2000 (11) TMI 282 - AT - Income Tax

Summary

Issues Involved:
1. Deduction under Section 32AB regarding the inclusion of income from house property, dividends, and interest on debentures.
2. Disallowance of telephone expenses related to directors' residential phones.

Detailed Analysis:

1. Deduction under Section 32AB:

The primary issue revolves around the assessee's claim for a deduction under Section 32AB amounting to Rs. 4,64,602 based on the total profit of Rs. 23,23,008. The income includes dividend income, interest on debentures, and income from house property. The assessee argued that the entire profit should be treated as business income as it was computed in accordance with Parts II and III of the VI Schedule of the Companies Act, 1956. However, the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] rejected this claim, stating that the deduction under Section 32AB should be made out of the profits and gains of "eligible business" and not from income computed under other heads like house property or other sources. The AO emphasized that income from house property, capital gains, and other sources should be excluded from business income for the purpose of Section 32AB.

The Tribunal upheld the AO's and CIT(A)'s orders, emphasizing that Section 32AB falls under Chapter IV of the Income Tax Act, specifically under Part 'D' which deals with "Profits and gains of business or profession." The Tribunal noted that the computation of business income must adhere to Sections 28 to 44D, and income from other heads cannot be included unless explicitly provided by the Act. The Tribunal cited the Supreme Court decisions in United Commercial Bank Ltd. vs. CIT and CIT vs. Chugandas & Co., which clarified that income from securities, though business income, must be assessed under the head "interest on securities." The Tribunal also referred to the Gauhati High Court's decision in CIT vs. Dinjoye Tea Estates (P) Ltd., which held that interest and dividend income should not be included in business profits for Section 32AB deductions.

2. Disallowance of Telephone Expenses:

For the assessment year 1989-90, the AO disallowed Rs. 39,159 related to telephone expenses for directors' residential phones, considering them personal expenses. The CIT(A) upheld this disallowance, stating that the phones were mainly used for non-business purposes. The assessee argued that the phones were used for business purposes, especially for contacting customers during off-hours. The Tribunal agreed with the assessee, stating that expenses incurred by the company cannot be personal in nature and should be treated as business expenses. The Tribunal directed the AO to delete the disallowance, noting that any personal use by directors should be treated as a perquisite in their hands, not a disallowance in the company's assessment.

For the assessment year 1990-91, a similar disallowance of Rs. 46,163 was contested. The Tribunal, consistent with its earlier decision, directed the AO to delete this disallowance as well.

Conclusion:

The appeals resulted in a partial allowance for the assessment year 1989-90 and a full allowance for the assessment year 1990-91, with the Tribunal affirming the disallowance of the Section 32AB claim but reversing the disallowance of telephone expenses.