SEN, J. - (1.) THE Tribunal has referred the three following questions of law under S. 256 (1) of the IT Act, 1961 ('the Act') :- "1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the expense of Rs. 4,.19,910 written of was not an allowable deduction in computing the business profit for the asst. yr. 1976-77? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the expense of Rs. 11,805 was not deductible in computing the business profit under the IT Act 1961? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding in holding that the legal expense of Rs. 8,550 was not deductible in computing the total income under the IT Act, 1961?"
(2.) IN this proceeding the assessment year involved is 1976-77 for which the relevant accounting year is the year ended on 31st March, 1976. The first question relates to the assessee's claim for deduction of Rs. 4,19,910 on account of expenditure of a new project. The CIT (A) observed that the facts are that the appellant wanted to start a new project, namely, Methyl Methacrylate Monomer project and incurred the expenses in connection with the project. After sometime the appellant could not proceed further with the implementation of the project and surrendered the Letter of Intent to the Central Government. The assessee claimed that the expenses were incurred in the ordinary course of business and did not result in the acquisition of any asset or advantage of an enduring nature. The details of the expenses written off to P&L A/c were Rs. 3,97,409-(Incurred in earlier years) , Rs. 22,501 (incurred in this year) totaling Rs. 4,19,910.The expenses to the extent of Rs. 3,97,409 were incurred earlier and did not pertain to the present accounting period. The appellant could not proceed with the new project and surrendered the Letter of Intent dt. 17th Nov., 1973 by its letter dt. 1st June, 1976 to the Ministry of Petroleum, Government of India as the Government did not agree to the enhancement of the know-how payable to the foreign collaborator Rohn & Haas Inc. These expenses were in the nature of initial expenses for starting a new venture and are of capital nature.
(3.) THE ITO found on a test check that the expenses included items like butter, whisky, rum, costly, cigarettes, etc. The appellant also did not explain how and on what basis the transfer of Rs. 17,552 was made to different heads of account. The ITO, therefore, allowed only Rs. 5,000 out of Rs. 17,552 on account of the employees and disallowed the balance, namely, Rs. 12,552 and also Rs. 11,805, i.e., in all Rs. 24,357. So far as disallowance of Rs. 11,805 is concerned the ITO's action was upheld because guest house expenses were properly incurred for outsiders and were disallowable under S. 37 (4) of the Act. As regards Rs. 17,552 transferred to the other heads of account, the same were allowed as they were incurred for the appellant's employees following the order for the earlier year. This meant a reduction of Rs. 12,552 under this head.;