1988 (10) TMI 69 - AT - Income Tax

Issues Involved:
1. Disallowance of Rs. 15,000 under Rule 6D of the IT Rules.
2. Addition of Rs. 1,35,963 and Rs. 1,65,312 as non-business expenditure.
3. Disallowance of Rs. 49,268 under the heading Research & Development.
4. Addition of Rs. 8,598 under Section 37(2A) of the IT Act.
5. Relief of Rs. 10,570 granted by CIT(A) on estimate under Rule 6D.
6. Addition of Rs. 40,455 under Section 40A(5) of the IT Act.
7. Deletion of Rs. 2,500 out of traveling expenses by the Directors.

Detailed Analysis:

1. Disallowance of Rs. 15,000 under Rule 6D of the IT Rules:
The CIT(A) upheld the disallowance of Rs. 15,000 from traveling expenses, citing lack of proper evidence for conveyance and other expenses. The assessee argued that conveyance and fare expenses should be fully allowable, while hotel and other expenses should be governed by the daily allowance under Rule 6D. The tribunal found no merit in the assessee's submission that conveyance expenses should be fully allowable like fare expenses. It upheld the CIT(A)'s decision, dismissing the assessee's appeal as without merit.

2. Addition of Rs. 1,35,963 and Rs. 1,65,312 as non-business expenditure:
The ITO added back these amounts, treating them as penalties for contract infringements. The assessee contended that these were business expenses for late delivery or short supply of goods, not penalties for law violations. The CIT(A) accepted the assessee's reasoning and deleted the additions. The tribunal agreed, noting that the deductions were part of normal business transactions and not for law violations. It confirmed the CIT(A)'s order, rejecting the Revenue's appeal for remand to the ITO.

3. Disallowance of Rs. 49,268 under the heading Research & Development:
The ITO disallowed this amount due to lack of detailed project information. The assessee explained that the expenses were for maintaining ISI specifications and laboratory testing. The CIT(A) accepted this explanation, noting that similar expenses were allowed in previous years. The tribunal found the departmental contention without merit and upheld the CIT(A)'s decision, recognizing the expenses as business-related.

4. Addition of Rs. 8,598 under Section 37(2A) of the IT Act:
The CIT(A) reversed the ITO's disallowance, identifying the expenses as staff welfare, including tea and medicines. The tribunal found no infirmity in the CIT(A)'s reasoning or factual appreciation, thus refusing to interfere with the decision.

5. Relief of Rs. 10,570 granted by CIT(A) on estimate under Rule 6D:
The CIT(A) granted this relief on an estimated basis. The tribunal, having dealt with the subject in detail, agreed with the Revenue that the estimate was inappropriate when correct facts were available. It set aside the CIT(A)'s order and directed a recomputation of disallowance under Rule 6D.

6. Addition of Rs. 40,455 under Section 40A(5) of the IT Act:
The CIT(A) held that disallowances for Directors' salaries should be under Section 40(c), not Section 40A(5), as none of the Directors received salaries above Rs. 72,000 including perquisites. The tribunal agreed with this finding, seeing no justification for the disallowance.

7. Deletion of Rs. 2,500 out of traveling expenses by the Directors:
The CIT(A) deleted this addition, noting that the ITO made the disallowance on an estimate without identifying any personal expenses. The tribunal found the CIT(A)'s decision correct and justified, thus upholding the deletion.

Conclusion:
The tribunal upheld most of the CIT(A)'s decisions, agreeing with the factual and legal reasoning provided. It dismissed the assessee's appeal regarding the Rs. 15,000 disallowance under Rule 6D, confirmed the deletion of additions related to business expenses, and upheld the allowance of research and development expenses. It also confirmed the deletion of the Rs. 8,598 addition and the Rs. 2,500 travel expense disallowance. However, it set aside the estimated relief of Rs. 10,570 under Rule 6D for recomputation and upheld the CIT(A)'s decision regarding Directors' salaries under Section 40(c).

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