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PUNJAB & HARYANA HIGH COURT
Bal Raj Tuli and S.S.Sandhawalia JJ.
Commissioner Of Income-tax
Versus
Saraswati Industrial Syndicate Ltd.
Income tax Reference No. 29 of 1971,30 of 1971,
Decided On : APRIL 15, 1975
Revenue - Income Tax - Section 41(1) - Summary of Acts and Sections: Section 41(1) of the Income-tax Act, 1961 - The court interpreted Section 41(1) of the Income-tax Act, 1961, and held that the corporate personality of the amalgamating company is blended and continued in the amalgamated company. The court emphasized that the benefit and the burden of a legal result must go together. The court also highlighted the statutory provisions of the I.T. Act, 1961, and held that the provision of housing for the labor of an industry is directly related to the purposes of business or profession. The court referred to Section 32(1) of the Act relating to depreciation and concluded that the provision of housing for the labor of the industry must be viewed as directly and intimately connected with the carrying on of the business. The court also referred to the case of CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC) to support the view that the expression 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits'.
Fact of the Case:
The case involved income tax references pertaining to two assessment years 1964-65 and 1965-66 of the assessee, M/s. Saraswati Industrial Syndicate Ltd., Yamunanagar. The first issue concerned the allowability of traveling expenses of the managing director as a revenue expenditure. The second issue related to the taxability of an amount taken over by the assessee-company on amalgamation with another company. The third issue involved the allowability of property tax paid on land and buildings used for the company's purposes as a revenue expenditure. The fourth issue concerned the taxability of an amount recovered as bond penalty from cultivators. The fifth issue involved the allowability of extra shift allowance on additions to plant and machinery. The sixth issue concerned the allowability of depreciation, extra shift allowance, and development rebate on loose tools and implements acquired by the company.
Finding of the Court:
The court found in favor of the assessee on the first, third, and sixth issues, holding that the traveling expenses, property tax, and loose tools and implements were allowable as revenue expenditure, and depreciation, extra shift allowance, and development rebate were admissible. The court found in favor of the revenue on the second, fourth, and fifth issues, holding that the amount taken over on amalgamation was chargeable to tax, the penalty recovered from cultivators was a trading receipt, and the extra shift allowance on additions to plant and machinery was allowable based on the number of days the concern worked as a whole.
Issues: The issues involved interpretation of the Income-tax Act, 1961, including the allowability of traveling expenses, taxability of amounts taken over on amalgamation, allowability of property tax as a revenue expenditure, taxability of penalty recovered from cultivators, allowability of extra shift allowance on additions to plant and machinery, and the allowability of depreciation, extra shift allowance, and development rebate on loose tools and implements.
Ratio Decidendi: The court's decision was influenced by the interpretation of the relevant provisions of the Income-tax Act, 1961, and the application of legal principles such as the wider scope of the expression 'for the purpose of the business' and the statutory definition of 'plant' under Section 43(3) of the Act. The court emphasized the direct and intimate connection of certain expenses with the carrying on of the business or profession and the principle that the benefit and the burden of a legal result must go together.
Final Decision: The court's final decision was a mixed outcome, with findings in favor of both the assessee and the revenue on different issues.
S.S.Sandhawalia, J.
1. This set of income-tax references at the instance of both the revenue and the assessee raises certain interesting questions of interpretation. As common questions of law and fact arise, I propose to dispose of them by this single judgment.
2. These references pertain to two assessment years 1964-65 and 1965-66 of the assessee, M/s. Saraswati Industrial Syndicate Ltd., Yamunanagar, for which the respective accounting periods ended on the 31st of August 1963, and the 31st of August, 1964. In the relevant statements of the case, as many as nine questions in all have been framed, but I propose to deviate from the serial order therein and first take up the two questions at the instance of the revenue.
3. M/s. Saraswati Industrial Syndicate Ltd. is a company carrying on the business of manufacture and sale of sugar and machinery for sugar mills and other industries. During July, 1963, its managing director visited Japan in connection with the companys business. A deduction of Rs. 11,922 on account of expenses was hence claimed by the company. The ITO disallowed the companys claim primarily on the ground that this expense was of a capital nature because the tour to Japan was undertaken with a yiew to enter into a collaboration agreement with a Japanese firm for the setting up of a unit for the manufacture of cement machinery. The AAC upheld the ITOs finding on this point. On further appeal, the Income-tax Appellate Tribunal found on facts that the company had already manufactured and sold cement machinery worth a little less than a lakh of rupees and that the tour of the managing director was not undertaken for the purpose of entering into a collaboration agreement for setting up a new venture, but it was for the purpose of improving upon the working of a venture already in existence, and for increasing its efficiency and output. The Tribunal, therefore, accepted the contention of the company that the amount claimed was a revenue expenditure. From these facts, the following question has been formulated :
"Whether, on the facts and in the circumstances of the case, the amount of Rs. 11,922 representing travelling expenses of the managing director is allowable as a revenue expenditure ?"
4. Mr. D. N. Awasthy, on behalf of the appellant-revenue, primarily contended that the tour of the managing director was solely for the purpose of signing the collaboration agreement and it was after this had been done that a new venture for the manufacture of cement machinery was set up. On these premises, he contended that the expense was of a capital nature.
5. I am unable to find any adequate factual basis for the appellant-revenues claim that the tour was primarily or solely for the signing of the collaboration agreement. Indeed, the facts found by the Tribunal point entirely to the contrary. It has been in terms found by the Tribunal that the business activity of manufacturing cement machinery was already in existence before the tour was undertaken. Not only that, in fact, substantial quantities of such machinery had been manufactured and marketed. Even prior to the 18th July, 1963, which is the date of the collaboration agreement, admittedly, two sales of about Rs. 60,622 on the 23rd of April, 1963, and Rs. 38,821 on the 3rd of June, 1963, had already been made by the company. There is no challenge to the date or the fact of these transactions. From this it is manifest that the manufacture of cement machinery was not the result or the consequence of the collaboration agreement. The Tribunal has, in terms, found that the object and purpose of the tour was to improve upon the working of the venture already in existence. It is the admitted case that no machinery whatsoever was ever purchased by the company from the collaborating firm in Japan, nor was this even an ancillary purpose of the tour. The object and the purpose of the tour is obviously a finding of fact which has been duly arrived at by the Tribunal and I fi
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