1995 (2) TMI 158 - AT - Income Tax

Advertisement Expenditure Business Expenditure Capital Asset Capital Gains Capital Loss Entertainment Expenditure Expenditure Incurred For The Purpose Of Business Guest House Income Tax Rules Interest On Borrowed Capital Revenue Expenditure

Issues Involved:
1. Deduction of interest on borrowed funds.
2. Deduction of salary and other costs.
3. Deduction of foreign travel expenses.
4. Disallowance under section 37(2A) of the Act.
5. Deduction of expenses relating to presentation and gift articles.
6. Disallowance of guarantee commission as capital expenditure.
7. Adjustment of set-off of capital loss.
8. Additions deleted by the CIT(A) in respect of maintenance of guest house.

Issue-wise Detailed Analysis:

1. Deduction of Interest on Borrowed Funds
The assessee claimed a deduction of Rs. 34,98,485 as interest on borrowed funds under section 36(1)(iii) of the Income Tax Act. The CIT(A) disallowed this, treating it as capital expenditure under Explanation (8) to section 43(1). The Tribunal held that the interest on borrowed funds is deductible under section 36(1)(iii), irrespective of the purpose of the loan, citing the Supreme Court's decision in India Cements Ltd. v. CIT. The Tribunal directed the revenue to exclude Rs. 34,98,485 from capital expenditure.

2. Deduction of Salary and Other Costs
The assessee claimed Rs. 38,04,363 as revenue expenditure for salary and other costs. The CIT(A) treated this as capital expenditure. The Tribunal upheld this view, stating that expenses related to the acquisition and installation of new units are capital in nature. However, the Tribunal allowed Rs. 17,36,571 as commitment charges, treating them as revenue expenditure based on Board Circular No. 2P(XI-6) of 1965 and the Tribunal's decision in Pudumjee Pulp & Paper Mills Ltd.

3. Deduction of Foreign Travel Expenses
The assessee claimed Rs. 9,81,482 as foreign travel expenses for training engineers. The CIT(A) did not allow this claim. The Tribunal upheld this decision, treating the expenses as capital expenditure, citing the Bombay High Court's decision in Ciba of India Ltd. v. CIT.

4. Disallowance under Section 37(2A) of the Act
The assessee claimed Rs. 19,94,496 as entertainment expenditure, arguing that Rs. 5,34,544 was spent on employees and should not be disallowed. The CIT(A) allowed 20% of the expenditure as deductible, following past practice. The Tribunal upheld the CIT(A)'s decision, allowing 20% of the expenditure as having been incurred on employees.

5. Deduction of Expenses Relating to Presentation and Gift Articles
The assessee claimed Rs. 7,80,262 for presentation and gift articles. The CIT(A) allowed 10% of this expenditure, disallowing the rest. The Tribunal modified this decision, allowing 90% of the expenditure as deductible, citing the decisions of the Bombay and Delhi High Courts, and acknowledging the personal element in such expenses.

6. Disallowance of Guarantee Commission as Capital Expenditure
The assessee claimed Rs. 9,54,951 as guarantee commission. The CIT(A) treated this as capital expenditure. The Tribunal upheld this decision, citing the Gujarat High Court's decision in CIT v. Vallabh Glass Works Ltd. and a Board Circular. The Tribunal held that the guarantee commission was necessary for acquiring capital assets and should be treated as capital expenditure.

7. Adjustment of Set-off of Capital Loss
The assessee claimed a loss of Rs. 31,73,123 on the transfer of a marketing division as a business loss or short-term capital loss. The CIT(A) treated it as short-term capital loss. The Tribunal upheld this decision, agreeing with the CIT(A)'s detailed analysis.

8. Additions Deleted by the CIT(A) in Respect of Maintenance of Guest House
The CIT(A) allowed Rs. 70,716 as rent and Rs. 2,13,232 as depreciation on the guest house, citing the Bombay High Court's decisions. The Tribunal upheld the deduction of rent but disallowed the depreciation, citing a later decision of the Bombay High Court in CIT v. Ocean Carriers (P.) Ltd., which held that depreciation on guest houses is not deductible under section 37(4) of the Act.

Conclusion
The Tribunal provided a detailed analysis for each issue, upholding some of the CIT(A)'s decisions and modifying others based on judicial precedents and legal interpretations. The final decisions were aimed at ensuring the correct tax liability of the assessee in accordance with the law.

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