Hindustan Times Ltd. vs Income-Tax Officer. on 3 November, 1989

ORDER

Per Ch. G. Krishnamurthy, President – These cross appeals arise out of the order dated 16-11-1987 of the learned Commissioner of Income-tax (A), IX, New Delhi for the assessment year 1984-85.

2. The assessed is a public limited company engaged in the printing and publishing of newspapers and periodicals.

ITA No. 733(Del) of 1988 (Departments appeal)

3. The first ground relates to the claim of Rs. 2,611 as cost of silver medals awarded by the assessed to outstanding students of Bharatiya Vidya Bhawan in journalism. The Income-tax Officer disallowed the same on the ground that the expense was not connected with the assesseds business.

4. The learned Commissioner (A), however, allowed the claim accepting the assesseds contention that it was in the interests of journalism as a profession as also in the interests of the assessed as some of them could join it.

5. We agree with the view of the learned Commissioner (A). In CIT v. Delhi Cloth & General Mills Co. Ltd. [1978] 115 ITR 659 (Delhi) the assessed was annually organising sports tournaments in hockey and football to which teams from various parts of the country were invited. The expenses were held to be allowable on the ground of publicity. In the present case the connection of the expenses is even more intimate and perhaps necessary. This ground therefore fails.

6. The second ground relates to the allowance of the following relief :

(a) Rs. 10,000 on account of gifts and articles presented to business associates, out of total amount of Rs. 14,303

(b) Rs. 24,029 on account of Diwali sweets

(c) Rs. 1,009 on account of brief cases presented to the employees

(d) Rs. 18,714 out of Kavi Sammelan expenses.

The Income-tax Officer had disallowed the entire expenses of Rs. 14,303 at (a) for which the details of the recipients were not given. The expenses at (b) to (d) were also disallowed by him.

7. The Commissioner (A) reduced the disallowance of Rs. 14,303 to Rs. 4,303 by holding that such presents were customary in business. The expenses on Diwali sweets and brief cases were allowed as connected with normal business practice. The expenses on Kavi Sammelan were allowed as having been incurred in order to maintain cordial relations with the employees as a labour welfare activity.

8. After considering the rival submissions and the details of these expenses, we are of the view that the order of the learned Commissioner (A) does not call for any interference as no element of hospitality is involved. The expenses on Diwali also do not exceed the limits given in the Boards circular dated 23-8-1965. In the case of Phool Chand Gajanand v. CIT [1989] 177 ITR 265/44 Taxman 15(FB) relied upon on behalf of the department the Honorable Allahabad High Court held that if an expenditure fell within the statutory definition of “entertainment expenditure”, it did not matter whether it was moderate or lavish. However, in the present case the expenses incurred cannot be taken to be “entertainment expenses” as so defined under section 37(2A). Therefore the above decision does not assist the department on any of the counts mentioned above. This ground therefore fails.

9. The third ground relates to the claim of bad debts/trade irrecoverable to the extent of Rs. 2,81,237. They consisted of amounts due from Government Departments for advertisement published by the assessed. The Income-tax Officer allowed a sum of Rs. 7,318. The remaining amount was disallowed on the ground that the payment of the outstanding dues from the Government departments were never refused and that the efforts for the recovery had not been exhausted.

10. In appeal the learned Commissioner (A) noticed that an amount of Rs. 11,648 was outstanding against M/s. Dimensions Advt. Bombay and that the enquiries made by the assessed through its representative disclosed that although the assessed had initiated legal steps for the recovery of the outstanding amount, that party had no asset and was no longer in existence and owed substantial amounts to other parties. The assesseds advocated Shri S. K. Puri had also advised it vide its letter dated 5-1-1984 that there was no use pursuing the case. The learned Commissioner (A) also noticed that the balance amount consisted of hundreds of petty items due from the selling agents and Government departments and it was not considered worthwhile by the assessed to pursue them from the practical angle. He was also influenced by the fact that in several preceding years, the Appellate Tribunal had upheld the write off of such irrecoverable on a similar pattern of facts holding it to be incidental to the business carried on by the assessed and therefore part of business expenses. He, therefore, upheld the assesseds claim.

11. After considering the rival submissions, we are the view that the pattern of facts remaining the same as in the earlier years, the claim of bad debts/trade irrecoverable could not be said to be premature and that the write off was, in the circumstances justified according to the best judgment and discretion of the assessed on well-known principles. In this connection, the earlier orders of the Appellate Tribunal including paragraphs 2 to 5 of the order dated 28-2-1989 in I. T. A. Nos. 6132 (Del) of 1986 and 97 (Del) of 1987 for assessment year 1983-84 in the case of the assessed. We accordingly uphold the view of the learned Commissioner (A) on this point.

