1990 (6) TMI 96 - AT - Income Tax

Issues Involved:
1. Treatment of rented accommodation for auditors as a guest house.
2. Disallowance of penalty under the Factories Act.
3. Disallowance of advertisement expenses.
4. Disallowance of miscellaneous expenses.
5. Treatment of sales promotion expenses as entertainment expenses.
6. Disallowance of directors' travelling expenses.
7. Addition out of office expenses.
8. Treatment of food expenses for foreign buyers as entertainment expenses.
9. Disallowance of travelling expenses.
10. Claim for loss due to breach of contract.
11. Charging of interest under Section 216 of the IT Act, 1961.

Detailed Analysis:

1. Treatment of Rented Accommodation for Auditors as a Guest House:
The assessee rented accommodation for auditors during audits, which the assessing authority treated as a guest house, disallowing the rent of Rs. 13,200 and adding an estimated Rs. 30,000 for maintenance. The Tribunal found no inquiry was made regarding the use and maintenance of the accommodation. The rent was deemed necessary for business, and the disallowance was based on conjectures without evidence. Both additions were deleted.

2. Disallowance of Penalty under the Factories Act:
A penalty of Rs. 500 under the Factories Act was disallowed. The Tribunal, referencing Supreme Court judgments, deemed the penalty as expenditure laid out wholly and exclusively for business, allowing the claim.

3. Disallowance of Advertisement Expenses:
The disallowance of Rs. 2,775 on advertisement expenses included Rs. 1,000 paid to Punjab Agricultural University. The Tribunal found the payment to the University reasonable and related to business, allowing Rs. 1,000 and confirming the rest.

4. Disallowance of Miscellaneous Expenses:
An estimated disallowance of Rs. 2,000 out of miscellaneous expenses was made without affording the assessee an opportunity to explain. The Tribunal found the disallowance unjustified given the substantial income and turnover, deleting the addition.

5. Treatment of Sales Promotion Expenses as Entertainment Expenses:
Sales promotion expenses were treated as entertainment expenses. The Tribunal acknowledged the involvement of employees in entertaining customers and estimated 10% of the expenditure as related to employees, adjusting the treatment accordingly.

6. Disallowance of Directors' Travelling Expenses:
The disallowance of Rs. 51,019 out of directors' travelling expenses was upheld, referencing judgments against the assessee. The Tribunal dismissed this ground of appeal.

7. Addition Out of Office Expenses:
An addition of Rs. 30,000 out of office expenses was challenged. The Tribunal found the details provided and the nature of expenses justified a partial relief, sustaining Rs. 20,000 and allowing Rs. 10,000.

8. Treatment of Food Expenses for Foreign Buyers as Entertainment Expenses:
Food expenses for foreign buyers were treated as entertainment expenses. The Tribunal directed that 20% of this expenditure be considered as spent on employees and the balance treated as entertainment expenses.

9. Disallowance of Travelling Expenses:
The disallowance of Rs. 48,000 out of travelling expenses was based on estimated personal expenditure. The Tribunal found the disallowance unjustified due to lack of specific evidence and consistent treatment in previous years, deleting the addition.

10. Claim for Loss Due to Breach of Contract:
A claim for loss of Rs. 90,92,832 due to breach of contract was disallowed. The Tribunal found the issue inadequately handled, lacking necessary evidence and correspondence. The matter was remanded for reconsideration with directions to examine the contract and related documents.

11. Charging of Interest Under Section 216 of the IT Act, 1961:
The charging of interest under Section 216 was challenged. The Tribunal noted the lack of findings on bona fides and opportunity for the assessee. The issue was left open for fresh consideration by the assessing authority after deciding other remanded issues.

Conclusion:
The appeal was partly allowed for statistical purposes, with several issues remanded for fresh consideration and others decided in favor of the assessee.

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