1997 (1) TMI 134 - AT - Income Tax

Advertisement Expenditure, Assessing Officer, Assessment Year, Capital Asset, Capital Gains, Collaboration Agreement, Enduring Nature, Entertainment Expenditure, Expenditure Incurred, Extinguishment Of Right, Mercantile System, Revenue Receipt

Summary

Issues Involved:
1. Admission of Additional Ground
2. Nature of Compensation Received
3. Taxability of Compensation in the Relevant Assessment Year
4. Treatment of Power Subsidy
5. Disallowance of Entertainment Expenses
6. Disallowance of Legal Expenses
7. Disallowance of Shrinkage in Textile Division
8. Treatment of Publicity Expenses
9. Deduction under Sections 80HH and 80-I
10. Set-off of Unabsorbed Business Loss and Depreciation

Detailed Analysis:

1. Admission of Additional Ground:
Issue:
The assessee sought to introduce an additional ground challenging the interest charged under section 234B, which was not raised before the CIT (Appeals) or in the Memorandum of Appeal.

Analysis:
The Tribunal considered the rival submissions and noted that the additional ground was not raised before the CIT (Appeals) or in the Memorandum of Appeal. The Tribunal found the explanation for the omission unconvincing and held that the additional ground could not be admitted because it involved further investigation into facts and no appeal is provided under section 246 against the levy of interest under section 234B. Consequently, the Tribunal declined to admit the additional ground.

2. Nature of Compensation Received:
Issue:
Whether the compensation received by the assessee on termination of the foreign collaboration agreement with Michelin was a capital receipt or a revenue receipt.

Analysis:
The Tribunal observed that the technical know-how agreement granted the assessee a non-exclusive right to use Michelin's technical know-how. The Tribunal held that the assessee did not acquire any capital asset or advantage of an enduring nature. The compensation received was for the premature termination of the agreement and not for the transfer of any capital asset. The Tribunal concluded that the compensation was a revenue receipt and not a capital receipt.

3. Taxability of Compensation in the Relevant Assessment Year:
Issue:
Whether the entire compensation amount should be taxed in the assessment year 1992-93 or split between 1992-93 and 1993-94.

Analysis:
The Tribunal noted that the right to receive the entire compensation accrued on the date of the settlement agreement (22-11-1991), which fell in the assessment year 1992-93. Since the assessee followed the mercantile system of accounting, the entire compensation was taxable in the assessment year 1992-93, regardless of the actual receipt of the second installment in the subsequent year.

4. Treatment of Power Subsidy:
Issue:
Whether the power subsidy received by the assessee was a revenue receipt.

Analysis:
The Tribunal followed its earlier decision in Kashyap Sweetners (P.) Ltd. v. CIT and held that the power subsidy received by the assessee was a capital receipt. Accordingly, the Tribunal decided this ground in favor of the assessee.

5. Disallowance of Entertainment Expenses:
Issue:
Whether the disallowance of entertainment expenses by the Assessing Officer and CIT (Appeals) was justified.

Analysis:
The Tribunal examined the details of the expenses and held that out of the total claim of Rs. 1,10,720 under 'refreshment to staff,' Rs. 88,229 and Rs. 17,881 were not disallowable as these were beyond the ambit of entertainment expenditure. However, the Tribunal allowed the disallowance of Rs. 24,024, which included expenses on meeting hotel bills and other unspecified expenses.

6. Disallowance of Legal Expenses:
Issue:
Whether the disallowance of legal expenses paid to Little & Co. and Arthur Andersen was justified.

Analysis:
The Tribunal noted that the details of professional services rendered by Little & Co. were not brought on record. The Tribunal restricted the disallowance to Rs. 2,88,500 and remitted the case to the Assessing Officer for verification of the expenses on air tickets and hotel expenses claimed in respect of one of the partners of Little & Co.

7. Disallowance of Shrinkage in Textile Division:
Issue:
Whether the disallowance of shrinkage claimed by the assessee in the textile division was justified.

Analysis:
The Tribunal acknowledged that some shrinkage was inevitable but found that the assessee had not maintained complete records. The Tribunal allowed the shrinkage at 1% and directed the Assessing Officer to work out the disallowable shortage on this basis.

8. Treatment of Publicity Expenses:
Issue:
Whether the disallowance of publicity expenses incurred in the assessment year 1989-90 but claimed on a prorata basis in subsequent years was justified.

Analysis:
The Tribunal held that there is no scheme of deferred revenue expenditure in the Act and upheld the Assessing Officer's decision to allow the expenditure on a prorata basis. The Tribunal rejected the assessee's contention for full allowance in the assessment year 1992-93.

9. Deduction under Sections 80HH and 80-I:
Issue:
Whether the assessee was entitled to deductions under sections 80HH and 80-I on the income derived from compensation.

Analysis:
The Tribunal held that the compensation amount could not be said to be income derived from an industrial activity. The Tribunal relied on the decision in CIT v. Eastern Seafoods Exports (P.) Ltd. and upheld the CIT(A)'s decision to deny the deductions under sections 80HH and 80-I.

10. Set-off of Unabsorbed Business Loss and Depreciation:
Issue:
Whether the assessee was entitled to set off unabsorbed business loss and depreciation of assessment years 1990-91 and 1991-92 against the income of the assessment year 1992-93.

Analysis:
The Tribunal noted that the assessee had taken a conscious decision not to claim loss and depreciation in the assessment years 1990-91 and 1991-92. The Tribunal upheld the CIT(A)'s decision to deny the set-off of losses and depreciation for those years against the income of the assessment year 1992-93.

Conclusion:
The appeal was partly allowed, with the Tribunal providing relief on some grounds while upholding the revenue's stance on others.