TMI Blog1976 (4) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 3,97,644. Subsequently, a demand for an amount of Rs. 61,537 including taxes and penalty was raised, and the amount was recovered by the department from the assessee some time before September 30, 1959. The assessee's appeal in respect of this amount to the Appellate Assistant Commissioner and the Tribunal were unsuccessful. In 1961, a suit was filed against the Union of India in the Court of II Civil Judge, Meerut, for the recovery of the amount of tax realised from them on account of the demand on Modi Supply Corporation. This suit was dismissed on May 21, 1962. Expenses to the tune of Rs. 6,025 had been incurred by the assessee in connection with this litigation, and this was claimed as a deduction. The Income-tax Officer held that the amount was not allowable because it related to recovery of income-tax. The Appellate Assistant Commissioner also disallowed the claim. The Tribunal on appeal did not accept the assessee's contention and disallowed the claim. In this very assessment year, i.e., 1959-60, an amount of Rs. 32,477 had been incurred as travelling expenses by Sri G. M. Modi, the chairman. The expenses had been incurred on tour undertaken by the chairman of severa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in connection with income-tax proceedings. The assessee had spent these amounts in connection with settlement of income-tax matters. These proceedings included appellate proceedings taken before the authorities under the Income-tax Act, writ petitions filed in the High Court and legal opinion obtained in connection with those proceedings. The claim was rejected by the Income-tax Officer, as in the present case, in view of the decision of this court in the case of J.K. Cotton Manufacturers Ltd. v. Commissioner of Income-tax [1962] 46 ITR 970 (All). Following the decision of their Lordships of the Supreme Court in the case of Commissioner of Income-tax v. Birla Cotton Spinning Weaving Mills [1971] 82 ITR 166 (SC), it was held that inasmuch as the proceedings were taken by the assessee for escaping tax liability or reducing the tax liability the amounts were allowable as business expenditure. Counsel for the revenue, on the contrary, has laid stress on the decision in the case of J.K. Cotton Manufacturers Ltd. v. Commissioner of Income-tax [1962] 46 ITR 970 (All) as also on the decision of the Supreme Court in the case of Commissioner of Income-tax v. Malayalam Plantations Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed and independent activities of a business. These activities are continuous and take place from year to year during the whole period for which the business continues. If the assessee takes any steps for reducing its liability to fax which result in more funds being left for the purpose of carrying on the business there is always a possibility of higher profits. To give an illustration, if an assessee can, by an appropriate proceeding, succeed in getting its tax liability for gains and profits reduced by a sum of Rs. 1,00,000, that amount will essentially become available for the purpose of business with a reasonable expectation of more profits. As was observed by Viscount Simon in Smith's Potato Estates' case [1948] AC 509; [1949] 17 ITR (Supp) 1 (HL), if the trader considers that the revenue seeks to take too large a share and to leave him with too little the expenditure which the trader incurred in endeavouring to correct this mistake is a disbursement laid out for the purposes of his trade. If he succeeds, he will have more money with which to earn profits next year." In view of this observation of the Supreme Court, it is not possible to follow the decision in J. K. Cotton M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y in his tour to foreign countries. The Income-tax Officer found that the tour had been undertaken mainly in connection with setting up of a new factory for the manufacture of electrodes and also a new steel factory. The chairman's wife also accompanied him during the foreign tour and part of the expenses incurred were for the travelling expenses of the chairman's wife. The Income-tax Officer, on a consideration of various circumstances, held that the tour was mainly for the purposes of setting up a new business, and, therefore, it was in the nature of a preliminary expense, and, as such, disallowed the claim. The Appellate Assistant Commissioner found that the chairman had visited various foreign countries in connection with setting up of new plants for the manufacture of electrodes and a steel factory. The manufacture of electrodes became necessary to push up the sales of oxygen and acetylene gases, which the assessee was manufacturing. The assessee also had a long-standing plan to set up a factory to manufacture different items of steel and had been in communication with certain firms in Japan for collaboration to set up a composite steel plant, including a rolling mill and wire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the cases cited at the bar. Counsel for the assessee relied upon the decision of the Andhra Pradesh High Court in Commissioner of Income-tax v. S. Krishna Rao [1970] 76 ITR 664 (AP), the decision of the Allahabad High Court in Security Printers of India (P.) Ltd. v. Commissioner of Income-tax [1970] 78 ITR 766 (All) and the decision of the Gujarat High Court in the case of Commissioner of Income-tax v. Saurashtra Cement Chemical Industries Ltd. [1973] 91 ITR 170 (Guj). The facts of the Andhra Pradesh decision in