This order will dispose of I. T. R. No. 43 of 1969 and I. T. R. No. 45 of 1969 which have been filed by the same assessee and similar points of law are involved in both the references. Only the year of assessment is different. The Income-tax Reference No. 43 of 1969 relates to the year 1962-63 while Income-tax Reference No. 45 of 1969 relates to the year 1961-62.
The relevant facts with regard to Income-tax Reference No. 45 of 1969 are that the assessee is a public limited company carrying on the business of manufacturing of sugar machinery and its component parts. In its income for the assessment year 1961-62, the assessee claimed allowance for a sum of Rs. 36,937 on account of travelling expenses of its managing director, Shri D. D. Puri. According to the assessee this expenditure was incurred by the managing director in respect of two foreign tours undertaken by him in connection with the business of the assessee-company. Out of the total claim of Rs. 36,937 a sum of Rs. 15,939 was said to have been spent by the managing director between October 4, 1959, and November 21, 1959, and the balance of Rs. 20,998 was stated to have been spent by him between April 10, 1960, and July 9, 1960. The purposes for which the managing director undertook the first tour from October 4, 1959 and November 21, 1959, are stated to be as under :
(a) To conclude negotiations with Messrs. A. F. Craig & Co. Ltd., for the manufacture of sugar machinery and for supply of imported components for sugar plants to be manufactured by the assessee;
(b) Negotiating the collaboration agreement with Messrs. John Thompson Ltd., Ettingshall, Wolverhampton - U. K.; and
(c) To place order for machine tools, etc.
The managing director wrote a letter to the Government of India on September 12, 1959, while submitting the application on the prescribed form for grant of foreign exchange. The reasons for the journey were stated as under :
'1. I visited U. K. earlier in the year for the purposes mentioned in my application dated 12th February, 1959, for grant of foreign exchange. While I was able to get a reduction of about Rs. 34,100 in the price of capital goods valuing Rs. 9,46,600 for which we placed orders, I could not conclude the negotiations with our collaborators, Messrs. A. F. Craig & Co. Ltd., Paisley, in connection with supply of imported components for sugar plant and assistance for the manufacture of other items in our works because the terms offered by them were prohibitive. I started negotiations with other manufacturers of sugar machinery also but as I could not make a commitment in the absence of any firm order, those negotiations also had to be suspended.
2. The Government of India in the Ministry of Industries, vide their letter No. IM/I/8(18)/59, dated 28th July, 1959 - annexure A - placed the responsibility of manufacturing and supplying the plant and machinery required for the Palakol Co-operative Agricultural & Industrial Society Ltd., Palakol, with us. We are taking this order in hand and have to deliver it on a tight time schedule.
3. In its very nature, the important work I have in hand cannot be undertaken by correspondence. Even if that was possible, the time element (for completion of the supply of machinery under the agreement with Messrs. Palakol Co-operative Agricultural and Industrial Society Ltd., which stipulates a heavy penalty for delay) would not permit of our adopting that course.
4. I, therefore, propose to visit U. K. and the continent as early as possible and finalise the matter. Besides I may have to visit some other European countries to arrange for steam engine or a turbo-alternator for the Palakol plant and another for the Saraswati Sugar Mills. The necessary foreign exchange for the latter is forthcoming in the form of a loan by the Industrial Credit and Investment Corporation of India Ltd. Bombay - copy of their letter enclosed marked B.
5. Besides we are negotiating a collaboration agreement with Messrs. John Thompson Ltd., Ettingshall, Wolverhampton, for the manufacture of boiler components in our works. The negotiations have been started with their representative in India but, as the matter is to be decided by the principals in U. K., I have to discuss the proposition with Messrs. John Thompson Ltd., so that the arrangement is finalised as early as possible to enable us to manufacture the boiler components also for the Palakol order. The basis of negotiations with John Thompson Ltd. is that they might invest from pound 1,00,000 to pound 3,00,000 for the first stage and much more later on.
6. We have yet to place orders for machine tools valuing about Rs. 1.5 lakhs for which we hold import licences. I have to negotiate with foreign manufacturers for those machine tools also.'
Question No. 7 in the application form is to the effect -
'If the object is to arrange for imports into Indian State :-
(a) Type of goods to be imported.
(b) Details of import licences held.' Against this question the reply given was yes and it was further stated -
(a) (1) Machine tools for the expansion of our works.
(2) Components and raw materials required for the manufacture of miling and other sugar manufacturing machinery including power plant.
(b) (1) Details of licences held for the import of machine tools as mentioned in (a) (1) above are :
(i) Licence No. 997537/HQ/CCI-CG dated 26-2-59 for Rs. 8.45 lakhs.
