1993 (4) TMI 103 - AT - Income Tax

Summary

Issues Involved:
1. Eligibility for investment allowance on plant and machinery used for job work.
2. Treatment of State Investment Subsidy in the computation of depreciation.
3. Disallowance of expenditure on tea, snacks, etc., as entertainment expenditure.
4. Disallowance of expenditure on project report preparation by KITCO.

Detailed Analysis:

1. Eligibility for Investment Allowance on Plant and Machinery Used for Job Work:
The assessee, a closely held company engaged in tea broking and rubber masticating, claimed investment allowance on the cost of plant and machinery installed in the rubber mixing mill. The ITO disallowed the claim, arguing that the assessee was only performing job work and not engaged in the production or manufacture of any article or thing. The CIT(A) reversed this decision, citing several judicial precedents that supported the eligibility for investment allowance even if the assessee was engaged in job work. The CIT(A) further held that the assessee was producing a commercially different product, masticated rubber, and had complied with the provisions of Section 32A of the IT Act. The Tribunal upheld the CIT(A)'s decision, stating that masticated rubber is a commercially different product from natural rubber and that investment allowance is allowable whether the assessee is engaged in manufacture or production.

2. Treatment of State Investment Subsidy in the Computation of Depreciation:
The assessee received a State Investment Subsidy from the Government of Kerala. The ITO reduced the cost of assets by the sanctioned subsidy amount for computing depreciation. The CIT(A) agreed with the reduction but corrected the amount to the actual subsidy received. The Tribunal, however, found that the State Investment Subsidy scheme was intended to promote industrial growth and was similar to the Central Subsidy Scheme. Therefore, the subsidy should not reduce the cost of assets for depreciation purposes. The Tribunal set aside the CIT(A)'s order on this issue.

3. Disallowance of Expenditure on Tea, Snacks, etc., as Entertainment Expenditure:
The assessee incurred expenses on serving tea, snacks, etc., to employees and bidders in the auction hall. The ITO disallowed these expenses as entertainment expenditure. The Tribunal held that 25% of the expenditure could be considered as spent on staff in connection with auction bidding and the rest as entertainment expenditure. The Tribunal directed that the entertainment expenditure be regulated under Section 37(2) of the IT Act.

4. Disallowance of Expenditure on Project Report Preparation by KITCO:
The assessee claimed Rs. 17,000 as expenditure for a project report prepared by KITCO. The CIT(A) disallowed the claim, stating that KITCO was not an approved institution by the CBDT and that the assessee failed to produce evidence to the contrary. The Tribunal upheld the CIT(A)'s decision, noting that the assessee did not provide materials to show KITCO's approval or that the project report resulted in the creation of an asset.

Conclusion:
The appeals of the Revenue were dismissed, and the appeals of the assessee were partly allowed. The Tribunal upheld the CIT(A)'s decision on investment allowance and State Investment Subsidy but provided partial relief on the disallowance of tea and snacks expenditure. The disallowance of the project report preparation expenditure was confirmed.