2002 (4) TMI 219 - AT - Income Tax

Issues Involved:
1. Disallowance of staff welfare expenses.
2. Disallowance of entertainment expenses.
3. Disallowance of expenses for transfer of technology.
4. Disallowance of board meeting expenses.
5. Treatment of foreign travel expenses as capital expenditure.
6. Disallowance under Section 40A(12).
7. Disallowance of subscription to superannuation funds.
8. Disallowance of expenses on souvenirs.
9. Computation of deduction under Section 32AB.
10. Deduction under Section 80-I.
11. Accrual of income related to warranty/guarantee/aftersales service.
12. Disallowance of group insurance expenses.
13. Charging of interest under Sections 234B and 234C.

Detailed Analysis:

1. Disallowance of Staff Welfare Expenses:
The AO disallowed Rs. 63,373, being 10% of the total staff welfare expenses, on the basis that the canteen facilities were used by outsiders. The CIT(A) upheld this disallowance. The Tribunal directed the AO to treat this amount as part of entertainment expenses and allow the deduction under Section 37(2A).

2. Disallowance of Entertainment Expenses:
The AO disallowed Rs. 1,44,032 out of Rs. 1,94,032 claimed as entertainment expenses, allowing only Rs. 50,000 under Section 37(2A). The Tribunal found merit in the assessee's claim that 25% of the expenses related to employees and directed the AO to treat 25% of Rs. 1,94,032 as staff welfare expenses and recompute the disallowance.

3. Disallowance of Expenses for Transfer of Technology:
The AO disallowed Rs. 1,000 paid for entering into an agreement for transfer of technical knowhow, treating it as capital expenditure. The Tribunal allowed this expense, holding it was incurred in the course of business and did not result in a new capital asset.

4. Disallowance of Board Meeting Expenses:
The AO disallowed Rs. 1,500 incurred on board meetings, treating it as entertainment expenses. The Tribunal allowed this expense, stating it was incurred for statutory obligations and thus for business purposes.

5. Treatment of Foreign Travel Expenses as Capital Expenditure:
The AO treated Rs. 5,94,405 incurred on foreign travel as capital expenditure. The Tribunal found that the expenses were incurred for various business activities, including procurement of material and technological studies, and allowed the expenses as revenue expenditure under Section 37(1).

6. Disallowance under Section 40A(12):
The AO disallowed Rs. 27,110 under Section 40A(12). The Tribunal directed the AO to disallow Rs. 15,100 after allowing a sum of Rs. 10,000.

7. Disallowance of Subscription to Superannuation Funds:
The AO disallowed Rs. 98,217 as the fund was not recognized. The Tribunal upheld the CIT(A)'s order, which allowed rectification under Section 154 when the fund is recognized.

8. Disallowance of Expenses on Souvenirs:
The AO disallowed Rs. 7,820 for advertisements in souvenirs. The Tribunal directed the AO to delete Rs. 6,351 out of the total disallowance.

9. Computation of Deduction under Section 32AB:
The AO restricted the deduction to plant and machinery purchased for each unit. The Tribunal directed the AO to recompute the deduction based on total investments by the assessee, following the decision of the Delhi Tribunal in Phoenix Oversees Ltd. vs. Asstt. CIT.

10. Deduction under Section 80-I:
The Tribunal dismissed this ground, following its earlier decision in ITA No. 1263 of 1992, where it was decided against the assessee.

11. Accrual of Income Related to Warranty/Guarantee/Aftersales Service:
The Tribunal held that the income accrues at the time of sale and cannot be reduced by probable obligations under warranty. The liability for warranty expenses will be deductible in the year it actually arises.

12. Disallowance of Group Insurance Expenses:
The Tribunal directed the AO to allow the claim after examining the proof of payment.

13. Charging of Interest under Sections 234B and 234C:
The Tribunal held that this ground is consequential in nature and directed accordingly.

Conclusion:
The appeal was partly allowed, with specific directions given on each issue. The Tribunal provided detailed reasoning for each decision, ensuring compliance with relevant legal provisions and precedents.

← Previous Next →