2000 (3) TMI 169 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of the addition of Rs. 48,07,733 as capital expenditure for consultancy services.
2. Adoption of the book profit method for calculating profit on the sale of green tea leaves.
3. Deletion of interest charged under sections 139(8) and 215 of the Income-tax Act.
4. Deletion of interest charged under section 220(2) of the Income-tax Act.

Detailed Analysis:

1. Deletion of the Addition of Rs. 48,07,733 as Capital Expenditure:

The primary issue in the appeal was the deletion of an addition of Rs. 48,07,733 made by the Assessing Officer (AO) on account of expenditure towards consultancy services. The AO had bifurcated the payment of Rs. 49,17,000 made to TMMC into two parts: Rs. 1,09,267 for actual consultancy services and Rs. 48,07,733 for a restrictive clause preventing TMMC from offering similar services to competitors for five years. The AO treated the latter as capital expenditure, resulting in a benefit of enduring nature.

The first CIT(A) upheld the disallowance in principle but remitted the issue back to the AO for quantification, allowing the assessee to cross-examine TMMC. The second CIT(A) noted that the AO did not allow such cross-examination and remitted the issue back again for fresh examination. The third CIT(A) concluded that the payment did not result in an enduring benefit and allowed the entire amount as revenue expenditure, relying on various judgments including Alembic Chemical Works Co. Ltd v. CIT and Devidas Vithaldas & Co. v. CIT.

Upon appeal, it was noted that the first CIT(A) had already upheld the disallowance in principle, and subsequent CIT(A) orders extending beyond quantification were beyond their powers. The Tribunal thus modified the order, allowing Rs. 30 lakhs as revenue expenditure and disallowing Rs. 19,17,000 as capital expenditure.

2. Adoption of the Book Profit Method for Calculating Profit on the Sale of Green Tea Leaves:

The second issue involved the method of calculating profit on the sale of green tea leaves. The first CIT(A) directed the AO to verify records and follow the method used in past years unless there were specific reasons to deviate. The second CIT(A) upheld this direction, favoring the book profit method over the bulk method used by the AO. The third CIT(A) directed the AO to accept the profit disclosed by the assessee as Rs. 2,21,743.

The Tribunal upheld the third CIT(A)'s order, noting that the method had been accepted in prior years and no appeal was preferred by the Department against the second CIT(A)'s direction.

3. Deletion of Interest Charged under Sections 139(8) and 215 of the Income-tax Act:

The third issue was the deletion of interest charged under sections 139(8) and 215. The second CIT(A) had dismissed the grounds against levying interest under these sections. The third CIT(A) deleted the interest, but the Tribunal noted that the issue was finalized by the second CIT(A) and should not have been re-decided by the third CIT(A). The Tribunal restored the levy of interest under section 139(8) but directed the AO to reconsider the levy under section 215 based on the discrepancy between assessed tax and advance tax paid.

4. Deletion of Interest Charged under Section 220(2) of the Income-tax Act:

The fourth issue involved interest charged under section 220(2). The Tribunal directed that the matter be considered based on the recalculated tax as a result of the Tribunal's order.

Conclusion:

The departmental appeal was partially allowed. The Tribunal modified the disallowance of consultancy expenses, upheld the book profit method for calculating profits, restored the levy of interest under section 139(8), and directed reconsideration of interest under sections 215 and 220(2) based on recalculated tax.