1989 (3) TMI 157 - AT - Income Tax

Additional Depreciation Assessment Year Bad Debt Business Expenditure Deduction In Respect Expenditure Incurred Hybrid System Mercantile System

Issues Involved:
1. Assessment of interest on sticky loans.
2. Addition of write backs previously sought to be taxed.
3. Disallowance under section 37(3A) of the Act.
4. Disallowance of bad debts.
5. Disallowance of write off of foreign currency debts.
6. Disallowance of long term capital loss.
7. Disallowance under section 43B.
8. Disallowance of expenses on presentation articles.
9. Charging of interest under section 215.
10. Charging of interest under section 209A(1).
11. Disallowance of additional depreciation on office equipment.

Detailed Analysis:

1. Assessment of Interest on Sticky Loans:
The primary issue was whether the interest on sticky loans should be taxed. The assessee switched from a mercantile system to a cash system of accounting for such interest. The Tribunal accepted this change, noting that it was bona fide and regularly followed. The assessee's method was consistent with the Supreme Court decision in the State Bank of Travancore case, which allowed such a switch if it reflected true profits and gains. The Tribunal directed the exclusion of Rs. 15,49,97,781 from taxable income.

2. Addition of Write Backs Previously Sought to Be Taxed:
The Tribunal upheld the addition of Rs. 20,29,825 for interest written off in past years, Rs. 57,767 for L/C Commission and other charges, and Rs. 13,10,030 for provision for bad and doubtful debts. However, the write back of interest suspense account amounting to Rs. 49,34,815 was also upheld, as the expenditure had been allowed in earlier years and was rightly brought to tax upon write-off.

3. Disallowance Under Section 37(3A) of the Act:
The Tribunal held that expenses on motor car repairs and insurance are allowable under section 31 and not subject to disallowance under section 37(3A). However, Rs. 9,600 spent on advertisement was subject to disallowance under section 37(3A).

4. Disallowance of Bad Debts:
The Tribunal found that the write-off pertained to specific debtors and was not an ad hoc provision. The CIT(A) was not justified in rejecting the claim, and the Tribunal directed the allowance of Rs. 6,42,46,421 as bad debts.

5. Disallowance of Write Off of Foreign Currency Debts:
The Tribunal remitted the matter back to the IAC (Asst.) to verify if the Reserve Bank of India's permission was necessary for the write-off. If not required, the claim should be accepted.

6. Disallowance of Long Term Capital Loss:
The assessee did not press this issue, and the ground was rejected.

7. Disallowance Under Section 43B:
The Tribunal modified the CIT(A)'s directions, stating that no disallowance should be made if the liabilities were not payable during the previous year, referencing the Andhra Pradesh High Court decision in Srikakollu Subba Rao & Co. v. Union of India.

8. Disallowance of Expenses on Presentation Articles:
The Tribunal reversed the CIT(A)'s decision, holding that the expenses on presentation articles were normal business expenses and should be allowed.

9. Charging of Interest Under Section 215:
The Tribunal noted that the CIT(A) had already directed consequential relief based on the appellate order. The challenge was rejected as misconceived.

10. Charging of Interest Under Section 209A(1):
The Tribunal upheld the CIT(A)'s decision to remit the matter back to the IAC (Asst.) for verification.

11. Disallowance of Additional Depreciation on Office Equipment:
The Tribunal confirmed the disallowance, noting that the equipment was installed in office premises and did not qualify for additional depreciation under the proviso to section 32(1)(ii).

Conclusion:
The appeal was partly allowed, with specific directions and remittals on several issues, reflecting a detailed and nuanced approach to the various claims and disallowances.

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