1982 (10) TMI 60 - AT - Income Tax

Issues Involved:
1. Disallowance of commission paid to Directors under Section 40(c) of the IT Act.
2. Restriction of weighted deduction under Section 35B of the IT Act for commission paid to Tata Exports Ltd.
3. Denial of relief under Section 80J of the IT Act on gross capital employed.
4. Disallowance of expenditure incurred on a foreign tour to explore the possibility of developing a manufacturing plant in Iran.

Issue-wise Detailed Analysis:

1. Disallowance of Commission Paid to Directors:
The CIT(A) held that the amount of Rs. 1,03,450 paid as commission to the Directors is part of remuneration for the purpose of computing disallowance under Section 40(c) of the IT Act. The assessee argued that the provisions of Section 40(c) do not apply to commission payments to Directors. However, the CIT(A) relied on the Tribunal's previous decision in the case of Navketan International Films Pvt. Ltd., which decided against the assessee. Consequently, the assessee's claim for allowance of Rs. 1,05,450 was not allowed. The Tribunal upheld the CIT(A)'s order, stating that there is no justification to take a different view, thus the assessee fails on this ground.

2. Restriction of Weighted Deduction under Section 35B:
The assessee paid a commission of Rs. 10,15,606 to Tata Exports Ltd. and claimed a weighted deduction under Section 35B. The ITO rejected this claim, stating that the relationship between the assessee and Tata Exports Ltd. is on a principal-to-principal basis and the services rendered do not fall under the activities mentioned in Section 35B(i)(b). The CIT(A) restricted the deduction to 28% of the commission paid, amounting to Rs. 2,84,370, based on the proportion of services entitled to deduction under Section 35B. The Tribunal, however, found that the issue has been consistently held in favor of the assessee in previous cases, such as TELCO, TISCO, and Voltas, and directed that the assessee is entitled to a 100% deduction, thus the assessee succeeds on this point.

3. Denial of Relief under Section 80J:
The assessee claimed relief under Section 80J on borrowed capital, relying on the decision of the Calcutta High Court in the case of Century Enka Ltd. The ITO and CIT(A) denied this claim, citing the retrospective amendment to Section 80J by the Finance (No. 2) Act, 1980. The Tribunal noted that similar issues are pending before the Supreme Court and directed the CIT(A) to pass an order in conformity with the Supreme Court's judgment. Thus, the matter was sent back to the CIT(A).

4. Disallowance of Foreign Tour Expenditure:
The assessee incurred Rs. 26,684 on a foreign tour to explore the possibility of developing a chemical manufacturing plant in Iran. The ITO and CIT(A) disallowed this expenditure, stating that it was not for the purpose of the existing business. The assessee argued that the expenditure was for the expansion of its existing business. The Tribunal referred to previous decisions, including TISCO's case and the Gujarat High Court's judgment, which held that expenditure for business expansion is revenue expenditure and allowable. The Tribunal agreed with this view and allowed the expenditure, thus the assessee succeeds on this ground.

Conclusion:
The Tribunal's judgment resulted in a partial allowance of the assessee's appeal. The disallowance of commission paid to Directors was upheld, while the restriction of weighted deduction under Section 35B and the disallowance of foreign tour expenditure were overturned in favor of the assessee. The issue regarding relief under Section 80J was remanded to the CIT(A) for reconsideration in light of the Supreme Court's pending decision.

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