Vazir Sultan Tobacco Co. Ltd. vs Commissioner of Income Tax

Jeevan Reddy, J.—Four question are referred u/s 256(1) of the Income Tax Act, 1961, for the opinion of this court. They are :

"(1) Whether, on the facts and in the circumstances of the case, the assessee is entitled to claim as revenue expenditure the sum of Rs. 26,594 paid by way of brokerage on the sale of shares held in Molins of India Ltd. ?

(2) Whether, on the facts and in the circumstances of the case, the assessee is entitled to claim as revenue expenditure the sum of Rs. 4,744 being part of expenditure incurred by Mr. A.M. Lal, chairman of the assessee-company, on account of his visit to foreign countries ?

(3) Whether, on the facts and in the circumstances of the case, the assessee is entitled to claim as revenue expenditure the sum of Rs. 33,000 paid by way of fees to Income Consultants and to Mr. A. C. Das ?

(4) Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction of surtax payable under the Companies (Profits) Surtax Act as business expenditure u/s 37 of the Income Tax Act, 1961, or alternatively as expenditure incidental to the carrying on of the business deductible u/s 28 of the Act while computing the income under the head ''Business'' ?"

For the sake of facility, we may straightaway say that question No. (4) is concluded against the assessee and in favour of the Revenue by the judgment of this court dated February 19, 1987 in R.C. No. 47 of 1980, pertaining to this very assessee for an earlier assessment year. Following the said decision, question No. (4) is answered in the negative, i.e., in favour of the Revenue and against the assessee. For answering the other three questions, it is necessary to briefly refer to the relevant facts.

The assessee is a public limited company engaged in the manufacture of cigarettes. The assessment year concerned herein is 1974-75. The assessee was holding 93,750 shares in Molins of India Ltd. The said company called upon the assessee to sell 62,575 shares out of the shares held by the assessee to give effect to certain directions given by the Government of India. Evidently, the Government of India had given directions to the said company to increase Indian participation in the said company and to give effect to the said direction, the company had decided to unload a part of its shares. The assessee entrusted the sale of the said shares to a broker and paid him an amount of Rs. 26,594 for effecting the transfer of shares. It claimed the said amount as business expenditure u/s 37. This was disallowed by the Income Tax Officer. The appeals filed by the assessee filed. That is how the first question arises.

During the accounting year relevant to the said assessment year, the chairman and managing director of the assessee, Mr. Lal, undertook a foreign tour. He was accompanied by his wife. They spent a certain amount for purchase of tickets and a certain amount towards their staying expenses. The Income Tax Officer allowed the expenses incurred on purchasing tickets only for Mr. Lal but disallowed the expenditure incurred on tickets for Mrs. Lal. Further, out of a sum of Rs. 9,517 spent by Mr. Lal towards staying expenses, he disallowed 50% thereof on the ground that the said expenditure is attributed to a new business venture contemplated by the assessee. Of course, he disallowed the staying expenses of Mrs. Lal. On appeal this was confirmed. On further appeal, however, the Tribunal found that Mrs. Lal had accompanied Mr. Lal as suggested by the foreign shareholders of the company. It observed that in the modern trend of carrying on business activity, business dealings are developed by social contacts and for this purpose, it may be necessary for the wife of the chairman and managing director to accompany her husband during the foreign tour. Accordingly, the Tribunal allowed the ticket expenses of Mrs. Lal. However, it confirmed the disallowance of her staying expenses in a sum of Rs. 800. Coming to the disallowance of half the staying expenses of Mr. Lal, the Tribunal affirmed the order of the Income Tax Officer holding that the leather business was an altogether new venture and, therefore, the money spent towards such new venture is capital in nature. This is the subject-matter of the second question.

The third question is closely allied to the second question. It relates to the permissibility of deduction of Rs. 33,000 paid to Incecon Consultants and Mr. A. C. Das towards preparation of a report for the diversification of the assessee''s business activity. The said report related to the proposed leather business.

