ORDER
N.K. Saini, A.M.
1. This is an appeal by the assessee against the order of the learned CIT(A) dt. 28th Jan., 1999.
2. In this appeal, eight grounds have been raised but the learned counsel for the assessee, however, during the course of hearing did not press grounds Nos. 1, 7 and 8. As such, these grounds are dismissed as not pressed.
3. Ground No, 2 relates to the confirmation of disallowance of Rs. 47,712 out of hamali, miscellaneous and office expenses. The facts in brief relating to this issue are that the AO disallowed 1/10th of the expenses amounting to Rs. 4,17,864, Rs. 31,363 and Rs. 27,918 on account of hamali, miscellaneous and office expenses respectively and for the reasons that those expenses were only partly vouched. The learned CIT(A) confirmed the action of the AO.
3.1 Before us, the learned counsel for the assessee submitted that there was increase in sales of the assessee which were at Rs. 1619.35 lakhs for the year under consideration as compared to Rs. 1497.84 lakhs for the earlier year and the increase in expenses under the heads ‘hamali, miscellaneous and office expenses’ were very less. It was stated that the expenses under these heads for the year, under consideration were Rs. 4,77,125 as against Rs. 4,40,466 for the earlier year. Therefore, the increase was very nominal and all the expenses were verifiable. It was explained that hamali expenses were paid to different labour contractors and even TDS had been deducted on those payments. The, details were furnished before the AO and no discrepancy was pointed out therein. It was argued that no such disallowance had been made in the past and even for the year under consideration the books of account had not been rejected. Therefore, there was no justification for. making the disallowance on estimate basis. The reliance was placed on the following decisions:
(i) Speed Carriers v. ITO (1987) 27 TTJ (Ahd) 387
(ii) Beta Naphthol (P) Ltd. v. Dy. CIT (1994) 50 TTJ (Ind) 375
(iii) Jupiter Textile v. TTO (2002) 77 TTJ (Jd) 735.
In his rival submissions, the learned Departmental Representative strongly supported the orders of the authorities below.
3.2 After considering the rival submissions and going through the material available on record, it is noticed that the turnover of the assessee increased in comparison to the last year and there was an increase of Rs. 121,51 lakhs, In comparison to the increase in sales, the increase in expenses was very meagre, that was only of Rs. 36,669. It is also true that the AO had not pointed out any instance of unvouched expense, although he mentioned that some of the expenses were partly vouched, The claim of the learned, counsel for the assessee that no such disallowance had been made in the past, had not been controverted by the learned Departmental Representative. It seems that the disallowance had been made by the AO merely on the basis of surmises and conjectures and similarly the learned CIT(A) without assigning any cogent reasons has confirmed the action of the AO. We, therefore, considering the totality of facts delete the addition made by the AO and confirmed by the CIT(A).
4. The next ground relates to the confirmation of addition of Rs. 60,500 under Section 40A(3) of the IT Act. During the assessment proceedings, the AO found that the assessee had made payments of Rs. 60,500 in violation of the provisions of Section 40A(3). He, therefore, asked the assessee to explain the circumstances under which the above payments were made. The assessee replied that the payments were covered under Rule 6DD(j) of the IT Rules, purchases were genuine and the payees identifiable. The AO did not find any merit in the explanation of the assessee and made the addition by applying the provisions of Section 40A(3). The learned CIT(A) confirmed the action of the AO by observing that the assessee did not respond to the query of the AO.
