1989 (12) TMI 89 - AT - Income Tax

Accounting Year, Assessment Year, Business Expenditure, Capital Asset, Capital Expenditure, Concessional Rate, Deduction In Respect, Development Allowance, Expenditure Incurred, Expenditure On Scientific Research, Foreign Company, Foreign Enterprise, Guest House, Managing Agent, Revenue Expenditure

Issues Involved:
1. Deduction of Provision for Electricity Surcharge
2. Treatment of Building Repairs as Capital Expenditure
3. Disallowance of Mess Expenditure
4. Weighted Deduction under Section 35B
5. Deduction under Section 80-O
6. Additional Ground for Deduction under Section 35 for Scientific Research

Detailed Analysis:

1. Deduction of Provision for Electricity Surcharge:

The assessee claimed a deduction for the provision of electricity surcharge due to a dispute with the Rajasthan State Electricity Board over the electricity rate. The Board charged at the full rate from November 1975, and the assessee refused to pay, leading to a 2% monthly surcharge for non-payment. Both the assessing authority and the CIT (Appeals) rejected the claim, stating that the liability was contractual and not settled within the year. The Tribunal upheld this view, referencing CIT v. Nadiad Electric Supply Co. Ltd., asserting that the mere sending of bills did not create a legally enforceable obligation on the assessee.

2. Treatment of Building Repairs as Capital Expenditure:

The ITO disallowed Rs. 1,37,018 out of Rs. 50,02,544 spent on building repairs, categorizing it as capital expenditure. The CIT (Appeals) upheld this, noting that the draft order had proposed such disallowance. The Tribunal agreed with the CIT (Appeals) on some items being capital in nature (e.g., kitchen cabinet, cupboards) but allowed certain expenditures as revenue (e.g., park shed for school bus, wall panelling, toilet fittings). The final allowed business expenditure was Rs. 64,458, with the balance sustained as capital expenditure, allowing depreciation thereon.

3. Disallowance of Mess Expenditure:

The assessee's mess expenditure of Rs. 4,49,187 was mostly disallowed, with only Rs. 60,000 allowed by the IAC. The CIT (Appeals) categorized the expenditure as guest house maintenance, thus inadmissible under section 37(4). The Tribunal, interpreting section 37(4), concluded that expenses on providing refreshments and meals to employees, even if at the guest house, should be admissible as business expenditure, distinguishing it from maintenance costs.

4. Weighted Deduction under Section 35B:

The assessee claimed weighted deduction for travel expenses to Kenya. The Tribunal examined the agreement with Industrial & Commercial Development Corporation, Kenya, and Africa Synthetic Fibres Ltd. (ASFL), concluding that the travel expenses were related to providing technical services, not acquiring a capital asset. However, the Tribunal agreed with the Department that travel expenses for providing technical know-how, not promoting sales, are not eligible for deduction under section 35B.

5. Deduction under Section 80-O:

The assessee claimed deduction under section 80-O for Rs. 15,35,907 received as technical fees from ASFL. The ITO and CIT (Appeals) rejected the claim, arguing the payment was for salaries, not technical fees, and questioned the approval and quantum of deduction. The Tribunal, referencing the Supreme Court's conditions in Petron Engg. Construction (P.) Ltd. v. CBDT, found that the fees were for technical services and satisfied all conditions under section 80-O. The Tribunal directed verification of whether travel expenses were reimbursable to determine the exact deduction.

6. Additional Ground for Deduction under Section 35 for Scientific Research:

The assessee raised an additional ground for Rs. 1,86,49,403 spent on capital assets for scientific research, initially claimed in 1982-83 but found by the ITO to pertain to 1981-82. The Tribunal allowed the additional ground, citing that all necessary facts were on record and the issue was purely legal. It concluded that deduction under section 35 should be claimed when the asset is put to use for scientific research, not when acquired, aligning with the assessee's method, which safeguards revenue interests.

Conclusion:

The appeal was partly allowed, with specific deductions and disallowances adjusted based on the Tribunal's detailed examination of each issue.

← Previous Next →