1985 (11) TMI 45 - HC - Income Tax

Being In S. 35D(2)(c)(iv) Amortisation Business Expenditure Entertainment Expenditure New Industrial Undertaking Preliminary Expenses

Summary

Issues Involved:
1. Allowability of expenditure on meals, tea, coffee, and light refreshments under Section 37(2B) of the Income-tax Act, 1961.
2. Deletion of disallowance of Rs. 6,03,410 out of the expenditure of Rs. 14,35,224 claimed under Section 35D(1) of the Income-tax Act, 1961.
3. Inclusion of borrowed capital for relief under Section 80J of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Allowability of Expenditure on Meals, Tea, Coffee, and Light Refreshments:
The Tribunal held that the expenditure incurred by the assessee on serving meals, tea, coffee, and light refreshments to its trade clients was an allowable business expenditure and not hit by the provisions of Section 37(2B) of the Income-tax Act, 1961. The Income-tax Officer initially disallowed 50% of the total expenditure by treating it as entertainment under Section 37(2B). The Appellate Assistant Commissioner upheld this disallowance. However, the Tribunal, upon reviewing the expenses, found that many were legitimate business expenses and restricted the disallowance to Rs. 10,000. The High Court agreed with the Tribunal's decision, citing precedents that treated such expenses as business expenditure and not entertainment expenditure.

2. Deletion of Disallowance of Rs. 6,03,410 under Section 35D(1):
The assessee claimed a total expenditure of Rs. 14,35,224 on the issue of its shares, which included various expenses such as underwriting commission, brokerage, and advertisement costs. The Income-tax Officer allowed certain expenses but disallowed Rs. 6,03,410, which he found were not covered under Section 35D(2)(c)(iv). The Appellate Assistant Commissioner upheld this disallowance. The Tribunal, however, concluded that the word "being" in Section 35D(2)(c)(iv) was illustrative and not restrictive, thus allowing the deduction of the disallowed amount. The High Court supported the Tribunal's interpretation, stating that the word "being" should be read in a broader context to include all expenses incurred in connection with the issue of shares, including the refund of oversubscription amounts.

3. Inclusion of Borrowed Capital for Relief under Section 80J:
The Tribunal held that borrowed capital should be taken into account to arrive at the capital employed in the industrial undertaking for the purpose of relief under Section 80J. However, the High Court, referencing the Supreme Court decision in Lohia Machines Ltd. v. Union of India, decided this question in favor of the Department and against the assessee, ruling that borrowed capital should not be included.

Conclusion:
The High Court answered questions Nos. (1) and (2) in favor of the assessee, validating the Tribunal's decisions on the allowability of business expenditure on refreshments and the interpretation of Section 35D(2)(c)(iv). Question No. (3) was answered in favor of the Department, excluding borrowed capital from the computation of capital employed under Section 80J. The reference was answered accordingly with no order as to costs.