ORDER
R.S. Syal, A.M.
1. This appeal by the Revenue and cross-objection by the assessee emanate from the order passed by the CIT(A) on 16th July, 1998, in relation to the asst. yr. 1994-95.
2. First grievance of the Revenue is against the allowing of relief of Rs. 14,798 out of addition of Rs. 16,262 made by the AO on account of travelling expenses.
3. Briefly stated, the facts of the case are that the AO observed that the travelling expenses in this year had increased tremendously in comparison with the preceding year. On the analysis of details, it was found that a sum of Rs. 1,464 was incurred on account of railway ticket of Smt. Urmila Jain, wife of the partner. It was further noticed that a sum of Rs. 10,840 represented the travelling expenses of customers. The balance amount was the travelling expenses incurred on inspectors. In total, a sum of Rs. 16,262 was added. In the first appeal, the learned CIT(A) restricted the addition to Rs. 1,464 being the amount of travelling expenses relating to Smt. Urmila Jain. The remaining amount of Rs. 14,798 was deleted.
4. After considering the rival submissions and relevant material on record, it is found that the travelling expense of Rs. 10,814 related to customers of the assessee and that of Rs. 3,984 pertaining to the inspectors of the customers who visited the assessee’s project. It is nothing but expenditure incurred in the carrying on (of) the business. We, therefore, uphold the impugned order on this score. Other amount of Rs. 1,464 being the travelling expense of Smt. Urmila Jain, wife of one of the partner’s, was rightly held to be disallowable.
5. Next ground is with regard to deletion of addition of Rs. 2,70,017 on account of expenditure on foreign travelling. The assessee had claimed foreign travelling expenses at Rs. 4,66,789 which were found to be far in excess of the amount spent in the preceding year. The details of such foreign travelling expenses were called for. On the perusal of such details, the learned AO held that the visits made by the partner’s to certain countries were not directly or indirectly connected with the assessee’s business, because in the subsequent year, the total business of concern was closed. In the first appeal, the learned CIT(A) deleted the addition by opining that the journies undertaken were only related to the business purposes.
6. After considering the rival submissions and relevant material on record, it is noted that the assessee had furnished complete details of foreign travelling expenses incurred by the partner’s along with the purpose of tour. The contention of the learned AO that the assessee had closed its business in the subsequent year is without any basis, for the reason that in the next year, the assessee-firm got converted into a private limited company and continued the same business in a different capacity. The learned AO has disallowed 75 per cent of the expenditure incurred on travelling to Germany and whole of expenditure on travelling to U.S. and London without appreciating the facts in entirety along with the purpose of these visits. We, therefore, uphold the impugned order on this count. This ground is not allowed.
7. Third ground is against the deletion of disallowance of Rs. 10,802 on account of expense of vehicles for which addition was made by the AO on the ground that the bill No. 3275 of M/s Bharat Motors recorded in the accounts as on 1st April, 1993, was dt. 29th March, 1993, and hence, related to the preceding year. The learned CIT(A) deleted the said addition. Before us, the learned counsel for the assessee placed on record, a copy of tax audit report of the assessee-firm in which the method of accounting has been mentioned as “hybrid” and not “mercantile”. In view of these facts, it becomes apparent that the assessee was not maintaining its account on accrual basis alone but was employing cash system for recording some transactions. As bill dt. 29th March, 1993, was admittedly relatable to the repairs of Maruti car of the assessee and paid in this year, in our considered opinion, the learned CIT(A) was justified in deleting the addition.
