ORDER
P.I. Mohan Singh, Judicial Member
1. These appeals filed by the assessee and the revenue relate to the asessment years 1978-79 to 1981-82 and arise out of the separate orders of the C.I.T. (Appeals). The aforesaid appeals of the assessee and the revenue involve common issues and are, therefore, heard together and disposed of by a common consolidated order for the sake of convenience.
2. The following grounds are raised by the assessee in its appeals: –
(i) Bank guarantee commission of Rs. 51,833 disallowed by the Income-tax Officer and confirmed by the C.I.T. (Appeals). This ground is raised only for the assessment year 1978-79.
(ii) Commission paid to M/s. Tara Agencies claimed by the assessee @ 5%. The I.T.O. allowed the same @ 2% for the assessment year 1978-79 and @ 1% for the assessment year 1979-80. The order of the I.T.O. for the assessment year 1978-79 was confirmed by the C.I.T. (A) and allowed the same rate of 2% for the assessment year 1979-80. This point is involved for the assessment years 1978-79 and 1979-80.
(iii) Maintenance of buildings and cars provided to managers of Tea Estates and cash allowances paid to them disallowed by the C.I.T. (A) Under Section 40A(5) at Rs. 46,792 for the assessment year 1978-79 and Rs. 87,474 for the assessment year 1979-80.
(iv) Disallowance Under Section 35B. This ground is raised for all the assessment years under consideration.
(v) Cash compensatory support claimed by the assessee. This ground is raised by the assessee for all the assessment years.
(vi) Commission paid to M/s Bhansali Brothers disallowed by the I.T.O. and confirmed by the C.I.T. (Appeals) for the assessment year 1979-80.
(vii) Replanting expenses and upkeep of the new clearings disallowed by the C.I.T. (A) for the assessment year 1979-80.
(viii) Maintenance of bungalow at Prospect Estate disallowed by the I.T.O. and confirmed by the C.I.T. (A) for the assessment year 1981-82.
3. The following grounds are raised by the revenue in its appeals, namely, on the facts and in the circumstances of the case, the C.I.T. (Appeals) erred in –
(i) allowing payment of consultancy fees to M/s Nonsuch Tea Estates for all the assessment years;
(ii) in. allowing payment of commission to M/s Tara Agencies @ 2% for the assessment years 1978-79 and 1979-80;
(iii) in allowing the claim Under Section 40A(5) for the assessment year 1980-81;
(iv) in allowing weighted deduction Under Section 35B in respect of E.C.G.C. premium for the assessment years 1978-79 to 1980-81.
(v) in allowing Deepawali expenses for the assessment years 1978-79 to 1980-81;
(vi) in deleting the disallowance of bonus paid in excess of the limits specified Under Section 36(1)(ii) of the I.T. Act for the assessment years 1980-81 and 1981-82;
(vii) in deleting the disallowance made by the I.T.O. on account of the excess salary paid to the directors for the assessment years 1980-81 and 1981-82;
(viii) in treating the company as an industrial company for the assessment years 1980-81 and 1981-82;
(ix) In allowing expenditure on replanting and upkeep of new clearings for the assessment year 1980-81;
(x) in granting investment allowance to the tea packing machine installed by the assessee in Cochin office for the assessment year 1981-82;
(xi) in allowing the bonus claim of Rs. 5,05,808 for the assessment year 1980-81;
(xii) in allowing the assessee’s claim with regard to additional depreciation for the assessment year 1981-82;
(xiii) in granting interest claim of Rs. 2,30,000 for the assessment year 1981-82.
4.1. Regarding the first ground taken by the assessee the facts in brief are as under: The assessee is a plantation company and the company was incorporated on 9-7-1976. The assessee company purchased four estates, namely, Bonaccord estate, Prospect estate, Liddellsdale estate and Seaforth estate on 24-9-1976 for Rs. 165 lakhs which includes cost of unused stocks and stores of estate requisites amounting to Rs. 10 lakhs and stamp duty registration charges etc. amounting to Rs. 10 lakhs. Out of the sale consideration, a balance of Rs. 55 lakhs was due to be paid by the assessee in instalments for which Bank of India and Union Bank of India stood as guarantors and guarantee commission of Rs. 51,833 was paid to Bank of India and Union Bank of India. The Income-tax Officer disallowed the guarantee commission paid to the bankers following the decisions in CIT v. Fort Gloster Industries Ltd. [1971] 79 ITR 48 (Cal.) and Ballarpur Papers Straw Board Mills Ltd. v. CIT [1979] 118 ITR 613 (Bom.). On appeal before the C.I.T. (Appeals) the learned counsel for the assessee contended that this is an allowable deduction in view of the decision of the Supreme Court in India Cements Ltd. v. CIT [1966] 60 ITR 52. The C.I.T. (Appeals) disallowed the contention of the assessee on the ground that this expenditure is not for raising capital and it has been incurred only for guaranteeing compliance of the terms of contract relating to the purchase of the estate by making the payments due under the contract. He, therefore, confirmed the order of the Income-tax Officer.
4.2 Before us, the learned counsel for the assessee relied upon the decision of the Andhra Pradesh High Court in Addl. CIT v. Akkamba Textiles Ltd. [1979] 117 ITR 294. He contended that since the ratio laid down in the aforesaid case is squarely applicable to the facts of this case, the bank guarantee commission paid by the assessee is an allowable deduction.
4.3 The learned departmental representative, on the other hand, relied upon the decision of the Bombay High Court in Ballarpur Paper & Straw Board Mills’ case (supra) and the Calcutta High Court decision in Fort Gloster Industries Ltd.’s case (supra).
4.4 We have carefully considered the rival contentions. In the case relied upon by the assessee mentioned supra, their Lordships of the Andhra Pradesh High Court have held that a transaction of acquisition of assets can be said to be closely related to the commencement and carrying on of the business by an assessee. Hence any expenditure incurred by the assessee, which is a running concern, for ensuring use of money for a certain period or enabling the assessee to make deferred payment of cost of assets acquired constitutes revenue expenditure and, therefore, the same is admissible as revenue expenditure. Therefore, the commission paid by the assessee to the guarantor for enabling it, the assessee, to make deferred payment of the purchase consideration constitutes revenue expenditure and not capital expenditure and, therefore, is admissible as deduction from the income. We have carefully gone through the decision of the Bombay High Court in Ballarpur Paper & Straw Board Mills Ltd. ‘s case (supra) the ratio of which is not exactly on the point at issue. Since the facts of the case on which the decision is rendered by the Andhra Pradesh High Court are identical to the facts of this case, we respectfully following the decision of the Andhra Pradesh High Court, hold that the guarantee commission paid by the assessee is a revenue expenditure and is an allowable deduction. This view is also supported by the decision of the Madras High Court in Sivakami Mills Ltd. v. CIT [1979] 120 ITR 211. The appeal filed by the assessee on this count is allowed.
5.1 Regarding the commission paid by the assessee to M/s. Tara Agencies, the facts in brief are as under: The assessee, as per an agreement reached between the company and the firm of M/s. Tara Agencies, agreed to pay the latter 5% commission for the services rendered by M/s. Tara Agencies to the assessee company. The total amount so paid came to Rs. 16,57,093 for the assessment year 1978-79 and Rs. 11,05,412 for the assessment year 1979-80. The Income-tax Officer found that the firm M/s. Tara Agencies consisted of three partners Smt. Taraben T. Bhansali, Shri Sumesh T. Bhansali and Shri Sailesh T. Bhansali. They were sharing the profits in the ratio of 30 : 30 : 40. The third partner Shri Sailesh T.Bhansali happened to be a director of the company whereas the first partner is his mother and the second partner his brother. Since the services rendered by the firm as explained by the assessee before the Income-tax Officer found to be sketchy, the I.T.O. asked for a descriptive note on the mechanism and set up that the firm had to render the necessary services. He also wanted to know the expenditure incurred by the firm in rendering the services so as to earn a fabulous commission of Rs. 16 lakhs. Not being satisfied with the reply given by the assessee company, the I.T.O. came to the conclusion that the firm did not have any specific set up for rendering any services so as to earn a fabulous commission from the company. In fact, the I.T.O. considered that the services rendered by the firm could not fetch more than 2% by way of commission if the particular relationship between the company and the firm is kept out of the picture. He accordingly allowed 2% commission for the assessment year 1978-79 and 1% for the assessment year 1979-80 and disallowed the balance by invoking the provisions of Section 40A(2)(a).
5.2 On appeal before the C.I.T. (Appeals), the succeeding I.T.O. made a request for curtailing even the allowance of 2% granted by his predecessor. It was his case that the services said to have been rendered by the firm to the assessee company were rather meagre and would not in any case entitle them to a commission of 2% when reputed auctioneers were charging only 1% for similar or even greater services that are being rendered by them. The assessee, on the contrary, contested the jurisdiction of the successor Income-tax Officer to demand further curtailment of commission granted by his predecessor. It was the assessee’s case before the C.I.T. (Appeals) that the entire commission of 5% should have been allowed as a deduction as M/s. Tara Agencies were rendering the assessee various kinds of services which would not strictly confine to auctioning of tea. It was submitted that the major and vital gain to the assessee by virtue of their association with M/s. Tara Agencies was that it had made an excellent penetration in the market and eliminated several expenses. As regards the request for enhancement, the assessee stated that such a request was totally unjustified as the allowance of 2% commission as an admissible deduction by his predecessor was based on an appreciation of all the relevant facts and had also the approval of the Inspecting Assistant Commissioner Under Section 144B. After hearing the learned counsel for the assessee and the successor I.T.O., the C.I.T. (Appeals) held that the commission of 2% allowed as a deduction by the I.T.O. in the assessment is fair and reasonable and he, therefore, confirmed the allowance of 2% and dismissed the assessee’s request for any more allowance in this regard. He also rejected the I.T.O’s request for enhancement in this respect. Against this order of the C.I.T. (A) the assessee is in appeal before us.
5.3 The learned counsel for the assessee contended before us that the services rendered by M/s. Tara Agencies cannot be compared with the brokers M/s Forbes Ewart and Figgis (P.) Ltd., Cochin, who are merely participants in the auction. He drew our attention to the portion of the C.I.T.(A)’s order wherein the C.I.T(A) gave a finding that Shri Sailesh T. Bhansali is a person known for his skill and competence in the tea business and if such a person in his capacity as partner had decided to charge a reasonable price for his services rendered to the company of which he is a director, that sort of arrangement cannot be frowned upon as unbusiness like or unethical. He then drew our attention to the copy of the market report dated 11-5-1977 which is at page 66 of the Paper Book, Volume I, for the assessment year 1978-79, wherein the break-up of details of sales of each estate is separately given. He then drew our attention to the copy of the agreement dated 9-7-1976 which is at pages 63 to 65 of the Paper Book, Volume I, for the assessment year 1978-79 in evidence of the fact that M/s Tara Agencies shall manage and look after the sales of tea not only through the Cochin auction but also sales to other merchants and shall also keep advised the company of all matters including the prevailing conditions in the market. He further relied upon the assessment orders of M/s Tara Agencies for the assessment years 1978-79 and 1979-80 to show that M/s Tara Agencies had returned the income earned by it by way of commission and it was assessed to tax. The counsel further contended that the firm M/s Tara Agencies is in existence from the year 1970 and deals in tea. Therefore, it has the necessary experience for marketing the tea. According to him, this is the technical service which can be acquired by experience in trade. The work involved the tasting and testing tea and fixing the rates while sending it for sales for the auction. Another important work carried on by the firm according to the counsel was the timing of the marketing of the tea produced. The firm not only takes part in the auctions but monitor the sales done by the brokers. In addition to this, there were several other advices given by M/s Tara Agencies mainly on the marketing side and the grades to be produced and the mode of packing etc. The counsel, therefore, contended that since the marketing is most important, the firm M/s Tara Agencies was appointed to supervise the auction sale of the tea produced in these four estates. One more factor which is very important to consider is that at that time the main administrative office was at Coonoor and in the absence of administrative office at Cochin they had to necessarily depend upon some other agencies to render various services in assisting the assessee to market the produce produced by it. Since M/s Tara Agencies is a sister concern and since Shri Sailesh T. Bhansali is known for his skill and competence in tea business, the assessee company thought it necessary to appoint M/s Tara Agencies and agreed to pay commission @ 5% which is reasonable. He next contended that by paying commission to M/s Tara Agencies, the tax incidence of M/s Tara Agencies is more and the tax effect is more than Rs. 20 lakhs for two years. Therefore, tax avoidance could not be the object of appointing M/s Tara Agencies inasmuch as while M/s Tara Agencies is liable to pay income-tax on 100% of its income, the assessee being a tea company will have to pay income-tax only at 40% as the other 60% will be treated as agricultural income. The counsel vehemently contended that since the agreement is genuine and the payment is bonafidely made and the object is not avoidance of tax liability, the tests laid down by the Punjab and Haryana High Court in the case in CIT v. Ishwar Prakash & Bros. [1986] 159 ITR 843 are satisfied and the entire commission paid by the assessee company to M/s Tara Agencies should be allowed as a deduction in the hands of the assessee company.
