1986 (2) TMI 132 - AT - Income Tax

Summary

Issues Involved:
1. Addition of Rs. 5,954 for advertisement expenditure in souvenirs.
2. Disallowance of Rs. 35,588 for travelling expenses exceeding limits under rule 6D.
3. Addition of Rs. 1,23,775 under section 40A(8) for interest on deposits.

Issue-wise Detailed Analysis:

1. Addition of Rs. 5,954 for Advertisement Expenditure in Souvenirs:

The first issue concerns the addition of Rs. 5,954 made by the ITO in respect of expenditure incurred for advertisements in souvenirs. The assessee claimed a deduction of Rs. 59,538 for advertisements in small newspapers under section 37(3A) of the Income-tax Act, 1961. The ITO disallowed Rs. 5,954, arguing that souvenirs do not qualify as small newspapers. Both the ITO and the Commissioner (Appeals) rejected the assessee's contention that souvenirs with circulation under 15,000 should be considered small newspapers.

Upon hearing the appellant's counsel and the departmental representative, the Tribunal agreed with the authorities below, stating, "A souvenir is neither a journal nor a periodical." However, the Tribunal acknowledged that some publications listed by the assessee, such as Shri Krishna Sandeehar and Sanmara, might qualify as periodicals if published regularly. The Tribunal restored the point to the assessing officer to examine the details and exclude amounts spent on advertisements in journals and periodicals when computing the disallowance under section 37(3A).

2. Disallowance of Rs. 35,588 for Travelling Expenses Exceeding Limits under Rule 6D:

The second issue involves the disallowance of Rs. 35,588 for travelling expenses. The assessee surrendered this amount, believing it exceeded the limit laid down by rule 6D of the Income-tax Rules, 1962. During the hearing under section 144B, the assessee argued that the expenses were within the limit and that non-journey expenses should not be considered identical to the period of travel.

The Tribunal, after considering the submissions, found that the assessee's contention did not align with rule 6D, which refers to the allowance for expenditure incurred in connection with travelling by an employee. The Tribunal cited Sundaram Finance Ltd. v. IAC [1985] SOT 410 (Mad.) (SB) to support its view and upheld the disallowance, stating, "Since, the disallowance has been made only in respect of the travelling expenses, which are in excess of the limit laid down by rule 6D, we find that the disallowance has to be sustained."

3. Addition of Rs. 1,23,775 under Section 40A(8) for Interest on Deposits:

The third issue pertains to the addition of Rs. 1,23,775 under section 40A(8) for interest on deposits. The assessee, a public limited company, argued that the deposits were secured by a floating charge on certain movable assets, and thus, the disallowance of 15% interest under section 40A(8) was not justified. The ITO had disallowed Rs. 1,47,018, and the assessee contested Rs. 1,23,775 of this amount.

The Tribunal examined whether a valid trust had been created and whether the floating charge was effective. The Tribunal found that the deed of trust did not create a valid trust as it lacked specificity and transfer of property. However, the Tribunal recognized that a floating charge was created by the assessee's letter dated 1-3-1978, sanctioned by the Central Government and registered by the Registrar of Companies. The Tribunal concluded that the floating charge was valid and effective from 1-3-1978.

The Tribunal then addressed whether the deposits received before 1-3-1978 could be considered secured. It concluded that the deposits received before this date were unsecured as the charge was created only on 1-3-1978. The Tribunal cited I.D.L. Chemicals Ltd. v. ITO [1984] 9 ITD 422 (Hyd.) to support its view that creating a charge with retrospective effect is legally ineffective.

The Tribunal directed the ITO to recalculate the disallowance, treating deposits received before 1-3-1978 as unsecured and those received after as secured.

Conclusion:

In conclusion, the Tribunal partly allowed the appeal, sustaining the disallowance for advertisement expenditure in souvenirs and travelling expenses exceeding limits under rule 6D, while directing the ITO to recalculate the disallowance for interest on deposits based on the effective date of the floating charge.