1995 (9) TMI 113 - AT - Income Tax

Tribunal directs reevaluation of expenses, depreciation, and accounting method for tax appeal

K & Co. Versus Deputy Commissioner Of Income-Tax.

K & Co. Versus Deputy Commissioner Of Income-Tax. - ITD 056, 448, Issues Involved:1. Disallowance of Rs. 1,01,057 under 'Opening ceremony expenses.'2. Disallowance of Rs. 18,67,822 in respect of depreciation on leased vehicles.3. Rejection of the method of accounting followed by the assessee, leading to an addition of Rs. 97,22,280.Issue-wise Detailed Analysis:1. Disallowance of Rs. 1,01,057 under 'Opening ceremony expenses':The appellant, a registered firm engaged in organizing lotteries for the Government of Sikkim, faced disallowance of Rs. 1,01,057 by the Assessing Officer (AO) under 'Opening ceremony expenses,' deemed inadmissible. The Commissioner of Income-tax (Appeals) upheld this, referencing Explanation 2 to Section 37(2A) of the Income-tax Act, which includes hospitality expenses as entertainment expenditure. The breakdown of expenses included dinner for 500 persons, stay charges for stockists, and Safari suits for stockists. The Tribunal, after hearing both parties, concluded that the entire expenditure fell under entertainment expenses per Explanation 2 to Section 37(2A). However, it accepted the alternative submission to exclude 25% of the dinner expenses (Rs. 10,700) for employees, directing the AO to recompute the disallowance accordingly.2. Disallowance of Rs. 18,67,822 in respect of depreciation on leased vehicles:The AO disallowed Rs. 18,67,822 in depreciation on vehicles leased out on the last day of the accounting period, questioning their actual use within the period. The Commissioner of Income-tax (Appeals) upheld this, emphasizing the necessity of permanent registration and commercial permits under the Motor Vehicles Act for claiming depreciation. The Tribunal, however, found merit in the appellant's arguments that the vehicles were owned, leased out, insured, and temporarily registered before the end of the accounting period, and lease rentals were received. The Tribunal noted the lack of cross-verification by tax authorities and the acceptance of depreciation on written down value in the subsequent assessment year. It directed the AO to allow the depreciation as claimed, citing relevant case laws supporting the appellant's position.3. Rejection of the method of accounting followed by the assessee, leading to an addition of Rs. 97,22,280:The AO noted a change in the appellant's accounting method, which excluded the closing stock of lottery tickets for draws not held from sales, resulting in a profit reduction of Rs. 97,22,280. The AO rejected the new method, citing it as a convenience to reduce tax liability. The Commissioner of Income-tax (Appeals) upheld this, referencing the Supreme Court's judgment in CIT v. British Paints India Ltd., emphasizing the need for consistency in accounting methods. The Tribunal, however, found the new method bona fide and consistent with industry practices, noting that the closing stock was accounted for, albeit under prepaid expenses. The Tribunal directed the AO to recompute the taxable income per the new method, ensuring consistency with other assessees in the same business, and to adjust subsequent years' incomes if necessary. The Tribunal emphasized the need for a valid reason to reject a new method, which was absent in this case.Conclusion:The Tribunal partially allowed the appeal, directing the AO to recompute the disallowance of opening ceremony expenses, allow depreciation on leased vehicles, and accept the new accounting method, ensuring consistency with industry practices and adjusting subsequent years' incomes if required.