1979 (2) TMI 143 - AT - Income Tax

Summary

Issues Involved:
1. Computation of Capital Gains
2. Disallowance under Section 40A(5)
3. Sales Promotion Expenses
4. Entertainment Expenditure
5. Depreciation on Guest House Premises and Related Taxes

Detailed Analysis:

1. Computation of Capital Gains:
The primary issue in this appeal was the computation of capital gains arising from the acquisition of shares by the government due to the nationalization of General Insurance. The assessee's computation included a cost for bonus shares, which the Income Tax Officer (ITO) rejected, arguing that bonus shares should have a nil value since no payment was made for them. The Appellate Assistant Commissioner (AAC) accepted the assessee's computation, which was based on averaging the cost of original shares and bonus shares. The Revenue contended that the AAC erred in this determination, arguing that the total cost of shares should not exceed the original cost paid. The Tribunal upheld the AAC's decision, emphasizing that the cost of acquisition for original shares should not be altered due to the issuance of bonus shares. The Tribunal referred to several cases, including CIT vs. Dalmia Investment Co. Ltd., which supported the method of averaging the cost of original and bonus shares but did not mandate a reduction in the cost of original shares.

2. Disallowance under Section 40A(5):
The ITO disallowed a sum of Rs. 87,703 under Section 40A(5), which pertains to the limits on the deductibility of expenditure on salaries and perquisites. The AAC reworked this amount and allowed only Rs. 15,238. The Revenue argued that the AAC failed to consider certain perquisites, such as rates and insurance, building and furniture maintenance, and depreciation. The Tribunal upheld the AAC's decision, agreeing that these items were part of the business assets of the company and should not be included as perquisites.

3. Sales Promotion Expenses:
The ITO disallowed Rs. 10,000 from the company's claimed sales promotion expenses of Rs. 50,016, suspecting that part of these expenses were in the nature of entertainment. The AAC disagreed, finding no evidence to support this assumption. The Tribunal upheld the AAC's decision, noting that the ITO's disallowance was based on mere presumption without any factual basis.

4. Entertainment Expenditure:
The ITO disallowed Rs. 6,380 as entertainment expenditure, which the AAC allowed on appeal, finding that these expenses were for routine items like coffee and cold drinks provided to customers. The Revenue argued that these should be disallowed under Section 37(2B). The Tribunal upheld the AAC's decision, noting that such routine expenses do not qualify as entertainment expenditure, referencing the decision in Patel Brothers.

5. Depreciation on Guest House Premises and Related Taxes:
The ITO disallowed depreciation on guest house premises and related taxes, amounting to Rs. 5,672 and Rs. 12,746 respectively. The AAC allowed these deductions, reasoning that the assets belonged to the company and the taxes were obligatory. The Revenue contended that these expenditures were disallowed under Section 37(4)(ii). The Tribunal upheld the AAC's decision, referencing a previous Tribunal decision that allowed such deductions.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the AAC's decisions on all contested points. The Tribunal's analysis emphasized the proper interpretation of the cost of acquisition for capital gains, the nature of perquisites under Section 40A(5), and the characterization of routine business expenses.