Karamchand Premchand Pvt. Ltd. vs Commissioner of Income Tax, Gujarat Commissioner of Income Tax, Gujarat Vs Karamchand Premchand Pvt. Ltd.

Mankad, J.—Two questions arising out of the Income Tax assessment for the assessment year 1966-67 of M/s. Karamchand Premchand

Pvt. Ltd., Ahmedabad (hereinafter referred to as the ""assessee-company""), have been referred to us for our opinion by the Income Tax Appellate

Tribunal (hereinafter referred to as ""the Tribunal"") under s. 256(1) of the I.T. Act, 1961 (hereinafter referred to as ""the Act""). One question has

been referred to us at the instance of the assessee-company, while the other has been referred to us at the instance of the revenue. The question

referred to us at the instance of the assessee-company is as under :

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in confirming the disallowance of travelling expenses of

Rs. 19,300 incurred by the assessee in relation to the assessee''s director, Shri Gautam Sarabhai, for the foreign tour undertaken by him for the

purpose of Calico Mills, the managed company of the assessee-company ?

The question which is referred to us at the instance of the Revenue is as under :

Whether, on the facts and in the circumstances of the case, under rule 19(5) of the Income Tax Rules, 1962, half of the profits had to be added

for the computation of capital for determining relief u/s. 84 of the Income Tax Act, 1961 ?

So far as the question referred to us at the instance of the revenue is concerned, it is directly covered by a decision of this court in Commissioner

of Income Tax, Gujarat II Vs. Elecon Engineering Co. Ltd., . Following the said decision, we answer the said question in the affirmative and

against the revenue.

This leaves for our consideration the question referred to us by the Tribunal at the instance of the assessee-company. The facts which are

relevant so far as this question is concerned are as follows :

The assessee-company was the managing agent of the Ahmedabad Manufacturing and Calico Printing Company Ltd. (hereinafter referred to as

the ""Calico Mills""). The Calico Mills had a manufacturing division at Bombay for manufacture of chemicals and plastics. It was granted a letter of

intent No. 3(76)-Ch. I/60, dated 29th June, 1965, by the Govt. of India for expansion of PVC plant of its chemical division from the present

capacity of 4,000 tons to 20,000 tons per annum. The expansion scheme involved capital expenditure of Rs. 14 crores out of which expenditure to

the extent of Rs. 8 crores was to be in foreign currency. Gautam Sarabhai, a director of the assessee-company, who was also the chairman of the

Calico Mills undertook a foreign tour to conduct negotiation with interested parties in the United States of America to enter into collaboration

agreement on suitable terms of payment. The foreign tour was undertaken after obtaining foreign exchange for incurring foreign tour expenses from

the Reserve Bank of India. The expenditure which was incurred by Gautam Sarabhai in this tour came to Rs. 19,300. This expenditure was

incurred in the year of account relevant to the assessment year 1966-67. The assessee-company claimed a deduction of this expenditure of Rs.

19,300 as revenue expenditure in the course of the Income Tax assessment proceedings for the assessment year 1966-67. The ITO disallowed

the claim mainly on the ground that the expenditure was of a capital nature inasmuch as the purpose of the visit of Gautam Sarabhai to the United

States of America for getting loan facilities was in connection with the establishment of a new undertaking. The AAC and the Tribunal have

confirmed the view taken by the ITO. The question which arises for our consideration is whether the Tribunal and the authorities below were right

in treating the expenditure of Rs. 19,300 incurred on the foreign tour of Gautam Sarabhai as capital expenditure.

We are unable to see how the expenditure incurred for the foreign tour of Gautam Sarabhai could be treated as capital expenditure. The

assessee-company had incurred this expenditure either for improvement or expansion of business or for starting a new business of the Calico Mills

managed by it. By incurring these expenses, the assessee did not acquire any capital asset, nor had any benefit of any enduring nature accrued to it.