12. The next point relates to the addition of Rs. 2 lakhs. The newsprint and printing paper used by the assessed is that rolled on reels. At the end when some paper is left on the reels, it cannot be used because of very little thickness of the reels. The only alternative is either to sell it as damaged newsprint or to get it converted into rewound reels/sheets. So what is done is that by pasting these end of the reel portions together and rolling them on, rewound reels are made and the said conversion enables the assessed to use more paper, which would have otherwise gone as a complete waste. Even then some end wastage still occurs. Some of that is sold by the assessed. The case of the assessed was that reel and paper was mainly given for conversion to outside parties and that 15% of the quantity given was allowed to be retained by the said parties as waste as also in lieu of their labour charges for making rewound reels (25% in case of Nepa newsprint). This procedure has been consistently followed by the assessed in the earlier years also. It also gave full particulars of the parties to whom damaged reels were given for conversion. However the Income-tax Officer disallowed the claim on the basis that it was not commensurate with the yield derived from it.

13. The learned Commissioner (A) accepted the assesseds claim on the ground that the cost of 850 Kg. of damaged newsprint converted by the outside parties (contractors) was only Rs. 5,360 whereas the cost of the same quantity of white printing paper would be more i. e. Rs. 6,870. He held that the yield was thus commensurate with the expenditure on conversion. The learned Commissioner (A) in paragraph 6.2 of his order gave a working to show that the saving was of Rs. 1,510 per metric ton due to conversion.

14. We have carefully considered the rival submissions as also the material on the record on this point. The working referred to above appears in paragraph 5 of the assesseds letter dated 20-3-1987 to the Income-tax Officer at page 168 of the paper book. It appears that in the earlier years (as against 15% claimed by the assessed in the assessment year in question) 17.5% was allowed. In fact in the case of Nepa newsprint, the wastage allowed ranged from 17.5% to 25%. In view of the above, we uphold the observations and the finding of the learned Commissioner (A) on this point.

15. The next point relates to the addition of Rs. 5,09,400 in respect of sale of waste. The facts and circumstances attending this addition as also the contentions raised on both the sides are the same as for the preceding assessment year 1983-84. In that year the Income-tax Officer had made a similar addition of Rs. 7,27,690 which has been deleted by the learned Commissioner (A). We find from a perusal of paragraphs 17 to 20 of the order dated 28-2-1989 of the Tribunal for that year (in I. T. A. Nos. 6132/Del/86 and 97/Del/86) that the deletion of the addition was upheld and it was held that on mere suspicion, such an addition could not be made in the absence of material and in view of the conduct of the assessed. The position remaining the same on facts, we similarly uphold the finding of the learned Commissioner (Appeals) on this point.

16. The next point relates to the claim for repairs to office and press premises. The Income-tax Officer held that the expenditure of Rs. 2,36,574 was of a capital nature. He allowed depreciation of Rs. 11,829. Thus the net disallowance was of Rs. 2,24,745. The details of the same were as under :

Rs.

(i)

“Chajja” of mild steel at the main entrance of daphtary deptt. in the factory premises and painting thereof in place of old projection which had worn out and was ineffective.

17,990

(ii)

Mild steel railings with jali on outer walls in replacement of barbed wire

1,47,407

(iii)

Mild steel railings with jali on stitching & cutting machines, lift hoist bay, dispatch, mono and other department in replacement of old wooden partition which had become unserviceable

71,186

2,36,583

The Income-tax Officer held that the said expenses were incurred for acquiring a benefit of an enduring nature. He therefore capitalised the said expenditure.

17. The learned Commissioner (Appeals), however, held that the expenditure was of a revenue nature since it had been incurred on the replacement of old and worn out parts of the factory premises and no new construction had been brought about. He therefore deleted the disallowance.

18. Before us on behalf of the department reference was made to the final bill of the contractor through whom this work was got executed by the assessed. Reference was also made to the decision of Kerala High Court in CIT v. Madras Spinners Ltd. [1989] 177 ITR 495. On the other hand on behalf of the assessed the order of the learned Commissioner (Appeals) was sought the be supported on the basis of the decision of the Bombay High Court in CIT v. Oxford University Press [1977] 108 ITR 166. It was also said that no structural changes were made and that no new asset came into existence.

19. We have carefully considered the papers on the record, the rival submissions as also the decisions referred to above. In Oxford University Press case (supra) it was held that mere quantum of expenditure is not by itself decisive of the question whether it is of the nature of revenue or capital. It was also held that if by an improved or sophisticated method an already existing asset had not changed viz. the building as a whole and the accommodation and earning capacity had not been increased, no new advantage of enduring benefit could be said to have been brought into existence. In the case of Madras Spinners Ltd. (supra) the machinery was very old and it became essential to replace old and worn out parts for the efficient functioning of the unit. The cost of replacement constituted only one-fifth of the value of the machinery. The replacement did not increase the overall capacity of the machinery but only improved its working. It was therefore held that the expenditure incurred on the modernisation of machinery was a revenue expenditure. In this case there is no addition to the machinery nor to the building or earning capacity and what was done was to replace the old worn out chajjas, fencing and railings by improved or sophisticated ones. The expenditure incurred on such replacements was therefore clearly in the revenue field. We accordingly uphold the order of the learned Commissioner (Appeals) on this point.

