1996 (11) TMI 32 - HC - Income Tax

Actual Cost Assessment Year Business Expenditure Capital Expenditure Capital Or Revenue Expenditure Entertainment Expenditure Exchange Fluctuation

Summary

Issues:
1. Disallowance of mess expenses as entertainment expenditure for the assessment year 1974-75.
2. Disallowance of mess expenses for the assessment years 1976-77 and 1977-78 under section 37(2A) of the Income-tax Act.
3. Allowance of interest paid to various entities as business expenditure for the assessment years 1974-75, 1976-77, and 1977-78.
4. Treatment of guarantee commission paid to the bank as revenue expenditure for the assessment years 1974-75, 1976-77, and 1977-78.
5. Allowance of higher development rebate for machinery installed in the pulp unit for the assessment years 1974-75, 1976-77, and 1977-78.
6. Allowance of depreciation on the amount paid as difference in exchange value for loans taken from foreign banks for the purchase of machinery for the assessment years.

Analysis:

1. The court upheld the Tribunal's decision to allow the mess expenses claimed by the assessee for the assessment year 1974-75, as it was not considered lavish entertainment expenditure, citing the introduction of Explanation 2 to section 37(2A) of the Act from April 1, 1976, which did not apply to the assessment year in question. Thus, the court answered question No. 1 in the affirmative and against the Department.

2. For the assessment years 1976-77 and 1977-78, the court disagreed with the Tribunal's decision to allow the entertainment expenditure incurred on customers as a deduction, as per Explanation 2 to section 37(2A) of the Act, which disallows such expenses unless incurred on the assessee's own employees. Therefore, the court answered question No. 2 in the negative and in favor of the Department.

3. The court affirmed the Tribunal's decision to treat the interest paid to various entities as revenue expenditure, following precedent decisions, and answered question No. 3 in the affirmative and against the Department.

4. Regarding the guarantee commission paid to the bank, the court upheld the Tribunal's decision to treat it as revenue expenditure, in line with previous court decisions, and answered question No. 4 in the affirmative and against the Department.

5. The court supported the Tribunal's decision to allow a higher development rebate for machinery installed in the pulp unit, based on previous rulings, and answered question No. 5 in the affirmative and against the Department.

6. The court agreed with the Tribunal's decision to allow depreciation on the amount paid as a difference in exchange value for loans from foreign banks for the purchase of machinery, considering it as capital expenditure entitling the assessee to depreciation, and answered question No. 6 in the affirmative and against the Department.