4.1 Before us, the learned counsel for the assessee submitted that the assessee purchased the goods for the first time from M/s Vardhman Oil Mills on 23rd June, 1994, against which cash payment of Rs. 20,000 was made on 30th June, 1994 and another payment of Rs. 22,500 was made on the same date against same purchases to the above said concern. It was stated that the supplier was new to the assessee and the cash payment Was made against the first purchase. Since the supplier belonged to Barmer, a remote desert area, and was not accepting payment by cheque as he was new to the assessee. It was stated that the payment made was covered by the CBDT circular No. 226 dt. 31st May, 1997 and Rule 6DD(j), as prevailing at the relevant time. It was stated that the exceptional or unavoidable circumstances as discussed in Circular No. 226 (supra) were there in the case of the assessee because the supplier was new to the assessee and the purchaser was not having any bank account. In respect of another payment of Rs. 18,000, it was stated that it was made to Bhanwarlal Sanwarmal, against contract at the instance of the party. Later on, the contract was cancelled and the whole of the amount received back. In support of the above contention, the learned counsel for the assessee drew our attention towards the copy of account of the above party filed at pp. 39-40 of the paper book. It was stated that the genuineness of the payments and the identity of the party had not been doubted at any stage. There was no justification for making the disallowance. The reliance was placed on the decision in the case of Kantilal Purshottam & Co. v. CIT (1985) 155 ITR 519 (Raj), wherein it has been held that the provisions of Section 40A(3) are not mandatory and when genuineness of payments and identity of the payee was not disputed, the disallowance was not justified.
4.2 In his rival submissions, the learned Departmental Representative supported the orders of the authorities below and submitted that there was no exceptional circumstance. As such, the transactions in question were hit by the provisions of Section 40A(3) and not covered under Rule 6DD(j). Therefore, the learned CIT(A) rightly confirmed the action of the AO.
4.3 After considering the rival submissions and the material available on record, it is noticed that the payments to Vardhman Oil Mills dt. 30th June, 1994 were related to the purchases made by the assessee on 23rd June, 1994. On perusal of copy of account of the aforesaid party, it would be clear that it was the first transaction. Therefore, there is some force in the contention of the learned counsel for the assessee that the party was new to the assessee and insisted for cash payment. This explanation of the assessee that there was no bank account where the supplier was located, had not been doubted. Therefore, these payments were covered under Rule 6DD(j). As regards the payment of Rs. 18,000, it was the claim of the assessee that this payment was against the contract which subsequently was cancelled and the amount received back. Therefore, this payment cannot be said to be covered under the provisions of Section 40A(3). In view of the above discussion, we delete the addition of Rs. 60,500 made by the AO and confirmed by the learned CIT(A) by invoking the provisions of Section 40A(3) of the IT Act.
5. The next issue vide ground No. 4 relates to the confirmation of the addition of Rs. 2,83,224 made by the AO under Section 40A(2)(b) of the IT Act. The AO during assessment proceedings found that the assessee made payments to M/s Shyam Oil Mills, Ajay Enterprises and Sh. Govind Ram for water charges. According to the AO, it was not possible to verify as to whether the payments were made at the market rates because the quantity of the water in tankers was not given in the bills. He, therefore, disallowed 10 per cent of the water expenses. Similarly, he disallowed 1 per cent of the purchases made from the sister-concerns, namely, Shyam Oil Mills and Ajay Enterprises. The AO also disallowed the salary paid to S/Sh. Mahesh, Prakash and Vinod, In this manner, the following additions were made:
Rs.
“a.
10 per cent of water charges
10,443
b.
1 per cent of the purchase made from sister-concerns, namely,
Shyam Oil & Ajay Enterprises
1,36,609
c.
Total salary payment to Mahesh, Prakash and Vinod disallowed
1,34,172
2,83,224″
The assessee carried the matter to the learned CIT(A) and stated that the additions made by the AO were without any justification. It was further stated that the water expenses ‘given to the director were not excessive because the assessee received water from other persons also and even lesser rate of purchase of water had been allowed to the directors in comparison to the other persons. It was stated that there was no justification in making the disallowance out of the purchases @ 1 per cent. As regards to the salary paid to S/Sh. Mahesh, Prakash and Vinod, it was stated that the payments had been made for the work done by them. The learned CIT(A) did not find any merit in the submissions of the assessee and confirmed the action of the AO.
