1993 (10) TMI 15 - HC - Income Tax

Development Allowance, Expenditure Incurred, Guest House, In The Nature, Weighted Deduction, Wholly And Exclusively

Summary

Issues Involved:
1. Disallowance of weighted deduction under section 35B of the Income-tax Act, 1961, for prospecting expenses in Bhutan.
2. Disallowance of development rebate under section 33(6) of the Income-tax Act, 1961, for expenditure on water works at residential colonies.

Issue-wise Detailed Analysis:

1. Disallowance of Weighted Deduction under Section 35B:

The first issue pertains to whether the assessee is entitled to a weighted deduction under section 35B of the Income-tax Act, 1961, for prospecting expenses incurred in Bhutan amounting to Rs. 2,11,000. The assessee, a company engaged in the manufacture and sale of cement, entered into a contract with the Government of Bhutan to prospect limestone. The assessee incurred an expenditure of Rs. 2,11,000 for this purpose and claimed a weighted deduction under section 35B. The Income-tax Officer, Appellate Assistant Commissioner, and the Income-tax Appellate Tribunal disallowed this claim, leading the assessee to seek a reference to the High Court.

The court examined the provisions of section 35B(1)(b) and found that the expenditure incurred by the assessee falls under sub-clauses (iii) and (viii) of clause (b) of section 35B(1). The court observed that the assessee supplied services to the Government of Bhutan under a contract and incurred the expenditure wholly and exclusively for this purpose. The services were provided in Bhutan, making the expenditure eligible for a weighted deduction as per sub-clause (iii). Additionally, the expenditure could be considered incidental to the execution of a contract for the supply of services outside India under sub-clause (viii). Consequently, the court held that the assessee is entitled to the weighted deduction under section 35B and answered the question in the negative, i.e., in favor of the assessee and against the Revenue.

2. Disallowance of Development Rebate under Section 33(6):

The second issue concerns the disallowance of a development rebate for the cost of water works amounting to Rs. 9,00,000 incurred by the assessee for supplying water to residential colonies. The assessee had spent Rs. 28,53,200 on water works, with Rs. 9,00,000 allocated to residential colonies. The Income-tax Officer allowed the development rebate for the water works at the factory but disallowed it for the residential colonies. The Appellate Assistant Commissioner reversed this decision, but the Tribunal reinstated the Income-tax Officer's order, leading the assessee to seek a reference to the High Court.

The court examined section 33(6) of the Act, which prohibits the allowance of a development rebate for machinery or plant installed in residential accommodation. The court found that the water works were used to supply water to residential colonies, making them fall within the purview of section 33(6). The court rejected the assessee's contention that the water works were installed at the river bed and not in residential accommodation, noting that the disallowed amount specifically pertained to the residential colonies. The court also dismissed the argument that section 33(6) only applies to certain types of machinery, stating that the expression "any machinery or plant" used in the section is comprehensive and includes the water works in question. Consequently, the court held that the assessee is not entitled to the development rebate for the water works at the residential colonies and answered the question in the affirmative, i.e., in favor of the Revenue and against the assessee.

In conclusion, the court ruled in favor of the assessee for the first issue regarding the weighted deduction under section 35B and in favor of the Revenue for the second issue regarding the development rebate under section 33(6). No order as to costs was made.