2006 (12) TMI 194 - AT - Income Tax

Partial success in tax appeal with remittance for fresh examination and varied outcomes on disallowed claims

The appeal filed by the assessee was partly allowed, with specific grounds being remitted back for fresh examination and others being upheld or rejected ... Business Expenditure Issues Involved:1. Disallowance of bad debts claim.2. Disallowance of fines and penalties.3. Disallowance of additional bonus payable to employees.4. Disallowance u/s 43B r/w s. 36(1)(va) regarding ESIC contributions.5. Treatment of public issue expenses as capital expenditure.6. Disallowance of motor car expenses and depreciation.7. Disallowance of residential telephone expenses.8. Disallowance of wealth tax payment.Summary:Issue 1: Disallowance of Bad Debts ClaimThe assessee's claim for bad debts amounting to Rs. 1,19,99,224 was disallowed and upheld by the CIT(A). The assessee did not press this ground during the appeal, and it was accordingly rejected.Issue 2: Disallowance of Fines and PenaltiesThe CIT(A) confirmed the disallowance of Rs. 24,960 representing fines and penalties. The assessee did not press the disallowance related to sales-tax penalties and Consumer Forum fines. The penalty of Rs. 21,810 under the Stamp Act was also disallowed as it was paid for infraction of law, which cannot be allowed as a deduction in the computation of total income.Issue 3: Disallowance of Additional Bonus Payable to EmployeesThe disallowance of Rs. 1,26,915 representing additional bonus payable to employees as per the amendment to the Payment of Bonus Act was not pressed by the assessee and was therefore rejected.Issue 4: Disallowance u/s 43B r/w s. 36(1)(va) Regarding ESIC ContributionsThe CIT(A) upheld the disallowance of Rs. 19,495 under s. 43B r/w s. 36(1)(va) for ESIC contributions. The Tribunal remitted the matter back to the AO for examination in light of the Tribunal's decision in the case of Star Rewinders and Electricals, Raigad vs. ITO, which held that employer's contributions are deductible if paid before the due date of filing the return, and employee's contributions are deductible if paid within the grace period.Issue 5: Treatment of Public Issue Expenses as Capital ExpenditureThe CIT(A) treated the entire amount of Rs. 2,55,07,817 incurred in connection with the public issue of shares as capital expenditure. The Tribunal upheld this decision, following the precedent set in the assessee's own case for the previous assessment year and the Supreme Court's decision in Brooke Bond India Ltd vs. CIT. The alternative plea to reduce interest earned on share application money from the expenditure was also rejected, as the IT Act does not permit set-off of capital expenditure against revenue receipt. The Tribunal remitted the matter back to the CIT(A) for fresh examination regarding the alternative plea for deduction u/s 35D and the taxability of interest income under 'Income from other sources'.Issue 6: Disallowance of Motor Car Expenses and DepreciationThe CIT(A) upheld the disallowance of Rs. 9,399 representing 1/8th of total expenses on motor cars and Rs. 6,432 representing 1/8th of the depreciation on the motor car given to the President of the assessee company. The Tribunal allowed these grounds, citing the Gujarat High Court's decision in Sayaji Iron and Engg. Co. vs. CIT, which held that a company, being an inanimate person, cannot have personal use of vehicles.Issue 7: Disallowance of Residential Telephone ExpensesThe CIT(A) upheld the disallowance of 1/4th of expenditure on residential telephone. The Tribunal allowed this ground, following the same reasoning as for motor car expenses.Issue 8: Disallowance of Wealth Tax PaymentThe disallowance of wealth tax payment of Rs. 60,270 u/s 40(1)(iia) was upheld by the CIT(A). The assessee did not press this ground during the hearing, and it was therefore rejected.Conclusion:The appeal filed by the assessee was partly allowed, with specific grounds being remitted back for fresh examination and others being upheld or rejected based on the merits and precedents cited.