8. Ground No. 4 of the Revenue’s appeal deals with the allowing of relief of Rs. 78,808 out of disallowance of Rs. 84,000 on account of hire charges of Maruti van. The AO found that the deduction was claimed by the assessee for payment of hire charges at Rs. 7,000 per month to M/s Jain Travels and Tours. The said concern was found to be a proprietorship concern of Shri M.K. Jain, whose wife was partner in the assessee-firm. It was noted that the vehicle was taken on hire as per agreement of dt. 28th May, 1992. It was noted by him that during the last year, a sum Of Rs. 3,000 per month was disallowed out of fixed hire charges under Section 40A(2) of the Act. However, by holding it to be a colourable device, he made an addition of Rs. 84,000 in this year. It was also noted that as per the agreement dt. 28th May, 1992, by which Maruti van was taken on hire, all the costs, namely, of driver, of maintaining vehicle and incidental charges were to be borne by the hirer only. On the perusal of details, it was seen that a sum of Rs. 16,994 was claimed by the assessee towards repair charges in respect of this van. He, therefore, made the above addition. In the first appeal, the learned CIT(A) observed that since some of the expenses were borne by the appellant in violation of the agreement with the owner of the vehicle, the same were to be deducted out of hire charges. He, however, held that the disallowance of Rs. 84,000, being total hire charges, at Rs. 7,000 per month, was not called for. He, therefore, reduced the repair cost of this vehicle at Rs. 5,192 from the total hire charges at Rs. 84,000 and allowed the relief of Rs. 78,808. It was contended by the learned Authorised Representative that the learned AO had wrongly included a sum of Rs. 10,802 as bill relatable to the repairs of hired van. It was stated that the firm’s own Maruti van met with an accident, which was got repaired against said bill. It was further stated that this contention was raised before the first appellate authority, who on the perusal of the details, deleted the addition. In the opposition, the learned Departmental Representative strongly relied on the order of the AO and contended that in the immediately preceding year, an addition of Rs. 3,000 per month was made by the learned AO. In the rejoinder, the learned Authorised Representative invited our attention towards the order passed by the first appellate authority in the preceding year in which the above referred disallowance of Rs. 3,000 per month was deleted.
9. After considering the rival submissions in the light of the material before us, it is found as an admitted position that the addition made by the AO in the preceding year at Rs. 3,000 per month out of total annual hire charges of Rs. 84,000 was deleted by the first appellate authority. The learned Departmental Representative has not brought to our notice the fact of the Revenue having come up in the second appeal against this order. In this view of this matter, we are satisfied that the hire charges of Rs. 7,000 per month are adequate and not excessive within the terms of Section 40A(2). The learned CIT(A) in the impugned order was reasonable in disallowing the repair expenses related to this hired vehicle which are to the tune of Rs. 5,192. The contention of the learned Authorised Representative regarding the amount of Rs. 10,802 relatable to the assessee’s own Maruti car as accepted in the first appeal, has also remained uncontroverted before us. In this view of the matter, we are satisfied the learned CIT(A) was justified in allowing the relief on this score.
10. Ground No. 5 of the Revenue’s appeal and first ground of the assessee’s cross-objection deal with the disallowance out of the conveyance expenses for the family members of the partner’s.
11. Briefly stated, the facts of the case are that the AO on perusal of details of conveyance and vehicle expenses found that a sum of Rs. 1,01,774 (details on pp. 9 and 10 of the assessment order) was not for business purposes as it included the expenses of family members of the partner’s as well. It was, therefore, held that a sum of Rs. 1,01,774 was not relatable to the assessee’s business and hence he disallowed the same. In the first appeal, the learned CIT(A) reduced the disallowance to Rs. 10,000 by observing that some of the expenses were relatable to the family members of the partner’s of the assessee-firm. The remaining addition of Rs. 91, 774 was deleted by the learned CIT(A) as expenditure incurred for the purpose of business. It was contended by the learned Departmental Representative that the first appellate authority had ignored the fact that the expenditure was not related to the business of the assessee-firm as it included the expenses of family members of the partner’s as well. In the opposition, the learned Authorised Representative invited our attention to page Nos. 38 and 39 of the paper book being bifurcation of total expenditure incurred under this head. It was argued that a major chunk of such expenditure was on the partner’s and employees of the assessee-firm who had undertaken tours to promote the business. The total expenditure of Rs. 23,304 was stated to be incurred on the family members of the partner’s of the assessee-firm. It was stated that Smt. Urmila Jain travelled with her husband Shri M.L. Jain, who is a partner in the firm, because the partner was not keeping a good health. It was, therefore, urged that the same be treated as business expenses. The assessee in the first ground of its cross-objection is aggrieved against the sustenance of addition to the level of Rs. 10,000.
