1988 (12) TMI 133 - AT - Income Tax

Summary

Issues Involved:
1. Deduction of sur-tax payable.
2. Disallowance of liability towards salaries, wages, and bonus.
3. Restriction of deduction for contribution to Superannuation Fund.
4. Disallowance of expenditure on advertisements, publicity, and sales promotion.
5. Disallowance of depreciation on capital expenditure on scientific research.
6. Restriction of depreciation on Forklift.
7. Disallowance of investment allowance on certain assets.
8. Disallowance of legal and professional charges.
9. Disallowances under Section 40A(5) of the IT Act.
10. Computation of capital employed in new industrial undertaking.
11. Disallowance of staff welfare expenses.
12. Disallowance of repairs and maintenance of plant and machinery.
13. Disallowance of repairs and maintenance of buildings.
14. Application of Rule 6D.
15. Trade discount vs. sales promotion expenditure.
16. Depreciation on fans costing less than Rs. 750.
17. Depreciation on roads inside the factory.
18. Extra-shift allowance on machinery.
19. Applicability of Section 40(C) vs. Section 40(A)(5).

Detailed Analysis:

1. Deduction of Sur-tax Payable:
The assessee's appeal regarding the deduction of sur-tax payable under the Companies (Profits) Surtax Act, 1964, amounting to Rs. 3,33,263 was disallowed by the ITO and CIT (A), following the decision of the Calcutta High Court in Molins of India Ltd. vs. CIT. The tribunal upheld this disallowance, rejecting the assessee's ground.

2. Disallowance of Liability Towards Salaries, Wages, and Bonus:
The CIT (A) disallowed Rs. 11,21,480 provision for salaries, wages, and bonus, as the assessee failed to produce minutes of discussions proving the liability arose in the year under consideration. The tribunal allowed the liability of Rs. 3,70,699 for clerical and technical staff, as it was supported by an agreement dated 17th Oct. 1979, but disallowed the provisions for workers and city warehouse employees as their agreements were dated post the assessment year.

3. Restriction of Deduction for Contribution to Superannuation Fund:
The ITO restricted the deduction to 80% of Rs. 42,367 contributed to the Superannuation Fund. The tribunal, following its own decision in the assessee's case for the previous year, allowed 100% deduction under Section 36(1)(iv) of the IT Act.

4. Disallowance of Expenditure on Advertisements, Publicity, and Sales Promotion:
The CIT (A) disallowed 15% of Rs. 22,82,638 spent on advertisements, publicity, and sales promotion. The tribunal allowed expenditure on sales literature, exhibition, and display but disallowed miscellaneous promotional aids, give-aways, complimentaries, public relations, samples, and 50% of souvenir advertisements. It allowed 50% of the expenditure on In-home and In-shop campaigns.

5. Disallowance of Depreciation on Capital Expenditure on Scientific Research:
The assessee's ground for depreciation on capital expenditure on scientific research amounting to Rs. 2,01,333 was not pressed and thus rejected.

6. Restriction of Depreciation on Forklift:
The tribunal directed the ITO to allow 30% depreciation on the forklift, as it falls within the definition of electrically operated vehicles per Board Instruction No. 617 dated 13th Sept. 1973.

7. Disallowance of Investment Allowance on Certain Assets:
The tribunal allowed investment allowance on fire-proof doors and air-conditioners, treating them as plant and machinery, but disallowed the same for cupboards, treating them as furniture and fixtures.

8. Disallowance of Legal and Professional Charges:
The tribunal upheld the CIT (A)'s decision that Rs. 16,513 out of legal and professional charges related to the purchase of property, flat, garage, and construction of a mezzanine floor were capital in nature and thus disallowed.

9. Disallowances Under Section 40A(5):
(a) Reimbursement of medical expenses and house rent allowance were considered as part of salary for disallowance under Section 40A(5), following the Special Bench decision in Glaxo Laboratories (India) Ltd.
(b) Service charges for air-conditioner use by the Managing Director were not considered for disallowance.
(c) Repairs to flats provided to employees were disallowed as per the Special Bench decision in Kodak India Ltd.
(d) Gratuity payable to Mr. U.R. Acharya was included as part of salary for disallowance under Section 40A(5), following the Calcutta High Court decision in Indian Oxygen Limited vs. CIT.
(e) The CIT (A) directed the ITO to obtain particulars of motor car expenses and then determine the disallowance.
(f) Section 40(c) was deemed applicable for the Managing Director's salary and perquisites, following the Special Bench decision in Geoffrey Manners & Co.

10. Computation of Capital Employed in New Industrial Undertaking:
The assessee did not press this ground, and it was thus rejected.

11. Disallowance of Staff Welfare Expenses:
The tribunal directed the ITO to verify that the assessee had booked/hired accommodation for more than 183 days/nights in Taj Group of Hotels without counting multiple persons staying simultaneously.

12. Disallowance of Repairs and Maintenance of Plant and Machinery:
The tribunal allowed the deduction for Rs. 27,70,625 spent on imported and local spares, treating them as revenue expenditure for repairs, following its previous decision in the assessee's case.

13. Disallowance of Repairs and Maintenance of Buildings:
The tribunal allowed the deduction for repairs and maintenance of leased properties, except for Rs. 4,83,600 spent on service charges for the headquarters' building, treating it as revenue expenditure.

14. Application of Rule 6D:
The tribunal decided against the assessee, following the Special Bench decision in Sundaram Finance Ltd. vs. IAC.

15. Trade Discount vs. Sales Promotion Expenditure:
The tribunal upheld the CIT (A)'s decision that Rs. 13,00,664 for bonus merchandise and samples was a trade discount, not sales promotion expenditure, following its previous decision in the assessee's case.

16. Depreciation on Fans Costing Less Than Rs. 750:
The tribunal upheld the CIT (A)'s decision to allow 100% depreciation on fans costing less than Rs. 750, following its previous decision in the assessee's case.

17. Depreciation on Roads Inside the Factory:
The tribunal upheld the CIT (A)'s decision to allow depreciation on roads inside the factory, treating them as first-class buildings, following the Bombay High Court decision in CIT vs. Colour Chem Ltd.

18. Extra-Shift Allowance on Machinery:
The tribunal upheld the CIT (A)'s decision to allow extra-shift allowance on machinery based on the working of the concern as a whole, following Board's Circular No. 135.

19. Applicability of Section 40(C) vs. Section 40(A)(5):
The tribunal upheld the CIT (A)'s decision that Section 40(C) is applicable for Director employees, following the Special Bench decision in Geoffrey Manners & Co.

Conclusion:
The assessee's appeal was partly allowed, and the departmental appeal was dismissed.