2008 (8) TMI 407 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of festival expenses.
2. Disallowance of expenses for presentation articles.
3. Direction to allow deductions under sections 80HH and 80-I.
4. Disallowance of travelling expenses for the director's wife.
5. Exclusion of gross or net interest income for deductions under sections 80HH and 80-I.

Detailed Analysis:

1. Disallowance of Festival Expenses:
The assessee contested the disallowance of 1/10th of the festival expenses amounting to Rs. 22,771. The AO initially disallowed 1/6th of the expenses, which was reduced by the CIT(A) to 1/10th. The Tribunal found that the AO did not pinpoint any specific instance of expenses incurred for non-business purposes and disallowed the expenses on an ad hoc basis. The Tribunal directed the AO to delete the disallowance, allowing the assessee's appeal and dismissing the Revenue's appeal on this issue.

2. Disallowance of Expenses for Presentation Articles:
The assessee challenged the disallowance of Rs. 10,000 out of Rs. 45,702 made by the AO for presentation articles. The AO had disallowed the amount under Rule 6B, which limits the deduction for advertisement expenses. The CIT(A) restricted the disallowance to Rs. 10,000. The Tribunal found that Rule 6B was not applicable as the articles did not contain the company's name and were not for advertisement purposes. The Tribunal allowed the assessee's appeal by deleting the disallowance of Rs. 10,000.

3. Direction to Allow Deductions under Sections 80HH and 80-I:
The Revenue's appeal challenged the CIT(A)'s direction to allow deductions under sections 80HH and 80-I based on net interest income. The Tribunal found that the CIT(A) had correctly directed the AO to follow the Tribunal's previous orders, which held that only net interest income should be disallowed. The Tribunal dismissed the Revenue's appeal, affirming that only net interest income should be excluded for deductions under sections 80HH and 80-I.

4. Disallowance of Travelling Expenses for the Director's Wife:
The AO disallowed 50% of the foreign travel expenses incurred by the director's wife, amounting to Rs. 6,60,997, on the grounds that her travel was not for business purposes. The CIT(A) deleted the disallowance, considering the director's age and health, and relying on the Kerala High Court decision in CIT vs. Appollo Tyres Ltd. The Tribunal upheld the CIT(A)'s decision, agreeing that the expenses were incurred for business purposes.

5. Exclusion of Gross or Net Interest Income for Deductions under Sections 80HH and 80-I:
The Tribunal was divided on whether to exclude gross or net interest income while computing deductions under sections 80HH and 80-I. The AM followed the Tribunal's earlier decisions and directed the exclusion of net interest income. The JM disagreed, relying on decisions from the Punjab & Haryana and Madras High Courts, which supported the exclusion of gross interest income. The Third Member agreed with the AM, holding that only net interest income should be excluded, aligning with the rule of consistency and decisions from the Delhi and Orissa High Courts.

Conclusion:
The Tribunal's majority view was to allow the exclusion of net interest income for deductions under sections 80HH and 80-I, and to uphold the CIT(A)'s decisions on festival expenses, presentation articles, and travelling expenses for the director's wife. The Revenue's appeals were dismissed, and the assessee's appeals were allowed.