1989 (10) TMI 88 - AT - Income Tax

Summary

Issues Involved:
1. Deduction u/s 80HH before or after setting off brought forward losses.
2. Deduction u/s 80J and computation of capital employed.
3. Disallowance of Mess/Guest house expenses.
4. Non-allowance of rent expenses for premises at B-9, Maharani Bagh, New Delhi.

Summary:

1. Deduction u/s 80HH before or after setting off brought forward losses:
The primary issue was whether the deduction u/s 80HH should be allowed before or after setting off the brought forward losses of earlier years. The assessee claimed deduction on net profits before setting off brought forward losses, while the Income-tax Officer (ITO) allowed it only after setting off these losses. The Tribunal upheld the ITO's view, emphasizing that the gross total income must be computed in accordance with the provisions of the Act, including the set off of carried forward losses u/s 72(1). The Tribunal relied on the Supreme Court's decisions in Cambay Electric Supply Industrial Co. Ltd. v. CIT and Distributors (Baroda) (P.) Ltd. v. Union of India, affirming that deductions under Chapter VIA, including u/s 80HH, are to be made from the balance of income after setting off brought forward losses.

2. Deduction u/s 80J and computation of capital employed:
The issue was the method of determining the capital employed in the industrial undertaking for deduction u/s 80J. The ITO computed the deduction by excluding long-term loans and other borrowings from the capital base, in accordance with the provisions of section 80J(1A) inserted retrospectively from 1-4-1972. The Tribunal upheld the ITO's order, finding no exception to the method of computation prescribed by the statute.

3. Disallowance of Mess/Guest house expenses:
The assessee claimed expenses for a guest house maintained in the factory premises. The ITO disallowed 50% of these expenses, suspecting non-business use. The Commissioner of Income-tax (Appeals) upheld the disallowance, inferring from the details that a regular mess was being run. The Tribunal agreed, noting that the accommodation fell within the definition of a guest house u/s 37(5) and upheld the disallowance due to lack of evidence supporting the assessee's claim.

4. Non-allowance of rent expenses for premises at B-9, Maharani Bagh, New Delhi:
The assessee claimed rent expenses for premises used as a registered office and guest house. The ITO disallowed the expenses, finding no evidence of business use. The Commissioner of Income-tax (Appeals) confirmed this disallowance based on a Board resolution describing the premises as a guest house. The Tribunal, however, acknowledged that the premises served as the registered office and directed that 50% of the rent expenses be allowed for business purposes other than as a guest house.

Conclusion:
The appeals were partly allowed, with the Tribunal upholding the ITO's and Commissioner of Income-tax (Appeals)'s decisions on deductions u/s 80HH and 80J, and disallowance of mess/guest house expenses, while granting partial relief on the rent expenses for the premises at B-9, Maharani Bagh, New Delhi.