1984 (4) TMI 111 - AT - Income Tax

Issues Involved:

1. Deduction of liability due to increased steel prices.
2. Disallowance of selling agency commission.
3. Valuation of work-in-progress.
4. Weighted deduction under section 35B.
5. Disallowance under section 40(c).
6. Development rebate on a tractor.
7. Addition of 'on money' received on sales.
8. Validity of the assessment period under section 153(1)(c).
9. Disallowance of advertisement and import license fees.
10. Disallowance of penalties as business expenditure.
11. Disallowance of expenditure for exploring a new project.
12. Disallowance of entertainment expenditure.
13. Relief under section 80G.
14. Disallowance of surtax liability.

Issue-wise Detailed Analysis:

1. Deduction of liability due to increased steel prices:
The assessee claimed a deduction of Rs. 26,52,610 due to an increase in steel prices, which was disallowed by the ITO but allowed by the Commissioner (Appeals). The Commissioner (Appeals) concluded that the liability accrued in the relevant previous year and ceased in October 1977 when HSL informed the assessee that the provisional bills were final. The Tribunal upheld the Commissioner (Appeals)'s decision, emphasizing that the liability was contractual and not contingent.

2. Disallowance of selling agency commission:
The ITO disallowed Rs. 22,90,327 paid as selling agency commission to Raunaq & Co. (P.) Ltd., citing a government letter prohibiting such commissions on direct sales. The Commissioner (Appeals) allowed the claim, noting that the prohibition was only effective from 24-7-1975 to 6-11-1975. The Tribunal agreed with the Commissioner (Appeals), finding the interpretation of the government letters correct and consistent with previous Tribunal decisions.

3. Valuation of work-in-progress:
The ITO added Rs. 1,01,231 to the value of work-in-progress, which the Commissioner (Appeals) deleted, upholding the assessee's method of valuing work-in-progress at cost or market value, whichever is lower. The Tribunal agreed, noting that the method was consistent with settled accountancy principles.

4. Weighted deduction under section 35B:
The Commissioner (Appeals) allowed Rs. 6,66,742 as weighted deduction under section 35B, against Rs. 85,179 allowed by the ITO. The Tribunal examined each item of expenditure and upheld the Commissioner (Appeals)'s decision, allowing the assessee's claim for relief on printing and stationery, postage, salaries, and rent.

5. Disallowance under section 40(c):
The ITO disallowed Rs. 23,200 on account of car maintenance and servants provided to directors, which was deleted by the Commissioner (Appeals). The Tribunal upheld the deletion, noting that the basis for the ITO's addition disappeared with the deletion of the addition in the director's assessment.

6. Development rebate on a tractor:
The ITO disallowed development rebate on a tractor, considering it a road transport vehicle. The Commissioner (Appeals) allowed the rebate, noting that the tractor was used within the factory premises. The Tribunal agreed, finding that the tractor did not qualify as a road transport vehicle.

7. Addition of 'on money' received on sales:
The ITO added Rs. 2,16,25,470 as 'on money' received on sales, which was deleted by the Commissioner (Appeals). The Tribunal upheld the deletion, finding no distinction in the evidence from the assessment year 1972-73, where a similar addition was deleted by the Tribunal.

8. Validity of the assessment period under section 153(1)(c):
The assessee argued that the assessment was time-barred, but the Tribunal, following the Allahabad High Court's decision in Niranjan Lal Ram Chandra v. CIT, held that the assessment was valid. The Tribunal concluded that the revised return filed on 23-1-1978 was valid, and the assessment completed on 1-3-1978 was within time.

9. Disallowance of advertisement and import license fees:
The ITO disallowed Rs. 8,721 as capital expenditure for a new project, which was upheld by the Commissioner (Appeals). The Tribunal agreed, finding that the expenditure was for setting up a new business and was capital in nature.

10. Disallowance of penalties as business expenditure:
The ITO disallowed Rs. 12,000 as penalties for non-payment of passenger tax, which was upheld by the Commissioner (Appeals). The Tribunal agreed, distinguishing the penalties from interest on arrears, which is compensatory.

11. Disallowance of expenditure for exploring a new project:
The ITO disallowed Rs. 2,25,000 for exploring the possibility of manufacturing steel strips, which was upheld by the Commissioner (Appeals). The Tribunal agreed, finding the expenditure to be capital in nature.

12. Disallowance of entertainment expenditure:
The assessee did not press this issue, and the Tribunal rejected the objection.

13. Relief under section 80G:
The ITO allowed relief on Rs. 13,555 out of Rs. 2,01,320 claimed. The Commissioner (Appeals) referred the matter for a de novo decision. The Tribunal directed the ITO to consider the claim for Rs. 12,000 donation to Haryana Welfare Society for the Deaf and Dumb in light of the exemption certificate.

14. Disallowance of surtax liability:
The Tribunal upheld the disallowance of surtax liability as business expenditure, following the Special Bench decision in Amar Dye-Chem. Ltd. v. ITO.

Separate Judgments:
The Tribunal's decision on the validity of the assessment period under section 153(1)(c) saw a difference in opinion between the members. The matter was referred to the President, who agreed with the learned Accountant Member, concluding that the revised return filed on 23-1-1978 was valid, and the assessment completed on 1-3-1978 was within time.

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