1989 (7) TMI 155 - AT - Income Tax

Issues Involved:
1. Deletion of credit balance written back amounting to Rs. 1,33,252.
2. Allowance of promotional expenses amounting to Rs. 21,06,69,751.
3. Deduction of Rs. 3,57,566 being foreign corporate taxes.
4. Weighted deduction on various items of expenditure.
5. Deduction of Rs. 6,93,065 representing loss of the foreign-based company.

Issue-wise Detailed Analysis:

1. Deletion of Credit Balance Written Back Amounting to Rs. 1,33,252:
The Department contended that the CIT(A) erred in deleting the addition of Rs. 1,33,252, arguing that the assessee's unilateral action of writing back credit balances indicated a total cessation of liability, making it taxable under income-tax. The Department relied on previous Tribunal decisions and the Bombay High Court decision in CIT vs. Batliboi and Co. The assessee argued that the amounts were not taxable, citing earlier Tribunal decisions and Bombay High Court rulings in Gannon Dunkerley and Co. Ltd. vs. CIT and J.K. Chemicals Ltd. vs. CIT. The Tribunal, referencing the Bombay High Court decision in CIT vs. Chase Bright Steel Ltd., held that Rs. 67,668 representing balances from creditors for goods/services could not be taxed due to lack of evidence of liability cessation. However, the remaining amount, being advances/deposits, was deemed taxable in the year carried to the P&L A/c. Thus, out of Rs. 1,33,252, relief to the extent of Rs. 67,668 was sustained.

2. Allowance of Promotional Expenses Amounting to Rs. 21,06,69,751:
The Department argued that the CIT(A) should have restricted the deduction to Rs. 49,93,847, the amount charged to the P&L A/c, as the assessee had completed only 11% of the contract work. The assessee contended that the entire amount should be allowed, as the liability arose upon the contract award, citing the Bombay High Court decision in J.N. Sharma, First ETO vs. H.H. Vijayakuverba and Anr. The Tribunal upheld the CIT(A)'s allowance of Rs. 2,06,69,741, noting that under the mercantile system of accounting, a liability incurred must be allowed as a deduction, even if discharged in instalments. This was supported by the Bombay High Court decision in CIT vs. Universal Fire and General Insurance Co. Ltd. and the Supreme Court decision in Calcutta Co. Ltd. vs. CIT.

3. Deduction of Rs. 3,57,566 Being Foreign Corporate Taxes:
The Department argued that foreign taxes on income are not deductible as they are an application of income. The assessee contended that the taxes were akin to turnover taxes rather than income taxes, citing Supreme Court and High Court decisions. The Tribunal found that the CIT(A) did not properly address the issue and remanded the case to the ITO for de novo adjudication, particularly examining the nature of the taxes under Iranian law and their deductibility in light of relevant case law.

4. Weighted Deduction on Various Items of Expenditure:
The CIT(A) allowed weighted deductions on several items, including foreign office expenses, commission, professional fees, bank commission, and insurance, among others. The Department challenged these allowances. The Tribunal upheld the CIT(A)'s decision, noting that expenses incurred through another party, like KACCL, were eligible for weighted deduction under s. 35B. This was supported by the CBDT Circular No. 27 and previous Tribunal decisions. The Tribunal also upheld the CIT(A)'s allowance of weighted deduction on promotional expenses, as there was no dispute in principle.

5. Deduction of Rs. 6,93,065 Representing Loss of the Foreign-Based Company:
The Department argued that the loss of KACCL, a separate company, should not be deductible. The assessee contended that under the agreement, the losses of KACCL were to be borne by the assessee. The CIT(A) noted that such losses had been allowed in previous years and upheld the deduction. The Tribunal agreed, emphasizing the contractual obligation and past allowances, and upheld the CIT(A)'s findings.

Conclusion:
The appeal was allowed in part, with significant relief granted to the assessee on various grounds, while some issues were remanded for further examination. The Tribunal's decisions were based on established legal principles and precedents, ensuring a fair and comprehensive resolution of the disputes.

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