1984 (3) TMI 206 - AT - Income Tax

Issues Involved:
1. Deduction of entertainment expenditure under section 37(2A) of the Income-tax Act, 1961.
2. Allowance of Pooja expenses as business expenditure.
3. Disallowance under section 35B of the Act dealing with 'export markets development allowance.'
4. Remuneration paid to the managing director under section 40(c) of the Act.
5. Treatment of foreign exchange difference as capital expenditure.
6. Computation of capital employed for the purpose of section 80J of the Act.

Issue-wise Detailed Analysis:

1. Deduction of Entertainment Expenditure:
The first contention by the assessee was regarding the deduction of entertainment expenditure of Rs. 54,331 under section 37(2A) of the Income-tax Act, 1961. The Income Tax Officer (ITO) disallowed this claim without providing reasons. The Commissioner (Appeals) directed the ITO to grant the deduction but noted the lack of documentation proving the expenditure was solely on refreshments for clients. The Tribunal referred to Explanation 2, inserted retrospectively by the Finance Act, 1983, which clarified that 'entertainment expenditure' includes all hospitality expenses except those for employees. The Tribunal directed the ITO to ascertain the factual details and disallow the expenditure as required under section 37(2A) read with Explanation 2.

2. Allowance of Pooja Expenses:
The next issue was the allowance of Rs. 5,000 as business expenditure out of the total Pooja expenses of Rs. 17,168. The ITO disallowed the entire sum, considering it non-business expenditure. The Commissioner (Appeals) allowed Rs. 5,000 as it was estimated to be spent on staff welfare, following the Board's Circular dated 3-10-1968. The Tribunal upheld this decision, citing the Board's instructions and the Punjab and Haryana High Court decision in Atlas Cycle Industries Ltd. v. CIT, which supported the claim that Pooja expenses in the nature of staff welfare are admissible.

3. Disallowance under Section 35B:
The assessee contended the disallowance of Rs. 1,07,271 under section 35B of the Act. The Commissioner (Appeals) allowed weighted deduction only for subscription to the Export Promotion Council and Export Inspection Agency charges. The Tribunal agreed with the disallowance of bank charges and exchange adjustments as they did not fall under section 35B(1)(b). The issue of commission on export sales was remanded to the ITO for fresh consideration in light of the Madras High Court decision in CIT v. Southern Sea Foods (P.) Ltd.

4. Remuneration to Managing Director:
The assessee argued for the allowance of the entire remuneration of Rs. 90,494 paid to the managing director. The ITO applied section 40A(5) and disallowed Rs. 30,494, exceeding the ceiling of Rs. 60,000. The Commissioner (Appeals) applied section 40(c), allowing a higher ceiling of Rs. 72,000 and disallowed Rs. 18,494. The Tribunal upheld the Commissioner (Appeals)'s decision, rejecting the assessee's plea, stating that the approval by the Government of India is irrelevant for applying section 40(c).

5. Foreign Exchange Difference:
The assessee's claim for Rs. 78,047 as revenue expenditure was disallowed by the ITO and upheld by the Commissioner (Appeals), who treated it as capital expenditure. The Tribunal noted that a similar issue for the earlier assessment year 1976-77 was remanded for fresh consideration. Following this precedent, the Tribunal vacated the findings and directed the ITO to reconsider the matter, including the assessee's alternate claim for depreciation if treated as capital expenditure.

6. Computation of Capital under Section 80J:
The final issue was the computation of capital employed under section 80J, where the ITO deducted borrowed capital. The Commissioner (Appeals) upheld this, rejecting the assessee's plea that the liability was from the branch office to the head office. The Tribunal noted the retrospective amendment to section 80J and the pending Supreme Court decision. Following the Tribunal's decision in Sundaram Fastners Ltd., the Tribunal restored the issue to the ITO for fresh decision after the Supreme Court or Madras High Court decision.

Third Member Opinion:
A difference of opinion arose between the members on the issue of section 80J relief. The Third Member emphasized the importance of following the Tribunal's earlier decisions unless there is a significant change in law or facts. The Third Member agreed with the view that the matter should be remanded to the ITO to await the Supreme Court or Madras High Court decision, ensuring consistency and judicial propriety.

Conclusion:
The assessee's appeal was partly allowed for statistical purposes, with several issues remanded for fresh consideration based on higher court decisions and additional factual determinations.

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