1975 (5) TMI 27 - AT - Income Tax

Summary

Issues:
1. Inclusion of profit earned by another individual in the assessment of the assessee.
2. Addition of accrued interest not taken into account by the assessee.
3. Disallowance of entertainment expenditure.

Analysis:

Issue 1: Inclusion of Profit Earned by Another Individual
- The appeal challenged the inclusion of profit earned by Shri Satyanarain Bihani in the assessment of the assessee.
- The ITO believed the profit belonged to the assessee firm as Satyanarain was deemed a dummy.
- The AAC upheld the addition, alleging the assessee diverted its own profit to Satyanarain.
- However, the ITAT found that Satyanarain conducted the transaction on his own behalf, had no connection with the assessee firm, and the profit rightfully belonged to him.
- The ITAT directed the deletion of the addition, disagreeing with the lower authorities' conclusions.

Issue 2: Addition of Accrued Interest
- The ITO added Rs. 9251 as accrued interest in seven debtor accounts where no interest was charged.
- The assessee explained the interest-free loan to one debtor due to business reasons and the practice of charging interest at settlement.
- The AAC sustained the addition, emphasizing the mercantile accounting system and the necessity to account for accrued interest.
- The ITAT upheld the addition for six debtors but deleted Rs. 2000 related to the interest-free loan, supported by an affidavit and the source of the advance.

Issue 3: Disallowance of Entertainment Expenditure
- The authorities disallowed entertainment expenditure on messing and tea to employees and adatias.
- The assessee claimed the expenditure as business expenses citing legal precedents.
- The Department argued the expenditure was rightly treated as entertainment expenses, supported by court decisions.
- The ITAT sustained the disallowance of most of the expenditure, except for a portion estimated as expenditure incurred on employees.

In conclusion, the ITAT partially allowed the appeal, directing the deletion of the profit inclusion, sustaining the accrued interest addition for most debtors, and upholding the disallowance of entertainment expenditure except for a portion related to employees.