1992 (11) TMI 124 - AT - Income Tax

Business Expenditure Concessional Rate Interest On Borrowed Capital Interest Payments Investment Allowance Previous Year S. 10

Issues Involved:
1. Whether the business of the Sahibabad Unit was set up during the period ending on 31-3-1985, allowing the assessee's claim for depreciation, additional depreciation, investment allowance, and pre-operative expenses.
2. Disallowance of the expenditure of Rs. 19,26,081 incurred for trial run and pre-commissioning expenses.
3. Deletion of the addition of Rs. 10,49,077 on account of loss of interest on loans given at concessional rates to Directors and their relatives.
4. Allowance of sales tax and other statutory liabilities even if paid after the expiry of the relevant previous year under section 43B.
5. Allowance of excise duty of Rs. 31,60,366 under section 43B.
6. Direction to modify the working of disallowance of bonus for earlier assessment years.
7. Deletion of Rs. 77,830 disallowed as ex-gratia payments to employees.
8. Deletion of Rs. 4,61,590 disallowed as payment of service charges to M/s. Unifab Engineers.
9. Deletion of Rs. 47,926 disallowed under section 40A(3) for payments made in cash.
10. Direction to allow deduction under section 80M on gross dividend without deducting expenses.

Detailed Analysis:

Issue 1: Setting up of Sahibabad Unit
The CIT (Appeals) held that the business of the Sahibabad Unit was set up during the period ending on 31-3-1985, allowing the assessee's claim for depreciation, additional depreciation, investment allowance, and pre-operative expenses. The Tribunal upheld this decision, noting that the unit had commenced trial production in March 1985. The CIT (Appeals) relied on judicial pronouncements, including decisions from the Calcutta and Madras High Courts, which supported the view that expenses incurred after the business had been set up but before commercial production are admissible as deductions.

Issue 2: Disallowance of Rs. 19,26,081
The ITO disallowed the expenditure of Rs. 19,26,081, claiming it was false and bogus. However, the CIT (Appeals) found that the expenses were incurred after setting up the business and before commercial production, making them admissible. The Tribunal upheld this decision, agreeing that the trial production had commenced and that the expenses were legitimate.

Issue 3: Loss of Interest on Loans
The ITO disallowed Rs. 10,49,077 on account of loss of interest on loans given at concessional rates to Directors and their relatives. The CIT (Appeals) deleted this addition, noting that there was no nexus between the interest paid on borrowings and the interest-free or concessional rate advances. The Tribunal upheld this decision, agreeing that the advances were given from interest-free funds and that the interest payments were for business purposes.

Issue 4: Sales Tax and Statutory Liabilities under Section 43B
The CIT (Appeals) directed the ITO to allow sales tax and other statutory liabilities even if paid after the expiry of the relevant previous year, provided they were paid within the statutory time limits. The Tribunal upheld this decision, relying on the decision of the Calcutta High Court in CIT v. Sri Jagannath Steel Corpn.

Issue 5: Excise Duty under Section 43B
The CIT (Appeals) held that the excise duty of Rs. 31,60,366 was not disallowable under section 43B as it represented amounts brought forward from earlier years. The Tribunal agreed, noting that section 43B was inapplicable to these amounts.

Issue 6: Working of Disallowance of Bonus
The CIT (Appeals) directed the ITO to recompute the disallowance of bonus for the assessment year 1985-86 after verifying the correctness of the assessee's working. The Tribunal found this direction fair and reasonable, upholding the CIT (Appeals)'s order.

Issue 7: Ex-Gratia Payments to Employees
The CIT (Appeals) deleted the disallowance of Rs. 77,830, noting that the payments were genuine, reasonable, and incurred for business purposes. The Tribunal upheld this decision, citing the Calcutta High Court's decision in CIT v. Shaw Wallace & Co. Ltd.

Issue 8: Payment of Service Charges to M/s. Unifab Engineers
The ITO disallowed Rs. 4,61,590 as payment of service charges to M/s. Unifab Engineers, claiming it was bogus. The CIT (Appeals) deleted this addition, noting that the payments were genuine and reasonable. The Tribunal upheld this decision, noting that the firm was recognized as genuine and that the charges were not excessive.

Issue 9: Payments Made in Cash under Section 40A(3)
The CIT (Appeals) deleted the disallowance of Rs. 47,926 made under section 40A(3) for payments made in cash, noting that the payments were genuine and made out of business necessity. The Tribunal upheld this decision, citing the Calcutta High Court's decision in Girdharilal Goenka v. CIT.

Issue 10: Deduction under Section 80M
The CIT (Appeals) directed the ITO to allow deduction under section 80M on the gross dividend without deducting expenses. The Tribunal upheld this decision, noting that there was no material to show that the assessee had incurred any expenditure for earning the dividend income.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT (Appeals)'s decisions on all the issues involved.

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