1990 (1) TMI 105 - AT - Income Tax

Issues Involved:

1. Disallowance under Section 40A(3) for salaries paid in cash exceeding Rs. 2,500.
2. Inclusion of profit from the Muscat Branch in the relevant assessment years.
3. Disallowance of depreciation on foreign cars.
4. Disallowance of salary paid to Mr. Z.M. Kadri under Section 40A(2).
5. Disallowance of salary and perquisites paid to Mrs. V.I. Kadri under Sections 40A(5)/40(c).
6. Levy of interest under Section 215.

Detailed Analysis:

1. Disallowance under Section 40A(3) for salaries paid in cash exceeding Rs. 2,500:

The assessee, an architectural consultancy company, paid salaries in cash exceeding Rs. 2,500 during the assessment years 1986-87, 1987-88, and 1988-89. The Income Tax Officer (ITO) disallowed these payments under Section 40A(3), which prohibits cash payments exceeding Rs. 2,500 unless exceptional circumstances under Rule 6DD(j) exist. The assessee argued that the payments were genuine, the payees were identifiable, and the payments were made at the insistence of the employees. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the ITO's disallowance. However, the Tribunal found that the payments were genuine, the employees were identifiable, and similar payments had been accepted in the past without disallowance. The Tribunal referenced several High Court decisions, including Girdharilal Goenka vs. CIT, which emphasized that Section 40A(3) should not be applied if the transaction is genuine and the identity of the payees is established. Consequently, the Tribunal held that Section 40A(3) was not applicable and deleted the disallowance.

2. Inclusion of profit from the Muscat Branch in the relevant assessment years:

The assessee accounted for the profit of its Muscat Branch for the period ending 30th June in the subsequent assessment year rather than the relevant year. The ITO included the branch's income for the periods ending 30th June 1985, 1986, and 1987 in the respective assessment years 1986-87, 1987-88, and 1988-89, arguing that the income should be taxed in the year it accrued. The CIT(A) confirmed this inclusion. The Tribunal agreed with the Revenue authorities, stating that the assessee's accounting year ends on 30th June, and any income accruing up to that date should be taxed in the relevant assessment year. Thus, the assessee's appeal on this ground was dismissed.

3. Disallowance of depreciation on foreign cars:

For the assessment years 1986-87 and 1987-88, the ITO disallowed depreciation on foreign cars, which was upheld by the CIT(A). The Tribunal referenced a previous decision in 5 SOT page 1.6, which held that depreciation on foreign cars is not permissible under the Indian Income Tax Act. Consequently, the assessee's appeal on this ground was dismissed.

4. Disallowance of salary paid to Mr. Z.M. Kadri under Section 40A(2):

The ITO disallowed the salary paid to Mr. Z.M. Kadri, who was away in America for medical treatment, under Section 40A(2)(b), doubting the genuineness of the payment. The CIT(A) confirmed this disallowance. The Tribunal, however, found that Mr. Kadri was a regular employee, tax was deducted at source, and there was no material to suggest that the payment was not made. The Tribunal noted that Mr. Kadri had been employed since 1974 and held that the disallowance was not justified, deleting the addition for all three assessment years.

5. Disallowance of salary and perquisites paid to Mrs. V.I. Kadri under Sections 40A(5)/40(c):

The ITO disallowed Rs. 75,184 as salary and perquisites paid to Mrs. V.I. Kadri, a Director, under Section 40A(5). The CIT(A) applied Section 40(c) and made a disallowance of Rs. 65,000 per year, considering the total emoluments unreasonable. The Tribunal reviewed previous Tribunal orders and found that Mrs. Kadri was experienced and her salary was justified. The Tribunal reduced the disallowance to Rs. 30,000 per year, considering it just and fair.

6. Levy of interest under Section 215:

The issue regarding the levy of interest under Section 215 was noted to be consequential.

Conclusion:

The Tribunal allowed the appeals partly, providing relief on certain grounds while upholding the Revenue's stance on others. The detailed analysis of each issue reflects the Tribunal's consideration of past practices, the genuineness of transactions, and the applicability of relevant provisions of the Income Tax Act.

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