1981 (8) TMI 93 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of exchange rate fluctuation loss as revenue expense.
2. Disallowance of sales promotion expenses.
3. Disallowance of expenses incurred on shifting plant and machinery.
4. Disallowance of club membership fees.
5. Direction to recompute disallowance under Rule 6D.
6. Appealability of interest charged under section 214.

Detailed Analysis:

1. Disallowance of Exchange Rate Fluctuation Loss as Revenue Expense:
The primary issue was whether the additional amount paid due to exchange rate fluctuation should be treated as a revenue expense or capital expenditure. The assessee argued that the additional amount paid due to the exchange rate fluctuation should be considered a revenue expense. The Tribunal, however, distinguished between the nature of expenditure incurred for raising a loan and repaying a loan, referring to the Calcutta High Court decision in Bestobell (India) Ltd. and the Punjab and Haryana High Court decision in Groz-Beckert Saboo Ltd. The Tribunal held that the Supreme Court's decision in India Cements Ltd. did not apply to the facts of this case, as it dealt with a different situation. The Tribunal concluded that the excess amount paid due to exchange rate fluctuation for discharging a loan liability used to acquire a capital asset should be treated as capital expenditure, as per section 43A of the Income-tax Act.

2. Disallowance of Sales Promotion Expenses:
The assessee contested the disallowance of Rs. 32,917 incurred as sales promotion expenses, which the ITO disallowed as entertainment expenses under section 37(2B). The Tribunal referred to its previous decision in the assessee's own case for the assessment year 1972-73, where similar expenses were allowed as business expenditure. The Tribunal allowed the majority of the sales promotion expenses, confirming the disallowance of only Rs. 6,769 out of the total, as these were found to be in the nature of entertainment expenses.

3. Disallowance of Expenses Incurred on Shifting Plant and Machinery:
The assessee contested the disallowance of Rs. 6,776 incurred on shifting plant and machinery within Cochin. The Tribunal referred to its earlier decision in the assessee's case for the assessment year 1972-73 and the case of Siemens India Ltd., concluding that such expenses were in the nature of revenue expenditure. The Tribunal allowed the entire amount of Rs. 6,776 as revenue expenditure.

4. Disallowance of Club Membership Fees:
The assessee contested the disallowance of Rs. 3,500 spent on entrance fees to various clubs for its employees and directors and Rs. 5,000 paid as the company's membership to Lotus Club. The Tribunal upheld the disallowance, stating that the assessee had not established that the expenses were wholly and exclusively incurred for carrying on its business or were incidental to it and did not represent capital expenditure.

5. Direction to Recompute Disallowance under Rule 6D:
The assessee contested the direction given by the Commissioner (Appeals) to the ITO for recomputing the disallowance made under Rule 6D. The Tribunal found nothing irregular in the direction given by the Commissioner (Appeals) and upheld the decision to recompute the disallowance after giving the assessee an opportunity to be heard.

6. Appealability of Interest Charged under Section 214:
The assessee contested the Commissioner (Appeals)'s decision that no appeal lay against the charging of interest under section 214. The Tribunal upheld the decision of the Commissioner (Appeals), relying on the binding Full Bench decision of the Bombay High Court in CIT v. Daimler Benz A.G., which broadly covered the issue.

Conclusion:
The Tribunal partly allowed the appeal, confirming the treatment of exchange rate fluctuation loss as capital expenditure, allowing the majority of sales promotion expenses, allowing the expenses incurred on shifting plant and machinery, upholding the disallowance of club membership fees, and directing the recomputation of disallowance under Rule 6D. The Tribunal also upheld the decision that no appeal lay against the charging of interest under section 214.