1986 (1) TMI 169 - AT - Income Tax

Issues Involved:

1. Treatment of medical reimbursement as perquisites under Section 40A(5).
2. Valuation of rent-free accommodation for disallowance under Section 40A(5).
3. Disallowance of entertainment expenses under Section 37(2A).
4. Disallowance of general charges not proved for business purposes.
5. Addition of written-back liabilities under Section 41(1).
6. Disallowance of initial contribution for past services under Rule 6(2).
7. Computation of capital employed under Section 80J.
8. Deduction of surtax liability as business expenditure.
9. Disallowance under Section 80VV for legal expenses.
10. Treatment of payment to Sybron Corporation as capital or revenue expenditure.

Detailed Analysis:

1. Treatment of Medical Reimbursement as Perquisites:
The Income Tax Officer (ITO) treated the reimbursement of medical expenses as perquisites under Section 40A(5) of the IT Act, 1961. The assessee argued that medical reimbursement should not be treated as a perquisite since it was a cash payment. The Commissioner of Income Tax (Appeals) [CIT(A)] accepted the assessee's submission. The Tribunal upheld the CIT(A)'s decision, stating that medical reimbursement, being cash payments, cannot be regarded as perquisites in terms of the definition given in sub-clause (ii) of clause (A) of sub-section (5) of Section 40A.

2. Valuation of Rent-Free Accommodation:
The ITO valued the rent-free accommodation provided by the assessee to its employees based on actual payments made. The assessee contended that the value should be determined as per Rule 3 of the IT Rules, 1962. The CIT(A) did not accept this submission. The Tribunal agreed with the CIT(A), stating that the actual expenditure incurred in providing rent-free accommodation should be regarded as the perquisite for the purpose of sub-clause (ii) of clause (A) of sub-section (5) of Section 40A. The Tribunal emphasized that Rule 3 was made with reference to the assessment of an employee under Section 17, which is different from the purpose of Section 40A(5).

3. Disallowance of Entertainment Expenses:
The ITO added Rs. 53,979 to the total income of the assessee as entertainment expenses not allowable under Section 37(2A). The expenses were mainly for lunch, dinner, etc. The CIT(A) upheld the disallowance, and the Tribunal agreed, stating that the expenses fell squarely within the language of Section 37(2A). The Tribunal noted that the assessee did not provide a break-up of charges for conference hall and lunch, making it impossible to split the expenses.

4. Disallowance of General Charges:
The CIT(A) sustained a disallowance of Rs. 15,017 out of general charges, noting that the expenses were not proved to be for business purposes. The Tribunal upheld this finding, observing that the assessee could not correlate the expenditure on presentation items, game tickets, etc., with business needs. However, the Tribunal allowed minor items totaling Rs. 440, which appeared to be of an allowable nature.

5. Addition of Written-Back Liabilities:
The ITO added Rs. 97,900 to the assessee's total income under Section 41(1) as liabilities written back. The CIT(A) allowed partial relief of Rs. 13,080, noting that these amounts did not represent revenue expenditure in earlier years. Both the assessee and the Department were aggrieved. The Tribunal upheld the CIT(A)'s decision, stating that the write-back of liabilities represented deemed income under Section 41(1). The Tribunal emphasized that the assessee's judgment in writing back the amounts should not be interfered with unless proven incorrect.

6. Disallowance of Initial Contribution for Past Services:
The ITO disallowed Rs. 96,237 out of Rs. 1,89,890 claimed as the third installment of initial contribution for past services under Rule 6(2). The CIT(A) upheld the disallowance. The Tribunal noted that this issue was covered against the assessee in the earlier year's order and upheld the addition.

7. Computation of Capital Employed under Section 80J:
The assessee included Rs. 80 lakhs in the capital employed for its electronics division, which was lying in fixed deposit. The CIT(A) rejected this claim, stating that the funds were surplus and not specifically earmarked for the new unit. The Tribunal upheld the CIT(A)'s decision, noting that the balance sheet did not show the funds as earmarked for any specific purpose.

8. Deduction of Surtax Liability as Business Expenditure:
The assessee claimed surtax liability as business expenditure. The Tribunal rejected this claim, stating that surtax liability is not a business expenditure but an application of income. The Tribunal cited the decision of the Calcutta High Court in Molins of India Ltd. vs. CIT.

9. Disallowance under Section 80VV for Legal Expenses:
The ITO disallowed Rs. 9,250 under Section 80VV for legal expenses. The CIT(A) upheld the disallowance. The assessee argued that Rs. 8,400 paid to M/s V. Shanker Iyer & Co. was retainer's fees and not related to IT matters. The Tribunal found no evidence to support this claim and upheld the CIT(A)'s decision.

10. Treatment of Payment to Sybron Corporation:
The assessee paid Rs. 10 lakhs to Sybron Corporation and claimed it as revenue expenditure. The ITO treated the entire amount as capital expenditure. The CIT(A) held that Rs. 5 lakhs was capital expenditure and Rs. 5 lakhs was revenue expenditure. The Tribunal examined the agreement and concluded that 1/3rd of Rs. 10 lakhs should be regarded as capital expenditure for acquiring technical property, while the remaining amount was for technical assistance and should be treated as revenue expenditure. The Tribunal directed that investment allowance and depreciation be allowed on the capital expenditure.

Conclusion:
Both the appeals were partly allowed, with the Tribunal providing detailed reasoning for each issue based on the facts and applicable legal provisions.

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