Commissioner of Income Tax vs Jamshedpur Engg. and Machine Mfg. Co. Ltd.

This is a reference u/s 256(1) of the income tax Act, 1961, (''the Act''). The assessment year in question is 1972-73. The assessee is a private limited company. On 3-10-1970 the board of directors resolved to shift the head office from Jamshedpur to Calcutta. In connection with that shifting the company incurred huge expenses. One item of the expenditure was a sum of Rs. 3,000 incurred on account of payment to the lawyers. The assessee at the time of assessment asserted that this expenditure was revenue in nature and, therefore, he was entitled to deduction of this amount. The ITO rejected the claim of the assessee, holding that the expenditure incurred on account of shifting of the head office from Jamshedpur to Calcutta was expenditure of capital nature.

The assessee-opposite party filed appeal to the AAC. The contention of the assessee found favour with the AAC. According to him, the expenditure was of revenue nature and not capital nature. He, therefore, allowed the appeal holding that the assessee was entitled to deduction of that amount.

Being aggrieved by the order of the AAC, the department filed appeal before the Tribunal. The Tribunal on the basis of the authority in the case of Commissioner of Income Tax, Central Vs. Modi Spinning and Weaving Mills Co. Ltd., affirmed the conclusion of the AAC and held that the assessee had been rightly allowed deduction of the sum of Rs. 3,000 spent on account of lawyers'' fees. On prayer being made by the department, the present reference has been made for our opinion. The question referred to us is as follows:

Whether, on the facts and in the circumstances of the case, the expenses incurred in shifting the headquarters of the company to West Bengal is a capital expenditure or a revenue expenditure?

The instant reference has to be answered on the basis of the ratio of the Supreme Court in the case of Sitalpur Sugar Works Ltd. Vs. Commissioner of Income Tax, Bihar and Orissa, . In that case the sugar factory at Sitalpur in the District of Chapra, had been shifted to Goraul in the District of Muzaffarpur. A total expenditure of Rs. 3,19,766 was incurred on account of shifting of the factory. The question raised before the Supreme Court was whether the assessee was entitled to deduction of this sum on the footing that the expenditure over shifting was revenue in character. The Supreme Court answered the question that shifting of the factory produced an enduring advantage in the shape of transfer to a better factory site, an advantage which enabled the trade to prosper, and an advantage that could be expected to last for ever. This verdict was given by the Supreme Court following the decisions in Atherton v. British Insulated & Helsby Cables Ltd. [1925] 10 TC 155 and Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34.

Let us see how the facts stand in the instant case. The reasons for shifting the registered office of the company are to be found in the order of the AAC. The reasons were that the petitioner was subsidiary company to the holding company Indian Steel & Wire Products. The registered office of the holding company was at Calcutta. The bulk of the parties was from Calcutta. The auditor of the holding company was stationed at Calcutta and lastly that the legal and taxation advisors S.K. Sawday & Co. were also stationed at Calcutta. It is obvious that there were advantages by shifting of the assessee''s company from Jamshedpur to Calcutta. The board of directors resolved that it would be commercially prudent to centralise the registered office of the assessee''s company at Calcutta. These grounds were meant to be conducive to the advantage of the assessee. The shifting of a head office is not a regular feature. The advantage derived from shifting would undoubtedly be of an enduring character. The case before us, therefore, falls squarely within the parameter of the Supreme Court decision in Sitalpur Sugar Works Ltd.''s case (supra). The expenses incurred on account of shifting of the head office, therefore, cannot be held to be on revenue account.

The learned counsel for the assessee submitted that since the factory of the assessee-company remained static at Jamshedpur the principles of the aforesaid Supreme Court case are not attracted in the instant case. In that case the factory itself had been shifted and that was taken to be an enduring advantage. We regret, the ratio of the Supreme Court case is that where the expenditure enables a trader to prosper and secure advantage that could last for ever, the expenditure would be capital in nature. In the instant case as well the advantages of shifting were to last for ever. Whether there was shifting of the factory or shifting of the head office was inconsequential. The distinction attempted to be made is more ethereal than real.

The learned counsel for the assessee also submitted that shifting of the head office was incidental to the business of the factory and, therefore, the expenditure incurred on account of shifting must be treated to be of the revenue nature. It is true that it is connected with the business of the factory but a distinction has been made in regard to the expenses which are of the enduring nature and the activities which are of the recurring nature. In the instant case, we have no doubt, that the advantages from shifting of the head office for the reasons indicated in the order of the AAC, were of the enduring'' nature. The Tribunal, was, therefore, not justified in allowing legal expenses as they were not revenue expenditure in nature. For the reasons stated above, in our view, the Tribunal was not justified in allowing deduction of legal expenses over shifting of the head quarters describing it as of the revenue nature. The reference is, therefore, answered in favour of the department and against the assessee. There shall, however, be no order as to costs.