2006 (9) TMI 366 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of Director's Remuneration under section 40C of the I.T. Act.
2. Addition on account of fees collected for payment to "Deposit Insurance and Credit Guarantee Corporation" (DICGC).
3. Deduction of subsidy from the cost of maintenance for depreciation.
4. Disallowance of maintenance charges included in the cost for the purpose of section 32AB.
5. Disallowance of payments made to Udyog Mitra, MCED, and Mitcon.
6. Disallowance of credit guarantee fees re-paid during the year.

Issue-wise Detailed Analysis:

1. Disallowance of Director's Remuneration under section 40C of the I.T. Act:
The assessee contended that the Managing Director was a State Government employee on deputation and hence, section 40C should not apply. However, it was determined that the Managing Director enjoyed additional facilities due to his position in the assessee-company and drew a salary from the assessee, not the State Government. Therefore, the provisions of section 40C were applicable, and the revenue authorities rightly invoked these provisions. The CIT(A)'s order was confirmed.

2. Addition on account of fees collected for payment to DICGC:
The assessee collected fees from borrowers for DICGC but did not pay it to the corporation, instead crediting it to a suspense account. The Assessing Officer added these amounts as income, which was upheld by the CIT(A). The Tribunal found that the collected fees were mixed with the assessee's funds and used for business purposes, making them part of the trading receipts. The Apex Court's judgments in Chowranghee Sales Bureau (P.) Ltd. and Sinclair Murray & Co. (P.) Ltd. were applied, confirming the addition as income. The Tribunal directed that any future payments to DICGC or refunds to borrowers should be allowed as deductions.

3. Deduction of subsidy from the cost of maintenance for depreciation:
The assessee received a computer subsidy from IDBI, which the Assessing Officer deducted from the cost of the computer, reducing depreciation. The Tribunal noted that the nature of the subsidy (capital or revenue) was not clear from the records and required re-adjudication by the Assessing Officer in light of the Apex Court's guidelines in Sahney Steels & Press Works Ltd. The order of the CIT(A) was set aside, and the issue was remanded for further examination.

4. Disallowance of maintenance charges included in the cost for the purpose of section 32AB:
The assessee included various expenses, including maintenance charges, in the cost of computers. The Assessing Officer disallowed the maintenance charges for section 32AB deduction, which was upheld by the CIT(A). The Tribunal found no evidence that maintenance charges were part of the computer's cost and confirmed the disallowance, treating maintenance as a revenue expense.

5. Disallowance of payments made to Udyog Mitra, MCED, and Mitcon:
The assessee made payments to these institutions as per government guidelines and claimed them as business expenses. The Assessing Officer disallowed these payments, and the CIT(A) upheld the disallowance. The Tribunal, referencing judgments in Sri Venkata Satyanarayana Rice Mill Contractors Co. and Madras Refineries Ltd., concluded that the payments were for public welfare and business purposes. The contributions were deemed allowable deductions under section 37(1), and the additions were deleted.

6. Disallowance of credit guarantee fees re-paid during the year:
The Tribunal reiterated its earlier direction that any guarantee fees paid to DICGC or refunded to borrowers should be credited in the respective years. No further direction was necessary.

Conclusion:
The appeals were partly allowed for statistical purposes, with specific directions for re-adjudication and confirmation of certain disallowances and additions. The revenue's appeal was also partly allowed for statistical purposes.