I.T.AS. NOS. 3635-A, 3634, 3635-B OF 1979-80 AND I.T.A. NO.2212 OF 1981-82, Versus I.T.AS. NOS. 3635-A, 3634, 3635-B OF 1979-80 AND I.T.A. NO.2212 OF 1981-82,
ORDER
ABRAR HUSSAIN NAQVI (JUDICIAL MEMBER). --These are four appeals filed by a private limited Company deriving income from manufacturing of rubber goods and relate to the assessment years 1976-77, 1977-78, 1978-79 and 1980-81. In all these appeals the assessee is aggrieved against the profit and loss disallowances which are discussed as under:-
2. FREIGHT OUTWARD :
In the assessment year 1976-77 the assessee claimed expenses at Rs.9,11,812 out of which Rs.10,000 were disallowed by the I.T.O. and confirmed by the learned A.A.C. The learned counsel for the assessee contended that out of this huge claim this minor disallowance was on13 tinkering in the account. It was submitted that all these expenses were incurred through one person and were, therefore, entirely verifiable. It was submitted that in the immediately past year the entire claim was allowed by the learned A.A.C. It was further submitted that even in the, subsequent year no such disallowance has been made. We, therefore, direct that this disallowance should be deleted.
MACHINERY REPAIRS:
1976-77
1977-78
1978-79
1975-76
Claimed
Rs.1,09,725
Rs.1,04,893
Rs.2,01.198
Rs.85,491
Disallowed by
I.T.O.
Rs. 25,000
Rs. 15,000
Rs. 12,000
Rs.10,000
AAC's action
Rs. 10,000
Rs. 8,700
Rs. 7,000
Rs. 7,000
Deleted by the Tribunal.
4. It was contended by the learned counsel for the assessee that complete details has been filed by the assessee before the Assessing Officer which has been admitted by him in his assessment order. It was contended that for the same reason, the Tribunal had deleted the addition for the assessment year 1975-76. We are inclined to agree with the learned counsel for the assessee and direct that additions for all the three years under this head should be deleted.
5. TRAVELLING EXPENSES-, "
1976-77
1977-78
1978-79
Claimed
Rs.67,866
Rs.34,636
Rs.18,280
Disallowed by the I.T.O.
Rs. 6,000
Rs. 2,000
Rs. 1,800
Confirmed by the A.A.C.
It was contended by the learned counsel for the assessee that there was no justification for making disallowances. However; on perusal of the orders of the officers below we find that disallowance has been made on the ground that in the assessment year 1976-77 one of the Directors had gone abroad and his travelling expenses been included in the travelling expenses. The disallowance has been made on account of possible personal expenditure. Similarly in the assessment years 1977-78 and 1978-79 the disallowance has been made on account of unvouched and unverifiable expenses, we, therefore, maintain the addition..
6. SHORT REALIZATION OF EXCISE DUTY :
The assessee claimed Rs.629 in the assessment year 1976-77 as short realization of excise duty sales-tax. This disallowance has rightly been made by the I.T.O. and is maintained.
7. CLAIM ON DAMAGED GOO DS:
In the assessment year 1976-77 the assessee claimed RS.8,086 out of which Rs.2,000 were disallowed by the I.T.O. and were confirmed by the learned A.A.C. The learned counsel for the assessee contended that in the immediately past year Rs.2,500 were disallowed by the I.T.O. but were deleted by the A.A.C. We, therefore, direct that this addition should be deleted
8. BUILDING MAINTENANCE
The assessee claimed Rs.35,692 in the assessment year 1977-78 and Rs.77,490 in the assessment year 1978-79. The I.T.O. disallowed Rs.3,000 and Rs.6,500 respectively in this account. The learned counsel contended that in the immediately past year the Tribunal had deleted the addition of Rs.5,000 out of the claimed of Rs.46,749. It was submitted that complete details were filed before the learned I.T.O. and no instance was quoted by the learned I.T.O. to show that any part of the expenditure was unverifiable. It was further submitted that in the assessment year 1976-77 no such disallowance was made out of the total claim of Rs.28,217. We, therefore, direct that these additions should be deleted.
9. BAD DEBTS :
The assessee claimed Rs.46,687 under the head Bad Debts which was written off by the assessee in the assessment year 1977-78. It' was claimed by the assessee that this amount was due from M/s. H.V. Trading Company, Karachi which firm had closed its office and whereat outs of its partners was not known. It was submitted by the learned counsel that this amount was as a result of accumulated balance since 1971. This claim was disallowed mainly on the ground that there was no evidence of any serious effort having been made by the assessee. We have considered the arguments. When the debtor firm had been dissolved and the whereabouts of the partners was not known and further this amount is an accumulated balance from past years, the assessee had no alternative but to write it off. We, therefore, direct that this addition should be deleted.
