Commissioner of Income Tax vs Avery Cycle Industries P. Ltd. (No. 2)

The following questions to law have been referred for the opinion of this Court by the Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh, arising out of its order dated July 8, 1994 in I.T.A. Nos. 1218 and 1386/Chd./1989, in respect of the assessment year 1986-87:

(i) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the expenditure of Rs. 20,642 on silver items presented to the engineers in appreciation of installation of a new unit was allowable as business expenditure ?

(ii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in allowing investment allowance on air-conditioner, water-cooler and weighing bridge?

(iii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the disallowance u/s 43B of the Act made by the Assessing Officer by holding that the liability of Rs. 74,010 was allowable if the payment was made before the due date prescribed u/s 139(1) of the Act?

The facts noticed in the order of the Tribunal are that the assessee claimed deduction of Rs. 20,642 in respect of certain silver articles purchased from M/s. Goel Jewellers and M/s. Sant Ram Mangat Ram for presentation to the engineers of Siemen Company for the installation of a new unit in the assessee''s premises. The Assessing Officer disallowed the claim of the assessee u/s 40A(3) of the Income Tax Act, 1961 (for short, "the Act") on the ground that the payments had been made in excess of Rs. 2,500. The Assessing Officer disallowed the claim towards investment allowance in respect of weighing bridge, water-cooler and air-conditioner installed in the factory premises. The Commissioner of Income Tax (Appeals), however, accepted the version of the assessee that the provisions of Section 40A(3) of the Act were not attracted. She, however, disallowed the claim of the assessee on the ground that such presentation of articles was for non-business purposes. Disallowance of investment allowance was also upheld. On further appeal, the Tribunal held that the expenditure had to be treated as business expenditure as there was no relationship between the assessee-company and the engineers of M/s. Siemen Company. The Tribunal observed that it was only as a token of regard that the engineers were presented gifts for the good work done by them for the installation of unit at the assessee''s premises. It was observed that the expenditure was to improve the relations with M/s. Siemen Company and was a business expenditure. The Tribunal, accordingly, ordered the deletion of disallowance of Rs. 20,642.

The Tribunal also upheld the claim for investment allowance on air-conditioner, water-cooler and weighing bridge, following its view taken in other cases.

We have heard learned Counsel for the parties and perused the record.

We proceed to answer the questions referred as under:

Question No. (i)

As regards question No. (i), we find that the Tribunal has recorded a finding in paragraph 17 of its order to the following effect:

After carefully considering the submissions of both the parties, we are of the opinion that the expenditure has to be treated as business expenditure because otherwise there was no relationship between the assessee-company and the engineers of M/s. Siemen Company. It was only as a token of regard that the engineers were appreciated for the good work done by them in the installation of a unit at the assessee''s premises for which the assessee gave silver articles to them. In our view, this expenditure was to improve the relations with M/s. Siemen Company and was a business expenditure. We order the deletion of disallowance of Rs. 20,642.

The above finding shows that the expenditure was to improve the relations with Siemen Company and was a business expenditure. The same was, thus, allowable as such u/s 37 of the Act. Learned Counsel for the Revenue could not point out any infirmity in the order of the Tribunal in allowing Rs. 20,642 as business expenditure. Accordingly, we answer the question against the Revenue and in favour of the assessee.

Question No. (ii)

As regards question No. (ii), the Tribunal has followed its earlier order in Indian Engineering and Commercial Corporation Pvt. Ltd. Vs. Commissioner of Income Tax, , wherein the earlier judgment of this Court in Commissioner of Income Tax Vs. S. Warriam Singh Cold Stores, was followed. This court has gone into the question in CIT v. Oswal Woollen Mills Ltd. (No. 1) [2002] 257 ITR 737:

...Thus, every new machinery installed in a business of manufacture or production of any article or thing qualifies for deduction u/s 32A unless it falls in any of the exceptions mentioned therein. A machinery or equipment can be used directly for a manufacturing process, yet for running such a machine, certain accessories may be required. Thus, it would be the entire machinery including the accessories and other equipment which can be said to have been installed for the purpose of business of manufacture of an article or thing. This view finds support from the decision of the Calcutta High Court in Commissioner of Income Tax Vs. Tribeni Tissues Ltd., , wherein it was held that all machinery and equipment that is necessary to make the assessee''s manufacturing unit in the state of operational integration pertain to its manufacturing process, because there could not be any manufacture unless this operational integration was achieved after installation of the plant and the plant goes operational. It was further held that any machinery or plant having a link, however, minor, in the total process of the operational integration should be taken as machinery or plant pertaining to the manufacturing process. It was, therefore, held that the assessee in that case was entitled to investment allowance on motors, electrical installations, underground cables, overhead cables and air conditioning equipment. On the same analogy in Tribeni Tissues Ltd. Vs. Commissioner of Income Tax, tube-well and weighing machines in a unit manufacturing paper were held to be entitled to investment allowance u/s 32A.

Accordingly, the question is answered against the Revenue and in favour of the assessee.

Question No. (iii)

We find that question No. (iii) is covered in favour of the assessee by the judgment of the hon''ble Supreme Court in Allied Motors (P.) Ltd. Vs. Commissioner of Income Tax, Delhi, , which we have also followed in the case of the assessee for the assessment year 1987-88, decided today being ITR No. 94 of 1996 Commissioner of Income Tax (Central) Vs. Avery Cycle Industries (P.) Ltd., .

Since the view taken by the Tribunal is based on judgment of this Court, we are unable to find any error therein. We, thus, decide this question in favour of the assessee and against the Revenue.

Reference is disposed of accordingly.