20. The next ground relates to the allowance of depreciation on commercialisation charges paid to the Land & Development Office for the construction of a multistoreyed office and press premises. The learned Commissioner (Appeals) found that the matter stood covered in favored of the assessed by the appellate orders from the assessment years 1973-74 to 1979-80 and the departments Reference under section 256(2) had also been rejected by the Honorable Delhi High Court on 20-2-1987 [I. T. O. Nos. 72, 73, 84, 191, 193 and 194 of 1986]. Respectfully following these orders, we hold that the learned Commissioner (Appeals) correctly decided the matter and there was no force in this ground.

21. The next ground relates to the addition of Rs. 8,63,540 made up two item :

(i) Rs. 2,85,000 as representing the payments made for purchase of newsprint over and above the cost of newsprint but not accounted for in the books;

(ii) Rs. 5,78,540 representing the inflation in the purchase price paid for white printing paper.

These two additions came to be made by the Income-tax Officer mainly on the basis of a statement recorded from one Shri S. K. Jain, said to be the proprietor of Capital Paper Co. The assessed company was purchasing its requirements of white paper from a company called Paras Vyapar Sangathan. For printing of newspapers and periodicals the assessed company has to use newsprint, white printing paper besides printing paper, art paper etc. On account of non-availability of the newsprint in sufficient quantities, the consumption of white printing paper, it was claimed, had increased. The State Trading Corporation of India, was the noodle agency importing the required quantity of newsprint and allotting it to the various newspapers in the country through Registrar of Newspapers of India. Out of total of Rs. 17,359.58 M. T. of newsprint entitlement of the assessed as fixed by the Registrar of Newspapers for the assessment year under appeal the quantity allocated by the State Trading Corporation of India was only 14,814.58 M. T. There was thus a shortfall of 2,543 M. T. Since the assessed had to carry on its business, this much of quantity of paper the assessed had to purchase from the local market as it could not withhold or avoid printing and publishing of daily newspapers and periodicals. There was a raid conducted by the Income-tax Department on the paper dealers carrying on their business in Chawri Bazar. One of the persons raided was Shri S. K. Jain, proprietor of Capital Paper Co. After the raid a statement was recorded from him by the Income-tax Department under section 131 of the Income-tax Act. In that statement, which was in the form of questions and answers, in response to a question put to him as to the modus operandi of the sale of fresh newsprint, the said Shri S. K. Jain replied stating that various magazines get their quota in excess of their requirements, which excess was being lifted by certain authorised agents from State Trading Corporation and sold in the market and by way of example, he gave the name of one Sanjay Enterprises, who use to lift their quota and sell them at a price of Rs. 1,000 to 1,200 more than the actual price. He also stated that although the bills were issued in the names of the purchasers but the actual stock sold was only white cream Vora or Cream paper, although the bills showed as if the newsprint was sold. In response to some other questions put to him, he mentioned that he was doing this kind of business for a commission of Rs. 50 for over two years and that he was selling the paper on behalf of one Sanjay Enterprises to Paras Vyapar Sangthan P. Ltd. Darya Gunj Delhi from whom the assessed company purchased its requirements. He also stated that goods were directly delivered to Paras Vyapar Sangthan P. Ltd. by Sanjay Enterprises P. Ltd. through transport. In passing he also mentioned that Paras Vyapar Sangthan P. Ltd. used to sell these goods to various customers, which included Hindustan Times Ltd., the assessed company and he gave some instances of bills. It was on the basis of this statement of Shri S. K. Jain that the Income-tax Officer drew the inference that the assessed company was not purchasing from Paras Vyapar Sangthan P. Ltd. white cream paper as it showed in the bills but only newsprint by paying excess amounts over and above what was recorded in the bills. The assessed company was asked to examine Shri S. K. Jain, but somehow the assessed company did not avail of this opportunity. The Income-tax Officer then drew the inference that when the assessed company purchased from Paras Vyapar Sangthan white printing paper of 257.321 M. T. Costing Rs. 20,90,540, the purchases were not of white paper but only of newsprint and the assessed as per the statement of Shri S. K. Jain must have paid Rs. 1,000 or 1,200 over and above the actual cost and as the actual cost was not know, an estimated amount of Rs. 2,85,000 was arrived at without disclosing any basis as the amount paid over and above the bills amount towards the cost of newsprint and not accounted for the in the books. Since the cost of 257.321 M. T. was shown in the books at Rs. 20,90,540, which worked out to an average of 8,124.25 per M. T. and whereas the cost of equivalent weight of newsprint worked out to only Rs. 15,10,000, the Income-tax Officer drew the further inference that the difference of Rs. 20,90,540 and Rs. 15,10,000 represented the inflation in the purchase of newsprint. That difference of Rs. 5,78,540 was also added as income. That was how a total of Rs. 8,63,540 was added.

