1980 (1) TMI 119 - AT - Income Tax

Issues Involved:
1. Deletion of an addition of Rs. 4000 related to rental income.
2. Deletion of Rs. 2,000 related to water and electricity charges.
3. Deletion of Rs. 10,000 related to pre-incorporation expenses.
4. Deletion of Rs. 11,278 related to travel expenses.
5. Weighted deduction under Section 35-B of the Income Tax Act.
6. Deletion of Rs. 23,654 for the assessment year 1975-76.
7. Deletion of Rs. 4,800 for the assessment year 1975-76.
8. Deletion of Rs. 3,000 for the assessment year 1975-76.
9. Allowance of depreciation at 100% on temporary structures.
10. Computation of disallowance under Rule 6-D of the Income-tax Rules, 1962.
11. Classification of the assessee as an Industrial Company for tax purposes.

Detailed Analysis:

1. Deletion of an Addition of Rs. 4000 Related to Rental Income:
The first issue concerns the deletion of an addition of Rs. 4000 by the AAC. The ITO had added this amount, asserting that the rent of Rs. 400 per month paid by Folk Garments Pvt. Ltd. for the first floor of the premises was not commensurate with the Rs. 2,100 per month paid by the assessee to its landlords. The AAC deleted this addition, reasoning that the assessee company, having taken over the business of India Exports as a running concern, could not vary the commitments made by Sh. Sachdev. The Tribunal upheld the AAC's finding, stating that the premises were let out to Folk Garments and not to Mrs. Wadhwa, a director of the assessee company, and that the rent of Rs. 400 was reasonable.

2. Deletion of Rs. 2,000 Related to Water and Electricity Charges:
The next issue pertains to the deletion of Rs. 2,000 related to water and electricity charges for premises occupied by Mrs. Wadhwa. The ITO disallowed this amount, asserting that it was not for the assessee's business. The AAC deleted this disallowance, arguing that the arrangement was part of the agreement made by Sh. Sachdev. The Tribunal partially agreed with the ITO, stating that the disallowance in principle was correct but excessive. The Tribunal reduced the disallowance to Rs. 1,000.

3. Deletion of Rs. 10,000 Related to Pre-Incorporation Expenses:
The third issue involves the deletion of Rs. 10,000 related to pre-incorporation expenses. The ITO had disallowed this amount, but the AAC allowed it, citing various authorities. The Tribunal upheld the AAC's decision, stating that if the Department wanted to tax the income of the business prior to 5th March 1973, it had to allow the expenses related to that period but incurred after 5th March 1973.

4. Deletion of Rs. 11,278 Related to Travel Expenses:
The fourth issue is the deletion of Rs. 11,278 related to travel expenses incurred by Sh. Rakesh Malhotra for attending a trade fair in the USA. The ITO disallowed this amount, questioning the business purpose of the trip and the lack of permission from the Reserve Bank. The AAC deleted this disallowance, satisfied that the trip was for business purposes. The Tribunal upheld the AAC's decision, stating that the question of securing permission from the Reserve Bank was irrelevant.

5. Weighted Deduction Under Section 35-B of the Income Tax Act:
The fifth issue concerns the weighted deduction under Section 35-B of the Income Tax Act. The ITO denied this deduction on various expenses, including rent and travel expenses. The AAC allowed the deduction based on a decision of the Tribunal. The Tribunal upheld the AAC's decision, stating that the assessee was entitled to the required relief on the said amounts, including the rental of Rs. 7,000 and travel expenses of Rs. 11,278.

6. Deletion of Rs. 23,654 for the Assessment Year 1975-76:
For the assessment year 1975-76, the first issue is the deletion of Rs. 23,654 related to the business of India Exports carried on by Sh. Sachdev. The ITO disallowed this amount, while the AAC allowed it. The Tribunal confirmed the deletion, following its decision for the assessment year 1974-75 regarding a similar claim of Rs. 10,000.

7. Deletion of Rs. 4,800 for the Assessment Year 1975-76:
The next issue for the assessment year 1975-76 is the deletion of Rs. 4,800 related to the rent of the first floor occupied by Mrs. Wadhwa. The ITO disallowed this amount, while the AAC allowed it. The Tribunal upheld the AAC's decision, following its finding for the assessment year 1974-75.

8. Deletion of Rs. 3,000 for the Assessment Year 1975-76:
The third issue for the assessment year 1975-76 is the deletion of Rs. 3,000 related to water and electricity charges for the portion occupied by Mrs. Wadhwa. The ITO disallowed this amount, while the AAC allowed it. The Tribunal modified the AAC's decision, directing the ITO to maintain a disallowance of Rs. 1,000.

9. Allowance of Depreciation at 100% on Temporary Structures:
The next issue involves the allowance of depreciation at 100% on temporary structures costing Rs. 50,313. The ITO allowed depreciation at 15%, considering the structures as third-class buildings. The AAC allowed depreciation at 100%, considering them as purely temporary erections. The Tribunal upheld the AAC's decision, agreeing that the structures were temporary and entitled to depreciation at 100%.

10. Computation of Disallowance Under Rule 6-D of the Income-tax Rules, 1962:
The next issue pertains to the computation of disallowance under Rule 6-D of the Income-tax Rules, 1962. The ITO disallowed an additional Rs. 9,208, interpreting the rule to limit travel expenses. The AAC deleted this addition, and the Tribunal upheld the AAC's decision, stating that the full expenditure in respect of travel by rail or road has to be allowed.

11. Classification of the Assessee as an Industrial Company for Tax Purposes:
The last issue concerns the classification of the assessee as an Industrial Company for tax purposes. The ITO rejected this classification, considering the assessee as a trading company. The AAC classified the assessee as an Industrial Company, citing various authorities. The Tribunal upheld the AAC's decision, agreeing that the assessee was engaged in the processing of goods and was therefore an Industrial Company within the definition laid down in the Finance Act, 1976.

Conclusion:
In conclusion, the Tribunal upheld most of the AAC's decisions, allowing various deletions and deductions claimed by the assessee. The Tribunal only modified the disallowance related to water and electricity charges, reducing it to Rs. 1,000. The classification of the assessee as an Industrial Company was also upheld, entitling it to a lower tax rate.

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