1999 (5) TMI 56 - AT - Income Tax

Summary

Issues Involved:
1. Application of Section 37(4) of the Income Tax Act regarding rent, repairs, and depreciation on the guest house.
2. Disallowance under Section 40A(9) of the Income Tax Act for contributions to unapproved institutions.
3. Inclusion of additional liability due to exchange rate fluctuation in the cost of machinery for depreciation purposes under Sections 32 and 43A of the Income Tax Act.
4. Exclusion of excise duty from total turnover for computing deduction under Section 80HHC.
5. Deduction of excise duty on actual payment basis under Section 43B of the Income Tax Act.

Detailed Analysis:

1. Application of Section 37(4) of the Income Tax Act:
The issue pertains to the disallowance of expenses related to the guest house, including rent, repairs, and depreciation, under Section 37(4) of the Income Tax Act for the assessment year 1991-92. The Assessing Officer (AO) disallowed these expenses, citing the specific provisions of Section 37(4), which state that all expenditures incurred on the maintenance of a guest house must be disallowed. The Commissioner of Income Tax (Appeals) [CIT(A)] set aside the disallowance, following the precedent from the assessment year 1990-91. However, the Tribunal, referencing the decision of the Hon'ble Calcutta High Court in CIT vs. Upper Ganges Sugar Mills Ltd., ruled in favor of the Revenue, restoring the AO's disallowance.

2. Disallowance under Section 40A(9) of the Income Tax Act:
For the assessment years 1991-92 and 1992-93, the AO disallowed contributions made by the assessee to Stone India Recreation Corner and J. Stone Employees Credit Co-operative Society Ltd. under Section 40A(9) of the Act, as these were made to unapproved institutions. The CIT(A) had set aside this disallowance, relying on a previous Tribunal decision. However, the Tribunal upheld the AO's disallowance, stating that Section 40A(9) explicitly disallows such contributions unless they are towards recognized provident funds, approved superannuation funds, or required by law. The Tribunal found no evidence that the payments were obligatory under any law, thus affirming the AO's decision.

3. Inclusion of Additional Liability Due to Exchange Rate Fluctuation:
The issue here is the inclusion of additional liability due to exchange rate fluctuation in the cost of machinery for depreciation purposes under Sections 32 and 43A for the assessment year 1991-92. The AO disallowed the depreciation claim on the additional liability, considering it a notional increase not backed by actual remittance. The CIT(A) directed the AO to recompute the depreciation, following the decision of the Hon'ble Calcutta High Court in CIT vs. Kanoria Chemicals and Industries Ltd. The Tribunal upheld the CIT(A)'s decision, emphasizing that actual remittance is not necessary for allowing depreciation on additional liability due to exchange rate fluctuation, aligning with the majority view of the Bombay, Karnataka, and Calcutta High Courts.

4. Exclusion of Excise Duty from Total Turnover for Computing Deduction under Section 80HHC:
For the assessment year 1982-83, the assessee excluded excise duty from the total turnover while computing the deduction under Section 80HHC. The AO included excise duty in the total turnover, but the CIT(A) directed the AO to exclude it, following the Tribunal's decision in Chloride India Ltd. The Tribunal upheld the CIT(A)'s decision, reasoning that including excise duty in the total turnover would reduce the proportionate export profit, contrary to the legislative intent of Section 80HHC, which aims to encourage exports.

5. Deduction of Excise Duty on Actual Payment Basis under Section 43B:
The issue involves the deduction of excise duty on actual payment basis under Section 43B for the assessment year 1982-83. The AO rejected the assessee's claim, arguing that the liability accrues only upon actual clearance of goods, not at the time of production. The CIT(A) accepted the assessee's claim, stating that the liability arises upon production and is deferred until clearance. The Tribunal upheld the CIT(A)'s decision, noting that under Explanation 2 to Section 43B, the liability to pay excise duty arises upon production, and actual payment can be claimed as a deduction, provided it is made before the return filing due date. The Tribunal also clarified that the same amount cannot be claimed in subsequent years.

Conclusion:
The appeals filed by the Revenue were partly allowed, with the Tribunal upholding the AO's decisions on Sections 37(4) and 40A(9) disallowances, while affirming the CIT(A)'s decisions on Sections 32, 43A, 80HHC, and 43B deductions.