1994 (6) TMI 43 - AT - Income Tax

Summary

Issues Involved:

1. Disallowance of foreign travel expenses.
2. Disallowance of interest on borrowed capital diverted for non-business purposes.
3. Disallowance of interest on income-tax liabilities.
4. Disallowance of various expenses including club subscription, export promotion expenses, gift and advertisement expenses, festival expenses, and travel expenses.
5. Disallowance of subscription expenses, miscellaneous expenses, and telephone expenses.
6. Addition to the trading account due to decline in turnover.
7. Addition due to difference in interest chargeable from a debtor.
8. Disallowance under Section 37(2A) of the IT Act.

Issue-wise Detailed Analysis:

1. Disallowance of Foreign Travel Expenses:

The appellant contested the disallowance of Rs. 1,05,953 on foreign travel expenses. The Assessing Officer (IAC) disallowed the expenses on the grounds that the individuals who undertook the travel were directors in other companies and failed to provide concrete evidence linking the travel to the appellant's business. The CIT confirmed the disallowance, and the Tribunal agreed, highlighting the lack of specific correspondence or proof establishing a connection between the travel and the appellant's business activities.

2. Disallowance of Interest on Borrowed Capital Diverted for Non-Business Purposes:

The IAC disallowed Rs. 1 lac out of the total interest claim of Rs. 11.83 lacs, arguing that borrowed funds were used for advancing interest-free loans to various parties. The appellant contended that the advances were made from interest-free creditors and personal capital. The Tribunal found the IAC's disallowance to be arbitrary and unsupported by evidence, noting that the borrowed funds were not necessarily used for the advances. The matter was remitted back to the ITO for re-examination, consistent with previous years' directions.

3. Disallowance of Interest on Income-Tax Liabilities:

The appellant did not press this ground during the hearing, and the disallowance of Rs. 1,50,133 was confirmed.

4. Disallowance of Various Expenses:

- Club Subscription: The Tribunal disagreed with the CIT's view that the expenses could not be allowed as a business deduction because they were not charged as perquisites to employees. The Tribunal allowed the deduction as staff welfare expenses.

- Export Promotion Expenses: The appellant did not press this ground, and the disallowance of Rs. 13,751 was confirmed.

- Gift and Advertisement Expenses: The Tribunal found that the disallowed amount of Rs. 31,000 was related to gifts and advertisements, which did not fall under Rule 6B. The disallowance was deleted.

- Festival Expenses: The Tribunal recognized the distribution of sweets on Diwali as a business expenditure and deleted the disallowance of Rs. 4,043.

- Travel Expenses: The appellant did not press this ground, and the disallowance of Rs. 324 was confirmed.

5. Disallowance of Subscription, Miscellaneous, and Telephone Expenses:

- Subscription Expenses: The Tribunal allowed the deduction, noting that the expenses were incurred exclusively for employees.

- Miscellaneous Expenses: The appellant did not press this ground, and the disallowance of Rs. 1,000 was confirmed.

- Telephone Expenses: The Tribunal followed its previous order and deleted the disallowance of Rs. 5,000.

6. Addition to the Trading Account:

The IAC made an ad hoc addition of Rs. 1 lac due to a decline in turnover and unserved letters of enquiry to two parties. The Tribunal found no justifiable reason for the addition, noting that the decline in turnover was due to trade conditions and the transactions with the parties were made through banks. The addition was deleted.

7. Addition Due to Difference in Interest Chargeable from a Debtor:

The IAC added Rs. 97,657, arguing that interest should have been charged on monthly balances rather than the year-end balance. The Tribunal disagreed, noting that there was no agreement to charge interest monthly and that the debtor had not credited the higher interest amount. The addition was deleted.

8. Disallowance under Section 37(2A) of the IT Act:

The IAC disallowed Rs. 7,623 by including car expenses and conveyance charges under Section 37(3A). The Tribunal directed that 10% of car expenses be considered as repairs under Section 31, and the balance be considered under Section 37(3A). The Tribunal upheld the inclusion of conveyance charges and hire charges for computing disallowance under Section 37(3A).

Conclusion:

The appeal was allowed in part, with several disallowances and additions being deleted or remitted back for re-examination.