1983 (10) TMI 83 - AT - Income Tax

Summary

Issues:
1. Disallowance of expenditure incurred on a conference.
2. Disallowance of certain expenses under section 37(2A) of the IT Act.
3. Disallowance under rule 6D of the IT Rules.
4. Disallowance of club subscription as business expenditure.
5. Applicability of provisions of s. 40(c) vs. s. 40A(5) in the case of Director employee.

Analysis:

1. The first issue pertains to the disallowance of expenditure incurred on a conference by the company. The Income Tax Officer (ITO) disallowed Rs. 10,000 on an ad hoc basis, assuming a portion was spent on entertainment. However, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted this disallowance, stating that the conference aimed to inform distributors about the company's products, justifying the expenses as business-related. The Tribunal directed the CIT(A) to reconsider the disallowance in light of the retrospective insertion of Expln. (2) to s. 37(2A) by the Finance Act 1983.

2. The second issue involves the disallowance of expenses like lunches, dinners, and refreshments under Expln. (2) to s. 37(2A) of the IT Act. The Tribunal noted that the explanation, applicable from April 1, 1976, broadened the scope of entertainment expenditure. Consequently, the matter was remanded to the CIT(A) for reassessment considering this provision.

3. The third issue concerns the disallowance under rule 6D of the IT Rules. The ITO added Rs. 10,000 based on incomplete details provided by the assessee. However, the CIT(A) found no mistakes in the submitted statement and restricted the disallowance to Rs. 7,362. The Tribunal upheld the CIT(A)'s decision, as no errors were identified to justify further disallowance.

4. The fourth issue relates to the disallowance of club subscription as business expenditure. The ITO questioned the Rs. 3,309 subscription paid by the company for the Managing Director's club memberships. The CIT(A) deemed the expenditure justified, stating it was related to the business activities. The Tribunal concurred, emphasizing the usefulness of club memberships in establishing business connections.

5. The final issue addresses the applicability of s. 40(c) vs. s. 40A(5) concerning the disallowance of Rs. 13,800 related to a Director employee. Citing a precedent set by the Special Bench in Geoffrey Manners & Co. Ltd. vs. ITO, the Tribunal confirmed the application of s. 40(c) for calculating the disallowance, supporting the CIT(A)'s decision.