1998 (10) TMI 83 - AT - Income Tax

Tribunal decision: Club fees & commission income allowed, share issue & travel expenses disallowed

The Tribunal partially allowed the appeal, reversing the disallowance of club subscription fees and the enhancement of commission income. However, it ... Capital Or Revenue Expenditure Issues Involved:1. Disallowance of club subscription fees.2. Disallowance of share issue expenses.3. Taxability of interest income on share subscription.4. Disallowance of traveling and conveyance expenses.5. Disallowance of air travel expenses for the wife of the managing director.6. Allowability of surtax paid.7. Enhancement of income by CIT(A) regarding commission income from BIISA.Detailed Analysis:1. Disallowance of Club Subscription Fees:The assessee contended that the CIT(A) erred in upholding the disallowance of Rs. 3,006 paid as club subscription fees. The AO disallowed the expense based on the audit report under s. 44AB. The CIT(A) upheld this disallowance, noting it pertained to the subscription fees of the President and Vice-President of the company. The Tribunal reversed the decisions of the lower authorities, allowing the expenses as revenue expenses, following the Gujarat High Court judgment in Gujarat Slate Export Corpn. Ltd. vs. CIT.2. Disallowance of Share Issue Expenses:The assessee claimed Rs. 39,35,823 as revenue expenses for share issue. The AO disallowed this, treating it as capital expenditure, supported by judgments from various High Courts. The CIT(A) upheld this view. The Tribunal detailed the genesis of the expenses, noting the RBI's conditions for Indianization of the business and the issuance of new shares. Despite the assessee's arguments and reliance on various judgments, the Tribunal upheld the disallowance as capital expenses, noting the expenses were related to the capital structure of the company.3. Taxability of Interest Income on Share Subscription:The assessee argued that interest on share subscription contributions should be considered capital receipts and not taxable. The Tribunal referenced the Supreme Court judgment in Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT, which held that interest income is of revenue nature unless received as damages or compensation. The Tribunal upheld the AO's decision to tax the interest income under s. 56.4. Disallowance of Traveling and Conveyance Expenses:The AO disallowed Rs. 10,00,000 out of Rs. 1,01,66,259 claimed as traveling expenses, noting personal expenses of the managing director's family were included. The CIT(A) reduced the disallowance to Rs. 2.50 lakhs. The Tribunal, acknowledging the need for detailed expense reports and the likelihood of personal expenses being included, partially modified the CIT(A)'s order, sustaining a disallowance of Rs. 1 lakh.5. Disallowance of Air Travel Expenses for the Wife of the Managing Director:The AO disallowed Rs. 49,075 incurred for the managing director's wife's air travel, not connected to the business. The CIT(A) upheld this disallowance. The Tribunal, referencing various High Court judgments, agreed with the CIT(A), noting the expenses did not exclusively serve the business purpose.6. Allowability of Surtax Paid:The assessee's claim that surtax paid is an allowable deduction was rejected by the Tribunal, following the Supreme Court decision in Smith Kline & French (India) Ltd. vs. CIT, which held surtax is not an allowable business expense.7. Enhancement of Income by CIT(A) Regarding Commission Income from BIISA:The CIT(A) enhanced the income by Rs. 1,72,550, noting commission income from BIISA was not disclosed. The Tribunal examined the jurisdiction of CIT(A) for enhancement and the method of accounting for commission income. It was found that the assessee followed the cash system for commission income, and no amount was received during the relevant year. The Tribunal concluded that the enhancement was not justified and deleted the amount.Conclusion:The Tribunal allowed the appeal partially, reversing the disallowance of club subscription fees and the enhancement of commission income while upholding the disallowance of share issue expenses, traveling expenses, air travel expenses, and the non-allowability of surtax paid.