1989 (12) TMI 91 - AT - Income Tax

ITAT Decision: Revenue Appeal Partly Allowed, Deductions Upheld for Specific Expenses

INSPECTING ASSISTANT COMMISSIONER. Versus NATH BROS. EXHIM INTERNATIONAL LTD.

The ITAT partly allowed the Revenue's appeal, upholding certain decisions of the CIT(A) while setting aside others. The ITAT disallowed weighted ... - Issues:1. Allowance of weighted deduction on charges paid to export promotion council.2. Allowance of weighted deduction on expenses incurred in providing hospitality to foreign buyers and traveling expenses.3. Allowance of entertainment expenditure of New York Office and grant of weighted deduction.4. Reduction of the amount of House Rent Allowance (HRA) paid in cash for working out the disallowance of perquisites under section 40A(5).Analysis:1. The first issue pertains to the allowance of weighted deduction on charges paid to export promotion council. The Revenue contested the CIT(A)'s decision to allow a weighted deduction of 50% on subscription given to various export promotion councils. The Revenue argued that there was no direct nexus between the expenditure and export promotion, citing a decision of the Andhra Pradesh High Court. The CIT(A) based the allowance on past deductions granted for service charges paid to Handicrafts and Handlooms Exports Corporation of India Ltd. (HHEC). However, the ITAT held that without a direct nexus, the weighted deduction could not be allowed. Referring to the decision in CIT vs. Navbharat Enterprises (P) Ltd., the ITAT concluded that subscription to export promotion councils cannot be allowed without evidence of a direct nexus with export promotion. Consequently, the ITAT set aside the CIT(A)'s order and restored the ITO's decision.2. The second issue concerns the allowance of weighted deduction on expenses related to hospitality for foreign buyers and traveling expenses. The CIT(A) allowed these deductions based on previous tribunal decisions. The Revenue contended that entertainment expenditure, including hospitality expenses, was not deductible as business expenditure under section 37(1) of the IT Act, citing a decision of the Patna High Court. However, the ITAT referred to the decisions of Special Benches of the Tribunal, which held that such expenses could be allowed under specific clauses of section 35B(1)(b). The ITAT reasoned that the expenditure on entertainment of foreign customers could qualify for deduction under section 35B(1)(b) and upheld the CIT(A)'s decision to allow these deductions.3. The third issue raised by the Revenue was regarding the allowance of entertainment expenditure of the New York Office and the grant of weighted deduction. The CIT(A) had allowed this expenditure incurred outside India for the promotion of sales. The ITAT confirmed the CIT(A)'s decision, stating that the expenditure was allowable as it was incurred for business promotion.4. The final issue involved the reduction of the amount of House Rent Allowance (HRA) paid in cash for calculating the disallowance of perquisites under section 40A(5). The CIT(A) directed the assessing officer to exclude cash payments of HRA from the calculation, relying on a decision of the Andhra Pradesh High Court. The ITAT agreed with the CIT(A)'s decision, stating that direct payments to employees like HRA did not fall within the definition of perquisites under section 40A(5). Therefore, the ITAT upheld the CIT(A)'s reduction of the HRA amount for computing the disallowance of perquisites.In conclusion, the ITAT partly allowed the Revenue's appeal, upholding certain decisions of the CIT(A) while setting aside others based on the legal principles and precedents discussed in the judgment.