22. On appeal, the Commissioner (A) deleted the addition mainly on the ground that there was no evidence to justify the conclusions drawn by the Income-tax Officer. Firstly he held that the two editions were mutually contradictory. Secondly he held that merely on the basis of the evidence of Shri S. K. Jain, the Income-tax Officer should not have come to the conclusion that there was payment of excess money over and above the bill amount not accounted for in the books and also inflation without examining the prime witness, namely, Paras Vyapar Sangthan P. Ltd. He also mentioned that the bill numbers given by Shri S. K. Jain did not find place in the bills issued by Paras Vyapar Sangthan P. Ltd. for the purchase of the paper. He also found that the purchase made from Paras Vyapar Sangthan P. Ltd. were fully verifiable from their books of account and the payments were made by account payee cheques attributing the Income-tax Officers inferences based upon the evidence of Shri S. K. Jain to pure surmises and conjectures.

23. It is against this deletion that the appeal has been filed by the Revenue and the Revenues main contention before us was that when Shri S. K. Jain, who was raided by the department made a categorical statement that he supplied only through Sanjay Enterprises P. Ltd. to Paras Vyapar Sangthan P. Ltd. the newsprint and not white printing paper and when he categorically stated that it was that paper that was supplied to the assessed company, the Commissioner (A) should not have brushed aside this important evidence and came to the erroneous conclusion that the Income-tax Officer had failed to prove the inflation in the purchase price. The fact that the bills did not disclose what was actually purchased proved the falsity of the accounted version and amounted to furnishing of inaccurate particulars. The Income-tax Officer might be wrong in estimating the quantum of inflation but the point to be noted and missed by the Commissioner of Income-tax was that there was inflation in the purchase price and that the assessed was acquiring newsprint only by paying higher price by camouflaging it as white paper. He therefore submitted that since the falsity of the particulars furnished by the assessed was proved beyond doubt, the additions made by the Income-tax Officer must be restored or at least some estimate of it must be made towards the inflation in purchase price.

24. The learned counsel for the assessed had submitted relying upon the order of the Commissioner (A) that nothing was proved by the department and that the statement of Shri S. K. Jain might have shown his modus operandi with regard to his dealings but did not prove the dealings the assessed company had with Paras Vyapar Sangthan P. Ltd. The Commissioner (A) was therefore right in deleting the addition.

