1981 (3) TMI 107 - AT - Income Tax

Summary

Issues Involved:

1. Disallowance of interest on borrowings.
2. Disallowance of telephone expenses.
3. Disallowance of scooter expenses and depreciation.
4. Disallowance of expenses on coffee, coca-cola, etc.

Issue-wise Detailed Analysis:

1. Disallowance of Interest on Borrowings:

The Income Tax Officer (ITO) disallowed Rs. 23,678 out of the interest expenses claimed by the assessee, M/s. Kesarlal Chandalal, a registered firm, on the grounds that the firm's partners had debit balances in their capital accounts, which suggested that the firm's funds were being used for non-business purposes. The ITO calculated the disallowance at 12% on the total debit balance of Rs. 1,97,314.

The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], arguing that the debit balances were due to investments in the construction of a shop where the firm conducted its business, and there was a verbal agreement among the partners that no interest would be charged on these debits. The CIT(A) upheld the ITO's disallowance, noting the absence of written documentation to support the assessee's claim and the lack of a clear nexus between the borrowings and the partners' debits.

Upon further appeal, the Tribunal considered the arguments and evidence presented by the assessee, including the history of the firm's borrowings and the partners' accounts. The Tribunal found that no part of the fresh borrowings in the year under consideration was diverted to the partners' accounts and that the earlier investments in the shop were not subject to interest disallowance. The Tribunal accepted the assessee's claim of a verbal agreement among the partners and directed the deletion of the disallowed interest amount of Rs. 23,678.

2. Disallowance of Telephone Expenses:

The assessee did not press the ground concerning the disallowance of Rs. 700 out of telephone expenses at the time of the hearing. Consequently, the Tribunal upheld the disallowance, agreeing with the reasons stated by the tax authorities.

3. Disallowance of Scooter Expenses and Depreciation:

Both the ITO and the CIT(A) had disallowed 1/4th of the scooter expenses and depreciation, attributing it to personal and non-business use. After hearing both sides, the Tribunal considered it fair and reasonable to restrict the disallowance to 1/5th instead of 1/4th, considering the type of vehicle, the nature of the business, and the attending circumstances.

4. Disallowance of Expenses on Coffee, Coca-Cola, etc.:

The assessee incurred expenses totaling Rs. 4,840 on providing coffee, coca-cola, etc., to its employees and customers. Both the ITO and the CIT(A) disallowed these expenses, categorizing them as entertainment expenses. The Tribunal, however, differentiated between the expenses for staff welfare and customary courtesy to customers. It allowed the expenses related to staff welfare and customary courtesy, citing a recent Supreme Court decision in the case of Allied Publishers (P) Ltd., which supported the view that such expenses were not in the nature of entertainment expenses. The Tribunal, therefore, deleted the addition sustained by the CIT(A).

Conclusion:

The Tribunal partly allowed the appeal by the assessee, directing the deletion of the disallowed interest and expenses on coffee, coca-cola, etc., while upholding the disallowance of telephone expenses and modifying the disallowance of scooter expenses and depreciation.