5.4 The learned departmental representative, on the other hand, supported the order of the I.T.O. He contended that the letter of M/s Tara Agencies dated 20-3-81 meant as reply to the I.T.O.’s letter dated 11-3-81 was totally silent about the organisation, personnel, competence, expenses etc. He, therefore, contended that in the absence of proper organisational set up it is entitled to receive a commission of only 1% as pleaded by the successor I.T.O. before the C.I.T. (Appeals).
5.5 We have carefully considered the facts and circumstances of the case, the material on record and the arguments advanced by both the sides. On a perusal of the order of the I.T.O. and the order of the C.I.T.(A) it is seen that the only factory which weighed with them in restricting the commission to be allowed in the hands of the assessee at 2% is by equating M/s. Tara Agencies with that of the auctioneers who are charging only 1%. From the facts as appearing in the records which are not disputed by the revenue, M/s Tara Agencies has been rendering various services other than merely taking part in the auction. When once it is accepted that M/s Tara Agencies is in existence from 1970 and is dealing in tea, it should be taken for granted that it has necessary experience for marketing the tea. From the nature of the services rendered by M/s Tara Agencies it cannot be compared with that of the auctioneers who are charging only 1% commission as the services rendered by M/s Tara Agencies involved tasting and testing of tea and fixing the timing of the marketing of the tea produced for sales in the auction and the advices given by it mainly on the marketing side in respect of the grades to be produced and the mode of packing and sending of periodical market reports giving details of break-up of sales clearly goes to show that the work of M/s Tara Agencies is not merely participating in the auction. One more important fact which is to be considered in this case is that at that point of time when the assessee company entered into the agreement with M/s Tara Agencies, the company had no administrative office at Cochin and since it is a newly incorporated company and landed itself in enormous task of producing and marketing tea, it had to necessarily depend upon some agency for rendering service for effective marketing of the tea produced by the assessee company. Therefore, on the very same day on which the company was incorporated, namely, 9-7-1976, it entered into an agreement with M/s Tara Agencies for the effective marketing of their produce. A further point to be noted in this case is that since Shri Sailesh T. Bhansali, a director of the assessee company is also a partner in M/s Tara Agencies, the assessee company readily entered into an agreement with M/s Tara Agencies under the belief that the interests of the assessee company would be well looked after by M/s Tara Agencies. It must also be noted that the agreement entered into with M/s Tara Agencies by the assessee company was only for two years and as soon as the administrative office at Cochin is established the agreement is terminated. Moreover the details of organisation, personnel, competence, expenses, mechanism, etc. are available in the file of M/s Tara Agencies as seen in pages 41A and 41B of the Paper Book, Volume I, for the assessment year 1978-79. We find that the services rendered by M/s Tara Agencies are quite different from the brokers and that the payment made to M/s Tara Agencies is quite reasonable for the services rendered. From the orders of both the I.T.O. and the C.I.T.(A) it is seen that they have not disputed the genuineness of the agreement and rendering of services by M/s Tara Agencies to the assessee company. When once the aforesaid two facts are not disputed and the object of entering into an agreement by the assessee company with M/s Tara Agencies is not for avoidance of tax, the tests laid down by their Lordships of the Punjab and Haryana High Court in Ishwar Prakash & Bros.’ case (supra) are fully satisfied and since the agreement is genuine and the payment is bonafidely made and the object is not avoidance of tax liability the commission @ 5% paid by the assessee company to M/s Tara Agencies should be allowed as a deduction in the hands of the assessee and the appeal filed by the assessee on this count is allowed.
6.1 The third ground of the assessee relates to disallowance of Rs. 46,792 for the assessment year 1978-79 and Rs. 87,474 for the assessment year 1979-80 under Section 40A(5). The I.T.O. disallowed Rs. 70,000 for the assessment year 1978-79 and the like amount for the assessment year 1979-80 Under Section 40A(5) on estimate in the absence of relevant details. Before the C.I.T. (Appeals) the assessee’s counsel furnished the details of the payments made to the employees to which Section 40A(5) could be applied. The C.I.T.(A) following the decision of the Kerala High Court in the case of CIT v. Forbes Ewart & Figgis (P.) Ltd. [1982] 138 ITR 1, restricted the addition to Rs. 46,792 for the assessment year 1978-79 and enhanced the disallowance to Rs. 87,474 for the assessment year 1979-80. Against these orders of the C.I.T.(A) the assessee is in appeal before us.
6.2 The learned counsel for the assessee contended before us that the C.I.T.(A) while working out the additions has followed the ratio laid down by the Kerala High Court in Forbes Ewart & Figgis (P.) Ltd.’s case (supra) whereas the later decision of the Kerala High Court in the case in CIT v. Toshiba Anand Lamps Ltd. [1984] 145 ITR 563 has held that house rent allowance and other payments relating to electricity, gas, has to be included in the salary and that the entire amount represented salary. He then drew our attention to the working contained at page 88 of the Paper Book, Volume II, for the assessment year 1978-79 where the amount to be disallowed Under Section 40A(5) had been worked out which comes to only Rs. 2,351. He further contended that the C.I.T. (A) has himself followed the latter decision of the Kerala High Court in Toshiba Anand Lamps Ltd. ‘s case (supra) and gave relief to the assessee in subsequent years. The counsel, therefore, contended that disallowance should be restricted to Rs. 2,351 as worked out at page 88 of the Paper Book, Volume II, for the assessment year 1978-79 and Rs. 28,446. for the assessment year 1979-80 as worked out at page 126 of the Paper Book, Volume II, for the assessment year 1979-80.
6.3 The learned departmental representative, on the other hand, contended that the decision of the Kerala High Court in CIT v. Commonwealth Trust Ltd. [1982] 135 ITR 19 is a Full Bench decision of the Kerala High Court and since it is not reversed by the subsequent decision in Toshiba Anand Lamps Ltd.’ case (supra) the ratio laid down in Commonwealth Trust Ltd. ‘s case (supra) is still a good law.
6.4 We have carefully considered the rival submissions. As per the ratio laid down by the Kerala High Court in Toshiba Anand Lamps Ltd. ‘s case (supra) if we take a solitary example as to the salary, leave allowance and servant allowance paid to Shri P. Adige which is at page 88 of the Paper Book, Volume II, for the assessment year 1978-79 the salary to be worked out would be Rs. 37,318. The perquisite, viz., expenditure on bungalow and 1/3rd expenditure on vehicles work out to Rs. 8,264. If we deduct 20% of the salary which is Rs. 7,464 from the value of perquisite, the amount to be disallowable would be Rs. 800. Likewise, it was calculated in respect of the other six employees in the assessment year 1978-79 which, in our opinion, is correct. Similar working was adopted for the assessment year 1979-80 and the figure is found at page 126 of the Paper Book, Vol. II for the year 1979-80 and the amount to be disallowed would be Rs. 28,446. Since the decision reported in 145 ITR 563 being the latter decision of the Kerala High Court, we prefer to follow the ratio laid down in that decision and the amount to be disallowed Under Section 40A(5) would be Rs. 2,351 for the assessment year 1978-79 and Rs. 28,446 for the assessment year 1979-80. This view of the Kerala High Court is subsequently affirmed by the same High Court in the case of Travancore Tea Estates Co. Ltd. v. CIT [1985] 153 ITR 444, wherein car supplied and car allowance paid to the employee and cash paid to employees by way of marriage allowance was treated as not a perquisite and not to be taken into account in computing disallowance Under Section 40A(5) of the I.T. Act.
7.1 The 4th ground taken by the assessee relates to weighted deduction Under Section 35B of the I.T. Act. The assessee has claimed weighted deduction in respect of freight for the assessment years 1978-79 to 1980-81. The I.T.O. disallowed the same and the C.I.T.(A) confirmed the order of the I.T.O. The claim made by the assessee in respect of freight is disallowable Under Section 35B(1)(b)(iii) of the I.T. Act. We, therefore, fully agree with the orders passed by the C.I.T.(A) in disallowing the weighted deduction claimed by the assessee in respect of freight for the assessment years 1978-79 to 1980-81 and confirm the same.
7.2 The assessee has claimed weighted deduction in respect of salary and bonus, postage, telegram, telephone, printing and office expenses for the assessment years 1978-79 to 1980-81. The C.I.T.(A) allowed 25% of the claim made by the assessee for 1978-79 and 1979-80 except the claim of the assessee for office expenses for assessment year 1978-79 and the I.T.O. himself has allowed 25% for the assessment year 1980-81. Following the ratio laid down by the Special Bench of the Tribunal in the case of J.H. & Co. v. Second ITO [1982] 1 SOT 150 (Bom.) (SB). We are of the opinion that the assessee is entitled to claim weighted deduction at 75% of the expenditure by way of salary and bonus and 50% of other expenditure.
7.3 A further claim of weighted deduction made by the assessee for motor car expenses has been disallowed by the C.I.T.(A) for the assessment years 1978-79 to 1980-81. This being administrative expenditure as salary, postage etc., we are of the opinion that it would be reasonable to allow 50% of the expenditure as weighted deduction.
7.4 The assessee claimed weighted deduction in respect of interest payment for the assessment years 1978-79 to 1980-81. The I.T.O. has disallowed the same and the CIT(A) has confirmed the orders of the I.T.O. Following the decision of the Padhya Pradesh High Court in CIT v. Vippy Solvex Product (P.) Ltd. [1986] 159 ITR 487 only interest paid on shipping loan account of Rs. 94,740 for the assessment year 1978-79, Rs. 1,82,225 for the assessment year 1979-80 and Rs. 2,76,817 for the assessment year 1980-81 which is similar to that of packing credit is to be allowed as a deduction as the assessee has produced certificate from the bankers which is at page 210 of the Paper Book, Volume IV of the assessment year 1978-79.
7.5 The assessee claimed weighted deduction in respect of bank charges for the assessment years 1978-79 to 1980-81. The I.T.O. disallowed the same. The C.I.T.(A) has confirmed the orders of the I.T.O. We are of the opinion that the claim of the assessee has to be at least on the same proportion in which the bank interest on shipping loan account is allowed (sic).
