2004 (1) TMI 46 - HC - Income Tax

Amount (subscription) paid for repairs of club building - Whether Tribunal was justified in law in rejecting the claim of subscription paid to Borsola Gymkhana Club for repairs of club building, which was destroyed by fire, of Rs. 5,00,000 on the ground that the assessee was not the owner of the club building, although its employees are members of this club? Held no In respect of computing eligible profit, Tribunal was justified in directing the Assessing Officer to compute 20 per cent. of the eligible profit inclusive of rental income, interest, dividend, profit on sale of assets, replantation subsidy along with other income as found in profit and loss account against the correct interpretation of section 32AB

Issues Involved:
1. Disallowance of deduction claimed under section 32AB of the Income-tax Act, 1961.
2. Disallowance of Rs. 5,93,126 under section 37(2A) of the Income-tax Act, 1961.
3. Justification of the Tribunal in rejecting the claim of subscription paid to a club for repairs of the club building.
4. Inclusion of various incomes in computing profits for deduction under section 32AB.

Detailed Analysis:

Issue 1: Disallowance of Deduction Claimed Under Section 32AB
The assessee, a limited company using the mercantile system of accounting, filed its return for the assessment year 1989-90. The Assessing Officer (AO) did not allow the deduction under section 32AB, which pertains to investment deposit accounts and acquisition of new plant and machinery. The Commissioner of Income-tax (Appeals) accepted the assessee's argument and directed the AO to allow the deduction. However, the Tribunal set aside this order and directed the AO to compute 20% of the eligible profit inclusive of various incomes like rental income, interest, dividend, etc., as per the Companies Act. The Revenue challenged this, leading to the question of whether the Tribunal was justified in its direction.

Issue 2: Disallowance of Rs. 5,93,126 Under Section 37(2A)
The AO disallowed a deduction of Rs. 5,93,126 claimed by the assessee for expenditure related to various clubs. The Tribunal allowed Rs. 78,135 but disallowed Rs. 5,00,000 paid for repairs and renovation of a club building, stating the assessee was not the owner of the building. The assessee argued that this payment should be considered a business expenditure under section 37.

Issue 3: Justification of the Tribunal in Rejecting the Claim of Subscription Paid to a Club
The Tribunal rejected the claim of Rs. 5,00,000 paid for repairs of a club building, reasoning that the assessee was not the owner. The court examined whether this payment could be considered a business expenditure. It was argued that such payments foster business interests by providing recreation for employees, thus enhancing their productivity. Citing various judgments, including CIT v. Sundaram Industries Ltd. and CIT v. Madras Auto Service (P.) Ltd., the court found that such expenditures, aimed at running the business, should be treated as revenue expenditures. The court concluded that the Tribunal was not justified in disallowing this deduction, as the payment was made in the business interest of the company.

Issue 4: Inclusion of Various Incomes in Computing Profits for Deduction Under Section 32AB
The Revenue questioned whether incomes like dividends, plantation subsidy, profit on sale of assets, and rental income should be included in computing profits for deduction under section 32AB. The court referred to several decisions, including Apollo Tyres Ltd. v. CIT, which supported the inclusion of such incomes in the computation of eligible business profits. The court affirmed that these incomes should be considered part of the business income and thus eligible for deduction under section 32AB. The Tribunal's direction to compute 20% of the eligible profit, including these incomes, was upheld.

Conclusion:
The court concluded that the Tribunal was not justified in disallowing the Rs. 5,00,000 paid for club repairs and that the assessee is entitled to this deduction as a business expenditure. Additionally, the court upheld the Tribunal's direction to include various incomes in computing eligible profits for deduction under section 32AB, thus answering both questions in favor of the assessee and against the Revenue. The reference was disposed of accordingly.

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