25. We have considered the rival submissions very carefully. For printing and publishing newspapers and periodicals, it is an undeniable fact that the assessed was using newspaper, while printing paper besides printing paper and other types of paper. It is also an undeniable fact that out of the quota of 17,359.58 M. T. newsprint allotted to the assessed company by the Registrar of Newspapers, the State Trading Corporation had allocated only 14,814.58 M. T. leaving a balance of 2,543 M. T. of newsprint to be purchased from the local market. It is also an undeniable fact that the local market price of the newsprint was higher as compared to the market price of ordinary white printing paper. So the requirements of the assessed to maintain its supply of newspapers and periodicals to the customers can only be met by purchasing either newsprint or white printing paper from the local market is not in doubt. But what was in doubt was as to what was the type of paper that the assessed had purchased and at what price. Did it purchase newsprint and shown it as white printing paper or did it really purchase white printing newsprint and shown it as white printing paper or did it really purchase white printing paper ? The assessed company with all its past experience of about 55 years can be trusted to make a wise business decision as to go in for a cheaper variety of newsprint rather than going for a costly newsprint by paying on money. Such a step would be taken only when one variety of paper was available in the market and not the other paper. This was not shown to be so by the department. Thus when two options are open to the assessed, it is not possible to believe that opted to go in for only costly variety of paper by paying on money. Secondly apart from the fact that Shri S. K. Jain stated in his statement that there was some on-money in the purchase of newsprint, it was never suggested by him that in his dealings with Sanjay Enterprises P. Ltd. or in the dealings of Sanjay Enterprises P. Ltd. with Paras Vyapar Sangthan or in the dealings of Paras Vyapar Sangthan P. Ltd. with the assessed company any on-money was involved. He made only a general and a vague statement about the existence of practice of payment of on-money in the market. That vague statement, it is very unsafe to attribute to the assessed unless there was some corroborative evidence. The corroborative evidence could have come from Paras Vyapar Sangthan P. Ltd. by examining it or from Sanjay Enterprises P. Ltd. Neither of it was attempted. It cannot therefore be said by eliminating the prime witness, that reliance could be placed upon the version of a party, who is not even remotely connected with the assessed company and that to on a vague and general statement. In any case the assessed company should not have spurned the opportunity given to it to vindicate its stand by examining Shri S. K. Jain It is possible to draw adverse inference but did the evidence on record show that the only conclusion possible was the one that the department had drawn. All the payments made by the assessed to Paras Vyapar Sangthan P. Ltd. were all by account payee cheques. Nothing was brought on record to show that a part of the money paid by account payee cheque had come back to the assessed in some form or the other so as to say that on money was involved. We may mention here that in fact the Income-tax Act by enacting in various sections attaches greatest credibility and genuineness to payments made by account payee cheques and statutorily recognises them to be genuine payments. For example section 69D, which requires that any amount borrowed on a hundy or paid on a hundy, if it is not through an account payee cheque drawn on a bank, the amount so borrowed or repaid shall be deemed to be the income of the person borrowing or repaying the amount aforesaid in the previous year in which the amount was borrowed or repaid, as the case may be. We do not want to dwell upon this particular subject any longer and we are making reference to this aspect here only to show the amount of credibility attached by the statute to transactions that take place on account payee cheques. In other words, this is also a statutory mandate that unless and until the payment was made by account payee cheque, the amount would be deemed to be the income of the from concealed sources, meaning thereby that if amounts are transacted through account payee cheque, the transaction would be genuine. When that is so and when the payments to Paras Vyapar Sangthan were all paid by account payee cheques and nothing was shown to have come back to the assessed company we fail to see how they could be doubted so as to draw an inference that in those payments some inflation of Rs. 5,78,540 was involved. To further say that some amount over and above the amount paid by account payee cheques had passed, the onus lies very heavily on the department and that onus had not been discharged in this case at all. The Income-tax Officer went only by surmises and conjectures. It is also to be pointed out that high quality of white paper and newsprint almost cost the same. This is borne out by the figures furnished at page 224 of the paper book. If that is so, there is no reason for the assessed to pay excess money over and above the bills, when it purchased white paper even if it did, it was not shown to be for extra commercial consideration. All that the Income-tax Officer mentioned in his order was that he would consider the purchase of white paper from Paras Vyapar Sangthan P. Ltd. as not of white paper but of newsprint. Unfortunately, he failed to bring in any evidence to prove this assertion other than the statement of Shri S. K. Jain, which was a vague and general statement. He then concluded that as the exact amount of overpayment was not known, he would estimate Rs. 2,85,000. This is absolutely without any basis, logic or reason. The same suspicion prevailed as the basis for making the other addition of Rs. 5,78,540. Merely because the cost of newsprint as per record worked out to Rs. 15,10,000, it did not mean that what was paid to Paras Vyapar Sangthan P. Ltd. of Rs. 20,90,000 by account payee cheques represented inflation in purchase price by Rs. 5,78,540. There is no connection whatsoever for this conclusion to be drawn from any of the facts mentioned by the Income-tax Officer. This addition is an undiluted conjecture. The Commissioner (A) is therefore justified in deleting both these additions as baseless. We agree with this conclusion. Further even if it is agreed for the sake of argument that the assessed had actually purchased newsprint describing it as white printing paper, still there was no evidence to establish that the assessed had paid anything more than the amount actually accounted for in the books resulting in fictitious payments, which alone can be called inflation. What is relevant at this juncture is that there was no discrepancy in the quantity. For inflation to remain in the purchase price, there ought to be evidence suggesting payment of money over and above what was shown in the books or what was shown in the books was inflated. That evidence is totally lacking. We have therefore no hesitation in upholding the order of the Commissioner (A) deleting this addition of Rs. 8,63,540.

26. The next ground relates to the disallowances under sections 37(3A) and 37(3B). The assessed is also in appeal on this point. The following is the position of disallowance of expenses falling under section 37(3B) white computing disallowance under section 37(3A) :

Serial No.

Name of Claim

Amount of claim

Disallowed by ITO

Disallowed by CIT(A)

1.

Commission/trade allowed to selling agents & advertising agencies.

3,63,92,683

3,63,92,683

3,63,92,683

2.

Freight Charges paid to transport contractors for transport of the publications by road

40,29,759

40,29,750

40,29,759

3.

Running & maintenance of Jeeps/Cars & benefits to drivers.

4,89,691

4,89,691

3,48,735

4.

traveling Expenses (other than payments to hotels).

3,60,000

3,60,000

Nil

5.

Payments to hotels to the extent disallowed under Rule 6D.

35,157

35,157

35,157

6.

Expenses out of employees welfare expenses (Kavi Sammelan)

34,115

34,115

Nil

With reference to serial No. 3, the learned Commissioner (A) had deleted the following items of disallowance :

(i) Other benefits to Drivers (on estimate basis) Rs. 40,000 (ii) Depreciation Rs. 1,00,956

Re : (i), the learned Commissioner (A) had that since the assessed had submitted all the details, there was no justification for a separate estimate on this account.