7.6 The assessee claimed weighted deduction on packing material, cartons, polythene bags amounting to Rs. 1,66,773 & Rs. 4,59,820 for the assessment year 1978-79, Rs. 9,41,492 & Rs. 2,55,185 for the assessment year 1979-80, Rs. 13,09,213 for the assessment year 1980-81 and Rs. 7,14,506 for the assessment year 1981-82. The I.T.O. disallowed the same and the C.I.T.(A) confirmed the order of the I.T.O. The learned counsel for the assessee relied upon the decision of the Cochin Bench in the case of Kesaria Tea Co. Ltd. [I.T. Appeal No. 444 (Coch.) of 1981 dated 3-4-1983]. He further contended that since printing has to be made on some material for giving publicity value, the weighted deduction should be allowed not only on the cost of printing as held by the Cochin Bench in the aforesaid decision but also on the cost of packing material on which printing is done. The learned departmental representative, on the other hand, contended that the cost of material cannot be considered for the purpose of weighted deduction as the main purpose is packing and the use of that material for printing is merely incidental. We have carefully considered the rival submissions. In the decision relied upon by the assessee the cost of printing on the material is entitled for weighted deduction. As pointed out by the learned D.R. the entire cost of the packing material on which printing is done cannot be entitled to weighted deduction. However, since the printing is done on the packing material which incidentally has publicity value also and further a perusal of the packing material brought to light that some Arabic letters are also printed for satisfying the requirements of the importer, we are of the opinion that the assessee should be allowed weighted deduction at least 50% of the expenditure incurred by it on packing material and printing.
7.7 The assessee has further claimed weighted deduction in respect of excise duty for the years 1978-79 to 1980-81. The same is disallowed by the I.T.O. and confirmed by the C.I.T.(A). Since the C.I.T.(A) has rightly disallowed the claim of the assessee, we do not find any reason to interfere with his orders. The appeal on this count is dismissed.
7.8 The assessee has claimed weighted deduction on tea export duty for the assessment years 1978-79 to 1980-81. The I.T.O. disallowed the same and the C.I.T.(A) confirmed the order of the I.T.O. The learned counsel for the assessee relied upon the decision of the Madras High Court in the case of CIT v. Kasturi Palayacat Co. [1979] 120 ITR 827. On the basis of the ratio laid down in the case, the counsel contended before us that export duty paid by branches abroad for the import of goods are entitled to weighted deduction. He, therefore, contended that since the assessee did not have a branch the customs duty was paid by the assessee in India and was therefore entitled to weighted deduction. The learned departmental representative on the other hand, supported the orders of the lower authorities. We have carefully considered the rival submissions. As the customs duty is paid by the assessee in India, we are of the opinion that the C.I.T.(A) has rightly held the same is not entitled to weighted deduction. The appeal filed by the assessee on this count is dismissed.
7.9 The assessee has claimed weighted deduction in respect of certifying charges for 1978-79. The same is disallowed by the I.T.O. and confirmed by the C.I.T.(A). Following the decision in the case of J.H. & Co. (supra), we fully agree with the order of the C.I.T.(A) in disallowing the claim of the assessee for weighted deduction and the appeal filed by the assessee on this count is dismissed.
7.10 The assessee has claimed weighted deduction in respect of licence fees for the assessment year 1979-80 and rates and taxes for the assessment year 1980-81. The I.T.O. disallowed the same and the C.I.T.(A) confirmed the orders of the I.T.O. Since the expenditure is incurred in India, we are of the opinion that the C.I.T.(A) has rightly disallowed the same and the appeals filed by the assessee on this count for both the years are dismissed.
7.11 The assessee has claimed weighted deduction in respect of godown rent for the assessment years 1979-80 & 1980-81. The I.T.O. disallowed the same and the CIT(A) confirmed the order of the I.T.O. Following the order of the Special Bench of the Tribunal in J.H. & Co.’s case (supra), we hold that the assessee is entitled to 50% of the rent as deduction.
7.12 The assessee has claimed weighted deduction on wages for the assessment year 1980-81. The I.T.O. disallowed the same and the C.I.T.(A) confirmed the order of the I.T.O. Since this has been paid in India, we are of the opinion that the C.I.T.(A) has rightly confirmed the order of the I.T.O. and we do not find any reason to interfere with his order and the appeal filed by the assessee on this count is dismissed.
7.13 The assessee has claimed weighted deduction in respect of special chest for the assessment year 1980-81. The I.T.O. disallowed the same and the C.I.T.(A) confirmed the order of the I.T.O. This is similar to the packing materials and printing on packing materials. For the reasons given by us in respect of packing materials and printing, we hold that 50% of the expenditure incurred by the assessee on special chest can be allowable as weighted deduction.
7.14 The assessee has claimed weighted deduction in respect of commission of Rs. 1,77,668 paid abroad for the assessment year 1981-82. The I.T.O. disallowed the same and the C.I.T.(A) has confirmed the order of the I.T.O. The learned counsel for the assessee contended before us that Section 35B(1)(b) provides for deduction of expenditure incurred on maintenance of a branch office or agency. If the assessee itself is to own and maintain the agency, the foreign agency becomes a branch or office of the assessee. Then there is no need for the word agency’ in the section. The Oxford Dictionary meaning of the word “agency” is function of an agent’. The meaning of the word “agent” is one who acts for another in business, politics etc.’. It docs not refer to a sole selling agent alone. According to him, therefore, the view of the I.T.O. does not derive support both from the Act and the dictionary. He, therefore, contended that the commission paid to agent abroad is eligible for the claim of weighted deduction. The learned departmental representative, on the other hand, relied upon the amendment to Section 35B with effect from 1-4-81 and contended that in view of the amendment the assesses is not entitled to weighted deduction on the commission paid abroad by the assessee. We have carefully considered the facts and circumstances of the case, the material on record and the arguments advanced by both the sides. As pointed out by the learned counsel for the assessee that if the assessee itself is to own and maintain an agency, the foreign agency becomes a branch or office of the assessee and in that case there is no need of the word ‘agency’ to find a place in the section. We, therefore, fully agree with the contention of the learned counsel for the assessee and we hold that the assessee is entitled to weighted deduction on the commission paid by it abroad. Further we may say that the amendment to Section 35B with effect from 1-4-81 will have no bearing in allowing the aforesaid deduction. The appeal filed on this count is, therefore, allowed.
7.15 The assessee has claimed weighted deduction in respect of certain items relating to Prospect estate which is at page 201D(ii) of the Paper Book, Volume IV for the assessment year 1978-79. The I.T.O. and the C.I.T.(A) have not considered the claim of the assessee. In the light of the guidelines given above, the I.T.O. is directed to verify the details and allow the claim of the assessee. In doing so, warehousing charges may be treated as rent. However, no weighted deduction is allowable on transit insurance.
8.1 The next ground raised by the assessee in its appeals is regarding the claim of the assessee in respect of cash compensatory support paid by the Government. This point is involved for all the assessment years and it should be also noted that this ground is raised by the assessee for the first time before us.
8.2 The learned counsel for the assessee contended that since this ground being a legal ground and does not require fresh facts to be investigated into by the lower authorities, the assessee is entitled to raise this ground at this stage. In support of his contention he relied upon the following decisions, namely, (i) Atlas Cycle Industries Ltd. v. CIT [1982] 133 ITR 231 (Punj. & Har.), (ii) CIT v. Gangappa Cables Ltd. [1979] 116 ITR 778 (AP), (iii) CIT v. Madras Industrial Investment Corpn. Ltd. [1980] 124 ITR 454 (Mad.), (iv) CIT v. Indian Express (Madurai) (P.) Ltd. [1983] 140 ITR 705 (Mad.). The counsel drew our attention to the observation made by their Lordships in the case of Addl. CIT v. Gurjargravures (P) Ltd. [1978] 111 ITR 1 (SC), which is extracted in the case of Gangappa Cables Ltd. (supra) which reads as under: –
We are not here called upon to consider a case where the assessee failed to make a claim though there was evidence on record to support it, or a case where a claim was made but no evidence or insufficient evidence was adduced in support. In the present case neither any claim was made before the Income-tax Officer, nor was there any material on record supporting such a claim. We, therefore, hold that, on the facts of this case, the question referred to the High Court should have been answered in the negative.
According to the counsel, their Lordships of the Supreme Court have impliedly held that a new ground can be raised by the assessee only under any one of the circumstances, namely, (i) when there was material on record supporting the claim of the assessee, or (ii) when there was a previous claim by the assessee. In the assessee’s case though there is no claim made before the I.T.O., there was sufficient material on record supporting the assessee’s claim on C.C.S. Hence on this ground also, the additional ground raised by the assessee at this stage is to be admitted. He further contended that the assessee before the I.T.A.T., Delhi B Bench, had also raised the claim of C.C.S. by way of an additional ground and the Delhi B Bench, had admitted the additional ground filed by the assessee rejecting the objection raised by the revenue. He further contended that the reference application against the admission of the additional ground was dismissed. The counsel then proceeded on the merits of the case. On merits he relied upon the decision of the I.T.A.T., Delhi B Bench in Gadore Tools (India) (P.) Ltd. v. ITO [1985] Taxation 78(6)-7 where an additional ground has been admitted by the Tribunal for the first time and decided the issue in favour of the assessee holding that the C.C.S. is not taxable. Referring to the decision of the Cochin Bench of the Tribunal in the case of Kesaria Tea Co. Ltd. (supra), the learned counsel contended that the facts of the aforesaid case are distinguishable to the facts of the case under consideration. The counsel then read several pages from the order of the Delhi B Bench to show that the facts of the case decided by the Delhi B Bench of the Tribunal are identical to the facts of the case under consideration.
8.3 The learned departmental representative, on the other hand, relied upon the decision of the Delhi A Bench in the case of Reliance International Corpn. Ltd. v. ITO [1986] 16 ITD 43 which is in favour of the revenue. He also relied upon the decision of the Calcutta High Court in Jeewanlal (1929) Ltd. v. CIT [1983] 142 ITR 448 which is followed by the Delhi A Bench in the case decided by it.
