2002 (12) TMI 659 - AT - Income Tax

Summary

Issues:
1. Disallowance under section 80-IA for cloth manufactured partially outside the factory.
2. Disallowance of expenditure for enhancement of authorized capital.
3. Disallowance of interest for not charging interest from a sister concern.

Issue 1: Disallowance under section 80-IA for cloth manufactured partially outside the factory:
The appeal challenged the disallowance under section 80-IA for cloth manufacturing, arguing that the deduction should apply to the entire production process, including steps done outside the factory. The assessee contended that the manufacturing and processing were under their supervision, making them eligible for the deduction. Citing relevant case laws, the Tribunal found in favor of the assessee, stating that only a part of the production process was outsourced and that the matter was covered by a previous decision. Consequently, the disallowance was deleted.

Issue 2: Disallowance of expenditure for enhancement of authorized capital:
The dispute involved the disallowance of an expenditure incurred for increasing the authorized share capital. The assessee claimed it as a business expenditure, but it was deemed of capital nature based on Supreme Court decisions. However, the Tribunal directed the Assessing Officer to allow 1/10th of the total expenditure under section 35D over a 10-year period, following a decision by the Rajasthan High Court.

Issue 3: Disallowance of interest for not charging interest from a sister concern:
The contention was regarding the disallowance of an amount for not charging interest from a sister concern. The assessee argued against the disallowance, stating it was notional income and that there was no evidence of accrual. Additionally, it was highlighted that there was no agreement for charging interest and that the funds were not diverted for non-business purposes. Relying on case laws and the availability of interest-free funds, the Tribunal found the disallowance unwarranted and deleted it.

In conclusion, the Tribunal partially allowed the appeal, ruling in favor of the assessee on all three issues. The disallowances under section 80-IA and for not charging interest were deleted, while the expenditure for enhancement of authorized capital was allowed to be spread over a 10-year period.