TMI Blog1994 (10) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... ta and Shri D. N. Mehta, directors of the assessee-company was disallowable as entertainment expenditure within the meaning of section 37(2B) of the Act ? 4. Whether, in the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessee was not entitled to deduction of surtax liability of Rs. 2,79,057 as expenditure for the purpose of business ? 5. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the expenditure of Rs. 39,823 was not allowable in the year in question on the ground that the liability has arisen in the years 1968-69 to 1973-74 ? " Question No. 1 relates to the allowance of expenditure in respect of getting legal opinion in various matters as well as counsel fee in respect of various matters relating to determination of the assessee's liability under the Income-tax Act, 1961 (hereinafter referred to as "the Act"), before the authorities under the Act or before the High Court, detailed in the order of the Tribunal. The Tribunal has upheld the order of the Income-tax Officer restricting the claim of the assessee for the deduction to a sum of Rs. 5,000 out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt to the decision of the Calcutta High Court in the case of Indian Oxygen Ltd. v. CIT [1987] 164 ITR 466. With utmost respect for the reasons aforesaid, we are unable to agree with the view expressed therein about the interpretation of the expression "in any case" in the proviso to section 80VV. It may further be noticed that, apart from the interpretation which we have expressed above, a Division Bench of this court in the case of McGaw Ravindra Laboratories (India) Ltd. v. CIT [1994] 210 ITR 1002 had occasion to consider the scope of operation of section 80VV of the Act. The court, on a plain reading of the section, was of the opinion that the aforesaid provision is operative only in relation to the expenditure incurred by an assessee in respect of the proceedings before any income-tax authority, the Tribunal or any court but is not applicable in respect of the expenses which are not related to any proceedings before the income-tax authority or Tribunal or any court. Such expenses will have to be examined and dealt with in accordance with the provisions of section 37(1) of the Act. The relevant observations read as under : ". . . any expenditure incurred in connection with a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, the assessing authority is required to examine the scheme of the provisions of the relevant statute providing for payment of such impost notwithstanding the nomenclature of the impost as given by the statute, to find whether it is compensatory or penal in nature. The authority has to allow deduction under section 37(1) of the Income-tax Act, wherever such examination reveals the concerned impost to be purely compensatory in nature . . ." He further contended that the interest charged under section 220 of the Act is compensatory in nature and it is not by way of penalty. He drew the attention of the court to the following observations made by the Delhi High Court in the case of Bharat Commerce and Industries Ltd. [1991] 188 ITR 277 (headnote) : " The rationale behind the provisions of section 220 to levy interest on delayed payment of tax is not to penalise the party but to make a provision for compensation for the department on the failure of the assessee to make payment on the first notice of demand." The argument apparently appears to be facile but does not stand scrutiny of reason. The mere fact that the interest on the late payment of the tax is compensatory does n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the form of section 80V for the purpose of allowing of such interest as expenditure in the computation of profits and gains from business. But for the special provision made, interest on the capital borrowed for the payment of tax is not allowable expenditure. If that be so on the same principle the interest paid for the late payment of tax cannot be held allowable expenditure as the same cannot be held to be expenditure incurred wholly and exclusively for the purpose of the business. For the aforesaid reasons, we answer question No. 2 in the affirmative, i.e., in favour of the Revenue and against the assessee. Question No. 3 relates to disallowance of Rs. 8,048 incurred by the directors of the assessee-company, The Income-tax Officer has disallowed the said expenses as falling under the head of entertainment expenditure, under section 37(2B) of the Act, The Tribunal recorded a finding, after going through the record, that the expenses incurred are of lavish nature and the authorities below were justified in not allowing the same as business expenditure, that is to say, the expenses were not held to be wholly and exclusively incurred for the purpose of business. In view of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cantile basis. In each case where the accounts are maintained on the mercantile basis it has to be found in respect of any claim, whether such liability was crystallized and quantified during the previous year so as to be required to be adjusted in the books of account of that previous year. If any liability, though relating to the earlier year, depends upon making a demand and its acceptance by the assessee and such liability has been actually claimed and paid in the later previous years it cannot be disallowed as deduction merely on the basis the accounts are maintained on mercantile basis and that it related to a transaction of the previous year. The true profits and gains of a previous year are required to be computed for the purpose of determining tax liability. The basis of taxing income is accrual of income as well as actual receipt. If for want of necessary material crystallizing the expenditure is not in existence in respect of which such income or expenses relate, the mercantile system does not call for adjustment in the books of account on estimate basis. It is actually known income or expenses, the right to receive or the liability to pay which has come to be crystalliz ..... X X X X Extracts X X X X X X X X Extracts X X X X
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