1993 (10) TMI 72 - HC - Income Tax

Ginning factory qualifies for tax deduction under section 80J, but entertainment expenses disallowed.

The High Court held that the ginning factory was entitled to the deduction under section 80J of the Income-tax Act, 1961, as ginning of cotton was ... Deduction For New Industrial Undertaking, Entertainment Expenditure, Expenditure Incurred On Customers, New Industrial Undertaking Issues:1. Eligibility of a ginning factory for deduction under section 80J of the Income-tax Act, 1961.2. Classification of expenditure incurred on customers as entertainment expenditure.Analysis:Issue 1:The case involved a dispute regarding the eligibility of a ginning factory for deduction under section 80J of the Income-tax Act, 1961. The Income-tax Officer had disallowed the deduction claimed by the assessee, stating that the entire capital invested in the branch represented borrowed money, and therefore, the relief under section 80J was not admissible. The Appellate Assistant Commissioner upheld this decision, emphasizing that the assessee was not engaged in processing goods or producing articles. However, in the subsequent appeal before the Income-tax Appellate Tribunal, it was argued that ginning of cotton should be considered as manufacturing, citing precedents where ginning and pressing of cotton were held to amount to manufacturing. The High Court agreed with this argument, stating that the ginning of cotton is indeed a process of manufacture, as established in previous court decisions. The High Court also referred to the definition of 'manufacture' from various legal sources to support its conclusion. Additionally, the High Court noted that the issue of whether borrowed capital should be included in the term 'capital employed' had already been settled by a previous apex court decision. Therefore, the High Court held that the ginning factory was entitled to the deduction under section 80J, overturning the decision of the Income-tax Appellate Tribunal.Issue 2:The second issue in the case pertained to the classification of expenditure incurred on customers as entertainment expenditure. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal had both disallowed the claim for deduction of Rs. 650, stating that it was in the nature of entertainment expenditure. The High Court examined the relevant provisions of the Income-tax Act and noted that no allowance could be made for entertainment expenditure incurred after a specified date. The High Court found that the expenditure of Rs. 650 fell within the category of entertainment expenditure and, therefore, was not allowable for deduction. Furthermore, the High Court highlighted that the assessee had agreed to the disallowance of this expenditure before the Income-tax Officer, and there was no subsequent claim of duress or coercion in this regard. Consequently, the High Court upheld the decision of the Income-tax Appellate Tribunal regarding the disallowance of the expenditure, ruling in favor of the Revenue.In conclusion, the High Court ruled in favor of the assessee on the issue of eligibility for deduction under section 80J but upheld the decision disallowing the expenditure incurred on customers as entertainment expenditure.