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Tax law

Depreciation and Entertainment Expenditure: Rajasthan High Court's Ruling in Anjani Kumar & Co. (Pvt) Ltd. v. Commissioner of Income-Tax

Strategic Insights

— 2 min read

The Rajasthan High Court has ruled that the conversion of grey cloth into finished calendered cloth does not constitute manufacturing under the Income Tax Act, 1961, and therefore, an assessee is not entitled to initial depreciation under section 32(1)(vi). The court also held that the provision of tea and coffee to factory workers in the factory does not amount to entertainment expenditure, as per Explanation 2 to subsection (2-A) of section 37 of the Act.

Key Takeaways:

  • The Rajasthan High Court ruled that the conversion of grey cloth into finished calendered cloth does not amount to manufacturing under the Income Tax Act, 1961.
  • The court held that the benefit under section 32(1)(vi) of the Income Tax Act, 1961, can only be claimed if the assessee is engaged in the manufacturing of one of the articles included in Schedule IX of the Act.
  • The court found that the textile was already manufactured and purchased as such, and simply by dyeing, printing, or calendering, it cannot be said that the textile has been manufactured from scratch.
  • The court also ruled that the provision of tea and coffee to factory workers in the factory does not amount to entertainment expenditure, as per Explanation 2 to subsection (2-A) of section 37 of the Act.
  • The court relied on the Supreme Court's ruling in Empire Industries Ltd. v. Union of India (1986) 162 ITR 846 (SC) to support its decision.
  • The court also noted that the assessee has consumed stores worth Rs.46.7 lakhs, incurred wage bills of Rs.2.22 lakhs, and consumed electricity worth Rs.1.83 lakhs in converting the grey cloth to calendered cloth, but that these expenses do not constitute manufacturing.

Statistics:

  • Rs.7,140: The amount of expenditure on providing tea and coffee to factory workers in the factory.
  • Rs.46.7 lakhs: The amount of stores consumed by the assessee in converting the grey cloth to calendered cloth.
  • Rs.2.22 lakhs: The amount of wage bills incurred by the assessee in converting the grey cloth to calendered cloth.
  • Rs.1.83 lakhs: The amount of electricity consumed by the assessee in converting the grey cloth to calendered cloth.
  • April 1, 1976: The date from which Explanation 2 was added to subsection (2-A) of section 37 of the Act.

Sources:

  • (1999) P T D 2503 [227 I T R 786] - Rajasthan High Court
  • (1986) 162 ITR 846 (SC) - Supreme Court of India (Empire Industries Ltd. v. Union of India)

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