1978 (6) TMI 67 - AT - Income Tax

Issues Involved:
1. Deduction of borrowings and debts from assets for calculating capital employed under Section 80J.
2. Disallowance of foreign travel expenses for the assessment year 1973-74.
3. Disallowance of depreciation claim on cars for the assessment year 1974-75.

Detailed Analysis:

1. Deduction of Borrowings and Debts from Assets for Calculating Capital Employed under Section 80J:
The primary issue was whether the AAC erred in deducting borrowings and debts from the assets to determine the capital employed for calculating the deduction under Section 80J. The assessee argued that liabilities should not be deducted from the total assets, a claim rejected by the ITO and upheld by the AAC based on Rule 19A(3) of the Income-tax Rules, 1962.

The Tribunal referred to a Special Bench decision in the case of M/s. Amar Dye-Chem Ltd. vs. ITO, which concluded that Rule 19A(3) is repugnant to Section 80J. The Special Bench held that the total value of the assessee's assets should be considered as capital employed without deducting liabilities. The Tribunal followed this reasoning, stating: "We hold that the total authorisation of the assessee's assets of the new industrial undertaking should be taken as capital employed for the purpose of computing relief under s. 80J without deducting any sum by way of liabilities."

The Tribunal dismissed the Revenue's argument that liabilities must be deducted to determine capital employed, emphasizing that the purpose of Section 80J is to encourage the establishment of new industrial undertakings with maximum capital employed. Thus, the AAC was in error in deducting borrowings and debts from the assets.

2. Disallowance of Foreign Travel Expenses for the Assessment Year 1973-74:
The AAC upheld the ITO's disallowance of Rs. 19,418 claimed as foreign travel expenses by a Director, Mr. B.M. Labroo, on the grounds that the assessee could not show any benefit derived from the visit. The Tribunal considered a contemporaneous letter from the Reserve Bank of India authorizing the export promotion visit, which was not mentioned in the AAC's order. The letter indicated that the visit was for export promotion purposes.

The Tribunal noted that while the AAC did not dispute that expenses could be allowed even if the visit did not result in pecuniary benefits, the absence of a detailed report from Mr. Labroo raised suspicions of personal expenditure. However, since the visit was authorized by the Reserve Bank and the expenditure was approved by the company's resolution, the Tribunal allowed Rs. 15,000 out of the claimed Rs. 19,418 as a legitimate business expense. Consequently, the assessee was also allowed weightage under Section 35B for this expenditure.

3. Disallowance of Depreciation Claim on Cars for the Assessment Year 1974-75:
The AAC disallowed the depreciation claim of Rs. 4,166 for cars on the basis that a similar claim was rejected for the previous assessment year. However, the AAC had allowed a claim of Rs. 4,750 for cars used by the Managing Director and Director, as these were provided as per terms of service.

The Tribunal directed the ITO to allow the depreciation claim for cars for which running expenses were allowed, leaving the actual computation to the ITO.

Conclusion:
- The assessee's appeal regarding the deduction of borrowings and debts from assets for calculating capital employed under Section 80J was allowed, following the Special Bench decision that Rule 19A(3) is repugnant to Section 80J.
- The disallowance of foreign travel expenses was partially allowed, with Rs. 15,000 being accepted as a legitimate business expense.
- The disallowance of the depreciation claim on cars was overturned, and the ITO was directed to allow the claim, subject to actual computation.

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