1986 (12) TMI 88 - AT - Income Tax

Summary

Issues Involved:

1. Disallowance of labour charges paid to Ice Machinery Mart.
2. Disallowance of travelling expenses.
3. Disallowance of salary and bonus to Shashi Bhargava.
4. Addition of deemed interest on advances to Ice Machinery Mart.
5. Disallowance of Rs. 10,000 related to Ice Machinery Mart.

Issue-wise Detailed Analysis:

1. Disallowance of Labour Charges Paid to Ice Machinery Mart:

The assessee, a private limited company engaged in the business of refrigeration, primarily manufacturing compressors, used machinery and plant established by Ice Machinery Mart, where the Directors of the assessee company were also interested. The Income Tax Officer (ITO) disallowed Rs. 23,500 out of Rs. 25,000 paid to Ice Machinery Mart for service and labour charges, reasoning that the payment was excessive and not justified due to lack of records of machinery usage and production discrepancies. The Commissioner of Income Tax (Appeals) [CIT(A)] allowed a slightly higher amount than the ITO but still disallowed a major portion. The Tribunal found no justification for the disallowance, noting that the machinery was indeed taken on hire for five months, and the charges were comparable to those paid in subsequent years and to rates by Small Scale Industries Service Institute. The Tribunal directed that the sum of Rs. 25,000 paid by the assessee to Ice Machinery Mart should be allowed as a deduction.

2. Disallowance of Travelling Expenses:

The assessee claimed Rs. 950 for the Managing Director's trip to Jaipur and Ajmer for negotiating sales of compressors to Hindustan Machinery Tools. The ITO and CIT(A) disallowed this amount, questioning the necessity of the trip. The Tribunal found that the travel was indeed for business purposes and saw no justification for the disallowance, thus allowing the expense.

3. Disallowance of Salary and Bonus to Shashi Bhargava:

The ITO disallowed Rs. 5,700 paid as salary and Rs. 941 as bonus to Shashi Bhargava, the sister of the Managing Director, on the grounds that there was no evidence of services rendered by her. The CIT(A) upheld the disallowance. The Tribunal agreed with the authorities, stating that mere payment does not qualify for deduction unless the necessity and purpose of the business are established, which was lacking in this case. Thus, the disallowance was confirmed.

4. Addition of Deemed Interest on Advances to Ice Machinery Mart:

The ITO added Rs. 12,390 as deemed interest on an advance of Rs. 1,03,523 given to Ice Machinery Mart, arguing that no interest was charged on this amount. The assessee claimed it was a result of business dealings, not a loan. The CIT(A) set aside the assessment for further investigation. The Tribunal found that the amount was a result of trading operations, not a loan, and noted that no borrowed funds were involved. The Tribunal directed that the addition be deleted.

5. Disallowance of Rs. 10,000 Related to Ice Machinery Mart:

The assessee objected to the disallowance of Rs. 10,000, suggesting it should have been allowed as a deduction since it was disallowed in Ice Machinery Mart's assessment. However, this ground was not pressed during the hearing, and thus no decision was rendered on this issue.

Conclusion:

The appeal was allowed in part, with the Tribunal directing the allowance of labour charges and travelling expenses while confirming the disallowance of salary and bonus to Shashi Bhargava and deleting the addition of deemed interest. The issue of the Rs. 10,000 disallowance was not pursued.