1983 (12) TMI 112 - AT - Income Tax

Summary

Issues Involved:

1. Allowance of business promotion expenses.
2. Eligibility for deduction under section 80J of the Income-tax Act, 1961.

Detailed Analysis:

1. Allowance of Business Promotion Expenses:

The first issue concerns the allowance of business promotion expenses for the assessment years 1976-77 to 1980-81, with amounts involved being Rs. 3,280, Rs. 534, Rs. 3,127, Rs. 10,480, and Rs. 7,858, respectively. The Income Tax Officer (ITO) had disallowed these amounts on the grounds that they included sums spent on club subscriptions and entertainment expenditure for guests, including tea, coffee, and biscuits. The Commissioner (Appeals) had verified the particulars and found the expenditure to be in line with ordinary hospitality, guided by custom and business expediency, and thus allowed the expenses based on the Andhra Pradesh High Court decision in Addl. CIT v. Maddi Venkataratnam & Co. Ltd. [1979] 119 ITR 514.

However, with the insertion of Explanation 2 to proviso (b) under section 37(2A) of the Income-tax Act by the Finance Act, 1983, with retrospective effect from 1-4-1976, the term 'entertainment expenditure' was clarified to include hospitality of every kind provided by the assessee to any person, excluding food or beverages provided to employees in office, factory, or place of work. This retrospective clarification invalidated the basis of the Commissioner (Appeals)'s decision, as the Andhra Pradesh High Court's decision could no longer be held as good law from 1-4-1976. Consequently, the Tribunal held that the impugned order of the Commissioner (Appeals) for the assessment years 1977-78 to 1980-81 was not correct under law and should be set aside. The matters were remanded back to the ITO to bifurcate the expenses into those incurred on food and beverages provided to employees and others, allowing only the former category.

2. Eligibility for Deduction under Section 80J:

The second issue raised by the revenue was the eligibility of the assessee-company for deduction under section 80J of the Income-tax Act, 1961, for the assessment years 1976-77 to 1979-80. The ITO had rejected the relief under section 80J on the grounds that the assessee was not manufacturing or producing any article, as it was only processing tobacco and not producing cigarettes or cigars. The Commissioner (Appeals) found this view incorrect, referencing the third proviso to sub-section (4) of section 80J introduced by the Finance Act, 1979, which included tobacco manufacturing within the scope of eligible industrial undertakings, provided the manufacture commenced before 31-3-1979. The Commissioner (Appeals) held that in the context of tobacco, 'manufacture' included 'processing,' following the Allahabad High Court decision in Tarai Development Corpn. v. CIT [1979] 120 ITR 342.

The revenue argued that the processes undertaken by the assessee, such as drying, redrying, and stripping, did not constitute manufacturing, citing Supreme Court decisions in Dy. CST v. Pio Food Packers AIR 1980 SC 1227 and Chowgule & Co. (P.) Ltd. v. Union of India AIR 1981 SC 1014. These decisions emphasized that for a process to be considered manufacturing, the end product must be commercially distinct from the original commodity.

The assessee countered that the end product, redried tobacco, was commercially different from the flue-cured tobacco purchased, fulfilling the test laid down by the Supreme Court. The Tribunal agreed with the assessee, referencing a similar case decided by the Madras Bench of the Tribunal and a Supreme Court decision under the Factories Act, 1948, which recognized the processes undertaken by the assessee as manufacturing.

The Tribunal upheld the Commissioner (Appeals)'s finding that the assessee was a new industrial undertaking entitled to relief under section 80J. However, the quantification of the relief was remanded back to the ITO, pending the Supreme Court's decision on the retrospective amendment to section 80J, which would determine whether debts and liabilities should be included in the capital base.

Conclusion:

The appeals filed by the revenue were deemed to be partly allowed. The matters concerning business promotion expenses were remanded back to the ITO for bifurcation, and the quantification of the relief under section 80J was also remanded, pending the Supreme Court's decision.