12. After going through the rival submissions and perusing the material on record and orders of the authorities below, it is seen that the amount disallowed by the AO included travelling expenses of the partner’s and employees of the assessee-firm. The same, therefore, cannot be held to be not relatable to the business.
13. However, we are not convinced with the submissions of the learned Authorised Representative that travelling expenses of Smt. Urmila Jain wife of one of the partners be allowed as business expenditure because the partner was not having good health, for the reason that such expenses cannot be held to be incurred for the purpose of assessee’s business. Similar view was taken by the Hon’ble Madras High Court in the cases of CIT v. T.S. Hajee Moosa & Co. (1985) 153 ITR 422 (Mad) and Bombay Mineral Supply Co. (P) Ltd. v. CIT (1985) 153 ITR 437 (Guj). Apart from the above legal position, there is no material on record to corroborate the assessee’s stand that the partner was having ill health and Smt. Urmila Jain accompanied him for medical purposes. We have considered the details at pp. 38 and 39 of the paper book. We find that the total travelling expenses claimed by the assessee relatable to the wife of the partner’s and children are to the tune of Rs. 23,304. In our considered opinion, the learned CIT(A) ought to have sustained the disallowance to this extent. Since, a sum of Rs. 1,464 was disallowed by the AO on account of travelling of Smt. Urmila Jain and this addition has been sustained in the first appeal, the addition on this ground is required to be sustained at Rs. 2,18,407 (Rs. 23,304 – Rs. 1,464). This ground of the assessee’s cross-objection is, therefore, dismissed and the Revenue’s ground is partly allowed.
14. Ground No. 6 of the Departmental appeal is against allowing a relief of Rs. 81,431 out of disallowance of Rs. 91,431 on account of sale promotion expenses.
15. Briefly stated, the facts of the ground that the assessee had claimed a deduction of Rs. 91,431 as sale and business promotion expenses. The AO called upon the assessee to give details to whom the gift items were presented. In the absence of any documentary proof, the AO made disallowance for the whole of the amount. However, in the first appeal, the learned CIT(A) held that the expenditure was incurred in connection with the business only. He, therefore, restricted the addition to Rs. 10,000. Before us, the learned Departmental Representative contended that the details of items noted in the assessment order such as, plastic trays, sarees, wrist watches, garments, dry fruits, buckets, etc. clearly showed that these were given for non-business purposes. Per contra, the learned Authorised Representative took as through pp. 45 and 46 of the paper book showing complete details of the expenses incurred along with the person to whom such gifts were made. It was stated that the AO erred in making wrong mention in the assessment order about the fact that details were not produced.
16. Having heard the rival submissions and perused the relevant material on record, it is noted that the Hon’ble jurisdictional High Court in the case of Modern Threads (India) Limited v. CIT (2002) 258 ITR 511 (Raj) has held that the expenses on distribution of gift articles constitute the entertainment expenditure. Similar view has been expressed in CIT v. Instrumentation Ltd. (2002) 258 ITR 513 (Raj). More recently, it has been held in CIT v. Mangalam Cement Ltd. (2004) 266 ITR 385 (Raj) that the expenditure on giving gifts amounts to entertainment expenditure. As both the authorities below have not dealt with the issue in the right perspective, we are of the considered opinion that the impugned order cannot be upheld on this score. By setting aside the view of the first appellate authority on the score, we remit the matter back to the file of the AO for deciding this issue afresh as per the opinion expressed by the Hon’ble jurisdictional High Court in the above discussed cases.
