2004 (7) TMI 598 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of fees paid to the Registrar of Companies and stamp duty related to the issue of bonus shares.
2. Disallowance of entertainment expenses.
3. Disallowance of expenditure on presentation articles under Rule 6B.
4. Disallowance of contingent expenses.
5. Disallowance of interest paid on borrowings for payment of tax.
6. Classification of interest on deposits with banks under "Other sources" instead of "Business".
7. Additional grounds regarding exclusion of sales tax and other income from total turnover for Section 80HHC deduction.

Detailed Analysis:

1. Disallowance of Fees Paid to the Registrar of Companies and Stamp Duty:
The assessee contested the disallowance of Rs. 90,520 paid as fees to the Registrar of Companies and stamp duty for issuing bonus shares, arguing it should be treated as revenue expenditure. The CIT(A) upheld the disallowance, citing the Supreme Court decision in Brooke Bond (India) Ltd. v. CIT. However, the Tribunal found that the issue of bonus shares does not expand the capital base and referenced the Bombay High Court's decision in Bombay Burmah Trading Corpn. Ltd. and the Supreme Court's approval in Punjab State Industrial Development Corpn. Ltd. v. CIT. Thus, the Tribunal deleted the disallowance.

2. Disallowance of Entertainment Expenses:
This ground was not pressed by the assessee's counsel and was therefore rejected.

3. Disallowance of Expenditure on Presentation Articles:
The assessee argued that Rule 6B does not apply as the articles did not carry any logo or insignia, thus should not be considered advertisement expenditure. The Tribunal noted the lack of evidence from the revenue to show that the articles had logos or insignia. Consequently, the Tribunal held that Rule 6B was inapplicable and deleted the addition of Rs. 1,76,433.

4. Disallowance of Contingent Expenses:
The assessee's provision of Rs. 1,00,000 for contingent expenses was disallowed by the Assessing Officer due to the mercantile system of accounting. The CIT(A) upheld this, noting that prior year's expenses were already allowed. The Tribunal agreed, stating that the liability had not arisen within the accounting year and could be claimed in the subsequent year. Therefore, the disallowance was upheld.

5. Disallowance of Interest Paid on Borrowings for Payment of Tax:
The Assessing Officer disallowed Rs. 2,59,419, considering it interest on borrowings for advance tax payment. The CIT(A) confirmed this based on the Supreme Court's decision in East India Pharmaceutical Works. The Tribunal, referencing its own orders in the assessee's previous cases, restored the matter to the Assessing Officer for re-adjudication.

6. Classification of Interest on Deposits with Banks:
The assessee argued that interest on deposits should be classified under "Business" income for Section 80HHC deduction. The Tribunal, referencing the Special Bench decision in Lalsons Enterprises v. Dy. CIT, directed the Assessing Officer to apply the net interest concept for determining the deduction, thus restoring the matter for re-adjudication.

7. Additional Grounds:
- Exclusion of Sales Tax from Total Turnover: The assessee cited the Bombay High Court decision in CIT v. Sudarshan Chemicals Industries Ltd., which the Tribunal accepted, allowing the exclusion of sales tax from total turnover for Section 80HHC computation.
- Exclusion of Other Income from Total Turnover: The assessee sought exclusion of Rs. 4,82,92,000 from total turnover. The Tribunal upheld the Assessing Officer's view that such income, being related to business activities, should be included in the turnover, thus rejecting this additional ground.

Conclusion:
The appeal was partly allowed, with the Tribunal granting relief on several grounds while upholding or remanding others for further examination.