(ii) Licence No. 997420/HQ/CCI-CG dated 31-3-59 for Rs. 6 lakhs.
(2) A limit of Rs. 20.2 lakhs has been fixed for the imported components and power plant as mentioned in (a) (2) above. We have applied for licences for the part amount of Rs. 16.40 lakhs. The licences for the same are still awaited.'
The assessee-company also wrote a letter to the Assistant Controller, Reserve Bank of India, New Delhi, on September 29, 1959, in which it was mentioned that the negotiations with Messrs. John Thompson Ltd. were likely to be on the following lines :
I (a) Determining the total Sterling and Rupee implications of the scheme and the phasing thereof in paragraph 2 or 3 stages :
(b) Participation of the foreign Collaborator, namely, Messrs. John Thompson, entirely on equity capital basis or as bank loan.
(c) The setting up of a joint machinery for the purpose of purchase of capital equipment in the U. K. We do not want to be saddled with out-of-date machinery, etc.
(d) Utilisation of our present equipment for the manufacture of boilers;
(e) The layout of plant and machinery may have to be altered to suit siding curves and other permanent features of our premises;
(f) Negotiations regarding staff and apportionment of duties and responsibilities as between boiler manufacture and our existing activities.
II. To continue negotiations with collaborators, M/s. A. F. Craig & Co. Ltd., Paisley, in connection with the supply of imported components for sugar plants and assistance for the manufacture of other items in our works.
III. To place orders for machine tools - about Rs. 1.5 lakhs machine tools being needed for the expansion of works.'
Before the Income-tax Officer it was admitted that till the date of visit of the managing director to the continent and the U. K. the assessee-company was not manufacturing boiler or boiler components. From this fact the Income-tax Officer concluded :
'It seems to me that the purpose of the managing directors visit is attributable to two different types of activities, one relating to the assessee-companys existing business and the other relating to the assessee-companys intention to take up the manufacture of boilers and boiler components. In so far as the latter is concerned, it seems to me that all expenditure, which it incurred in respect of this activity, is in the nature of preliminary expenditure and cannot form a charge on the revenue of the company in respect of the activity relating to the former.'
No written report was submitted by the managing director to the assessee-company on his return nor was any such report submitted to the Income-tax Officer. The Income-tax Officer, therefore, observed :
'It is impossible accurately to work out the cost which has reference to the activity relating to the manufacturing of boiler and boiler components. In view, however, of the importance accorded to it by the company itself, it appears to me that its splitting-up at 50% would be reasonable allocation of the managing directors expenses, amongst the two different activities.'
He, therefore, allowed a sum of Rs. 7,969 out of Rs. 15,939 as a deductible expenditure and disallowed the remaining sum of Rs. 7,970 which he termed as preliminary expenses. This decision of the Income-tax Officer was upheld in appeal by the Appellate Assistant Commissioner as well as by the Appellate Tribunal.
The purposes of undertaking the second foreign tour by the managing director of the assessee-company from April 10, 1960, to July 9, 1960, were stated as under in the application made to the Government for sanction of the foreign exchange on February 27, 1960 :
'When I visited Europe last, I was able to arrive at a provisional agreement with M/s. John Thompson Ltd., Ettingshall, Wolverhampton, England, for manufacture of boilers and allied equipment in our workshop at Yamunanagar, District Ambala, with their collaboration. A copy of the provisional agreement is enclosed. The boards of directors of the two companies have since met and finally approved of the terms. We have applied to the Government of India for necessary licence under the Industries Development and Regulation Act. The Government of India have written to the effect that they have no objection to our undertaking the manufacture of boilers and have asked for further information to enable them to issue the licence. A copy of their letter in this regard is enclosed. The information has been furnished and we hope to get the licence in the near future. We have also applied to the Reserve Bank of India for permission to allot 8,333 shares of the face value of Rs. 100 each @ Rs. 120 per share to M/s. John Thompson Ltd. in terms of the agreement and we expect the necessary permission will be granted in due course. From the agreement it will be observed that the price of the shares payable by M/s. John Thompson Ltd. is to be utilised for the purchase and shipment from U. K. of plant and equipment required for the manufacture of boilers by us. From clause 7 of the provisional agreement it will also be observed that the purchase of plant and equipment for the manufacture of boilers has to be made in close co-operation of both the parties. It is, therefore, necessary for me to go to England in connection with the selection and purchase of this machinery. Besides, we have also to finalise the general layout plan for the boiler shop in our works in consultation with the experts of M/s. John Thompson Ltd. My visit is necessary in that connection also.
