1979 (11) TMI 124 - AT - Income Tax

Summary

Issues:
1. Weighted deduction under section 35B - Allowance of various expenses.
2. Entertainment expenses disallowance.
3. Dispute regarding interest disallowance under section 40(b).

Detailed Analysis:

1. Weighted deduction under section 35B:
The judgment concerns appeals by both the assessee and the Revenue related to the asst. yr. 1975-76 for a partnership firm. The primary issue revolves around the claim of weighted deduction under section 35B. The firm, engaged in oil-seeds and spices trading, had its export turnover and total turnover scrutinized. The Income Tax Officer (ITO) allowed certain expenses but disallowed others like bank interest, insurance, and export guarantee premium. The CIT (A) partially allowed the claims, leading to appeals before the Tribunal. The Tribunal considered arguments from both parties and upheld the CIT (A)'s decision on certain expenses like E.C.G.C. premium and export executive's salary. However, the Tribunal directed a correction in the calculation of the weighted deduction on the export executive's salary. The Tribunal also allowed a claim for exchange rate loss under section 35B, reversing the CIT (A)'s decision.

2. Entertainment expenses disallowance:
Another issue in the judgment pertains to the disallowance of entertainment expenses amounting to Rs. 790. The lower authorities disallowed the expenses considering them as entertainment costs. However, the Tribunal accepted the assessee's contention that the expenses were not lavish and did not qualify as entertainment expenses based on precedents set by the Bombay High Court and the Gujarat High Court. Therefore, the disallowance of the entertainment expenses was overturned.

3. Dispute regarding interest disallowance under section 40(b):
The final issue addressed in the judgment involves a dispute over interest disallowance under section 40(b). The firm had charged interest from two partners while paying interest to others. The CIT accepted the assessee's claim and reduced the interest amount added back for income computation. However, the Tribunal, after considering the arguments from both sides, disagreed with the CIT's decision. The Tribunal referred to the provisions of section 40(b) and a relevant case law from the Allahabad High Court to support its conclusion that interest charged by the firm from partners cannot be deducted from the firm's income. As a result, the Tribunal ruled in favor of the Revenue on this ground.

In conclusion, the Tribunal partly allowed both the appeals of the assessee and the Revenue, addressing various issues related to weighted deduction under section 35B, entertainment expenses disallowance, and interest disallowance under section 40(b.