. It is nobody’s case that the assets in question are being used by the management of the company in a manner, which can be treated as personal and unrelated to business expediencies and requirements. Ground No. 2 in the appeal is accordingly rejected.
13. As regards ground No. 3 both the parties agreed and stated that the matter be restored back to the file of the AO asking him to pass an order in conformity with the view taken by the Special Bench in the case of M/s Eicher Tractors Ltd. v. Dy. CIT in ITA No. 3033 (Del) of 1994. In view of this accepted position, we restore the matter back to the file of the AO asking him to pass an order in conformity with the view taken by the said Special Bench as and when the order becomes available.
14. Ground No. 5 in the appeal pertains to the ad hoc disallowance of Rs.50,000 made by the AO by resorting to provisions of Rule 6B of the IT Rules. It was explained before the CIT(A) that the company with a view to maintain cordial relations with its customers and business associates gifted certain items to them, but inasmuch as such items did not carry the name or logo of the company, the same did not come within the purview of Rule 6B. We may mention that in spite of the aforesaid submissions the AO took the view that Rule 6B did not exclude items, which did not bear the name or logo of the company.
15. Before the CIT(A) it was submitted that applicability of Rule 6B was in respect of those items which had an element of advertisement in them and this presupposes that the article presented or gifted bears the name or logo of the assessee-company. In support of the arguments advanced reliance was placed on CIT v. Indian Aluminium Cables Ltd. (1990) 183 ITR 611 (Del) and CIT v. Modi Spinning & Weaving Mills Co. Ltd. (1993) 202 ITR 708 (Del).
16. Considering the aforesaid facts and the authorities cited, the CIT(A)
proceeded to delete the addition of Rs. 50,000. After hearing both the parties and taking into account the facts of the case and the authorities relied upon, we are of the view that no interference is warranted in the order passed by the CIT(A) and this would mean rejection of ground No. 5.
17. As regards the last ground in the Revenue’s appeal the matter was vehemently argued by both the sides canvassing their respective view points, but before we come to their arguments and our conclusions, it is necessary to set out the brief facts and these are that the assessee took over the business of Ramon & Demm Ltd. pursuant to a revival and rehabilitation scheme sanctioned by the Board of Industrial and Financial Reconstruction (BIFR). As a result of the scheme the respondent-company was to take oVer all the liabilities of Remon & Demm Ltd., which included statutory dues, such as sales-tax, excise, etc. as also liability for interest to financial institutions and banks. It is an accepted fact between the parties that BIFR vide order .dt. 2nd June, 1992, which falls in the previous year relevant to the assessment year under consideration, sanctioned the following concessions :
“(a) Waiver of penal interest, liquidated damages upto 31st March, 1992;
(b) The compounded portion of interest to be repaid on an interest-free basis in 10 annual instalments;
(c) Funding of simple interest upto 31st March, 1992;
(d) Additional sanction of loans upto Rs. 450 lacs at concessional rate of interest. ”
18. The assessee’s case before the AO was that as a result of the scheme sanctioned by BIFR, the interest got converted into a loan. It was the submission that the deferred compound interest and simple interest funded by the institution amounted to Rs. 8.55 crores out of which the funded simple interest amounted to Rs. 5.41 crores. The assessee claimed deduction to the tune of Rs. 5 crores and odd, which had been disallowed in the earlier years.
19. The main submission on behalf of the assessee was that as a result of the funding of defaulted interest, the outstanding interest stood liquidated and in its place principal amount of loan became outstanding. The plea was that there was repayment of interest and receipt on corresponding amount of loan, which although not backed by actual cash flow was nevertheless accepted as discharge of the outstanding interest liability. It was emphasized that the assessee had not claimed deduction for the repayment of the loan amounts, which were outstanding against the assessee of funding of simpler interest and which stood fully repaid up to the time the assessment proceedings were in progress.
20. Before the AO the assessee filed detailed submissions by means of three written communications placing reliance on the decision of the Delhi Bench of the Tribunal in the case of Nuchem Plastic Ltd. v. Dy. CIT (1992) 44 TTJ (Del) 261 as also on CBDT Circular No. 496, dt. 25th Sept., 1987, as also No. 674, dt. 29th Dec., 1993 and which were issued in the context of the sales-tax deferred scheme. The assessee also placed on record before the AO certificates from the financial institutions wherein it had been stated that the funding of interest had an impact of conversion into term loan of an equivalent amount.
