2003 (1) TMI 53 - HC - Income Tax

Whether, on the facts and circumstances of the case and in law, the Tribunal was justified in discussing the Department s appeal against the order Of the Commissioner of Income-tax (Appeals), deleting the addition made under section 143(1)(a) of the Income-tax Act as it then stood, relying on the ratio of the judgment in the case of Khatau Junkar Ltd. v. K.S. Pathania, without appreciating the Board Circular No. 689, dated August 24, 1994, which permits prima facie disallowance on the basis of the information available in the return, accounts and documents annexed to it? - Whether an expenditure was on revenue account or capital account is required to be examined in the light of the totality of all facts for this purpose - That, by merely looking at the balance-sheet and profit and loss account, one cannot infer the nature of the expenditure. - the above question is answered in the affirmative, i.e., in favour of the assessee and against the Department.

Summary

Issues:
1. Justification of disallowing expenditure under section 143(1)(a) of the Income-tax Act.

Analysis:

The judgment delivered by the High Court of Bombay pertains to an appeal under section 260A of the Income-tax Act, 1961, for the assessment year 1995-96. The primary question of law raised was whether the Tribunal was justified in discussing the Department's appeal against the deletion of an addition made under section 143(1)(a) of the Income-tax Act based on a specific judgment without considering a relevant Board Circular. The case involved an assessee-company that claimed a loss of Rs. 17,74,85,826 for the assessment year 1995-96 after incurring an expenditure of Rs. 18 crores in the entertainment business. The Department disallowed this expenditure as being on capital account. The Commissioner of Income-tax (Appeals) and the Tribunal ruled in favor of the assessee, prompting the Department's appeal to the High Court.

The court analyzed the provisions of section 143(1)(a) of the Income-tax Act, which allows for adjustments by the Income-tax Officer based on information available in the return or accounts. The court emphasized that the determination of whether an expenditure is on revenue or capital account requires a thorough examination of all relevant facts and circumstances. In this case, the expenditure of Rs. 18 crores was related to acquiring brand value for ten years in the entertainment business. The court highlighted that such a determination cannot be made solely by looking at the balance-sheet and profit and loss account, as it necessitates a detailed assessment of the business nature, agreement terms, and accounts.

The court concluded that the Income-tax Officer was not justified in disallowing the expenditure under section 143(1)(a) without a comprehensive evaluation of all pertinent factors. The judgment in the case of Khatau Junkar Ltd. [1992] 196 ITR 55 was deemed applicable, supporting the Tribunal's decision. The court clarified that its ruling was confined to the applicability of section 143(1)(a) and did not delve into the merits of the case. Ultimately, the court answered the question in favor of the assessee, disposing of the appeal without any order as to costs.