1998 (3) TMI 161 - AT - Income Tax

Issues Involved:
1. Rejection of the assessee's claim of relief under Section 80-I of the Act.
2. Determination of whether the assessee is a small-scale industrial undertaking.
3. Employment of the requisite number of workers.
4. Deduction eligibility concerning specific incomes (interest on bank deposits, trading sales, and raw material sales).
5. Rate of deduction under Section 80-I.
6. Addition to trading results.
7. Disallowance of foreign tour expenses.
8. Disallowance of telephone expenses.
9. Disallowance of entertainment expenditure.
10. Penalty under the Sales Tax Act and Factories Act.
11. Charging of interest under Sections 234B and 234C.
12. Non-admission of additional ground by the CIT(A).

Detailed Analysis:

1. Rejection of the Assessee's Claim of Relief under Section 80-I:
The assessee, a private limited company engaged in manufacturing detergent powder, toothpaste, detergent cake, and shaving cream, claimed a deduction under Section 80-I amounting to Rs. 67,10,045. The AO rejected this claim on the grounds that the assessee was manufacturing items listed in Schedule XI and was not a small-scale undertaking as the value of its plant and machinery exceeded Rs. 35,00,000. The AO also noted that the assessee did not employ the requisite number of workers directly but through contractors.

2. Determination of Small-Scale Industrial Undertaking:
The assessee argued that its units should be considered separate undertakings. However, the AO found that the units were not separate based on factors such as a common premises, single electric connection, and shared administrative office. The AO concluded that the assessee did not qualify as a small-scale industrial undertaking.

3. Employment of Requisite Number of Workers:
The AO contended that the assessee did not employ the required number of workers directly, as the workers were employed through contractors. The CIT(A) agreed with the AO's findings.

4. Deduction Eligibility for Specific Incomes:
The AO held that incomes from interest on bank deposits, trading sales, and raw material sales were not eligible for deduction under Section 80-I. The CIT(A) upheld this view, noting that these incomes did not directly derive from the industrial undertaking.

5. Rate of Deduction under Section 80-I:
The AO stated that the higher deduction rate of 30% was only available to companies that began manufacturing during a specific period. The CIT(A) confirmed this view, noting that the assessee commenced manufacturing before the specified period.

6. Addition to Trading Results:
The AO made an addition of Rs. 12,64,660 to the trading results, citing unverifiable purchases. The CIT(A) restored this issue to the AO for further investigation.

7. Disallowance of Foreign Tour Expenses:
The AO disallowed 50% of the foreign tour expenses, amounting to Rs. 4,34,626, on the grounds that the directors overstayed in foreign countries. The CIT(A) confirmed this disallowance. However, the Tribunal deleted the addition, noting that the trips were for business purposes.

8. Disallowance of Telephone Expenses:
The AO disallowed 1/5th of the telephone expenses incurred on phones installed at the directors' residences. The CIT(A) upheld this disallowance. The Tribunal deleted the addition, finding it uncalled for.

9. Disallowance of Entertainment Expenditure:
The AO disallowed Rs. 15,000 out of the entertainment expenditure. The CIT(A) reduced the disallowance to Rs. 5,000, which the Tribunal found fair and reasonable.

10. Penalty under Sales Tax Act and Factories Act:
The AO disallowed Rs. 6,550 as penalties under the Sales Tax Act and Factories Act. The CIT(A) confirmed this disallowance. The Tribunal upheld the disallowance, concurring with the authorities.

11. Charging of Interest under Sections 234B and 234C:
The AO charged interest under Sections 234B and 234C. The CIT(A) directed the AO to grant corresponding reductions based on relief granted. The Tribunal held that the assessee was not liable to pay advance tax and thus, there was no justification for charging interest under these sections.

12. Non-Admission of Additional Ground by the CIT(A):
The CIT(A) did not admit an additional ground raised by the assessee. The Tribunal directed the CIT(A) to entertain and adjudicate upon the additional ground after hearing the parties.

Conclusion:
The Tribunal allowed the appeal in part, granting relief on several grounds, including the deletion of additions for foreign tour and telephone expenses, and holding that the assessee was entitled to deduction under Section 80-I. The Tribunal also directed the CIT(A) to entertain the additional ground raised by the assessee.

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