1989 (12) TMI 105 - AT - Income Tax

Assessment Year, Business Expenditure, Entertainment Expenditure, Expenditure Incurred, Investment Allowance

Issues Involved:
1. Disallowance of investment allowance on new machinery.
2. Disallowance of expenses under section 37(2A).
3. Non-disposal of additional ground of appeal regarding disallowance under section 40A(3).

Issue-wise Detailed Analysis:

1. Disallowance of Investment Allowance on New Machinery:

The appeal disputes the disallowance of the assessee's claim for an investment allowance of Rs. 79,069 on new machinery purchased and installed during the assessment year 1982-83. The ITO disallowed the claim because the assessee did not create any reserve during the year as required under section 32A(4)(ii) of the Income-tax Act. The CIT(A) upheld the disallowance, stating that computers do not produce or manufacture any article and are installed in office premises, making them ineligible for the allowance under section 32A(1)(a).

The assessee contended that the computers were used for the business of manufacturing or producing articles or things, relying on decisions from the Bangalore and Bombay Benches of the Tribunal. It was also argued that the computers were installed in a separate room, not part of the office premises, and that the reserve was not required to be created in the year of loss but in the year when there is profit, supported by CBDT Circulars No. 202 and No. 305.

The Tribunal noted that the provisions governing the grant of investment allowance are in pari materia with those for development rebate under section 33 read with section 34(3)(a). It was held that investment allowance cannot be allowed unless a reserve is created in the year of installation or first use, as per the Supreme Court's decision in Shri Shubhlaxmi Mills Ltd. However, the CBDT Circulars, which are binding on Income-tax authorities, provided that the reserve should be created in the year when there is income. Hence, the assessee's claim for investment allowance should not be disallowed on the ground of non-creation of reserve during the year.

The Tribunal also held that the assessee is engaged in the business of production of an article or thing, and the computers are used for that purpose, thus eligible for investment allowance. The issue of whether the air conditioner is installed in the office or the room with computers was remanded to the ITO for verification.

2. Disallowance of Expenses under Section 37(2A):

The assessee disputed the disallowance of Rs. 9,175 under section 37(2A), where the ITO allowed only Rs. 5,000 out of Rs. 14,175 claimed as business promotion expenses, treating the balance as entertainment expenses. The CIT(A) upheld this disallowance.

The assessee argued that part of the expenditure was incurred on providing food and refreshments to the staff and should be allowable. The Tribunal, after reviewing the details, concluded that 50% of the expenses should be allowed as they were incurred on providing food and refreshments to employees, reducing the disallowance to Rs. 7,088.

3. Non-disposal of Additional Ground of Appeal Regarding Disallowance under Section 40A(3):

The assessee raised an additional ground of appeal regarding the disallowance of Rs. 9,125 under section 40A(3) before the CIT(A), which was not considered in the impugned order. The Tribunal directed the CIT(A) to verify if the additional ground was filed and, if so, to consider its admissibility and dispose of the issue in accordance with law after giving an opportunity of hearing to the parties.

Conclusion:

The appeal was partly allowed. The assessee is entitled to investment allowance on computers, subject to the creation of a reserve in the year of income. The issue of the air conditioner's installation location was remanded to the ITO. The disallowance under section 37(2A) was reduced, and the CIT(A) was directed to consider the additional ground regarding section 40A(3).

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