17. Ground No. 7 deals with the deletion of disallowance of Rs. 5,862 out of expenditure of fees and subscription, which was held by the AO to be in the nature of donation. The AO made this addition by holding that these expenses, detailed at Order 13 of the assessment order, were in the nature of donation. In the first appeal, the learned CIT(A) deleted the said allowance by holding that these were the payments made to the trade associations. It was contented by the learned Departmental Representative that the addition was wrongly deleted in the first appeal. In the opposition, the learned counsel for the assessee relied on several order passed by the Tribunal including CWS India Ltd. v. IAC (1994) 50 TTJ (Coch) 640, wherein it was held that the payment to service clubs like Rotary club, etc., towards membership fee or other charges was allowable as business expenditure. In the absence of the learned Departmental Representative having brought on record any contrary decision, we uphold the impugned order on this count. This ground is, therefore, not allowed.
18. Ground No. 8 of the Revenue’s appeal is against the deletion of addition of Rs. 1,14,613 on account of bad debts disallowed by the AO. The assessee had claimed deduction for the bad debts. On being called upon to explain the reasons for treating it as bad debt, it was stated on behalf of the assessee that these were written off after all the efforts of recovery fell down. It was observed by the learned AO that the assessee had claimed deduction for bad debt in the name of M/s Batra Walls, Faridabad, at Rs. 34,688 despite the fact that it had transactions with the said concern, thereafter. In the first appeal, the learned CIT(A) deleted the addition on the ground that the assessee had written off such amount as bad debts during the accounting year. It was contented by the learned Departmental Representative that the addition was wrongly deleted simply on the score that the amount was written off as bad debt in the books of account. In the opposition, the learned Authorised Representative while relying on the impugned order, made a statement at the Bar that all the amounts had in fact become bad and no recovery from any of such accounts is made even till date. It was further submitted that the amount of M/s Batra Walls was written off as the goods supplied were of the defective quality and the business continued with them by foregoing the claim against such defective goods. Our attention was invited towards a copy of account of this party and all other parties, whose amounts were written off as bad debts. Such details are on p. 52, onwards of the paper book.
19. After considering the records, it is seen that the deduction was claimed by writing off which in the opinion of the assessee had become bad and there was no scope of any further recovery. The AO had not commented upon any party other than M/s Batra Walls, Faridabad, copy of whose account makes it explicitly clear that the supply worth Rs. 34,688 made to it was of defective quality and the amount was foregone, being relatable to the bad quality of goods and in the interest of business. Further, transactions were carried out and payments were regularly received. The details of all other accounts, placed in the paper book clearly show that the amounts were old balances. The learned Authorised Representative has made statement at the Bar that till date not even a single rupee is received from these parties. Neither it is a case of the Revenue that any amount was realized from these parties after such write off. We are, therefore, satisfied that the assessee rightly claimed deduction of the bad debts by writing off. in the books of account. However, we do not subscribe to the view of the first appellate authority that any amount written off as bad debt in the books of account qualifies for deduction by virtue of amendment carried out in Section 36(i)(vii) by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1st April, 1989. The earlier requirement for claiming deduction was that the debt should be established to have become bad in the previous year. By virtue of this amendment, the requirement of establishing the year in which the debt has become bad has been dispensed with by providing that the deduction can be claimed in any year, in which bad debt is written off as irrecoverable. It is only a bad debt which can be claimed as deduction by writing (it) off in the books of account. It is wholly impermissible to claim deduction for “good debt” by writing off in books, because of the fact that the word ‘bad’ is prefixed to the word ‘debt’ in the amended section as well. In this view of the matter, we uphold the impugned order on the factual aspect only.
20. Last ground of Department’s appeal is against the deletion of disallowance of Rs. 5,42,524 on account of commission to M/s B.R. Associates (P) Limited.
