1984 (12) TMI 92 - AT - Income Tax

Accounting Year, Banking Company, Business Loss, Closing Stock, Foreign Exchange, Tax Liability

Issues Involved:
1. Deduction of income-tax paid on behalf of employees.
2. Provision of loss on foreign exchange forward contracts.
3. Deferred amount of guarantee fees relating to future periods.
4. Disallowance of rebate under Section 80M of the Income-tax Act.
5. Disallowance of entertainment expenditure.
6. Disallowance of depreciation on furniture and fixtures.
7. Disallowance of perquisite value of cars used by employees.
8. Disallowance of dues and membership fees.

Detailed Analysis:

1. Deduction of Income-Tax Paid on Behalf of Employees:
The assessee, a non-resident banking company, claimed a deduction of Rs. 2,25,376 representing income-tax paid on behalf of its employees. The IAC disallowed the claim, and the Commissioner (Appeals) upheld this decision, stating that the bank guaranteed the payment of tax liability of the individual employees as an employer, which was not part of its business. The Tribunal found that the guarantee furnished under Section 230 could not be equated with the bank's ordinary business guarantees. The Commissioner (Appeals) was justified in upholding the IAC's addition, and the addition was upheld.

2. Provision of Loss on Foreign Exchange Forward Contracts:
The assessee disclosed a net profit on foreign exchange transactions after adjusting for a provision of loss on forward exchange contracts. The IAC added back Rs. 6,74,325, stating that provision for probable loss on outstanding contracts is not admissible. The Commissioner (Appeals) upheld this disallowance. The Tribunal, however, found that the method of accounting followed by the assessee was consistent and bona fide. The Commissioner (Appeals) was not justified in upholding the IAC's disallowance, and the addition was deleted.

3. Deferred Amount of Guarantee Fees Relating to Future Periods:
The assessee deferred a portion of its guarantee commission income, which the IAC disallowed, stating that the commission accrued at the time of issuing the guarantee letters. The Commissioner (Appeals) upheld this disallowance. The Tribunal found that the system of accounting followed by the bank was bona fide and consistent. The Commissioner (Appeals) was not justified in adding back the deferred commission, and the addition was deleted.

4. Disallowance of Rebate Under Section 80M:
The assessee's claim for rebate under Section 80M on dividend income of Rs. 64,756 was disallowed by the IAC and upheld by the Commissioner (Appeals). The assessee did not press this ground during the hearing before the Tribunal, and the disallowance was upheld.

5. Disallowance of Entertainment Expenditure:
For the assessment year 1977-78, the IAC disallowed Rs. 20,831 as entertainment expenditure, which was upheld by the Commissioner (Appeals). The assessee did not press this ground during the hearing before the Tribunal, and the disallowance was upheld.

6. Disallowance of Depreciation on Furniture and Fixtures:
The IAC estimated Rs. 35,000 as depreciation on furniture and fixtures used in the assessee's guest house, and Rs. 25,000 was disallowed as relating to the residential portion used by officers. The Commissioner (Appeals) upheld this estimate. The Tribunal restored the matter to the Commissioner (Appeals) for fresh adjudication after hearing the assessee.

7. Disallowance of Perquisite Value of Cars Used by Employees:
The IAC disallowed Rs. 6,000 as the perquisite value of cars used by the general managers. The Tribunal found that there was a double addition of Rs. 6,000 and restored the matter to the Commissioner (Appeals) for fresh disposal.

8. Disallowance of Dues and Membership Fees:
For the assessment year 1979-80, the IAC disallowed Rs. 2,240 out of dues and membership fees, which was upheld by the Commissioner (Appeals). The assessee did not press this ground during the hearing before the Tribunal, and the disallowance was upheld.

Conclusion:
The Tribunal allowed the appeals in part, deleting certain additions and restoring some matters for fresh adjudication by the Commissioner (Appeals). The disallowances related to the deferred guarantee fees, provision of loss on foreign exchange forward contracts, and certain other expenses were found to be unjustified based on the consistent and bona fide accounting practices followed by the assessee.

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