Mixed Outcome in Appeal: Some Disallowances Upheld, Others Reversed; Key Issues Remanded for Further Review.

The assessee's appeal resulted in a mixed outcome. The ITAT confirmed disallowances for traveling expenses and guesthouse depreciation, while deleting disallowances for warranty provisions and canteen expenses. The issue of debenture redemption premiums was remanded for reconsideration. The inclusion of sales tax reimbursement in total turnover was decided in favor of the assessee, and the gain from foreign exchange contract cancellations was deemed a capital receipt, requiring adjustments to the project's cost for depreciation purposes. The disallowance of special pension liability was reversed. Overall, the appeal was partly allowed, with certain issues remanded for further review.

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Issues Involved:
1. Disallowance of travelling expenses u/r 6D.
2. Expenditure from welfare fund of Tractors division.
3. Deduction for premium on redemption of debentures.
4. Disallowance of provision for warranties.
5. Disallowance of depreciation on guesthouse.
6. Disallowance of canteen expenses as entertainment expenses.
7. Disallowance of incremental liability for special pension.
8. Inclusion of sales tax reimbursement in total turnover for deduction u/s 80HHC.
9. Taxability of receipt from cancellation of foreign exchange forward cover contracts.

Summary:

1. Disallowance of travelling expenses u/r 6D:
The assessee's appeal against the disallowance of travelling expenses u/r 6D was dismissed as the issue was already decided against the assessee in previous assessment years (1991-92 and 1992-93). The order of the CIT(A) was confirmed.

2. Expenditure from welfare fund of Tractors division:
The assessee did not press this ground regarding the expenditure of Rs. 4,42,307 from the welfare fund of the Tractors division. Consequently, the order of the CIT(A) was confirmed.

3. Deduction for premium on redemption of debentures:
The issue of deduction for Rs. 18,45,905 representing 1/7th premium on redemption of debentures was restored back to the file of the CIT(A) to be decided de novo in light of the Tribunal's directions, as the merits were not examined in the right perspective.

4. Disallowance of provision for warranties:
The disallowance of Rs. 55,06,533 for provision for warranties was deleted, following the precedent set by ITAT's orders for previous assessment years (1989-90, 1990-91, and 1991-92).

5. Disallowance of depreciation on guesthouse:
The disallowance of depreciation on the guesthouse was confirmed as the issue was already decided against the assessee in previous ITAT orders.

6. Disallowance of canteen expenses as entertainment expenses:
The disallowance of 2.5% of canteen expenses as entertainment expenses was deleted, following the ITAT's orders for previous assessment years (1991-92 and 1992-93).

7. Disallowance of incremental liability for special pension:
The disallowance of incremental liability for special pension was reversed, and the Assessing Officer was directed to allow the deduction, consistent with the Tribunal's view in the assessee's case for the assessment year 1989-90.

8. Inclusion of sales tax reimbursement in total turnover for deduction u/s 80HHC:
The issue of including sales tax reimbursement in the total turnover for the purpose of deduction u/s 80HHC was decided in favor of the assessee, following the Bombay High Court decision in CIT v. Sudarshan Chemicals Industries Ltd. The Assessing Officer was directed to exclude sales tax reimbursement from the total turnover.

9. Taxability of receipt from cancellation of foreign exchange forward cover contracts:
The net gain of Rs. 520.68 lakhs from the cancellation of foreign exchange forward cover contracts was held to be a capital receipt. The Tribunal followed the ITAT Delhi Special Bench decision in Apollo Tyres Ltd. and held that such gain should be adjusted against the actual cost of the project for the purposes of allowing depreciation. The Assessing Officer was directed to re-compute the actual cost of the project and revise the written down value for subsequent assessment years accordingly.

Conclusion:
The assessee's appeal was partly allowed, with some disallowances confirmed, some deleted, and some issues remanded for fresh consideration.

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