1989 (12) TMI 79 - AT - Income Tax

Issues Involved:
1. Disallowance of professional fees paid to Indopol Limited.
2. Alternative claim against the taxability of salary receipts from Indopol.
3. Disallowance of royalty payable to M/s B. & S. Massy Ltd.
4. Disallowance of provision for royalty to M/s Trustzscheler Machinen Gmbh.
5. Disallowance of entertainment expenses.
6. Disallowance of fees paid in connection with FERA matters.
7. Deduction under Section 35B.
8. Disallowance under Section 80VV.
9. Valuation of stock of machinery supplied to K.E.D. in U.A.R.
10. Disallowance of professional fee paid in connection with Goregaon property and survey for development of property at Pune.
11. Disallowance of water charges.
12. Valuation of closing stock.
13. Disallowance of engineering fees payable to Sinto Kagolic Ltd., Japan.
14. Depreciation on assets used for scientific research as per interim order of the Bombay High Court.
15. Cross objections regarding depreciation on royalty and engineering fees if not allowed as revenue expenditure.

Detailed Analysis:

1. Disallowance of Professional Fees Paid to Indopol Limited:
The first common dispute in the assessee's appeals for the two years is against the disallowance of Rs. 2,87,500 in the assessment year 1976-77 and Rs. 3,90,007 out of Rs. 4,70,000 in the assessment year 1977-78, being the amounts paid as professional fees to Indopol Limited. The IAC (Asst.) disallowed the payments, holding that no services were rendered by Indopol to the assessee. The CIT(A) confirmed the disallowance, stating that Indopol did not have any staff of its own and could not have executed the jobs entrusted to it. The Tribunal upheld the disallowance, agreeing that the payments were not genuine and appeared to be a diversion of income to Indopol, which had brought forward losses and no tax liability.

2. Alternative Claim Against the Taxability of Salary Receipts from Indopol:
The assessee made an alternative claim against the taxability of salary receipts from Indopol amounting to Rs. 71,467 in the assessment year 1976-77 and Rs. 79,993 in the assessment year 1977-78. The CIT(A) rejected the claim for the first year but allowed it for the second year. The Tribunal directed the IAC to reduce the disallowance by Rs. 71,467 in the assessment year 1976-77, agreeing that the receipts of salary should not be assessed in the assessee's hands.

3. Disallowance of Royalty Payable to M/s B. & S. Massy Ltd.:
The disallowance of Rs. 7,10,528 payable to M/s B. & S. Massy Ltd. was confirmed by the CIT(A) and upheld by the Tribunal. The Tribunal agreed with the interpretation of the agreements that the liability for royalty expired on 30th September 1974, and the provision made by the assessee was not representing the liability in accordance with the agreement. The claim of Rs. 34,472 for royalty was allowed as revenue expenditure, following the Tribunal's order in the earlier year.

4. Disallowance of Provision for Royalty to M/s Trustzscheler Machinen Gmbh:
The disallowance of Rs. 4,80,000 being provision for royalty to M/s Trustzscheler Machinen Gmbh was confirmed by the CIT(A) and upheld by the Tribunal. The amount was reversed by the assessee in the assessment year 1977-78 and was directed to be not assessable by the CIT(A) in that year.

5. Disallowance of Entertainment Expenses:
The disallowance of Rs. 935 out of the entertainment expenses for the assessment year 1977-78 was confirmed by the Tribunal in view of the insertion of the Explanation with retrospective effect in Section 37(2A) with effect from 1st April 1975.

6. Disallowance of Fees Paid in Connection with FERA Matters:
The disallowance of Rs. 20,125 paid in connection with FERA matters was confirmed by the CIT(A) and upheld by the Tribunal. The Tribunal agreed that the expenditure incurred for defending the violation of FERA was not business expenditure.

7. Deduction Under Section 35B:
The deduction under Section 35B was claimed with respect to various expenses. The CIT(A) allowed 50% of the salary of the staff working in the export department. The Tribunal directed the ITO to allow the deduction at 75% of the salary and confirmed the disallowance on the balance expenditure.

8. Disallowance Under Section 80VV:
The disallowance under Section 80VV was partially allowed by the Tribunal. The Tribunal directed the IAC to exclude the amount incurred in connection with the filing of the return of income and the payment made in connection with the sur-tax matters from the disallowance.

9. Valuation of Stock of Machinery Supplied to K.E.D. in U.A.R.:
The valuation of the stock of machinery supplied to K.E.D. in U.A.R. was disputed. The Tribunal directed that the value of the stock agreed to be taken back be taken at Rs. 11,50,000 as against the disclosed value of Rs. 5,00,000 by the assessee, reducing the addition to Rs. 6,50,000.

10. Disallowance of Professional Fee Paid in Connection with Goregaon Property and Survey for Development of Property at Pune:
The disallowance of professional fee of Rs. 36,011 was partially allowed by the Tribunal. The Tribunal directed that the sum of Rs. 575 paid to S.B. Gupta in connection with a criminal complaint filed against a trespasser of the Goregaon property be allowed as business expenditure.

11. Disallowance of Water Charges:
The disallowance of water charges of Rs. 16,448 was confirmed by the Tribunal, following its earlier decision in the assessee's appeal for 1980-81.

12. Valuation of Closing Stock:
The issue concerning the valuation of the closing stock was restored to the file of the first appellate authority by the Tribunal, following its earlier decision for the assessment years 1974-75 and 1975-76.

13. Disallowance of Engineering Fees Payable to Sinto Kagolic Ltd., Japan:
The disallowance of engineering fees payable to Sinto Kagolic Ltd., Japan was allowed by the CIT(A) and upheld by the Tribunal, following the decisions of the Bombay High Court in similar cases.

14. Depreciation on Assets Used for Scientific Research as Per Interim Order of the Bombay High Court:
The CIT(A) directed the IAC to follow the interim order of the Bombay High Court and allow depreciation on assets used for scientific research. The Tribunal confirmed this direction.

15. Cross Objections Regarding Depreciation on Royalty and Engineering Fees if Not Allowed as Revenue Expenditure:
The cross objections regarding depreciation on royalty and engineering fees if not allowed as revenue expenditure were dismissed by the Tribunal, as it had confirmed the order of the CIT(A) allowing these expenditures as revenue in nature.

Conclusion:
The appeals were partly allowed, and the cross objections were dismissed. The Tribunal upheld the disallowances made by the CIT(A) on various grounds, allowed certain claims, and directed the IAC to make adjustments as per its findings.

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