1995 (3) TMI 159 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of commission paid to M/s Giriraj Fertilizers & Chemicals (P) Ltd. (GFC) and M/s Anand Pratyabhut Vit Nigam Ltd. (APVN).
2. Disallowance of various business expenses.
3. Computation of relief under section 80HHC.

Detailed Analysis:

1. Disallowance of Commission Paid to GFC and APVN:
- Commission to GFC (Rs. 22,50,000):
- The assessee claimed that the commission was paid to GFC for assisting in the export of detergents to Russia, including negotiating better prices and persuading Russian buyers.
- The Assessing Officer (AO) disallowed the claim, stating that GFC did not respond to summons, and their involvement was not satisfactorily proven.
- The CIT(A) upheld the disallowance, agreeing with the AO that the payment represented capital expenditure to eliminate competition, referencing the Chelpark Co. Ltd. case.
- The Tribunal found that the payment was for specific services rendered by GFC, corroborated by M/s Novo Export of Russia. The payment was deemed revenue in nature and allowable under section 37 of the IT Act. The assessee was granted relief of Rs. 22,50,000.

- Commission to APVN (Rs. 46,65,600):
- The assessee claimed the commission was paid to APVN for introducing them to M/s Prakash Cotton Mills Ltd. and assisting in the sale of textile machinery.
- The AO disallowed the claim, noting that APVN did not exist at the given address and had not filed returns for the relevant years.
- The CIT(A) upheld the disallowance, noting that APVN was involved in illegal activities, and the payment was not verifiable.
- The Tribunal found that there was sufficient evidence of correspondence and payments made by account payee cheques. The disallowance was deemed unjustified, and the addition was deleted.

2. Disallowance of Various Business Expenses:
- Entertainment Expenses (Rs. 41,872):
- The expenses included costs for entertaining a Russian party and business promotion.
- The AO allowed Rs. 5,000 and disallowed the balance. The CIT(A) upheld this decision.
- The Tribunal agreed with the CIT(A) and upheld the disallowance.

- Rent (Rs. 9,440):
- The issue was similar to a pending appeal for the preceding year.
- The Tribunal held that the view taken in the previous appeal would apply.

- Telephone Expenses (Rs. 11,732):
- This ground was not pressed by the assessee.

- Legal Expenses (Rs. 31,559):
- The expenses were incurred in defending a suit to protect the assessee's business interests.
- The Tribunal found the expenses allowable as they were incurred to protect the source of income, referencing the O.P.N. Arunachala Nadar case.
- The assessee was granted relief of Rs. 31,559.

3. Computation of Relief Under Section 80HHC:
- Relief Under Section 80HHC:
- The assessee claimed that relief should be computed on the profits and gains of the business as finally determined.
- The CIT(A) directed relief based on the audit report, which the assessee contested.
- The Tribunal referred to the Special Bench order in International Research Park Laboratories Ltd. vs. Asstt. CIT, which provided a formula for computing the deduction.
- The Tribunal directed the recomputation of the deduction under section 80HHC, following the formula laid down by the Special Bench.

Conclusion:
The Tribunal allowed the appeal in part, granting relief for the commission paid to GFC and APVN, legal expenses, and directed the recomputation of deduction under section 80HHC. The disallowance of entertainment expenses was upheld, and the issue of rent was to follow the decision in the pending appeal for the preceding year.