1981 (4) TMI 143 - AT - Income Tax

Issues Involved:
1. Disallowance of inauguration expenses.
2. Allowance of Section 80J claim regarding borrowed money and debts.
3. Allowance of Section 80J claim proportionate to the actual working period.
4. Depreciation on business promotion and training expenses capitalized before commencement of production.

Detailed Analysis:

1. Disallowance of Inauguration Expenses:
The assessee company claimed inauguration expenses of Rs. 22,863 as business expenditure under Section 37 of the IT Act, 1961. These expenses included costs for lunch, travel for guests, marble stone, taxi hire, tent rent, furniture, decoration, and invitation cards. The ITO disallowed this claim, and the CIT(A) upheld the disallowance, stating that the expenses were not incurred in the course of carrying on the business. The assessee argued that these expenses were necessary for business purposes, citing various judicial precedents. However, the Tribunal found that the cited cases were not applicable, as they involved different contexts, such as expenses for maintaining goodwill among cooperative society members or commercial expediency. The Tribunal upheld the decision of the CIT(A), referencing the Bombay High Court's ruling that inaugural expenses are not deductible under Section 37 of the Act.

2. Allowance of Section 80J Claim Regarding Borrowed Money and Debts:
The assessee claimed an 80J deduction of Rs. 6,15,478, which was reduced to Rs. 25,525 by the authorities, excluding borrowed money and debts from the capital employed. The CIT(A) relied on the Andhra Pradesh High Court's decision in Warner Hindusthan Ltd., which supported this exclusion. The Tribunal noted that Section 80J had been amended by the Finance Act, 1980, with retrospective effect from 1st April 1972, mandating the exclusion of borrowed capital from the computation. Despite the assessee's argument that the retrospective amendment was under challenge in the Supreme Court, the Tribunal held that the stay granted by the Supreme Court was personal and not applicable to other assessees. Thus, the authorities' exclusion of borrowed capital was justified.

3. Allowance of Section 80J Claim Proportionate to the Actual Working Period:
The assessee's industrial undertaking operated for only 1 1/2 months during the relevant assessment year, and the ITO allowed a proportionate deduction under Section 80J. The CIT(A) upheld this, interpreting Section 80J(1) to mean that deductions should be proportional to the period of operation. The assessee contested this, citing the Madras High Court's decision in Simpson and Co., which interpreted "per annum" to ensure a full year's deduction regardless of the actual operating period. The Tribunal agreed with the assessee, finding no contrary authority, and directed the ITO to recompute the relief for the entire year.

4. Depreciation on Business Promotion and Training Expenses Capitalized Before Commencement of Production:
The assessee sought depreciation on capitalized expenses of Rs. 6,778 for business promotion and Rs. 43,831 for training incurred before production commenced. The ITO and CIT(A) disallowed this, referencing the Supreme Court's decision in Sitalpur Sugar Works Ltd., which stated that depreciation is allowable only on capital expenditure resulting in a tangible asset or improvement. The assessee argued that the training was essential for machinery installation, providing evidence of training programs. However, the Tribunal found that the training was for operational purposes, not installation, and upheld the authorities' disallowance of capitalization for depreciation purposes.

Conclusion:
The appeal was partly allowed, with the Tribunal directing the recomputation of the Section 80J relief for the entire year while maintaining the disallowance of inauguration expenses and depreciation on pre-production expenses.

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