I propose to visit M/s. Demag-Zug GMBH(21b) Watter Ruhr., West Germany. We are negotiating collaboration for the manufacture of certain items including cranes and rotary compressors with this firm.
Since I am going abroad for the above main purpose I will also visit M/s. Escher Wyss at Zurich to discuss the question of one C-4 centrifugal machine which they agreed to supply to the Saraswati Sugar Mills free of charge from Godavari Sugar Mills Ltd. Godavari had been supplied that machine by Escher Wyss on approval earlier. In spite of our best efforts, M/s. Godavari Sugar Mills Ltd., have not dispatched that machine to us and the non-supply has already affected crushing of the said Saraswati Sugar Mills for the current season. M/s. Escher Wyss have now to be persuaded to supply one machine free of cost from Switzerland, direct, so that the Saraswati Sugar Mills is able to make use of it at least from the start of the next crushing season as Godavari Sugar Mills is not likely to supply the machine without long drawn-out litigation.
I will also visit Holland to sort out some outstanding matters with M/s. Stork Werkspoor. I also propose to go to Sweden to check up on the progress for the manufacture of turbines on order with M/s. Svenska Turbinfabriks Aktiebolaget Ljungstron, Pinspong (Sweden), placed through Asea Electric (India) (Private) Ltd.'
Question No. 7 in the application form was the same as stated above and the answer against this question was 'yes' and further it was stated :
'(a) Capital machinery for manufacture of boilers and allied equipment by the Indian Sugar & General Engineering Corporation Ltd.
(b) Application for the licence will be made after I have selected the machine to be imported.'
In the letter dated February 27, 1960, written by the assessee-company to the Reserve Bank of India it was stated as under :
'Shri D. D. Puri, managing director, Indian Sugar & General Engineering Corporation Ltd., is going abroad on this companys business for the following purposes :
1. To select and purchase machinery for the manufacture of boilers in co-operation with Messrs. John Thompson Ltd.
2. To finalise the general layout plan for the boiler shop in our works in consultation with the experts of M/s. John Thompson Ltd.
The full cost of Shri D. D. Puris journey will be borne by this company.'
On his return from the tour the managing director did not submit any report to the assessee-company nor was any such report made available to the Income-tax Officer. He, therefore, concluded that the main purpose of the visit by the managing director on behalf of the assessee-company was in respect of collaboration with Messrs. John Thompson Ltd. to start a new venture. He referred to the draft agreement and stated :
'The draft agreement brings out in details the stipulations which have been agreed to and the supply of the same would reveal that the assessee-company is heading on to a new and distinct feature, so, however, that all the expenditure in the nature of setting-up of this venture, including the managing directors travelling expenses, will stand to be treated on the footing of preliminary expenses. Even in respect of secondary visit to Ruhr there is no written report available, but it appears that here also, the purpose is to establish collaboration with a foreign party for manufacture of certain items of cranes and rotary compressors of certain dimensions which were not hitherto being made by the company. The expenses relating to this part of the visit of the managing director would also, therefore, be treated as being on the same footing as that relevant to the negotiations, etc., with M/s. John Thompson Ltd. and purchase of machinery.'
In view of all these facts the Income-tax Officer disallowed the entire amount of Rs. 20,998 and treated this expenditure as being in the nature of preliminary expenditure. This decision was upheld in appeal by the Appellate Assistant Commissioner and in further appeal by the Income-tax Appellate Tribunal.
During his foreign tour Shri D. D. Puri had claimed Rs. 761 on account of entertainment of companys guests. This expenditure was also held by the Income-tax Officer to be a capital expenditure and was disallowed. The question of law referred to this court for opinion in this case is as under :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the travelling expenses amounting to Rs. 28,967 and the entertainment expenses of Rs. 761 were not allowable as a revenue expenditure ?'
Income-tax Reference No. 43 of 1969 relates to the expenditure incurred by Shri D. D. Puri, the managing director of the assessee-company, on his foreign tour from November 3, 1960, to December 16, 1960. The purposes of this tour were stated in the application to the Reserve Bank of India, dated October 13, 1960, as under :
'The present capacity of the workshops of Indian Sugar & General Engineering Corporation Ltd. is two complete sugar factories per year.
It has now been decided to -
(a) step up the output from 2 to 4 plants a year;
(b) to reduce the imported content progressively;
(c) to undertake the manufacture of bigger plants than any made in the country so far. Hitherto, plants of only 1,000/1,200 tons capacity are being manufactured. We wish to manufacture plants up to 3,000 tons per day capacity;
(d) to negotiate the outright purchase of designs and drawings from abroad. This will not only help achieving (b) but also make large savings in royalties we now remit to our foreign collaborators.
