2011 (10) TMI 610 - AT - Income Tax

Issues Involved:

1. Disallowance of Rs. 90,00,000 for impending union settlement.
2. Disallowance of Rs. 4,89,918 for gift articles as entertainment.
3. Taxability of Rs. 5,05,000 compensation received for breach of contract.
4. Nature of expenditure on production of TV films, promotion films, and medical films.
5. Classification of various expenses as entertainment under Section 37(2).
6. Inclusion of sales tax, trade discount, and margins in total turnover for Section 80HHC deduction.
7. Disallowance of Rs. 1,67,768 for air fare and hotel expenses for foreign visitors.
8. Disallowance of hotel expenses and air fares for foreign visitors under Section 37(2A).
9. Disallowance of Rs. 6,78,816 as excess provision for expenses.
10. Disallowance of Rs. 2,52,152 under Section 43B for unpaid sales tax.
11. Disallowance of Rs. 50,00,000 for premium on redemption of non-convertible debentures.
12. Disallowance of Rs. 1,55,442 against dividend income for administrative expenses under Section 80M.
13. Non-adjudication of additional ground for deduction of Rs. 4,28,696.
14. Exclusion of excise duty from total turnover for Section 80HHC deduction.
15. Valuation of closing stock and proportionate cost of freight.
16. Adhoc disallowance of Rs. 10,00,000 under Rule 6D.
17. Disallowance of Rs. 7,18,148 under Section 37(2A) for foreign visitors.
18. Addition of 10% on foreign travel expenses.
19. Addition to closing stock for unutilized Modvat credit.
20. Computation of deductions under Sections 80I and 80HH.
21. Restriction of disallowance to 2% of dividend income for administrative expenses.

Detailed Analysis:

1. Disallowance of Rs. 90,00,000 for Impending Union Settlement:
The Assessing Officer (AO) disallowed Rs. 90,00,000 debited by the assessee for impending union settlement, terming it as a contingent liability. The CIT(A) upheld this disallowance, noting that the amount was allowed in the subsequent year. The Tribunal observed that no significant development occurred during the year under consideration to justify the provision and upheld the disallowance.

2. Disallowance of Rs. 4,89,918 for Gift Articles as Entertainment:
The AO disallowed Rs. 4,89,918 for gift articles under Rule 6D, treating it as entertainment expenditure under Section 37(2). The CIT(A) confirmed this. The Tribunal noted that the issue was not identical to the earlier years and upheld the disallowance, citing relevant case laws.

3. Taxability of Rs. 5,05,000 Compensation Received for Breach of Contract:
The AO treated Rs. 5,05,000 received as compensation for breach of contract as revenue receipt. The CIT(A) agreed. The Tribunal held that the amount was for allowing the use of technical know-how and sale of products to other parties, thus rightly assessed as revenue income.

4. Nature of Expenditure on Production of TV Films, Promotion Films, and Medical Films:
The AO disallowed these expenditures as capital in nature. The CIT(A) upheld this. The Tribunal, following the jurisdictional High Court's decision in Geoffrey Manners and Co. Ltd., held the expenditure as revenue in nature and allowed it.

5. Classification of Various Expenses as Entertainment under Section 37(2):
The AO disallowed lunch expenses, canteen expenses, conference expenses, and AGM expenses as entertainment. The CIT(A) confirmed this. The Tribunal, following earlier orders, allowed conference and AGM expenses but disallowed Rs. 2,00,000 each for lunch and canteen expenses.

6. Inclusion of Sales Tax, Trade Discount, and Margins in Total Turnover for Section 80HHC Deduction:
The AO included sales tax, trade discount, and margins in the total turnover. The CIT(A) directed the AO to exclude certain items already included in the turnover. The Tribunal, following relevant case laws, directed the exclusion of sales tax and trade discount from the total turnover.

7. Disallowance of Rs. 1,67,768 for Air Fare and Hotel Expenses for Foreign Visitors:
The AO disallowed these expenses as capital in nature. The CIT(A) upheld this. The Tribunal noted that the expenses were for setting up a new project and allowed depreciation as per Section 32.

8. Disallowance of Hotel Expenses and Air Fares for Foreign Visitors under Section 37(2A):
The AO treated Rs. 7,18,148 as entertainment expenditure. The CIT(A) reduced the disallowance by Rs. 1,67,768. The Tribunal followed earlier orders and allowed the expenses as business expenditure.

9. Disallowance of Rs. 6,78,816 as Excess Provision for Expenses:
The AO disallowed the excess provision. The CIT(A) confirmed this. The Tribunal upheld the disallowance but noted that the consequential effect in the subsequent year should be considered to avoid double addition or deduction.

10. Disallowance of Rs. 2,52,152 under Section 43B for Unpaid Sales Tax:
The AO disallowed the unpaid sales tax. The CIT(A) upheld this. The Tribunal confirmed the disallowance, noting that the subsequent year's offering of income is irrelevant for the current assessment year.

11. Disallowance of Rs. 50,00,000 for Premium on Redemption of Non-Convertible Debentures:
The AO disallowed the premium payable. The CIT(A) agreed. The Tribunal allowed the proportionate claim of the premium to be spread over the period of the debentures, following the Supreme Court's decision in Madras Industrial Investment Corpn. Ltd.

12. Disallowance of Rs. 1,55,442 against Dividend Income for Administrative Expenses under Section 80M:
The AO disallowed 2% of the dividend income for administrative expenses. The CIT(A) upheld this. The Tribunal set aside the issue to the AO for reconsideration in light of relevant case laws.

13. Non-Adjudication of Additional Ground for Deduction of Rs. 4,28,696:
The CIT(A) did not adjudicate the additional ground. The Tribunal noted that the issue requires verification of facts and declined to entertain the ground, dismissing it.

14. Exclusion of Excise Duty from Total Turnover for Section 80HHC Deduction:
The Tribunal admitted the additional ground and set aside the issue to the AO for decision as per law after considering the assessee's contention.

15. Valuation of Closing Stock and Proportionate Cost of Freight:
The Tribunal followed the earlier decision in the assessee's own case and decided the issue in favor of the assessee, against the revenue.

16. Adhoc Disallowance of Rs. 10,00,000 under Rule 6D:
The AO made an adhoc disallowance for conveyance and telephone expenses. The CIT(A) deleted it. The Tribunal, following earlier orders, decided the issue against the revenue.

17. Disallowance of Rs. 7,18,148 under Section 37(2A) for Foreign Visitors:
The Tribunal remanded the issue to the AO to avoid double deduction or addition.

18. Addition of 10% on Foreign Travel Expenses:
The Tribunal, following earlier orders, decided the issue against the revenue.

19. Addition to Closing Stock for Unutilized Modvat Credit:
The Tribunal followed the Supreme Court's decision in Indo Nippo Chemicals and decided the issue against the revenue.

20. Computation of Deductions under Sections 80I and 80HH:
The Tribunal directed the AO to compute the deductions in light of the jurisdictional High Court's decision in Associated Capsules P. Ltd.

21. Restriction of Disallowance to 2% of Dividend Income for Administrative Expenses:
The Tribunal set aside the issue to the AO for reconsideration as per relevant case laws.

Cross Objection:
The cross-objection filed by the assessee was dismissed as infructuous in light of the Tribunal's findings in the appeals.

Conclusion:
The appeals filed by both the assessee and the revenue were partly allowed, and the cross-objection by the assessee was dismissed.

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