8.4 We have carefully considered the facts and circumstances of the case, the material on record and the decisions cited on behalf of the assessee as well as the revenue. In the case relied upon by the assessee and decided by the Andhra Pradesh High Court in the case of Gangappa Cables Ltd. (supra) the facts of the case are as follows: The assessee for the first time raised a plea in second appeal before the Appellate Tribunal that the expenditure incurred by the assessee before it went into commercial production was an admissible deduction for the purpose of Section 80J(1) of the I.T. Act. The revenue resisted the claim on the ground that the said claim having not been put forward by the assessee before the I.T.O. or the A.A.C., it could not be raised in second appeal. The Tribunal held that the director’s report accompanied by the balance-sheet and Profit and Loss account and other statements were filed by the assessee before the I.T.O. and practically all the details for allowing the claim Under Section 80J(1) of the I.T. Act were on record and hence it was open to the Tribunal to allow the claim. On a reference the Court held that the Tribunal was correct in allowing the claim of the assessee as there was material on record for valuing the same. In the case under consideration before us it is an admitted fact that the additional ground raised by the assessee claiming deduction of the cash compensatory support was made for the first time before the Tribunal. In the Profit and Loss account filed by the assessee at page 8 of the Paper Book, Volume I, for the assessment year 1978-79 and at page 4 of the Paper Book, Volume I for the assessment year 1979-80, page 4 of the Paper Book, Volume I for the assessment year 1980-81 and page 7 of the Paper Book, Volume I, for the assessment year 1981-82, the assessee has mentioned the cash compelsatory support received by it on the credit side under the nomenclature incentive on packet tea. Since these particulars were before the I.T.O., the I.T.O. could have gone into the claim of the assessee even though the claim was not specifically made by the assessee before him. Since this does not require investigation into fresh facts, we are of the opinion that the mention of this claim in the P & L account is enough for the I.T.O. to consider the claim of the assessee though the claim is not made by the assessee before the I.T.O. Since the claim was raised before us for the first time, we admit this ground and proceed to decide the issue on merits. The Cochin Bench of the Tribunal in the case of Kesaria Tea Co. Ltd. (supra) has rendered the decision considering the decisions of the Bombay High Court in the case of Mehboob Productions (P.) Ltd. v. CIT [1977] 106 ITR 758 and Dhrangadhra Chemical Works Ltd. v. CIT [1977] 106 ITR 473. In the case of Mehboob Productions (P.) Ltd. (supra) the facts are entirely different to the facts of this case. The facts of that case are that the claim was in respect of entertainment tax exempted by the State Government in respect of a Motion picture. The assessee’s main contention was that the entertainment tax was not liable to be included in its total income because it was not a trading receipt but only an amount received by way of personal testimonial and that at any rate it was a casual and non-recurring receipt and was, therefore, exempt Under Section 4(3)(vii) of the I.I.T. Act, 1922, whereas the question that has come up for decision in this case was whether cash compensatory support given to the assessee is capital or revenue receipt. The other decision relied upon by the Tribunal is the decision of the Bombay High Court in Dhrangadhra Chemical Works Ltd. ‘s case (supra) . The facts of this case are also entirely different inasmuch as the decision was in respect of subsidy granted by the Government to two companies on their representation about the glut in the market of Soda ash and the difficulty faced by them to carry out the business profitably. Moreover, in this case the assessee has instituted a suit to recover the said amount based on the agreement between the assessee and the Government. Further in this case it was felt that the right to receive the subsidy accrued or arose to the assessee for the first time only when an amicable agreement as recorded in a letter was arrived at. Hence this is a case where legal right had emanated to the assessee from a contract. Further this is a case where the subsidy had been granted not for fulfilment of the policy objective of the Government but for compensating the loss suffered by the assesses from the stiff competition it faced from the importers. This point has also been distinguished by the Delhi Bench B of the Tribunal while rendering the decision on C.C.S. which held the issue in favour of the assessee. The learned departmental representative relied upon the decision of the Delhi A Bench of the Tribunal wherein the same issue was held in favour of the revenue and against the assessee. In our opinion the facts of the case decided by Delhi A Bench are distinguishable to the facts of this case. The facts of that case namely in the case decided by the Delhi A Bench are as under: –
The C.C.S., in the present case, was cash subsidy, which was notified by the Central Government to the Export Promotion Council vide its letter dated 17-8-66. It was to be given at a certain percentage of f.o.b. value of the specified engineering goods exported from 6-6-1966 onwards and there was to be no concessional supply of iron and steel to those who get the cash subsidy as above. Cash subsidy was, thus, in lieu of the scheme of ‘concessional supply of iron and steel’. The purpose of the scheme was to reimburse the assessee’s cost of manufacturing the exported goods. Earlier, the assistance was in kind. But now it was in cash. But the purpose was the same.
In the aforesaid case, the cash subsidy as seen from the facts of that case was in lieu of the scheme of ‘concessional supply of iron and steel’ which is not the case before us. In the case under consideration before us it is an outright cash compensatory support not given in lieu of anything else. The revenue has also relied upon the decision of the Calcutta High Court in Jeewanlal (1929) Ltd. ‘s case (supra). While referring to the Calcutta High Court decision, the Delhi B Bench of the Tribunal in the case of Gadore Tools (India) Ltd. (supra) has stated the reasons which forced their Lordships to give the decision in favour of the revenue. According to the Delhi Bench B certain material difference between the nature of import entitlement, duty draw backs on the one hand and the C.C.S. on the other hand were not brought out before their Lordships of the Calcutta High Court. They further observed that there was no statutory sanction for the grant of C.C.S. as in the case of import entitlements and duty draw backs and hence it is granted by the administrative decision of Govt. of India. It was further held by the Bench that C.C.S. has been granted for the fulfilment of the policy objective of the Government and not for enriching the profits of the assessee. On appreciation of facts and the material on record, the following aspects are worth mentioning to show that C.C.S. received by the assessee is not taxable:-
(i) that the payment made by the Government is voluntary in nature and on a unilateral decision of the Government,
(ii) the payment is purely by way of a donation or gift or a bounty,
(iii) there is neither statutory nor contractual right for the assessee to claim the payment, and
(iv) the Government is making the payment to fulfil the policy objectives and not for enriching the profits of the assessee.
Since the facts of the case considered by the Delhi Bench B of the Tribunal are in all fours applicable to the facts of the case under consideration, we are inclined to follow that decision and hold that C.C.S. received by the assessee is not taxable. The Supreme Court in the case of CIT v. Naga Hills Tea Co. Ltd. [1973] 89 ITR 236 held that if a provision of the taxing statute can be reasonably interpreted in two ways that interpretation which is in favour of the assessee is to be accepted. Since in this case two views, namely, one in favour of the assessee and the other against the assessee is possible we respectfully following the aforesaid decision of the Supreme Court hold the view which is favourable to the assessee. In the result, the appeal filed by the assessee on this count is allowed.
9.1 The next ground taken by the assessee is regarding the commission paid by the ‘ assessee to M/s Bhansali Brothers. This ground is raised only for one year, viz., for 1979-80. The assessee has claimed the commission @ 5% paid to M/s Bhansali Brothers for the assessment year 1979-80 and claimed the same as a deduction as, according to the assessee, it was paid as per the terms of the agreement dated 1-7-1977 for looking after the various aspects of the tea grown in the High Forest estate. The I.T.O. has disallowed the amount mainly on the ground that no details whatever regarding the services rendered by that firm had been made available to him. On appeal, the order of the I.T.O. was confirmed by the C.I.T.(A) for the reasons stated by him in his order.
9.2 The learned counsel contended before us that the payment made was similar to that made to M/s Tara Agencies. This payment is made in pursuance of an agreement dt. 1-7-1977 entered into with M/s Bhansali Brothers for looking after the various aspects of the sale of tea grown in the High Forest estate. He contended that M/s Bhansali Brothers is also a sister concern of the assessee. This firm is trading in tea since 1975. Therefore, it has earned necessary experience for marketing the tea. The partners of the firm are Shri Sailesh T. Bhansali, Shri Samresh T. Bhansali, Amrish T. Bhansali and Alkesh T. Bhansali. Shri Sailesh T. Bhansali, one of the aforesaid partners of the firm is known for his skill and competence in the tea business and he is also a Member of the Tea Board. This made the assessee to readily enter into an agreement with M/s Bhansali Brothers to control and supervise the marketing of the tea grown in High Forest estate since Shri Sailesh T. Bhansali who has got sufficient experience in tea trade is also partner of that firm. The counsel further contended before us that the I.T.O. has not cared to even examine the set up of M/s Bhansali Brothers as he has done in the case of M/s Tara Agencies. He has also filed a copy of the market report dated 12-7-78 which contains the break-up of sales which is at pages 93 to 97 of the Paper Book, Volume II, for the assessment year 1979-80. The counsel next contended that since the assessee company is formed just a year ago and since it landed itself in an enormous task of producing and marketing tea, it had to necessarily depend upon some agency to control and supervise the marketing of tea and to perform other services. As the assessee company did not find any difference between M/s. Tara Agencies and M/s. Bhansali Brothers as regards expertise in tea business and as High Forest estate was situated in a place far off from the other estates, it appointed M/s Bhansali Brothers as its agent for High Forest estate. The fact that there is no administrative office at Cochin at that time is also a factor which forced the assessee to appoint M/s Bhansali Brothers. He then took us through the assessment order for the year 1978-79 in the case of M/s Bhansali Brothers, wherein the commission received by the firm has been shown in the income returned and has been assessed by the I.T.O. He further contended that by paying commission to M/s Bhansali Brothers, the tax incidence in the hands of M/s Bhansali Brothers is more and from this it is evident that tax avoidance could not be the object of the assessee in entering into an agreement with M/s Bhansali Brothers.
9.3 The learned departmental representative, on the other hand, relied upon the orders of the lower authorities.
9.4 We have carefully considered the facts and circumstances of the case, the material on record and the arguments advanced by both the sides. On a perusal of the order of the C.I.T.(A) it is seen that no specific reasons have been given by the C.I.T.(A) for disallowing the commission paid to M/s Bhansali Brothers. At this stage, it is also desirable to mention that the I.T.O. has also not cared to examine the set up and mechanism of M/s Bhansali Brothers as he has done in the case of M/s Tara Agencies. The averments in the agreement entered into between the assessee and M/s Bhansali Brothers and the copy of the market report clearly go to show that the services rendered by the firm to the assessee company cannot be compared with brokers who charge commission only @ 1%. We are, therefore, of the opinion that the payment of commission made by the assessee company to M/s Bhansali Brothers is quite reasonable for the services rendered by M/s Bhansali Brothers. It is an admitted fact that at the time of entering into the agreement with M/s Bhansali Brothers, the same position as stood at the time of agreement entered into by the assessee with M/s Tara Agencies existed and it is also an admitted fact that this is a sister concern of the assessee company where they can expect maximum co-operation from the firm M/s Bhansali Brothers for the purpose of controlling and supervising the marketing of tea. In our opinion, when the agreement entered into by the assessee company with M/s Bhansali Brothers is genuine and the payment is bonafidely made and the object is not avoidance of tax liability the tests laid down by the Punjab and Haryana High Court in the case in Ishwar Prakash & Bros.’ case (supra) will apply to the facts of this case and the commission paid by the assessee company to M/s Bhansali Brothers should be allowed as a deduction. In the result, the appeal filed by the assessee on this count is allowed.
10.1 The next ground raised by the assessee relates to expenses incurred in replanting the upkeep of new clearings for the assessment year 1979-80. This ground is raised as an additional ground before the C.I.T. (Appeals). The CIT(A) dismissed the appeal of the assessee on the ground that no details and no facts have been made available to the I.T.O. at any stage. Before us the learned counsel for the assessee relied upon the Circular of the Board at page 46 of the Paper Book, Volume I, for the assessment year 1980-81, according to which he contended that the assessee is entitled to claim deduction in respect of expenses incurred in replanting and upkeep of new clearings. He contended before us that the C.I.T.(A) himself has allowed the claim of the assessee for the assessment year 1980-81.
10.2 The learned departmental representative, on the other hand, supported the orders of the C.I.T.(A). He contended that he may be given time for filing written submissions on this aspect. On his request, we have allowed him time to file written submissions. The learned departmental representative filed an extract from Direct Taxes Circulars, by J.P. Bhatnagar, pages 443 to 445 wherein on considerations of the Memorandum on the subject submitted by the General Committee of the Indian Tea Association, the Central Board gave the following guidelines which is in para 6 of the extract which reads as under: –
From these principles it follows that for ‘income-tax purposes’ the cost of infilling or supplying should in all circumstances be treated as capital expenditure and a fortiori the cost of all replanting of abandoned areas or planting areas to replace such areas should also be treated as capital expenditure. Even if the Board’s principles that it is the individual bush and not the estate as a whole that is the source of revenue or creation of a source of revenue is not accepted, it seems abundantly clear that expenditure on the replanting of an area that has been abandoned or the planting of a fresh area to replace it is capital expenditure.
This is a sort of clarification issued to the Board’s Circular No. 37 F.No. 557-IT/32 dated 7-12-32 which is relied upon by the assessee. He, therefore, contended that in view of the clarification issued by the Board, replanting expenditure should be treated as capital expenditure.
