1983 (3) TMI 90 - AT - Income Tax

Tribunal grants relief on Section 35B expenses and interest, dismisses departmental appeal, emphasizes integrated tourism business

TRADE WINGS LIMITED. Versus INCOME TAX OFFICER.

TRADE WINGS LIMITED. Versus INCOME TAX OFFICER. - TTJ 018, 239, Issues Involved:1. Weighted allowance under Section 35B.2. Disallowance of entertainment expenditure.3. Claim of bad debt.4. Claim of interest on borrowed capital for hotel construction.Detailed Analysis:1. Weighted Allowance under Section 35B:The common ground in both the department's and the assessee's appeal pertains to the weighted allowance under Section 35B. The assessee claimed an export market allowance for a sum of Rs. 7,62,420, which included various expenses such as foreign travel, membership subscription, advertisements, salaries, local travel expenses, communication charges, motor car expenses, gifts to foreign agents, and expenses for foreign agents' visits to India. The CIT (A) allowed a weighted deduction of Rs. 2,05,202, which was half of the approved expenses totaling Rs. 4,10,404. The assessee appealed for the allowance of relief on the entire amount, while the department objected to the relief granted by the CIT (A).The Tribunal decided to follow its earlier decision for the same matters in ITA Nos. 2980 to 2983 (Bom) / 1979. Consequently, out of the salaries to the tourist department's staff of Rs. 1,37,073, only 75% is to be considered. The entire expenditure on domestic traveling expenses of Rs. 41,932 and motor-car expenses of Rs. 36,633 is to be ignored for relief under Section 35B. However, a weighted allowance is granted for gifts to foreign agents amounting to Rs. 30,625. The expenses incurred for foreign agents on their visit to India, previously disallowed by the Commissioner, are to be reconsidered afresh as per the Tribunal's earlier directions.2. Disallowance of Entertainment Expenditure:The assessee claimed an expenditure of Rs. 46,837 under the head 'entertainment expenditure,' which was disallowed by the ITO. The Tribunal, upon reviewing the details of the expenditure incurred at several hotels for various clients, found no lavishness in the scale of expenditure, especially given the large turnover and sophisticated foreign clientele of the assessee. Hence, the addition was deleted, and the expenditure was allowed.3. Claim of Bad Debt:The claim of bad debt amounting to Rs. 12,168 was not pressed by the assessee, and hence, no further discussion or decision was made on this issue.4. Claim of Interest on Borrowed Capital for Hotel Construction:The assessee, a travel agent with over three decades of experience, claimed an interest deduction of Rs. 4,24,545 on borrowed amounts used for constructing a new hotel in Goa. The ITO and the Commissioner had rejected this claim. The assessee argued that the construction of the hotel was part of its integrated tourism promotion business, which included coordinating various activities such as transportation, accommodation, and entertainment. The investment in the hotel was claimed to be part of the existing business, and thus, the interest on borrowed capital should be allowed as a deduction.The Tribunal examined the object clauses of the company, which supported the assessee's claim that the hotel construction was part of its comprehensive tourism business. The Tribunal noted that the hotel activity was an important part of the integrated travel agency and tourism business. The fact that the hotel management was entrusted to an expert outsider (Oberoi Hotels) further indicated that the assessee was only the owner of the property, and the hotel operation was not a separate business.The Tribunal referenced several legal precedents, including the Supreme Court's decision in India Cements Ltd. vs. CIT (1966) 60 ITR 52 (SC), which supported the allowance of interest on borrowed capital for business purposes. Based on these considerations, the Tribunal directed that the interest claimed by the assessee be allowed.Conclusion:The assessee's appeal was partly allowed, granting relief on several claims, including the weighted allowance under Section 35B for specific expenses and the interest on borrowed capital for hotel construction. The departmental appeal was dismissed.