1996 (7) TMI 179 - AT - Income Tax

Issues Involved:

1. Disallowance of Staff Welfare Expenses.
2. Disallowance of Sales Promotion Expenses.
3. Disallowance of Expenses on Taxis and Airfare for Dealers.
4. Disallowance of Cost of Coins Distributed to Dealers.
5. Disallowance of Cost of Silk Suits, Shawls, and Other Items Distributed to Dealers.
6. Disallowance of Cost of Velvet Blankets and Titan Watches Given to Dealers.
7. Disallowance of Expenditure Incurred Through Diners Cards.
8. Disallowance of Entertainment Expenses on Sweaters and Silk Suits Distributed to Foreign Visitors.
9. Disallowance of Research and Development Expenses.
10. Disallowance of Interest on Advance to Managing Director.
11. Disallowance of Deduction u/s 80HHC.
12. Non-Allowance of Deduction u/s 80M on Dividend Income.
13. Levy of Interest u/s 234B.

Summary:

1. Disallowance of Staff Welfare Expenses:
The issue was regarding the confirmation of disallowance of Rs. 25,000 out of staff welfare expenses. The Tribunal noted that the claim of the assessee for the year under consideration was Rs. 14,21,835 compared to Rs. 17,90,247 in the preceding year. The disallowance was upheld to the extent of Rs. 20,000, providing relief of Rs. 5,000 to the assessee.

2. Disallowance of Sales Promotion Expenses:
The AO disallowed Rs. 73,340 on account of expensive items such as silver vessels and glasses. The Tribunal held that since these were given to dealers as business expenditure, the disallowance was not called for and was deleted.

3. Disallowance of Expenses on Taxis and Airfare for Dealers:
The AO treated 25% of the airfare and the entire taxi fare as entertainment expenses. The Tribunal, relying on the Bombay High Court decision in CIT vs. Kirloskar Oil Engines Ltd., ordered the deletion of both disallowances, recognizing them as business expenditures.

4. Disallowance of Cost of Coins Distributed to Dealers:
The AO disallowed Rs. 56,777 as entertainment expenditure. The Tribunal found the expenditure was properly vouched and incurred as business expenditure, thus ordering the deletion of the disallowance.

5. Disallowance of Cost of Silk Suits, Shawls, and Other Items Distributed to Dealers:
The AO disallowed Rs. 50,000 out of Rs. 99,570 as entertainment expenditure. The Tribunal recognized the expenditure as business-related and ordered the deletion of the disallowance.

6. Disallowance of Cost of Velvet Blankets and Titan Watches Given to Dealers:
The AO disallowed Rs. 69,000 and Rs. 77,614, respectively. The Tribunal held that such customary gifts were business expenditures and ordered the deletion of both disallowances.

7. Disallowance of Expenditure Incurred Through Diners Cards:
The AO disallowed Rs. 92,609 due to lack of details. The Tribunal allowed 25% of the expenditure, consistent with the decision for asst. yr. 1983-84, confirming the balance disallowance.

8. Disallowance of Entertainment Expenses on Sweaters and Silk Suits Distributed to Foreign Visitors:
The AO disallowed Rs. 3,000 out of Rs. 6,985. The Tribunal deleted the disallowance, treating the expenditure as business-related.

9. Disallowance of Research and Development Expenses:
The AO disallowed Rs. 4,81,000 paid to a sister concern for developing multi-speed freewheels, not related to the assessee's business. The Tribunal allowed the expenditure as business-related, noting the subsequent export of the developed freewheels.

10. Disallowance of Interest on Advance to Managing Director:
The AO disallowed Rs. 2,70,000 as interest on a Rs. 15 lacs interest-free loan to the managing director. The Tribunal found the advance was for securing property at a nominal rent for business purposes and deleted the disallowance.

11. Disallowance of Deduction u/s 80HHC:
The AO allowed no deduction under s. 80HHC, considering the aggregate of profits and losses. The Tribunal directed the AO to allow the deduction based on 90% of export incentives, ignoring the losses under cls. (a) and (b) of sub-s. (3) of s. 80HHC.

12. Non-Allowance of Deduction u/s 80M on Dividend Income:
This ground was not pressed by the assessee during the hearing and was treated as dismissed.

13. Levy of Interest u/s 234B:
The AO charged interest under s. 234B without prior notice. The Tribunal upheld the charging of interest, citing it as part of the assessment process and not requiring a separate notice.

In conclusion, the appeal was partly allowed with specific reliefs granted on various grounds.

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