2002 (5) TMI 221 - AT - Income Tax

Issues Involved:
1. Disallowance of royalty payment.
2. Disallowance of interest paid.
3. Addition towards provision for bad debts and gratuity.
4. Validity of the order u/s 250/143(3).
5. Deduction of actual payment of funded interest.
6. Deletion of addition of service charges.
7. Deletion of addition u/s 41(1).
8. Deletion of addition u/s 37(4)/(5).
9. Disallowance of exchange loss.
10. Disallowance of club fee.
11. Disallowance of stores and tools consumed.

Summary:

1. Disallowance of Royalty Payment:
The assessee challenged the disallowance of Rs. 52.23 lacs as royalty payment, arguing it was a revenue expenditure for technical assistance from Mitsubishi Motors Corporation (MMC). The Tribunal found the payment was for access to technical knowledge and not an outright purchase, thus allowable as a revenue expenditure under s. 37(1) of the Act.

2. Disallowance of Interest Paid:
The assessee contested the disallowance of Rs. 55,569 out of interest paid, arguing sufficient interest-free funds were available. The Tribunal restricted the addition to Rs. 5,248, considering the assessee had offered Rs. 50,321 for tax being interest accrued at 15.5% per annum.

3. Addition Towards Provision for Bad Debts and Gratuity:
The assessee opposed the addition of Rs. 14,36,026 for bad debts and Rs. 2,67,011 for gratuity to book profit under s. 115J. The Tribunal allowed the claims, directing the AO to accept the provision for bad debts and gratuity as ascertained liabilities.

4. Validity of the Order u/s 250/143(3):
The assessee argued the order dated 9th May 1995 was bad in law. The Tribunal did not find merit in this ground, thus it was not separately adjudicated.

5. Deduction of Actual Payment of Funded Interest:
The Tribunal allowed the additional ground for deduction of Rs. 1,05,75,000 on account of actual payment of funded interest, directing the AO to accept the claim subject to the jurisdictional High Court's decision on the reference application for the asst. yr. 1989-90.

6. Deletion of Addition of Service Charges:
The Department's appeal against the deletion of Rs. 27,50,000 service charges paid to Eicher Good Earth Ltd. was rejected. The Tribunal upheld the CIT(A)'s finding that the payment was not excessive or unreasonable under s. 40A(2)(b).

7. Deletion of Addition u/s 41(1):
The Tribunal upheld the deletion of Rs. 7,41,903 added by the AO under s. 41(1), finding no cessation of liability as the amounts were still payable.

8. Deletion of Addition u/s 37(4)/(5):
The Tribunal restored the addition of Rs. 1,50,086 under s. 37(4)/(5) for guest house expenses, following the jurisdictional High Court's decision in National Newsprint & Paper Mills Ltd. vs. CIT.

9. Disallowance of Exchange Loss:
The Tribunal allowed the claim of Rs. 15,20,852 for exchange loss on raw materials and Rs. 7,21,000 on royalty payment, directing the AO to verify the crystallization of liability during the relevant year.

10. Disallowance of Club Fee:
The Tribunal upheld the deletion of Rs. 72,010 club fee disallowed by the AO, finding the CIT(A)'s order comprehensive and reasoned.

11. Disallowance of Stores and Tools Consumed:
The Tribunal upheld the deletion of Rs. 18,82,000 disallowed by the AO for stores and tools consumed, agreeing with the CIT(A) that the expenditure was revenue in nature.

Conclusion:
The Tribunal allowed the appeals in favor of the assessee on most grounds, directing the AO to make necessary adjustments and verifications as per the Tribunal's findings. The Department's appeals were largely dismissed except for the guest house expenses issue.

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