10. EXPORT REBATE :
The assessee made exports amounted to Rs.34,04,396 in the assessment year 1978-79. These exports wee made to Afghanistan however no export rebate was allowed by the' I.T.O. On appeal the learned A.A.C also did not allow export rebate on the ground that the object of allowing export rebate to the exporters was to earn the maximum foreign exchange. Since no foreign exchange was earned by making export to Afghanistan, the export rebate should not be allowed to the assessee as the assessee received the export proceeds in Pakistani currency.
11. The learned counsel for the assessee vehemently contended that while making exports to Afghanistan all the formalities of exports had to be observed and for all intents and purposes these are exports.
The goods sent to Afghanistan were exported within the meaning of the Income-tax law and as such the assessee was entitled to the export rebate. It was further contended that it is not written in the law that export made to Afghanistan would not be entitled to the export rebate. It was further brought to our notice that in the assessment year 1980-81 the learned A.A.C. in appeal has already directed to allow the export to agree with the learned counsel for the rebate. We are inclined, assesses on this issue as well. Export is an export, irrespective of the fact as to in what currency the export proceeds are received by the assessee. We are not in agreement with the view of the learned A.A.C. that apparently the object of the Government for allowing export rebate seems to be to earn maximum foreign exchange. We have to administer law as it is. The law does not create any exception that no export rebate would be allowed to an exporter whose export proceeds are received in Pakistani currency. We, therefore, direct that export rebate should be allowed to the assessee.
In the assessment year 1978-79 an addition of Rs.8,193 has been made by the I.T.O. under Explanation 8 of section 4(1) of the repealed Income-tax Act on the ground that an amount of Rs.6,328 was available in the accounts as debit balance. Consequently Rs.8,193 were added by the I.-T.0, as deemed income of the assesses-company. The learned counsel for the assessee contended that these debit balances could not be called as loans within the meaning of explanation 8 of section 4(1) of the Repealed Income-tax Act. Nothing has been shown either by the assessee or by the learned D.R. as to the nature of these debit balances. We, therefore, set aside the orders of the officers below and direct that the nature of the debit balances should be found out in the books of accounts of the assesses. If these debit balances are found to be loans the addition should be made under explanation 8 of section 4(1) of the repealed Income-tax Act.
12. TAXES AND FEE:
Under this head in the assessment year 1980-81 the assessee claimed expenses at Rs.59,236. In this claim an amount of Rs.49,856 was included which was paid as tuition fee of one Mr. Naeem Barny, a son of an employee of the assessee. It was claimed by the assessee that these expenses were incurred as Mr. Naeem Barny was sent abroad a for studying in rubber technology. The learned counsel submitted that the assessee Company expected to benefit out of the technical knowledge of Mr. Naeem Barny and in fact was employed by the Company on his return from abroad for about four years. It was further contended that these expenses were incurred for the business purposes. However, at present we have nothing on record that Mr. Naeem Barny was employed by the assessee as a technical expert. This point needs an inquiry. We, therefore, set aside the orders of the officers below and remit the) case back to the I.T.O. with the direction that he should find out as to whether Mr. Naeem Barny was employed by the assessee Company on his return from abroad after obtaining rubber technology. If it is confirmed that he was employed by the assessee Company this expense should be allowed as admissible expense because in that case it will be established that Mr. Naeem Barny was sent abroad and the assessee Company contributed his tuition fee in order to take advantage of his technical knowledge. If, however, this fact is not proved no such expense should be allowed and addition may be made.
13. BUILDING REPAIR :
In the assessment year 1980-81 the assessee claimed an expense on account of building repair to the tune of Rs.43,881 out of which Rs.26,029 were disallowed by the I.T.O. as a capital expenditure. It was discovered by the learned Assessing Officer that the expenses to the tune of Rs.26,029 consisted of expenses on bricks, labour and iron gate which is as under:-
Bricks
Rs. 8,700
Labour
Rs.15,027
Iron Gate
Rs. 2,302
The learned I.T.O. observed that employment of bricks indicate than there was an additional work in the building and not a mere repair work. He was of the view that since some addition has been made in the building therefore, these expenses were of capital nature. We are inclined to agree with the learned I.T O. on this issue. Since there is an addition in the assets because of addition in building, the expenditure to the tune of Rs.26,029 was of capital nature. We, therefore, maintain the addition.
