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TMI Blog1970 (7) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... Kanpur, conceived the idea of executing these jobs in India in collaboration with the London company. Accordingly, he entered into an agreement with the London company to float a private company, limited by shares, to be named and styled M/s. Security Printers of India (P.) Ltd. This company, as already stated, was incorporated on April, 6, 1957. It was agreed that a representative of the London company would be appointed as a director of the assessee-company to look after the security arrangements. The shares of this company were held as under : W. W. Sprague and Co. Ltd. ... 3,570 shares. L. N. Khunnah ... 10 shares. L. N. Khunnah on behalf of ... 3,430 shares. L. N. Khunnah and Sons Mr. W.J. Harffey was the director representing the London company and Mr. M. C. khunnah was the director of the assessee-company representing the Khunnah group. The assessee-company fell to be assessed for the first time in the assessment year 1958-59. In this assessment a sum of Rs. 70,437 was disallowed by the Income-tax Officer being pre-incorporation expenses of the company which were capital in nature. The break up of this amount is given below under appropriate heads: Through whom, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transactions which had taken place before the incorporation of the assessee-company had been included in its first assessment for the year 1958-59, the revenue expenses attributable to those receipts should also be allowed in that assessment. In the opinion of the Tribunal, however, a part of the sum of Rs. 23,549 incurred by Mr. W. J. Harffey as travelling expenses and also a part of Rs.15,455 expended by Mr. M. C. Khunnah in connection with his trip to England should be regarded as capital in nature as the assessee-company derived, more or less, enduring benefit thereby. The Tribunal estimated the amount at Rs. 20,000 and, while setting aside the order of the Appellate Assistant Commissioner, directed that the disallowance should be restricted to this amount in place of Rs. 70,437 disallowed by the Income-tax Officer. At the instance of the assessee-company the following question has been referred to this court for opinion : " Whether, on the facts and in the circumstances of the case, any portion of the sums of Rs. 23,549 and Rs. 15,455 incurred by the directors could be disallowed as capital expenditure ? " The sum of Rs. 23,549, as already noted, represents travelling a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e regarded as capital in nature and the whole of the amount has to be allowed as revenue expenses of the company. It is no doubt true that the above expenditure was incurred before the incorporation of the assessee-company, but, as pointed out above, the corresponding receipts were entered in the accounts for the relevant previous year and included in the assessment for the year 1958-59. The principle laid down by this court in Commissioner of Income-tax v. Bijli Colton Mills Ltd. is that the profits of a business commenced by the promoters which is taken over by the company on its incorporation is assessable in the hands of the latter. If the pre-incorporation profits are assessable in the hands of the company, the expenditure incurred to earn such profits must also be allowed in the assessment. In the present case, it is common ground that the business of the assessee-company was commenced by the promoters, namely, Mr. Harffey and the Khunnahs, and they secured orders of considerable value and also procured the necessary import licence for indent of fugitive papers for the purpose of execution of jobs in security printing. These expenditures were, evidently, incurred wholly for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the study tour undertaken by Mr. Khunnah was to acquire knowledge of some new technology in security printing. In fact, as already stated, at the relevant time, jobs in security printing were not executed by any printers in India. The purpose of Mr. Khunnah in undertaking the tour was, evidently, to learn the methods of security printing which was then in practice in England. It cannot, therefore, be said that Mr.Khunnah came back with knowledge of new methods of security printing which enured to the permanent and enduring benefit of the company. In the case of Chemical Industries and Pharmaceutical Laboratories Ltd. v. Commissioner of Income-tax (I.T.R. No. 14 of 1951), decided by the Bombay High Court, on the 31st August, 1951 (noticed in The Unreported Income-tax Judgments of the Bombay High Court, Book 1, 1959), the facts were that the managing director of a company, Dr. Hamid, visited England and America with a view to study the developments made in the chemical industries in those countries and to establish collaboration between foreign and indigenous chemical and pharmaceutical industries. A sum of Rs. 25,000 was allowed by the company for the expenditure of Dr. Hamid i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deriving benefit for his business, the expenditure is of a capital nature. Take the ordinary case of a businessman giving a bonus to his employees. He gives the bonus in order to earn the goodwill of his employees, in order to make them work better and in order to see that they are contented. Can it be said that by reason of his bringing these qualities into existence and by creating that atmosphere in his office he has brought an asset into existence and, therefore, the payment of the bonus is a capital expenditure and not a revenue expenditure. In the case I have just given, the businessman gives bonus to his employees; in the case that we are considering the company sends its managing director to foreign countries in order to improve the prospects of business of the company. Both cases stand more or less on the same footing. The result of the expenditure is not the bringing into existence of a new asset, but the expenditure is calculated to increase the profits of the company, and everything that is calculated to increase the profits of a business is not necessarily a capital expenditure. " As laid down by Chagla C.J. in the above case, the main consideration that has got to w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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