1993 (2) TMI 52 - HC - Income Tax

Business Expenditure, Education Cess, Priority Industry, Special Deduction, Textile Machinery

Summary

Issues:
- Entitlement to benefit under section 80-1 of the Income-tax Act, 1961
- Qualification for deduction or relief under section 80-I
- Deductibility of education cess amount

Entitlement to benefit under section 80-1:
The assessee, a manufacturer of humidifiers used in textile mills, claimed a deduction under section 80-1 for the assessment year 1972-73, asserting that the humidifiers were textile machinery or accessories. The Income-tax Officer and the Appellate Assistant Commissioner initially rejected this claim. However, in a previous judgment, the High Court held that the humidifiers manufactured by the assessee qualified as textile machinery or accessories. Consequently, the High Court in this case ruled in favor of the assessee, allowing the benefit under section 80-1 for the humidifiers.

Qualification for deduction or relief under section 80-I:
Regarding the deduction or relief under section 80-I, the Tribunal had rejected the assessee's claim on the grounds that necessary facts were not provided, and it was unclear how the arrears of education cess for earlier years were paid. The Tribunal also cited the assessee's use of the mercantile system of accounting as a reason for rejecting the claim. However, the High Court disagreed with the Tribunal's reasoning. It emphasized that payment of education cess is a statutory liability and should be allowed as a deduction in the year when the relevant transactions occur, regardless of the timing of quantification or provision in the accounts. The High Court found that the Tribunal had failed to appreciate the explanations provided by the assessee and erroneously rejected the claim based on procedural grounds. The High Court ultimately ruled in favor of the assessee on this issue as well.

Deductibility of education cess amount:
The Tribunal had rejected the claim for the deduction of Rs. 3,596 as education cess payable for previous years, citing lack of necessary facts, doubts about payment of arrears, and the mercantile system of accounting. However, the High Court held that the liability to pay education cess was established, and the Tribunal's doubts were unfounded. The High Court emphasized that the liability existed under the Gujarat Education Cess Act, and the assessee's failure to provide for the expenditure in the accounts did not justify denying the deduction. Consequently, the High Court ruled in favor of the assessee on this issue as well.

In conclusion, the High Court answered all three questions in favor of the assessee and against the Revenue, allowing the benefit under section 80-1, confirming qualification for deduction under section 80-I, and permitting the deduction of the education cess amount. No costs were awarded in this judgment.