21. On being called upon to explain the reasons for making huge payment of the commission, the assessee justified the payment by giving seven reasons incorporated on p. 16 of the assessment order. It was noted by the AO that the payment to this party in this year was much more than that of the preceding year in which it was only to the tune of Rs. 1,86,322. The AO noted that a sum of Rs. 5,42,524 was standing as payable in the account of this party at the year end. He, therefore, made a disallowance to this extent by allowing deduction of Rs. 4,50,000. In the first appeal, it was contended on behalf of the assessee that the AO had also, by written inquiry letter, inquired the services rendered by agent directly from him, who explained the rendering of services vide his letter. The learned CIT(A) got convinced with the assessee’s submission and deleted the addition.
22. Before us, the learned Departmental Representative strongly relied on the assessment order. On the contrary, the learned Authorised Representative reiterated the submissions as advanced before the first appellate authority and on the basis of his reasoning urged that his order be maintained. Our attention was invited towards p. 102, onwards of the paper book, namely, the written submission made before the first appellate authority to contend that the AO had made direct inquiry from the said agent but failed to incorporate this fact in the assessment order as it might have gone against his addition.
23. After considering the rival submissions and perusing the relevant material on record, it is found that the sale of the assessee to M/s UNICEF increased manifolds in this year, which was the result of services by M/s B.R. Associates, Delhi, who acted as agent between the assessee and this company. It is not the case of the Revenue that the said M/S B.R. Associates was in any way connected with the assessee. The learned Departmental Representative could not controvert the written submission made before the first appellate authority with regard to the direct inquiry conducted by the AO from this party. In these circumstances, we are satisfied that the learned CIT(A) was right in deleting the addition which was made by the AO simply on the basis of the outstanding balance appearing in the account of such agent without considering the other attending facts, such as, the increase in turnover, the rate of commission, etc. We, therefore, uphold the impugned order on this count. This ground is, therefore, not allowed.
24. The only other ground in assessee’s cross-objection, which survives for our consideration, is the sustenance of disallowance of Rs. 6,276 made by the AO by applying of Section 40A(2) of the Act on account of interest. The facts leading to this, ground are that the assessee had claimed deduction for interest paid to Shri M.P. Jain (HUF) @ 21 per cent and M.L. Jain (HUF), M.P. Jain (HUF) @ 24 per cent. It was noted by the AO that the assessee had paid interest between 12 per cent to 24 per cent to different parties. By allowing interest @ 18 per cent, he made the addition of Rs. 6,276 under Section 40A(2) of the Act. In the first appeal, the learned CIT(A) confirmed the addition of the AO.
25. It was contended by the learned Authorised Representative that the addition was wrongly sustained, in view of the fact that it had paid interest to the bank @ 21.5 per cent along with other charges and after such charges were considered, the effective bank rate came to 24 per cent. It was further stated that these were old balances and interest at these rates was regularly paid by the assessee in the earlier years as well and no disallowance was made. In the opposition, the learned Departmental Representative relied on the impugned order.
26. We have heard the rival submissions and perused the relevant material on record. It is noted that the AO made the disallowance by relying on the provisions of Section 40A(2) of the Act. In order to make any disallowance, the AO has to form opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which payment is made, etc. The case of the assessee before the authorities below was that the effective bank interest rate paid by it in the year was 24 per cent and allowing interest at 21 per cent and 24 per cent to these parties was not excessive. In our considered opinion, the learned CIT(A) has not considered this provision in the right perspective and sustained addition mechanically without commenting upon the assessee’s assertion regarding effective bank interest rate at 24 per cent. Another important aspect of the matter is that the learned Authorised Representative has stated that the interest was paid at the same rates in the earlier years as well and was also allowed. This contention also remained uncontroverted by the learned Departmental Representative. We are, therefore, of the opinion that the learned CIT(A) was not justified in rejecting the assessee’s claim on this count. This ground is allowed.
27. In the result, the appeal of the Revenue and cross-objection of the assessee are partly allowed.