TMI Blog1983 (1) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... ,35,000 were to be allotted to Eimco in consideration of their undertaking to make available its technical know-how to the assessee-company to be formed and incorporated. The assessee company was incorporated in the year 1965. On April 29, 1968, the assessee-company's board of directors allotted to Eimco, equity shares worth Rs. 2,35,000 as and towards the consideration for supply of technical know-how. The balance of equity shares of the face value of Rs. 45,000 were allotted to Eimco for cash. In the assessee-company's assessment for 1969-70, relevant to the year ended December 31, 1968, a deduction was claimed on the amount of Rs. 2,35,000 which, as we stated above, represented the face value of the shares allotted by the assessee-company to Eimco in consideration of the latter's undertaking to supply technical know-how to the assessee-company. It was contended that this amount represented allowable business expenditure of a revenue nature. The ITO did not, however, accept the contention of the assessee-company. He held that the claim related to capital expenditure. He was, however, inclined to hold that, although it was a capital expenditure, it might be treated as having ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allotment of shares of this value to Eimco in consideration of the undertaking to provide technical know-how was only the means adopted for raising the company's initial share capital. On this basis, it was urged by Mr. Jayaraman that there was no question whatever of the assessee-company claiming a deduction for the amount of Rs. 2,35,000. We accept this contention for the Department as well-founded. What happened in this case was that two company promoters, Eimco and KCP, promoted and brought forth the assessee-company. And, while they undertook, as between themselves, to contribute the entire share capital of the company, Eimco was allowed to pay for Rs. 2,35,000 worth of shares by providing know-how from time to time. An arrangement of this kind appertains to the formation of the company and the building up of its share capital. We have heard of preliminary expenses incurred in the formation of a company, such as drafting fees for preparing the memorandum and articles, registration fees for registration with the Registrar of Companies and the like. These preliminary expenses apart, we have never heard it said that the very contribution of share capital in a form other than c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re in the trading sense of the term had arisen in the events that happened in this case, there is no scope for the further question of " capital versus revenue ?" being debated. Mr. Uttam Reddi for the assessee-company said that for an expenditure to be allowed under the I.T. Act, it is not always necessary that it Should involve an outlay or even an outgoing of money from the assessee. He relied on some observations of the Supreme Court in CIT v. Nainital Bank Ltd. [1966] 62 ITR 638. We do not dispute this proposition. Normally, trading expenditure brings in some asset into the business, as when the trader spends money to purchase stock-in-trade. There are cases where even without any trading asset coming into the trader's hands, the money spent may be regarded as expenditure. Entertainment expenditure is of this kind. Money spent to supply tea, coffee, etc., to customers only goes down the drain, as it were, but they are also to be regarded as legitimate business expenditure, because they are incurred out of considerations of business expediency. The Supreme Court in the case cited by Mr. Reddy were dealing with yet another species of business expenditure which does not result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure, in the right sense of the term, could arise for consideration. The pertinent question of law on the subject of this discussion has been framed as follows : " Whether, on the facts and in the circumstances of the case, the sum of Rs. 2,35,000 paid by the assessee-company to the foreign collaborator constituted revenue expenditure ? " For the reasons set out in the foregoing paragraphs our answer to it is clearly in favour of the Department. There is another controversial question in this reference which has been raised by the assessee-company for our decision. It raises a point of appellate procedure and powers. It arises in the following circumstances. When the assessment in this case was completed, the ITO, as we briefly indicated earlier, felt inclined to treat the sum of Rs. 2,35,000 as entitled to a fractional capital allowance equivalent to 1/14th part thereof under s. 35A of the Act. The officer took the view that Rs. 2,35,000 must be held to represent the price paid by the assessee for an outright purchase of certain patent rights from Eimco. In this view the officer granted an allowance of Rs. 16,785 which worked out to 1/14th share of Rs. 2,35,000. The Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioner before the AAC disposed of the appeal against the very assessment. In such a situation the boot might well be said to be on the other leg, and it might be a matter for debate as to whether and to what extent the AAC can exercise his appellate powers as respects a matter arising in an assessment which has already been the subject of a revision by the Commissioner under s. 263. In this case that point does not arise; nor has the AAC purported to touch, in his appellate order, anything which the Commissioner had decided in his revisional order under s. 263. The pertinent inquiry, therefore, is, does the I.T. Act bar the Commissioner from exercising his power under that section merely because the prejudicial order of the ITO is the subject of an appeal ? There is nothing in s. 246, 249 or 250, which deal with appeals before the AAC, which imposes any bar on the Commissioner's power of revision. Section 263, which confers as well as delimits the revisional power of the Commissioner, also does not enact that the Commissioner is barred from acting merely because of the pendency of an appeal before the AAC. What s. 263 contemplates is not so much a power, but a duty on the Cornmi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judice of the assessee, whereas invariably the Commissioner will have to concentrate only on the aspects of the officer's order which are to the Revenue's prejudice. In this statutory milieu, we do not see any implied curb on the revisional powers of the Commissioner under s. 263, which might be thought to exist merely on the accident of the quite different aspects of the officer's order having been carried in appeal before the AAC. In the present case, the officer gave deduction for Rs. 16,785 on a particular view as to the applicability of s. 35A. Whether the assessee-company accepted the officer's interpretation or not is beside the point. All we know is that the assessee-company appealed to the AAC for the allowance of Rs. 2,18,215 over and above Rs. 16,785. In this situation, what hit the Revenue was the deduction granted by the officer as respects Rs. 16,785. It is not the argument of the assessee-company that the grant of allowance of Rs. 16,785 under s. 35A cannot be regarded as prejudicial to the Department. Nor could it be said, contrary to facts, that this amount was also part of the subject-matter of the assessee-company's appeal before the AAC. In these events, we do n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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