1984 (11) TMI 100 - AT - Income Tax

Business Expenditure, Entertainment Expenditure, Investment Allowance, Plant And Machinery, Sales Promotion

Issues Involved:
1. Disallowance of Sales Promotion Expenses.
2. Disallowance of Selling Expenses.
3. Disallowance of Investment Allowance.

Detailed Analysis:

1. Disallowance of Sales Promotion Expenses:
The primary contention revolves around the disallowance of sales promotion expenses for the assessment years 1975-76, 1976-77, 1977-78, and 1978-79. The amounts disallowed were Rs. 14,187, Rs. 33,702, Rs. 27,954, and Rs. 50,820, respectively. The disallowance was based on the premise that these expenses were incurred for giving lunches and dinners to customers in five-star hotels, which were categorized as entertainment expenses under Section 37(2A) of the Income-tax Act, 1961.

The Commissioner (Appeals) upheld the disallowance, reasoning that the expenses fell within the ambit of entertainment expenses as per the Explanation to Section 37(2A). The assessee's argument that sales promotion allowances paid to employees should be excluded was rejected, as it was held that these allowances also fell within the mischief of Explanation 1(i) to Section 37(2A).

The Tribunal confirmed the Commissioner (Appeals)'s order, stating that the expenses in question were indeed entertainment expenses, even if classified under a different head. The Tribunal also referenced the Gujarat High Court decision in CIT v. Patel Bros. & Co. Ltd. and the Bombay High Court decision in CIT v. Shah Nanji Nagsi, affirming that the expenses were not allowable as business expenditure.

2. Disallowance of Selling Expenses:
The second issue pertains to the disallowance of selling expenses claimed by the assessee as business expenditure for the assessment years 1975-76 to 1982-83. The amounts ranged from Rs. 79,352 to Rs. 3,25,463. The assessee argued that these expenses were paid to employees of its customers as incentives to boost sales.

The Commissioner (Appeals) upheld the disallowance, relying on the Bombay High Court decision in Goodlas Nerolac Paints Ltd. v. CIT, which held that the burden of proving the expenditure lay on the assessee, and the refusal to disclose the names and addresses of the recipients justified the disallowance.

The Tribunal, however, noted that in subsequent years, the Tribunal had allowed similar expenses in the assessee's own case. The Tribunal referred to its earlier orders for the assessment years 1970-71, 1971-72, and 1974-75, where it had allowed the deduction after examining the materials and finding that the payments were made wholly and exclusively for business purposes. The Tribunal also referenced the Bombay High Court decision in CIT v. Mills Stores Trading Co. India (P.) Ltd., which supported the allowance of such expenses if the payments were satisfactorily established.

The Tribunal concluded that the selling expenses claimed by the assessee were reasonable and allowable as business expenditure under Section 37(1), following its earlier decisions and the principles laid down by the Bombay High Court.

3. Disallowance of Investment Allowance:
The final issue concerns the disallowance of the assessee's claim for investment allowance under Section 32A of the Act for the assessment year 1978-79. The claim was for Rs. 4,21,564 for new plant and machinery installed for the manufacture of synthetic resin and Rs. 44,809 for machinery installed for the manufacture of pigments.

The Commissioner (Appeals) disallowed the claim for pigments, as they were specified in item 26 of the Eleventh Schedule. However, the Commissioner (Appeals) allowed the claim for synthetic resin in subsequent years, as the machinery was used mainly for manufacturing an article not listed in the Eleventh Schedule.

The Tribunal agreed with the Commissioner (Appeals) that the assessee was entitled to investment allowance for the synthetic resin plant. It held that the machinery was used solely for manufacturing synthetic resin, and the assessee was entitled to the deduction under Section 32A(2A). The Tribunal also noted that the Legislature had subsequently omitted item 26 from the Eleventh Schedule, reinforcing the assessee's claim.

Conclusion:
The Tribunal upheld the disallowance of sales promotion expenses as entertainment expenses but allowed the deduction of selling expenses as business expenditure. The Tribunal also allowed the investment allowance for the synthetic resin plant, affirming the assessee's entitlement under Section 32A. The appeals were partly allowed.

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