1986 (5) TMI 84 - AT - Income Tax

Summary

Issues Involved:
1. Method of accounting for the purpose of income tax.
2. Disallowance of entertainment expenses.
3. Disallowance of advertisement and publicity expenses.
4. Levy of interest under Section 215.

Detailed Analysis:

1. Method of Accounting for the Purpose of Income Tax:
The primary issue in these appeals concerns the income of the Corporation and the method of accounting to be used for tax purposes. The assessee argued that due to disputes, defaults in recovery, and irregular receipt of dues, it would be proper to tax the income based on actual cash receipts to avoid paying tax on unrealized income. The assessee maintained a mixed or hybrid system of accounting (mercantile and cash) as per the State Financial Corporation Act but sought to file tax returns on a cash basis. The Department rejected this claim, emphasizing that the books are maintained on a mercantile basis, and the return should reflect the same. The Tribunal examined Section 5 and Section 145 of the IT Act, concluding that income includes both received and receivable amounts, emphasizing the accrual system. The Tribunal held that the real income of a financial corporation, which operates on an accrual basis, must be computed on the same basis for tax purposes. The Tribunal rejected the assessee's argument, stating that the method of accounting for business cannot differ from that used for tax purposes unless the entire business operation switches to a cash system.

2. Disallowance of Entertainment Expenses:
The next issue involved the disallowance of entertainment expenses, which the assessee claimed were provisions for tea to staff, a long-standing practice. The Tribunal referred to a previous order and remitted the matter back to the IAC for verification. The IAC was instructed to verify if any part of the expenses related to the staff and had not been claimed under the head of staff welfare. If verified, a part of the expenses could be allowed.

3. Disallowance of Advertisement and Publicity Expenses:
The assessee contested the disallowance of expenses related to momentos and gift articles given to customers during the Corporation's Silver Jubilee celebration. The Department argued that Rule 6B of the IT Rules applied, limiting the allowance to Rs. 50 per article. The Tribunal upheld the Department's action, confirming that any amount over Rs. 50 per article was rightly disallowed.

4. Levy of Interest under Section 215:
The final issue was the levy of interest under Section 215. The assessee argued that the interest should not have been levied or should be reduced based on the relief granted. The Tribunal noted that this was a consequential ground, and the interest under Section 215 would need to be recalculated based on the relief allowed. The appeal was partly allowed on these terms.