Expenses incurred by a parent company on behalf of its subsidiary companies may be allowable as a deduction under Section 10(2)(xv) of the Income-tax Act, 1922, if the expenses are wholly and exclusively incurred for the purpose of the subsidiary companies' businesses.

1. This reference raises a very interesting question. There is no direct authority on the point. However, the cases cited at the bar do throw some light in determining the controversy.

2. This reference has been made by the Income-tax Appellate Tribunal, Chandigarh Bench. The question referred for our opinion is as follows :

"Whether, on the facts and in the circumstances of the case, the amount of Rs. 36,966 charged to the assessee-company by Messrs. Oriental Carpet Manufacturers (London) Ltd. was not an allowable deduction under Section 10(2)(xv) of the Income-tax Act, 1922?"

3. This question has arisen out of the decision rendered by the Income-tax Appellate Tribunal, Delhi Bench "B".

4. On the facts leading to the reference, there is no dispute. The parent-company is Messrs. Oriental Carpet Manufacturers (London) Ltd. It has six subsidiary companies, namely:

1. East India Carpet Manufacturing Co. Ltd., Amritsar,

2. E. Hills & Co. Pvt. Ltd., Mirzapur,

3. Oriental Carpet Manufacturers (Canada) Ltd., Toronto,

4. Oriental Carpet Manufacturers Co. (London) Pvt. Ltd.,

5. Fritz & La Rue Company, New York,

6. The Oriental Carpet Manufacturers (India) Private Ltd., Amritsar--the assessee-company.

5. The parent-company (Messrs. Oriental Carpet Manufacturers (London) Ltd. (hereinafter referred to as the parent-company) does not carry on its own business. Its only source of income is dividends received from its six subsidiary companies. The parent-company, however, renders certain services to the subsidiary companies, namely :

(a) arranged for overdraft facilities.

(b) stood surety for Rs. 14 lakhs for the assessee-company for loans advanced by National & Grindlays Bank Ltd.

(c) advanced large amounts to the assessee-company for business purposes without charging interest.

(d) rendered advice on technical and business matters, export market expenditure for the work done for the subsidiary companies.

6. The expenses so incurred are recovered by the parent-company in proportion to the paid-up capital of the subsidiary companies.

7. The dispute in the present reference relates to the assessment year 1957-58, the previous year ending on 31st December, 1956. The total expenditure incurred by the parent-company during this assessment year amounted to £20,071. The parent-company deducted an amount of £3,903 on account of the expenses incurred by it. The balance £16,168 was distributed by the parent-company towards the expenses incurred by it on behalf of the subsidiary companies in proportion to the paid-up capital of those companies. The amount that fell to the share of the assessee-company is £2,072, or converted into rupees, Rs. 36,966. This amount was claimed by the assessee-company as a deduction on account of "central office administrative expenses". The claim was made under Section 10(2)(xv) of the Indian Income-tax Act, 1922.

8. The Income-tax Officer disallowed the assessees claim by his order dated 26th March, 1962. The relevant part of the order reads thus:

"Thus, it is clear that the holding company (parent-company) is incurring these expenses for its own purpose of ensuring that the capital sunk by that company entirely in the subsidiaries is properly supervised and controlled and is ultimately duly rewarding in the form of dividends."

9. An appeal was taken by the assessee to the Appellate Assistant Commissioner of Income-tax, Amritsar Range, and the Appellate Assistant Commissioner affirmed the decision of the Income-tax Officer for the same reasons which prevailed with the Income-tax Officer. The assessee preferred a second appeal to the Income-tax Appellate Tribunal, Delhi Bench B", and the Tribunal allowed the claim with the following observations:

"The assessee-company has made its claim for deduction under Section 10(2)(xv). Two conditions must be satisfied before it can be allowed. The first condition is that the disputed amount should have been spent by it wholly and exclusively for the purpose of its business.