1989 (11) TMI 89 - AT - Income Tax

Assessment Year, Business Expenditure, Capital Or Revenue Expenditure, Development Allowance, Expenditure Incurred, Insurance Company, Remuneration Paid To Directors, Travelling Expenses, Wholly And Exclusively

Issues Involved:

1. Disallowance of Rs. 50,400 as business loss due to embezzlement.
2. Disallowance of Rs. 5,296 as insurance premium for Directors.
3. Allowance of bonus of Rs. 1,38,135 as production incentive and attendance bonus.
4. Allowance of gardening expenses of Rs. 21,640.
5. Allowance of Rs. 17,000 as commission.
6. Application of section 40(c) vs. section 40A(5) for remuneration of employee Directors.
7. Allowance of foreign travel expenses of Rs. 14,117.
8. Allowance of 50% of electricity and water charges for Directors' residences.
9. Allowance of deductions under both sections 35B and 80HHC.

Detailed Analysis:

1. Disallowance of Rs. 50,400 as Business Loss Due to Embezzlement:

The assessee, a private limited company, claimed a business loss of Rs. 50,400 due to embezzlement of a bank draft by an employee. The ITO disallowed the claim, reasoning that the loss was premature as the assessee had filed a suit against the bank with bright prospects of recovery. The Tribunal referenced the Karnataka High Court's decision in Canara Spies Corpn. Ltd. v. CIT and the Supreme Court's ruling in Associated Banking Corpn. of India Ltd. v. CIT, which established that a trading loss cannot be deemed to have occurred if there is a reasonable prospect of recovery. The Tribunal remitted the case back to the CIT for fresh disposal, requiring an investigation into the prospects of recovery.

2. Disallowance of Rs. 5,296 as Insurance Premium for Directors:

The ITO disallowed the insurance premium paid for Directors, stating it was not connected to the business. The CIT upheld the disallowance, referencing the Gujarat High Court's decision in CIT v. Khodidas Motiram Panchal. The Tribunal, however, found that insurance against accidents for Directors is a business expenditure, as it secures valuable services and allows Directors to work without apprehension. The Tribunal directed that the amount be allowed as a deduction under section 37 of the I.T. Act.

3. Allowance of Bonus of Rs. 1,38,135:

The assessee paid bonus as production incentive and attendance bonus. The ITO disallowed it, stating section 36 did not cover such bonuses. The CIT allowed the claim, noting the bonuses were paid monthly based on individual performance and were not subject to the limits of the Payment of Bonus Act. The Tribunal upheld this view, referencing the Madras High Court's decision in CIT v. Sivanandha Mills Ltd. and the Calcutta High Court's ruling in CIT v. Babcock & Willcox of India Ltd., which allowed such bonuses under section 37.

4. Allowance of Gardening Expenses of Rs. 21,640:

The ITO disallowed gardening expenses, but the CIT allowed them, emphasizing the social responsibility of maintaining ecological balance. The Tribunal agreed, stating that such expenses are essential business expenditures and related to maintaining a pollution-free atmosphere.

5. Allowance of Rs. 17,000 as Commission:

The ITO disallowed the commission paid to Samrat Udyog due to lack of evidence. The CIT allowed it, noting the payment was made by cheque for the sale of products. The Tribunal found the CIT's reasoning insufficient and remitted the matter back to the CIT for fresh examination of relevant evidence.

6. Application of Section 40(c) vs. Section 40A(5) for Remuneration of Employee Directors:

The Tribunal upheld the CIT's application of section 40(c) for limiting the remuneration of employee Directors, following the Special Bench decision in Geoffrey Manners & Co. Ltd v. ITO. The CIT found the emoluments below the ceiling of Rs. 72,000, and the Tribunal confirmed this view.

7. Allowance of Foreign Travel Expenses of Rs. 14,117:

The ITO disallowed the foreign travel expenses due to inconsistencies in travel dates. The CIT allowed the claim, criticizing the ITO for not verifying facts. The Tribunal remitted the matter back to the CIT to ascertain the facts and allow the claim if the expenditure was solely for business purposes.

8. Allowance of 50% of Electricity and Water Charges for Directors' Residences:

The ITO disallowed 50% of the electricity and water charges for Directors' residences. The CIT allowed the claim, noting the company's use of the premises for business purposes. The Tribunal upheld the CIT's decision, emphasizing the business connection.

9. Allowance of Deductions Under Both Sections 35B and 80HHC:

The ITO disallowed deductions under both sections 35B and 80HHC. The CIT allowed the deductions, stating there was no prohibition against claiming both in the same year if conditions were met. The Tribunal confirmed this view, noting the distinct and separate objectives of the two sections.

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