1995 (11) TMI 124 - AT - Income Tax

Business Expenditure Business Income Deductions In Respect Depreciation On Building Export Business Lease Rent Plant And Machinery

Issues Involved:
1. Disallowance of depreciation on buildings and plant and machineries.
2. Deduction of lease rent for plant and machineries.
3. Disallowance of expenditure on presentation articles as entertainment expenditure.
4. Disallowance of a portion of entertainment expenditure and club membership fees.
5. Deduction under section 80HHC.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on Buildings and Plant and Machineries:

The assessee claimed depreciation on buildings and plant and machineries installed in Marine Container Division No. II (MCD-II). The Assessing Officer disallowed the depreciation, stating that the assets were not used during the year as the actual production started after the year-end. The CIT(A) upheld this decision, citing the lack of evidence of usage. The Tribunal confirmed that for claiming depreciation under section 32, the assets must be used for business purposes. The assessee failed to provide direct evidence of usage, such as electricity bills or production registers. Consequently, the Tribunal upheld the disallowance of depreciation on plant and machineries but allowed depreciation on the building, as the installation of machinery indicated its use for business purposes.

2. Deduction of Lease Rent for Plant and Machineries:

The assessee claimed a deduction for lease rent paid on plant and machineries taken on lease for MCD-II. The CIT(A) disallowed the claim, invoking section 30, which pertains to rent and taxes for buildings. The Tribunal held that section 30 was not applicable and that the claim should be considered under section 37, which does not require actual use of the assets. Since the lease rent was incurred for business purposes, the Tribunal allowed the deduction.

3. Disallowance of Expenditure on Presentation Articles as Entertainment Expenditure:

The assessee's claim for expenditure on presentation articles was disallowed by the CIT(A), who treated it as entertainment expenditure. The Tribunal noted that the list of items included costly gifts and that the assessee failed to provide the names of recipients. The matter was remanded to the Assessing Officer to re-examine the issue and allow the assessee to provide necessary evidence.

4. Disallowance of a Portion of Entertainment Expenditure and Club Membership Fees:

The CIT(A) disallowed a portion of the entertainment expenditure, which the assessee claimed was attributable to employees. The Tribunal upheld this disallowance, noting that the assessee had already claimed 20% of such expenses for employees. Regarding club membership fees, the Tribunal allowed the deduction, following the Bombay High Court's decision in Otis Elevator Co. (India) Ltd., which held that such fees are allowable business expenditures.

5. Deduction under Section 80HHC:

The assessee claimed a deduction under section 80HHC, excluding indenting commission and sale of packing material from the total turnover. The Assessing Officer included these amounts, and the CIT(A) upheld this inclusion. The Tribunal held that commission income not related to exports should not be included in the total turnover or profits for computing the deduction. However, the sale of packing material was rightly included in the total turnover, following the Tribunal's decision in International Research Park Laboratories Ltd.

Conclusion:

The Tribunal partly allowed the appeal, granting depreciation on the building, allowing the lease rent deduction, remanding the issue of presentation articles, upholding the disallowance of a portion of entertainment expenditure, allowing club membership fees, and directing the recomputation of the deduction under section 80HHC by excluding indenting commission from the total turnover.

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