10.3 We have carefully considered the facts and circumstances of the case, the material on record and the arguments advanced by both the sides. Firstly, we are of the opinion that since the C.I.T.(A) also is assessing authority and since this being an additional ground taken by the assessee on the basis of the material on record, the C.I.T.(A) should have admitted the ground and remitted the matter back to the file of the I.T.O. to look into the matter afresh on the basis of the material available on record and decide the issue on merits. On merits, the learned counsel for the assessee relied upon the Board’s Circular No. 37 of 1932 dated 7-12-1932 wherein the expenditure on the maintenance of tea garden including the expenses on the maintenance of an area that has not reached maturity is an item of revenue expenditure and as such is allowable. Following the aforesaid circular the expenditure incurred by the assessee for the upkeep, in our opinion, is allowable. The next item of expenditure is replanting expenditure. Though in the clarification issued by the Board, the Board gave specific directions that the replanting expenditure should be treated as capital expenditure, Rule 8(2) of the I.T. Rules specifically provides that in computing income from manufacture of tea, allowance shall be made in respect of the cost of planting bushes in replacement of bushes that had died or become permanently useless in an area already planted, if such area has not previously been abandoned. Since the assessee is entitled to claim deduction in respect of replanting expenditure in view of Rule 8(2) of the I.T. Rules, 1962, we are of the opinion that the assessee is entitled for deduction. Since the matter has not been looked into by the I.T.O., the matter is remitted back to the file of the I.T.O. with a direction to consider the matter afresh according to law.
11.1 The next ground raised by the assessee is in respect of the claim with reference to the expenditure incurred for maintenance of a building at Prospect estate. The claim was disallowed by the I.T.O. Under Section 37(5) of the I.T. Act. The C.I.T.(A) confirmed the order of the I.T.O.
11.2 Before us the learned counsel contended that this is a bungalow situated in the Prospect estate and used by the staff and auditors at the time of business trips. He contended that the assessee is entitled to the claim.
11.3 The learned departmental representative, on the other hand, relied upon the, orders of the lower authorities.
11.4 We have carefully considered the rival submissions. Since this is used purely as guest house, irrespective of the user by the auditors, this claim is clearly disallowable under Section 37(5) of the Act.
12.1 The first ground taken by the revenue is regarding the payment of consultancy fees to M/s Nonsuch Tea Estate. This ground is raised by the revenue for all the assessment years. Consequent on the purchase of the estate by the assessee company from M/s Nonsuch Tea Estate, the latter was appointed as the assessee’s technical consultants for a period of 10 years paying quarterly remuneration of Rs. 90,000. The income-tax Officer who made the assessment after going through the relevant details allowed an amount of Rs. 3,60,000 paid as consultancy fees as a revenue expenditure. The successor Income-tax Officer who re-heard and allowed the claim in the 1st year has however, changed his mind in the second year and felt that Nonsuch Tea Estate did not render any worthwhile service to the assessee company for earning that much consultancy fee. Besides, the successor I.T.O. who found that the appointment of M/s Nonsuch Tea Estate as a consultant on a quarterly payment of Rs. 90,000 was a part and parcel of the arrangement for purchase of the estate considered that such payment was nothing but a payment towards purchase price camouflaged as a technical fee. He was, therefore, of the view that no part of the consultancy fees should have been allowed as a revenue expenditure. The assessee has vehemently objected to the suggestion. The assessee’s case is that the purchase consideration of Rs. 1,45,00,000 was itself quite high and the consultancy fee for rendering services by way of periodic inspection of the estates and recommendations for improving the quality of the plantation had nothing to do with the purchase price. It was also contended that M/s Nonsuch Tea Estate was paying tax on the entire amount as revenue receipt and had it been a part of purchase consideration the entire receipt would have been a capital receipt which would not have attracted capital gains-tax also. Yet another objection raised by the assessee is that the amount had been allowed as a deduction by the I.T.O. after full appreciation of the facts on proper directions by the Inspecting Assistant Commissioner Under Section 144B. After hearing the learned counsel for the assessee the CIT(A) confirmed the order of the I.T.O. and rejected the request for enhancement made by the successor I.T.O. As against this order of the CIT(A) the revenue is in appeal before us.
12.2 The learned departmental representative contended before us that there is no mention by the assessee of the nature of service rendered by M/s Nonsuch Tea Estate. He contended that the services rendered by M/s Nonsuch Tea Estate are routine and non-technical and could be offered by any other person who has at least a year experience in the tea producing factory. He, therefore, contended that the consultancy fees paid to M/s Nonsuch Tea Estate is nothing but sale consideration.
12.3 The learned counsel for the assessee, on the other hand, first took us through the agreement entered into between the assessee company and M/s Nonsuch Tea Estate which is at pages 143 to 145 of the Paper Book, Volume II, for the year 1978-79, in pursuance of which technical consultancy fee was paid by the assessee. He then drew our attention to clause 3 of the agreement wherein the nature of the services to be rendered by M/s Nonsuch Tea Estate have been mentioned. He further contended that the company was incorporated in the year 1976 and since the assessee company has invested Rs. 1,45,00,000 for the purchase of four estates and since the assessee company has no experience in agricultural operations it had to take the assistance of M/s Nonsuch Tea Estate to advise on different matters connected in effect of weather, climatic conditions, fertiliser, programme, type of fertiliser to be used, type of pruning, lichen wash, mossing, cleaning, spraying, type of drier equipments, nurseries, weeding, soil testing, etc. The assessee company, therefore, entered into an agreement with M/s Nonsuch Tea Estate agreeing to pay consultancy fee for the services rendered by it. He, further contended that the action of the assessee company in entering into an agreement with M/s Nonsuch Tea Estate is fully justified as the latter is the vendor and that it has the full knowledge of the estates sold by it. He then referred to copy of the report submitted by M/s Nonsuch Tea Estate which is at pages 266 to 269 of the Paper Book, Volume IV for the year 1978-79 which gives the details of the work to be done by M/s Nonsuch Tea Estate in each estate. The learned counsel further contended that the assessee’s predecessor in title has bought four estates viz., Prospect, Liddellsdale, Seaforth and Highforest from Sterling company on 28-6-74 for which the RBI has fixed the market price at Rs. 1,12,40,000 after referring the matter to the Government of India which in turn had referred the matter for market valuation of Tea Board which had fixed at Rs. 1,12,40,000. As Highforest Estate and Bonaccord estates were sold by Nonsuch Tea Estate for Rs. 18,68,000 and Rs. 23,25,000 respectively, the market value of Prospect Liddellsdale, Seaforth and Bonaccord at that rate would come to Rs. 1,16,97,000 only whereas the assessee had paid only Rs. 1,45,00,000. As the present transaction is within a period of two years from the earlier transaction it cannot be said that the market rate of the four estates is more than Rs. 1,45,00,000 as contended by the I.T.O. He further contended that in the same matter in acquisition proceedings initiated by the department the sale consideration of Rs. 145 lakhs has been accepted by the department and the proceedings initiated were dropped after due consideration by an authority higher than that of the I.T.O. He, therefore, supported the order of the C.I.T.(A) in allowing deduction of the consultancy fees paid by the assessee company to M/s Nonsuch Tea Estate.
12.4 We have carefully considered the facts and circumstances of the case, the material on record and the arguments advanced by both the sides. As seen from the facts, the assessee company was incorporated in the year 1976. The assessee company for the first time landed itself in the enormous task of producing and marketing of the tea produced. As the company is new to this business it naturally requires the assistance of some agency to look after the affairs in the estate. The company immediately after its incorporation, therefore, entered into an agreement with M/s. Nonsuch Tea Estate for managing the entire affairs at the estates and for the services rendered by M/s Nonsuch Tea Estate the assessee company agreed to pay a technical consultancy fee of Rs. 3,60,000 per annum for 10 years. By virtue of clause 3 of the agreement M/s. Nonsuch Tea Estate agreed to render such advices or other assistance other than financing, as may be required by M/s Mahavir Plantations in the running of the four estates, from the reports submitted by M/s Nonsuch Tea Estate to the assessee company which is contained at pages 266 to 269 of the Paper Book, Vol. IV for the year 1978-79 it is revealed that all the operations to be conducted by M/s. Nonsuch Tea Estate for the improvement of the tea estate have been given in detail. Since this assessee company is new to this business and M/s. Nonsuch Tea Estate had experience in agricultural operations inasmuch as they were the previous owners of the four estates, the assessee company had entered into an agreement with M/s. Nonsuch Tea Estate who had the full knowledge of all the estates. Moreover after making an investment of Rs. 145 lakhs no prudent investor would grudge to make payment for consultancy services @ Rs. 90,000 per quarter for taking advice on matters connected with whether, climatic condition, fertiliser programme, type of fertiliser to be used, type of pruning, spraying, type of drier equipments, weeding, soil testing etc. As pointed out earlier, since the assessee company did not have experience in agricultural operations as this is the first year of its business, the assessee company is fully justified in entering into an agreement with M/s. Nonsuch Tea Estate in the matters connected with agricultural operations for the proper maintenance of the tea estates. These aspects, in our opinion, have not been considered by the ITO. The argument of the learned departmental representative that the consultancy fee paid by the assessee to M/s. Nonsuch Tea Estate is nothing but sale consideration cannot be accepted inasmuch as in the acquisition proceedings initiated by the same department, the sale consideration of Rs. 1,45,000 has been accepted by the department. In the same matter in the proceedings under the Stamp Act the sale consideration of Rs. 1,45,00,000 has been confirmed not only by the appellate authority but also by the High Court of Madras in C.R.P.No. 526 of 1979 dated 12-1-81 at pages 262 to 264 of Paper Book, Volume IV of 1978-79. Since the consultancy fees was paid by the assessee in pursuance of an agreement for the various services rendered by M/s. Nonsuch Tea Estate for the upkeep of the four estates, we are of the opinion that the sum paid by the assessee to M/s. Nonsuch Tea Estate should be allowed as deduction and we fully agree with the C.I.T.(A), Therefore, the appeal filed by the revenue on this count is dismissed.
13.1 The second ground raised by the revenue relates to the payment of commission to M/s. Tara Agencies for the assessment years 1978-79 and 1979-80. Since this point has already been decided by us in the second ground raised by the assessee in favour of the assessee in its appeal, the appeal filed by the department on this count is dismissed.
14. The third ground raised by the revenue relates to the claim allowed by the C.I.T.(A) under Section 40A(5) for the assessment year 1980-81. Since this point has already been dealt with and decided by us in ground No. 3 raised by the assessee in its appeal, the appeal filed by the revenue on this count is dismissed.
15. The fourth ground raised by the revenue is with regard to weighted deduction Under Section 35B allowed by the C.I.T.(A) in respect of E.C.G.C. Premium for the assessment years 1978-79 to 1980-81. The assessee has claimed weighted deduction in respect of E.C.G.C. Premium for assessment years 1978-79 to 1980-81. The I.T.O. disallowed the same and the C.I.T.(A) allowed the claim of the assessee against which the department is in appeal before us. The departmental representative merely supported the order of the I.T.O. The learned counsel for the assessee on the other hand supporting the order of the C.I.T.(A) relied upon the Special Bench decision of the Tribunal in J.H. & Co.’s case (supra). Respectfully following the aforesaid decision, we hold that the assessee is entitled to weighted deduction on the entire amount of E.C.G.C. Premium and the appeals by the revenue on this count are dismissed.
16.1 The fifth ground raised by the revenue is regarding Deepawali expenses for the assessment years 1978-79 to 1980-81. The ground regarding Deepawali expenses has been wrongly raised by the revenue for the assessment year 1978-79 as it does not arise out of the order of the C.I.T.(A). Therefore, the appeal filed by the revenue on this count for the assessment year 1978-79 is dismissed.
16.2 In support of the claim of Deepawali expenses the assessee has furnished an analysis of the Deepawali expenses before the C.I.T. (A). The C.I.T. (A) found that out of the total expenses of Rs. 28,097, Rs. 1,359 represented subscriptions to clubs and out of the remaining an amount of Rs. 4,177 is shown as office tea which represents expenditure on tea provided to the staff as well as to the visitors. The C.I.T.(A) therefore disallowed only half of what has been incurred and shown as office tea amounting to Rs. 2,088 and deducting this from the amount of Rs. 28,097 the C.I.T.(A) held that the balance is towards business expenses.
