Commissioner of Income Tax vs Aurofood Pvt. Ltd.

Ratnam, J.—At the instance of the Revenue, u/s 256(1) of the Income Tax act, 1961 (hereinafter referred to as ""the Act""), the following two

questions of law have been referred to this court for its opinion :

(1) Whether, on the facts and in the circumstances of the case, it has been rightly held that a sum of Rs. 24,250 paid by the assessee-company to

the Registrar of Companies, Rs. 120 paid towards filing fees and Rs. 14.40 towards stamp papers, should not be termed as capital in nature and

that they should be allowed as revenue expenditure ?

(2) Whether, on the facts and in the circumstances of the case, it has been rightly held that the assessee would be entitled to the claim u/s 80J for

the assessment year, even though the factory commenced production only in the middle of the accounting ?

The assessee is a private limited company. In the course of the assessment proceedings for the assessment year 1973-74 (accounting period

ending December 31, 1972), the assessee claimed that an expenditure of Rs. 24,384 should be allowed as revenue expenditure falling u/s 37(1) of

the Act, though such expenses were incurred for increasing the authorised share capital of the company. Further, the assessee also put forward a

claim for deduction u/s 80J of the Act in respect of a biscuit plant in which machinery of the value of Rs.4,03,601 was installed during the year

1972. The claims so made by the assessee were rejected by the Income Tax Officer, on the ground that the expenditure of Rs. 24,384 had been

incurred for improving the capital and so, the expenditure would be capital expenditure and not revenue and that, as even according to the

statement of the assessee, the biscuit plant was installed during the year, the plant was not in operation on the first day of the computation period,

vi., January 1, 1972, and, as such, the claim for deduction u/s 80J of the Act was not in order. On appeal by the assessee before the Appellate

Assistant Commissioner, he took the view that the expenses had been incurred by the assessee in the amendment of the memorandum and articles

for the purpose of increasing the authorised capital of the assessee-company, and that too was in fulfillment of a statutory requirement for the

purpose of carrying on the business of the assessee and the expenditure incurred could be regarded as for carrying on the business and would,

thus, be revenue expenditure. However, the Appellate Assistant Commissioner concurred with the view that as the biscuit plant was installed only

during the year 1972, there was no question of allowing the deduction u/s 80J with effect from January 1, 1972, which was the first day of the

computation period and, therefore, the claim for deduction, as made by the assessee, u/s 80J of the Act, read with rule 19A of the Income Tax

Rules, 1962, was not quite in order. Eventually. The appeal was allowed partially. On further appeals by the Revenue as well as the assessee

before the Tribunal, it held that the expenditure of Rs. 24,384 incurred by the assessee cannot be considered as capital, but one incurred in

connection with, and incidental to, the carrying on of the business of the company and the expenditure was rightly treated to be not of a capital

nature. Adverting to the claim made by the assessee u/s 80J of the Act in its appeal, the Tribunal proceeded to hold that merely because the

duration of the period between the commencement of the production and the ending of the accounting year, is not a full year, that would not justify

the denial of the relief u/s 80J to the assessee, as the assessee would be entitled to the relief so long as the assessee had earned profits from the

new industrial undertaking and the assessee should not lose the benefit of such relief for the first of the five years of assessment for which it would

be entitled to such a relief, in the view so taken, the Tribunal dismissed the appeal preferred by the Department and allowed the assessee''s appeal.

That has given rise to the two question of law set out earlier.

The assessee had incurred an expenditure of Rs. 24,384 for the purpose of securing an amendment of the memorandum of articles with a view

to increase the authorise capital of the assessee. The Income Tax Officer disallowed the expenditure on the ground that it had been incurred for

improving the capital and, therefore, the expenditure is of capital nature and not revenue expenditure. On the other hand, the Appellate Assistant

