1995 (3) TMI 156 - AT - Income Tax

Tribunal affirms AO's adjustments under section 43B, directs expense apportionment, and grants relief to assessee.

The Tribunal upheld the AO's additions and disallowances, emphasizing the applicability of section 43B to unpaid sales-tax and the treatment of sales-tax ... Assessing Officer, Attributable To, Deduction In Respect, Expenditure Incurred, Industrial Undertaking, Sales Promotion, Sales Tax, Setting Up, Trading Receipt Issues Involved:1. Addition on account of unpaid sales-tax collected by the assessee.2. Applicability of section 43B of the Income-tax Act, 1961.3. Disallowance of expenses under section 37(3A).4. Disallowance under section 40A(6).5. Apportionment of overhead expenses for section 80-I deduction.6. Disallowance of advance surtax under section 7A of the Companies (Profits) Surtax Act.Detailed Analysis:1. Addition on Account of Unpaid Sales-Tax Collected by the Assessee:The common dispute in both assessment years 1985-86 and 1986-87 revolves around the addition of unpaid sales-tax collected by the assessee. The Assessing Officer (AO) treated these collections as trading receipts and refused to allow deductions on account of the corresponding liability by invoking section 43B of the Income-tax Act, 1961. The assessee argued that since it did not claim a deduction for sales-tax in the profit and loss account, section 43B could not be invoked. However, the CIT(A) and the Tribunal held that the sales-tax collected forms trading receipts, and the assessee would be entitled to a deduction under section 43B only to the extent of payments made during the respective year.2. Applicability of Section 43B:The Tribunal considered whether section 43B is applicable to sales-tax payments that remained unpaid at the close of the previous year but were paid within the statutory period in the subsequent assessment year. The Tribunal upheld that sales-tax collections are trading receipts, and section 43B applies to these payments. The Tribunal rejected the assessee's contention that section 43B could not be invoked if no claim was made in the profit and loss account, emphasizing that the true nature of the receipt determines its character.3. Disallowance of Expenses Under Section 37(3A):For assessment year 1985-86, the CIT(A) disallowed 20% of the rent/hire charges of shelf-space, treating them as advertisement and sales promotion expenses under section 37(3A). The Tribunal found that the expenditure was partly for sales promotion and partly for protecting goods from damage, justifying an apportionment of the expenses. The Tribunal reversed the CIT(A)'s finding and held that 50% of the expenditure should be attributed to sales promotion.4. Disallowance Under Section 40A(6):The AO disallowed Rs. 3,10,000 paid to M/s. A.M. Qubic P. Ltd. by invoking section 40A(6), treating the payment as made to a former employee, Mr. A. Ramalingam. The Tribunal held that section 40A(6) applies only when the payment is made to a former employee, not to a company in which the former employee has an interest. Thus, the payment to M/s. A.M. Qubic P. Ltd. did not fall within the ambit of section 40A(6). The Tribunal remitted the issue to the AO to determine the expenditure relating to projects that did not materialize, which should be treated as revenue expenditure.5. Apportionment of Overhead Expenses for Section 80-I Deduction:The AO attributed a portion of the overhead expenses to the cereal plant unit based on turnover, which the assessee disputed. The Tribunal held that overhead expenses must be considered to determine the true income of the unit. The Tribunal directed the AO to rework the overhead expenses attributable to the new unit by considering both the increase in overhead expenses and the turnover, and then recompute the deduction under section 80-I.6. Disallowance of Advance Surtax Under Section 7A of the Companies (Profits) Surtax Act:The assessee's claim for deduction of advance surtax was disallowed by the AO, upheld by the Tribunal, following the decisions of the Gauhati High Court in Makum Tea Co. (India) Ltd. v. CIT and the Bombay High Court in Lubrizol (India) Ltd. v. CIT, which held that such claims are not allowable.Conclusion:The Tribunal upheld the AO's additions and disallowances in most instances, emphasizing the applicability of section 43B to unpaid sales-tax and the necessity of including sales-tax collections as trading receipts. The Tribunal provided directions for apportioning overhead expenses and remitted certain issues back to the AO for further determination, ensuring that the true income and allowable deductions are accurately computed. The appeals were partly allowed, providing some relief to the assessee on specific grounds.