2023 (1) TMI 24 - AT - Income Tax

Deduction u/s 80G - when to claim deduction u/s 80G? - Income from business of manufacturing of tea - AO was of the view that first total income is to be computed and thereafter, it has to be divided in 40 60 ratio and then claim of deduction u/s 80G has to be made against 40% shares. - HELD THAT - AO was of the view that first total income is to be computed and thereafter, it has to be divided in 40 60 ratio and then claim of deduction u/s 80G has to be made against 40% shares. The stance of the assessee was that, first business income has to be determined after allowing all necessary deduction and thereafter, apportionment of 40 60 has to be made. It can be explained by a simple example i.e., An assessee has gross income of Rs.100/-. Out of that necessary expenditure and deductions are to be allowed and the assessee has deduction admissible under Chapter VI at Rs.10/- and also under 80G, 80IA or 80HHC, then that Rs. 10/- has to be excluded from Rs.100/- and from the balance Rs. 90/-, apportionment of 40 60 has to be made. AO did not accept this contention. However, the ld. First Appellate Authority has accepted this contention on the strength of the decision of the Hon ble Madras High Court in the case of Periakaramalai Tea and Produce Co. Ltd. 1971 (8) TMI 46 - MADRAS HIGH COURT After going through this well reasoned finding of the ld. CIT(A) based on the decision of the Hon ble Madras High Court, we do not find any error in it. Accordingly, this ground of appeal is dismissed. Allowable business expenses - foreign of travel expenses of the wife of the Managing Director - CIT-A deleted the addition - HELD THAT - No error in the finding of the ld. CIT(A) because various Hon ble High Courts, namely, George Williamson (Assam) Ltd. 1998 (8) TMI 80 - GAUHATI HIGH COURT , Glaxo Laboratories (India) Ltd. 1986 (5) TMI 46 - ITAT BOMBAY-A and Appolo Tyres Ltd. 1998 (8) TMI 68 - KERALA HIGH COURT are unanimous in their opinion that presence of wife with the top level executives is to assist him for discharging his social cum business obligation and such expenditure are deductible u/s 37(1) of the Act. Finally, the ld. First Appellate Authority held that similar expenditure was allowed in the earlier Assessment Years, and no disallowance is called for. Sale of gunny bags - business income - HELD THAT - As during the course of its business activity i.e., manufacturing of tea, certain scrap value has been generated. The assessee has sold gunny bags and other items, which are byproduct of its business activity as well as manufacturing activity. The Assessing Officer has treated sale proceeds of such gunny bags etc. as income from other source which the ld. CIT(A) has held as income from business. We find that identical issue came up in earlier years and these were held as integral part of assessee s manufacturing process and gunny bags are necessary tools. Therefore, as the gunny bags go through wear and tear, they are bound to be sold out. This activity is interconnected with the business activity and hence such income deserves to be assessed as business income. CIT(A) has given right treatment to the above sale proceeds. We do not find any error in the order of the ld. CIT(A). Thus, this ground of appeal is rejected. Disallowance on account of Guest House expenses - basic reason for the Assessing Officer to make the disallowance is that such expenditure are to be disallowed towards maintenance of guest house - HELD THAT - Stand of the assessee is that sum is not meant for guest house. Rather, it is with respect to transit flats given to the employees on transfers. The manufacturing activities of the assesse are such a place where it is difficult to find out any space to stay. The employees have to stay in the gardens where certain space is mandatory for the assessee to maintain. After considering the finding of the revenue, we do not find any error in this finding and accordingly, this ground of appeal is rejected. Deduction u/s 32 AB (1) (b) allowed in earlier years for direct utilization for purchase of plant and machinery - HELD THAT - On due consideration of the above facts and circumstances, we are of the view that the ld. Assessing Officer has erred in construing the judgment of the Hon ble High Courts. On the other hand, the ld. CIT(A) has rightly appreciated it and has rightly held that once choice of the date is left open for making any scheme applicable, then it will be applicable from that date which is finalized by the parties. In the present case, that date is 31/05/1993. The amalgamated company DDIL ceased to exist on 01/06/1993. Whatever, it has deposited will be falling to its successor i.e. Brooke Bond India Limited (amalgamated company and it is entitle for deduction u/s 33AB of the Act. The ld. CIT(A) has not committed any error in this regard. Accordingly, this additional ground of appeal is dismissed. Deduction u/s 32AB(1)(b) and 32AB(7) r.w.s. 33AB(8) - whether merger of two companies under the scheme of amalgamation would be construed as transfer of assets for denying benefit of Section 33AB and 33AB(8) r.w.s. 32AB(7)? - HELD THAT - AO under the scheme of Section 33AB of the Act, the amalgamated company has made certain deposits and also purchased certain machineries which was required to be used for eight continuous years as contemplated in the Act. But since before completion of those eight years, the amalgamated company which had made deposits has been amalgamated with Brooke Bond India Ltd. and, therefore, all those benefits are to be treated as of the assessee company i.e., Brooke Bond India Ltd. The assessee has explained about two factual positions about years of purchase and utilization of the machineries as well as about the creation of the funds with NABARD and its withdrawal for utilization for business purposes. The amalgamation of erstwhile DDIL into Brooke Bond India Limited cannot be construed as transfer. It is just an amalgamating company which ceased to exist in the eyes of law and it excludes itself for all practical purposes. In other words, it merged in the new company along with all its assets and liabilities and the same treatment has to be given to the new company i.e., the amalgamating company. The ld. First Appellate Authority has discussed this issue thoroughly and after going through all these details, we do not find any reason to interfere in the findings of the ld. CIT(A) extracted supra.