Commissioner of Income-tax v. S. Krishna Rao [1970] 76 ITR 664 (AP) were these. The assessee was the owner of a printing press and attended the International Printers Conference at Amsterdam, representing the Andhra Pradesh Printers Association. Besides attending the conference at Amsterdam, he visited various countries in Europe and utilised his time for studying various types of printing and machinery. The assessee claimed deduction of a sum of Rs. 7,160 which he had incurred on foreign tour, on the ground that the tour was actuated by business considerations and that it had helped him to get acquainted with development in printing equipment and techniques. The clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lied and expenditure for joining the company as a director, and (4) expenses incurred by Mr. M.C.K. for a trip to England to study techniques of security printing, director's remuneration, and rent of flat. These claims were disallowed by the Income-tax Officer on the ground that these were pre-incorporation expenses of the company and were of a capital nature. The Appellate Assistant Commissioner held that the expenses were all of a revenue nature, and they had been incurred by the promoters of the assessee-company in connection with business which was subsequently taken over by the company on its incorporation and were allowable as business expenditure. The Tribunal found that before the assessee-company was incorporated, its promoters had not only made preliminary arrangements for obtaining orders for security printing, but they had also actually commenced trading operations, and that, inasmuch as receipts resulting from these 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. The Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f security printing which were then in vogue in England. It as such held that it could not be said that Mr. M.C.K. came back with the knowledge of new methods of security printing which enured to the permanent and enduring benefit of the company. Following an unreported decision of the Bombay High Court in the case of Chemical Industries and Pharmaceutical Laboratories Ltd. v. Commissioner of Income-tax (ITR No. 14 of 1951 decided by the Bombay High Court on 31-8-1951), where the test laid down was that in such cases one has to find out whether the expenditure was a part of the process of profiting, it held that the expenditure incurred was a business expenditure. The view of the Tribunal that it was an expenditure to bring into existence a new asset was not accepted. In the case of Commissioner of Income-tax v. Saurashtra Cement Chemical Industries Ltd. [1973] 91 ITR 170 (Guj), a company was formed in 1956 for the manufacture and sale of cement. As part of its business, the assessee obtained a mining lease for quarrying limestone and started the mining operations in 1958. The expenditure was claimed by the assesseecompany for sums spent on extracting limestone as also depreciati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds of manufacturing, designing and processing. After their visit, the assessee-company imported new improved and modern machinery for the purpose of being used in running its textile mills. The Tribunal found that "the object" of this tour was to replace the old and out-of-date or obsolete machinery used in the textile mills of the assessee-company, by the more modern ones, and that the expenditure incurred in these circumstances related to the fixed framework of the profit-making apparatus of the assessee-company, and not to its carrying on of the business, and was, therefore, a capital expenditure. After accepting the finding of the Tribunal, the High Court held that the tour had been undertaken for the purpose of a preliminary survey of new methods of manufacturing, designing and processing and inspecting new machinery with a view to purchase them, even if not immediately, but at a later stage. It held that the tour was undertaken for the purpose of bringing into existence a capital asset and such expenditure would, therefore, be capital expenditure. Before we comment on these cases, it would be useful to refer to the decision of the Supreme Court in Assam Bengal Cement Compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssam Bengal Cement Company Ltd. v. Commissioner of Income-tax [1955] 27 ITR 34 (SC). The dicta of the Gujarat High Court in the case of Commissioner of Income-tax v. Saurashtra Cement Chemical Industries Ltd. [1973] 91 ITR 170 (Guj) would also apply. The cases cited by counsel for the assessee, in our view, cannot be appropriately applied to the facts of the present case. In the Andhra Pradesh case of Commissioner of Income-tax v. S. Krishna Rao [1970] 76 ITR 664 (AP) the trip had not been undertaken for the purpose of setting up any new business or purchasing any new equipment. It had been undertaken only to help the assessee to get acquainted with various developments in printing equipment and technology. Thus, the Andhra Pradesh decision cannot be appropriately applied to the present case. In Security Printers' case [1970] 78 ITR 766 (All) the expenses of Mr. H were allowed on the ground that business receipts arising out of the transaction which he entered into were included in the assessment year and further that the expenditure was incurred by Mr. H for procuring orders of considerable value and import licence for indent of fugitive papers for the purpose of security printi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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