INCOME TAX OFFICER v. SUTLEJ COTTON MILLS LTD
[Citation -1987-LL-0123-4]

Citation 1987-LL-0123-4
Appellant Name INCOME TAX OFFICER
Respondent Name SUTLEJ COTTON MILLS LTD.
Court ITAT
Relevant Act Income-tax
Date of Order 23/01/1987
Assessment Year 1981-82
Judgment View Judgment
Keyword Tags legitimate business expenditure • capital or revenue expenditure • benefit of enduring nature • construction of a building • commercial expediency • cost of construction • annual subscription • chamber of commerce • commercial practice • specific provision • enduring advantage • revenue nature • capital nature • capital asset • share capital • sugar factory
Bot Summary: The departmental representative by referring to the Calcutta High Court decision in the case of Bengal Assam Investors Ltd. vs. CIT 142 ITR 156 and the Punjab Harayana High Court decision in the case of Groz- Beckert Soboo Ltd. vs. CIT 54 CTR 221: 160 ITR 743 argued that since the object and the purpose of the expenditure was to strengthen man the capital structure of the assessee company on a permanent basis, the assessee derived benefit of enduring nature and the ITO was justified in treating the expenditure as capital in nature. The expenditure incurred was not for the purpose of raising any additional capital as was the case before the Punjab Harayana High Court in the case of Gros-Beckert Saboo Ltd. vs. CIT 54 CTR 221: 160 ITR 743 and therefore, by following the Bombay High Court decision in the case of Bombay Trading Corpn. The departmental representative stated that the CIT(A) was wrong in relying on the Supreme Court decision in the case of T.H. Sugar Factory and Oil Mills Ltd. vs. CIT 19 CTR 185: 125 ITR 293 as in that case the issue was whether the contribution made under the sugarcane development scheme towards the part of cost of construction of roads in the area around the assessee's factory was an expenditure of revenue or capital nature. The Supreme Court in that case holding that by having the new road constructed for the improvement of transport facilities the assessee acquired an enduring advantage and expenditure incurred was of a capital nature. To be a permissible deduction there must be a direct and intimate connection between the expenditure and the business, i.e. between the expenditure and the character of the assessee as a trader and not as owner of assets, even if they are assets of business. As the facts of the instant case would show that the amount paid as contribution was not by way of regular subscription or annual fees payable by the assessee as a member of the Punjab, Haryana and Delhi Chamber of Commerce, there is no direct nexus between the expenditure and the business of the assessee and it cannot be said on the facts stated above that the expenditure incurred was incidental to the assessee's business. In the circumstances, the ITO was wrong in inferring from the facts stated by him that the expenditure was capital in nature, inasmuch as no asset was created by the assessee by incurring the aforesaid expenditure.


grounds raised in this departmental appeal as follows: That on facts and in circumstances of case CIT(A) erred in law as well as on facts in holding that expenses incurred in connection with issue of bonus shares was revenue expenditure and thereby violated specific provision of s. 35D (C) (iv) of IT Act. That facts and circumstances of case ld. CIT(A) was not justified in deleting sum of Rs. 1 lakh considering same as revenue expenditure. I regard to first ground facts in brief are that ITO added back Rs. 29,332 out of miscellaneous expenses with narration "Bonus shares issue expenses capital expenditure." CIT (A) by following Supreme Court decision in case of India Cements Ltd. vs. CIT (1966) 60 ITR 52 (SC) and Madras High Court decision in case of CIT vs. Kishenchand Chellaram (India) P.Ltd. (1980) 16 CTR (Mad) 248: (1981) 130 ITR 385 (Mad) deleted addition. departmental representative by referring to Calcutta High Court decision in case of Bengal & Assam Investors Ltd. vs. CIT (1983) 142 ITR 156 (Cal) and Punjab & Harayana High Court decision in case of Groz- Beckert Soboo Ltd. vs. CIT (1986) 54 CTR (P&H) 221: (1986) 160 ITR 743 (P&H) argued that since object and purpose of expenditure was to strengthen man capital structure of assessee company on permanent basis, assessee derived benefit of enduring nature and, therefore, ITO was justified in treating expenditure as capital in nature. In reply assessee's ld. counsel stated that none of case laws relied on departmental representative applied to facts of instant case as in first case (1983) 142 ITR 156 (Cal) question before Calcutta High Court was whether legal expenses incurred in connection with purposed amalgamation with another company, which never took place, was capital or revenue expenditure and in second case (1986) 54 CTR (P&H) 221: (1986) 160 ITR 743 (P&H) issue before High Court was whether expenditure incurred in increasing share capital of company was capital or revenue expenditure. It has been stated that assessee issued bonus shares by transferring part of its reserve to share capital account. It did not affect capital structure of company and hence on ratio of Supreme Court in case of Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113: (1980) 124 ITR 1 (SC), it has to be held that advantage derived by assessee was not in capital filed and hence was deductible as revenue expenditure. assessee's ld. counsel placed reliance on Bombay High Court in case of Bombay Burmah Trading Corpn. Ltd. vs. CIT (1983) 32 CTR (Bom) 306: (1984) 145 ITR 793 (Bom) and decision relied upon by CIT(A), namely CIT vs. Kisenchand Chellaram (India) P. Ltd.