2011 (8) TMI 515 - HC - Income Tax

Court rules against assessee on disallowance, guest house expenses, revaluation reserve.

Commissioner of Income-tax Versus SRF Ltd.

Commissioner of Income-tax Versus SRF Ltd. - [2012] 342 ITR 106 Issues Involved:1. Disallowance under section 37(3) read with Rule 6D of the Income-tax Act.2. Disallowance of expenses on the guest house under section 37(4) of the Income-tax Act.3. Reduction of the amount withdrawn from the revaluation reserve account in computing book profits under section 115J of the Income-tax Act.Detailed Analysis:Issue 1: Disallowance under section 37(3) read with Rule 6D of the Income-tax ActThe primary issue was whether the disallowance under Rule 6D should be computed by consolidating all travel undertaken by each employee in a year or by considering each trip separately. The assessee had aggregated trips made by an employee during the year, adjusting any surplus against deficits from subsequent trips. The Assessing Officer (AO) disagreed, computing the disallowance on a per-trip basis, resulting in a higher disallowance amount. The Tribunal reversed the AO's decision, supporting the assessee's method.The court examined Rule 6D(2), which specifies limits on travel expenses based on the mode of travel and daily allowances for employees. The court concluded that disallowance must be computed per journey due to varying factors such as different cities and guest house provisions, which affect the limits. The court agreed with the Bombay High Court's view in CIT v. Aorow India Ltd., rejecting the aggregation method. Thus, the question was answered in the negative and against the assessee.Issue 2: Disallowance of expenses on the guest house under section 37(4) of the Income-tax ActBoth parties agreed that this issue was covered against the assessee by the Supreme Court's decision in Britannia Industries Ltd. v. CIT. The court did not provide further analysis, simply noting the consensus and ruling against the assessee.Issue 3: Reduction of the amount withdrawn from the revaluation reserve account in computing book profits under section 115J of the Income-tax ActThe AO had included the revaluation reserve in the book profits calculation, arguing that the assessee's method of providing depreciation on revalued assets without crediting the profit and loss account deflated book profits. The Tribunal disagreed, allowing the reduction of the amount withdrawn from the revaluation reserve.The court analyzed the provisions of section 115J and the explanation regarding book profits, noting that the revaluation reserve was created before the insertion of section 115J. The court emphasized that the reduction is only permissible if the reserve was created by crediting the profit and loss account, which was not the case here. The Supreme Court's decision in Indo-Rama Synthetics (I.) Ltd. v. CIT was cited, supporting the AO's view that the reduction is not allowable if the reserve did not increase book profits initially. Thus, the question was answered in the negative and against the assessee.Conclusion:The court ruled against the assessee on all three issues, emphasizing the correct interpretation of the Income-tax Act provisions and relevant rules. The reference was disposed of accordingly, with costs following the result.