2007 (3) TMI 291 - AT - Income Tax

Issues Involved:
1. Maintainability of Department's Appeals.
2. Disallowance u/s 37(3A) for expenses reimbursed/paid to Advocates/Solicitors.
3. Disallowance u/s 37(3A) for customer services, catering, and hotel expenses.
4. Disallowance u/s 40A(5) for employees posted abroad.
5. Applicability of section 43B to foreign travel tax.
6. Disallowance of remuneration to the Managing Director.

Summary:

1. Maintainability of Department's Appeals:
The Department's appeals for assessment years 1985-86 and 1986-87 were dismissed in limine due to the lack of requisite approval from the Committee of Disputes (COD). The assessee had obtained the necessary COD approval, allowing their appeals to be adjudicated.

2. Disallowance u/s 37(3A) for expenses reimbursed/paid to Advocates/Solicitors:
The Assessing Officer disallowed Rs. 3,35,408 u/s 37(3A) for hotel, car hire, and entertainment expenses reimbursed/paid to Advocates/Solicitors. The Tribunal held that these expenses were in the nature of legal expenses and allowable u/s 37(1), not hit by section 37(3A)/(3B). Thus, the disallowance was vacated.

3. Disallowance u/s 37(3A) for customer services, catering, and hotel expenses:
The assessee incurred expenses on customer services (Rs. 6,00,74,389), catering (Rs. 22,62,26,779), and hotel facilities (Rs. 7,96,19,947). The Tribunal ruled that these expenses were not sales promotion expenses but were incurred in the ordinary course of business and contractual obligations. They were also excluded from section 37(3A) by section 37(3C). Consequently, the disallowances were vacated.

4. Disallowance u/s 40A(5) for employees posted abroad:
The Assessing Officer estimated a disallowance of Rs. 6,00,000 u/s 40A(5) for employees posted abroad. The Tribunal held that even short-term deputation abroad constitutes "any period of his employment outside India" within section 40A(5)(b)(i). Thus, the disallowance was vacated.

5. Applicability of section 43B to foreign travel tax:
The Assessing Officer disallowed Rs. 1,67,48,151 for foreign travel tax and Rs. 86,371 for turnover tax in Ceylon u/s 43B. The Tribunal upheld the CIT(A)'s view that foreign travel tax is covered by section 43B. However, the CIT(A) directed the Assessing Officer to verify if the amounts were paid before the due date u/s 139(1) and allow the claim accordingly. The Tribunal did not express an opinion on this direction as it was part of the Department's appeal.

6. Disallowance of remuneration to the Managing Director:
The Assessing Officer disallowed Rs. 40,000 from the Managing Director's remuneration u/s 40A(5). The Tribunal upheld the CIT(A)'s decision, agreeing that the provisions of section 40A(5) were applicable, not section 40(c). Thus, the disallowance was confirmed.

Conclusion:
The appeals filed by the assessee for the assessment years 1984-85, 1985-86, and 1986-87 were allowed in part, while the Department's appeals were dismissed due to lack of COD approval.

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