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1978 (4) TMI 28 - HC - Income Tax

Issues:
1. Interpretation of rules under the Companies (Profits) Surtax Act, 1964 regarding the treatment of certain expenses in computing chargeable profits.
2. Whether prior approval of the Inspecting Assistant Commissioner of Income-tax was necessary for treating certain expenses as excessive in arriving at chargeable profits.

Analysis:
The judgment delivered by the High Court of Allahabad involved the interpretation of rules under the Companies (Profits) Surtax Act, 1964, specifically regarding the treatment of expenses incurred on commission, entertainment, and advertisement in computing chargeable profits. The case revolved around the assessment year 1967-68, where the ITO had disallowed certain expenses claimed by the assessee under the Income Tax Act, which were included in the total income assessed. The assessee sought relief on the grounds that these disallowed expenses should be deducted from the chargeable profits as they were included without the prior approval of the Inspecting Assistant Commissioner (IAC).

The AAC initially rejected the assessee's claim, stating that Rule 3 of the Act applies only if an expenditure had been allowed under the Income Tax Act while computing total income. However, the Tribunal later sided with the assessee, acknowledging the ambiguity in the law. The Tribunal allowed the assessee's claim for deduction of certain disallowed expenses, emphasizing the requirement of prior approval from the IAC for treating such expenses as excessive in arriving at chargeable profits.

The Court analyzed the provisions of the Companies (Profits) Surtax Act, particularly Rule 3, which outlines the computation of chargeable profits. Rule 3(ii) specifically deals with expenditure on commission, entertainment, and advertisement, stating that the ITO can add such expenses if deemed excessive, with the prerequisite of obtaining approval from the IAC. The Court emphasized that the ITO cannot reconsider or vary the total income assessed under the Income Tax Act while computing chargeable profits under the Surtax Act.

Ultimately, the Court answered the question posed by the Tribunal in the negative, favoring the department and ruling against the assessee. The judgment highlighted the importance of adhering to the rules and procedures outlined in the Companies (Profits) Surtax Act, particularly concerning the treatment of expenses and the necessity of obtaining prior approval for considering expenses as excessive in computing chargeable profits.

 

 

 

 

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