2001 (6) TMI 173 - AT - Income Tax

Summary

Issues Involved:
1. Validity of assessment framed under section 143(2) of the Income-tax Act, 1961.
2. Disallowances upheld by CIT(A):
a. Disallowance out of travelling expenses.
b. Disallowance out of entertainment expenses.
c. Disallowance out of advertisement expenses.
d. Disallowance under section 40A(2)(b).
e. Addition for notional interest on advance.
f. Compensation paid for loss of office to Directors.
3. Charging of interest under section 234.

Issue-wise Detailed Analysis:

1. Validity of Assessment under Section 143(2):
The ground concerning the validity of the assessment framed under section 143(2) was not pressed by the assessee's counsel during the hearing. Consequently, this ground was rejected as not pressed.

2. Disallowances Upheld by CIT(A):

a. Disallowance out of Travelling Expenses:
The Assessing Officer (AO) disallowed Rs. 19,467 along with Rs. 58,266 based on Rule 6D(2)(b), which was confirmed by CIT(A). The assessee referred to CIT v. Chemet and Sundaram Finance Ltd v. IAC, arguing that local conveyance and telephone expenses are not subject to disallowance under Rule 6D. The Tribunal decided in favor of the assessee, holding that Rs. 19,467 is not subject to disallowance under Rule 6D.

b. Disallowance out of Entertainment Expenses:
The AO disallowed 50% of entertainment and hotel bills, club expenses, and sales promotion expenses under section 37(2A). CIT(A) allowed 25% of the expenditure for employee participation and allowed club expenses based on OTIS Elevator Co. (India) Ltd. v. CIT. The Tribunal directed the AO to allow 35% of hotel bills and entertainment expenses and the entire amount of Rs. 46,192 for articles of presentation, as these did not contain the company's logo.

c. Disallowance out of Advertisement Expenses:
The AO disallowed Rs. 20,500 claimed for advertisement expenses outside India, which was confirmed by CIT(A). The Tribunal found that the amount was for participation in a conference convened by Ashok Leyland (P.) Ltd. and directed the AO to allow the same as business expenditure.

d. Disallowance under Section 40A(2)(b):
The AO disallowed Rs. 94,558 for vehicle and telephone expenses under section 40A(2)(b), confirmed by CIT(A). The Tribunal noted that recoveries were made from the Managing Director and Chairman for personal use, and such disallowances are not justified in the case of a company. Reference was made to Asstt. CIT v. Bumpuy Shoe Co. (P.) Ltd. and D.S. Construction (P.) Ltd. v. ITO. The Tribunal directed the AO to delete the disallowance.

e. Addition for Notional Interest on Advance:
The issue was restored to the file of the AO for further verification, following the guidelines given by CIT(A) for the assessment year 1988-89.

f. Compensation Paid for Loss of Office to Directors:
The assessee claimed Rs. 1,29,26,601 as compensation paid to erstwhile directors Ramesh Suri and Lalit Suri. The AO and CIT(A) concluded that the payment was for settling a family dispute and not for business purposes. The Tribunal upheld this view, noting that the payment was capital in nature and not wholly and exclusively for business purposes. The Tribunal referred to various case laws, including Coal Shipments (P.) Ltd. v. CIT and Chelpark Co. Ltd. v. CIT, and concluded that the amount was not allowable as revenue expenditure.

3. Charging of Interest under Section 234:
The AO was directed to give consequential relief to the assessee while giving effect to the appellate order.

Conclusion:
The assessee's appeal was partly allowed, with specific disallowances being overturned, and others upheld as capital expenditure or non-business-related.