1984 (8) TMI 103 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of Rs. 1,00,000 claimed as bad debt.
2. Treatment of work-in-progress in the computation of capital base for relief under section 80J.
3. Deduction of interest paid towards arrears of income-tax and sales tax.
4. Treatment of salaries and perquisites paid to the managing director under section 40(c) or section 40A(5).
5. Treatment of commission paid to the managing director as part of remuneration or perquisites.
6. Addition of gratuity liability under section 40A(7).
7. Levy of interest under section 215.

Issue-wise Detailed Analysis:

1. Disallowance of Rs. 1,00,000 Claimed as Bad Debt:
The assessee, a battery manufacturer, claimed Rs. 1,00,000 as a bad debt related to an advance to Northern India Batteries Ltd. The ITO disallowed it, deeming it a capital payment meant to ward off competition. The first appellate authority concurred, noting the payment was capital in nature and not part of the assessee's profits. The Tribunal, however, found that the payment was towards the purchase of batteries and should be allowed as a business loss under section 28 of the Income-tax Act, 1961, as it was incidental to business and not a capital outlay.

2. Treatment of Work-in-Progress in the Computation of Capital Base for Relief under Section 80J:
The first appellate authority allowed the assessee's claim, following the Bombay High Court's decision in CIT v. Alcock Ashdown & Co. Ltd. and the Tribunal's earlier decision in the assessee's own case. The Tribunal upheld this view, dismissing the departmental appeal on this point.

3. Deduction of Interest Paid Towards Arrears of Income-tax and Sales Tax:
The ITO disallowed interest on arrears of income-tax and sales tax, considering them penalties. The first appellate authority allowed the interest on sales tax arrears, finding it a business expense necessary to avoid coercive measures. The Tribunal upheld this view but disallowed the interest on income-tax arrears, as income-tax itself is not an allowable deduction under section 37.

4. Treatment of Salaries and Perquisites Paid to the Managing Director under Section 40(c) or Section 40A(5):
The first appellate authority applied section 40(c) instead of section 40A(5), following a Special Bench decision in Geoffrey Manners & Co. Ltd. v. ITO. The Tribunal upheld this decision, dismissing the departmental appeal on this point.

5. Treatment of Commission Paid to the Managing Director as Part of Remuneration or Perquisites:
The first appellate authority, following a Tribunal decision, did not treat the commission as part of remuneration/perquisites. However, the Tribunal, citing a Special Bench decision in Mettur Chemical & Industrial Corpn. Ltd. v. ITO, held that the commission should be considered part of remuneration/perquisites and directed the ITO to re-work the disallowance under section 40(c).

6. Addition of Gratuity Liability under Section 40A(7):
The first appellate authority disallowed the gratuity liability provision of Rs. 1,85,563 under section 40A(7). The Tribunal upheld this decision, noting that the provision could not be allowed unless specific conditions were satisfied.

7. Levy of Interest under Section 215:
The Commissioner (Appeals) remitted the issue of interest under section 215 to the ITO for fresh consideration. The Tribunal found no cause for the assessee's apprehension, clarifying that the entire matter was restored to the ITO for examination in accordance with law.

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