21. The aforesaid submissions, however, did not find favour with the AO, who on the ground that the funding arrangement did not tantamount to the payment of outstanding interest proceeded to reject the submissions made. The AO also distinguished the decision of the Delhi Benches of the Tribunal in the case of Nuchem Plastics relied upon and the two circulars of the CBDT were also held to be inapplicable. The certificates issued by the financial institutions were also rejected on the ground that none of these confirmed that the outstanding interest whether simple or compound had been paid/discharged. According to the AO, the letters obtained by the assessee from the various financial institutions were identically worded.
22. During the course of the assessment proceedings the assessee also made an alternative claim to the extent of Rs. 2.48 crores which according to it represented actual payments during the previous year under consideration and this was without prejudice to the main claim for deduction to the tune of Rs. 5 crores and odd. The alternative claim was rejected on the ground that necessary evidence in support thereof had not been furnished.
23. Being aggrieved with the view expressed by the AO the assessee in further appeal before the CIT(A) argued at length and the submissions thereof can be summarized as under :
(i) Deduction was admissible at the stage when the outstanding interest was funded/converted into a loan;
(ii) The assessee had been sanctioned a fresh loan to discharge the earlier outstanding interest, which stood in the books of the amalgamation sick company and as a result of the funding of the defaulted interest of Rs. 5 crores and odd, the outstanding interest got converted into a loan;
(iii) The interest payable amounting to Rs. 5 crores and odd as appearing in the assessee’s balance-sheet as on 31st March, 1992, did not appear as part of the interest accrued and due in the balance sheet as on 31st March, 1993, but formed part of the principal amount of loan outstanding and this clearly established that interest due and payable was actually paid during the year;
(iv) That the financial institutions had categorically stated that the funding had the impact of conversion into term loan of equivalent amount. That connotation of the term “funding” was to be taken as understood in a commercial sense and this was not to be replaced by the understanding of the AO; and
(v) That the appellant could not have been denied deduction vis-a-vis Section 43B in case cheques for the outstanding amount of interest in favour of the financial institutions had been made out and awaiting their presentation the financial institutions would have issued cheques for equivalent amount in favour of the respondent and the same would have been credited in the bank account.
24. In support of the aforesaid submissions, reliance was placed on CIT v. Nagri Mills Co. Ltd.(1958) 33 ITR 681 (Guj), Saurashtra Cements & Chemical v. CIT (1995) 213 ITR 523 (Guj), CIT v. Rohit Mills Ltd. and Mula Sahakan Sakhar Karkhana Ltd. v. ITO (1996) 55 TTJ (Pune) 375. It was in fact submitted that the last judgment was on all fours with the facts of the assessee’s case.
25. Without prejudice to the main submissions, the assessee reiterated that it had repaid a sum of Rs. 2.48 crores during the previous year ending 31st March, 1993, relevant to the assessment year under consideration and deduction under Section 43B was, therefore, allowable but this being the alternative submission. It was emphasized that the payment of the aforesaid amount was evidenced by the certificate of the chartered accountant as also by the covering letters of the assessee giving relevant details including cheque numbers. It may be mentioned with reference to para 11.1 of the order of the CIT(A) that the AO objected to the admission of the additional evidence with regard to the alternative claim on the ground that necessary evidence had not been furnished along with the return of income. In rebuttal the stand of the assessee was that the necessity to make the alternative claim came about at the. assessment stage when the AO indicated that she was not inclined to accept the original claim. The plea, in other words, was that there was no occasion for the assessee for filing the evidence at the assessment stage.
26. In considering the aforesaid submissions, the CIT(A) proceeded to decide the matter in favour of the assessee on the main ground itself without dealing with the alternative contention. His reasons are recorded as follows :
“I have considered the matter. There is no dispute that the deduction on account of the interest is admissible to the appellant-company under Section 43B of the Act. The controversy is with regard to the year in which the deduction is admissible. Whether it is to be allowed in the year of funding or in the year(s) when the funded interest/converted loan is subsequently repaid. The business of Ramon & Demm Ltd. was taken over by the appellant-company pursuant to a revival and rehabilitation scheme sanctioned by the BIFR. The financial package, inter alia, includes funding of simple interest upto March, 1992. As per the certificates of the financial institutions the funding of interest has similar impact as of conversion into term loans of equivalent amount. The existing term loans and funded simple interest to carry interest @ 15 per cent p.a. and to be repaid in 11 quarterly instalments. It. has been stated that repayment of this loan in instalments has not been claimed as a deduction under Section 43B of the Act in the relevant previous year or subsequent previous years since what has been repaid subsequently is not. interest but the principal amount of loan and till date the entire amount of the funded interest stood repaid. Further, the interest payable amounting to Rs. 5,00,03,643 as appearing in the assessee’s balance-sheet as on 31st March, 1992, does not so appear as part of interest accrued and due in the balance-sheet as on 31st March, 1993, but forms part of the principal amount of loan outstanding. There is force in the assessee’s contention that had the appellant made out a cheque for the outstanding amount of interest in favour of the financial institutions which would have to await for presentation until the financial institutions issued a cheque for an equivalent amount in favour of the appellant’s bank account, the appellant could not have been denied the deduction under Section 43B of the Act. In substance there is payment of the outstanding interest on the one hand and receipt of an equivalent amount of loan on the other. It is just that for the value of convenience that there was no physical exchange of cheques. There can be no denying the fact that the outstanding simple interest has got converted into
loan with fresh terms regarding repayment., levy of interest, etc. The appellant accordingly succeeds on this point.
