1989 (9) TMI 183 - AT - Income Tax

Allowable Expenditure, Assessment Year, Business Expenditure, Carrying On Business, Change In Constitution Of Firm, Cinema Theatre, Dissolution Of Firm, Entertainment Tax, Firm Consisting, In Part, Let Out, Mercantile System, Partnership Deed, Written Down Value

Summary

Issues Involved:
1. Depreciation on revalued assets.
2. Legal expenses.
3. Entertainment tax.
4. Corporation tax arrears and legal charges.

Detailed Analysis:

1. Depreciation on Revalued Assets:
The primary issue in both assessment years was the depreciation claimed on the revalued assets of the firm. The firm had revalued its assets before admitting three new partners and claimed depreciation on the enhanced value. The Income-tax Officer disallowed this claim, allowing depreciation only on the original written-down value. The Appellate Assistant Commissioner upheld this decision, leading to the appeal before the Tribunal. The Tribunal found that the revaluation of assets was done prior to the admission of new partners and that the firm continued as the same taxable entity. The Tribunal held that no event occurred that justified the revaluation of assets, and thus, depreciation should be allowed only on the original written-down value, not the revalued value.

2. Legal Expenses:
For the assessment year 1981-82, the assessee claimed legal expenses of Rs. 2,000, which were disallowed by the Income-tax Officer and upheld by the Appellate Assistant Commissioner on the ground that they were capital expenditures. The Tribunal confirmed this disallowance, noting that the legal expenses were incurred for fighting a penalty case for infraction of law, which cannot be allowed as ordinary business expenditure.

3. Entertainment Tax:
For the assessment year 1982-83, the assessee claimed an amount of Rs. 1,05,904 towards entertainment tax arrears. The Income-tax Officer disallowed this claim, stating that the expenditure was capital in nature and related to the business of the lessee, not the assessee-firm. The Appellate Assistant Commissioner upheld this disallowance, noting that the arrears did not pertain to the relevant previous year but to earlier years when the business was run by the lessee. The Tribunal agreed with this view, stating that the expenditure was not incurred wholly and exclusively for the business of the assessee and that it related to a period when the lessee was running the business.

4. Corporation Tax Arrears and Legal Charges:
For the assessment year 1982-83, the assessee claimed Rs. 7,096 towards corporation tax arrears and legal charges, which were disallowed by the Income-tax Officer and upheld by the Appellate Assistant Commissioner on the ground that they related to periods prior to the relevant previous year. The Tribunal directed the Income-tax Officer to verify the date of the demand notice for the corporation tax and allow the deduction if it fell within the relevant accounting year. The legal charges were also to be verified and allowed if applicable.

Conclusion:
The Tribunal dismissed the appeal for the assessment year 1981-82, confirming the disallowance of depreciation on revalued assets and legal expenses. For the assessment year 1982-83, the Tribunal partially allowed the appeal for statistical purposes, directing the Income-tax Officer to verify and allow the corporation tax arrears and legal charges if applicable. The disallowance of depreciation on revalued assets and entertainment tax was upheld.