5.1 Before us, the learned counsel for the assessee reiterated the submissions made before the CIT(A) and submitted that the water expenses paid to Sh. Govind Ram Chhugani were at lesser rate in comparison to the market price and he was an existing income-tax assessee. It was stated that full details of the water expenses, copies of vouchers and statements showing the comparative rates as charged by different parties were furnished. Therefore, there was no justification in making the ad hoc disallowance @ 10 per cent. It was stated that the AO nowhere explained in what manner the expenses incurred by the assessee were excessive and no comparable case was cited where the water expenses were paid at lower amount. As regards to the purchases, it was stated that that had been made at the prevailing market price and the AO had not pointed out even a single case of purchases where the assessee had paid the higher amount to those parties in comparison to the similar supplies by the other party. It was also stated that the auditors had certified in para xi at p. 3 of their report that the said purchases had been made at the prices which were prevalent having regard to the market price. As regards to the payment of salary to S/Sh. Mahesh Chhugani, Prakash Chhugani and Vinod Chhugani amounting to Rs. 44,723.80 each, it was stated that the payment had been made on monthly basis, in view of the services rendered by them. The learned counsel for the assessee explained that Sh. Mahesh Chhugani was looking after the office work along with dispatch of the goods; Sh. Vinod Chhugani was looking after the stores Department and production work; and Sh. Prakash Chhugani was looking after inward and outward of goods. It is emphasised that their working was duly verifiable from the records maintained by the assessee-company. It was also stated that these persons were on regular muster roll of the assessee. The learned counsel for the assessee drew our attention to pp. 70-79 of the paper book, which is copy of the staff salary register. Learned counsel for the assessee vehemently argued that there was no justification in making the disallowance -of the whole of the salary paid to the aforesaid persons only on the basis that those were the relatives of the directors, even when the payments were not excessive. The reliance was placed on the following case law:
(i) Dy. CIT v. Joshi Formulabs (P) Ltd (2000) 67 TTJ (Rajkot) 396
(ii) S.L. Poddar v. ITO (1980) 9 TTJ (Pat) 370.
In rival submissions, learned Departmental Representative strongly supported the orders of the authorities below.
5.2 We have given our thoughtful consideration to the rival submissions and the material available on record. It is noticed that the AO while disallowing 10 per cent of the water charges had not cited any comparable case where the payment had been made at lower rate. It seems that the disallowance had been made without any basis. Similarly, for making the disallowance @ 1 per cent of the total purchases from the sister-concerns, the AO had not quoted any instance to substantiate that the purchases made by the assessee were at higher rates. The AO while making ad hoc disallowance @ 1 per cent had not given any valid reasons which shows that the disallowance had been made merely on assumptions and presumptions, which is not tenable in the eyes of law. Similarly, for making the disallowance of salary, the AO never stated that the payments were excessive. The disallowance had been made merely on the basis that the persons working for the assessee were the relatives of the directors. Under the provisions of Section 40A(2)(b), the payment can be disallowed if it is found that the payments made to the relatives are excessive but nowhere it is provided that the whole of the claim can be disallowed. In the instant case, the AO disallowed the whole of the claim. However, he has not pointed out excessiveness of the payment. The learned CIT(A) also confirmed the action of the AO in slipshod manner. He has not given any concrete finding in respect of his action. In view of the aforesaid facts, we are of the view that the disallowance made by the AO and confirmed by the CIT(A) are without any basis, We, therefore, delete the same.
6. The next agitation vide ground No. 5 relates to the confirmation of the action of the AO to consider the interest received amounting to Rs. 12,10,286 as income from other sources instead of setting off the same against construction expenses. During assessment proceedings, the AO found that the assessee had earned interest amounting to Rs. 12,10,286 from share collection money. The AO did not accept the plea of the assessee that the aforesaid amount could be set off against the public issue expenses. He opined that the interest income was to be taxed separately as income from other sources, by relying on the decision in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. v. CIT (1997) 227 ITR 172 (SC). The learned CIT(A) confirmed the action of the AO observing that the assessee was not entitled to set off in respect of that income against expenses. He relied on the decision in the case of CIT v. Coromandal Cements Ltd. (1998) 234 ITR 412 (SC).