Commissioner found that the expenditure was incurred by the assessee for the purpose of its business and the carrying on of the business and,

therefore, the expenditure would partake of the character of the revenue expenditure and allowable u/s 37(1) of the Act and this view was also

affirmed by the Tribunal. We are of the view that the Tribunal was right in the view it took. That the assessee had incurred the expenditure for the

purposes mentioned by it had not been disputed. It may be that the expenditure incurred by the assessee ultimately resulted in the securing of a

alteration of the memorandum of articles by the assessee leading to an increase in the capital of the assessee-company, but the expenditure

incurred in that manner cannot be considered as capital expenditure, or, as the Income Tax Officer treated it. As an expenditure for increasing

capital, which would be capital expenditure. According to the provisions of the Companies Act, the various particulars have to be furnished and

notices issued and fees paid under several heads and if as an entity under the Companies Act, various particulars have to be furnished and notices

issued and fees paid under several heads and if as an entity under the Companies Act, the assessee had wanted to carry on business, it had

necessarily to comply with the provisions of the Companies Act, as otherwise, it would have exposed itself to penalties as well. The expenditure

incurred cannot also be regarded as capital expenditure, as the incurring of such expenditure cannot be stated to have given any enduring benefit to

the company. When it is resolved that there should be an increase in capital, it may, in, sense, justifiably be said that the capital of the company got

increased, but the incurring of the expenditure for amending the memorandum or articles and also for implying with the other formalities under the

Companies Act, has to be regarded as having been incurred in the fulfillment of the statutory formalities incidental to the carrying on of the business

of the assessee as a company. We may also, in this connection, make a brief reference to Commissioner of Income Tax Vs. Kisenchand

Chellaram (India) P. Ltd., . In that case, the assessee incurred an expenditure of Rs. 2,350 towards fee, etc., for increasing the capital of the

company and claimed it as a deduction u/s 37(1) of the Act. Without any reason, that claim of the assessee was negatived by the Income Tax

Officer, though on appeal, the Appellate Assistant Commissioner held that the expenditure could not be stated to have been incurred wholly and

exclusively for purposes of the business. The Tribunal, however, took the view that the expenditure was not in the nature of capital expenditure,

since it had not resulted in any advantage of enduring benefit and as the amount was wholly and exclusively used for purposes of the business, the

expenditure deserved to be allowed as a deduction u/s 37(1) of the Act. In upholding the correctness of the conclusion so arrived at by the

Tribunal, it was pointed out by this court that, without capital, a company could not have carried on the business and, therefore, the expenses

incurred to increase the capital of the company are inextricably bound up with the functioning and financing of the business and further that it is in

the nature and character of expenditure that determines its allowability. It was also pointed out that the fact that the expenditure contributed to the

increase in capital should not make any difference to its allowability, and the amounts having been spent for purposes of the business, there was no

capital element and the deduction was rightly granted by the Tribunal, we are of the view that the aforesaid principle would be applicable in this

case also. We have therefore, no hesitation in answering the first question referred to us in the affirmative and against the Revenue.

We now proceed to a consideration of the second question referred to us. Even according to the assessee, on the first day of the first day of the

computation period, viz., January 1, 1972, ascertained in accordance with rule 19A(2) of the Rules under the Income Tax Rules, the biscuit plant

was not installed, but was installed only during the year 1972. In other words, the biscuit plant installed by the assessee was not operational for the

whole period of one year; but only for a portion of it. The question is whether this would justify the denial of the relief of deduction u/s 80J of the

Act asked for by the assessee. We are of the view that the assessee would be entitled to the relief u/s 80J of the Act even though the biscuit plant,

as such, was installed during the year 1972, and had been operational only for a part of the year and not for the whole of it. We find that almost all

the courts have taken a view in favour of the assessee. We would like to make a detailed reference to only two of such cases for reasons which

will be apparent later. Commissioner of Income Tax, Tamil Nadu-I Vs. Simpson and Company, dealt with the scope of the relief given u/s 84 of

the Act to newly established undertakings which provided that Income Tax shall not be payable by an assessee on so much of the profits or gains

derived from any industrial undertaking or business of a hotel or from any ship, to which this section applied, as does not exceed six per cent. per

annum on the capital employed in such undertaking or business or ship, computed in the prescribed manner. The computation of capital even for

purposes of section 84 of the Act was governed by rule 19 of the Income Tax Rules. The controversy that arose was whether the six per cent. per

annum on the capital employed in such undertaking or business or ship, computed in the prescribed manner. The computation of business or ship,

computed in the prescribed manner. The computation of capital even for purposes of section 84 of the Act was governed by rule 19 of the Income

Tax Rules. The controversy that arose was whether the six percent, per annum incentive by way of tax relief for a period of five years should be on

the capital as computed or should be computed as restricted to the period, during which the business was carried on during the relevant year.