27. We agree with the learned Commissioner (A) that since the assessed had given all the details of the expenses, the disallowance on estimate, of the amount of Rs. 40,000 was without any basis. The deletion of the same is therefore upheld.

28. Re : (ii), the learned Commissioner (A) held that depreciation being a statutory allowance, could not be treated as an expenditure on the running and maintenance of motor cars.

29. We agree with the learned Commissioner (A). Depreciation is a deduction allowed under section 32 and it is not an expenditure as this expression is properly so understood. We therefore uphold the deletion of this disallowance as well.

30. With reference to serial No. 4 above, the learned Commissioner (A) held that there was no evidence that part of the traveling was done for sale promotion. Therefore he deleted the disallowance.

31. We have considered the rival submissions on this point. The Income-tax Officer made this disallowance on estimate on the ground that the assessed had not given the purpose of each journey. We have seen the details of the traveling expenses and we are of the view that no disallowance could be justified merely on the basis of assumptions and surmises, in the absence of a disallowable purpose. We therefore, uphold the deletion of this disallowance.

32. With reference to serial No. 6 above, the learned Commissioner (A) upheld the assesseds contention that it was in the nature of an expenditure for the welfare of employees.

33. We have already observed earlier in this order that the expenses on “Kavi Sammelan” are expenses on a labour welfare activity in order to maintain cordial relations with the employees. Therefore the deletion of this disallowance is also upheld.

34. The next ground relates to the disallowance under section 40A (5). The Income-tax Officer had treated house rent allowance and reimbursement of medical expenses as perquisites.

35. The disallowance was deleted by the learned Commissioner (A) on the basis of his order for the preceding year as also the decision of the Honorable High Court in Installment Supply (P.) Ltd. v. CIT [1984] 149 ITR 457 (Delhi).

36. We have considered the rival submissions on this point. The assessed had given the details of the amounts which could be justified for being disallowed under section 40A (5). They aggregated to Rs. 52,936 (revised later on to Rs. 55,336). We find that for the assessment years 1978-79 and 1980-81 these very two items of disallowances came up for consideration before the Appellate Tribunal when vide its order dated 25-2-1985 in I. T. A. Nos. 5224, 5225, 5576-5578/Del/83, the deletion of these disallowances had been upheld. The same was the position vide para 11 of the order dated 28-2-1989 for assessment year in I. T. A. No. 6132/Del/86 and I. T. A. No. 97/Del/87 wherein the decision of the jurisdiction High Court Delhi in the case of Installment Supply (P.) Ltd. (supra) was relied upon. Respectfully following these decisions, we find no force in this ground.

37. The last ground relates to the charge of interest under section 216. The learned Commissioner (A) notice that the first estimate of advance tax was filed by the assessed on 14-9-1983 for Rs. 4 crores whereas the income returned on 1-9-1984 was Rs. 4,22,95,620, the difference being minor. He therefore deleted the charge of interest.

38. We have considered the rival submissions. The case of the assessed was that the advance tax paid was than the tax payable on the income returned under section 140A. For the assessment year 1983-84 when the assessed had filed the revised estimate and paid the balance of advance tax within time, the Appellate Tribunal had upheld the deletion of the interest under section 206 vide its order dated 28-2-1989 (supra). Since the difference between the estimated and the returned income was minor, we would uphold the order of the learned Commissioner (A) on this point.

I. T. A. No. 353 (Del) of 1988

39. In the assesseds appeal, the first ground relates to the disallowance u/s 37(3A) and section 37 (3B) of two-thirds of the commission/trade discount to selling agents and advertising agencies amounting to Rs. 3,63,92,683. The Income-tax Officer noted while examining the accounts of the assessed that there was a steady increase in the income from advertisement from the assessment year 1980-81 to the assessment year 1984-85 and he attributed the increase in the advertisement income to the expenditure incurred by the assessed on sales promotion by allowing it as a discount to the selling agents. After noticing the expenditure incurred on payment of selling agents commission and commission to advertising agencies, the Income-tax Officer required the assessed to explain as to why the amount paid by way of commission should not be considered for disallowance u/s 37(3A). The assessed was also asked to give the figures of commission paid to the commission agents and also to the advertising agencies. The assessed replied stating that the bills were prepared after reducing the commission allowable to the agents and only the net amount of the bill was accounted for in the books. Similarly bills for advertisements published on behalf of the advertising agencies were also prepared after reducing the commission allowable to the agents and only the net amount of the bill was accounted for in the books. Similarly bills for advertisements published on behalf of the advertising agencies were also prepared after reducing the commission payable thereon and only the net amount was accounted for in the books. Thus the details of the amounts paid to the commission agents were not was in the nature of trade discount and was not a sales promotion expenses and for that reason did not fall under the ambit of section 37(3A) or 3(B) of the Income-tax Act. The Income-tax Officer rejected this explanation as in his opinion the expressions used in section 37(3B) (i) “advertisement, publicity and sales promotion” does include the commission and trade discount paid to the selling agents and on that view he applied the provisions of section 37(3A) and estimated that two-thirds of these expenses must have been incurred for sales promotion and on that basis, he disallowed the above sum of Rs. 3,63,92,683. The Commissioner (A) agreeing with the Income-tax Officers view, confirmed the disallowance. His categorical finding was that the expenditure incurred by the assessed was very much concerned with sales promotion and was incurred with a definite view for attracting bulk orders from the agents. The other advantages that the assessed acquired were only peripheral. Now in the present appeal, this disallowance is hotly contested.

