N.R.S. Ganesan, J.M. - (1.) BOTH the appeals of the assessee relate to assessment years 1994-95 and 1995-96. We heard both the appeals together -and disposing of the same by this common order.
(2.) Let us first take I.T.A. No. 369 (Mad,)/98 for the assessment year 199495. The first issue arises for consideration is regarding disallowance of Rs. 11,87,763 paid towards salary and LTA to service engineers deputed to M/s. Alacrity Electronics Ltd. Mr. S. Renganathan, the learned representative for the assessee submitted that the service engineers were on the pay roll of the assessee-company who were recruited and appointed even before the Housing and the Electronics Division were transferred to the public limited company, namely, Alacrity Housing Ltd. and Alacrity Electronics Ltd. According to the learned representative, the assessee-company entered into manpower transfer agreement to depute experienced service engineers to Alacrity Electronics Ltd. During deputation period, M/s. Alacrity Electronics Ltd. would pay the salary to the service engineers. Therefore, the service engineers, who were not deputed, continued to remain with the assessee-company and the salary and other emoluments were paid by the assessee-company. According to the learned representative, as per the agreement, Alacrity Foundations (P.) Ltd., the assessee-company agreed to train and depute all future manpower required by Alacrity Electronics Ltd. Therefore, according to the learned representative, expenses were incurred by the assessee for payment of salary and LTA to the said service engineers in a long-term perspective from the point of view of the assessee's business. According to the learned representative, there is no justification in disallowing the payment of salary on the ground that the services of all the employees were not fully utilized by the assessee. According to the learned representative, the salary was paid since the employees were appointed by the assessee-company and in case they were discharged from the service, the assessee-company would be forced to incur heavy expenditure towards gratuity and other retirement benefit. Therefore, as a prudent businessman, the assessee-company has incurred the expenditure towards salary and LTA to the service engineers so that they could be profitably utilized by deputing them to Alacrity Electronics Ltd. whenever the manpower is required by Alacrity Electronics Ltd. The learned representative further submitted that since the genuineness of the payment was not doubted, the reasonableness of the expenditure cannot be questioned by the assessing officer. The learned representative placed his reliance on the judgment of the Supreme Court in the case of CIT v. Walchand & Co. (P.) Ltd. (1967) 65 ITR 381 (SC) and submitted that the reasonableness and commercial expediency of the expenditure has to be judged from the businessman's point of view and not of the revenue. The learned representative again placed his reliance on the judgment of the Madras High Court in the case of CIT v. Associated Electrical Agencies (2004) 266 ITR 631 (Mad). Therefore, according to the learned counsel, the assessee has incurred the expenditure due to commercial expediency, therefore, the entire claim of Rs. 11,87,763 has to be allowed. On the contrary, Dr. I. Vijayakumar, the learned departmental Representative submitted that the assessing officer found that a sum of Rs. 32,78,727 was debited towards payment of salary and another sum of Rs. 3,13,335 was debited towards leave travel allowance. According to the learned Departmental Representative, the only income of the assessee for the assessment year under consideration are income from royalty, consultancy fees, rent, hire charges, corporate fees and technology transfer fees, etc. The assessee admittedly transferred the business of Electronics Division to the newly promoted company M/s. Alacrity Electronics Ltd. As per the transfer agreement all assets and liabilities and rights were transferred to M/s. Alacrity Electronics Ltd. The learned Departmental Representative further submitted that the new company has confirmed the taking on deputation all the personnel attached to Electronics Division as on 31-10-1992. According to the learned Departmental Representative, since all the assets and liabilities were transferred, the assessee did not have any activity relating to Electronics Division during the year under consideration. Therefore, according to the learned Departmental Representative any further payment of salary and leave travel allowances to service engineers and other employees after the transfer of Electronics Division to the newly formed company cannot be justified. According to the learned Departmental Representative the payment made by the assessee towards salary in respect of the employees working in General Administration, Finance, Accounts have not been disallowed. Therefore, according to the learned Departmental Representative when the Electronics Division has been completely transferred together with all assets and liabilities and the newly formed company confirmed that it took all the personnel working in Electronics Division on deputation, there is no necessity much less commercial expediency for the assessee to pay the salary and leave travel allowance in respect of employees who are already taken on deputation to M/s. Alacrity Electronics Ltd. According to the learned Departmental Representative, the agreement for transfer of assets and liabilities to M/s. Alacrity Electronics Ltd. stipulates that once the personnel ceases to be on the pay roll of the assessee, he automatically ceases to be an employee of Alacrity Electronics Ltd. Furthermore, Alacrity Electronics Ltd., undertook to pay the salary and other benefits to the personnel who are on deputation. Therefore, it is very clear that the assessee is to train the personnel and keep them on their pay roll and M/s. Alacrity Electronics Ltd. has to pay their salary. In those factual circumstances, the learned Departmental Representative submitted that there is no justification for claiming any expenditure towards salary and leave travel allowances for the personnel who are meant for the benefit of M/s. Alacrity Electronics Ltd. Therefore, according to the learned Departmental Representative, the lower authorities have rightly disallowed the claim of the assessee to the extent of Rs. 11,87,763.
(3.) WE have considered the rival submissions on either side, and also perused the material available on record. Admittedly, the Electronics Division of assessee-company was transferred to M/s. Alacrity Electronics Ltd. which is a new company promoted by the assessee. As per the transfer agreement, the assessee-company has to recruit the necessary manpower, train them and keep them in their pay roll. Whenever the necessary personnel were required by M/s. Alacrity Foundations (P.) Ltd., the assessee-company would depute them to M/s. Alacrity Electronics Ltd. The learned representative for the assessee submitted before this Tribunal that the employees were recruited even before the new company was promoted, therefore, if they are discharged from service, the assessee has to incur a heavy expenditure in payment of retirement benefits. According to the learned representative of the assessee, just to avoid the payment of heavy amount towards retirement benefit, the assessee retained the service engineers and other personnel and they were deputed to M/s. Alacrity Electronics Ltd. whenever they require the manpower. It is also an admitted fact that whenever the personnel were deputed to M/s. Alacrity Electronics Ltd., the payment and other benefits to the personnel on deputation were paid by M/s. Alacrity Electronics Ltd. The learned representative for the assessee has produced a copy of the manpower transfer agreement and business transfer agreement between the assessee-company and M/s. Alacrity Electronics Ltd. The agreement for transfer of manpower reads as follows : "(1) AFPL agrees to lend & AEL accepts to be taken on Deputation all the personnel of AFPL, engaged in the business of production, marketing, sales, service, accounting, belonging to the Electronics Division, as also the personnel at the various branches taken over, and those manning ancillary services like word processing, delivery of material and the like, numbering in all 130 as on 1-11-1992. (2) During the currency of this agreement, AFPL agrees to train and depute all future manpower required by AEL, wherefor the latter agrees to given reasonable Notice, and, during said period, AEL agrees, not to recruit/engage any personnel, otherwise than, on deputation from AFPL, and also, not to alter, the terms/ conditions of service of such personnel, directly /indirectly. It is clearly understood that any person ceasing to be an employee of AFPL for any reason whatsoever shall forthwith cease to work for AEL as well. (3) AEL undertakes to directly pay at its own cost the salaries /benefits/ perquisites of such personnel and treat the same as part of its operational expenditure, and agrees to the solely responsible in meeting all concomitant legal/contractual obligations, payment/s, including contributions to Provident/Superannuation/Gratuity Funds, Income-tax Deduction at Source.";