2000 (6) TMI 118 - AT - Income Tax

Issues Involved:

1. Legality of CIT(A)'s order.
2. Deduction of interest paid on borrowings u/s 36(1)(iii).
3. Allowability of various expenditures as revenue expenditure.
4. Debenture issue expenses and their treatment.
5. Expenditure on advertisement.
6. Disallowance of gift articles and marketing expenses.
7. Deduction claims under sections 80HH and 80-I.
8. Re-computation of deduction u/s 35D considering bridge loan.
9. Deletion of disallowances u/s 40A(3) and 43B.
10. Deduction under sections 80HH and 80-I on miscellaneous income.

Summary:

1. Legality of CIT(A)'s Order:
The assessee challenged the CIT(A)'s order as bad in law and contrary to the facts of the case.

2. Deduction of Interest Paid on Borrowings u/s 36(1)(iii):
The assessee claimed a deduction of Rs.1,56,76,000 as interest paid on borrowings. The CIT(A) and the Assessing Officer (AO) disallowed this, treating it as capital expenditure. The Tribunal, following the decision in Alembic Glass Industries Ltd., held that the interest was deductible under section 36(1)(iii) as it was for the expansion of an existing business, not a new business.

3. Allowability of Various Expenditures as Revenue Expenditure:
The assessee claimed several expenditures as revenue expenditure, including salaries, wages, and travel expenses. The CIT(A) and AO treated these as capital expenditures. The Tribunal upheld this treatment, stating these expenses were directly related to the acquisition and installation of new machinery and thus capital in nature.

4. Debenture Issue Expenses:
The assessee incurred expenses on debenture issues and claimed them under sections 35D and 37(1). The CIT(A) allowed part of these expenses under section 35D but directed the AO to proportionately allow the remaining expenses. The Tribunal restored the matter to the CIT(A) for re-adjudication regarding the non-convertible debentures and allowed the balance expenditure under section 37(1).

5. Expenditure on Advertisement:
The assessee claimed Rs.70,22,742 as advertisement expenditure. The CIT(A) and AO disallowed this, treating it as capital expenditure. The Tribunal allowed the expenditure as revenue expenditure, stating it did not bring any tangible asset into existence and was incurred for business purposes.

6. Disallowance of Gift Articles and Marketing Expenses:
The AO made ad hoc disallowances of Rs.20,000 and Rs.30,000 for gift articles and marketing expenses, respectively, citing unverifiable nature. The Tribunal deleted these disallowances, stating the expenditures were fully vouched and related to business purposes.

7. Deduction Claims Under Sections 80HH and 80-I:
The CIT(A) excluded gross interest receipts from income eligible for deduction under sections 80HH and 80-I. The Tribunal restored the issue to the AO for fresh adjudication in light of the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd.

8. Re-computation of Deduction u/s 35D Considering Bridge Loan:
The CIT(A) directed the AO to recompute the deduction under section 35D, considering the bridge loan as part of the capital employed. The Tribunal upheld this direction.

9. Deletion of Disallowances u/s 40A(3) and 43B:
The CIT(A) deleted disallowances of Rs.44,250 u/s 40A(3) and Rs.4,51,452 u/s 43B. The Tribunal upheld the CIT(A)'s decision, finding the assessee's explanations satisfactory.

10. Deduction Under Sections 80HH and 80-I on Miscellaneous Income:
The CIT(A) allowed deduction on miscellaneous income from the sale of containers under sections 80HH and 80-I. The Tribunal upheld this decision, agreeing that such income was derived from the industrial undertaking.

Conclusion:
The appeal filed by the assessee was partly allowed, granting deductions for interest paid on borrowings and advertisement expenses, while the appeal filed by the revenue was dismissed.

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