It is unnecessary to go into alternate contention of the appellant.
According to the assessee the total compound interest and simple interest amounts to Rs. 8,55.27,429 out of which funded simple interest amounts to Rs. 5,41,78,695. The claim for deduction is of Rs. 5,00,03,643. The AO should however, verify the accuracy of the figures furnished and compute the deduction accordingly. ”
27. We have heard both the parties at length and have also perused the orders passed by the tax authorities. The learned Departmental Representative vehemently supported the order of the AO pressing into service the decision of the Indore Bench of the Tribunal in the case of Eicher Motors Ltd. v. CIT (1999) 63 TTJ (Ind) 640 : (1999) 69 ITD 177 (tod). It was emphasized by the learned Departmental Representative that on identical facts the Tribunal had been pleased to uphold the action of the tax authorities in disallowing the assessee’s claim with reference to provisions of Section 43B. We in fact would go to the extent of observing that the arguments of the learned Departmental Representative proceeded on lines quite identical to those advanced on behalf of the Revenue before the Indore Bench of the Tribunal. A reference was made to the meaning of the term “actual” appearing in Black’s Dictionary 7th Edition. The learned Departmental Representative took us through relevant portions of the order passed by the Indore Bench (supra) to buttress the Revenue’s case. As against this the learned counsel for the respondent placed on record copy of an article appearing in on the judgement of the Indore Bench of the Tribunal. It was emphasized by the learned counsel that a different view was possible as observed by the learned author of the article, but he did not rest his case there and proceeded to rely on the following decisions:
(i) Nuchem Plastic Ltd. v. Dy. CIT (supra);
(ii) Mula Sahakari Sakhar Karkhana Ltd. v. ITO (supra);
(iii) Astt. CIT v. Shanti Dyeing & Finishing Works (2000) 68 TTJ (Ahd) 214;
(iv) Cosmo Films Ltd. v. IAC (1994) 50 TTJ (Del) 54 : (1995) 79 Taxman 21 (Del) (Mag.);
(v) Shankar Trading Co. (P) Ltd. v. Astt. CIT (2001) 114 Taxman 195 (Del) (Mag.); and
(vi) Dy. CIT v. Udaipur Distillery Co. Ltd. (2002) 74 TTJ (Jd) 193 : (2002) 119 Taxman 206 (Jd) (Mag).
28. After examining the rival submissions, we are of the view that the order passed by the CIT(A) does not require any interference on our part since the majority opinion expressed by various Benches of the Tribunal is in favour of the respondent. The solitary decision, which is in favour of the Revenue and which has been heavily relied upon is that of the Indore Bench (supra). All that we would like to observe is that in arguing the said appeal the assessee had placed reliance on the decisions of the Tribunal in (1992) 44 TTJ 261 (Del) (supra), Sunil Silk Mills Ltd. v. Dy. CIT (1993) 46 YTD 4 (Bom), 55 TTJ 375 (Pune) (supra) and Subhra Motel (P) Ltd. v. CIT (1998) 64 ITD 134 (Del) but none of
them are discussed in the said order although specifically noted in para 4 at p.
181 of the report.
29. Under the aforesaid circumstances, we uphold the action of the CIT(A) whereby he has directed the AO to allow the requisite relief subject to verification of the facts and figures. As we have upheld the view of the CIT(A) on the main ground, we say nothing about the alternative stand taken by the assessee. Ground No. 6 in the Revenue’s appeal is accordingly rejected.
30. In the result, the appeal of the Revenue is partly allowed, for statistical
purposes.