1998 (4) TMI 14 - HC - Income Tax

Investment Allowance Business Expenditure Depreciation Rate Of Depreciation Law Applicable

Summary

Issues Involved:
1. Disallowance of cash allowances for medical reimbursement under section 40A(5) of the Income-tax Act, 1961.
2. Applicability of amended rates of depreciation prescribed in Appendix I to the Income-tax Rules, 1962, for pending assessments as on April 2, 1983.
3. Deletion of club subscription from the computation of disallowance under section 40A(5).
4. Entitlement to investment allowance in respect of new machinery leased out.

Issue-wise Detailed Analysis:

Issue 1: Disallowance of Cash Allowances for Medical Reimbursement
The Tribunal held that cash allowances for medical reimbursement should not be disallowed under section 40A(5) of the Income-tax Act, 1961. This decision aligns with the Supreme Court's ruling in CIT v. Mafatlal Gangabhai and Co. (P.) Ltd. [1996] 219 ITR 644 (SC), which concluded that cash payments made by an assessee to its employees do not fall within the ambit of section 40(a)(v) or section 40A(5)(a)(ii) of the Income-tax Act. Therefore, the question is answered against the Revenue, affirming that such cash payments do not fall within the ambit of section 40A(5).

Issue 2: Applicability of Amended Rates of Depreciation
The Tribunal ruled that the amended rates of depreciation prescribed in Appendix I to the Income-tax Rules, 1962, would not be applicable for pending assessments as on April 2, 1983. Rule 5 of the Income-tax Rules, 1962, provides for depreciation, and the amendment changing the rate from ten percent to fifteen percent came into effect on April 2, 1983. The amendment rules do not provide for retrospective operation, and as such, they cannot be applied to the assessment year 1983-84. This view is supported by decisions from the Calcutta High Court in S. P. Jaiswal Estates Pvt. Ltd. v. CIT (No. 2) [1994] 209 ITR 307 (Cal) and the Madras High Court in CIT v. S. Palaniswamy [1996] 219 ITR 380 (Mad). Consequently, the amended rates are applicable only from the assessment year 1984-85.

Issue 3: Deletion of Club Subscription
The Tribunal found that the expenditure incurred by the assessee-company on club subscriptions for its employees is not allowable under section 40A(5) of the Income-tax Act. There was no evidence to suggest that the employees were directed to become members of various clubs for the company's business purposes. The memberships were deemed for personal benefit, providing recreational or sports amenities, and had no correlation to the legitimate needs of the company. Therefore, the expenditure on club subscriptions cannot be considered a permissible deduction under section 40A(5).

Issue 4: Entitlement to Investment Allowance for Leased Machinery
The Tribunal upheld that the assessee was entitled to an investment allowance for new machinery leased out. This decision is consistent with the rulings in CIT v. First Leasing Co. of India Ltd. [1995] 216 ITR 455 (Mad) and CIT v. Shaan Finance (P.) Ltd. [1998] 231 ITR 308 (SC). Section 32A of the Income-tax Act does not require that the machinery must be installed and used by the assessee for manufacturing or production. The conditions for investment allowance are that the machinery must be owned by the assessee, used for business purposes, and fall under the categories specified in section 32A(2). The Supreme Court confirmed that leasing out machinery for specified purposes fulfills these requirements, affirming the Tribunal's decision.

Conclusion:
The tax cases (reference) are disposed of with no order as to costs.