1985 (3) TMI 21 - HC - Income Tax

Summary

Issues Involved:
1. Classification of expenditure as revenue or capital.
2. Depreciation on capital expenditure.
3. Deduction under section 80M of the Income-tax Act, 1961.

Detailed Analysis:

1. Classification of Expenditure as Revenue or Capital:
The primary issue was whether the expenditure incurred by the assessee, a private limited company, under an agreement with a foreign company for setting up a garment factory, should be classified as revenue expenditure or capital expenditure. The Tribunal determined that 20% of the expenditure should be treated as revenue expenditure and the remaining as capital expenditure. This decision was based on the terms of the agreement, which included provisions for both setting up the plant and rendering various services. The agreement's clauses indicated that while some expenses were directly related to the establishment of the plant (capital expenditure), others were for services that could be categorized as revenue expenditure. The High Court upheld the Tribunal's apportionment, stating that the estimate of 20% as revenue expenditure was just and reasonable, and thus answered the first question in the affirmative and against the Revenue.

2. Depreciation on Capital Expenditure:
The second issue was whether one-third of the capital expenditure paid to the foreign consultant could be added to the cost of the machinery for the purpose of claiming depreciation. The Tribunal allowed the assessee to claim depreciation on one-third of the capital expenditure as part of the cost of the machinery. The High Court referenced several precedents, including CIT v. L. G. Balakrishnan & Bros. (P) Ltd., Challapalli Sugars Ltd. v. CIT, and others, which supported the inclusion of such expenditures as part of the actual cost of the machinery for depreciation purposes. The Court concluded that the Tribunal's estimate was just and reasonable and answered the second question in the affirmative and against the Revenue.

3. Deduction under Section 80M:
The third issue concerned whether the deduction under section 80M should be allowed on the gross dividend income. The Tribunal had held that the deduction should be made on 60% of the gross dividend. The High Court referenced the Supreme Court's decision in Cloth Traders (P.) Ltd. v. Addl. CIT, which established that the deduction under section 80M should be calculated based on the full amount of dividends received without deducting interest paid on borrowings. However, the High Court noted that the Tribunal had not fully considered whether the entire amount should be allowed under business income. Consequently, the High Court remitted the matter back to the Tribunal for a de novo consideration of this aspect and returned the third question unanswered.

Conclusion:
The High Court upheld the Tribunal's decisions on the classification of expenditure and depreciation but remitted the issue of deduction under section 80M back to the Tribunal for further consideration. The Court found the Tribunal's estimates and conclusions to be just and reasonable, providing a detailed analysis of the relevant legal principles and precedents.