14. As a result of the above discussion all the four appeals are disposed of as above.
15. ZAFAR HUSSAIN (ACCOUNTANT MEMBER). --I would like to add in respect of the amount of Rs.49,856 claimed as tuition fee of one Mr. Naeem Barny son of an employee of the Company under the head 'Taxes and Fees'. The Company had claimed these expenses, as having been incurred on Naeem Barny's studies abroad in rubber technology on the expectation that the Company would possibly benefit from his training on return when he could be employed. This amount was claimed as expenses incurred for business purposes. Apart from the fact, as mentioned in the above order that nothing was available on record to show that on his return Mr. Naeem was employed in the company as technical expert, I am of the view, that even if he was employed in the company later on this fact would not entitle the company to claim the amount as expense, as stated in para. 12 of my learned brothers' order. The amount could be claimed under section 10(2)(xvi) of the Income-tax Act, 1922 if it is wholly and exclusively incurred for the purpose of the business. Mr. Naeem is not an employee of the company but son of an employee and any expenditure incurred for his education, even if it is connected with the business of the assessee cannot be allowed as such since it is neither wholly and exclusively incurred in connection with the affairs of the company, nor it is for" the purpose of the business of the assessee Company, as another purpose can be the education of the son as such which the employees of all companies are otherwise ensuring. The second reason which has to be borne in mind is that in the relevant assessment year no purpose of the company's; business is served, and, therefore, the expenditure would not be admissible.
16. Further, the provisions of section 10(2)(xv) of the Income-Taxi Act, 1922 could be invoked for claiming expenditure incurred on the, training, but that clause lays down that an expenditure incurred on, training of citizens of Pakistan could be allowed if the: scheme had been approved by the Central Board of Revenue for the purpose of this clause. That being not the case, the said clause cannot be invoked. The I.T.O. while re-examining the case on this issue would bear in mind these directions, with these observations I agree to the rest of the order.
QUESTION OF DIFFERENCE OF OPINION:
"Whether the amount of Rs.49,856 incurred as tuition fee for Mr. Naeem Barny, son of an employee of the company for his training abroad was admissible under section 10 of the Income-tax Act, even if he was employed in the company later on after the assessment year?"
17. Since a difference of opinion has arisen the matter may be placed before the learned Chairman for nomination of a third Member for resolving the issue.
18. SIKANDAR HAYAT KHAN (ACCOUNTANT MEMBER) .--A difference of opinion having arisen with regard to admissibility of a sum of Rs.49,856 on account of tuition fee in rubber technology paid for Mr. Naeem Barny, son of an employee of the assessee, between my learned brother the Judicial Member and my learned brother the Accountant Member, the question relating to the difference of opinion, as set out below has been referred to me for adjudication:-
"Whether the amount of Rs.49,856 incurred as tuition fee for Mr. Naeem Burny, son of an employee of the company for training abroad was admissible under section 10 of the Income-tax Act, even if he was employed in the company later on after the assessment year?"
19. Brief facts relating to the difference of opinion with regard to admissibility of a sum of Rs.49,856 are that this amount was a part of the expenditure under the head taxes and fees and was paid on account of tuition fee abroad in rubber technology for Mr. Naeem Burny, son of an employee of the assessee in respect of the charge year 1982-83. Therefore, this amount was claimed as a deduction against gross income for the said year. On this point however assessment was set aside for re-examination by learned Judicial Member in the following words:-
"We therefore, set aside the orders of the officers below and remit the case back to the I.T.O. with the direction that he should find out as to whether Mr. Naeem Burny was employed by the assessee Company on his return from abroad after obtaining rubber technology. If it is confirmed that he was employed by the assessee Company this expense should be allowed as admissible expense because in that case it will be established that Mr. Naeem Burny was sent abroad and the assessee Company contributed his tuition fee in order to take advantage of his technical knowledge. If however this fact is not proved no such expense should be allowed and addition may be made."
20. The learned Accountant member while agreeing with the rest of the order of the learned Judicial Member made the following observation with regard to claim of the assessee for a sum of Rs.49,856 on account of tuition fee of Mr. Naeem Bunny:- I am of the view, that even if he was employed in the company later on, this fact would not entitle the company to claim the amount as expense as stated in para. 12 of my learned brothers order. The amount could be claimed under section 10(2)(xvi) of the Income-tax Act, 1922 if it is wholly and exclusively incurred for the purpose of the business. Mr. Naeem is not an employee of the company but son of an employee and any expenditure incurred for his education, even if it is connected with the business of the assessee, cannot be allowed as such since it is neither wholly and exclusively incurred in connection with the affairs of the company, nor it is for the purpose of the business of the assessee Company, as another purpose can be the education of the son as such which the employees of all companies are otherwise ensuring. The second reason, which has to be borne in mind is that in the relevant assessment year no purpose of the company's business is served, and, therefore, the expenditure would not be admissible.