Taking up the first question first, it has been found by the Tribunal that the shares in Molins of India Ltd. were held by the assessee as an investment and not as stock-in-trade. The Tribunal observed :

"There has been no evidence brought before us to show that it was necessary for the assessee-company to hold the shares in Molins of India Ltd.... In other words, the investment in the shares of Molins of India Ltd. is not incidental to the purpose of the business of the company and as such any expenditure incurred in connection with the sale of such investment can only be considered as capital in nature...."

In view of the said finding, we are of the opinion that the Tribunal was right in holding that the brokerage paid in connection with the sale of such shares, held as investment and not as stock-in-trade, cannot be deducted as revenue expenditure. It will be capital in nature. Accordingly, the first question is answered in the negative, i.e., in favour of the Revenue and against the assessee.

Coming to the second question, the only surviving aspect is the disallowance of half the staying expenses of Mr. Lal in the U. K. and the Continent. This disallowance has been effected on the ground that the said expenditure is attributable to that part of the activity of Mr. Lal, as is related to the proposed new venture in leather goods manufacture. The Tribunal has found that the proposed new line of business is in no way connected with the assessee''s business; it was altogether a new venture proposed to be undertaken by the assessee. It must be remembered that u/s 37, only that expenditure can be allowed to be deducted as is "laid out or expended wholly and exclusively for the purposes of the business or profession", so long as it is not in the nature of capital expenditure or personal expenses of the assessee. This deduction is allowed "in computing the income chargeable under the head ''Profits and gains of business or profession''..." Once it is found that the new venture is totally unconnected with the business now carried on and which has given rise to the income which is being computed for the purpose of determining the taxable amount, there appears to be no ground for holding that such expenditure is laid out wholly or exclusively for the purpose of the business carried on by the assessee. No decision could be brought to our notice by Mr. Y. Ratnakar, supporting his proposition. Only two decisions could be cited by him with which we may deal.

CIT v. Elecon Engineering Co. [1981] 132 ITR 752 is a decision of the Gujarat High Court. The assessee, which was carrying on the business of manufacturing engineering equipment of various kinds, had sent one of its directors abroad for selection of some foreign engineers with a view to start the manufacture of aerial rope ways for transporting of machines as well as human beings. The expenses incurred in that connection were claimed as a deduction u/s 37. It was disallowed by the Income Tax Officer and the Appellate Assistant Commissioner.

On further appeal, however, the Tribunal found, on a consideration of the relevant facts and circumstances, that the assessee only wanted to utilise the existing resources in a more effective way and that the manufacture of aerial ropeways was an extension of the assessee''s existing business activity, and on the basis of the said finding, allowed the said expenditure as revenue expenditure which was upheld by the High Court. We do not see any relevance of the said decision to the facts of the case before us.

The decision in Commissioner of Income Tax Vs. Karanpura Development Co. Ltd., , is cited only for the purpose of impressing upon us that while judging the permissibility of business expenditure, the court must be guided by judicial common sense and must have regard to the degree and nature of the expenses involved, and the benefits and advantage secured by the assessee. The said observation, being general in nature, does not in any way advance the case of the assessee on this score. Accordingly, question No. (2) is answered in the negative, i.e., in favour of the Revenue and against the assessee.

The third question, as stated above, is closely allied to the second question. Since the sum of Rs. 33,000, mentioned in the third question, is expended on the proposed new business, it stands on the same footing as the amount concerned in the second question. For the very same reasons and in the light of the findings of the Tribunal already referred to, we answer the third question as well in the negative, i.e., in favour of the Revenue and against the assessee.

The result is that all the question are answered in favour of the Revenue and against the assessee. No costs.

Mr. Y. Ratnakar, learned counsel for the assessee, makes an oral request for grant of leave to appeal to the supreme Court u/s 261 of the Income Tax Act, so far as question No. (4) is concerned. We have answered question No. (4) against the assessee following an earlier unreported decision of this court. It is stated that against the said unreported decision, leave has been granted by this court. Accordingly, we direct the issuance of a certificate on question No. (4) mentioned above.