The Court : The subject matter of challenge in this appeal is a judgement and order dated 27th April, 2007 passed by the Income Tax Appellate Tribunal " E " Bench, Kolkata in ITA No.288 (Kol) of 2006 and ITA No.374(Kol) of 2006 both pertaining to the assessment years 2002-03. There were two appeals because both the revenue and the assessee had challenged the order of the CIT(A). The appeal preferred by the revenue was dismissed and the appeal preferred by the assessee was partly allowed. The assessee has come up in appeal. The following questions of law were formulated when the matter was admitted by this Court on 7th February, 2008:"1. Whether on a true and proper interpretation of Section 80IB of the Income Tax Act, 1961 the Tribunal was justified in law in holding that income from import and sale of inks, rent and interest recovered from employees, interest on margin money furnished for obtaining banking facilities, interest on short term deposits, interest from debtors and miscellaneous income all aggregating to
Rs. 9,59,86,164/- did not form part of profits and gains derived from the eligible business within the meaning of the said section for the purpose of computing the amount of deduction? 2. Whether the Tribunal was justified in law in upholding the disallowance of Rs. 25 lacs out of business promotion expenditure incurred by the appellant wholly and exclusively for the purposes of its business ignoring the material facts and the settled legal position that the Assessing Officer could not substitute his own views in place of those of the businessman who was the best judge of commercial expediency and its purported findings in that behalf are arbitrary, unreasonable and perverse?" The Assessing Officer straightway refused to allow deduction under Section 80 IB with respect to the trading profit amounting to a sum of Rs. 9,29,24,119/-. The refusal on the part of the Assessing Officer to allow the deduction as regards the aforesaid sum was perfectly justified and no submissions were advanced. Some submissions were advanced with regard to the refusal on the part of the Assessing Officer to allow the deduction with respect to income arising out of interest recovered from employees, interest on margin money, interest on short term fixed deposits, interest from debtors, rent realised from the employees which aggregated to a sum of Rs. 30 lacs approximately. Mr. Agarwal, learned advocate for the respondent/revenue, submitted that there is nothing to show that the income of about Rs. 30 lacs was derived from the manufacturing activities. He submitted that unless a link between the income and the manufacturing activities is established, the same did not become eligible for deduction under Section 80 IB. We find that the assessee has not clearly established that the income was derived from manufacturing activities or that the income is directly relatable to the manufacturing activities. The assessee admittedly had trading activity. It is not clear as to whether the income, as indicated above, aggregating to approximately Rs. 30 lacs arose out of activities relating to manufacturing activity. The question no.1, for lack of appropriate evidence, is answered in the affirmative and in favour of revenue. In so far as the question no.2 is concerned, Mr. Agarwal drew our attention to paragraph 4.2 of the judgement of the learned Tribunal which reads as follows:"At the time of hearing before us, it is submitted by the learned counsel that the expenditure was incurred for the purpose of business. He has furnished the details of the expenditure which is placed at page-186 of the paper book. However, he fairly admitted that the assessee does not have the details with regard to the names of the parties to whom such articles were distributed. We have gone through the details furnished before us and we find that it was mainly with regard to purchase of suite length, sarees, silver bars, colour TVs, music system, jewellery, watches etc. In the absence of the details of names and address of the persons to whom these items were distributed, the A.O. was unable to verify whether the expenditure was incurred for the purpose of business promotion, as claimed. The expenditure incurred was disproportionately high as compared to immediately preceding years. In view of the totality of the above facts, in our opinion, some disallowance out of business promotion expenditure was certainly called for. The disallowance was made by the A.O. at Rs. 50,00,000/- out of the total expenditure of Rs. 1.11 crores was certainly excessive. Considering the facts of the case and the arguments of both the sides, in our opinion, the disallowance sustained by the C.I.T.(A) at Rs. 25 lakhs is reasonable. We, accordingly, uphold the order of the C.I.T.(A) on this point and reject ground No.3 of the assessee's appeal as well as ground No.2 of the Revenue's appeal. Mr. Agarwal contended that there was clear admission by the learned counsel that the assessee had failed to furnish the details with regard to the names of the parties to whom such articles were distributed. Mr. Khatian disputed this fact. He drew our attention to the order of the CIT(A) appearing at page 77 of the Paper Book and internal page 27 of the order of the CIT(A) in order to show that the nature of expenses, name and address of the party to whom paid and the total amount paid during the year were duly furnished by the assessee. The assessee, it appears, had filed a written submission before the C.I.T.(A). The C.I.T.(A) on its part has extensively quoted from the written submissions. The C.I.T.(A) has also quoted the submissions in that regard from which it appears that all particulars as regards the nature of expenses, name and address of the parties to whom the items were given were duly furnished. The C.I.T.