16.3 The learned departmental representative supporting the order of the I.T.O. contended before us that the entire amount of Rs. 28,097 should have been disallowed by the C.I.T.(A) as pertaining to entertainment. The learned counsel for the assessee, on the other hand, supported the order of the C.I.T.(A).
16.4 We have carefully considered the rival submissions. On a perusal of the details of the Deepawali expenses the C.I.T.(A) held that only half of what has been shown as office tea has to be disallowed on the ground of entertainment and since all the other items of expenditure are found by the C.I.T.(A) as incurred for the purpose of business the C.I.T.(A) has disallowed only Rs. 2,088 from out of Rs. 28,097 claimed by the assessee. We, therefore, fully agree with the order of the C.I.T.(A) and the appeal filed by the revenue on this count is dismissed, for both the years 1979-80 and 1980-81.
17.1 The next ground raised by the revenue is that the C.I.T.(A) erred in deleting the disallowance of bonus made by the I.T.O. since these payments were in excess of the limits specified in Section 36(1)(ii) for the assessment years 1980-81 and 1981-82. For the assessment year 1980-81 the I.T.O. has disallowed a part of the provision for bonus amounting to Rs. 6,83,850 being the excess of the maximum bonus payable under the Bonus Act. The I.T.O. has also disallowed certain cash payments made during the year by way of bonus for the assessment year 1979-80. This comes to Rs. 3,81,591. Besides, the bonus included in the estate expenditure amounting to Rs. 34,357 and bonus relating to Cochin office amounting to Rs. 13,184 have also been disallowed by the I.T.O. on the ground that they are in excess of the limits specified under the Bonus Act. The C.I.T.(A) held that any excess provision has to be dealt with only in the year of payment or in the year of agreement as the case may be. In this view of the matter, he upheld the disallowance of excess provision of Rs. 6,83,850. The same is allowed by the C.I.T.(A) in his supplementary order for the assessment year 1981-82 on the ground that the same has been paid in that year. Regarding additional payment of Rs. 3,81,591, the bonus included in the estate expenditure amounting to Rs. 34,357 and the bonus relating to Cochin office amounting to Rs. 13,184 in excess over the payment of Bonus Act for 1979-80 arc allowed by the C.I.T.(A) during the year 1980-81 on the ground that the payment was made as a result of agreement reached after the relevant previous year. He also observed that any actual payment of bonus over and above the provision made is to be allowed as a deduction in the year of payment.
17.2 For the assessment year 1981-82 the I.T.O. disallowed Rs. 2,94,861 being bonus paid in excess of 8-1/3%. The C.I.T.(A) allowed it as a deduction on the ground that this amount though pertaining to 1980-81 has been paid during this year and it is also paid as a customary bonus. As against these orders of the C.I.T.(A) the revenue is in appeal before us.
17.3 The learned departmental representative supported the order of the I.T.O, He contended before us that since these payments were in excess of the payments specified in Section 36(1)(ii) the I.T.O. is fully justified in disallowing the claim of the assessee.
17.4 The learned counsel for the assessee, on the other hand, contended before us that the revenue cannot take the stand that bonus paid in excess of the limits prescribed under the Payment of Bonus Act is not an allowable deduction inasmuch as many Tribunals have held that payment of such an additional bonus on account of agreement or custom is allowable as a deduction under the second proviso to Section 36(1)(ii) or Under Section 37. He relied upon the decision in the case of ITO v. Gopalpur Tea Co. Ltd. [1985] Taxation 79(6)-9 (Cal.). He also relied upon the decision of the Madras High Court in CIT v. Sivananda Mills Ltd. [1985] 156 ITR 629. He also drew our attention to the director’s report of the assessee company vide page 9 of the Paper Book in Volume I of 1979-80 and also page 9 of the Paper Book, Volume I for 1980-81 in evidence of the fact that the assessee has been making payment of bonus in excess of the limits specified under the payment of Bonus Act since its inception. He also drew our attention to a letter elated 5-3-1982 to the I.T.O. while replying to the draft assessment order for the assessment year 1979-80 to show the circumstances under which it had to pay bonus in excess of the prescribed limits.
17.5 We have carefully considered the facts and circumstances of the case, the material on record and the arguments advanced by both the sides. On a perusal of the director’s report of the assessee company and the assessment order of the I.T.O. it is seen that the assessee company had been making payment of bonus in excess of the limits specified under the payment of Bonus Act from its inception. On a perusal of the letter dated 5-3-82 addressed to the I.T.O. in reply to the draft assessment order for the assessment year 1979-80 vide page 66 of the Paper Book, Volume I, for the assessment year 1979-80 it is evident that the company has decided to pay 20% bonus to avoid unrest in the plantation. It is further stated in the letter that during the financial year ending in June 1980, the assessee company declared minimum bonus for which there was a great agitation in the plantation followed by go-slow and a strike in one of the properties for 60 days which perhaps was the longest strike in the plantation regarding the bonus matter. The payment of bonus paid in excess of the provision made is also a customary bonus inasmuch as the estates were purchased from a company called M/s. Nonsuch Tea Estate which was paying customary bonus when the estates were under the management of M/s. Nonsuch Tea Estate. The Calcutta Bench C of the Tribunal in the case of Gopalpur Tea Co. Ltd. (supra) has held that bonus in consequence of an agreement or a custom might be allowed either Under Section 36(1)(ii) or Under Section 37. The Tribunal also observed that the payment of bonus in excess of the limit is a practice in the tea industry. Further, the Madras High Court in the case of Sivananda Mills Ltd. (supra) held that bonus other than the bonus paid under the Bonus Act is allowable Under Section 37. The I.T.O. himself did not object to the payment of bonus @ 20% in the first year. Further it is the case of the revenue before us that the claim of bonus in excess of the limits provided under the Bonus Act should be disallowed. The revenue did not dispute the finding given by the C.I.T.(A) that the bonus paid in excess of the provision in the subsequent years is either a customary bonus or bonus paid under an agreement. The facts as they were on the record, we are of the opinion that the C.I.T.(A) is perfectly in order in allowing the aforesaid claims of the assessee and we do not find any reason to interfere with the order of the C.I.T.(A). The appeal filed by the revenue on this count is dismissed.
17.6 Another point to be noted is that for the assessment year 1979-80, the assessee has raised a ground claiming bonus in excess of the minimum but did not press this ground as the same is allowed by the C.I.T.(A) in the assessment year 1980-81 on the basis of actual payment.
18.1 The next ground raised by the revenue is regarding the excess salary paid to the directors for 1980-81 and 1981-82. The learned departmental representative heavily relied upon para 10 of the assessment order for the year 1980-81 and supported the finding given by the I.T.O. The learned counsel for the assessee, on the other hand, contended that since these directors are the family members, they are devoting their full time to the services of the company. He contended that the I.T.O. gave his finding mainly on the basis of the academic qualifications of the directors which is not relevant to decide the issue. According to him, Sailesh T. Bhansali is a member of the Tea Board, Calcutta, and also a Member of Regional Board of State Bank of India and Samresh T. Bhansali, the other director, is holding the position of a Committee Member in Tea Trade Association of Cochin. Considering their experience in the tea trade, the salary paid to them, according to him, is very reasonable. He further contended that at the relevant point of time there was only one person drawing a salary of more than Rs. 36,000, and naturally the work load was more and the directors were looking after the work both at Cochin and the estates. He, therefore, contended that the salary paid to them is very reasonable.
18.2 We have carefully considered the facts and circumstances of the case, the material on record and the arguments advanced by both the sides. The fact that Sailesh T. Bhansali, a Member of the Tea Board, Calcutta, is also a Member of the Regional Board of State Bank of India and Samresh T. Bhansali, the other director, is holding the position of Committee Member in the Tea Trade Association of Cochin, clearly goes to show that the aforesaid persons have got lot of experience in tea trade. The other factor that at the relevant point of time there was only one person drawing a salary of more than Rs. 36,000 will naturally compel the directors to share the work load. We are, therefore, of the opinion that the academic qualification which was taken as a basis by the I.T.O. to hold that the salary paid to the aforesaid directors is excessive is not relevant on the facts and in the circumstances of the case. We, therefore, hold that the remuneration paid to all the directors is quite reasonable and the C.I.T.(A) is fully justified in deleting the disallowance made by the I.T.O. The appeal filed by the revenue on this count is dismissed.
19.1 The next ground is that the C.I.T.(A) erred in treating the company as an industrial company in the assessment years 1980-81 & 1981-82. The learned departmental representative supported the order of the I.T.O. whereas the learned counsel for the assessee supported the order of the C.I.T.(A). He further relied upon the Board’s Circular No. 103 dated 17-2-1973.
19.2 We have carefully considered the rival submissions. The I.T.O. in his order for the assessment year 1981-82 has held that the activity of the assessee in Cochin office is purely trading inasmuch as they deal only in purchase and sale of tea. He, therefore, concluded that this is not an industrial company. The Cochin office, in our opinion, cannot be isolated from the assessee’s manufacturing activities in the estates. Further it cannot be said that Cochin office is merely engaged in the trading activity as blending activity is also involved before sale. Applying the ratio laid down by the Calcutta High Court in G.A. Randerian Ltd. v. CIT [1983] Taxation 69(1)-23, we hold that blending amounts to processing activity and hence it is an industrial activity. We, therefore, fully agree with the finding given by the C.I.T.(A) and confirm his order. The appeal filed by the revenue on this count is dismissed.
20.1 The next ground raised by the revenue is regarding the claim in respect of replanting and upkeep of the new clearings allowed by the C.I.T.(A) for the year 1980-81. The C.I.T.(A) allowed the claim of the assessee following the Circular of the Board No. 37 of 1932 dated 7-12-1932. Since the circular is clear on the point of expenditure on the maintenance which is nothing but upkeep of tea garden, we fully agree with the finding given by the C.I.T.(A) on this count. This circular read with a subsequent clarification issued by the Board will go to show that replanting expenditure should be treated as capital expenditure. But as per Sub-clause (2) of Rule 8 it is clear that deduction should be given in respect of the cost of planting bushes in replacement of bushes that have died or become permanently useless in an area already planted if such an area has not previously been abandoned. Following the aforesaid rule, we agree with the conclusion arrived at by the C.I.T.(A) that the expenditure claimed by the assessee for replanting should be allowed as a revenue expenditure but not on the basis of the circular as held by the C.I.T.(A). The appeal filed by the revenue on this count is, therefore, dismissed.
21. The next ground is regarding grant of investment allowance to the machinery installed by the assessee in the Cochin office for the assessment year 1981-82. Since in the earlier ground we have held that the activities of Cochin office is industrial activity, we hold that the assessee is entitled to investment allowance. The appeal filed by the revenue on this count is dismissed.
22.1 The next ground is regarding the bonus claim amounting to Rs. 5,05,808 for earlier years. This is an additional ground raised before the C.I.T.(A). For the assessment year 1981-82 the assessee claimed a sum of Rs. 5,05,808 being bonus paid to the workers for the period 1975-76. The I.T.O. rejected the claim for two reasons (i) it related prior to the purchase of the estates by the assessee and (ii) the date of award of Industrial Labour Tribunal being 29-1-79, was prior to the relevant previous year. Since the Award was dated 29-1-79 which was outside the previous year relevant to the assessment year 1981-82, the assessee has sought to withdraw the ground of appeal relating to the disallowance of that claim for the assessment year 1981-82. Side by side the assessee has taken an additional ground for 1980-81 for allowing the bonus paid for that year as the date of the relevant award of the Tribunal fell within the previous year of 1980-81. The I.T.O.’s stand is that the bonus related to the year prior to the purchase and hence constituted the liability taken over from the previous owner. In this view of the matter the bonus payable, according to him, was capital expenditure. The assessee’s stand, on the contrary, is that the bonus is payable by virtue of the assessee being a businessman exploiting an estate and without paying the bonus the business cannot also be run even for a day and hence the expenditure becomes revenue expenditure incurred after taking over of the estate. Since the payment has become necessary by virtue of the award dated 29-1-79 which is within the relevant previous year for 1980-81 the assessee is entitled to claim this as a deduction in the year 1980-81. After hearing the learned counsel for the assessee, the C.I.T.(A) held that the bonus of Rs. 5,05,808 relating to the period 1975-76 is a revenue expenditure for the reasons stated by him in his order. As against this order of the C.I.T.(A) the revenue is in appeal before us.
