2002 (3) TMI 225 - AT - Income Tax

Issues Involved:
1. Disallowance of Rs. 22.18 lakhs as revenue expenditure.
2. Disallowance of interest amounting to Rs. 16,82,707 and allowance of Rs. 18,64,555.
3. Disallowance of Rs. 35,000 as architect fee and Rs. 4,41,155 for upkeep of Bombay office.
4. Disallowance of Rs. 34,249 on account of sales representatives' conference.
5. Disallowance of rent for guest house amounting to Rs. 1,06,867.
6. Disallowance of Rs. 59,678 as donations (Dakshina) to Sadhus.
7. Disallowance of business loss amounting to Rs. 51,26,777.
8. Disallowance of Rs. 1,95,000 as earlier year expenses.
9. Disallowance of Rs. 4,19,064 as provision for various liabilities.
10. Deduction u/s 80-I amounting to Rs. 53,22,801.
11. Carry forward of deduction u/s 80-I for previous years.

Summary:

1. Disallowance of Rs. 22.18 lakhs as revenue expenditure:
The Tribunal upheld the CIT(A)'s decision that the expenditure of Rs. 22.18 lakhs was covered by the provisions of s. 35D of the IT Act and not allowable as revenue expenditure. The funds raised were for the expansion and modification of polycondensation facilities, thus falling under s. 35D(1)(ii).

2. Disallowance of interest amounting to Rs. 16,82,707 and allowance of Rs. 18,64,555:
The Tribunal agreed with CIT(A) that interest of Rs. 16,82,707 paid on borrowings for purchasing units of UTI and tax-free securities was correctly disallowed. However, interest of Rs. 18,64,555 on OD account was rightly allowed as business expenditure, as it was withdrawn from the company's own funds.

3. Disallowance of Rs. 35,000 as architect fee and Rs. 4,41,155 for upkeep of Bombay office:
The Tribunal allowed the expenditure of Rs. 4,41,155 for renovation of the Bombay office as revenue expenditure, following the precedent set by Calcutta High Court. However, the erection of a garage was held to be of capital nature.

4. Disallowance of Rs. 34,249 on account of sales representatives' conference:
The Tribunal set aside the CIT(A)'s order and allowed the expenditure, recognizing it as necessary for the business and not as entertainment expenditure.

5. Disallowance of rent for guest house amounting to Rs. 1,06,867:
The Tribunal allowed the rent for the guest house as a deductible expense, following the decisions in CIT vs. Chase Bright Steel Ltd. and CIT vs. A.B. Thomas & Co. Ltd.

6. Disallowance of Rs. 59,678 as donations (Dakshina) to Sadhus:
The Tribunal confirmed the CIT(A)'s decision, holding that donations to Sadhus were not for business purposes and could not be allowed as business expenditure.

7. Disallowance of business loss amounting to Rs. 51,26,777:
The Tribunal upheld the CIT(A)'s decision that the loss was capital in nature and not allowable as business expenditure. The advance was made for acquiring a source of income and not in the ordinary course of business.

8. Disallowance of Rs. 1,95,000 as earlier year expenses:
The Tribunal confirmed the CIT(A)'s decision, stating that the liability should have been provided in the earlier year under the mercantile system of accounting.

9. Disallowance of Rs. 4,19,064 as provision for various liabilities:
The Tribunal upheld the disallowance of Rs. 4,19,064 but allowed Rs. 45,000 as revenue expenditure for advocate fees.

10. Deduction u/s 80-I amounting to Rs. 53,22,801:
The Tribunal confirmed the CIT(A)'s decision allowing the deduction u/s 80-I. The polycondensation plant was considered an industrial activity, and the profits derived from it were eligible for deduction.

11. Carry forward of deduction u/s 80-I for previous years:
The Tribunal declined to adjudicate this issue as it was already referred to the Hon'ble Madhya Pradesh High Court.

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