2001 (6) TMI 175 - AT - Income Tax

Appeal allowed with directions on disallowances & compensation. Consequential relief ordered on interest under s. 234.

DELHI AUTOMOBILES LTD. Versus DEPUTY COMMISSIONER OF INCOME TAX.

DELHI AUTOMOBILES LTD. Versus DEPUTY COMMISSIONER OF INCOME TAX. - TTJ 089, 109, Issues Involved:1. Validity of assessment framed in pursuance of notice under s. 143(2) of the IT Act, 1961.2. Disallowances upheld by the CIT(A) including:- Travelling expenses- Entertainment expenses- Advertisement expenses- Disallowance under s. 40A(2)(b)- Addition for notional interest on advance- Compensation paid for loss of office to directorsDetailed Analysis:Issue 1: Validity of Assessment under s. 143(2)- Summary: The learned counsel did not press this ground during the hearing, and thus, it was rejected as not pressed.Issue 2: Disallowances Upheld by CIT(A)Ground 2(a): Disallowance out of Travelling Expenses- Facts: The AO disallowed Rs. 19,467 related to local conveyance and telephone expenses under r. 6D(2)(b) in addition to Rs. 58,266.- Arguments: The assessee argued that local conveyance and telephone expenses are not subject to disallowance under r. 6D, citing CIT vs. Chemet and Sundaram Finance Ltd. vs. IAC.- Decision: The Tribunal decided in favor of the assessee, holding that Rs. 19,467 is not subject to disallowance under r. 6D.Ground 2(b): Disallowance out of Entertainment Expenses- Facts: The AO disallowed 50% of entertainment and hotel bills, club expenses, and Rs. 46,192 under sales promotion expenses.- Arguments: The assessee argued for 50% allowance for employee participation, citing CIT vs. Expo Machinery Ltd. The CIT(A) allowed 25% for employees and club membership fees but disallowed the rest.- Decision: The Tribunal directed the AO to allow 35% of entertainment and hotel expenses, and the entire Rs. 46,192 for presentation articles, as they did not promote sales.Ground 2(c): Disallowance out of Advertisement Expenses- Facts: The AO disallowed Rs. 20,500 claimed for advertisement expenses related to a conference in Kathmandu.- Arguments: The assessee submitted that the expense was for participating in a business conference, not advertisement.- Decision: The Tribunal held that the expense was for business participation and directed the AO to allow it.Ground 2(d): Disallowance under s. 40A(2)(b)- Facts: The AO disallowed Rs. 94,558 related to car and telephone expenses for directors, treating it as personal use.- Arguments: The assessee argued that amounts for personal use were already recovered from salaries and cited precedents where such disallowances were not upheld.- Decision: The Tribunal directed the AO to delete the disallowance.Ground 2(e): Addition for Notional Interest on Advance- Facts: The CIT(A) had previously restored this issue to the AO for verification.- Arguments: The assessee requested the same treatment as the previous year.- Decision: The Tribunal restored the matter to the AO for fresh decision, following the guidelines from the previous year.Ground 2(f): Compensation Paid for Loss of Office to Directors- Facts: The assessee claimed Rs. 1,29,26,601 as revenue expenditure paid to two directors for loss of office and non-compete agreement.- Arguments: The assessee argued that the payment was necessary to avoid competition and ensure business continuity. The AO and CIT(A) viewed it as a settlement of family dispute and capital expenditure.- Decision: The Tribunal agreed with the AO and CIT(A) that the payment was not for business purposes but to settle a family dispute, and thus, it was capital expenditure and not allowable as revenue expenditure.Interest under s. 234- Decision: The AO was directed to give consequential relief while giving effect to the appellate order.Conclusion:The appeal was partly allowed, with specific directions to allow certain disallowances and restore one issue for fresh decision. The major claim regarding compensation for loss of office was upheld as capital expenditure and not allowable as revenue expenditure.