1976 (10) TMI 46 - AT - Income Tax

Issues Involved:

1. Eligibility of certain items of receipts for relief under Section 80-I of the Income Tax Act, 1961.
2. Disallowance of advertisement expenses under the guise of charity for the assessment year 1970-71.
3. Eligibility for weighted deduction under Section 35B of the Income Tax Act for the assessment year 1971-72.
4. Disallowance of entertainment expenses under Section 37(2B) for the assessment year 1971-72.
5. Disallowance of perquisites under Section 40(A)(v) for the assessment year 1971-72.

Detailed Analysis:

1. Eligibility of Certain Items of Receipts for Relief under Section 80-I:

The first issue pertains to whether certain items of receipts are eligible for relief under Section 80-I of the Income Tax Act, 1961. The assessee, a concern manufacturing nuts and bolts, is recognized as a priority industry. Section 80-I allows a deduction from gross total income of an amount equal to 8% of the profits and gains attributable to any priority industry. The items in question include interest income, miscellaneous receipts, insurance and other claims, rent from staff, export incentives, surplus on sale, and sales-tax refund.

The Revenue contended that these items have a remote connection with the manufacturing activity and cannot be termed as "profits and gains from the activity of manufacturing." However, the Appellate Assistant Commissioner (AAC) held that these items have a direct bearing on the business of manufacturing nuts and bolts and cannot be excluded for the purpose of Section 80-I.

The Tribunal agreed with the AAC, stating that the distinction between "income" and "profits and gains" is not well-founded. The term "attributable" should be understood in a wider sense, meaning any receipts derived from the business of manufacturing that increase the profits and gains. Therefore, all the impugned items have a close connection with the conduct of the business of manufacturing and should be taken into account for working out the profits and gains from the priority industry.

2. Disallowance of Advertisement Expenses:

For the assessment year 1970-71, the assessee spent a sum on advertisements in souvenirs published by charitable institutions. The Income Tax Officer (ITO) disallowed half of these expenses, implying an element of charity. The AAC restricted the disallowance to 25%, following a precedent set by the Appellate Tribunal Bombay Bench 'D'. The Tribunal found no justification to interfere with the AAC's view, especially considering a recent circular from the Central Board of Direct Taxes allowing 100% cost of advertisements if the payment is genuine.

3. Eligibility for Weighted Deduction under Section 35B:

For the assessment year 1971-72, the issue was the AAC's direction to allow a weighted deduction under Section 35B for payments made to the Director of Exhibitions, Ministry of Foreign Trade, for displaying exhibits at international trade fairs. The ITO had not accepted this claim. The Tribunal upheld the AAC's decision, stating that the condition of payment being made outside India does not apply to items listed under Section 35B(1)(b)(i), which pertains to advertisement or publicity outside India.

4. Disallowance of Entertainment Expenses:

For the assessment year 1971-72, the ITO disallowed entertainment expenses incurred after 28th February 1970 under Section 37(2B). The AAC held that these expenses, which included offering tea, drinks, and snacks to suppliers and customers, could not be termed as entertainment expenses. The Tribunal agreed, citing a recent Gujarat High Court decision that offering such simple hospitality constitutes ordinary hospitality and not entertainment.

5. Disallowance of Perquisites under Section 40(A)(v):

For the assessment year 1971-72, the issue was the disallowance of perquisites provided as rent-free quarters to the company's Chairman and Managing Director. The ITO disallowed amounts exceeding 20% of their salaries. The AAC held that the Chairman and Managing Director were not employees, and thus Section 40(A)(v) could not be invoked. The Tribunal restored the disallowance for the Managing Director but agreed that the Chairman was not an employee, and thus the disallowance for him was not justified.

Conclusion:

The Tribunal upheld the AAC's decisions on all issues except for the partial disallowance of perquisites under Section 40(A)(v) for the Managing Director. The appeal for the assessment year 1971-72 succeeded partly.

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