(A) has also quoted in its judgment the following submissions made on behalf the assessee:-"Accordingly, during the year under consideration, the appellant made various gifts to the middle and lower level functionaries of the company, to the business associates, to the various customers and dealers for purpose of company's business. List of direct customers and dealers to whom the above gifts were given is enclosed herewith and marked as Annexure-2. The above efforts have resulted in an expansion in the market share of commercial inks of the appellant by 41% in Assessment Year 2003-04 as compared to Assessment Year 2002-03 with a corresponding increase in turnover of commercial inks by 57% in the next assessment year." Mr.Khaitan also drew our attention to the views expressed by the statutory auditors in their report appearing at page 80 of the paper book, which include the comments as follows:-"During the course of our examination of the books of account carried on in accordance with the generally accepted auditing practices in India, we have not come across any personal expenses which have been charged to Profit & Loss account, nor have we been informed of such cases by the management other than those payable under contractual obligations and/or accepted business practices." Mr.Khaitan submitted that the statutory auditors have clearly stated that they did not come across any personal expenses, which were charged to the profit and loss account. The question was also considered by the internal audit and the question raised by them were also duly answered and the views were also considered by the audit committee. The purpose of drawing our attention to the aforesaid pieces of evidence is to show that the learned advocate out of misapprehension of facts may have submitted that the assessee had not been able to furnish the details with regard to the names of the parties to whom articles were distributed. But in reality those particulars were duly furnished and such particulars would also appear from the order under challenge before the learned Tribunal that is the order passed by the C.I.T.(A). He tried to strengthen his submission by drawing our attention to the following part of the order of the assessing officer."As the assessee has not furnished an explanation regarding the allowability and reasonableness of the aforementioned expenditure and also in view of the comment of the Internal Auditor, Rs. 50,00,000/- is being disallowed." The Commissioner of Appeal did not disallow the sum of ? 25 lakhs on the ground that there was any lack of details as regards the recipients of the gifts. Whether the business promotion expenditure incurred by the assessee is an allowable expenditure is a question which need not be answered by us because had it not been an allowable expenditure, the question of restricting it to any sum by disallowing Rs. 50 lakhs as done by the assessing officer or by disallowing it to the extent of Rs. 25 lakhs would not have arisen. The fact that the assessing officer restricted the disallowance to a sum of Rs. 50 lakhs and the C.I.T.(A) restricted the disallowance to a sum of Rs. 25 lakhs goes to show that it is an allowable expenditure. Therefore, that question does not arise for determination. The question which arises for determination is whether the disallowance to the extent of Rs. 50 lakhs by the assessing officer and to the extent of Rs. 25 lakhs by the C.I.T.(A) which subsequently got the seal of approval from the Tribunal was a correct disallowance. If there is no dispute that the amount has been spent wholly and exclusively for the purpose of business, the question of disallowance of a sum of Rs. 50 lakhs or Rs. 25 lakhs should not have been arisen.
We are also supported, in our view, by a judgment of the Apex Court in the case of C.I.T., Bombay Vs. Walchand and Co. Pvt. Ltd. reported in (1967) 65 ITR 381 wherein the following views were expressed :-
"In paragraph 2 of their order the Tribunal correctly set out the principle applicable to claims for deduction of expenditure incurred in payment of remuneration to its employees by the assessee. But for partially rejecting the claim for allowance of the amount paid, no reasons were recorded. If the Tribunal was satisfied that the expenditure was laid out or expended wholly and exclusively for the purpose of the business of the assessee there was no reason why the full amount expended should not have been allowed. It is open to the Tribunal to come to a conclusion either that the alleged payment is not real or that it is not incurred by the assessee in the character of a trader or that it is not laid out wholly and exclusively for the purpose of the business of the assessee and to disallow it. But it is not the function of the Tribunal to determine the remuneration which in their view should be paid to an employee of the assessee. When a claim for allowance under section 10(2)(xv) of the Income-tax Act is made, the income-tax authorities have to decide whether the expenditure claimed as an allowance was incurred voluntarily and on grounds of commercial expediency. In applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the revenue. The Income-tax Officer was of the view that there was no adequate increase in the earnings of the assessee, for the increase in remuneration was not reflected in the increase in profits of the assessee and that it appeared that, as compared to the previous years, the business profits disclosed by the assessee had fallen by Rs. 2 lakhs and, therefore, the increase in expenditure could not be justified as laid out wholly and necessarily for the purposes of the business. But an employer in fixing the remuneration of his employees is entitled to consider the extent of his business, the nature of the duties to be performed, and the special aptitude of the employee, future prospects of extension of the business and a host of other related circumstances. The rule that increased remuneration can only be justified if there be corresponding increase in the profits of the employer is, in our judgment, erroneous."
Since the learned Tribunal has not based its judgment on the evidence, which was available on record, in affirming the order of the C.I.T.(A) restricting disallowance to the sum of Rs. 25 lakhs, we are of the opinion, that the matter must now go back to the learned Tribunal for reconsideration of the question on the basis of the evidence on record indicated above by us. The learned Tribunal shall reconsider the matter and shall pass an appropriate order in accordance with law. For the reasons already discussed above, we need not give any answer to the question no.2. which is also necessary in order to enable the learned Tribunal to apply its mind to the evidence on record and to pass an appropriate order. The appeal is, therefore, partly allowed.
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