1997 (7) TMI 77 - HC - Income Tax

Business Expenditure Company Surtax Development Allowance Entertainment Expenditure Expenditure Incurred Sales Promotion Total Income Weighted Deduction

Summary

Issues Involved:
1. Deduction of surtax payable under the Companies (Profits) Surtax Act, 1964.
2. Disallowance of expenditure on conference expenses.
3. Availability of weighted deduction under section 35B for freight and miscellaneous expenses.

Issue-wise Detailed Analysis:

1. Deduction of Surtax Payable:

The first issue addressed whether the assessee was entitled to deduct the surtax payable under the Companies (Profits) Surtax Act, 1964, in arriving at the taxable income. The Assessing Officer, following the precedent set in the preceding assessment year, disallowed the surtax deduction. Both the Appellate Assistant Commissioner and the Tribunal upheld this decision, agreeing that surtax was not deductible under the Income-tax Act, 1961. The High Court referred to the precedent set in *Highway Cycle Industries Ltd. v. CIT* [1989] 178 ITR 601 (P & H), which held that surtax was not deductible. Consequently, the court answered this question in the affirmative, i.e., against the assessee and in favor of the Department.

2. Disallowance of Conference Expenses:

The second issue concerned the disallowance of Rs. 20,000 out of the total conference expenses incurred by the assessee. The Assessing Officer deemed the expenditure on dinner, liquor, and snacks during a conference at Goa to be lavish and in the nature of entertainment, thus disallowing Rs. 44,270 under section 37(2A) read with section 37(2B). The Appellate Assistant Commissioner reduced the disallowance to Rs. 20,000, and the Tribunal upheld this decision. The court examined various precedents, including *CIT v. Patel Brothers and Company Ltd.* [1977] 106 ITR 424 and *Addl. CIT v. Bangalore Turf Club Ltd.* [1980] 126 ITR 430, which discussed the nature of entertainment expenses. However, the court noted that Explanation 2, inserted by Act 11 of 1983 with retrospective effect from April 1, 1976, broadened the scope of "entertainment expenditure" to include hospitality expenses. Therefore, the court upheld the disallowance of Rs. 20,000, answering the question in the affirmative, i.e., against the assessee and in favor of the Department.

3. Availability of Weighted Deduction under Section 35B:

The third issue involved the assessee's claim for a weighted deduction under section 35B on freight and miscellaneous expenses. The Assessing Officer disallowed the weighted deduction for freight expenses, citing their specific exclusion under sub-clause (iii) of clause (b) of section 35B(1). Both the Appellate Assistant Commissioner and the Tribunal upheld this disallowance. The court examined sub-clauses (iii) and (viii) of section 35B(1)(b), noting that sub-clause (iii) excluded expenditure on the carriage of goods to their destination outside India and sub-clause (viii) pertained to services performed outside India. The court found that the freight charges did not qualify for weighted deduction under either sub-clause. Citing *CIT v. Roadmaster Industries of India Pvt. Ltd.* [1993] 202 ITR 968 and *CIT v. Indo Asian SwitchGears (P.) Ltd.* [1996] 222 ITR 772, the court concluded that internal freight charges were not admissible. Hence, the court answered this question in the affirmative, i.e., against the assessee and in favor of the Department.