1999 (5) TMI 608 - AT - Income Tax

Issues Involved:
1. Treatment of the revised return under the Amnesty Scheme.
2. Classification of Rs. 4,00,625 as income from other sources or business income.
3. Disallowance under Section 37(3A).
4. Disallowance of remuneration paid to Directors under Section 40A(5).
5. Correctness of deduction under Section 80HH.

Issue-Wise Detailed Analysis:

1. Treatment of the Revised Return under the Amnesty Scheme:
The assessee, a private limited company, filed a revised return on 30-9-1986, declaring Rs. 11,18,530 under the Amnesty Scheme. The Assessing Officer refused to treat this as an Amnesty return, and the CIT(A) upheld this decision, stating the assessment was based on materials seized during search operations from 20-5-1986 to 30-5-1986. The CIT(A) justified that the concealed income detected in the search does not fall under the Amnesty Scheme. The Tribunal, however, found no evidence that the sum of Rs. 4,00,625 was detected from the search materials. The Tribunal concluded that necessary investigations justifying the addition were likely made during the assessment proceedings and not from the seized materials. Thus, the revised return filed on 30-9-1986 should be treated as an Amnesty return, as the time for filing such returns was extended until 31-3-1987.

2. Classification of Rs. 4,00,625 as Income from Other Sources or Business Income:
The Assessing Officer treated Rs. 4,00,625, representing the peak of raw material purchases made in cash, as income from other sources. The Tribunal noted that the company admitted the unaccounted cash introduced was Rs. 4,00,625. The Tribunal found no evidence from the search proceedings indicating cash purchases from M/s. Supreme Pharma and M/s. Midway Traders. The Tribunal held that since the return was accepted under the Amnesty Scheme, the source of income should not be questioned, and the sum should not be treated as income from other sources.

3. Disallowance under Section 37(3A):
The Assessing Officer disallowed Rs. 27,614 under Section 37(3A), considering advertisement, sales promotion, car maintenance, and hotel expenses. The CIT(A) directed to exclude Rs. 13,055 (disallowed under Rule 6D) from the hotel payments. The Tribunal held that car maintenance expenses should not be included for disallowance under Section 37(3A), as per various judicial precedents. The disallowance needs to be recalculated excluding these expenses.

4. Disallowance of Remuneration Paid to Directors under Section 40A(5):
The CIT(A) applied Section 40A(5) instead of Section 40(c) for disallowance of remuneration paid to directors. The Tribunal followed the Bombay High Court's decision in CIT v. Hico Products (P.) Ltd., which held that an aggregate ceiling of Rs. 72,000 applies to employee directors. Therefore, any expenditure exceeding Rs. 72,000 should be disallowed.

5. Correctness of Deduction under Section 80HH:
The company claimed a deduction of Rs. 3,11,311 under Section 80HH, but the lower authorities restricted it to Rs. 1,40,619. The Tribunal noted that the CIT(A) did not consider certain items eligible for deduction, such as interest from distributors and profit under Section 41(2). The Tribunal directed the Assessing Officer to include these items while recomputing the deduction under Section 80HH.

Conclusion:
The appeal was partly allowed. The revised return filed on 30-9-1986 was to be treated as an Amnesty return. The sum of Rs. 4,00,625 should not be treated as income from other sources. Disallowance under Section 37(3A) should be recalculated excluding car maintenance expenses. Remuneration paid to directors should be disallowed only if it exceeds Rs. 72,000. The deduction under Section 80HH should be recomputed considering certain additional items as eligible.

← Previous Next →