1988 (10) TMI 71 - AT - Income Tax

Summary

Issues Involved:
1. Inclusion of interest on sticky and doubtful accounts in income.
2. Provision for bonus and its treatment in subsequent years.
3. Disallowance of miscellaneous expenses.
4. Treatment of pro rata interest on securities.
5. Inclusion of interest on debentures in income.
6. Claims for bad debts.
7. Deduction on account of entertainment expenses.
8. Treatment of loss on sale of stocks and shares.

Detailed Analysis:

1. Inclusion of Interest on Sticky and Doubtful Accounts in Income:
The primary grievance of the assessee was the inclusion of Rs. 12,44,754 as interest accrued on sticky and doubtful accounts in its income. The ITO added this amount to the total income, asserting that the interest had accrued and arisen during the accounting period. The CIT(A) set aside the ITO's order, directing a re-examination based on observations from a previous year. The Tribunal upheld the addition, citing the Supreme Court's judgment in State Bank of Travancore vs. CIT, which held that income from interest on sticky advances accrues and must be included in total income. The Tribunal noted that the Supreme Court had considered CBDT circulars and still concluded that such interest should be included in income.

2. Provision for Bonus and Its Treatment in Subsequent Years:
The ITO added Rs. 63,089 to the assessee's income, considering it an excess provision for bonus. The CIT(A) upheld this addition. The assessee argued that this amount was offered for taxation in the following year when the bonus was disbursed. The Tribunal sustained the addition for the current year but allowed the assessee to raise an additional ground for the subsequent year to avoid double taxation. Consequently, the Tribunal directed the exclusion of this amount from the assessee's income for the subsequent year.

3. Disallowance of Miscellaneous Expenses:
The ITO disallowed Rs. 10,000 out of miscellaneous expenses on an estimated basis. The Tribunal reduced this disallowance to Rs. 5,000, consistent with its decision for the previous assessment year.

4. Treatment of Pro Rata Interest on Securities:
The ITO added Rs. 3,01,116 to the assessee's income, treating the pro rata interest on securities as a capital expenditure. The CIT(A) upheld this view. The Tribunal remanded the issue to the CIT(A) to determine whether the securities were held as stock-in-trade or as investments. If held as stock-in-trade, the interest would be a business expenditure; otherwise, it would be capital expenditure.

5. Inclusion of Interest on Debentures in Income:
The ITO added Rs. 17,500 to the assessee's income as interest on debentures. The assessee argued that the recovery of the principal was doubtful. The Tribunal upheld the addition, stating that income from debentures must be assessed on a due basis under Section 18 of the IT Act, regardless of the recoverability of the principal.

6. Claims for Bad Debts:
The assessee claimed bad debts totaling Rs. 3,21,000 for the assessment year 1978-79 and Rs. 8,64,690 for the assessment year 1979-80. The Tribunal examined each claim individually:

- Electrical Machine Corpn.: The claim was rejected as the fixed assets of one partner were still available as security.
- Gopal Iron & Steel Corpn.: The claim was accepted as the debt was considered irrecoverable after the sale of stocks.
- Raj Kumar Ashok Kumar: The claim was accepted as the debt was written off after the pledged goods were sold.
- E.M.C. Works Ltd.: The claim was rejected as the company had not lost all hopes of recovery during the accounting period.
- Alpine Sales Corporation: The claim was accepted, consistent with the Tribunal's decision for the previous year.
- S.R. Traders: The claim was remanded to the CIT(A) for verification of a claim with the Credit Guarantee Corporation.
- Modern Industrial Corpn.: The claim was rejected as recoveries were made during the year.
- Nizamuddin & Co.: The claim was rejected as a suit was filed for recovery.
- Ashok Electric Co.: The claim was rejected due to recoveries made during the year.
- Vijay Engg. Works: The claim was rejected as a suit was filed after the accounting period.
- Shah Gur Gum Industries: The claim was rejected as the debt was secured by a house property.
- Shah Agro Industries: The claim was rejected as a suit was filed for recovery.
- Syndicate Motors (P) Ltd.: The claim was rejected as the debt was secured by immovable properties.
- Govind Metal Industries, Sanjeev Industries, and Sky Larc Corporation: The claims were rejected as suits were pending.
- P.K. Rajendra: The claim was rejected as a suit was pending and the debt was secured.
- P.S.M. Steel Rolling Mills: The claim was rejected as a significant recovery was made later.
- Rajmani Pandey: The claim was rejected as a suit was pending.
- EMC Works (P) Ltd.: The claim was rejected for the same reasons as in the previous year.
- Emkay Industries, J.P. Sharma, and Associated Enterprises: The claims were rejected as premature or unsupported by details.

7. Deduction on Account of Entertainment Expenses:
The CIT(A) allowed a deduction for entertainment expenses based on the scale prescribed in Section 37(2) of the IT Act. The Tribunal directed the ITO to verify whether the business income exceeded Rs. 10 lakhs to determine the allowable deduction.

8. Treatment of Loss on Sale of Stocks and Shares:
The CIT(A) allowed a deduction for the loss on the sale of stocks and shares, treating it as a business loss. The Tribunal remanded the issue to the CIT(A) to ascertain whether the securities were held as stock-in-trade or investments. The nature of the securities would determine whether the loss was a business or capital loss.

Conclusion:
The Tribunal's judgment addressed multiple issues related to the inclusion of interest on sticky accounts, treatment of bonus provisions, disallowance of miscellaneous expenses, treatment of pro rata interest on securities, inclusion of interest on debentures, claims for bad debts, deduction for entertainment expenses, and treatment of loss on sale of stocks and shares. The Tribunal upheld some additions, allowed some claims, and remanded certain issues for further verification and determination.