For the manufacture of articles being imported presently we are negotiating for the purchase of drawings from McLeans in liquidation. If we succeed in getting these at a reasonable price, we shall reduce the imported content of the sugar machinery we manufacture, save sizeable amounts in the royalty payments to foreign collaborators and also enter the export market. McLeans have, over the last 50 years, supplied sugar factories all over the world. Orders for spares and replacements can be met only by the firm which succeeds in securing their drawings and patterns.
Alternative sources of securing drawings have been explored. We have approached Mr. L. A. Tromp, the international authority on sugar machinery designs, to undertake preparation of designs and drawings for us. This matter has to be discussed.
We are approaching other parties, i.e., B. M. A., Braunschewig and Stork-Verkspoor, Holland. We are trying to get these firms to show interest in the manufacture of new items at our shop.
We have a collaboration agreement with Messrs. John Thompson Ltd. of Wolverhampton for the manufacture of boilers. This is based on equity participation and provision of foreign exchange requirements by them. Machinery has been purchased and shipments are due to start shortly. I have to discuss the production programme. We are wanting to step up the production from 6 to 24 boilers a year in the very first phase and also to manufacture stokers right from the start.
I have also to discuss with John Thompson the proposed merger of the Indian Sugar & General Engineering Corporation Ltd. with its parent company.
We have a collaboration agreement with Messrs. Escher Wyss Ltd., of Zurich for the manufacture of continuous centrifugals. Production could not start for various reasons. This matter has to be reviewed and discussed with them.
We have on an order abroad for stuff worth Rs. 40 lakhs, being the imported content of the sugar factories we are supplying. Some items are falling behind schedule. I must look these up and expedite them or else the supply of the complete plant may be delayed. The first three plants are being supplied to co-operatives in Andhra Pradesh and Punjab.'
Against question No. 7, similarly worded as question No. 7, set out above, a list of the goods to be imported and the relevant import licences with regard thereto was appended. Along with the application of the assessee-company to the Reserve Bank of India, dated October 12, 1960, a certificate was sent by the chairman of the company stating that Shri Puri was going abroad on companys business, inter alia, for the following purposes :
'(i) To make arrangements, on the basis of collaboration, or otherwise, for the manufacture of fabricated head stocks and gearings and also for the manufacture of steam engine and centrifugals with some firm(s) abroad.
(ii) To discuss outstanding matters with M/s. John Thompson Ltd., Wolverhampton, including output programme of boilers and also with a view to make arrangements for the manufacture of stokers in our shops.
(iii) To review the work of the collaboration agreement with M/s. A. F. Craig & Co. Ltd.'
From these two documents the Income-tax Officer concluded that the cost of the foreign tour of the managing director had to be treated as one acquiring the character of capital expenditure but he disallowed only one half of the expenditure, i.e., a sum of Rs. 8,258, out of Rs. 16,516 claimed by the assessee-company. This order was also upheld in appeal by the Appellate Assistant Commissioner and in further appeal by the Income-tax Appellate Tribunal. The following question of law has been referred for opinion to this court in this case :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the travelling expenses amounting to Rs. 8,258 on the foreign tour of the managing director for the assessee-company were not allowable as business expenditure ?'
The assessment for the year 1961-62 was made under section 23(3) of the Indian Income-tax Act 1922, while the assessment for the year 1962-63 was made under section 143(3) of the Income-tax Act, 1961. Allowances of these expenses were claimed under the provisions of section 10(2) (xv) of the 1922 Act, and section 37(1) of the 1961 Act, corresponding thereto. This matter was considered by Mehar Singh C.J. and myself in Dalmia Dadri Cement Co. Ltd. v. Commissioner of Income-tax. In that case an engineer had gone abroad on behalf of the assessee-company to inspect the machinery which was to be purchased by the company for the extension of its factory and the company claimed The travelling expenses of the engineer as business expenditure. The claim was disallowed by the Income-tax Officer and the Appellate Assistant Commissioner, on the ground that the expenses were incurred by the engineer in connection with the purchase and inspection of the machinery which was to be installed for the extension of the assessees factory and, therefore, could not be considered as revenue expenditure. On appeal, the Income-tax Appellate Tribunal found as a fact :
(a) that the travelling expenses incurred by the engineer were connected with the purchase of new plant and machinery which were to be installed for extension of the assessee-companys cement factory; and
(b) that the assessee-company actually purchased plants and machinery worth one crore of rupees soon after the visit of the engineer to Europe, and the Tribunal, therefore, held that the expenditure was of a capital nature.
