2006 (9) TMI 88 - HC - Income Tax

Deduction - Question arises (i) whether assessee is entitle for deduction if rent paid to PSIDC for its guest house (ii) Whether assessee was entitle to deduct the pro-rata liability and to include work in progress in the capital employed for purpose of deduction u/s 80J of the Act - Held (i) no (ii) yes

Summary

Issues:
1. Interpretation of Section 37(4) of the Income Tax Act regarding disallowance of rent paid for a guest house.
2. Computation of capital employed for deduction under Section 80J of the Act, specifically regarding liabilities on a pro rata basis.

Issue 1:
The first issue involved the interpretation of Section 37(4) of the Income Tax Act, 1961, regarding the disallowance of rent paid for a guest house. The assessee claimed a sum of Rs.7200 as rent paid to PSIDC for their guest house, which the Assessing Officer disallowed under Section 37(4). The Commissioner of Income-tax (Appeals) accepted the assessee's contention, a view upheld by the Tribunal. However, the High Court referred to the judgment in Britannia Industries Limited v. CIT [2005] 278 ITR 546, where it was held that the legislative intention was clear to exclude expenses towards rents for guest houses. The Court interpreted the statute's language literally and ruled against the assessee, citing the need to avoid a meaning that would contradict the statute's provisions. Despite this ruling, the Court decided not to give effect to its order due to the small amount involved, following the precedent set in CIT v. Smt. Aruna Luthra, [2001] 252 ITR 76.

Issue 2:
The second issue pertained to the computation of capital employed for deduction under Section 80J of the Act, specifically focusing on liabilities on a pro rata basis. The assessee claimed relief under Section 80J for the tractor division, which was initially negatived by the Assessing Officer. The dispute centered on the inclusion of pro rata liability and work-in-progress in computing the capital employed. The Commissioner of Income-tax (Appeals) allowed the deduction, citing the judgment in CIT, v. Dalmia Dadri Cement Limited, [1970] 77 ITR 410. The Court examined the interpretation of Rule 19A for computing capital employed in an industrial undertaking, referencing the Bombay High Court's decision in Indian Oil Corporation v. S. Rajagopalan, ITO [1973] 92 ITR 241. Following this precedent and Circular No.380 dated April 10, 1984, the Court ruled in favor of the assessee, emphasizing that liabilities in respect of a new industrial unit should be deducted only from the assets of that specific unit for computing capital employed. This interpretation aligned with the legislative intent and the provisions of Section 80J(1A), leading to a judgment against the revenue in this aspect.