2004 (5) TMI 619 - AT - Income Tax

Tax Tribunal Adjusts Assessments, Allows Assessee Appeals

The Tribunal partially allowed the assessee's appeals, directing the AO to make adjustments as per the Tribunal's findings. The disallowance under Section ... - Issues Involved:1. Disallowance under Section 40A(8) of IT Act.2. Disallowance of legal and professional fees incurred to defend criminal proceedings.3. Deduction under Section 80MM.4. Disallowance of expenditure on pooja and other occasions.Issue-Wise Detailed Analysis:1. Disallowance under Section 40A(8) of IT Act:The first issue pertains to the disallowance of Rs. 13,766 under Section 40A(8) of the IT Act for the assessment year 1982-83. The relevant statutory provision states that 15% of the expenditure incurred by a company on interest in respect of any deposit received by it shall not be allowed as a deduction. However, the explanation to this section exempts deposits received from other companies. The assessee contended that the disallowance should not apply to the interest expenditure of Rs. 40,235 received from three other companies. The Departmental Representative did not raise any contrary arguments. Consequently, the Tribunal directed the AO not to make the disallowance of 15% under Section 40A(8) on the interest payment/expenditure of Rs. 40,235.2. Disallowance of Legal and Professional Fees:The second issue concerns the disallowance of Rs. 1,93,942 incurred by the assessee as legal and professional fees to defend criminal proceedings initiated by the CBI. The assessee argued that these expenses were incurred to protect its business interests and reputation, as the criminal proceedings were related to an agreement with an American company for setting up an Ammonia plant. The assessee cited several legal precedents to support the claim that such expenses should be deductible. However, the Departmental Representative argued that the expenditure was not wholly and exclusively for business purposes and cited the Supreme Court decision in CIT vs. H. Hirjee, which held that expenses incurred in defending criminal proceedings are not deductible if they are not wholly and exclusively for business purposes. The Tribunal, after considering the rival contentions and relevant material, concluded that the expenditure was incurred for defending against criminal prosecution for alleged leakage of classified documents, which is not incidental to the business. Therefore, the Tribunal upheld the disallowance under Section 37(1) as the expenditure was deemed to be for a purpose that is an offence or prohibited by law.3. Deduction under Section 80MM:The third issue involves the disallowance of deduction under Section 80MM amounting to Rs. 4,06,017 for the assessment year 1982-83. The assessee argued that the AO wrongly computed the net profit from consulting fees by applying a net profit rate of 4.3% instead of 40.2%. The assessee provided detailed calculations and certificates regarding man-hours used, which were not initially furnished before the AO for the assessment year 1982-83 but were submitted for the assessment year 1983-84. The Tribunal admitted the additional evidence and held that the assessee's working of net profit from consultancy services fees was based on actual calculations and not on estimates. The Tribunal directed the AO to verify the facts and figures provided by the assessee and allow the deduction under Section 80MM accordingly.4. Disallowance of Expenditure on Pooja and Other Occasions:The fourth issue pertains to the disallowance of Rs. 1,604 contributed by the assessee towards expenditure on pooja and other occasions at various sites. The assessee argued that these expenses were customary and necessary for running the business smoothly. The Tribunal referred to the decisions in Brijraman Das & Sons vs. CIT and an order of the 'C' Bench of the Tribunal, Mumbai, which allowed similar expenses as business expenditure. The Tribunal distinguished the facts from the case cited by the Departmental Representative (Kolhapur Sugar Mills Ltd. vs. CIT) and concluded that a small contribution towards pooja expenses made to run the business smoothly should be allowed. Therefore, the Tribunal deleted the disallowance.Conclusion:The Tribunal allowed the assessee's appeals in part, directing the AO to make adjustments as per the Tribunal's findings on each issue. The disallowance under Section 40A(8) was directed to be removed, the legal and professional fees were upheld as non-deductible, the deduction under Section 80MM was to be recalculated based on actual figures, and the pooja expenses were allowed as business expenditure.