Summary

Issues Involved:
1. Deduction under Section 80G before application of Rule 8 of the Income Tax Rules.
2. Deletion of disallowance of traveling expenses and foreign travel expenses of the Managing Director's wife.
3. Treatment of sale proceeds from scrap as business income.
4. Deletion of disallowance of guest house expenses.
5. Additional grounds of appeal regarding deductions under Sections 32AB and 33AB due to amalgamation.

Detailed Analysis:

1. Deduction under Section 80G before application of Rule 8 of the Income Tax Rules:
The revenue contended that the CIT(A) was not justified in directing the Assessing Officer to allow deduction under Section 80G of Rs.1,16,090 before applying Rule 8 of the Income Tax Rules. The assessee argued that business income should be determined after allowing all necessary deductions, and then the apportionment of 40:60 should be made. The CIT(A) accepted this contention based on the decision of the Hon'ble Madras High Court in Periakaramalai Tea and Produce Co. Ltd. The Tribunal found no error in the CIT(A)'s finding and dismissed this ground of appeal.

2. Deletion of disallowance of traveling expenses and foreign travel expenses of the Managing Director's wife:
The revenue challenged the deletion of disallowance of Rs.18,182 on account of traveling expenses and Rs.1,57,330 on foreign travel expenses of the Managing Director's wife. The CIT(A) allowed these expenses, noting that the Board of Directors had approved the reimbursement and that the wife performed secretarial services and attended social gatherings during business tours. The Tribunal upheld the CIT(A)'s finding, referencing various High Court decisions that supported the deductibility of such expenses under Section 37(1) of the Act.

3. Treatment of sale proceeds from scrap as business income:
The revenue disputed the CIT(A)'s direction to treat the sale of Rs.6,62,200 and Rs.88,227 as business income. The assessee sold gunny bags and other items, which were byproducts of its business. The Assessing Officer treated these as income from other sources, but the CIT(A) held them as business income. The Tribunal agreed with the CIT(A), noting that the sale of such items was integral to the assessee's manufacturing process and thus should be treated as business income.

4. Deletion of disallowance of guest house expenses:
The revenue contested the deletion of Rs.8,12,692 incurred on guest house expenses. The CIT(A) found that repair and maintenance, depreciation on guest house, and expenses for transit flats were not disallowable under Section 37(4) except for Rs.20,000 towards food for guests. The Tribunal upheld the CIT(A)'s finding, agreeing that these expenses were necessary for business purposes and not subject to disallowance under Section 37(4).

5. Additional grounds of appeal regarding deductions under Sections 32AB and 33AB due to amalgamation:
The revenue raised additional grounds challenging the deletion of Rs.1,27,27,520 and Rs.2,19,13,300 related to deductions under Sections 32AB and 33AB due to the amalgamation of Doom Dooma India Ltd. with Brooke Bond India Ltd. The CIT(A) held that amalgamation does not amount to a sale or transfer and thus does not attract the provisions of Sections 32AB(7) and 33AB(8). The Tribunal agreed, noting that amalgamation is a legal transmission, not a transfer, and upheld the CIT(A)'s deletion of these additions.

Cross-Objection by the Assessee:
The assessee's cross-objection was dismissed as it did not show any grievance against the impugned order but rather supported the CIT(A)'s order. The Tribunal found no merit in the plea that additional grounds taken by the revenue were bad in law.

Conclusion:
The appeal of the revenue and the cross-objection of the assessee were both dismissed. The Tribunal upheld the CIT(A)'s findings on all grounds, concluding that the CIT(A) had correctly interpreted and applied the relevant legal provisions.