1994 (6) TMI 38 - AT - Income Tax

Summary

Issues:
1. Disallowance of professional and legal charges
2. Disallowance of subscription paid to clubs
3. Disallowance of royalty payment
4. Disallowance under section 40A(5) related to motor car perquisite
5. Allowance of weighted deduction for maintaining an agency for sales outside India

Issue 1: Disallowance of professional and legal charges

The appeal by the assessee contested the disallowance of professional and legal charges paid to Chartered Bank for financial advisory services related to long-term corporate plans. The CIT(A) upheld the disallowance, considering the services as capital expenditure. The assessee provided evidence of the necessity of the services for obtaining loans and machinery. Relying on the decision in India Cements Ltd. vs. CIT, the ITAT allowed the claim, stating that the expenditure was wholly and exclusively for business purposes. The disallowance was overturned in favor of the assessee.

Issue 2: Disallowance of subscription paid to clubs

The appeal challenged the disallowance of subscriptions to Cochin Suburban Club and Rotary Club. The CIT(A) disallowed a portion of the claim, stating it was not connected to the assessee's business. The ITAT disagreed, noting that attending such clubs could benefit the business by connecting with potential customers. Therefore, the claim for deduction of subscriptions to the clubs was allowed in favor of the assessee.

Issue 3: Disallowance of royalty payment

The disallowance of royalty paid for collecting sand was contested, with the taxing authorities claiming it was capital expenditure. The ITAT agreed that the payment was capital in nature but directed the Assessing Officer to allow depreciation on the amount. Consequently, the assessee was entitled to depreciation on the royalty payment.

Issue 4: Disallowance under section 40A(5) related to motor car perquisite

The Revenue's appeal challenged the deletion of disallowance under section 40A(5) concerning the value of a motor car perquisite. The CIT(A) directed the calculation of disallowance for maintenance of the car per rule 3(c)(ii) of the IT Rules. However, the ITAT, following a Kerala High Court decision, restricted the disallowance to 20% of car expenses and depreciation, disagreeing with the CIT(A) on the valuation of the perquisite. The point was decided in favor of the Revenue.

Issue 5: Allowance of weighted deduction for maintaining an agency for sales outside India

The Revenue disputed the allowance of weighted deduction for maintaining an agency for sales outside India, arguing that the agents were not true agents as per legal interpretation. Citing a precedent from Srivilas Cashew Co. vs. CIT, the ITAT upheld the CIT(A)'s decision, stating that the commission paid to agents for promoting sales abroad constituted expenses for maintaining an agency. The weighted deduction was allowed in favor of the assessee.

In conclusion, the ITAT partially allowed both appeals, overturning certain disallowances and restrictions while upholding others based on legal interpretations and precedents cited during the proceedings.