2005 (11) TMI 368 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition made under section 69C of the Income-tax Act, 1961 on account of unexplained expenditure by way of freight paid in cash.
2. Levy of interest under section 234B.
3. Exclusion of Sales Tax and Central Sales Tax from total turnover while computing deduction under section 80HHC.
4. Treatment of cost of Sprinkle System as capital expenditure.
5. Classification of interest income for the purposes of computing deduction under section 80HHC.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made Under Section 69C:
The primary issue was the deletion of additions made under section 69C related to unexplained expenditure on freight allegedly paid in cash to M/s. Sam Aviation Pvt. Ltd. The assessee, a manufacturer and exporter, was accused of making cash payments for freight, which were not reflected in its books of account. The Assessing Officer (AO) based the additions on entries found in the books of M/s. Sam Aviation Pvt. Ltd. The CIT(A) deleted these additions, noting that the assessee had no direct dealings with M/s. Sam Aviation Pvt. Ltd. and that no corroborative evidence supported the cash payments. The Tribunal upheld the CIT(A)'s decision, emphasizing that mere entries in the books of a third party without corroborative evidence could not justify the additions. The Tribunal also noted that the AO had not allowed the assessee to cross-examine M/s. Sam Aviation Pvt. Ltd. and that no direct evidence linked the assessee to the cash payments.

2. Levy of Interest Under Section 234B:
The issue concerned the manner of calculating interest under section 234B. The AO had reduced the amount refunded under section 143(1) from the advance tax paid by the assessee, which was not accepted by the CIT(A). The Tribunal agreed with the CIT(A), stating that interest should be calculated based on the provisions of section 234B without considering the refund of tax at the time of processing the return under section 143(1). The Tribunal clarified that section 234D, which deals with interest on excess refund, did not apply to the calculation of interest under section 234B.

3. Exclusion of Sales Tax and Central Sales Tax from Total Turnover:
The CIT(A) directed the AO to exclude Sales Tax and Central Sales Tax from the total turnover while computing deduction under section 80HHC. The Tribunal upheld this decision, citing the jurisdictional Tribunal's decision in the case of Freeman Measures Ltd. and further supported by the decisions of the Bombay High Court and Calcutta High Court. The Tribunal noted that the mere filing of an appeal under section 260A by the department did not warrant a different view.

4. Treatment of Cost of Sprinkle System as Capital Expenditure:
The assessee had installed a sprinkle system in rented office premises and claimed it as revenue expenditure. The AO treated it as capital expenditure. The CIT(A) allowed the deduction as revenue expenditure, applying the tests laid down by the Supreme Court in the case of Madras Auto Service (P.) Ltd. The Tribunal upheld the CIT(A)'s decision, noting that the expenditure did not create an enduring benefit or involve substantial replacement of equipment, and given the nature of the expenditure and its installation in rented premises, the CIT(A)'s decision was justified.

5. Classification of Interest Income for Deduction Under Section 80HHC:
The issue was whether interest income should be classified as business income or income from other sources for computing deduction under section 80HHC. The Tribunal referred to its earlier decision in the case of Nahar Spinning Mills Ltd. and the jurisdictional High Court's decision in Rani Paliwal v. CIT, holding that 90% of the gross interest should be treated as income from other sources and excluded from the profits of business for the purposes of section 80HHC. The Tribunal directed the AO to follow this approach, modifying the CIT(A)'s order accordingly.

Conclusion:
The Tribunal upheld the CIT(A)'s deletion of the additions under section 69C except for specific amounts pending appeal in the case of M/s. Sam Aviation Pvt. Ltd. The Tribunal dismissed the revenue's appeal on the levy of interest under section 234B and upheld the exclusion of Sales Tax and Central Sales Tax from total turnover for section 80HHC deduction. The Tribunal also upheld the CIT(A)'s treatment of the sprinkle system's cost as revenue expenditure and directed the AO to treat 90% of the gross interest as income from other sources for section 80HHC purposes. The appeals for assessment years 1997-98 and 1998-99 were partly allowed, while those for assessment years 1995-96 and 1996-97 were dismissed.