1996 (5) TMI 34 - HC - Income Tax

Summary

Issues:
1. Interpretation of section 32(1)(vi) for initial depreciation claim on new machinery.
2. Determination of whether the assessee was engaged in manufacturing textiles as per Ninth Schedule.
3. Classification of expenditure of Rs. 7,140 as entertainment nature.

Analysis:
1. The case involved a dispute regarding the claim of initial depreciation under section 32(1)(vi) of the Income-tax Act by the assessee for new machinery. The Income-tax Officer disallowed the claim, stating that the assessee was not engaged in manufacturing any item listed in the Ninth Schedule. The process of converting grey cloth into calendered cloth was deemed not a manufacturing process, leading to the disallowance.

2. The Commissioner of Income-tax (Appeals) noted that the raw material used by the assessee was cloth, and the final product, calendered cloth, was distinct from the initial grey cloth, indicating a manufacturing process. The Tribunal agreed, emphasizing the commercial difference between the raw material and final product, thereby allowing the claim under section 32(1)(vi) for the assessee.

3. Regarding the expenditure of Rs. 7,140 on factory tea and coffee expenses, the Tribunal determined that it did not fall under the category of entertainment expenditure. The Tribunal relied on Explanation 2 added by the Finance Act, 1983, which clarified that expenditure on providing food or beverages to employees at the workplace is excluded from entertainment expenditure. As the expenses were for providing tea and coffee to factory workers, the Tribunal held that it was not entertainment expenditure.

In conclusion, the High Court held that the assessee was engaged in manufacturing textiles as per the Ninth Schedule, entitling them to claim initial depreciation under section 32(1)(vi). Additionally, the expenditure of Rs. 7,140 on factory tea and coffee was deemed non-entertainment in nature, thus ruling in favor of the assessee against the Revenue.