TMI Blog1998 (10) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... to Tata Sons Limited constitutes business expenditure deductible from its business income ? (4) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that the amounts of Rs. 13,241 and Rs. 7,860 spent by the assessee towards reimbursement of expenses incurred by Apex Geological Services Private Limited and Holtec Engineers Pvt. Limited constitute business expenditure deductible from its business income ?" The first question relates to payment of Rs. 45,000 as remuneration to the managing director. The Commissioner of Income-tax excluded the amount for the purpose of section 40(c) of the Income-tax Act (for short "the Act"). The Tribunal agreed with the view of the Commissioner following their view for the earlier assessment year. Learned counsel appearing for the Revenue contended that the issue is now covered by a judgment of this court in CIT v. Bakelite Hylam Ltd. [1996] 217 ITR 469 wherein it was held that the commission paid to the managing director of the company would constitute remuneration for the purpose of computing disallowance under section 40(c) of the Act. While learned counsel for the assessee contended that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be excluded while computing the amounts deductible. 'In other words, section 40(b) expressly uses the word "commission", while under section 40(c) the expression "commission" was not used, but only the expressions "remuneration or benefit or amenity" are used. From the above, it follows that the Legislature intended to use the expressions "commission" and "remuneration" with different meanings and in different contexts. In other words, the expression "remuneration" cannot be interpreted as including "commission." If the intention of the Legislature is to include "commission" paid in the expression "remuneration", it would not have used both the words "commission" and "remuneration" under section 40(b) and omitted the word "commission" under section 40(c) of the Act. The very fact that the Legislature has not used the word "commission" under section 40(c) of the Act indicates that commission does not mean remuneration. Further, as pointed out in the earlier paragraph, the nature of commission paid in Bakelite Hylam Ltd.'s case [1996] 217 ITR 469 (AP) to the director is not explicit from the facts of the case ; whereas in the present case, a percentage of the net profit was pai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee paid Rs. 2,29,306 to Tata Sons Ltd. (Tata Economic Consultancy Services, Bombay) towards fee and reimbursement of incidental expenditure incurred for undertaking certain techno-economic feasibility studies to identify projects that may be taken up by the assessee advantageously. These feasibility studies related to the possibility of establishing a large scale cement plant and rayon grade pulp unit. The Income-tax Officer disallowed this on the ground that the expenditure related to the starting of new lines of business which are not covered by the existing memorandum of association and those expenses would come up for consideration as pre-commencement expenses after the units come into existence. The assessee contended that the identification of new projects which may be taken up with advantage does not amount to initiation of a new business but, on the other hand, it forms part of the development activity of the assessee's existing business. It was further contended by the assessee that mere conducting of studies for finding out the possibility of taking new lines of business activity would not per se mean that new business had been brought into existence and, therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for that purpose it obtained a techno-economic feasibility report from Industrial Consulting Bureau (P.) Limited on payment of a fee of Rs. 15,000. Whereas in the present case, the object of obtaining the feasibility report is for utilising the surplus funds, The company wanted to ascertain how best it can utilise the surplus funds for the purpose of expanding its business. Therefore, it is contended that since the object of the expenditure is for utilisation of surplus funds, it. is revenue expenditure and it is of an antenatal nature. Further, the expenditure incurred is exclusively for carrying on its business, viz., for the purpose of proper utilisation of the surplus funds. Counsel for the Revenue strongly relied on the following observation of the Supreme Court in Empire Jute Co. Ltd.'s case [1980] 124 ITR 1 : "(ii) There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring 'nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re incurred is on capital account. The judgment in Saurashtra Cement and Chemical Industries Ltd.'s case [1992] 196 ITR 237 (Guj) as pointed out by learned counsel for the assessee, is a case where a decision was already taken by the assessee to set up a new soda ash plant whereas in the instant case no decision has yet been taken. It is only, at the stage of studying the feasibility for exploring the area for investing the surplus funds. It has not resulted in a benefit of enduring nature. Further, as pointed out in the earlier paragraph, the object of the expenditure is how to put the best use of the surplus funds. Therefore, we are of the view that the expenditure incurred by the assessee is on account of revenue and not of capital. In this context, the following observation of the Supreme Court in Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 is relevant : "There is also no single definitive criterion which, by itself, is determinative as to whether a particular outlay is capital or revenue. The 'once for all' payment test is also inconclusive, What is relevant is the purpose of the outlay and its intended object and effect, considered in a common sense way havi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... feasibility report or preparation of policy report before the commencement of business is an allowable expenditure under section 35D of the Act. In this case, it cannot be said that the expenditure is incurred before the commencement of the business as that stage has not yet arrived as no decision is taken for setting up of a new business. Section 35D of the Act reads as follows : "35D. (1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2),--- (i) before the commencement of his business, or ... the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of the industrial undertaking is completed or the new industrial unit commences production or operation. (2) The expenditure referred to in sub-section (1) shall be the expenditure specified in any one or more ..... X X X X Extracts X X X X X X X X Extracts X X X X
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