2001 (1) TMI 60 - HC - Income Tax

Business Expenditure, Entertainment Expenditure, Disallowance, New Industrial Undertaking, Special Deduction

Summary

Issues:
1. Entertainment expenditure disallowance under section 37(2B) of the Income-tax Act, 1961.
2. Inclusion of the cost of machinery gifted by the Government of Australia in the capital employed for the purpose of deduction under section 80J of the Income-tax Act.

Entertainment Expenditure Disallowance (Section 37(2B)):
The dispute in this case pertains to the assessment year 1973-74, where the assessee claimed expenditure on guests at various branches. The Income-tax Officer disallowed the entire expenditure as entertainment expenditure under section 37(2B). However, the Appellate Assistant Commissioner found that a portion of the expenditure was not entertainment-related and restricted the disallowance. The Tribunal, after examining the details, concluded that the expenditure was incurred for customary courtesy and not lavish entertainment. The Tribunal allowed the entire amount as expenditure, emphasizing the business connection of the expenses incurred.

Inclusion of Machinery Cost in Capital Employed (Section 80J):
The assessee claimed a deduction under section 80J for imported machinery worth Rs. 1,24,27,650 gifted by the Government of Australia. The machinery was given in exchange for shares, but no shares were issued, and the amount was shown as a liability in the balance sheet. The Income-tax Officer excluded the amount while computing capital employed for section 80J deduction. The Appellate Assistant Commissioner disagreed, stating that the amount should be considered as capital and not a debt. The Tribunal concurred with this view, citing precedents and holding that the value should be treated as capital for section 80J purposes.

Judgment Analysis:
Regarding the entertainment expenditure disallowance, the High Court referred to a Supreme Court decision to support the assessee's position, ruling in favor of the assessee against the Revenue. For the machinery cost inclusion in capital employed, the Assessing Officer and Appellate Assistant Commissioner had conflicting views on whether the amount was a liability or capital. The High Court found discrepancies in the Tribunal's analysis and directed a rehearing on the section 80J deduction issue to ensure a proper assessment based on facts and legal principles. The High Court disposed of the references accordingly, highlighting the need for a fresh decision on the section 80J deduction aspect.