2006 (4) TMI 200 - AT - Income Tax

2018 (2) TMI 2013 - AT

Issues Involved:
1. Admission of additional ground for non-refundable tooling advance.
2. Disallowance under Rule 6B for gifts and advertisement expenditure.
3. Disallowance of traveling expenditure under Rule 6D.
4. Allowance for employees' participation in entertainment expenditure.
5. Deduction under Sections 80HH and 80-I for profits from sale of bought-out gensets and spare parts.
6. Addition of excise duty and sales tax to total turnover for Section 80HHC deduction.
7. Investment allowance on foreign exchange fluctuation capitalized to plant and machinery.
8. Treatment of generator sets sent to Japan under Rule 6B.
9. Exclusion of excise duty from the value of closing stock.
10. Disallowance of guest house expenses.
11. Increased depreciation claim due to foreign exchange fluctuation.
12. Disallowance under Section 40A(2) for payments to related entities.

Detailed Analysis:

1. Admission of Additional Ground for Non-Refundable Tooling Advance:
The assessee sought to admit an additional ground for a sum of Rs. 14,87,885 being non-refundable tooling advance paid to vendors as a revenue deduction. The Tribunal admitted this ground based on the precedent set by the Delhi High Court in Orissa Cement Ltd. vs. CIT, noting that all relevant facts were on record and no further investigation was required. The Tribunal concluded that the expenditure, although providing an enduring advantage, was in the revenue field, facilitating the trading operations and enabling the business to be conducted more efficiently. Thus, the amount was allowed as revenue expenditure.

2. Disallowance under Rule 6B for Gifts and Advertisement Expenditure:
The Tribunal addressed two parts under this issue:
- The first part concerning Rs. 16,950 for gifts made through the marketing manager was allowed as a deduction, following the Delhi High Court judgment in CIT vs. Inman Aluminium Cables Ltd.
- The second part related to the disallowance of Rs. 87,400, which was partially allowed, restricting the disallowance to Rs. 41,700 based on the rule allowing Rs. 1,000 per item.

3. Disallowance of Traveling Expenditure under Rule 6D:
This ground was dismissed as not pressed by the assessee.

4. Allowance for Employees' Participation in Entertainment Expenditure:
The Tribunal followed its earlier orders for the assessee's previous assessment years and held that 25% of the expenditure may be treated as employees' participation, rejecting the assessee's claim for 50%.

5. Deduction under Sections 80HH and 80-I for Profits from Sale of Bought-Out Gensets and Spare Parts:
The Tribunal upheld the CIT(A)'s decision denying the deduction for profits from the sale of imported gensets, agreeing that this was a trading activity unrelated to the industrial undertaking. However, the Tribunal reversed the CIT(A)'s decision regarding the profits from the sale of spare parts, agreeing with the Department that this activity was more of a service and not directly derived from the industrial undertaking.

6. Addition of Excise Duty and Sales Tax to Total Turnover for Section 80HHC Deduction:
The Tribunal followed the judgments of the Bombay and Calcutta High Courts, excluding excise duty and sales tax from the total turnover for computing the deduction under Section 80HHC.

7. Investment Allowance on Foreign Exchange Fluctuation Capitalized to Plant and Machinery:
The Tribunal accepted the assessee's claim for investment allowance on the foreign exchange fluctuation capitalized to plant and machinery, citing various judgments, including the Full Bench judgment of the Gujarat High Court in CIT vs. Gujarat State Fertilizer Co. Ltd.

8. Treatment of Generator Sets Sent to Japan under Rule 6B:
The Tribunal affirmed the CIT(A)'s decision that generator sets sent to Japan for testing and approval did not fall under advertisement expenditure, as they were sent for technical reasons and not for advertisement purposes.

9. Exclusion of Excise Duty from the Value of Closing Stock:
The Tribunal upheld the CIT(A)'s decision to exclude excise duty from the value of closing stock, noting the consistent method of valuation adopted by the assessee and supported by Tribunal orders in similar cases.

10. Disallowance of Guest House Expenses:
Following the Supreme Court's judgment in Britannia Industries Ltd. vs. CIT, the Tribunal reversed the CIT(A)'s decision and restored the disallowance of guest house expenses.

11. Increased Depreciation Claim Due to Foreign Exchange Fluctuation:
The Tribunal confirmed the CIT(A)'s decision allowing increased depreciation due to foreign exchange fluctuation, supported by the Tribunal's earlier order in the assessee's case and other relevant judgments.

12. Disallowance under Section 40A(2) for Payments to Related Entities:
The Tribunal upheld the CIT(A)'s decision deleting the disallowance under Section 40A(2), finding that the payments to Siel Ltd. were justified and not excessive or unreasonable, considering the services rendered and the benefits obtained by the assessee.

Conclusion:
Both the assessee's and the Department's appeals were partly allowed, with detailed issue-wise adjudication provided by the Tribunal.

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