1977 (5) TMI 2 - HC - Income Tax

Summary

Issues Involved:
1. Computation of depreciation in regard to extra shift allowance.
2. Justification of the estimated addition of Rs. 75,000.
3. Validity of disallowance of Rs. 2,000 out of medical expenses.
4. Validity of disallowance of Rs. 18,330 (Raza Sugar Co. Ltd.) and Rs. 24,374 (Buland Sugar Co. Ltd.) out of legal expenses.
5. Entitlement to claim share of loss from an unregistered firm (Buland Sugar Co. Ltd.).

Detailed Analysis:

1. Computation of Depreciation in Regard to Extra Shift Allowance:
The assessee-companies, being seasonal factories, worked three shifts. The ITO computed the allowance for the second and third shifts in accordance with Rule 8 of the Indian I.T. Rules, 1922. The contention of the assessees that the depreciation allowance for the second and third shifts should be exactly 50% of the normal depreciation was rejected. The court referred to the provisions in Rule 8 and the remarks column, which indicated that the extra allowance for double and triple shifts must be proportionate to the actual number of days worked. The court agreed with the view that the computation of depreciation was properly made by the income-tax authorities, citing precedents from the High Court of Allahabad (Raza Sugar Co. v. CIT [1970] 76 ITR 541 and Kundan Sugar Mills v. CIT [1977] 106 ITR 704).

2. Justification of the Estimated Addition of Rs. 75,000:
The ITO added Rs. 75,000 to the income of each assessee-company, concluding that the companies had under-recorded the sale price of sugar. This conclusion was based on discrepancies between the sale prices recorded in the books and the actual market prices, supported by statements from buyers indicating that the difference in price (referred to as "on money") was to be paid to the company. The AAC and the Appellate Tribunal upheld this view. The court found that the inference drawn by the income-tax authorities and the Tribunal was justified, despite the lack of direct evidence, given the nature of the business and the control exerted by the managing agents over the selling agents. The court affirmed the addition as it was based on a reasonable estimation of the under-recorded sales.

3. Validity of Disallowance of Rs. 2,000 Out of Medical Expenses:
The disallowance of Rs. 2,000 related to expenses for the staff on the Matkhera farm, which was considered a separate entity. The court upheld the disallowance, agreeing with the AAC and the Appellate Tribunal that the maintenance expenses for the Matkhera farm were rightly disallowed as they pertained to a different entity.

4. Validity of Disallowance of Rs. 18,330 (Raza Sugar Co. Ltd.) and Rs. 24,374 (Buland Sugar Co. Ltd.) Out of Legal Expenses:
In the case of Raza Sugar Co. Ltd., the disallowed legal expenses were related to the sale of shares, agricultural income-tax, and registration of a sale deed, which were deemed capital expenses. The court agreed that these expenses did not constitute business expenditure. For Buland Sugar Co. Ltd., the disallowed legal expenses were related to investments in shares, and the court upheld the disallowance as the company failed to prove it was dealing in shares. The court affirmed the Tribunal's view that the expenses were capital in nature and not allowable as business expenses.

5. Entitlement to Claim Share of Loss from an Unregistered Firm (Buland Sugar Co. Ltd.):
Buland Sugar Co. Ltd. contended that the share of loss from the unregistered firm, M/s. Agricultural Company, should be set off against its business income. The ITO, AAC, and the Appellate Tribunal rejected this claim, citing that the Agricultural Company was an independent partnership concern and not a joint department of the two companies. The court agreed with the Tribunal's reliance on precedents (CIT v. Jadavji Narsidas & Co. [1963] 48 ITR 41 (SC) and CIT v. Gangadhar Nathmal [1966] 60 ITR 790 (Pat)), which held that losses from an unregistered firm could not be set off against the income of the partners. The court answered the question in the negative.

Conclusion:
The court answered all the questions in the affirmative, supporting the findings and decisions of the income-tax authorities and the Appellate Tribunal. The computation of depreciation, the estimated addition of Rs. 75,000, and the disallowances of medical and legal expenses were all upheld. The claim for setting off the share of loss from an unregistered firm was denied. No order as to costs was made.