2001 (5) TMI 137 - AT - Income Tax

Summary

Issues Involved:
1. Withdrawal of deduction under Section 80HHC due to non-filing of audit report in Form No. 10CCB.
2. Disallowance under Rule 6D for travelling expenses incurred by partners.
3. Exclusion of interest income from profits and gains of business for deduction under Section 80HHC.
4. Rectification under Section 154 for restricting the deduction under Section 80HHC.

Issue-wise Detailed Analysis:

1. Withdrawal of Deduction under Section 80HHC (ITA No. 420/Bang/1994):
The Revenue's appeal contested the CIT(A)'s cancellation of the AO's order under Section 154, which withdrew the deduction under Section 80HHC. The AO's withdrawal was based on the absence of the audit report in Form No. 10CCB with the return of income. The CIT(A) noted that the AO had accepted a duplicate report during assessment and had recomputed the deduction. The Tribunal upheld the CIT(A)'s order, stating that even if the audit report was filed later, it should not negate the deduction as the requirement is procedural. This view was supported by the Supreme Court's decision in Mangalore Chemicals and Fertilizers Ltd., which distinguished between procedural and substantive conditions.

2. Disallowance under Rule 6D for Travelling Expenses (ITA No. 249/Bang/1995):
The assessee appealed against the disallowance of Rs. 15,981 under Rule 6D for travelling expenses. The CIT(A) upheld the disallowance, considering the expenses excessive. However, the Tribunal found that Rule 6D applies only to employees, not partners. The AO could disallow expenses under Section 37(1) or Section 40A(2)(a) if deemed excessive, but no such provisions were invoked. The Tribunal concluded that disallowance under Rule 6D was not justified for partners' expenses.

3. Exclusion of Interest Income from Profits for Section 80HHC Deduction (ITA No. 249/Bang/1995 & ITA No. 250/Bang/1995):
The assessee challenged the exclusion of interest income from business profits for Section 80HHC deduction. The AO and CIT(A) treated the interest as income from 'other sources'. The Tribunal noted that the issue was debated and could not be rectified under Section 154, as established in T.S. Balaram, ITO vs. Volkart Bros. The Tribunal also considered the interest charged to clients for late payments as business income, intimately connected with business activities, and thus eligible for Section 80HHC deduction. The Tribunal relied on the Bombay High Court's decision in CIT vs. Nagpur Engineering Co. Ltd.

4. Rectification under Section 154 for Restricting Deduction (ITA No. 421/Bang/1995):
The Revenue appealed against the CIT(A)'s cancellation of the AO's rectification order under Section 154, which reduced the Section 80HHC deduction. The CIT(A) held that the AO erred in restricting the deduction in rectification proceedings. The Tribunal agreed, emphasizing that interest income from clients' delayed payments is business income, not from surplus funds, and thus eligible for Section 80HHC deduction. The Tribunal upheld the CIT(A)'s order, consistent with its findings in related appeals.

Conclusion:
The Tribunal dismissed the Revenue's appeals for the assessment years 1987-88 and 1992-93, and allowed the assessee's appeals for the assessment years 1990-91 and 1992-93, affirming the CIT(A)'s orders and recognizing the procedural nature of filing requirements, the non-applicability of Rule 6D to partners, and the classification of interest income as business income for Section 80HHC purposes.