2000 (2) TMI 227 - AT - Income Tax

Summary

Issues Involved:
1. Eligibility for deduction u/s 80-I of the Income-tax Act, 1961.
2. Disallowance of secret commission expenditure.
3. Disallowance of entertainment expenditure.
4. Remand of the issue of traveling expenses to the Assessing Officer.

Summary:

1. Eligibility for Deduction u/s 80-I:
The main issue was whether the assessee's process of converting sugar into candy sugar, P.G. sugar, and pulverized sugar constitutes a manufacturing process, making it eligible for deduction u/s 80-I. The Assessing Officer (AO) and CIT(A) disallowed the claim, holding that the process did not result in a new and distinct commercial commodity. They relied on various judicial precedents, including the Supreme Court's decision in *Sakarwala Bros.*, which held that different forms of sugar do not constitute manufacturing. However, the assessee argued that the end products had distinct commercial identities and uses, supported by certificates from customers and technical experts. The Judicial Member, supported by the Third Member, concluded that candy sugar is a commercially different commodity from ordinary sugar, thus qualifying the assessee for deduction u/s 80-I.

2. Disallowance of Secret Commission Expenditure:
The assessee claimed Rs. 4,93,490 as secret commission expenditure. The AO disallowed the claim due to the assessee's failure to provide details of the payees and establish the trade practice of paying secret commissions. The CIT(A) upheld the AO's decision, emphasizing that the expenditure must be proven to be incurred for business purposes. The Tribunal agreed with the authorities below, noting the lack of evidence and the assessee's inconsistent claims in subsequent years.

3. Disallowance of Entertainment Expenditure:
The assessee claimed Rs. 32,564 as entertainment expenses. The AO allowed Rs. 10,000 and 50% of the balance, disallowing Rs. 11,282. The CIT(A) upheld the disallowance due to the lack of evidence supporting the claim that the expenses were for staff purposes. The Tribunal directed the AO to allow 20% of the total expenditure for staff accompanying visitors and compute the disallowance accordingly.

4. Remand of Traveling Expenses Issue:
The CIT(A) remanded the issue of traveling expenses to the AO for reconsideration. The assessee did not press this ground during the hearing, leading to its dismissal by the Tribunal.

Conclusion:
The Tribunal, by majority view, allowed the appeal regarding the deduction u/s 80-I, holding that the assessee's process constituted manufacturing. The disallowances of secret commission and entertainment expenses were upheld, with a partial relief granted for the latter. The remand of the traveling expenses issue was not contested by the assessee.