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Issues: (i) whether the imported prototype machine was sold in the previous year relevant to assessment year 1983-84 so as to attract capital gains tax; (ii) whether the entertainment expenditure disallowance required reduction; and (iii) whether the advertisement expenditure was allowable as revenue expenditure.
Issue (i): whether the imported prototype machine was sold in the previous year relevant to assessment year 1983-84 so as to attract capital gains tax.
Analysis: The transaction had to be tested under the Sale of Goods Act, 1930 by examining the intention of the parties from the contract terms, conduct, and surrounding circumstances. The correspondence provided for a two-year guarantee, refund of the sale price, and return of the machine if satisfactory performance was not achieved. The machine was treated by the buyer as delivered for demonstration and approval, while the buyer had not capitalised it as its asset in the relevant period and the agreement showed that ownership was not intended to pass immediately on the bill date. On this footing, the arrangement was not a completed sale in the previous year but an agreement to sell, with property passing only on fulfilment of the stipulated approval period.
Conclusion: The machine did not pass to the vendee in the accounting period relevant to assessment year 1983-84 and no capital gains arose in that year; the issue is in favour of the assessee.
Issue (ii): whether the entertainment expenditure disallowance required reduction.
Analysis: The expenditure was partly attributable to employees partaking of refreshments and, in the absence of exact evidence, the disallowance was estimated on a reasonable basis.
Conclusion: The disallowance was restricted to 50 per cent. and the assessee succeeded partly on this issue.
Issue (iii): whether the advertisement expenditure was allowable as revenue expenditure.
Analysis: The expenditure fell within the category of revenue outlay on the basis of the applicable Board circulars and was not of a capital nature.
Conclusion: The disallowance was deleted and the issue is in favour of the assessee.
Final Conclusion: The principal capital gains addition failed, the entertainment disallowance was curtailed, and the advertisement claim was allowed, leaving the assessee successful on the substantial controversy and partly successful overall.
Ratio Decidendi: For a transaction governed by the Sale of Goods Act, 1930, the passing of property depends on the parties' intention as gathered from the contract, conduct, and circumstances, and where the arrangement is a sale on approval with a stipulated right of return and refund, title does not pass until the approval condition is satisfied.
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