1988 (12) TMI 7 - HC - Income Tax

Court ruling on Income-tax Act: depreciation for roads, development rebate for tools allowed, entertainment expenses disallowed, public issue expenses non-deductible.

The court ruled in favor of the assessee on the treatment of cash allowances under the Income-tax Act, allowing depreciation on the cost of roads as part ... Cash allowances and disallowance under section 40(c)(iii) - cash allowances and disallowance under section 40(a)(v) - classification of roads as 'building' for depreciation - development rebate for durable machine tools as 'plant and machinery' - meaning of 'installed' for plant and machinery - entertainment expenditure - lunches and dinners - public issue expenses - revenue deductionCash allowances and disallowance under section 40(c)(iii) - Cash allowance paid to employees for assessment years 1967-68 and 1968-69 fell outside the scope of disallowance under section 40(c)(iii). - HELD THAT: - The court answered these questions in the assessee's favour having regard to this Court's decision in CIT v. Indokem Pvt. Ltd., holding that on the facts and circumstances of the case the cash allowances were not caught by the disallowance provision and therefore should not be disallowed for AY 1967-68 and 1968-69.Answered in the affirmative and in favour of the assessee.Cash allowances and disallowance under section 40(a)(v) - Cash allowance paid to employees for assessment years 1969-70 and 1970-71 fell outside the scope of disallowance under section 40(a)(v). - HELD THAT: - Following the Court's reasoning in CIT v. Indokem Pvt. Ltd., the tribunal's conclusion that such cash allowances were not disallowable under the provision was accepted and the questions were answered for the assessee for AY 1969-70 and 1970-71.Answered in the affirmative and in favour of the assessee.Classification of roads as 'building' for depreciation - Assessee entitled to depreciation on the cost of roads as 'building'. - HELD THAT: - Relying on this Court's earlier decision in CIT v. Colour-Chem Ltd., the court held that the cost of roads should be treated as 'building' for purposes of claiming depreciation, and thus the assessee was entitled to depreciation accordingly for the years in question.Answered in favour of the assessee.Development rebate for durable machine tools as 'plant and machinery' - meaning of 'installed' for plant and machinery - Durable tools used by the assessee constituted 'plant and machinery' and were eligible for development rebate provided the statutory reserve was created; 'installed' does not require embedding in the earth but placement for use. - HELD THAT: - The court agreed with the Tribunal that the Income-tax Rules themselves consider such durable tools as plant and machinery. The term 'installed' was construed to mean put in a position in which the tool can be used, not necessarily embedded. The court rejected the contention that part debited to profit and loss precluded the rebate, holding that accounting entries did not affect entitlement; the matter was remitted to the Income-tax Officer to verify creation of the required reserve and, if found, to allow the development rebate.Answered in the affirmative and in favour of the assessee, subject to verification of the requisite reserve by the Income-tax Officer.Entertainment expenditure - lunches and dinners - Expenditure on lunches and dinners for clients and persons connected with the business was treated as entertainment expenses and disallowance sustained. - HELD THAT: - The Tribunal examined the lists of items and found many payments were for lunches and dinners for clients and business contacts, concluding they constituted entertainment. The court declined to interfere with this factual conclusion; whether such meals were 'lavish' was a question of fact for the Tribunal to assess.Assessee's contention rejected; question answered in the negative and in favour of the Revenue.Public issue expenses - revenue deduction - Expenditure incurred on a public issue was not deductible as revenue expenditure. - HELD THAT: - The assessee's counsel conceded that, in view of this Court's decision in Bombay Burmah Trading Corporation Ltd. v. CIT, the public issue expenses could not be allowed as revenue deduction. The court therefore answered the question against the assessee.Assessee's contention rejected; question answered in the negative and in favour of the Revenue.Final Conclusion: The reference was answered: cash allowances for AYs 1967-68 to 1970-71 were held not disallowable (in favour of the assessee); depreciation on roads as 'building' allowed; development rebate on durable tools allowed subject to verification of statutory reserve and the Income-tax Officer's compliance; claims for deduction of client lunches/dinners and public issue expenses disallowed (in favour of the Revenue). No order as to costs. Issues:1. Cash allowances and their treatment under specific sections of the Income-tax Act for different assessment years.2. Entitlement to depreciation on the cost of roads as part of factory buildings.3. Entitlement to development rebate for durable machine tools.4. Allowance of business expenditure for lunches and dinners.5. Deductibility of public issue expenses as revenue expenditure.Analysis:1. The first and second questions raised by the Revenue regarding the treatment of cash allowances paid to employees under specific sections of the Income-tax Act were answered in favor of the assessee based on precedents cited in the judgments of CIT v. Indokem Pvt. Ltd. and CIT v. Colour-Chem Ltd. The court ruled that the cash allowances were outside the purview of the mentioned sections for the respective assessment years.2. The third question raised by the Revenue regarding the entitlement to depreciation on the cost of roads was also decided in favor of the assessee. The court held that the assessee was entitled to depreciation on the cost of roads as part of 'building' based on the interpretation of relevant laws and precedents.3. The fourth question raised by the Revenue concerned the entitlement to development rebate for durable machine tools. The court noted that the Income-tax Rules considered such tools as plant and machinery. The Tribunal's decision to allow development rebate on these tools was upheld, emphasizing that the tools need not be physically installed to qualify as plant and machinery.4. The first question raised by the assessee related to the disallowance of entertainment expenses. The court upheld the Tribunal's decision that the lunches and dinners provided to clients and business associates constituted entertainment expenses. The court deferred to the Tribunal's factual findings on the nature of these expenses.5. The second question raised by the assessee pertained to the deductibility of public issue expenses as revenue expenditure. The court, based on precedent from Bombay Burmah Trading Corporation Ltd. v. CIT, ruled in favor of the Revenue, stating that such expenses were not deductible as revenue expenditure.In conclusion, the court ruled on various issues related to income tax treatment, depreciation, development rebate, and deductibility of expenses, providing detailed reasoning and referencing relevant legal precedents to support its decisions.