Referring to the practice of administration of an earlier similar provision in section 15C of the Indian Income Tax Act, 1922, and the rules of

interpretation is fiscal statutes, particularly of those conferring an exemption or relief. It was pointed out that the words ""per annum"" had been used

only with a view to ensure that the assessee got relief for each of the five years, during which the relief u/s 84 of the Act is available, the said six per

cent on the capital employed, and those words could not be understood as contrasted with any broken period. In that view, the claim of the

assessee in that case who actually utilised the machinery only for a period of nine months was countenanced at the rate of six per cent. on the

capital as computed under rule 19 of the Income Tax Rules. The principle of the aforesaid decision was applied to a case arising u/s 80J of the Act

in Commissioner of Income Tax, Karnataka-II Vs. Mysore Petro-chemical Ltd., . The assessee, in that case, claimed relief u/s 80J of the Act for

the assessment year 1977-78, though the assessee started production only on May 16, 1976, and the accounting period ended on June 30, 1976.

Prorata relief for a month and a half was made available to the assessee by the Income Tax Officer. However, the Commissioner and the tribunal

took the view that the assessee was entitled to the full deduction and on a departmental reference, the order of the Tribunal was affirmed. While

holding so, the Karnataka High Court referred to CIT v. simpson and Co. (1988) 122 ITR 283 and the fact that special leave petitions to appeal

against that decision had been refused by the Supreme Court in SLP (Civil) Nos. 8411 and 8412 of 1980 dated December 31, 1981, and finally

held that the terms ""per diem"", ""per mensem"" and ""per annum"" indicate the period for which the rate is prescribed and do not necessarily imply that

there shall be pro-rating. It was also further pointed out that the relief at the rate of 6 per cent or 7 1/2 per cent. per annum, as provided u/s 80J of

the Act and that too for a period of five years, is in the nature of an incentive and though availability of such relief would depend upon the capital

employed in the commencement of production, there is no scope for pro-rating for the period of productive operation. In this state of the

interpretation of section 80J, the Central Board of Direct Taxes issued Circular No. 378 dated March 3, 1984 (See (1984 149 St. 1 referring to

Commissioner of Income Tax, Tamil Nadu-I Vs. Simpson and Company, and Commissioner of Income Tax, Karnataka-II Vs. Mysore Petro-

chemical Ltd., and stated that in view of those decisions, the deduction u/s 80J should not be reduced proportionately with reference to the period

for which the business of the undertaking, ship or the hotel was not carried on during the relevant previous year, in view of the clear circular of the

Central Board of Direct Taxes, which, it is not disputed, would govern the case of the assessee also, we have to hold that Tribunal was quite right

in the view it took. Learned counsel for the assessee also invited our attention to the decisions in Commissioner of Income Tax Vs. Godrej Soaps

Private Ltd., ; Commissioner of Income Tax Vs. Carter-wallace Ltd., ; Commissioner of Income Tax Vs. Kansal Hosiery Works, ;

COMMISSIONER OF Income Tax Vs. PLASTIC DELA FOOTWEAR., and COMMISSIONER OF Income Tax Vs. RALLIS INDIA

LTD., . All these decisions, accepting the principles laid down in the two decisions referred to earlier and the circular of the Central Board of

Direct Taxes (See Additional Commissioner of Income Tax, Delhi-II Vs. Rattan Chand Kapoor, , have held that for the purpose of giving relief u/s

80J, there should not be any pro-rating, we, therefore, do not find it necessary to make detailed reference to those decisions. We answer the

second question referred to us also in the affirmative and against the Revenue. The assessee will be entitled to the costs of this reference. Counsel''s

fee Rs. 500.