2006 (12) TMI 85 - HC - Income Tax

Interest on borrowed funds utilized to make interest free advances not deductible exp. on gifts or silverware for distribution to dealers & foreign visitors are deductible as they will result in higher productivity in future ST & CST must be excluded from total turnover for deduction u/s 80HHC

Summary

Issues:
1. Business expenditure on silver wares
2. Disallowance of interest on interest-free advances
3. Exclusion of ST and CST from total turnover for deduction under section 80HHC
4. Business expenditure on distribution of Titan watches
5. Eligibility for deduction under section 80-I for the assessment year 1985-86

Analysis:

Issue 1 - Business expenditure on silver wares:
The court referred to a similar case where the question was decided against the Revenue. Following the previous decision, the current question was also decided in favor of the assessee, allowing the expenses on silver wares as business expenditure.

Issue 2 - Disallowance of interest on interest-free advances:
The court emphasized the need for a direct nexus between borrowed funds and interest-free advances for business purposes. Relying on a precedent, the court held that the interest component on interest-free advances to certain parties cannot be disallowed without establishing a clear nexus between the borrowed funds and the advances made.

Issue 3 - Exclusion of ST and CST for deduction under section 80HHC:
The court upheld the view taken by the Tribunal based on a previous case, ruling in favor of the assessee regarding the exclusion of ST and CST from the total turnover for computing the deduction under section 80HHC.

Issue 4 - Business expenditure on distribution of Titan watches:
The court discussed the disallowance of expenses on Titan watches by the Assessing Officer, which was later upheld by the Commissioner of Income-tax (Appeals). However, the Tribunal allowed the claim, stating that the distribution of watches among employees fostered better relations and productivity. The court sided with the Tribunal, ruling in favor of the assessee.

Issue 5 - Eligibility for deduction under section 80-I for the assessment year 1985-86:
The court examined the eligibility of the assessee for deduction under section 80-I for the assessment year 1985-86. The Revenue argued that the benefit period had expired, but the assessee contended that the plant setup was not complete in the earlier year. The court agreed with the assessee, noting that the industrial license was received in 1985, and manufacturing began in 1986. Consequently, the court dismissed the Revenue's appeal on this issue.

In conclusion, the court disposed of the appeal based on the detailed analysis of each issue, providing legal reasoning and referencing relevant precedents to support its decisions.