It may be that by reason of the expenses incurred by it, a certain asset of enduring benefit accrued to the managed company; but what we have to

bear in mind is the purpose for which the assessee, the managing agents of the Calico Mills, had incurred these expenses in order to answer the

questions referred to us. The assessee-company was interested in increasing its own earnings or augmenting the commission derived from Calico

Mills and it is with the object of increasing its income that it spent the amount on the foreign tour of Gautam Sarabhai. It is not relevant as to what

the Calico Mills, the managed company, gained by the foreign tour expenses of Gautam Sarabhai. What is important to bear in mind is the object

for which the assessee had incurred these expenses. Obviously, the object was to increase its own income by expanding the existing business or

starting the new business of the managed company. From the facts found by the Tribunal, it is difficult to hold that the foreign tour expenses of

Gautam Sarabhai incurred by the assessee-company are of a capital nature.

The view which we are taking finds support from the judgment of the Bombay High Court in Tata Sons Ltd. Vs. Commissioner of Income Tax,

Bombay City, . That was a case in which the assessee, a limited company, held the managing agency of another company. Under the managing

agency agreement, the assessee was to be paid a commission at a certain rate which was to be computed upon the net profits of the managed

company. During the relevant year the assessee paid voluntarily a certain sum as its share of the bonus which the managed company paid to some

of its officers. The bonus paid by the managed company was not an unreasonable bonus it was not such that a deduction could not be claimed by

the managed company was not be claimed by the managed company under s. 10(2)(x) of the Indian I.T. Act, 1922. The assessee claimed that the

payment made by it was a permissible deduction under s. 10(2)(xv) of the Indian I.T. Act, 1922. The assessee claimed that the payment made by

it was a permissible deduction under s. 10(2)(xv) of the Indian I.T. Act, 1922. The Division Bench of the Bombay High Court observed that while

deciding the question whether a particular deduction claimed by the assessee-company as a deduction is an expenditure laid out or expended

wholly and exclusively for the purposes of the business of the assessee-company, one has not got to take an abstract or academic view of what is

proper expenditure laid out or expended wholly and exclusively for the purposes of one''s business; but one has got to take into consideration

questions of commercial expediency and the principles of ordinary commercial trading and the main consideration that has got to weigh with the

court is whether the expenditure was a part of the process of profit making. If the expenditure helps or assists the assessee in making or increasing

the profits, then undoubtedly that expenditure would be expended wholly and exclusively for the purpose of business. It was observed that the

bonus was paid by the managed company to their employees in order to increase the efficiency in the working of the company. An increased

efficiency of that company would incidentally result in higher and better profits, and the assessee-company would be as much interested in the

working of the managed company being more efficient as the managed company itself. Whatever tended to increase the profits of the managed

company would also tend to increase the income and profits of the assessee-company. Therefore, it was observed it could not be suggested that

the assessee-company had an indirect or ulterior motive in making the above payment. The only motive by which it was actuated was a purely

commercial and pecuniary one and that was to see that more profits were made by the managed company so that its own commission should

thereby be increased. It was, therefore, held that looking at the payment from the point of view of commercial principles what the assessee had

done was something which had as its object increasing the profits of the managed company and thereby increasing its own share of the commission

and that, therefore, the sum claimed by the assessee was wholly and exclusively expended for the purposes of its business and was an allowable

deduction under s. 10(2)(xv) of the Indian I.T. Act, 1922.

Testing the expenditure incurred by the assessee-company on the foreign tour of Gautam Sarabhai on the principles laid down by the Bombay

High Court in the case of Tata Sons Ltd. Vs. Commissioner of Income Tax, Bombay City, , there cannot be any doubt that the expenditure was

wholly and exclusively incurred for the purpose of the business of the capital nature, it is revenue expenditure, deduction of which is allowable

under s. 37(1) of the Act.

We accordingly answer the question referred to us as under :

At the instance of the assessee :

Question Answer

Whether, on the facts and in the circum- In the negative

stances of the case, the Tribunal was and against the

justified in law in confirming the dis- revenue.

allowance of travelling expenses of Rs.

19,300 incurred by the assessee in

relation to the assessee''s director,

Shri Gautam Sarabhai, for the foreign

tour undertaken by him for the purpose

of Calico Mills, the managed company of

the assessee-company ?

Reference answered accordingly with no order as to costs.