1985 (5) TMI 64 - AT - Income Tax

Issues Involved:
1. Entertainment expenses claim.
2. Deduction of borrowings and liabilities for relief under Section 80J.
3. Quantification of relief under Section 80J.
4. Disallowance of provision for misappropriation.
5. Charging of interest under Sections 215 and 139(8).
6. Revenue's appeal regarding disallowance of expenses pertaining to earlier years.

Issue-wise Detailed Analysis:

1. Entertainment Expenses Claim:
The first ground in the assessee's appeal is in respect of a claim of Rs. 20,031 for entertainment expenses. The counsel for the assessee submitted that he had instructions not to press this ground. Therefore, this ground is rejected.

2. Deduction of Borrowings and Liabilities for Relief under Section 80J:
The second ground involves the deduction of borrowings and liabilities from the amount of capital employed for the purpose of relief under Section 80J of the IT Act, 1961, in respect of the Pesticides Unit. This ground is rejected due to the retrospective amendment to Section 80J and the Supreme Court decision in Lohia Machines Ltd. vs. Union of India, which upheld Rule 19A regarding the computation of capital.

3. Quantification of Relief under Section 80J:
The third ground pertains to the quantification of relief under Section 80J. The company, engaged in various activities and having multiple subsidiaries, claimed relief for the Pesticides Unit. The ITO observed that the head office had both borrowed and own funds, making it difficult to verify the exact composition of funds used for the Pesticides Unit. The ITO calculated the percentage of own capital at 58% and granted relief accordingly.

On appeal, the assessee argued that the capital employed in the Unit came from own capital and that current liabilities and provisions should be reduced from gross assets. The CIT(A) did not agree, maintaining that the capital employed included both own funds and borrowings. The CIT(A) made minor adjustments and applied a ratio to determine the eligible capital.

During the hearing, it was argued that an amount of Rs. 1,05,86,335, an unsecured loan from the Gujarat Government, should not be considered as it was meant for Gujarat Agro Service Products Ltd. The Tribunal found that the Rs. 76 lakhs credit balance in the H.O. account did not include borrowings and directed the ITO to grant relief of Rs. 5,73,516.

4. Disallowance of Provision for Misappropriation:
The next ground involves the disallowance of a provision for misappropriation amounting to Rs. 71,124 by an employee. The ITO and CIT(A) disallowed the claim, stating that the loss pertained to an earlier assessment year when the misappropriation was discovered.

The assessee argued that the final determination of the loss occurred in the accounting year 1979-80, supported by the Controller and Auditor General's audit. The Tribunal found that the loss should be allowed in the year it was determined that recovery was not possible, thus allowing the claim.

5. Charging of Interest under Sections 215 and 139(8):
The ITO charged interest under Sections 215 and 139(8) without providing reasons. The CIT(A) upheld this, stating that the sufficiency of the cause for delay could not be considered by appellate authorities. The Tribunal agreed, directing the ITO to modify the interest amounts based on the finally determined income.

6. Revenue's Appeal Regarding Disallowance of Expenses Pertaining to Earlier Years:
The CIT(A) verified the necessary bills and, considering the accounting system followed by the assessee, deleted the disallowance to the extent of Rs. 1,47,578 out of Rs. 1,96,267. The Tribunal found no justification to interfere with the CIT(A)'s decision and upheld his order.

Conclusion:
The appeal filed by the assessee is allowed in part, and the appeal filed by the Revenue is dismissed. The ITO is directed to pass appropriate orders in accordance with the Tribunal's findings.

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