40. The learned counsel for the assessed submitted that the amounts paid by way of commission to the selling agents was neither an expenditure incurred on advertisement or publicity or sales promotion but a mere expenditure incurred to organise the ordinary sales. In the case of a newspaper, it was submitted that the sales promotion would not depend upon the efforts of the agents to push up the sales but on the type of news and views and policy adopted by the newspapers, that would enthusiast the public to go in for the newspapers and wider the readership, the larger the income from advertisement, which automatically comes in. Therefore it is the inherent capacity of the newspapers that attracts the readers and promote the readership and does not depend upon the efforts of the agents at all. As the readership increases, the obligation to supply papers to the readership at fixed times would also arise and for that purpose, large number of agencies had to be engaged by paying commission. Thus the increase in the payment of commission is directly related to the increase in the readership and increase in the readership is co-related to the advertising revenue. Merely because there is increase in the advertising revenue, it cannot be inferred that the increase was only on account of the sales promotion efforts by paying commission to the agents. Thus, it was submitted, a wrong inference and illogical to the newspapers industry. It was also submitted that the advertising is also controlled by the Directorate of Advertisement and Visual Publicity. Reliance was also placed upon an order of the Chandigarh Bench of the Tribunal dated 25-6-1985 in the case of ITO v. Meera & Co. [1986] 15 ITD 227 where the commission paid to agents for procuring orders and for after sales-service was held to be an expenditure not in the area of sales promotion. Reliance was also placed upon a decision of the Bombay Bench B of the Tribunal in the case of L. D. Wvg. Industries Ltd. v. ITO [1986] 26 Taxman (Tax – Mag.) 84, where it was held that incentive bonus commission and brokerage paid to dealers and agents and brokers fell out of the ambit of sales promotion expenses.

41. On the other hand, the learned Departmental Representative drawing our attention to clauses 5, 6 & 16 of the Agency Agreement submitted that since the discount varied according to the sales and since clause 16 specifically referred to the obligation of the agent to promote the sales of all publications, the expenditure incurred was only towards sales promotion and the estimate of two-thirds was a very reasonable estimate and could not be interfered with. He also submitted that the sales could be promoted either directly or indirectly and that both are covered by section 37(3B). For this proposition, he placed reliance on J. H. & Co. v. Second ITO [1982] 1 SOT 150 (Bom.) (SB) and a decision of the Delhi High Court in the case of CIT v. Jay Engg. Works [1984] 149 ITR 297/19 Taxman 587.

42. In our view in a newspaper business, the commission paid to the agents for supplying the newspapers to the readers cannot be said to be expenditure incurred on advertisement, publicity or sales promotion. By appointing selling agents, the assessed company relieves itself of the obligation of supplying the newspapers to the various individual readers. The commission paid to the selling agents was therefore a proper business expenses and not a sales promotion expenses, which section 37(3B) seeks to discourage by providing a disincentive of disallowance. Clause 5 of the agency agreement, on which reliance was placed by the Departmental Representative states that all the legitimate contingent charges such as railway or bus freight for forwarding parcels from the agents/agents station shall be borne according to previous agreement, by the proprietors on production of necessary vouchers. Nothing therefore turns upon this clause]. Clause 6 provided that discount as specified in the Appointment letter will be allowed to the agents on actual sales and all expenses other than agreed to by the proprietors will be met by the agents. This again simply provides for the payment of a discount in the Appointment letter minus all expenses. Nothing therefore will turn upon this clause also. Clause 16 on which certain emphasis was laid was in the following term :

“16. That the agents/agent shall undertake to utilise all possible means to promote the sales of all the publications of the proprietors month after month to the mutual advantage and the agents/agent accept/accepts that non-progress and/or decrease in sales, save in exceptional circumstances known to the proprietors, will be defined as difference or acting against the interests of the proprietors and will result in the termination of the agency.”