"Further, the provisions of section 10(2)(xv) of the Income-tax Act, 1922 could be invoked for claiming expenditure incurred on the training, but that clause lays down that an expenditure incurred on training of citizens of Pakistan could be allowed if the scheme had been approved by the Central Board of Revenue for the purpose of this clause. That being not the case, the said clause cannot be invoked. The I.T.O. while re-examining the case on this issue would bear in mind these directions."
21. On account of the above difference of opinion between my two learned brothers the question of difference of opinion as framed by them is now before me for adjudication.
22. The assessee as has been stated above claimed a sum of Rs.49,856 on account of tuition fee of Mr. Naeem Burny on his education abroad for studying rubber technology. Therefore, admissibility of this amount is governed by section 23(1)(xviii) of the Ordinance and not the Repealed Income-tax Act, 1922 (hereinafter called the Act). This position having been admitted by learned counsel of the assessee the question of difference of opinion has been reframed to read as under:-
"Whether the amount of Rs.49,856 incurred as tuition fee for Mr. Naeem Burny, son of an employee of the company for his training abroad was admissible under section 23(1)(xviii) of the Ordinance, even if he was employed in the company later on after the assessment year?" ..
23. The learned Accountant Member while disagreeing with the views of the learned Judicial Member has primarily relied on the fact that expenditure was neither incurred in connection with the business affairs of the company nor it was undertaken for its business purpose, as another purpose could be the education of the son as such which the employees of all companies are otherwise ensuring and, therefore, the expenditure, would not qualify for deduction. This reasoning has not found favour with him and in support of this conclusion I have relied on clause (xviii) of subsection (1) of section 23 of the Ordinance which is set out below:- "any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business or profession."
24. The expression wholly and exclusively, for the purpose of such business, profession of vocation has been coming up on the anvil of the Courts from time to time for interpretation. The same expression has been used in English Income-tax Act and in Athertion v. British Insulated Herelsby Cables Ltd. (1925) 10 Tax Cas. 155, wherein Viscount Cave L.C. interpreted this expression to include any amount spent voluntarily and on the grounds of Commercial expediency." The Indian Courts have held that the expenditure will be held to be laid out wholly and exclusively for the purpose of business, profession or vocation". If it was proved that:-
(a) that it was spent on consideration of commercial expediency and principles of ordinary commercial trading or
(b) the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business."
25. In the present case the amount was spent to defray cost of tuition fee of Mr. Naeem Burny abroad in the field of rubber technology. At this point it is necessary to put on record that the assesee is engaged in manufacture and sale of hose pipes, washer rings, cycle tubes, football bladders, etc. In other words the assessee is engaged in the production and sale of rubber goods. Therefore, amount spent on the tuition fee of Mr. Naeem Burny abroad was in connection with the furtherance of assessee activities as on return his services could be utilized by it. The payment of amount also satisfies second condition under clause (b) of para. 24 as the expenditure was incurred consistent with principles of ordinary commercial trading. In arriving at in this conclusion I am strengthened by the facts of a parallel case cited as 1985 P T D (Trib.) 386.
26. The amount having been incurred on tuition fee of Mr. Naeem Burny abroad in rubber technology cannot be said not to have been incurred in connection with the business of the assessee as the assessee is involved in the production of rubber goods. Therefore, the only logical conclusion that can be drawn from underwriting of this expenditure is that it was incurred for the purpose of the business of the assessee.
27. The second reason which weighed with the learned Accountant Member far disagreeing with the views of the learned Judicial Member rests on the fact that during the previous year relevant to the charge year 1980-81, no purpose of the company's business having been served, P the expenditure was not liable to deduction. Even this reason for discarding claim of the assessee or a sum of Rs.49,856 on account of tuition fee paid abroad for Mr. Naeem Burny in rubber technology is not well founded as the expenditure was incurred strictly in the interest of commercial expediency.
28. Since clause (xv) of subsection (1) of section 23 of the Ordinance is not attracted on the facts of this case, I have not recorded a finding on it. On other hand based on my discussion from paras. 22 to 24, the only conclusion that I can draw from payment of Rs.49,856 on account of tuition fee of Mr. Naeem Burny paid abroad in rubber technology is that the amount was properly deductable in respect of the charge year 1980-81 as an item of P and L expenses. Therefore the question of difference of opinion referred to me is answered in the affirmative.
M.B.A./381/T Order accordingly