1998 (11) TMI 144 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of legal expenses under Section 40A(12) of the IT Act, 1961.
2. Addition on account of alleged sale of leather scrap.
3. Disallowance of export promotion expenses under Section 37(2A) of the IT Act.
4. Denial of deduction under Section 80HHC for interest and rental income.
5. Deletion of addition on account of alleged suppressed sale of shoe-uppers.

Issue-wise Detailed Analysis:

1. Disallowance of Legal Expenses:
The assessee raised a ground regarding the confirmation of disallowance of Rs. 20,000 made by the AO out of legal expenses by invoking the provisions of Section 40A(12) of the IT Act, 1961. However, this ground was not pressed by the assessee during the hearing. Consequently, the ground was rejected as not pressed.

2. Addition on Account of Alleged Sale of Leather Scrap:
The AO made an addition of Rs. 40,000 on account of alleged suppressed sale of leather scrap, following similar additions in preceding years. The assessee contended that no saleable leather scrap was generated during the production process, and whatever scrap was generated was either burnt as fuel or thrown away. The Tribunal had previously deleted similar additions in the assessee's case for earlier years. The Tribunal held that the principle of res judicata does not apply to IT proceedings, but the rule of consistency should be followed unless distinguishable facts or subsequent judgments are presented. Therefore, the Tribunal directed the AO to delete the addition of Rs. 40,000.

3. Disallowance of Export Promotion Expenses:
The AO disallowed Rs. 59,406 out of the export promotion expenses of Rs. 73,216, treating it as entertainment expenditure under Section 37(2A). The CIT(A) allowed a relief of Rs. 39,729, attributing 50% of the entertainment expenses to employee participation. The Tribunal, considering the precedent from the assessee's case for the assessment year 1986-87, directed the AO to restrict the relief to 25% of the balance amount of entertainment expenditure instead of 50%. Thus, the Revenue's appeal was partly allowed, and the assessee's ground was rejected.

4. Denial of Deduction under Section 80HHC for Interest and Rental Income:
The assessee challenged the denial of deduction under Section 80HHC for interest income of Rs. 39,608 and rental income of Rs. 600. The claim for rental income was not pressed. The Tribunal noted that the nature of the interest income was not clear and directed the AO to verify whether the interest income had a direct nexus with the export business. The AO was instructed to decide the matter afresh after giving a reasonable opportunity to the assessee.

5. Deletion of Addition on Account of Alleged Suppressed Sale of Shoe-Uppers:
The AO made an addition of Rs. 6,21,021 on account of alleged suppressed sale of shoe-uppers, stating that the assessee sold shoe-uppers at very low prices to petty karigars without establishing the buyers' identity. The CIT(A) deleted the addition, and the Tribunal upheld this decision, noting that similar additions had been deleted in the assessee's case for earlier years. The Tribunal found no justification to interfere with the CIT(A)'s finding, as the facts were similar to those in previous years.

Conclusion:
The assessee's appeal was partly allowed for statistical purposes, and the Revenue's appeal was also partly allowed. The Tribunal directed the AO to delete the addition regarding leather scrap, restricted the relief for export promotion expenses to 25%, and remanded the issue of deduction under Section 80HHC for interest income back to the AO for verification. The deletion of the addition regarding suppressed sale of shoe-uppers was upheld.