2000 (8) TMI 276 - AT - Income Tax

Summary

Issues Involved:
1. Rejection of the assessee's claim of long-term capital gains on the sale of its chemical unit and denial of deduction under Section 54E of the IT Act, 1961.
2. Disallowance of expenses incurred on the chairman's birthday celebration as business expenditure.
3. Disallowance of club bills of directors as entertainment expenses under Section 37(2A).
4. Inclusion of excise duty and sales tax in the turnover for the purpose of determining the claim under Section 80HHC.

Issue-wise Detailed Analysis:

1. Rejection of Long-term Capital Gains and Denial of Deduction under Section 54E:
- The assessee sold its Chemical Division for Rs. 58 lakhs and claimed the long-term capital gain as Nil by investing Rs. 58,00,380 in UTI as per Section 54E.
- The AO applied Section 50, treating the sale as short-term capital gains, and denied the deduction under Section 54E.
- The CIT(A) upheld the AO's decision, stating that the sale was of a block of assets, not a slump sale, and thus fell under Section 50.
- The assessee argued that the sale was of the entire unit as a going concern, not individual assets, and relied on the Karnataka High Court judgment in Syndicate Bank Ltd. vs. Addl. CIT.
- The Department contended that the sale was not a slump sale as only fixed assets were sold, and current assets and liabilities were retained.
- The Tribunal concluded that the sale was not a slump sale as the liabilities were not transferred, and the unit was not sold as a going concern.
- However, the Tribunal held that Section 54E is not controlled by Section 50 and should be read independently, allowing the assessee the benefit of deduction under Section 54E.

2. Disallowance of Expenses on Chairman's Birthday Celebration:
- The assessee incurred Rs. 10,575 on the chairman's 60th birthday celebration and claimed it as a business expenditure.
- The AO disallowed the expense, considering it personal, and the CIT(A) upheld this decision.
- The Tribunal allowed the expense, stating it was incurred for business promotion as the event included the company's constituents, distributors, and stockists.

3. Disallowance of Club Bills of Directors as Entertainment Expenses:
- The assessee incurred Rs. 37,914 on club bills of directors, claimed as business expenditure.
- The AO disallowed it as entertainment expenses, and the CIT(A) confirmed the disallowance.
- The Tribunal found that most expenses were for visits of distributors and stockists, and some were reimbursed by directors, thus not purely entertainment expenses, and allowed the claim.

4. Inclusion of Excise Duty and Sales Tax in Turnover for Section 80HHC:
- The assessee contested the inclusion of excise duty and sales tax in the turnover for determining the claim under Section 80HHC.
- The Tribunal decided in favor of the assessee, referencing the decision in Sudarshan Chemical Industries Ltd. vs. Dy. CIT, which excluded excise duty and sales tax from the turnover for Section 80HHC calculations.

Conclusion:
The appeal was allowed in part, granting the assessee relief on the issues of long-term capital gains deduction under Section 54E, birthday celebration expenses, and club bills, while confirming the exclusion of excise duty and sales tax from turnover under Section 80HHC.