On a reference to this court it was held that the expenditure incurred in this connection as travelling expenses of the engineer was an integral part of the whole transaction of the purchase of plant and machinery for the expansion of its business. Since the purchase of the said machinery by the assessee-company for expansion of its business was in the nature of capital expenditure and as it was for the completion of that the expenditure in question was incurred by it for the expansion of its business and the Tribunal had rightly held that this amount was in the nature of capital expenditure and was not allowable to the assessee-company under section 10(2) (xv) of the 1922 Act.
Several judgments of their Lordships of the Supreme Court were considered in that case. In the light of the principle laid down in that judgment it has to be determined in this case whether the expenditure incurred on foreign tours of the managing director related to the acquisition of the capital assets, that is, assets of enduring nature or stock-in-trade of the company. The careful scrutiny of the purposes of foreign tours mentioned above in detail clearly shows that the Income-tax Officer had correctly arrived at the conclusion that all the three tours were mostly concerned with the acquisition of capital assets in the form of collaboration for expansion of the business of the company or the consultation with their former collaborators for expansion of the manufacturing capacity of the company which were advantages of enduring nature and would have become the source of income for the assessee-company. With regard to two foreign tours the Income-tax Officer liberally allowed one-half of the expenses as revenue expenses and disallowed the remaining one-half. That proportion can also not be said to be unjustified or unreasonable in the circumstance of the case. The managing director had not furnished any report as to his achievements and accomplishments in foreign countries as a result of his tours and the benefit that the business of the company acquired therefrom. In order to claim a deduction on account of expenditure for purposes of business the onus lies on the assessee to prove that the expenditure was incurred for the purposes of business and was not of a capital nature. Merely because a businessman goes out to the foreign country to study there the manufacturing conditions of factories similar to the one worked by him, does not necessarily lead to the conclusion that the expenditure was of a revenue nature. The learned counsel for the assessee has, however, relied on a judgment of their Lordships of the Supreme Court in India Cements Ltd. v. Commissioner of Income-tax, wherein the following observation of Shah J. in Bombay Steam Navigation Co. v. Commissioner of Income-tax, at page 59, was approved :
'Whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on or conduct of the business, that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure.'
The case before their Lordships of the Supreme Court related to the expenses incurred on securing the loan for the purpose of the company which was disallowed by the income-tax authorities. After discussing the case law their Lordships expressed the opinion - (a) that the loan obtained was not an asset or an advantage of enduring nature, (b) that the expenditure was made for securing the use of money for a certain period, and (c) that it was irrelevant to consider the object with which the loan was obtained. Consequently, in the circumstances of the case, the expenditure was revenue expenditure within section 10(2) (xv).
In the instant cases it can be said that the foreign tours undertaken by the managing director of the assessee-company were in connection with the business of the company but they were mostly of capital nature and, therefore, were rightly disallowed to the extent of the disallowance made. The learned counsel for the assessee has, however, vehemently argued that if it was necessary for the managing director of the assessee-company to go abroad in connection with the companys business, the passage-money could not be apportioned. We find no substance in this submission as every expenditure incurred has to be apportioned. If a part of it is to be allowed and the remaining to be disallowed, the onus is on the assessee-company to prove the amount of expenditure which can be allowed. But, the assessee-company did not furnish any material to the Income-tax Officer to arrive at the conclusion. He, therefore, exercised his judgment and discretion which cannot be said to be arbitrary or unreasonable. To repeat, the purposes of these foreign tours set out above clearly make out that the primary purpose was to acquire assets of a capital nature which would have resulted in the expansion of the manufacturing activities of the assessee-company and did not refer to the acquisition of stock-in-trade in foreign lands.
With regard to the item of Rs. 761 on account of entertainment, we are of the opinion that this amount should have been allowed by the income-tax authorities once they came to the conclusion that the managing director had visited the foreign countries for the purposes of the business of the assessee-company. By this expenditure no capital asset was brought into existence. It was an ordinary courtesy to entertain some persons connected with the business of the company in the countries visited by the managing director. This amount should have been allowed.
For the reasons given above our answer to the question referred to us in I. T. R. No. 43 of 1969 is in the affirmative, that is, in favour of the revenue and against the assessee. Our answer to the question referred in I. T. R. No. 45 of 1969 is in the affirmative, that is, in favour of the revenue and against the assessee with regard to travelling expenses amounting to Rs. 28,967 and in the negative, that is, in favour of the assessee and against the revenue, with regard to the entertainment expenditure of Rs. 761. The Commissioner of Income-tax is entitled to his costs which we assess at Rs. 300 for both the references.