2002 (8) TMI 265 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of expenses on articles for presentation as entertainment expenses.
2. Addition in the valuation of closing stock of export goods in transit.
3. Disallowance of expenses for telephone installed at directors' residence.
4. Disallowance of foreign travelling expenses of directors' wives.
5. Computation of deduction under Section 80HHC.
6. Addition in respect of interest-free advances to sister concerns.
7. Deduction of proportionate management expenses out of dividend income for Section 80M.
8. Claim of pre-operative expenses in respect of CR Division.
9. Disallowance of Shagans paid to dealers.
10. Addition on account of closing stock of stores, spare parts, tools, etc.
11. Disallowance of interest due and claimed to have been written off.
12. Pre-operative expenses in respect of CR Division.

Detailed Analysis:

1. Disallowance of Expenses on Articles for Presentation as Entertainment Expenses:
The assessee contested the disallowance of Rs. 1,77,678 on articles for presentation, which were treated as entertainment expenses by the AO and CIT(A). The Tribunal found that the articles did not have the company's logo and were not in the nature of advertisement. Citing the decision in CIT vs. Escorts Employees Ancillaries Ltd., the Tribunal directed the AO to delete the disallowance, stating that such expenses cannot be regarded as entertainment expenses.

2. Addition in the Valuation of Closing Stock of Export Goods in Transit:
The assessee challenged the addition of Rs. 2,410 in the valuation of closing stock of export goods in transit. The Tribunal referenced a similar issue decided in favor of the assessee for the assessment year 1989-90 and directed the AO to delete the addition.

3. Disallowance of Expenses for Telephone Installed at Directors' Residence:
The assessee contested the disallowance of Rs. 60,319 for telephone expenses at the directors' residence. The Tribunal, referencing its earlier order for the assessment year 1989-90, directed the AO to delete the addition.

4. Disallowance of Foreign Travelling Expenses of Directors' Wives:
The assessee challenged the disallowance of Rs. 2,24,204 for foreign travel expenses of directors' wives. The Tribunal, following its reasoning for the assessment year 1990-91, directed the AO to delete the disallowance.

5. Computation of Deduction under Section 80HHC:
The assessee claimed a deduction of Rs. 52,16,630 under Section 80HHC, while the AO allowed Rs. 48,66,441. The AO included carriage in total turnover and excluded interest and royalty from business income. The Tribunal directed the AO to compute the deduction under Section 80HHC after including interest and royalty, provided they were assessed under 'income from business'. The Tribunal also directed the AO to exclude carriage outward from total turnover for the computation of deduction under Section 80HHC.

6. Addition in Respect of Interest-Free Advances to Sister Concerns:
The assessee contested the addition of Rs. 77,85,059 for interest-free advances to sister concerns. The Tribunal found no evidence of a nexus between borrowed funds and the advances. Citing its earlier order, the Tribunal deleted the addition, stating that the advances were given out of the assessee's own funds.

7. Deduction of Proportionate Management Expenses out of Dividend Income for Section 80M:
The assessee challenged the deduction of management expenses from dividend income for Section 80M deduction. The Tribunal held that no expenses were incurred for earning the dividend income and directed the AO to allow the deduction under Section 80M without reducing it by any presumed expenses.

8. Claim of Pre-Operative Expenses in Respect of CR Division:
The assessee restricted its claim to Rs. 88,94,965 for interest paid on borrowed capital for the CR Division. The Tribunal, following its reasoning for the assessment year 1990-91, directed the AO to allow the deduction for interest paid on borrowed funds.

9. Disallowance of Shagans Paid to Dealers:
The assessee contested the disallowance of Rs. 67,461 for Shagans paid to dealers. The Tribunal, referencing its earlier order, directed the AO to delete the disallowance.

10. Addition on Account of Closing Stock of Stores, Spare Parts, Tools, etc.:
The Revenue contested the deletion of Rs. 8,79,145 added by the AO for closing stock of stores, spare parts, and tools. The Tribunal upheld the CIT(A)'s deletion, referencing its earlier orders for previous assessment years.

11. Disallowance of Interest Due and Claimed to Have Been Written Off:
The Revenue contested the deletion of Rs. 30,12,150 written off as bad debt. The Tribunal upheld the CIT(A)'s decision, stating that the assessee was entitled to the deduction in the year the bad debt was written off.

12. Pre-Operative Expenses in Respect of CR Division:
The Revenue contested the treatment of pre-operative expenses as revenue expenditure. The Tribunal, referencing its earlier order, directed the AO to treat all pre-operative expenses as capital in nature, except for interest paid on borrowed funds.

Conclusion:
Both the assessee's and the Revenue's appeals were partly allowed, with specific directions given to the AO for recomputation and deletions as per the Tribunal's findings.