1975 (3) TMI 34 - AT - Income Tax

Summary

Issues:
1. Allowability of expenses incurred on investigation, research, and feasibility of industrial projects.
2. Treatment of interest income on loans advanced under a changed accounting method.
3. Disallowance of certain expenses like payment to Labor and Industrial Bureau, entertainment expenses, and interest on delayed payment of advance Income-tax.

Issue 1:
The judgment deals with the allowability of expenses incurred on investigation, research, and feasibility of industrial projects by a state-owned company. The company argued that these expenses were part of its business activities aimed at promoting industries, conducting research, and providing feasibility studies to prospective entrepreneurs. The company presented evidence of two instances where expenses were reimbursed by companies establishing industrial units based on the feasibility reports. The tribunal noted that the company had not previously provided such evidence but found the current evidence sufficient to establish a connection between the expenses and the business. The tribunal decided to remit the matter back to the Appellate Authority to allow the expenses if satisfied with the evidence presented.

Issue 2:
The judgment also addressed the treatment of interest income on loans advanced by the company under a changed accounting method. The company switched from the mercantile system to a hybrid system, accounting for interest only on a cash basis. The Income Tax Officer (ITO) disallowed this change, insisting on including accrued interest income for assessment. The tribunal upheld the ITO's decision, citing a lack of statutory provision for such selective changes in accounting methods. It referred to a similar case involving the State Bank of Travancore where accrued interest was required to be assessed. The tribunal found no merit in the company's argument and upheld the inclusion of accrued interest income.

Issue 3:
Additionally, the judgment addressed other points, including the disallowance of expenses like payment to the Labor and Industrial Bureau, entertainment expenses, and interest on delayed payment of advance Income-tax. The tribunal confirmed the disallowance of certain expenses like entertainment expenses incurred for dinners and meetings with industrialists. However, it allowed expenses like drilling operations and business-related traveling expenses while remitting the matter back to the Appellate Authority for further clarification on certain expenses.

In conclusion, the tribunal partly allowed all the appeals, remitting certain matters back to the Appellate Authority for further examination based on the evidence presented by the company. The judgment clarified the treatment of expenses incurred on industrial projects, interest income on loans under a changed accounting method, and the disallowance of specific expenses based on their nature and purpose.