1980 (4) TMI 148 - AT - Income Tax

Summary

Issues:
1. Classification of brokerage payment as capital or revenue expenditure.
2. Disallowance of traveling expenses.
3. Disallowance of motor car expenses.
4. Disallowance of salary paid to Managing Director prior to incorporation.
5. Additional ground of appeal regarding deduction under s. 80J of the IT Act.

Analysis:
1. The first issue in this case pertains to the classification of the brokerage payment made by the assessee for leasing flats. The Income Tax Officer (ITO) and the Appellate Authority Commission (AAC) considered the expenditure as capital in nature and a perquisite under s. 40(c) of the Act. However, the Appellate Tribunal held that since the lease period was only for 4 years and the expenditure was incidental to the business, it should be treated as revenue expenditure. The Tribunal disagreed with the department's view and allowed the brokerage payment as a legitimate business expense.

2. The second issue involves the disallowance of traveling expenses by the ITO and subsequent affirmation by the AAC. The Tribunal reviewed the details of the expenses and found that the AAC had correctly scrutinized the expenses in question. As the expenses were within the prescribed limits under rule 6D of the IT Rules, 1962, the Tribunal upheld the decision of the AAC regarding the disallowance of traveling expenses.

3. The third issue concerns the disallowance of motor car expenses by the ITO and the subsequent modification by the AAC. The ITO disallowed a portion of the expenses for personal use of the car by the directors, which the AAC further reduced. The Tribunal noted that there was no evidence of the car being used for business purposes and agreed with the disallowance of a portion of the motor car expenses by the AAC, considering it fair and reasonable.

4. The fourth issue revolves around the disallowance of salary paid to the Managing Director prior to the incorporation of the company. The ITO disallowed the salary amount, which was upheld by the AAC. The Tribunal concurred with the disallowance, stating that such payments made before incorporation are considered preliminary expenses and cannot be allowed under s. 37(1) of the Act.

5. The final issue pertains to an additional ground of appeal raised by the assessee regarding the deduction under s. 80J of the IT Act. The Tribunal considered two aspects of the appeal related to the total capital employed without deduction of borrowed funds and current trade liabilities. The Tribunal referred to previous decisions and directed the ITO to compute the deduction under s. 80J based on the total capital employed without deducting current trade liabilities. The Tribunal partially allowed the appeal on this ground.

In conclusion, the Appellate Tribunal ITAT CALCUTTA partially allowed the appeal by the assessee, addressing various issues related to expenditure classification, disallowance of expenses, salary disallowance, and deduction under s. 80J of the IT Act.