1980 (10) TMI 124 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of car expenditure.
2. Ignoring the loss claimed in bus transport business.
3. Payment of gratuity to employees.

Detailed Analysis:

1. Disallowance of Car Expenditure:
The first issue pertains to the direction of the AAC to the ITO to disallow 1/3rd of the expenditure on the car. Initially, the ITO had disallowed 50% of the depreciation on the car but did not make any addition regarding the maintenance expenditure. The AAC, upon reviewing the records, noted that in the preceding year, the assessee had disallowed 1/3rd of the depreciation but not the running expenses. Consequently, the AAC directed the ITO to disallow 1/3rd of the car's maintenance expenditure in addition to 1/3rd of the depreciation. The assessee argued that this direction effectively enhanced the income without notice. The Department contended that no enhancement notice was necessary since the AAC had deleted an addition of Rs. 12,760 related to lorry transport, which was more than the disallowed car expenses. The Tribunal concluded that while a formal enhancement notice was not necessary, the AAC should have raised the issue during the hearing to allow the assessee to object. Since this was not done, the Tribunal deleted the disallowance of 1/3rd of the car expenditure.

2. Ignoring the Loss Claimed in Bus Transport Business:
The second issue concerns the ITO's action in ignoring a loss of Rs. 18,310 claimed by the assessee in his bus transport business, which was confirmed by the AAC. The ITO found the accounts defective and unverifiable, noting poor collections compared to previous years and the absence of detailed accounts for receipts and outgoings. The AAC agreed, citing insufficient evidence to corroborate the collections and excessive diesel consumption. The assessee argued that the low collections were due to competition from Cheran Transport Corporation and the poor condition of the buses. The Tribunal, considering the arguments, found that the books of accounts were not complete and verifiable. However, it accepted the assessee's explanation of low collections due to competition and old buses. The Tribunal concluded that the collections shown were reasonable under the circumstances and directed the ITO to modify the assessment by adopting the loss of Rs. 18,310 under the head "bus transport business."

3. Payment of Gratuity to Employees:
The last issue involves the assessee's claim for the payment of gratuity amounting to Rs. 6,264 to certain employees. The ITO disallowed this, considering it a liability of M/s Gobald Motor Services Pvt. Ltd., and the AAC agreed, viewing it as capital expenditure. The assessee contended that the gratuity liability was not taken over from Gobald Motor Services Pvt. Ltd. under the arbitration award but was the assessee's liability. The Tribunal examined the arbitration award, which stipulated that gratuity for employees under the control of the assessee should be borne by the allottees. The Tribunal agreed with the AAC, concluding that the liability to pay gratuity was anticipated and formed part of the capital transaction when the assessee took over part of the business. Hence, the payment of Rs. 6,264 was considered capital expenditure and not deductible. The orders of the lower authorities were confirmed.

Conclusion:
The appeal was allowed in part. The Tribunal deleted the disallowance of 1/3rd of the car expenditure and directed the ITO to adopt the loss of Rs. 18,310 under the head "bus transport business." However, it confirmed the disallowance of the gratuity payment of Rs. 6,264 as capital expenditure.