1989 (4) TMI 120 - AT - Income Tax

Assessment Year, Capital Employed, Carrying On Business, Industrial Undertaking, Profits And Gains

Summary

Issues Involved:
1. Deduction under Section 80J of the Income-tax Act, 1961.
2. Disallowance of Sales Promotion Expenses.

Issue-wise Detailed Analysis:

1. Deduction under Section 80J of the Income-tax Act, 1961:

The assessee appealed against the reduction of the deduction under Section 80J from Rs. 2,55,217 to Rs. 98,825 by the CIT(A). The IAC(A) had computed the deduction based on the assumption that part of the funds for the silicon unit came from borrowed funds of the main branch. Consequently, the IAC(A) apportioned the capital employed in the silicon unit in the same ratio as the capital and reserves of the main branch to the total of share capital, reserves, and borrowings. The IAC(A) determined the capital employed as Rs. 16,47,086 and allowed a deduction of Rs. 98,825.

The assessee contended that there was no presumption that the funds advanced to the silicon unit came from borrowed funds. The assessee argued that there was no nexus between the borrowings and the capital employed in the silicon unit. The assessee relied on several judgments, including Bishamber Dayal Badri Prasad v. IAC and Indian Explosive Ltd. v. CIT, to support its claim.

The revenue argued that each unit should be considered an independent entity and that the transfer of funds from the head office to the silicon unit should be treated as borrowing, thus justifying the proportionate reduction in the deduction under Section 80J.

The Tribunal found that there was no direct transfer of borrowed funds to the silicon unit. The capital employed in the silicon unit was computed correctly by the assessee at Rs. 42,53,617. The Tribunal held that the assessing officer's presumption was unjustified and based on conjectures and surmises. The Tribunal directed that the deduction under Section 80J at 6% of Rs. 42,53,617, amounting to Rs. 2,55,270, be allowed as claimed by the assessee.

2. Disallowance of Sales Promotion Expenses:

The assessee had shown total expenditure of Rs. 46,606 under 'Sales Promotion Expenses,' out of which the assessing officer added back Rs. 41,606, allowing a deduction of Rs. 5,000 under Section 37(2A) of the Act. The CIT(A) found that some expenses were incurred on employees and on customers, and allocated 50% of the expenses as entertainment expenditure, allowing a deduction of Rs. 5,000 and disallowing the balance of Rs. 18,304.

The assessee argued that the allowance should be more than what was allowed by the CIT(A). The revenue contended that the CIT(A) was fair in his allocation and that no further interference was necessary.

The Tribunal found that the CIT(A) was reasonable and fair in allocating the expenses and that the allocation did not require any interference. The Tribunal rejected the assessee's ground of appeal regarding the disallowance of sales promotion expenses.

Conclusion:

The appeal was partly allowed. The Tribunal directed that the deduction under Section 80J be allowed as claimed by the assessee, amounting to Rs. 2,55,270. The Tribunal upheld the CIT(A)'s allocation of sales promotion expenses and rejected the assessee's ground of appeal on this issue.