2004 (12) TMI 315 - AT - Income Tax

Summary

Issues Involved:

1. Adjustment of carry forward loss.
2. Disallowance of expenses on household equipment, maintenance, and inland travel.
3. Addition of expenditure on mobile and residential telephones.
4. Disallowance of expenditure on foreign travel.

Detailed Analysis:

1. Adjustment of Carry Forward Loss:

The primary issue was the denial of the adjustment of carry forward loss amounting to Rs. 33,72,320 by the Assessing Officer (AO) and upheld by the CIT(A). The assessee, a private limited company fully owned by M/s. Shell International Petroleum Co. Ltd., UK (SIPC), claimed set off of losses from the previous year (AY 1997-98) against the current year's income. The AO disallowed this claim citing Section 79 of the Income-tax Act, which restricts the carry forward and set off of losses if there is a change in shareholding exceeding 51%. The AO found that the initial shareholders, Shri C.R. Dua and Shri V.S. Mehta, beneficially owned the shares, and the change in shareholding disqualified the assessee from claiming the set off. The CIT(A) upheld this view, emphasizing the unambiguous nature of Section 79.

The Tribunal reviewed the arguments, including the assessee's contention that Dua and Mehta were merely nominees and not beneficial owners, and SIPC was the actual beneficial owner. The Tribunal referred to Supreme Court rulings emphasizing literal interpretation of statutes unless it leads to absurdity. It concluded that the shares were beneficially held by Dua and Mehta, and the change in shareholding invoked Section 79, disallowing the loss set off. Additionally, the AO's view that the loss was pre-commencement and non-revenue was not contested by the assessee. Thus, the Tribunal upheld the disallowance of the carry forward loss.

2. Disallowance of Expenses on Household Equipment, Maintenance, and Inland Travel:

The assessee contested the disallowance of Rs. 38,800 incurred on household equipment, maintenance, and inland travel of Mr. M. Mackie, an expatriate. The AO disallowed these expenses as they were not covered under the agreement between the assessee and SIPC. The CIT(A) confirmed this disallowance, and the Tribunal upheld it, noting that the assessee failed to demonstrate that these expenses were contractually obligated.

3. Addition of Expenditure on Mobile and Residential Telephones:

The AO added Rs. 5,70,700, being 10% of the expenditure on mobile and residential telephones provided to employees, for personal use. The Tribunal referred to the Gujarat High Court ruling in Sayaji Iron & Engg. Co. v. CIT, which held that a company cannot have personal use and thus disallowed such ad hoc additions. The Tribunal followed this precedent and deleted the addition, allowing the assessee's appeal on this ground.

4. Disallowance of Expenditure on Foreign Travel:

The AO disallowed Rs. 8,74,760, being 10% of the foreign travel expenses, due to the lack of details provided by the assessee. The CIT(A) upheld this disallowance. However, the assessee later submitted detailed statements of the foreign travels. The Tribunal decided to remand this issue back to the AO for verification of the submitted details and to quantify the disallowance accordingly. Thus, the appeal on this ground was treated as allowed for verification.

Conclusion:

The appeal was partly allowed. The Tribunal upheld the disallowance of the carry forward loss and expenses on household equipment and maintenance. It deleted the addition for personal use of telephones and remanded the issue of foreign travel expenses back to the AO for verification.