1984 (3) TMI 112 - AT - Income Tax

Summary

Issues Involved:
1. Advertisements in souvenirs
2. Depreciation on capital expenditure for scientific research incurred in earlier years
3. Expenditure on shareholders' visit to the factory
4. Shortage in inventories
5. Motor car expenses
6. Guest house expenses
7. Stock exchange listing fees
8. Development rebate on nylon plant
9. Coal handling contract
10. Brokerage
11. Inflation of purchases
12. Legal charges
13. Sales promotion expenditure
14. Loss on purchase of shares
15. Interest on superannuation fund
16. Reimbursement of medical expenses
17. Commission paid to Nacksons Corpn. Ltd

Issue-wise Detailed Analysis:

1. Advertisements in Souvenirs:
The assessee claimed Rs. 2,32,000 as advertisement expenditure in souvenirs, which the ITO disallowed, considering it a donation to a political party without business advantages. The Commissioner (Appeals) upheld this disallowance. However, the Tribunal allowed the claim, noting that the payments were made by account payee cheques, properly entered in the accounts, and supported by bills and vouchers. The Tribunal emphasized the commercial expediency and potential business advantages of such advertisements.

2. Depreciation on Capital Expenditure for Scientific Research Incurred in Earlier Years:
The ITO disallowed depreciation of Rs. 1,19,619 on capital expenditure for scientific research, upheld by the Commissioner (Appeals) based on the amendment of section 35(2)(iv). The Tribunal directed the matter to be reconsidered by the ITO in light of the Supreme Court's interpretation of the amendment.

3. Expenditure on Shareholders' Visit to the Factory:
The ITO disallowed Rs. 88,663 as entertainment expenses, upheld by the Commissioner (Appeals). The Tribunal allowed the expenditure, noting that it was incurred to inform shareholders about the business, encouraging their constructive interest, and was not personal or entertainment expenditure.

4. Shortage in Inventories:
The ITO added Rs. 75,722 due to unexplained shortages, partially upheld by the Commissioner (Appeals). The Tribunal deleted the entire addition, noting that the shortages and excesses could result from mistakes in entries or identity of items, considering the large turnover and extensive inventory.

5. Motor Car Expenses:
The ITO disallowed Rs. 30,000 based on internal auditors' observations about possible non-business use of motor cars, upheld by the Commissioner (Appeals). The Tribunal deleted the disallowance, noting the lack of specific evidence of non-business use and the general nature of the auditors' remarks.

6. Guest House Expenses:
The ITO disallowed half of the guest house expenses amounting to Rs. 26,822 and half of the depreciation amounting to Rs. 1,254, upheld by the Commissioner (Appeals). The Tribunal upheld a disallowance of Rs. 10,000 for expenses on outsiders but allowed the balance, noting the business necessity of housing staff in guest houses.

7. Stock Exchange Listing Fees:
The ITO disallowed Rs. 6,000 as capital expenditure, upheld by the Commissioner (Appeals). The Tribunal allowed the expenditure, recognizing the business advantages and advertisement value of stock exchange listing.

8. Development Rebate on Nylon Plant:
The ITO rejected the development rebate claim, but the Commissioner (Appeals) allowed it. The Tribunal upheld the Commissioner (Appeals)'s decision, citing the Supreme Court's decision in CIT v. Nirlon Synthetic Fibres & Chemicals Ltd.

9. Coal Handling Contract:
The ITO added Rs. 6,49,670 for not invoking penalty clauses in coal handling contracts, reduced from an initial Rs. 11,56,000. The Commissioner (Appeals) deleted the addition, noting the commercial expediency and practical difficulties in enforcing penalties. The Tribunal upheld this deletion, emphasizing the business discretion and overall benefit to the assessee.

10. Brokerage:
The ITO disallowed Rs. 6,04,869 in brokerage, reduced by the IAC to Rs. 2,29,102, but the Commissioner (Appeals) allowed the entire claim. The Tribunal upheld the Commissioner (Appeals)'s decision, following its earlier order in the assessee's case.

11. Inflation of Purchases:
The ITO disallowed Rs. 2,47,750 for purchases not conforming to company guidelines, but the Commissioner (Appeals) deleted the addition. The Tribunal upheld this deletion, recognizing the practical business needs and lack of evidence of non-business purchases.

12. Legal Charges:
The ITO disallowed Rs. 1,09,880 for legal advice related to opposing Government Directors' appointment, but the Commissioner (Appeals) allowed the claim. The Tribunal upheld this decision, noting the business necessity and timing of the expenditure.

13. Sales Promotion Expenditure:
The ITO disallowed Rs. 29,448 as entertainment expenditure, but the Commissioner (Appeals) allowed it as sales promotion. The Tribunal remitted the matter to the ITO to reconsider in light of amended provisions.

14. Loss on Purchase of Shares:
The ITO disallowed Rs. 23,100 advanced to the association of Manmade Fibre Industry, but the Commissioner (Appeals) allowed it. The Tribunal upheld this decision, recognizing the commercial expediency and business connection.

15. Interest on Superannuation Fund:
The ITO disallowed Rs. 3,950 paid as interest for late payment of superannuation contributions, but the Commissioner (Appeals) allowed it. The Tribunal upheld this decision, noting the business necessity and lack of penal characteristics.

16. Reimbursement of Medical Expenses:
The ITO included Rs. 691 in medical expenses for applying section 40A(5), but the Commissioner (Appeals) deleted the addition. The Tribunal upheld this decision, following the Special Bench of the Tribunal in Blackie & Sons Ltd.

17. Commission Paid to Nacksons Corpn. Ltd:
The ITO disallowed Rs. 219 due to lack of details, but the Commissioner (Appeals) allowed it. The Tribunal upheld this decision, noting the small amount and identifiable payment.

Conclusion:
Both the assessee's and department's appeals were partly allowed, with detailed considerations given to each issue based on business necessity, commercial expediency, and adherence to legal principles.