6.1 Before us, learned counsel for the assessee submitted that the facts of the cases relied upon by the AO and the learned CIT(A) were altogether different from the facts of the assessee’s case. As such, there was no justification on the part of the CIT(A) in confirming the action of the AO. It was further submitted that the assessee had gone for public issue of equity shares so as to finance expansion of the existing production capacity. The assessee was already having oil expelling facility, solvent extraction plant and oil refining plant. The assessee wanted to increase the capacity of solvent extraction and oil refining and for that purpose it had gone for public issue. Therefore, the main purpose of the public issue was to raise funds so as to finance the expansion and also to cover the cost of issue. It was argued that the assessee had come out with the public issue and it was legally required to be kept in the form of deposits with the banks till the finalisation of allotment and thus the assessee earned interest on those deposits. The assessee had incurred expenses, i.e. public issue expenses. Setting off the interest income against expenses was fully justified. As regards to the cases relied upon by the AO as well as the CIT(A), the learned counsel for the assessee submitted that in those cases interest was earned before commencement of the business, whereas the assessee was having running business and in those cases no direct expenditure was incurred for earning interest, whereas in the assessee’s case public issue expenses were incurred for raising funds from the public and the interest had been earned on share application money as received from the date of collection to the date of finalisation of the allotment and the interest earned has a direct nexus with the expenses incurred. In view of the above, it was stated that the facts of the cases relied upon by the AO and the learned CIT(A) were altogether different from the facts of the assessee’s case. The learned counsel for the assessee further submitted that the facts of the case decided by the apex Court in the case of CIT v. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC) were more nearer to the facts of the assessee’s case. Therefore, in view of the ratio laid down by the apex Court in the case of Bokaro Steel Ltd. (supra), . the action of the assessee was correct in adjusting the interest towards public issue expenses.
6.2 In his rival submissions, learned Departmental Representative supported the orders of the authorities below.
6.3 We have considered the rival submissions and carefully gone through the material available on record. In the instant case, as regards to the facts, there is no controversy. The assessee had gone for public issue to collect shares so as to finance the expansion of its existing business. For that purpose, the assessee incurred certain expenses on public issue and received share application money which was kept in banks on which interest was earned. The assessee set off that interest income against the public issue expenses incurred. It is relevant to point out that the Hon’ble Supreme Court while deciding the case of Coromandal Cements Ltd. (supra) followed its own judgment in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. (supra), had also been made in the case of Bokaro Steel Ltd. (supra). In other words, the Hon’ble Supreme Court had considered its own judgment in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. while deciding the case of Bokaro Steel Ltd. (supra). In that case, the brief facts were as follows:
“….The assessee was a corporation wholly owned by the Government of India. It was assessed in the status of a company. It was incorporated in January, 1964. Its object was to construct and own an integral iron and steel works. During the asst. yrs. 1965-66 to 1971-72, the work of construction of the company’s factory and installation of the plant was in the process of completion. The company had not started any business during the assessment years in question. (i) During this period, the company had given to the contractors, quarters for the residence of the staff and workers employed by the contractors who had been engaged by the assessee for carrying out the work of construction. The assessee charged the contractors for the use of the quarters so given. (ii) Secondly, during the assessment years in question, the assessee had entered into supplementary agreements with the contractors under which the assessee had made certain advances to the contractors to enable them to execute the large scale construction work smoothly. The assessee-company had charged interest. This interest was later adjusted against the dues of the contractors. (iii) For the purpose of the construction work the assessee had given on hire certain plant and machinery to the contractors. Against the letting of plant and machinery, the assessee received from the contractors, income in the form of hire charges. (iv) The assessee-company allowed the contractors to use the stones lying on the assessee’s land for construction work. The stones lying on the assessee-company’s land were the capital assets of the assessee-company. The assessee charged the contractors a certain amount by way of royalty for excavation and use of these stones for construction work. (v) The assessee had, during the asst. yr. 1971-72, shown in its accounts as income from interest a certain sum said to have accrued to the assessee from H for eight locomotives supplied by the assessee. The Tribunal held that the amounts under items Nos. 1 to 4 received by the assessee had gone to reduce the cost of construction. These were in the nature of capital receipts which could be set off against the capital expenditure incurred by the assessee during the relevant assessment years. This view was upheld by the High Court. With regard to the income from H both the Tribunal as well as the High Court held that since this entry reflected only hypothetical income, it could not be brought to tax as income.”
