1979 (1) TMI 249 - HC - Income Tax

Issues Involved:
1. Continuation of relief under section 80J for the assessment year 1969-70.
2. Deduction under section 80G for donations made in kind.
3. Application of section 40(a)(v) regarding expenditure on the guest house.

Detailed Analysis:

Issue 1: Continuation of Relief under Section 80J

The primary issue was whether the relief granted under section 80J for the assessment year 1968-69 should continue for the subsequent year 1969-70. The Income Tax Officer (ITO) initially disallowed this continuation, arguing that the expansion of the cement manufacturing unit did not constitute a new industrial undertaking. The Appellate Assistant Commissioner (AAC) disagreed, noting that the relief granted in the initial year had not been withdrawn and should continue for four years. The Income Tax Appellate Tribunal (ITAT) upheld the AAC's decision, emphasizing that the relief for the initial year had not been disturbed, making the ITO's attempt to withdraw it for the subsequent year unjustified. The High Court affirmed this view, stating that the ITO could not withhold or withdraw the relief without disturbing the relief granted in the initial year.

Issue 2: Deduction under Section 80G for Donations Made in Kind

The second issue concerned the deduction of Rs. 1,051 for cement bags donated to a public charitable trust. The ITO disallowed this deduction, arguing that donations must be in cash to qualify under section 80G. The AAC allowed the deduction, referencing a decision by the Bombay High Court in CIT v. Associated Cement Co. Ltd., which permitted such deductions. The ITAT and subsequently the High Court upheld this view, stating that the substance of the transaction should be considered, and the donation, although in kind, was essentially equivalent to a cash donation.

Issue 3: Application of Section 40(a)(v) Regarding Expenditure on the Guest House

The third issue was whether the expenditure of Rs. 88,701 on repairs to the guest house occupied by the Managing Director should be classified as revenue or capital expenditure. The ITO considered it capital expenditure, while the AAC allowed it as terminal allowance under section 32(1)(iii). The ITAT modified this, directing the ITO to apply section 40(a)(v) and limit the allowance to Rs. 12,000, resulting in a minimum disallowance of Rs. 76,701. The High Court referenced its earlier decision in Addl CIT v. Tarun Commercial Mills Ltd., concluding that section 40(c) should apply to directors, overriding section 40(a)(v). Therefore, the High Court answered in favor of the assessee, stating that the Tribunal's application of section 40(a)(v) was unjustified.

Conclusion:

1. Continuation of Relief under Section 80J: The High Court upheld the continuation of relief under section 80J for the assessment year 1969-70, stating that the ITO could not withdraw the relief without disturbing the initial year's relief.

2. Deduction under Section 80G for Donations Made in Kind: The High Court affirmed that donations in kind could be considered equivalent to cash donations for the purposes of section 80G, allowing the deduction of Rs. 1,051.

3. Application of Section 40(a)(v) Regarding Expenditure on the Guest House: The High Court ruled that section 40(c) should apply, not section 40(a)(v), and thus the minimum disallowance of Rs. 76,701 was unjustified.

Costs:
The Commissioner of Income Tax (CIT) was ordered to pay the costs to the assessee in both references.

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