2003 (3) TMI 284 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of head office expenses
2. Classification of business activities
3. Revenue vs. capital expenditure
4. Write-off of unrealizable duty drawback claims
5. Liability for compensation to bottlers
6. Provision for pension fund and other separation benefits
7. Deduction of foreign tour expenses for executives' spouses
8. Deduction of professional fees
9. Disallowance of entertainment expenses

Detailed Analysis:

1. Disallowance of Head Office Expenses:
The appellant challenged the disallowance of Rs. 10,34,501 as head office expenses. The computation of these expenses was based on the percentage of net product sales. The CIT(A) developed a ratio of 7:6 between net profit from trading operations and other income, which was contested. The Tribunal found merit in the appellant's argument that section 44C of the IT Act, which overrides sections 28 to 43A, provides for deduction of head office expenses. Since the adjusted total income was a loss, the deduction was to be computed at 5% of the average adjusted total income of the preceding three years. The Tribunal allowed the appeal, finding the computation of Rs. 10,34,501 to be in accordance with the provisions of section 44C.

2. Classification of Business Activities:
The CIT(A) treated the appellant's business in manufacturing concentrate and mango pulp as separate businesses. The Tribunal upheld the CIT(A)'s decision based on the appellant's own case for the assessment year 1975-76, where similar disallowance was upheld.

3. Revenue vs. Capital Expenditure:
The disallowance of Rs. 58,247 as capital expenditure was upheld by the Tribunal, following its decision in the appellant's own case for the assessment year 1975-76.

4. Write-off of Unrealizable Duty Drawback Claims:
The appellant argued that Rs. 31,550, representing unrealizable duty drawback claims, should be allowed as a deduction. The Tribunal found force in the appellant's argument that the amount, having been offered for tax in earlier years and now written off, should be allowed as a loss incidental to business. The AO was directed to verify and allow the said amount if it had been offered for taxation in earlier years.

5. Liability for Compensation to Bottlers:
The appellant claimed Rs. 1,20,00,000 as liability for compensation to bottlers, which was disallowed on the ground that it did not accrue in the relevant previous year. The Tribunal, after examining the bottlers' agreement and the appellant's inability to supply concentrate due to the denial of an import license, concluded that the liability accrued during the relevant previous year. The Tribunal relied on the Supreme Court's decisions in Bharat Earth Movers vs. CIT and Metal Box Co. of India Ltd. vs. Their Workmen, which held that once the accrual of liability is established, the deduction should be allowed in the year of accrual.

6. Provision for Pension Fund and Other Separation Benefits:
The disallowance of Rs. 38,89,815 towards the pension fund was contested. The Tribunal, relying on the decisions of the Kerala High Court in CIT vs. Aspinwall & Co. and the Karnataka High Court in Chief CIT vs. Karnataka Electricity Board, held that the provision for the pension fund, though not an approved fund, was an expenditure laid out wholly and exclusively for business purposes and deductible under section 37 of the Act.

7. Deduction of Foreign Tour Expenses for Executives' Spouses:
The disallowance of Rs. 29,249 relating to the foreign tour of the wife of an executive was contested. The Tribunal, relying on the Gujarat High Court's decision in CIT vs. Smt. Kamalini Gautam Sarabhai, held that the expenditure incurred on the air ticket of the executive's wife could not be termed as a perquisite and directed the AO to allow the claim.

8. Deduction of Professional Fees:
The disallowance of Rs. 15,000 paid to M/s R.K. Khanna & Co. was contested. The Tribunal, relying on various judicial precedents, held that the payment of Rs. 10,000 as general management fee not related to income-tax matters was outside the purview of section 80VV of the Act and allowed the deduction.

9. Disallowance of Entertainment Expenses:
The disallowance of Rs. 19,516 spent on holding bottlers' meetings as entertainment expenses was contested. The Tribunal, relying on the jurisdictional High Court's decision in CIT vs. Modern Bakeries Ltd., held that the expenditure on dealers' conferences was not in the nature of entertainment expenditure and allowed the claim.

Conclusion:
The Tribunal allowed the appeal partly, providing relief on several grounds while upholding certain disallowances based on precedents and statutory provisions.