1981 (3) TMI 110 - AT - Income Tax

Summary

Issues Involved:

1. Disallowance of interest claimed as deduction.
2. Disallowance of expenses on repairs of a rented showroom.
3. Disallowance of bad debt.
4. Disallowance of entertainment expenditure.
5. Disallowance of interest under section 139(8).

Detailed Analysis:

1. Disallowance of Interest Claimed as Deduction:

The assessee-firm's appeal against the disallowance of Rs. 66,349 out of interest claimed as deduction was scrutinized. The Income Tax Officer (ITO) found that the firm paid 18% interest on loans from various parties, including relatives of the partners, while advancing interest-free loans to certain entities. The ITO disallowed the interest, citing that borrowed money used for non-business purposes is not deductible. The Commissioner of Income Tax (Appeals) [CIT (A)] upheld the disallowance, emphasizing that the borrowed funds were diverted for non-business purposes, making the interest non-deductible under Section 36(1)(iii). However, the Tribunal found that the disallowance lacked justification, as it was not established that the borrowed funds were diverted for non-business purposes. The Tribunal held that the disallowance of Rs. 66,349 was not justified and deleted the addition.

2. Disallowance of Expenses on Repairs of a Rented Showroom:

The assessee claimed Rs. 11,182 as expenses on repairs of a rented showroom, which the ITO disallowed as capital expenditure. The CIT (A) upheld this view. However, the Tribunal found that the expenses were for cementing the floor, plastering walls, and woodwork, which were necessary for the day-to-day business and did not bring any enduring advantage. The Tribunal held that the expenses should be allowed as revenue expenditure, citing precedents where similar expenses were treated as revenue expenditure.

3. Disallowance of Bad Debt:

The assessee claimed Rs. 2,278 as bad debt, which was disallowed by the ITO on the ground that the claims had become bad prior to the assessment year. The Tribunal directed the ITO to verify if any part of the disallowed claim could be allowed in any of the earlier four years prior to the assessment year and to take appropriate action as provided under law.

4. Disallowance of Entertainment Expenditure:

The assessee claimed Rs. 11,367 as entertainment expenditure, out of which Rs. 6,367 was disallowed. The CIT (A) held that the supply of fruits to officials was not necessary and was in the nature of a bribe, while the other part related to tea, coffee, etc., was not considered entertainment. The Tribunal found that expenses on tea, coffee, and soft drinks for customers and constituents were normal business expenses and should not be treated as entertainment expenditure. It also held that offering fruits to officers connected with the business was a customary business expense and not a bribe. Thus, the Tribunal allowed the entire expenditure as normal business expenditure.

5. Disallowance of Interest under Section 139(8):

The CIT (A) did not consider the assessee's claim regarding the disallowance of interest under section 139(8) as the assessee had moved the ITO for waiver of interest. The Tribunal declined to interfere in the absence of specific facts regarding this matter.

Conclusion:

The appeal was allowed in part, with significant relief granted on the disallowance of interest claimed as deduction, expenses on repairs, and entertainment expenditure. The Tribunal provided directions for reconsideration of the bad debt claim and upheld the disallowance of interest under section 139(8) due to lack of detailed facts.