1985 (6) TMI 41 - AT - Income Tax

Summary

Issues Involved:
1. Excise liabilities
2. Advertisement expenses
3. Bank guarantee commission
4. Disallowance under Section 40(c) of the IT Act
5. Disallowance of travelling expenses
6. Disallowance of fines for breach of Factory Act
7. Deduction under Section 80VV of the IT Act
8. Investment allowance on intercom telephone system
9. Advance rent
10. Expenditure for increasing authorized share capital and issuing bonus shares
11. Provision for hank yarn obligation

Detailed Analysis:

1. Excise Liabilities:
The first issue concerns the disallowance of claims for excise duty payable for the assessment years 1979-80 and 1980-81. The appellant had received several show cause notices from the Central Excise Department proposing demands for excise duty based on the weight of sized yarn. The Gujarat High Court quashed these notices, and the Supreme Court dismissed the Special Leave Petitions filed by the Central Excise Department. However, the Government of India amended the Central Excise Rules retrospectively. The CIT (Appeals) confirmed the disallowance on the grounds that the liabilities had not crystallized during the relevant years, the original notices had been quashed, no fresh notices were received after the retrospective amendment, and the principles enunciated by the Supreme Court in 145 ITR 1 were applicable.

The Tribunal held that the provisions of Section 43B of the IT Act, which allow deductions only in the year the payment is made, were applicable. The Tribunal rejected the appellant's claim, stating that the liability had not been met, and directed that the deduction should be allowed as per Section 43B when the payment is made.

2. Advertisement Expenses:
The second issue pertains to the disallowance of expenditure debited under advertisement expenses. The CIT (Appeals) had followed a decision from the assessment year 1977-78. The Tribunal held that such expenditure could not be disallowed under Section 37(2A) of the IT Act, as it was related to the disposal of old machines and was laid out for proper administration of the assets. The Tribunal allowed the deduction.

3. Bank Guarantee Commission:
The third issue involves the disallowance of expenditure on bank guarantee commission and stamp charges. The CIT (Appeals) upheld the disallowance as capital expenditure based on the Gujarat High Court decision in CIT vs. Vallabh Glass Works. The Tribunal observed that the facts were not properly brought out and that the decision in Vallabh Glass Works might not be entirely applicable. The Tribunal directed the ITO to verify the facts and decide the issue in light of the observations made, emphasizing the need to consider the nature of the expenditure and its relation to the purchase of machinery.

4. Disallowance under Section 40(c) of the IT Act:
This issue concerns the inclusion of commission paid to two directors and part of the telephone operator's salary. The appellant did not press the issue regarding the telephone operator's salary. The Tribunal confirmed the CIT (Appeals)' decision, citing the Special Bench decision in ITO vs. Sapt Textile Products (India) Ltd.

5. Disallowance of Travelling Expenses:
The disallowance was made based on Rule 6D of the IT Rules. The Tribunal confirmed the CIT (Appeals)' decision, noting that the disallowance was in excess of allowable expenditure as per Rule 6D.

6. Disallowance of Fines for Breach of Factory Act:
The ITO disallowed fines for breach of certain rules of the Factory Act, and the CIT (Appeals) confirmed this based on the Supreme Court decision in Haji Abdul Aziz. The Tribunal upheld the CIT (Appeals)' decision.

7. Deduction under Section 80VV of the IT Act:
The issue involves the disallowance of an amount paid to Chartered Accountants under Section 80VV. The CIT (Appeals) allowed part of the expenditure under Section 37 and applied Section 80VV to the balance. The Tribunal found no justification to interfere with the CIT (Appeals)' decision.

8. Investment Allowance on Intercom Telephone System:
The appellant claimed investment allowance on an intercom telephone system. The CIT (Appeals) disallowed the claim, stating that the system was installed in office premises. The Tribunal held that only the part of the expenditure related to instruments and lines installed within the office premises should be disallowed. The Tribunal directed the ITO to bifurcate the expenditure and allow investment allowance for the portion installed in non-office premises.

9. Advance Rent:
The appellant claimed deduction for advance rent paid for leasing space. The CIT (Appeals) and ITO allowed only a proportionate amount based on the period of use. The Tribunal held that the advance rent paid for a term of 60 years gave rise to a valuable right and should be treated as deferred revenue expenditure. The Tribunal allowed the proportionate deduction for the current year and directed the ITO to adjust the remaining amount in future years.

10. Expenditure for Increasing Authorized Share Capital and Issuing Bonus Shares:
The appellant claimed deduction for expenditure incurred for increasing authorized share capital and issuing bonus shares. The CIT (Appeals) disallowed the claim as capital expenditure. The Tribunal held that the expenditure on issuing bonus shares was of a revenue nature and allowed the deduction. However, the expenditure for increasing authorized share capital was disallowed as it brought an enduring advantage.

11. Provision for Hank Yarn Obligation:
The appellant made a provision for an obligation to pack yarn in hank form. The CIT (Appeals) and ITO disallowed the provision, stating that there was no crystallized liability. The Tribunal held that the obligation was a concomitant of the benefit derived and allowed the provision based on the rate accepted for transferring the obligation.

Conclusion:
The Tribunal modified the consolidated order of the CIT (Appeals) to the extent indicated and directed the ITO to pass appropriate orders in accordance with the law. Both appeals were allowed in part.