1992 (9) TMI 149 - AT - Income Tax

Issues Involved:
1. Claim of deduction for advance license fee and current license fee.
2. Disallowance of interest paid on borrowed capital.
3. Treatment of salary paid to drivers as expenditure for maintenance of motor cars.
4. Classification of market research expenditure as sales promotion expenditure.
5. Addition of estimated income of sister concern.
6. Inclusion of repairs and insurance of vehicles in disallowance under section 37(3A).
7. Classification of advance license fee payment as capital expenditure.
8. Disallowance of license fee payment as a tax avoidance scheme.
9. Reimbursement of medical expenses under section 40(c).

Detailed Analysis:

1. Claim of Deduction for Advance License Fee and Current License Fee:
The assessee, a private limited company, claimed a deduction of Rs. 34,31,000 for advance license fee and current license fee in the assessment year 1985-86. The Assessing Officer disallowed the claim, considering the transaction as a sham and back-dated. The CIT (Appeals) upheld the disallowance but did not agree on the grounds of section 40(c), section 40A(5), or capital expenditure. For the assessment year 1986-87, the CIT (Appeals) found the transaction genuine and relevant to the previous year 1985-86. The Tribunal concluded that the transaction was genuine, commercially purposed, and not solely for tax advantage, thus allowing the deduction for the assessment year 1985-86.

2. Disallowance of Interest Paid on Borrowed Capital:
The Assessing Officer disallowed Rs. 90,000 out of the interest paid on borrowed capital, considering it as a diversion of borrowed capital to T. & Co. without charging interest. The CIT (Appeals) agreed. However, the Tribunal found that the transaction was commercial, and the advance to T. & Co. was necessary for financing the interior decoration of the licensed premises, thus deleting the disallowance.

3. Treatment of Salary Paid to Drivers as Expenditure for Maintenance of Motor Cars:
The Assessing Officer and CIT (Appeals) included the salary paid to drivers as expenditure for running and maintaining motor cars under section 37(3A). The Tribunal disagreed, stating that the driver's salary, being a fixed expenditure, cannot be considered under section 37(3A), which is meant for variable expenditures. Thus, the Tribunal directed the exclusion of the driver's salary from the disallowance computation.

4. Classification of Market Research Expenditure as Sales Promotion Expenditure:
The Assessing Officer classified Rs. 4,50,231 incurred for market research as sales promotion expenditure and applied disallowance under section 37(3A). The Tribunal found that market research expenditure is for gathering information for business use and not for promoting sales, directing its exclusion from the disallowance computation.

5. Addition of Estimated Income of Sister Concern:
The Assessing Officer added Rs. 5 lakhs as the estimated income of the sister concern, Collage, considering it controlled by the assessee. The CIT (Appeals) deleted the addition, finding no evidence of excessive expenditure. The Tribunal confirmed the deletion, agreeing with the CIT (Appeals) that the expenditure incurred by the assessee was not excessive.

6. Inclusion of Repairs and Insurance of Vehicles in Disallowance under Section 37(3A):
The CIT (Appeals) excluded repairs and insurance of vehicles from disallowance under section 37(3A), stating they are allowable under section 31. The Tribunal confirmed this view, supported by the Bombay High Court decision in CIT v. Chase Bright Steel Ltd. (No. 2).

7. Classification of Advance License Fee Payment as Capital Expenditure:
The Assessing Officer classified the advance license fee payment as capital expenditure. The CIT (Appeals) disagreed, stating the payment was for rent in advance and not a capital outlay. The Tribunal upheld this view, finding the payment as advance rent and not a premium or salami, thus allowable as revenue expenditure.

8. Disallowance of License Fee Payment as a Tax Avoidance Scheme:
For the assessment year 1986-87, the revenue disallowed Rs. 2,64,000 as license fee payment, considering it a tax avoidance scheme. The Tribunal found the transaction genuine and commercially purposed, allowing the expenditure as incurred wholly and exclusively for business purposes.

9. Reimbursement of Medical Expenses under Section 40(c):
The CIT (Appeals) excluded reimbursement of medical expenses from disallowance under section 40(c), following the decision in Jay Engg. Co. and the Tribunal's earlier orders in the assessee's case. The Tribunal confirmed this exclusion for the assessment year 1986-87.

Conclusion:
The Tribunal allowed the assessee's appeal, granting deductions for advance license fee, current license fee, and other expenditures, while dismissing the revenue's appeals on all grounds. The Tribunal emphasized the genuineness and commercial purpose of the transactions, rejecting the revenue's claims of sham transactions and tax avoidance schemes.

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