1988 (8) TMI 126 - AT - Income Tax

Summary

Issues Involved:

1. Deduction of expenses related to sick mills taken over by the appellant.
2. Claim under Section 35B for payments to Textile Export Promotion Council and Indian Cotton Mills Federation.
3. Change in the method of accounting from mercantile to cash basis for interest on loans.
4. Fees paid to the Registrar of Companies for increasing share capital.
5. Deletion of income not agitated before the ITO.

Issue-Wise Detailed Analysis:

1. Deduction of Expenses Related to Sick Mills:

The appellant, a public sector undertaking, took over certain sick mills and claimed deductions for expenses related to these mills, which were not debited to the profit & loss account but separately claimed. The ITO rejected this claim, stating the expenses were not related to the appellant's business. The CIT(A) confirmed this, treating the expenses as capital expenditure. The Tribunal, however, found that the expenses were in the nature of outstanding liabilities (interest, telephone charges, loss, etc.) which the appellant had to bear due to the take-over. The Tribunal directed that these expenses should be allowed as revenue expenditure and deductions in the computation of income for the assessment year 1977-78.

2. Claim under Section 35B:

The appellant claimed deductions under Section 35B for payments made to the Textile Export Promotion Council and Indian Cotton Mills Federation. The appellant's representative conceded that no supporting documents were available for these claims, and thus, these claims were not pressed. Consequently, the Tribunal rejected these claims.

3. Change in Method of Accounting:

The appellant changed its method of accounting for interest on loans from mercantile to cash basis due to the non-payment of interest by various mills. The ITO added interest on an accrual basis, relying on the decision of the Bombay High Court in CIT vs. Confinance Ltd. The CIT(A) upheld this addition. The Tribunal, however, found that the change in accounting method was bona fide and taken due to the financial difficulties of the mills. The Tribunal held that the change was realistic and did not involve any mala fides, reversing the CIT(A)'s order and deleting the notional interest addition of Rs. 17,23,344.

4. Fees Paid to Registrar of Companies:

The appellant claimed that fees paid to the Registrar of Companies for increasing share capital should be allowed as revenue expenditure. The Tribunal, however, found that this expenditure was incurred in a capital field and not in a revenue field. The Tribunal upheld the CIT(A)'s decision, dismissing this ground.

5. Deletion of Income Not Agitated Before ITO:

The appellant claimed deletion of Rs. 8,344 and Rs. 1,46,432 as income, which was not agitated before the ITO. The CIT(A) held that this ground could not be entertained as it was not taken before the ITO and lacked supporting material. The Tribunal confirmed the CIT(A)'s order, rejecting this ground.

Conclusion:

The appellant's appeal was allowed in part. The Tribunal directed that the claim for deduction of expenses related to sick mills should be allowed, upheld the rejection of claims under Section 35B, reversed the addition of notional interest due to the change in accounting method, dismissed the claim for fees paid to the Registrar of Companies, and confirmed the rejection of the claim for deletion of income not agitated before the ITO.