Tax allowances, factory-road depreciation and development rebate verification upheld in assessee's favour under restored legal position.

Entertainment allowance, car allowance and house rent allowance were held outside the restriction in section 40(c)(iii) because binding precedent governed the point, and the assessee succeeded. Roads inside the factory premises were treated as part of the building used for business, not as plant, so depreciation was allowable to the assessee. A direction to verify the admissibility of development rebate to the amalgamating company for earlier assessment years was upheld, since the retrospective amendment to section 34(3)(a) restored the earlier legal position and supported the verification exercise. All referred questions were answered in favour of the assessee.

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Issues: (i) Whether entertainment allowance, car allowance and house rent allowance fell within the ambit of section 40(c)(iii) of the Income-tax Act, 1961. (ii) Whether depreciation was allowable on roads inside the factory premises as building used for business and not as plant. (iii) Whether the direction to verify the admissibility of development rebate to the amalgamating company for earlier assessment years was sustainable.

Issue (i): Whether entertainment allowance, car allowance and house rent allowance fell within the ambit of section 40(c)(iii) of the Income-tax Act, 1961.

Analysis: The issue was covered by the binding precedent relied upon by the parties, under which such allowances did not fall within the restriction contained in section 40(c)(iii).

Conclusion: The issue was answered in favour of the assessee.

Issue (ii): Whether depreciation was allowable on roads inside the factory premises as building used for business and not as plant.

Analysis: The question was governed by the earlier decision treating roads within the factory premises as part of the building used for business purposes, and not as plant for depreciation purposes.

Conclusion: The assessee was entitled to depreciation on the roads as building used for the purpose of business.

Issue (iii): Whether the direction to verify the admissibility of development rebate to the amalgamating company for earlier assessment years was sustainable.

Analysis: The Tribunal had only directed verification of admissibility and had not granted the rebate. Although the earlier view supporting such verification had been disapproved, the retrospective amendment to section 34(3)(a) by the Finance Act, 1990 restored the legal position in line with the earlier circular and precedent.

Conclusion: The direction was held to be valid and the issue was answered in favour of the assessee.

Final Conclusion: All three referred questions were answered in favour of the assessee, and the reference was disposed of accordingly.

Ratio Decidendi: Where a retrospective statutory amendment restores the earlier legal position, a direction based on that restored position remains sustainable; similarly, roads within factory premises may be treated as building for depreciation purposes, and the relevant allowances may fall outside the statutory restriction when covered by binding precedent.

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