2004 (7) TMI 47 - HC - Income Tax

Court rules machinery cost as capital employed under section 80J of Income-tax Act. Expenditure not entertainment.

The court ruled in favor of the assessee regarding the inclusion of machinery cost as capital employed under section 80J of the Income-tax Act. The court ... Entertainment expenditure and deduction admissible u/s 80J Tribunal on considering the evidence placed on record and on the facts arrived at a conclusion that the expenditure incurred cannot be treated as entertainment expenditure. Section 37(2B) refers to expenditure incurred by the assessee in the nature of entertainment. On the facts the Tribunal has arrived at a conclusion that section 37(2B) of the Act is not applicable. – No question arise from tribunal’s order – Further, in respect of machinery gifted by the Government of Australia to the Government of India, Tribunal arrived at a finding 'that the Government supplied the plant and machinery and the cost of which was paid not in cash but in the form of share capital. Therefore, it leaves no doubt to think that the machinery became part and parcel of the assets of the assessee-company and it cannot be considered to be the liabilities due to the Government of India'. Issues:1. Disallowance of entertainment expenditure under section 37(2B) of the Income-tax Act for assessment years 1974-75 and 1975-76.2. Inclusion of the cost of machinery gifted by the Government of Australia to the Government of India as capital employed for the purpose of deduction under section 80J of the Income-tax Act.Issue 1: Disallowance of entertainment expenditure under section 37(2B):The Commissioner of Income-tax (Appeals) held that the expenditure incurred by the assessee did not fall under entertainment expenditure as per section 37(2B) of the Income-tax Act. The Tribunal, after examining the evidence, concluded that the expenditure in question could not be categorized as entertainment expenditure. The Tribunal found that section 37(2B) was not applicable based on the facts presented. Consequently, the court determined that the question regarding the disallowance of entertainment expenditure did not arise, and thus, the reference on this matter was left unanswered.Issue 2: Inclusion of machinery cost as capital employed under section 80J:Regarding the cost of machinery gifted by the Government of Australia to the Government of India, the Commissioner of Income-tax (Appeals) opined that the value of the machinery, payable in the form of shares of the assessee, constituted part of the capital and not a liability. The Appellate Tribunal examined the matter and referred to a letter from the Government of India approving the increase in share capital of the company against the cost of materials and equipment supplied. The Tribunal concluded that since the Government supplied the machinery and the cost was paid through share capital, the machinery became an asset of the assessee, not a liability to the Government of India. Consequently, the answer was to be in favor of the assessee and against the Revenue.In conclusion, the court disposed of the references accordingly, ruling in favor of the assessee on the issue of machinery cost inclusion as capital employed and leaving the question of entertainment expenditure disallowance unanswered. No costs were awarded in this disposition.