(1980) 16 CTR (Mad) 248: (1980) 131 ITR 3 8 5 (Mad) wherein it has been held that fees paid to Registrar of Companies for increasing share capital of company is revenue expenditure. ld. counsel also brought to our notice Tribunal's orders in case of Jay Shree Tea & Industries Ltd. ITA No. 1277 (Cal) of 1983) & Century Enka Ltd. (ITA No. 52 (Cal) of 1978-79) wherein on similar facts it was held that expenditure incurred in connection with issue of bonus shares was deductible as revenue expenditure. We agree with assessee's ld. counsel that High Court decisions relied on by departmental representative are distinguishable on facts with assessee's case. expenditure incurred was not for purpose of raising any additional capital as was case before Punjab & Harayana High Court in case of Gros-Beckert Saboo Ltd. vs. CIT (1986) 54 CTR (P&H) 221: (1986) 160 ITR 743 (P&H) and therefore, by following Bombay High Court decision in case of Bombay Trading Corpn. Ltd. (supra) we uphold CIT(A) 's order in this regard. It is pertinent to print out that point raised in ground, namely, that expenditure in connection with issue of bonus shares was to be considered in light of provisions of s. 35D (c) (iv) does not arise out of orders of authorities below. It seems that in ground, reference has been made to provisions contained s. 35D(2) (c)(iv) which provisions in circumstances are not applicable inasmuch as same concerns expenditure incurred in connection with issue for public subscription of shares in or debentures of company. In instant case, no fresh shares were issued either by public company. In instant case, no fresh shares were issued either by public subscription or otherwise and, therefore, provisions of s. 35D are not applicable. facts relating to ground No. 2 are that assessee who is member o f Punjab, Haryana & Delhi Chamber of Commerce paid Rs. 1. Lac to said Chamber of Commerce as subscription. Before ITO it was explained that aforesaid Chamber of Commerce constructed building in Delhi and each member made certain contribution for that purpose. assessee, it was explained before ITO, contributed Rs. 1 lac for construction of Chamber's building in Delhi. ITO on these facts held that expenditure incurred was o f capital nature. ITO further refused to allow depreciation on amount capitalised by observing that assessee was not owner of building. CIT(A) held that expenditure was of revenue nature as "the building constructed by Chamber of Commerce will be utilised for purpose of rendering various services in constituents including appellant." departmental representative stated that CIT(A) was wrong in relying on Supreme Court decision in case of T.H. Sugar Factory and Oil Mills (P) Ltd. vs. CIT (1980) 19 CTR (SC) 185: (1980) 125 ITR 293 (SC) as in that case issue was whether contribution made under sugarcane development scheme towards part of cost of construction of roads in area around assessee's factory was expenditure of revenue or capital nature. It has been pointed out that assessee paid towards construction of building of Chamber of Commerce and, therefore was not expenditure laid out wholly and exclusively for purpose of assessee's business. Our attention was drawn to Supreme Court decision in case of Travancore Cochin Chemicals Ltd. vs. CIT 1977 CTR (SC) 148: (1977) 106 ITR 900 (SC) where in question was whether money contributed for construction of new road in area where assessee's factory is located to improve transport facilities is capital or revenue expenditure. Supreme Court in that case holding that by having new road constructed for improvement of transport facilities assessee acquired enduring advantage and expenditure incurred was of capital nature. In reply, assessee's ld. counsel stated that question whether particular expenditure is of revenue or capital nature can arise only when it is found by ITO that expenditure was incurred in course of assessee's business. It has been pointed out that ITO did not dispute fact that expenditure was incurred in connection with assessee's business but its legitimacy within meaning of s. 37(1) was disputed by ITO. With reference to Madras High Court in case of CIT vs. Sundaram Iyengar & Sons (P) Ltd. (1974) 95 ITR 428 (Mad) and Supreme Court decision in case of Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113: (1980) 124 ITR 1 (SC) ld. counsel stated that assessee did not acquire for itself any capital asset and amount in question was permissible deduction as revenue expenditure incurred wholly and exclusively for purpose of assessee's business. amount paid was not in nature of fees or annual subscription payable to Punjba, Haryana and Delhi Chamber of Commerce, of which assessee is member. Being existing member, assessee was obtaining all facilities and services of said Association. During relevant previous year, assessee paid voluntarily aforesaid sum of Rs. 1 lac towards construction of Chambers buildings at Delhi. If payment or expenditure is incurred to facilitate carrying on of business of assessee and is supported by commercial expediency it does not matter that payment is voluntarily. expression used in s. 37 (1) i.e. "for purpose of business" has been explained in context of more or less similar expression used in s.10(2)(xv) of IT Act 1922. In case of Travancore Titanium Product Ltd. vs. CIT (1966) 60 ITR 277 (SC) wherein at p. 282 it has been observed thus: "The nature of expenditure or outgoing must be adjudged in light of accepted commercial practice and trading principles. expenditure must be incidental to business and must be necessitated or justified by commercial expediency. It must be directly and intimately connected with business and be laid out by taxpayer in his character as trader. To be permissible deduction there must be direct and intimate connection between expenditure and business, i.e. between expenditure and character of assessee as trader and not as owner of assets, even if they are assets of business." As facts of instant case would show that amount paid as contribution was not by way of regular subscription or annual fees payable by assessee as member of Punjab, Haryana and Delhi Chamber of Commerce, there is no direct nexus between expenditure and business of assessee and it cannot be said on facts stated above that expenditure incurred was incidental to assessee's business. contribution as such in our opinion was nature of donation which was not necessitated b y commercial expediency and therefore, was not legitimate business expenditure of assessee. In circumstances, ITO was wrong in inferring from facts stated by him that expenditure was capital in nature, inasmuch as no asset was created by assessee by incurring aforesaid expenditure. case laws relied on by both parties are not, therefore, applicable to facts of instant case. We would accordingly, hold that assessee was not entitled to deduction of Rs.1 lac being contribution made to Punjab, Haryana & Delhi Chamber of Commerce as same was not extended wholly and exclusively for purpose of assessee's business. We would accordingly, by reversing CIT(A) 's order restore ITO's order in this regard. In result, appeal is allowed in part. *** INCOME TAX OFFICER v. SUTLEJ COTTON MILLS LTD.
Report Error