22.2 The departmental representative heavily relied upon the order of the I.T.O. He contended that the earlier year’s liability cannot be allowed in this year. The learned counsel for the assessee on the other hand, referred to the agreement entered into by the company with Nonsuch Tea Estate which is at pages 232 to 269 of the Paper Book, Volume IV, for 1978-79 and particularly drew our attention to the middle portion at page 236(c) wherein it is specifically mentioned that all dues (including any bonus and other benefits or additional benefits) that may be determined after the date of sale to be payable to the labour or staff whether in respect of services under the vendor or under the purchaser shall be paid by the purchaser. He, therefore, contended that since the amount became payable to the workers after the Award of the Labour Court, which falls within the accounting year relevant to the assessment year the C.I.T.(A) is fully justified in allowing the same.
22.3 We have carefully considered the rival submissions. The award is passed by the Industrial Tribunal, Madras, dated 29-1-1979 which falls in the accounting year relevant to the assessment year in question. Further on a perusal of the sale deed dated 24-9-76 it is seen that all dues (including any bonus and other benefits or additional benefits) that may be determined after the date of sale to be payable to the labour or staff whether in respect of services under the Vendor or the purchaser shall be paid by the purchaser. Therefore, the assessee company was forced to make the payment, though it is an earlier year’s liability, in pursuance of the aforesaid condition laid down in the sale deed. We are, therefore, of the opinion that the C.I.T.(A) has rightly allowed the claim made by the assessee and we fully agree with the order of the C.I.T.(A). This view is also supported by the decision of the Madras High Court in the case of Associated Printers (Madras) (P.) Ltd. v. CIT [1961] 43 ITR 281. The appeal filed by the revenue on this count is dismissed.
23. The next ground raised by the revenue relates to the assessee’s claim with regard to the additional depreciation for the assessment year 1981-82. This claim has been allowed by the I.T.O. in the assessment year itself. However, the assessee appealed to the C.I.T.(A) on the point and the C.I.T.(A) allowed the same by mistake. It is requested by the assessee’s counsel that while revising the assessment on the basis of the C.I.T.(A)’s order the assessee requested the I.T.O. not to grant any further additional depreciation. The I.T.O. also did not grant further additional depreciation in the revised order. The appeal filed by the department on this count is, therefore, allowed and this is purely academic.
24.1 The next ground raised by the revenue is regarding interest claim of Rs. 2,30,000 for the assessment year 1981-82. As per schedule 10 of the accounts a sum of Rs. 12,85,523 was due from the directors and other officers of the company as on the last day of the previous year. The I.T.O., however, found that this amount was exclusively due from one of the directors Shri T.A. Bhansali. The entire capital and reserves and surpluses of the assessee company were held as fixed assets. The company had borrowed money from banks and outsiders on interest. A huge amount of Rs. 47,30,998 had been debited as interest on such borrowings. No interest was charged on the amount advanced to Shri T.A. Bhansali. The I.T.O., therefore, felt that by diverting the borrowed funds to one of the directors free of interest the assessee’s claim for deducting the entire interest as a business expenditure stood eroded. He accordingly disallowed Rs. 2,30,000 being interest @ 18% on the amount due from T.A. Bhansali.
24.2 On appeal, it was contended by the learned counsel for the assessee before the C.I.T.(A) that out of the amounts due from Shri T.A. Bhansali a sum of Rs. 8,34,646 was due from him on the very formation of the company and further a sum of Rs. 4,78,100 advanced to him for purchasing a flat was also treated as a deemed dividend in his hands. It is, therefore, contended that the amount due from Shri T.A. Bhansali was not from any borrowed funds for which the interest can be allowed. It is further contended that, in any case, bulk of the borrowings were not during the year as is evident from the debit balance on the formation of the company. It is also stated that the amount which is considered as dividend and taxed in the hands of the person should not again be treated as loan, for disallowance of interest. After hearing the learned counsel for the assessee, the C.I.T. (A) deleted the disallowance made by the I.T.O. for the reasons stated by him in his order. As against this order of the C.I.T.(A) the revenue is in appeal before us.
24.3 The learned departmental representative relied upon the order of the I.T.O. whereas the learned counsel for the assessee reiterated the contentions raised before the C.I.T. (Appeals).
24.4 We have carefully considered the rival submissions. The sum of Rs. 12,85,523 which was due from one of the directors Shri T.A. Bhansali is made up of two amounts, namely, Rs. 8,34,646 and Rs. 4,78,100. The C.I.T.(A) found that the sum of Rs. 8,34,646 was due from Shri T.A. Bhansali on the very formation of the company and the sum of Rs. 4,78,100 advanced to him for purchasing a flat was also treated as a deemed dividend in his hands. The amount of Rs. 8,34,646 outstanding right from the formation of the company cannot represent any borrowings by the assessee company on interest. In respect of the other amount, namely, Rs. 4,78,100 the same had been treated as deemed dividend in the hands of the director which has come out of the profits of the company and not out of the borrowings of the company. We, therefore, fully agree with the order passed by the C.I.T.(A) in deleting the disallowance made by the I.T.O. on this count and we confirm the order of the C.I.T.(A) on this count. The appeal filed by the revenue on this count is dismissed.
25. In the result, the appeals in I.T.A. No. 538(Coch)/83 and I.T.A. No. 363 (Coch) 85 of the department are dismissed and all others are allowed in part.
Sd/- (P.I. Mohan Singh)
JUDICIAL MEMBER
A. Satyanarayana, Accountant Member
26. I have carefully gone through the order of my learned brother. However, I am unable to agree with his findings in the assessee’s appeals on ground No. 2 relating to commission paid to M/s. Tara Agencies for the assessment years 1978-79 and 1979-80, ground No. 6 in respect of commission paid to M/s Bhansali Brothers for the assessment year 1979-80 and ground No. 5 in respect of cash compensatory support for the assessment years 1978-79 to 1981-82.
27. For the assessment year 1978-79, the Income-tax Officer after considering the services rendered by M/s Tara Agencies to the assessee, as explained by the assessee in its letter dated 20-3-1981, came to the conclusion that “whatever services were rendered by the firm to the assessee-company to the extent proved were not worth the remuneration paid as commission at such a high rate as 5% on auction sales”. He, therefore, involved the provisions of Section 40A(2)(a) and curtailed the allowance to 2% of the auction sales. For the assessment year 1979-80, he noticed that one of the recognized tea brokers, namely, Forbes Ewart and Figgis Pvt. Ltd. were also sending to their clients detailed market reports which were in fact more detailed than the information furnished by M/s Tara Agencies to the assessee, that in addition they were sending their highly paid and qualified technicians to the estates of their clients for advising them on the quality of tea and method of improvement thereon and for these services the said company was not charging anything extra over the 1% commission. So the I.T.O. came to the conclusion that the commission payment to M/s Tara Agencies was very much on the high side. He, therefore, allowed deduction in respect of commission payments only at 1% of the direct sales and ‘nil’ on auction sales as the firm was not entitled to conduct auction. It will be seen that the assessee claimed commission in these two years to M/s Tara Agencies at the rate of 5% on the total sales effected through the Cochin auction as per the agreement dated 9-7-1976.
28. Before the Tribunal, the assessee explained the services rendered by M/s Tara Agencies as “testing and tasting of tea and fixing the rates while sending tea for sale in the auction, timing of the marketing of the tea produced, monitoring the sales done by the brokers J. Thomas & Co. Pvt. Ltd. and advising on the market side and the grades to be produced and mode of packing etc.” In my opinion, these services by M/s Tara Agencies to the assessee-company cannot be said to be more exhaustive and comprehensive than the services rendered by Forbes Ewart and Figgis Pvt. Ltd. to their clients. The only extra service rendered by M/s Tara Agencies to the assessee-company is as a tea taster. Considering all these things the CIT(A) has allowed payment of commission at the rate of 2%. At the time of hearing the departmental representative filed a statement showing details of auction sales of tea conducted by (1) Carrit Moran & Co. Pvt. Ltd., (2) Contemporary Tea Services (P) Ltd., and (3) Forbes Ewart & Figgis Pvt. Ltd. wherein they received commission at the rate of 1% only. Further the assessee-company had to pay brokerage to J. Thomas & Co. for the sales effected by them in auction. This brokerage is in addition to the commission paid to M/s. Tara Agencies by the assessee. So in my opinion the services rendered by M/s. Tara Agencies to the assessee-company did not warrant commission payment of more than 2% already allowed by the CIT(A). However, there is another contention of the assessee that since tax liability of the recipient firm and its partners on this commission amount is much more than the tax reduction in the case of the assessee-company, there is no avoidance of tax by payment of the commission to M/s. Tara Agencies. In support of this contention he filed a statement (page 206 of Paper Book, Vol. IV for the assessment year 1978-79) wherein it is stated that the allowance of the entire commission at 5% would result in reduction of tax of Rs. 19,94,049 in the hands of the assessee as against the” increased tax liability of Rs. 20,89,760 in the hands of the recipient firm M/s Tara Agencies and its partners. He also relied on the decision in 159 ITR 843 and urged that since the payment of commission was not a device to reduce tax liability on the part of the assessee this should be allowed in full. These figures of tax incidence on the assessee-company and the recipient company and its partners was filed for the first time before the Tribunal. This claim of the assessee requires investigation by the I.T.O. So, in my opinion this matter should go back to the I.T.O. to investigate and verify the correctness of the assessee’s contention in respect of the tax incidence in the hands of the assessee-company vis-a-vis the tax incidence on M/s. Tara Agencies and its partners and find out whether there is any tax avoidance or not. So I remit the matter back to the I.T.O. to investigate and verify the correctness of the assessee’s claim that there is no tax avoidance by paying 5% commission to M/s. Tara Agencies. If the I.T.O. finds on verification that there is no tax avoidance by the assessee-company, then this 5% commission is to he allowed in full. Otherwise the assessee is to be allowed commission only at the rate of 2% as already allowed by the CIT(A) and confirmed by me earlier.
29. As regards the commission paid to M/s. Bhansali Brothers of Rs. 3,12,609 in the assessment year 1979-80, the I.T.O. disallowed the same on the ground that the assessee had not produced any evidence regarding the assessee’s eligibility for deduction of the said amount and the CIT(A) confirmed the same, The agreement with M/s. Bhansali Brothers dated 1-7-1977 was only in respect of one estate, namely, High Forest Estate. The services rendered by this firm and the services rendered by M/s Tara Agencies were similar. The arguments of the assessee regarding this claim are also identical to the arguments regarding the claim for deduction of the commission paid to M/s. Tara Agencies. Following my reasonings in paragraph 28 above, I hold that the assessee is entitled to deduction of 2% only as commission paid to M/s. Bhansali Brothers. However, as in the case of Tara Agencies, the matter is remitted back to the I.T.O. to investigate and verify the correctness of the assessee’s contention that there is no tax avoidance by the assessee inasmuch as the tax liability of the recipient firm and its partners was much more than the reduction obtained by the assessee by paying commission at the rate of 5%. If it is found that there is no tax avoidance then the entire 5% is to be allowed. Otherwise the assessee would be entitled to deduction of only 2%.
