1988 (9) TMI 79 - AT - Income Tax

Issues Involved:
1. Disallowance of secret commission.
2. Disallowance of surtax liability.
3. Reimbursement of medical expenses.
4. Disallowance of car expenses/depreciation.
5. Disallowance of club fees.
6. Treatment of Managing Director's commission as remuneration.
7. Disallowance of 1/3rd travelling expenses of the Managing Director.
8. Disallowance of interest for late filing of return and default in payment of advance tax.
9. Treatment of roads within factory premises for depreciation.
10. Depreciation on leasehold rights in land.
11. Disallowance of marriage presents and Diwali Mahurat expenses.
12. Disallowance of certain expenses under section 37(2A).
13. Inclusion of expenditure on gift articles and Diwali greeting cards under section 37(3A).
14. Disallowance of carpet cost as capital expenditure.
15. Disallowance under section 35B.
16. Taxation of proceeds from sale of import entitlements.
17. Disallowance of fees paid to Registrar of Companies.
18. Disallowance of payment for delay in Family Pension Contribution.
19. Disallowance of bad debts.
20. Taxation of credit balances written back to Profit & Loss Account.

Detailed Analysis:

1. Disallowance of Secret Commission:
The Tribunal addressed the disallowance of secret commission payments charged to the Profit & Loss Account. The CIT(A) confirmed the disallowance due to lack of evidence that the payments were for services rendered. The Tribunal, however, noted that similar claims had been allowed in previous years and emphasized the industry practice of such payments. The Tribunal found the CIT(A)'s reasoning flawed, especially considering the destruction of relevant documents in a fire, and allowed the claim.

2. Disallowance of Surtax Liability:
The Tribunal upheld the disallowance of surtax liability as a deduction in computing the total income, in line with unanimous judicial opinion.

3. Reimbursement of Medical Expenses:
The Tribunal ruled that reimbursement of medical expenses in cash should be considered part of the salary, not a perquisite, and thus allowed the claim.

4. Disallowance of Car Expenses/Depreciation:
The Tribunal found the CIT(A) in error for disallowing the full expenses and depreciation on cars. It held that only 1/3rd of the expenses should be considered under sections 40A(5)/40(c), aligning with the Bombay High Court's ruling that employer-incurred expenses, not perquisite value, should be considered.

5. Disallowance of Club Fees:
The Tribunal dismissed the ground related to the disallowance of club fees under sections 40(c)/40A(5) as it was not raised before the CIT(A).

6. Treatment of Managing Director's Commission as Remuneration:
The Tribunal upheld the CIT(A)'s decision to treat the Managing Director's commission as remuneration under section 40(C), citing a Special Bench decision.

7. Disallowance of 1/3rd Travelling Expenses of the Managing Director:
The Tribunal reversed the CIT(A)'s disallowance of 1/3rd of the Managing Director's travelling expenses, recognizing the expenses as normal business expenditure under section 37(1) due to their connection with a proposed collaboration agreement.

8. Disallowance of Interest for Late Filing of Return and Default in Payment of Advance Tax:
The Tribunal rejected the ground, affirming that such payments cannot be allowed as business expenses or interest on borrowed capital.

9. Treatment of Roads Within Factory Premises for Depreciation:
The Tribunal upheld the CIT(A)'s decision to treat roads within factory premises as buildings, not plant, for depreciation purposes, referencing a Bombay High Court decision.

10. Depreciation on Leasehold Rights in Land:
The Tribunal agreed with the CIT(A) that expenditure on leasehold rights in land should be treated as part of the land cost, which is not a depreciable asset.

11. Disallowance of Marriage Presents and Diwali Mahurat Expenses:
The Tribunal found the CIT(A)'s disallowance unjustified, ruling that the expenses were for business purposes and should be allowed.

12. Disallowance of Certain Expenses Under Section 37(2A):
The Tribunal directed the ITO to exclude 25% of the disallowed expenses, recognizing them as incurred on employees accompanying customers, following the amendment to section 37(2A).

13. Inclusion of Expenditure on Gift Articles and Diwali Greeting Cards Under Section 37(3A):
The Tribunal could not interfere with the CIT(A)'s order due to the lack of details about the expenses, which were destroyed in a fire.

14. Disallowance of Carpet Cost as Capital Expenditure:
The Tribunal deleted the disallowance, viewing the expenditure on carpets as routine with no enduring benefit, thus not capital in nature.

15. Disallowance Under Section 35B:
The Tribunal rejected the ground as it was not pressed by the assessee's counsel.

16. Taxation of Proceeds from Sale of Import Entitlements:
The Tribunal upheld the CIT(A)'s decision to tax the proceeds from the sale of import entitlements, supported by a Bombay High Court decision.

17. Disallowance of Fees Paid to Registrar of Companies:
The Tribunal allowed the ground, reversing the CIT(A)'s disallowance in light of a Bombay High Court decision.

18. Disallowance of Payment for Delay in Family Pension Contribution:
The Tribunal upheld the CIT(A)'s disallowance, referencing a Gujarat High Court decision.

19. Disallowance of Bad Debts:
The Tribunal upheld the CIT(A)'s denial of the bad debt claim due to insufficient evidence that the debts became irrecoverable during the year under consideration.

20. Taxation of Credit Balances Written Back to Profit & Loss Account:
The Tribunal deleted the inclusion of credit balances in the total income, finding no evidence of liability cessation or remission by creditors.

Conclusion:
The appeals for assessment years 1970-71 and 1971-72 were allowed, while those for 1978-79 to 1980-81 were allowed in part.

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