2007 (2) TMI 632 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of short-term capital loss on sale of SPNs.
2. Disallowance of foreign travel expenditure.
3. Disallowance of guest house expenses.
4. Disallowance of interest on interest-bearing funds advanced to subsidiary companies.
5. Disallowance of interest on the ground that interest-bearing funds were utilized for non-business purposes.
6. Taxation of reimbursement as perquisites.
7. Computation of book profit under Section 115JA of the IT Act.

Detailed Analysis:

1. Disallowance of Short-Term Capital Loss on Sale of SPNs:
The first issue relates to the confirmation of disallowance of short-term capital loss of Rs. 1,60,84,408 arising from the sale of 4,08,960 partly paid secured premium notes (SPNs) of Bombay Dyeing and Manufacturing Co. Ltd. (BDMC). The assessee company, engaged in the export and trading of clothes and chemicals, claimed a short-term capital loss on the sale of SPNs. The Assessing Officer (AO) disallowed the loss, reasoning that the price paid for SPNs included the cost of detachable warrants, relying on accounting guidelines and a Supreme Court decision. The CIT(A) upheld the AO's decision. However, the Tribunal, referencing multiple cases, concluded that the loss on the sale of SPNs should be allowed as a business loss, as the cost of SPNs could not be attributed to the warrants. The Tribunal directed the AO to allow the short-term capital loss claimed by the assessee.

2. Disallowance of Foreign Travel Expenditure:
The second issue involves the disallowance of foreign travel expenditure amounting to Rs. 21,28,441. The AO disallowed 2/3rd of the total foreign travel expenses incurred by key personnel, following the pattern of previous years. The CIT(A) reduced the disallowance to 50% of the expenses incurred. The Tribunal upheld the CIT(A)'s decision, noting that similar disallowances had been confirmed in previous years.

3. Disallowance of Guest House Expenses:
The third issue pertains to the disallowance of guest house expenses. The assessee admitted that this ground is covered against them by the Supreme Court's judgment in Britannia Industries Ltd. vs. CIT. Consequently, the Tribunal confirmed the CIT(A)'s order disallowing the guest house expenses.

4. Disallowance of Interest on Interest-Bearing Funds Advanced to Subsidiary Companies:
The fourth issue concerns the disallowance of interest amounting to Rs. 99,128 on the grounds that interest-bearing funds were advanced to subsidiary companies without interest. The Tribunal, referencing the Supreme Court's judgment in S.A. Builders Ltd. vs. CIT, set aside the CIT(A)'s order and remanded the matter to the AO to re-examine the commercial expediency of the advances.

5. Disallowance of Interest on Grounds of Non-Business Utilization:
The fifth issue relates to the disallowance of interest of Rs. 21,575, arguing that interest-bearing funds were used for non-business purposes, such as payment of advance tax and donations. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's judgment in East India Pharmaceutical Works Ltd. vs. CIT, which held that interest on money borrowed for payment of income tax is not an allowable deduction.

6. Taxation of Reimbursement as Perquisites:
The sixth issue involves the taxation of Rs. 9,000 received as reimbursement for Goa property as perquisites under Section 17(2)(iv) of the IT Act. The Tribunal, following its earlier decision in the assessee's case for the assessment year 1990-91, confirmed the CIT(A)'s order treating the reimbursement as perquisites.

7. Computation of Book Profit under Section 115JA of the IT Act:
The seventh issue pertains to the computation of book profit under Section 115JA. The AO increased the net profit by provisions for advances and debts considered doubtful. The CIT(A) partially upheld the AO's adjustments. The Tribunal, referencing the Special Bench decision in Jt. CIT vs. Usha Martin Industries Ltd., concluded that provisions for doubtful debts and advances are not provisions for liabilities but for diminution in the value of assets. Therefore, such provisions should not increase the net profit for computing book profit under Section 115JA. The Tribunal set aside the CIT(A)'s order and directed the AO to re-compute the book profit accordingly.

Conclusion:
The Tribunal allowed the appeals regarding the disallowance of short-term capital loss on SPNs and the computation of book profit under Section 115JA. It upheld the disallowance of foreign travel expenditure, guest house expenses, and the taxation of reimbursement as perquisites. The issue of disallowance of interest on advances to subsidiaries was remanded to the AO for re-examination. The disallowance of interest for non-business utilization was confirmed.