1993 (9) TMI 162 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of expenditure on purchase of plant & machinery.
2. Interest on Fixed Deposit Receipts (FDRs).
3. Disallowance u/s 40A(7) for provision towards approved gratuity fund.
4. Disallowance of share issue expenses and survey expenses.
5. Expenses relating to earlier years.

Summary:

1. Disallowance of Expenditure on Purchase of Plant & Machinery:
The assessee claimed Rs. 1,12,48,100 as revenue expenditure for the purchase of new machinery, arguing it replaced old machinery to update technology and reduce manufacturing costs. The Assessing Officer (AO) and Tribunal held this expenditure as capital in nature, not revenue, as it expanded the business and increased production capacity. The Tribunal directed that the assessee would be entitled to depreciation and investment allowance on these machines. The AO viewed this as furnishing inaccurate particulars of income, but the Tribunal found no concealment or furnishing of inaccurate particulars by the assessee.

2. Interest on Fixed Deposit Receipts (FDRs):
The assessee claimed that interest accrued on FDRs amounting to Rs. 31,86,320 should not be taxed as the principal amount was under dispute in the Delhi High Court. The AO and Tribunal held that the interest income belonged to the assessee. The AO applied Explanation 1 to section 271(1)(c), treating it as concealed income. However, the Tribunal found that the assessee disclosed full particulars and the claim was bona fide.

3. Disallowance u/s 40A(7) for Provision towards Approved Gratuity Fund:
The AO disallowed the provision for payment of gratuity based on the Tax Audit Report, which was confirmed by the CIT (Appeals) and Tribunal. The AO treated this as furnishing inaccurate particulars of income. The Tribunal, however, found that the assessee disclosed all material particulars and the claim was bona fide.

4. Disallowance of Share Issue Expenses and Survey Expenses:
The assessee claimed Rs. 6,02,805 for share issue expenses and Rs. 90,000 for survey expenses as revenue expenditure. The AO and Tribunal held these as capital in nature, relying on the Andhra Pradesh High Court decision in Vazir Sultan Tobacco Co. Ltd. The Tribunal noted that different High Courts had divergent views on this issue and found that the assessee's claim was bona fide and disclosed all material facts. Therefore, Explanation 1 to section 271(1)(c) was not applicable.

5. Expenses Relating to Earlier Years:
The AO initiated penalty proceedings for disallowance of expenses relating to earlier years, but the CIT (Appeals) accepted the assessee's contention, and this item was not considered for penalty. Thus, it was not a subject matter of penalty in the appeal.

Conclusion:
The Tribunal concluded that the assessee disclosed all material particulars and the claims were bona fide. Therefore, the penalty levied u/s 271(1)(c) was found to be illegal and invalid, and the appeal was allowed.