1994 (2) TMI 45 - HC - Income Tax

Borrowed Capital, Business Expenditure, Computation Of Capital, Entertainment Expenditure, Income Tax Act, New Industrial Undertaking, Special Deduction, Travel Expenditure, Written Down Value

Issues Involved:
1. Computation of capital employed for the purpose of Section 80J.
2. Deduction of entertainment expenditure.
3. Inclusion of borrowed money in capital employed for Section 80J.
4. Computation of average capital for Section 80J.
5. Allowability of foreign tour expenses.

Detailed Analysis:

1. Computation of Capital Employed for Section 80J:

The questions referred by the assessee pertain to whether debts owed should be deducted and whether the written down value of assets should be taken instead of the original cost when computing the capital employed for a new industrial undertaking under Section 80J. The Supreme Court's decision in Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308, which upheld the validity of Rule 19A of the Income-tax Rules, 1962, was cited. Consequently, these questions were answered in favor of the Revenue, indicating that both the debts owed and the written down value of assets should be considered as per Rule 19A.

2. Deduction of Entertainment Expenditure:

The Tribunal found that the expenditure of Rs. 3,44,316 incurred during the inaugural function of the assessee's fertilizer plant was wholly and exclusively for business purposes and not in the nature of entertainment expenditure. The Revenue argued that the expression "in the nature of entertainment" in Section 37(2B) of the Act includes any expenditure with an element of hospitality, supported by various High Court decisions. However, the assessee contended, supported by Delhi High Court and Calcutta High Court decisions, that the expenditure was not entertainment expenditure.

The court noted that Section 37(2B) disallows entertainment expenditure incurred in India after February 28, 1970. The court agreed with the Gujarat High Court's view in CIT v. Patel Brothers and Co. Ltd. [1977] 106 ITR 424, which distinguished between hospitality and entertainment, concluding that not all hospitality constitutes entertainment. The court held that the expenditure was necessary for the function's success and was not lavish or wasteful. Thus, the Tribunal's decision to allow the expenditure as revenue expenditure was upheld, except for a minor portion related to alcoholic drinks and a dance show, which was deemed entertainment but too minor to overturn the Tribunal's decision.

3. Inclusion of Borrowed Money in Capital Employed for Section 80J:

The Tribunal's decision to include borrowed money as part of the capital employed for computing deductions under Section 80J was challenged by the Revenue. In light of the Supreme Court's decision in Lohia Machines Ltd., which validated Rule 19A, the court answered this question in favor of the Revenue, indicating that borrowed money should not be included.

4. Computation of Average Capital for Section 80J:

The Tribunal directed that the average capital for Section 80J should be computed based on the Calcutta High Court's decision in Century Enka Ltd. v. ITO [1977] 107 ITR 123 (Cal). However, in view of the Supreme Court's ruling in Lohia Machines Ltd., the court answered this question in favor of the Revenue, implying that the computation should follow Rule 19A.

5. Allowability of Foreign Tour Expenses:

The Tribunal held that the expenditure of Rs. 92,777 incurred on the foreign tour of Dr. Bharat Ram was allowable. The Revenue conceded that, based on the Delhi High Court's decision in Delhi Cloth and General Mills Co. Ltd. v. CIT [1986] 158 ITR 64, such expenses for attending a business conference by an employee are deductible as business expenditure. Thus, this question was answered in favor of the assessee.

Conclusion:

The court upheld the Tribunal's decisions favoring the assessee on the deductibility of the inaugural function expenditure and foreign tour expenses. However, it ruled in favor of the Revenue regarding the computation of capital employed for Section 80J, aligning with the Supreme Court's decision in Lohia Machines Ltd.

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