Tribunal upholds exclusion of share premium in business deduction under Income-tax Act

The Tribunal upheld the AO's decision to exclude share premium from the capital employed in the business for the purpose of calculating deduction under Section 35D(3) of the Income-tax Act. The CIT(A)'s deletion of the disallowance was overturned, ruling in favor of the revenue. Regarding foreign traveling expenses, the Tribunal partially sustained the AO's disallowance due to lack of evidence supporting the business purpose of the trips. The appeal for the Assessment Year 2002-03 was allowed in favor of the revenue, while for the Assessment Year 2005-06, a partial disallowance of foreign traveling expenses was upheld.

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Issues Involved:
1. Deletion of disallowance made under Section 35D of the Income-tax Act.
2. Deletion of disallowance on account of foreign traveling expenses.

Detailed Analysis:

Issue 1: Deletion of Disallowance under Section 35D

Facts and Circumstances:
The assessee claimed Rs.31.67 lakh as a deduction under Section 35D of the Income-tax Act, being 1/5th of 5% of the public issue of 39,10,000 shares at a premium of Rs.76/-. The Assessing Officer (AO) restricted the deduction to Rs.1.95 lakh after excluding the premium amount realized on shares. The AO disallowed Rs.29,72,000/-.

CIT(A) Decision:
The CIT(A) deleted the addition by following the decision of the Income-tax Appellate Tribunal, Ahmedabad Bench in JCIT vs. Sirhind Steel Ltd., which held that share premium should be treated as issued share capital.

Tribunal's Analysis:
The Tribunal noted that the issue is covered by the decision of the Hon'ble Delhi High Court in Berger Paints India vs. CIT, which held that the premium collected on the issue of shares is not part of the capital employed in the business of the company for the purpose of Section 35D. The Tribunal emphasized that the Explanation to Section 35D does not include reserves and surplus of the company as part of the capital employed.

Conclusion:
The Tribunal upheld the AO's order, excluding the premium collected by the assessee on the issue of its share capital for determining the amount of capital employed in the business of the company while computing the deduction under Section 35D(3). The CIT(A)'s order was set aside, and the AO's order was restored, deciding the issue in favor of the revenue.

Issue 2: Deletion of Disallowance on Foreign Traveling Expenses

Facts and Circumstances:
The AO disallowed 20% of the foreign traveling expenses amounting to Rs.2,95,616/- on the ground that the assessee failed to provide evidence of the business purpose for the foreign travels.

CIT(A) Decision:
The CIT(A) deleted the addition, observing that the AO made the disallowance on an ad hoc basis without citing any instance of personal expenditure.

Tribunal's Analysis:
The Tribunal reviewed the details of foreign traveling expenses and noted that the assessee incurred Rs.13,83,002/- on foreign traveling. The Tribunal found that the visit to Vienna/Prague/Copenhagen was not substantiated with details of prospective customers contacted. The assessee failed to establish that the journey was exclusively for business purposes.

Conclusion:
The Tribunal disallowed Rs.1,50,000/- out of the total expenses claimed for the journey to Vienna/Prague/Copenhagen, as the assessee did not provide sufficient evidence. The AO's order was modified accordingly, and the addition was sustained to the extent of Rs.1,50,000/-.

Final Decision:
- The appeal for the Assessment Year 2002-03 was allowed in favor of the revenue.
- The appeal for the Assessment Year 2005-06 was partly allowed, with a partial disallowance of foreign traveling expenses.

Pronouncement:
This decision was pronounced in the open court immediately after the hearing on 29th July 2010.

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