1996 (3) TMI 149 - AT - Income Tax

Issues Involved:

1. Confirmation of disallowance of Rs. 1,07,02,500 on account of price difference of gas supplied by ONGC.
2. Disallowance of the claim of interest paid to GIDC amounting to Rs. 4,88,611.
3. Disallowance of electricity expenses in the director's residence.
4. Disallowance of Rs. 15,000 on conveyance expenses.
5. Disallowance of Rs. 15,050 relating to payment of club membership and Rs. 18,940 on account of guest house expenses.
6. Initiation of penalty proceedings under s. 271(1)(c).
7. Levy of interest under ss. 234B and 234C of the IT Act.

Issue-wise Detailed Analysis:

1. Confirmation of Disallowance of Rs. 1,07,02,500 on Account of Price Difference of Gas Supplied by ONGC:

The assessee, a private limited company, follows the mercantile system of accounting. During the assessment proceedings, the AO noted that ONGC had increased the price of natural gas from Rs. 770-963 per 1000 cubic metres to Rs. 2,877 per 1000 cubic metres after the expiry of the agreement on 14th Sept., 1986. The Gujarat High Court, through an interim order, directed ONGC to supply gas at Rs. 1,050 per 1000 cubic metres, which was later fixed at Rs. 1,400 per 1000 cubic metres by the Supreme Court. Consequently, the assessee was liable to pay the price difference for the period from 15th Sept., 1986, to 31st March, 1989, amounting to Rs. 1,19,02,499. The AO allowed only Rs. 12 lakhs, disallowing Rs. 1,07,02,500, as the liability pertained to earlier years. The CIT(A) confirmed the AO's order. The Tribunal, however, ruled in favor of the assessee, stating that the liability was crystallized only in the assessment year under consideration due to the High Court's order and should be allowed as a deduction in that year.

2. Disallowance of the Claim of Interest Paid to GIDC Amounting to Rs. 4,88,611:

The AO disallowed the claim of Rs. 4,88,611 as the liability was disputed and not paid. The CIT(A) confirmed the disallowance. The Tribunal found that the liability crystallized during the assessment year under consideration, as evidenced by the letter from GIDC dated 5th Feb., 1990, and allowed the deduction on an accrual basis.

3. Disallowance of Electricity Expenses in Director's Residence:

The assessee did not press this issue during the hearing, and it was dismissed as not pressed.

4. Disallowance of Rs. 15,000 on Conveyance Expenses:

The AO disallowed Rs. 20,000 out of Rs. 39,935 claimed for conveyance expenses, suspecting personal use by the directors. The CIT(A) reduced the disallowance to Rs. 15,000. The Tribunal reversed the CIT(A)'s order, finding no evidence of personal use and deeming the disallowance unjustified.

5. Disallowance of Rs. 15,050 Relating to Payment of Club Membership and Rs. 18,940 on Account of Guest House Expenses:

The AO disallowed the club membership fee, considering it personal entertainment. The CIT(A) confirmed this. The Tribunal reversed the disallowance, accepting that club membership was for business purposes. However, the Tribunal upheld the disallowance of guest house expenses, citing the Explanation to sub-s. (4) to s. 37 and sub-s. (5) introduced by the Finance Act, 1983, which disallows such expenses.

6. Initiation of Penalty Proceedings Under s. 271(1)(c):

This issue was not pressed by the assessee and was dismissed as not pressed.

7. Levy of Interest Under ss. 234B and 234C of the IT Act:

This issue was not considered by the CIT(A). The Tribunal restored the issue back to the CIT(A) for consideration.

Conclusion:

The appeal was partly allowed, with the Tribunal ruling in favor of the assessee on the major issues of gas price difference and interest paid to GIDC, while upholding the disallowance of guest house expenses and dismissing the unpressed issues. The issue of levy of interest under ss. 234B and 234C was remanded back to the CIT(A) for consideration.

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