2003 (1) TMI 246 - AT - Income Tax

Summary

Issues Involved:
1. Deduction under Section 32AB.
2. Computation of deduction under Section 80HH.
3. Disallowance under Rule 6B for articles presented/distributed.
4. Computation of disallowance under Rule 6D.
5. Disallowance of entertainment expenses.
6. Disallowance of guest house expenses under Section 37(3).

Issue-wise Detailed Analysis:

1. Deduction under Section 32AB:
The assessee claimed a deduction under Section 32AB, which was partially allowed by the AO after reducing certain amounts from the eligible profit. The CIT(A) confirmed the AO's action for some items and allowed deductions for others. The Tribunal, referencing the case of Highway Cycles Industries Ltd., upheld the CIT(A)'s decision on interest, rent, and other income, confirming their eligibility for deduction under Section 32AB. However, the Tribunal directed the AO to reconsider the provision written back as part of profits if no qualifications were found in the auditor's report. For rental income received from a bank for ATM installation, the Tribunal allowed the deduction under Section 32AB. The profit on the sale of units was not considered eligible for deduction under Section 32AB as it was shown under 'capital gains' and not as business income.

2. Computation of Deduction under Section 80HH:
The AO excluded interest, rental, and miscellaneous income from the computation of deduction under Section 80HH, which was partially upheld by the CIT(A). The Tribunal agreed with the AO that interest income and rental income from ATM installation were not derived from the industrial undertaking and thus not eligible for deduction under Section 80HH. However, the Tribunal found that rental income from employees was also not directly linked to the industrial undertaking and upheld the AO's decision. The Tribunal referred to various case laws, including CIT vs. Sterling Foods and Hindustan Lever Ltd. vs. CIT, to support its decision.

3. Disallowance under Rule 6B for Articles Presented/Distributed:
The AO disallowed expenses under Rule 6B, which the CIT(A) partially confirmed. The Tribunal, following the decision in Vardhman Spinning & General Mills Ltd., deleted the disallowance for sales promotion and gift scheme items, confirming that Rule 6B does not apply to items presented during business. The Tribunal also upheld the CIT(A)'s deletion of disallowance for cabinets distributed to dealers and Diwali expenses, considering them customary business expenses. However, the Tribunal confirmed the disallowance for wall clocks bearing the company's logo, as Rule 6B was applicable.

4. Computation of Disallowance under Rule 6D:
The AO disallowed Rs. 1,79,388 under Rule 6D, which the CIT(A) reduced by excluding expenditure-tax. The Tribunal disagreed with the CIT(A), stating that hotel expenses, including expenditure-tax, should be considered as a whole for disallowance under Rule 6D. The Tribunal restored the AO's original disallowance.

5. Disallowance of Entertainment Expenses:
The AO disallowed 20% of entertainment expenses, which the CIT(A) reduced, considering part of the expenses as staff welfare. The Tribunal upheld the CIT(A)'s decision, acknowledging that it is customary for employees to accompany customers and business associates during entertainment, thus justifying the reduction.

6. Disallowance of Guest House Expenses under Section 37(3):
The AO disallowed guest house expenses, which the CIT(A) upheld. The Tribunal confirmed the disallowance, referencing the Special Bench decision in Eicher Tractors Ltd. vs. Dy. CIT, which held that Section 37(4) specifically disallows guest house expenses, overriding general provisions under Sections 30 to 36.

Conclusion:
Both the appeals of the Revenue and the assessee were partly allowed, with specific directions and confirmations on various disallowances and deductions as per the detailed analysis above.