1992 (10) TMI 76 - HC - Income Tax

Business Expenditure Business Income Capital Employed Current Repairs Deduction Developement Rebate Entertainment Expenditure Exemptions High Court Income Tax Interest On Tax New Industrial Undertaking Power To Reframe Question Purchase Tax Repairs Tax Demand

Issues Involved:
1. Deductibility of interest levied under Section 220 of the Income-tax Act, 1961.
2. Deductibility of commission paid for securing a bank guarantee for income-tax payment.
3. Deductibility of expenditure on repairs and renovations under Section 30(a)(ii).
4. Admissibility of development rebate on enhanced machinery costs due to currency devaluation.
5. Classification of expenditure as entertainment under Section 37(2).
6. Deductibility of commission paid for securing a bank guarantee for purchase tax payment.
7. Deductibility of maintenance expenses for a guest house under Section 37(1).
8. Calculation of relief under Section 80J before deduction of unabsorbed depreciation or carried forward loss.
9. Deduction of liabilities relating to a particular undertaking for capital employed under Section 80J.
10. Classification of renovation expenses for leased flats as revenue expenditure under Section 37.

Detailed Analysis:

Issue 1: Deductibility of Interest under Section 220
The court held that the interest of Rs. 17,552 levied under Section 220 of the Income-tax Act, 1961, was not an allowable deduction under Section 37. The court referenced previous decisions in similar cases, such as Dalmia Dadri Cement Ltd. v. CIT and Jindal Industries Ltd. v. CIT, affirming that interest on delayed payment of income-tax is not deductible. Thus, question No. 1 was answered in the affirmative and against the assessee.

Issue 2: Deductibility of Commission for Bank Guarantee
The court found that the commission of Rs. 3,000 paid to secure a bank guarantee for income-tax payment was not an allowable deduction under Section 37(1). This decision was consistent with the ruling on interest payments, as both were related to income-tax payments. Therefore, question No. 2 was answered in favor of the Department.

Issue 3: Deductibility of Repairs and Renovations
The court upheld the Tribunal's decision that the expenditure of Rs. 34,606 on repairs and renovations of the administrative block was not admissible as current repairs under Section 30(a)(ii). The court reasoned that the expenses were not for current repairs but for long-overdue renovations, and thus did not qualify under Section 30(a)(ii). The court also refused to reframe the question to consider Section 37, as this was not raised before the authorities. Consequently, question No. 3 was answered in the affirmative and in favor of the Revenue.

Issue 4: Development Rebate on Enhanced Machinery Costs
The court referred to the Supreme Court decision in CIT v. Arvind Mills Ltd., which held that fluctuations in exchange rates do not affect the actual cost of machinery for calculating development rebate. Thus, the additional liability of Rs. 21,76,873 due to rupee devaluation was not considered for development rebate. Question No. 4 was answered in favor of the Department.

Issue 5: Classification of Entertainment Expenditure
The court determined that the sum of Rs. 14,682 spent on food and refreshments for customers was entertainment expenditure under Section 37(2). The court distinguished between maintenance expenses and expenses for providing food and refreshments, concluding that the latter falls under entertainment. However, the court noted the small amount relative to the company's turnover and followed precedents like CIT v. Supreme Motors (P) Ltd., ruling that such expenses are not lavish and thus not entertainment expenditure. Question No. 5 was answered in the negative and in favor of the assessee.

Issue 6: Commission for Bank Guarantee for Purchase Tax
The court found that the commission paid to secure a bank guarantee for purchase tax was an allowable deduction under Section 37(1), as purchase tax is a business-related expense. Question No. 1 for the Revenue was answered in favor of the assessee.

Issue 7: Maintenance Expenses for Guest House
The court ruled that the expenses for maintaining a guest house at Delhi were allowable under Section 37(1), similar to the ruling for the guest house at Modinagar. The Tribunal's decision was upheld as the expenses were business-related. Question No. 2 for the Revenue was answered in favor of the assessee.

Issue 8: Relief under Section 80J
The court upheld the Tribunal's decision that relief under Section 80J should be calculated on the profits of the two units before deducting unabsorbed depreciation or carried forward losses, following the principle laid down by the Supreme Court in CIT v. Patiala Flour Mills Co. P. Ltd. Question No. 3 for the Revenue was answered in the affirmative and against the Revenue.

Issue 9: Deduction of Liabilities for Capital Employed
The court agreed with the Tribunal that only liabilities related to the particular undertaking should be deducted when ascertaining capital employed under Section 80J. This was consistent with the Bombay High Court's interpretation in Indian Oil Corporation Ltd. v. S. Rajagopalan and the Department's Circular No. 380. Question No. 4 for the Revenue was answered in favor of the assessee.

Issue 10: Renovation Expenses for Leased Flats
The court upheld the Tribunal's decision that the expenditure of Rs. 47,723 on renovating leased flats was a revenue expenditure under Section 37. The court distinguished this case from Hotel Diplomat v. CIT, noting the temporary nature of the lease and the purpose of facilitating business operations. Question No. 5 for the Revenue was answered in the affirmative and in favor of the assessee.

Conclusion:
The reference was disposed of with no order as to costs, with most questions answered in favor of the assessee, except for those related to interest and commission on income-tax payments, and the development rebate on enhanced machinery costs.

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