30. Regarding the taxability of the cash compensatory support, I am of the view that it is taxable for the following reasons: The Delhi ‘B’ Bench of the Tribunal decided the issue in favour of the assessee in the case of Gedore Tools (India) (P.) Ltd. (supra) and while Delhi ‘A’ Bench in the case of Reliance International Corp. Ltd. (supra), and also the Cochin Bench in the case of Kesaria Tea Co. Ltd. (supra) decided the issue in favour of the revenue. In the present case my learned brother had preferred to follow the decision of the Delhi ‘B’ Bench which was in favour of the assessee in preference to the later decision of the Delhi ‘A’ Bench referred to above. In the case decided by the Delhi ‘B’ Bench, that Bench did not consider the decisions of the Delhi High Court in the case of Addl. CIT v. Handicrafts & Handloom Export Corpn. [1982] 133 ITR 590, and Handicrafts & Handloom Export Corpn. v. CIT [1983] 140 ITR 532 whereas in the case decided by the Delhi ‘A’ Bench, the Bench had considered several decisions of various High Courts including the decisions of the Delhi High Court referred to above. The Delhi High Court held in Handicrafts & Handloom Export Corpn. ‘s case (supra) as under:
There is a basic difference between grants made by a government or from public funds generally to assessees in a particular line of business or trade, with a view to helping them in the trade or to supplement their general revenues or trading receipts and not earmarked for any specific or particular purpose and a case of a private party agreeing to make good the losses incurred by an assessee on account of a mutual relationship that subsists between them. The former are treated as trading receipts because they reach the trader in his capacity as such and are made in order to assist him in the carrying on of the trade. The latter are in the nature of gifts or voluntary payments motivated by personal relationship and not stemming from any business considerations.
The later decision of the Court of Sessions (First Division) in IRC v. Falkirk Ice Rink Ltd. 51 TC 42/ [1986] 24 Taxman 334(Tax Mag.) is also a pointer to the above view. I am unable to subscribe to the view taken by the Delhi ‘B’ Bench and I would prefer to follow the decision of the Delhi ‘A’ Bench of the Tribunal and the decision of the Delhi High Court (supra). I, therefore, hold that the amounts received as cash compensatory support are taxable in the hands of the assessee for all the years under consideration.
ORDER
G. Krishnamurthy, President
1. In this case, the points of difference referred as Third Member to me are :
1. Whether, on the facts and in the circumstances of the case, the assessee is entitled to claim deduction of commission payment of 5% to M/s. Tara Agencies?
2. Whether, on the facts and in the circumstances of the case, the assessee is entitled to claim deduction of commission payment of 5% to M/s. Bhansali Brothers?
3. Whether, on the facts and in the circumstances of the case, the cash compensatory support received by the assessee from the Government is taxable in the hands of the assessee?
Questions 1 and 2 raise a common issue and the answer given to question No. 1 will serve as the answer to the other question.
2. I therefore deal with the facts relevant to question No. 1 which are: The assessee, a private limited company was incorporated on 9-7-1976 to take over the tea business heretofore carried on by a partnership concern called Mahavir and Company. The partnership of Mahavir and Company was doing tea business from 1952. It was started as a partnership concern between three brothers and sometime in 1972 two of the three brothers retired and the sons of the remaining brother were admitted as partners.
3. There were four different tea estates which were purchased by the assessee, M/s. Mahavir Plantations Pvt. Ltd., for a total consideration of Rs. 1.45 crores from the company called Nonsuch Tea Estates Ltd., on 9-7-1976. With a view to help the assessee-company for marketing its products at the most advantageous prices so as to be able to withstand the fierce competition for the sale of tea in the market, it claimed that it. had to enter into an agreement with another concern called M/s. Tara Agencies to provide services for marketing its tea on payment of 5% commission. For my present purpose, which will unfold itself hereafter, I thought it unnecessary to deal with all the terms of the agreement. This firm of M/s. Tara Agencies was in existence since 1970. Some of the directors of the assessee-company and partners of M/s. Tara Agencies are common.
4. The Income-tax officer who examined the claim of the assessee found that the payment of commission of 5% to M/s. Tara Agencies was excessive, and un-reasonable, having regard to the legitimate needs of the business, and the benefits derived by it. Invoking the provisions of Section 40A(2) of the I.T. Act, 1961, he allowed only 2% commission in 1978-79 and 1% commission in 1979-80 and disallowed the balance. The agreement to pay commission was revoked thereafter.
5. When the matter came on appeal before the CIT(A) he agreeing with the Income-tax Officer’s view confirmed the disallowance to the extent of excess over 2%. There was a further appeal to the Tribunal. The Members of the Tribunal who heard this matter could not agree on certain conclusions.
6. It was not the case of the Revenue at any stage of the proceedings that the arrangement for payment of commission to M/s. Tara Agencies was either fictitious, or the payment was not at all made or services were not rendered at all, The point canvassed for was whether having regard to the nature and services rendered by M/s. Tara Agencies, the payment of commission of 5% was unreasonable, excessive or not.
7. The learned Judicial Member in the operative portion of his order has observed as under:
From the orders of both the I.T.O. and the C.I.T.(A) it is seen that they have not disputed the genuineness of the agreement and rendering of services by M/s. Tara Agencies to the assessee company. When once the aforesaid two facts are not disputed and the object of entering into an agreement by the assessee company with M/s. Tara Agencies is not for avoidance of tax, the tests laid down by their Lordships of the Punjab and Haryana High Court reported in 159 ITR 843 are fully satisfied and since the agreement is genuine and the payment is bonafidely made and the object is not avoidance of tax liability the commission @ 5% paid by the assessee company to M/s Tara Agencies should be allowed as a deduction in the hands of the assessee and the appeal filed by the assessee on this count is allowed.
The learned Accountant Member in the dissenting order however held as under :
These figures of tax incidence on the assessee-company and the recipient company and its partners was filed for the first time before the Tribunal. This claim of the assessee requires investigation by the I.T.O. So in my opinion this matter should go back to the I.T.O. to investigate and verify the correctness of the assessee’s contention in respect of the tax incidence in the hands of the assessee-company vis-a-vis the tax incidence on M/s. Tara Agencies and its partners and find out whether there is any tax avoidance or not. So I remit the matter back to the I.T.O. to investigate and verify the correctness of the assessee’s claim that there is no tax avoidance. If the I.T.O. finds on verification that there is no tax avoidance by the assessee-company then this 5% commission is to be allowed in full. Otherwise the assessee is to be allowed commission only at the rate of 2% as already allowed by the CIT(A) and confirmed by me earilier.
(Emphasis supplied)
It will be seen from the above quotations that both the Members agreed on the view that the commission at 5% was reasonable and had to be allowed as a deduction. That is, the Accountant Member did not differ from the Judicial Member’s view that the agreement was genuine, that services were rendered by M/s. Tara Agencies to the assessee-company and the payment of commission was necessary for the purpose of the assessee’s business. There was, however, a difference of opinion on the additional reason given by the Judicial Member. For the first time before the Tribunal the assessee furnished figures to show that by this arrangement of payment of commission there was no tax avoidance. The Judicial Member accepted the statement and held by specifically referring that there was no tax avoidance that the tests laid down by the Punjab & Haryana High Court in 159 ITR 843 were fully satisfied. But the learned Accountant Member was not prepared to accept this additional reason viz., absence of tax avoidance. He seemed to have felt that this aspect required investigation by the Income-tax Officer. He held, therefore, that the figures furnished before the Tribunal for the first time should be investigated into by the Income-tax Officer and only after satisfying that there was no tax avoidance the full amount of commission of 5% must be allowed. That is to say, there was no difference of opinion between the two Members on the allowance of quantum of commission of 5% provided there was no tax avoidance. According to the learned Accountant Member, as I said before, if on investigation it is found that there was no tax avoidance the entire amount of 5% commission must be allowed or else only 2% of commission must be allowed. Since the Judicial Member proceeded on the basis that the figures furnished were correct and, therefore, there was no tax avoidance, to my mind it appears that the point of difference between the two Members was on the aspect as to whether the assessee is entitled to the deduction of commission at 5% to M/s. Tara Agencies. This refers to a stage which has not yet been arrived at and which would only arise in the event of a further analysis of the facts showing that there was no tax avoidance.
8. Now, therefore, the real difference of opinion embedded in the question is whether any investigation into the tax avoidance aspect with reference to the tax incidence in the hands of the assessee-company vis-a-vis the tax incidence in the hands of M/s. Tara Agencies and its partners is called for or not, though the question as formulated by the Members is couched in a language which does not expressly highlight this aspect. Therefore, I am in complete agreement with the Accountant Member’s view that in view of the data having been furnished before the Tribunal and relied on for the first time for the position that there was no tax avoidance requires to be verified in the manner suggested by the Accountant Member. If on verification it is found as claimed by the assessee that there was no tax avoidance with reference to the criteria spelt out by the Accountant Member then the entire amount of 5% commission must be allowed as a deduction. Whether 5% commission should be allowed or 2% commission should be allowed, therefore, depends upon the results of the verification of facts which remains to be done. With these findings the matter will now go to the Bench to pass appropriate orders thereon to get these facts verified. If on verification it is established that there was no tax avoidance with reference to the perspective spelt out by the Accountant Member, then the entire amount of 5% commission has to be allowed – this I say because there is no disagreement between the Members on this point – but if it is found otherwise then the question would be whether 5% commission should be allowed or only 2% commission should be allowed, that is a matter on which the Bench has to take a decision in the light of the results of the verification of the facts. As at present that question does not arise for rendering an answer.
9. Regarding the second question I am refraining from relating the facts in full dealing with the payment of commission to M/s. Bhansali Brothers which relates only to the assessment year 1979-80 because according to the learned Accountant Member the answer to that question would also depend upon the verification of the aspect of tax avoidance. His observations on this matter is relevant and I reproduce them below:
As regards the commission paid to M/s. Bhansali Brothers of Rs. 3,12,609 in the assessment year 1979-80, the I.T.O. disallowed the same on the ground that the assessee had not produced any evidence regarding the assessee’s eligibility for deduction of the said amount and the CIT(A) confirmed the same. The agreement with M/s. Bhansali Brothers dated 1-7-1977 was only in respect of one estate, namely, High Forest Estate. The services rendered by this firm and the services rendered by M/s. Tara Agencies were similar. The arguments of the assessee regarding this claim are also identical to the arguments regarding the claim for deduction of the commission paid to M/s. Tara Agencies. Following my reasonings in paragraph 28 above, I hold that the assessee is entitled to deduction of 2% only as commission paid to M/s. Bhansali Brothers. However, as in the case of Tara Agencies, the matter is remitted back to the I.T.O. to investigate and verify the correctness of the assessee’s contention that there is no tax avoidance by the assessee inasmuch as the tax liability of the recipient firm and its partners was much more than the reduction obtained by the assessee by paying commission at the rate of 5%. If it is found that there is no tax avoidance then the entire 5% is to be allowed. Otherwise the assessee would be entitled to deduction of only 2%.
(Emphasis supplied)
My answer to the second question will be the same as the answer to the first question. This will dispose of the first two points of difference of opinion.
10. As regards the third question which deals with the taxability of cash compensatory support received by the assessee-company from the Government, this matter now stands concluded by a decision of a larger Bench of five Members of the Tribunal in the case of Gedore Tools (India) (P.) Ltd. v. IAC [1988] 25 ITD 193 (Delhi) (SB). Though the departmental representative contested the correctness of this decision and stated it requires reconsideration, and should be followed, since no distinguishing features have been brought to my notice to deviate from the view expressed by the larger Bench, respectfully following the view expressed by the larger Bench with which I entirely agree, I hold that the cash compensatory support received by the assessee from the Government is not taxable as revenue receipt. I, therefore, agree with the view expressed by the learned Judicial Member in this regard.
11. The matter will now go before the regular Bench for passing the orders in accordance with the opinion expressed by me as above.