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Issues Involved:
1. Allowability of payment made to the Textile Commissioner as business expenditure u/s 28 or u/s 37 of the Income-tax Act, 1961. 2. Classification of air-conditioner and electric fans as "plant or machinery" within the meaning of sections 32 and 33 of the Income-tax Act, 1961, for the purpose of depreciation and development rebate. Summary: Issue 1: Allowability of Payment as Business Expenditure The assessee-company claimed a sum of Rs. 1,03,437 paid to the Textile Commissioner as compensation for the shortfall in production of controlled variety of cloth. The Income Tax Officer (ITO) disallowed this claim, considering it a penalty for infringement of a statutory order. However, the Appellate Assistant Commissioner (AAC) allowed the claim, following the Tribunal's decision in Rustom Jehangir Vakil Mills Ltd. The Tribunal upheld this view on appeal by the Revenue. The High Court referred to its earlier decision in Addl. CIT v. Rustam Jehangir Vakil Mills Ltd. [1976] 103 ITR 298, concluding that such payments are not penalties but options available to producers and thus allowable as business expenditure u/s 37(1) of the Income-tax Act, 1961. Issue 2: Classification of Air-Conditioner and Electric Fans The assessee also claimed development rebate on air-conditioners and electric fans installed in its office premises. The ITO disallowed this claim, stating that these items were not used directly for business purposes. The AAC confirmed this view. However, the Tribunal upheld the assessee's claim, interpreting these items as "plant and machinery" under sections 32 and 33 of the Income-tax Act, 1961. The High Court examined whether these items could be considered "plant or machinery" and referred to the definition provided in CIT v. Elecon Engineering Co. Ltd. [1974] 96 ITR 672 (Guj). The court concluded that the term "plant" includes any apparatus used by a businessman for carrying on business, excluding stock-in-trade and parts of the premises. The court rejected the Revenue's contention that these items were office appliances, emphasizing that their primary function in the business context qualifies them as "plant." The court also referenced decisions in CIT v. Taj Mahal Hotel [1971] 82 ITR 44 and Sundaram Motors Pvt. Ltd. v. CIT [1969] 71 ITR 587 (Mad), supporting the inclusion of such items as "plant." Conclusion: The High Court answered both questions in favor of the assessee: 1. The payment to the Textile Commissioner is allowable as business expenditure u/s 28 or u/s 37. 2. Air-conditioners and electric fans qualify as "plant or machinery" under sections 32 and 33, entitling the assessee to depreciation and development rebate. The Commissioner was directed to pay the costs of the reference to the respondent.
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