This only provides that the agent shall make efforts to promote the sales of all the publications to the mutual advantage by providing a sort of punishment clause that any decrease in sales except in exceptional circumstances would be treated as a ground leading to the termination of the agency. As it has provided for increase in sales, it has also provided for the determination of the agency in case of any indifference. Judged from the point of view of the penalty provided for termination of the agency, this clause can only be looked at as a clause providing for situations whereby the agents shall not be negligent or show any let up in their efforts to the sales promotion and as we have said looked at from the point of view of providing for punishment for negligence, this is a clause acting as a safeguard against negligence. It is now seen that but for the payment of the commission, the assessed would not be able to distribute its publications to the wide net of readers spread over the country. It is therefore inherent in the very nature of the assesseds business that the payment of commission must be made and here we agree with the contention advanced on behalf of the assessed that the sales of newspapers would depend upon how the newspaper becomes an addiction to the readers and not upon the efforts of the agent. It must cater to the needs of the various types of readers. It must contain news and topics relating to policies, social cultural economic, historical, literature, philosophical, foreign, sports news particularly concerning students, children, women, good and absorbing short stories. If the newspaper depending on the efforts of its sales agents for increase in its circulation can as well be closed down. It is therefore illogical to presume that the increase in advertisement Revenue or circulation was the result of efforts of the selling agents by paying them selling commission or trade discount. The trade discount is meant to meet the expenses of the selling agents and also to provide them a reasonable amount by way of living wage. The commission increase as the circulation increases. As the circulation increases, the advertisements increase, and with it its revenue. One is related to the other and everything eventually depends upon the inherent worth of the newspapers and its capacity to attract, retain, and widen its appeal to the readers. The effort of the agent is only to see that the publication reaches the readers in time. The rest all depends upon the publishers. Therefore even if the commission or discount is expressed as a percentage of the sales, that by itself would not show that it was an effort for sales promotion. Thus clauses 5,6 and 16 of the agency agreement do not assist the department nor the fact that there was increase in the sales revenue would support the departments view that the increase was brought about only by incurring the expenditure on sales promotion. We are therefore of the view that on the facts the disallowance was not warranted or justified much less there was any justification for estimating it at two-thirds. The estimate of two-thirds is actually baseless. The addition is therefore deleted.

43. The next ground relates to the freight charges of Rs. 40,29,759 paid to transport contractors for the transportation of the assesseds publications to various places in the country by road. While the departments view was that this was expenditure incurred by section 37(3B) (ii) and clause (c) of the Explanation, the case of the assessed was that the expenditure of hiring taxies for dispatch of newspapers and magazines was in the nature of freight charges paid to transport contractors for the transportation of its publications, which could not be treated as an expenditure incurred on the hiring of taxies for the use of the assesseds personnel. While both the Income-tax Officer and the Commissioner (A) held it to be expenditure incurred by section 37 (3B), we are not able to share that view for the reason that the expenditure incurred by the assessed on transportation of its publications by road can be considered to be an expenditure incurred on running and maintenance of aircraft or motor cars. What the restrictive clause of section 37(3B) provides is that the expenditure on running and maintenance of motor cars for purposes other than transportation of goods is to be disallowed. Explanation (c) states that the expenditure on running and maintenance of aircraft and expenditure on hire charges for engaging cars plied for hire and conveyance allowance paid to employees and, where the assessed is a company, conveyance allowance paid to its directors also. The tenor of the section shows that the running and maintenance of aircraft and motor cars must be for the personal use of the directors or the employees of the company and not the expenditure incurred on transportation costs, which are essential for the distribution of the assesseds goods. It is no more or no less than expenditure incurred on railway freight for transporting goods manufactured by the assessed to the destination. These sums were paid to the various transport contractors, the details of which were filed on page 9 of the paper book. Those contractors engage their vehicles to carry the publications of the assessed from the place of publication to the place of distribution. the object of enacting section 37(3A) and (3B) is to put a curb on the lavish and wasteful expenditure by trade and industry, particularly on traveling, advertisement and the like, and with a view to inculcating a climate of austerity and providing a disincentive to unproductive, avoidable and ostentatious spending by trade and industry. The Finance Minister proposed in his Budget Speech that he was providing for a disallowance of 20% of such expenditure. Therefore the object is definitely to disallow the lavish and wasteful expenditure on traveling and advertisement but not on essential transportation cost of goods. The department is therefore not right in our view in construing the essential transport cost incurred by the assessed in reaching its publications to the readers as an expenditure incurred on running and maintenance of motor cars. As we have seen these motor cars were not hired for the use of any personnel of the assessed company. The disallowance is therefore unwarranted and unjustified. It is also to be noted that what would not be disallowable under section 37 (3B) for sending the publications for sale by incurring freight, cartage and transportation charges would not change its character or became any different in it is nature if the same object is achieved by incurring the expenditure through the agency of transport contractors. As we have observed earlier, it is not the case of the department that the taxies or cars were hired for persons belonging to the assessed company and not for the cartage of the assesseds publications.

44. In the result, the appeal filed by the department fails whereas the appeal filed by the assessed succeeds.