2004 (7) TMI 293 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of disallowance of Rs. 49,68,000 out of interest payments attributable to interest-free advances of Rs. 2.76 crores made to employees for purchasing shares.
2. Deletion of disallowance of Rs. 63,76,256 under section 80-I of the IT Act.
3. Sustaining the disallowance of Rs. 1,80,000 being rent paid for Employees Club.
4. Sustaining the disallowance of Rs. 14,416 being the amount of expenditure incurred on employees at Employees Club.

Issue-wise Detailed Analysis:

1. Deletion of disallowance of Rs. 49,68,000 out of interest payments attributable to interest-free advances of Rs. 2.76 crores made to employees for purchasing shares:
The assessee had advanced Rs. 2.76 crores as interest-free loans to its employees for purchasing shares of the company. The Assessing Officer (AO) disallowed the proportionate interest on the grounds that these funds were not utilized for business purposes, relying on precedents like Shankar Theatres v. CIT and CIT v. H.R. Sugar Factory (P.) Ltd. The CIT(A) deleted this disallowance, following the ITAT's decisions for earlier years (1992-93 and 1993-94). The revenue contended that the funds were advanced out of interest-bearing loans, while the assessee argued that it had sufficient reserves and surplus to cover these advances.

The Tribunal noted that each assessment year is independent and requires separate factual examination. It was observed that the assessee had not provided sufficient evidence to show that the advances were made out of non-interest-bearing funds. The Tribunal partially allowed the revenue's appeal, directing the AO to disallow interest on Rs. 1.22 crores advanced during the year at the rate of 18%.

However, the President of the Tribunal disagreed, emphasizing the principle of consistency and the fact that similar disallowances were deleted in previous years. He argued that the advances were for business purposes, as they kept employees in a happy frame of mind and ensured the shares were subscribed. The Third Member concurred with the President, noting that the advances were for business purposes and the assessee had sufficient surplus funds. Thus, the majority view upheld the deletion of the disallowance of Rs. 49,68,000.

2. Deletion of disallowance of Rs. 63,76,256 under section 80-I of the IT Act:
The assessee claimed a deduction under section 80-I for three units based on separate books of account maintained for each unit. The AO recomputed the deduction at 'nil', invoking sections 80-I(6), 80-I(8), and 80-I(9), arguing that the expenses claimed for the Head Office (HO) were disproportionately high. The CIT(A) directed the AO to allow the deduction, following the Tribunal's order for the assessment year 1992-93.

The Tribunal upheld the CIT(A)'s order, noting that the Tribunal had consistently allowed the deduction in previous years and found no reason to deviate from this view. The revenue's ground of appeal was dismissed.

3. Sustaining the disallowance of Rs. 1,80,000 being rent paid for Employees Club:
The AO disallowed the expenses incurred on the guest house maintained by the assessee, which the assessee did not contest before the CIT(A). The assessee argued that the rent was specifically allowable under section 30, and therefore, the provisions of section 37(4) should apply.

The Tribunal referred to the Special Bench decision in Eicher Tractors Ltd. v. Dy. CIT, which held that rent and depreciation related to the guest house are not allowable under section 37(4). Thus, the disallowance made by the AO was confirmed, and the assessee's ground was rejected.

4. Sustaining the disallowance of Rs. 14,416 being the amount of expenditure incurred on employees at Employees Club:
Similar to the rent disallowance, the AO disallowed the expenses incurred on employees at the Employees Club. The Tribunal, following the same reasoning as in the rent disallowance, upheld the AO's decision, confirming that such expenses are not allowable under section 37(4).

Conclusion:
The Tribunal, by majority view, upheld the deletion of the disallowance of Rs. 49,68,000 out of interest payments attributable to interest-free advances made to employees for purchasing shares. The deletion of the disallowance of Rs. 63,76,256 under section 80-I was also upheld. However, the disallowances of Rs. 1,80,000 for rent paid for the Employees Club and Rs. 14,416 for expenditure incurred on employees at the Employees Club were confirmed. The appeal of the revenue was partly allowed, and the cross-objection filed by the assessee was dismissed.