TMI Blog1989 (12) TMI 296X X X X Extracts X X X X X X X X Extracts X X X X ..... amounts of Rs. 9,26,963 as freight and Rs. 1,641 as insurance are not covered for weighted deduction under section 35B of the Income-tax Act, 1961? 4. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in confirming the disallowances made by the Commissioner of Income-tax (Appeals) and thereby restricting the claim of Rs. 1,87,978 to only Rs. 1,08,155 being the proportionate H.O. expenses under section 35B of the Income-tax Act, 1961?" The questions referred at the instance of the revenue are as under : " 1. Whether on the facts and in the circumstances of the case, the Tribunal was justified in deleting Rs. 22,221 being the legal expenses incurred by the assessee for amalgamation of one of the subsidiary, a company with it on the premises that the same expenditure did not create any benefit of an enduring nature to the assessee and, therefore, a revenue expenditure? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the revaluation of closing stock was not proper?" Question No. 1 raised at the instance of the assessee is now concluded by a judgment of this Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 1,21,861 has to be excluded as the appellant in their computation of Rs. 36,11,112 had separately deducted this amount from the total head office proportionate expenses being interest not attributable to the export business. Since the entire interest amount is held to be not relating to the activities under consideration this separate deduction is called for. Therefore while computing weighted deduction on proportionate head office expenses the ITO should take the following figures : Rs. 36,11,112 - Rs. 17,51,324 + Rs. 1,21,861 = Rs. 19,81,649. The ITO should allow weighted deduction under section 35B on this amount of proportionate head office expenses applying the ratio of export sales to total sales." On appeal, the Tribunal affirmed the order of the Commissioner (Appeals). In our view the Tribunal has not committed any error in principle in deciding the controversy. What should be the quantum of exact allowance has been calculated and it has not been demonstrated how the calculation is erroneous. Under the above circumstances, question No. 4 will also have to be answered in the affirmative and in favour of the revenue. 2. Now I shall examine the two questions r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the expenditure was to bring about a change in the structure of the company. If the purpose and object of incurring the expenditure is to alter the framework or the structure under which the assessee was carrying on its business and affected the profit-making apparatus, then the expenditure would be of capital in nature. 4. In the instant case the nature and purpose of incurring the expenditure was to bring about an amalgamation between the assessee and another company. The question was gone at length by this Court in the case of Bengal Assam Investors Ltd. v. CIT [1985] 142 ITR 156, in which it was held by Sabyasachi Mukharji, J. (as His Lordship then was) that the legal expenditure incurred for the purpose of bringing about an amalgamation between the two companies was of capital nature, even though ultimately no amalgamation was brought about by the expenditure. In that case, it was held that "It is also necessary to reiterate that whether the expenditure yielded any result or proved abortive is not always a determinative factor. What is determinative of the question is the object and purpose of incurring the expenditure. Any expenditure which facilitates only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been drafted practically in line with the approach taken by Lord Cave in the case of British Insulated Helsby Coller Co. ( supra ). Section 37 itself contemplates that such expenditure will be allowed as a deduction only if it is laid out wholly and exclusively for the purpose of business and the expenditure must not be of capital nature. 7. Three tests have been laid down to find out whether the expenditure is of capital or revenue nature. In every case the purpose of the expenditure has to be seen. It has to be found out whether the expenditure will bring about an enduring assets to benefit or not. Another test is to find out whether the expenses will bring about any improvement in the profit-making apparatus of the company or not. There is another well-known test, that is whether the expenditure relates to circulating capital or fixed capital of the company. Therefore, following the principles laid down in the case of Bengal Assam Investors Ltd. ( supra ), the first question raised by the revenue has to be answered in the negative and in favour of the revenue. The second question at the instance of the revenue relates to valuation of the closing stock. The fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itled to value the closing stock on cash or market price whichever is lower. 10. The second case relied on by the revenue is in the case of Dhrangadhra Chemical Works Ltd. v. CIT [1977] 106 ITR 473. The Bombay High Court in that case held that where subsidies or grants were given by the Government to assist a trader in his business, they were, generally speaking, payments of a revenue nature. They were supplementary trade receipts. In that case, the assessee-company and Tata Chemicals Ltd., the two companies, manufacturing soda ash found it difficult carry on the business profitably and the production of soda ash was stopped in April 1949 altogether. The Government after some manipulation decided that the manufacturers of soda ash should be allowed a subsidy at Re. 1 per Cwt. of soda ash produced by the two companies provided the Government was satisfied that the two companies actually sold soda ash at the fair selling price recommended by the Tariff Board. The Bombay High Court pointed out that the sole object underlying the grant of subsidy was to enable the assessee-company to carry on its business in commercial manner so that it could yield profit. When such was the pos ..... 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