2000 (10) TMI 179 - AT - Income Tax

Summary

Issues Involved:

1. Disallowance of Foreign Travelling Expenses.
2. Eligibility for Depreciation on Flats and Garages.

Detailed Analysis:

1. Disallowance of Foreign Travelling Expenses:

The primary issue was whether the disallowance out of Foreign Travelling Expenses claimed at Rs. 10,04,318 should be Rs. 6,02,290 as per the Assessing Officer (AO) and the Judicial Member, or Rs. 10,746 as per the Accountant Member.

The AO observed that the expenses were incurred for setting up a new Export Oriented Unit (EOU), and thus, disallowed 50% of the expenses as capital expenditure and 10% as personal expenditure. The CIT(A) deleted these disallowances, stating they were based on suspicion and surmises, and the expenses were sanctioned by the RBI.

On further appeal, the Judicial Member upheld the AO's disallowance, citing that the travel was for a new venture, thus capital in nature, and personal expenses were rightly disallowed. The Accountant Member disagreed, emphasizing that the expenses were for expanding the existing business and thus revenue in nature. He referred to precedents like Bralco Metal Industries (P.) Ltd. vs. CIT, which supported the view that such expenditures are of a revenue nature. He also noted that the company, being a juridical person, cannot have personal expenses, and any disallowance should be consistent with previous years, restricting it to Rs. 10,746.

The Third Member agreed with the Accountant Member, noting that the expenses were for expanding the existing business and thus revenue in nature. The disallowance of 10% for personal expenses was also restricted to Rs. 10,746, consistent with previous years.

2. Eligibility for Depreciation on Flats and Garages:

The second issue was whether the assessee was entitled to depreciation on four flats and two garages purchased in Antriksha Bhawan, New Delhi. The AO disallowed the depreciation, arguing that the assessee neither owned nor used the flats for business purposes during the relevant period.

The CIT(A) allowed the depreciation, stating that the assessee was in a position to exercise ownership rights and had used the flats for business purposes. This decision was based on the precedent set in Additional CIT vs. U.P. State Agro Industrial Corpn. Ltd.

On further appeal, the Judicial Member disallowed the depreciation, citing a lack of evidence of business use and noting discrepancies in the possession dates of the flats. The Accountant Member, however, referred to the Supreme Court's decision in CIT vs. Podar Cement (P.) Ltd., which clarified that legal ownership is not necessary for claiming depreciation if the assessee is in possession and uses the asset for business purposes. He also noted that passive use of assets qualifies for depreciation, as established in Khimji Visram & Sons (Gujarat) (P.) Ltd. vs. CIT.

The Third Member agreed with the Accountant Member, confirming that the assessee was entitled to depreciation based on possession and business use of the flats, supported by the Supreme Court's broader interpretation of "ownership" in section 32.

Conclusion:

The Third Member's agreement with the Accountant Member on both issues led to the dismissal of the revenue's appeal. The disallowance of foreign travelling expenses was restricted to Rs. 10,746, and the assessee was entitled to depreciation on the flats and garages.