2005 (6) TMI 207 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition on account of lease rent on trucks.
2. Deletion of addition on account of festival expenses.
3. Deletion of addition on account of anniversary expenses.
4. Direction to the AO on the issue of lease charges paid to the financiers.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Lease Rent on Trucks:
The primary issue in ITA No. 325/Asr/1995 pertains to the deletion of an addition of Rs. 2,35,958 on account of lease rent on trucks. The assessee-company had acquired 12 trucks from M/s Ashok Leyland Finance Ltd. on a lease financing arrangement, debiting Rs. 2,35,938 as revenue expenditure and showing deferred capital expenditure of Rs. 15,43,644. The AO disallowed the revenue expenditure, treating it as capital expenditure, arguing that the trucks were not in the name of the assessee and thus, no expenditure could be charged to the P&L account. The CIT(A), however, allowed the appeal of the assessee, considering the opinion of the Institute of Chartered Accountants of India, which supported the treatment of 50% of the lease rental as revenue expenditure and 50% as deferred capital expenditure. The Tribunal upheld the CIT(A)'s decision, noting that the lease agreement specified that the lessor was entitled to claim depreciation, and the assessee could not capitalize the rental amount. The Tribunal also referenced the Hon'ble Supreme Court's decision in Challapalli Sugars Ltd. vs. CIT, which supported the application of commercial accountancy principles in the absence of statutory definitions.

2. Deletion of Addition on Account of Festival Expenses:
The second issue relates to the deletion of an addition of Rs. 23,640 made on account of festival expenses. The assessee had spent Rs. 58,108 on Diwali for distributing sweets to employees and important customers. The AO treated this as entertainment expenditure, but the CIT(A) deleted the addition, considering it as business expenditure aimed at improving business relations. The Tribunal upheld the CIT(A)'s decision, referencing similar decisions by the Tribunal's Delhi and Ahmedabad Benches, which allowed Diwali gifts as business expenditure.

3. Deletion of Addition on Account of Anniversary Expenses:
In ITA No. 260/Asr/1995, the assessee appealed against the addition of Rs. 11,032 for anniversary expenses at the Dera Bassi Factory. The AO disallowed this as entertainment expenditure, but the CIT(A) confirmed the disallowance. The Tribunal, however, allowed the appeal, referencing the Full Bench decision of the Hon'ble Gujarat High Court in Karjan Co-operative Cotton Sales Ginning & Pressing Factory vs. CIT, which allowed similar business expenditure. The Tribunal noted that the expenses were incurred for the annual day of the company, benefiting business relations between employees and the employer.

4. Direction to the AO on the Issue of Lease Charges Paid to the Financiers:
In ITA No. 367/Asr/1999, the Revenue appealed against the CIT(A)'s direction to the AO to recompute income based on the decision in Addl. CIT vs. General Industries Corporation. The Tribunal, considering its earlier decisions in similar cases, set aside the orders of the authorities below and directed the AO to follow the Tribunal's order in ITA No. 325/Asr/1995.

Conclusion:
The Tribunal dismissed the Revenue's appeals and upheld the CIT(A)'s decisions on all issues, confirming the treatment of lease rent on trucks as partly revenue expenditure, allowing festival and anniversary expenses as business expenditures, and directing the AO to follow the Tribunal's earlier orders on lease charges paid to financiers.