The Hon’ble Supreme Court on appeal held as under:
“….that the first three heads of income were (i) the rent charged by the assessee to its contractors for housing workers and staff employed by the contractor for the construction work of the assessee including certain amenities granted to the staff by the assessee, (ii) hire charges for plant and machinery which was given to the contractors by the assessee for use in the construction work of the assessee, and (iii) interest from advances made to the contractors by the assessee for the purpose of facilitating the work of construction. The activities of the assessee in connection with all these three receipts were directly connected with or incidental to the work of construction of its plant undertaken by the assessee. The advances which the assessee made to the contractors to facilitate the construction activity of putting, together a very large project was as much to ensure that the work of the contractors proceeded without any financial hitch as to help the contractors. The arrangements which were made between the assessee-company and the contractors pertaining to these three receipts were arrangements which were intrinsically connected with the construction of its steel plant. The receipts had been adjusted against the charges payable to the contractors and had gone to reduce the cost of construction. They had, therefore, been rightly held as capital receipts and not income of the assessee from any independent source.”
We, therefore, keeping in view the ratio laid down by the Hon’ble Supreme Court in the case of Bokaro Steel Ltd. (supra) are of the opinion that the assessee is entitled to set off interest earned on deposits out of the public issue money against the expenses incurred for the public issue. In that view of the matter, we reverse the finding of the CIT(A) and direct the AO to set off the interest earned by the assessee against the public issue expenses.
7. The last issue agitated by the assessee relates to the confirmation of disallowance of Rs. 4,05,878 in respect of the fee paid to the Registrar of Companies, considering the same as non-revenue expenditure. During assessment proceedings, the AO found that the assessee had made payment of Rs. 2,13,414 to the Registrar of Companies and had further debited a sum of Rs. 1,92,438 in the P&L a/c. According to the AO, such expenses were capital in nature and not revenue, as claimed by the assessee, The reliance was placed on the decision in the case reported in Punjab State Industrial Development Corporation Ltd. v. CIT (1997) 225 ITR 792 (SC). Before the learned CIT(A), the claim of the assessee was that the expenses in question were revenue in nature and not capital expenses. The learned CIT(A) did not find any merit in the submissions of the assessee and confirmed the action of the AO by observing that the assessee had incurred such expenses on account of increase in the authorised share capital.
7.1 Before us, the learned counsel for the assessee submitted that a sum of Rs. 2,13,440 was paid to the Registrar of Companies on various dates and further payment of Rs. 1,92,438 was made, out of which a sum of Rs. 1,91,820 related to the increase of authorised capital for the purpose of public issue. These expenses were only capital in nature and the remaining payments were normal filing fee of various Company Law returns and documents. Therefore, the disallowance made by the AO and confirmed by the CIT(A) is not justified. The learned Departmental Representative relied on the orders of the authorities below.
7.2 After considering the submissions of the learned representatives of both the parties, it is noticed that full details of the expenses had not been discussed either by the AO or the CIT(A). From the orders of the authorities below, it is not clear as to what was the nature of the payments made to the Registrar of Companies. The claim of the assessee is that the payments had been made for normal filing fee of various Company Law returns and documents except the payment of Rs. 1,91,820, which was related to the increase of capital. Since the clear facts are not available on record. We, therefore, to meet the ends of justice, deem it appropriate to remand the issue to the file of the AO and direct him to decide the same afresh in accordance with law, after affording due and reasonable opportunity of being heard to the assessee.
8. In the result, the appeal is partly allowed.