1978 (10) TMI 58 - AT - Income Tax

Summary

Issues:
1. Deduction of bad debts due from Shri K.P. Bhatt.
2. Entitlement to weighted deduction under section 35B.
3. Expenditure incurred for provision of ordinary hospitality to customers.

Detailed Analysis:
1. The first issue revolves around the deduction of bad debts amounting to Rs. 26,866 due from Shri K.P. Bhatt, the proprietor of Silk India. The assessee, an exporter of various goods, claimed that the bad debts arose due to Shri Bhatt's failure to deliver goods of proper quality and in the required quantity. Despite efforts to recover the amount, Shri Bhatt's financial incapacity led the assessee to write off the debt. The Income Tax Officer (ITO) initially disallowed the claim, questioning the relationship of advances with specific orders and the lack of legal action. However, the Appellate Assistant Commissioner (AAC) allowed the deduction, considering the debt as a loss incidental to the assessee's business. The Tribunal upheld the AAC's decision, emphasizing the business relationship between the parties and the futility of legal action against an insolvent debtor.

2. The second issue pertains to the entitlement of weighted deduction under section 35B for commission paid to Shri D.C. Joshi, an Export Manager, and other related expenditures. The assessee, engaged in exporting various goods, claimed the deduction based on the services rendered by Shri Joshi in developing the export market. The ITO initially rejected the claim due to the expenditure being incurred in India. However, the AAC allowed the deduction, considering Shri Joshi's specialized role in enhancing the export business. The Tribunal upheld the AAC's decision, citing a precedent and affirming the eligibility of the expenditure for weighted deduction, along with the commission paid to Shri Joshi.

3. The final issue concerns the treatment of expenditure incurred for providing ordinary hospitality to customers as not being in the nature of entertainment. The ITO had characterized the expenses as entertainment costs, adding them to the assessment. However, the AAC disagreed, relying on a recent decision of the Bombay High Court that distinguished between entertainment and ordinary hospitality. The Tribunal concurred with the AAC's reasoning, upholding the treatment of the expenditure as ordinary hospitality and consequently deleting the addition made by the ITO. As a result, the departmental appeal was dismissed, affirming the decisions of the AAC on all three issues.