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Commissioner of Income-tax Vs. Rajasthan Machinery Mart (P.) Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtRajasthan High Court
Decided On
Case NumberD.B. Income-tax Reference No. 50 of 1980
Judge
Reported in[1986]160ITR952(Raj); 1985(2)WLN142
ActsIncome Tax Act, 1961 - Sections 37(1)
AppellantCommissioner of Income-tax
RespondentRajasthan Machinery Mart (P.) Ltd.
Appellant Advocate B.R. Arora, Adv.
Respondent Advocate J.L. Daga, Adv.
Excerpt:
.....the managing director was of capital nature. [1969] 71 itr 752, while considering the question of capital expenditure or business expenditure in connection with an expenditure on obtaining the benefit of technical assistance for running the assessee's business more efficiently so as to earn more profits with the improved knowledge and technique which trainees had acquired, held that a payment made with a view to obtain the benefit of technical assistance for running the assessee's business more efficiently so as to earn more profit and not by way of transfer of fruits of research, once and for all can be treated as an item of revenue expenditure. this decision is clearly distinguishable on facts. in the circumstances, we are more than satisfied that the income-tax officer could not be..........incurred by the assessee on the tour of its managing director to the u.s.a. was allowable as revenue expenditure '2. the assessee (non-petitioner) is a private limited company. it derives income from selling tractors, luna mopeds, godrej steel furniture, etc. for the assessment year 1976-77, the assessee incurred an expenditure of rs. 11,039 on the foreign tour of the managing director, shri p.s. murdia. the case of the assessee is that the tour was undertaken to the u.s.a. mainly on the following two grounds :' 1. to take direct dealership for the supply of steel to hindustan zinc ltd., udaipur, against their annual enquiry. there was an invitation from m/s. mclouth steel corporation, 300, south livernois avenue, detroit, michigan (usa). 2. to study the equipments such as test.....
Judgment:

S.K. Mal Lodha, J.

1. This reference has been made by the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur ('the Tribunal' herein), at the instance of the Commissioner of Income-tax, Jodhpur. The Tribunal has referred the following question of law arising out of its order dated December 10, 1979, passed in ITA No. 764/JP/1978-79 :

'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the expenditure of Rs. 11,039 incurred by the assessee on the tour of its managing director to the U.S.A. was allowable as revenue expenditure '

2. The assessee (non-petitioner) is a private limited company. It derives income from selling tractors, luna mopeds, godrej steel furniture, etc. For the assessment year 1976-77, the assessee incurred an expenditure of Rs. 11,039 on the foreign tour of the managing director, Shri P.S. Murdia. The case of the assessee is that the tour was undertaken to the U.S.A. mainly on the following two grounds :

' 1. To take direct dealership for the supply of steel to Hindustan Zinc Ltd., Udaipur, against their annual enquiry. There was an invitation from M/s. McLouth Steel Corporation, 300, South Livernois Avenue, Detroit, Michigan (USA).

2. To study the equipments such as Test Bench, Antomiser Repair Bench and important tools required for the repairs and calibration of PT pumps of Commins Engines and to take practical training in the same. '

3. Before the Income-tax Officer, the assessee submitted a detailed note on February 18, 1978. The Income-tax Officer after considering the evidence on record and contentions of the assessee opined that the tour was undertaken primarily in connection with the farbrication of the Test Bench. In these circumstances, the Income-tax Officer held, vide his order dated February 21, 1978, that such expenditure was of capital nature. He, therefore, disallowed it.

4. An appeal was taken. The Appellate Assistant Commissioner on the basis of the material on record concurred with the finding of the Income-tax Officer that such expenditure was of capital nature. He, therefore, dismissed, the appeal by his order dated August 31, 1978. A further appeal was filed by the assessee before the Tribunal. The Tribunal disagreed with the conclusion arrived at by the Income-tax Officer and the Appellate Assistant Commissioner. It held that the amount of Rs. 11,039 spent in connection with the foreign tour of the managing director was a business expenditureand as such should be allowed. It will be useful to excerpt the following portions from para. 7 of the order of the Tribunal :

'...From the aforesaid material, it is clear that the assessee company was trading in machinery, hardware, steel furniture, millgin stores and other raw materials. It was also on the approved list of suppliers to the various Government departments and semi-Government undertakings......So, in substance, the purpose of visiting the U.S.A. was to seek the feasibility of a steel deal, which was required by the assessee company for increasing its profits. The assessee company also wanted to start a Test Bench in Udaipur, but that did not materialise. Under the circumstances, the expenditure in question cannot be called as capital in nature... '

5. An application under Section 256(1) of the Income-tax Act, 1961 (No. XLIII of 1961)('the Act'), was filed by the Commissioner of Income-tax, Jodhpur. He desired that two questions of law which have been mentioned in the statement of the case may be referred for the opinion of this court. The Tribunal has, however, referred the aforesaid question only.

6. We have heard Mr. B.R. Arora, learned counsel for the Revenue, and Mr. J.L. Daga, learned counsel for the assessee.

7. It was contended by Mr. B. R. Arora that the expenditure incurred by the assessee on the foreign tour of its managing director was capital expenditure and, therefore, the Tribunal should not have allowed it. The submission, in this connection, is that the expenditure was incurred in connection with the fabrication of a Test Bench by obtaining training for the repairs of pumps and technical know-how from the foreign company and since the expenditure is related to a capital asset, this would be treated as a capital expenditure and not as a revenue expenditure. In this connection, he invited our attention to the reasons given by the Income-tax Officer as well as the Appellate Assistant Commissioner for holding that the expenditure incurred by the assessee on the foreign tour of the managing director was of capital nature. On the other hand, Mr. J.L. Daga, learned counsel for the assessee, supported the order of the Tribunal and while adopting the reasons given by it pressed for our consideration that the Tribunal was justified in allowing the amount of Rs. 11,039 spent on the foreign tour of the managing director as revenue expenditure. We have given our anxious consideration to the rival contentions of the learned counsel for the parties.

8. Section 37 of the Act lays down that any expenditure (not being expenditure of the nature described in Sections 30 to 36 and Section 80VV and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes ofthe business or profession shall be allowed in computing the income chargeable under the head ''Profits and gains of business or profession'. In other words, in Section 37 of the Act, if any amount has been spent by the assessee wholly and exclusively for the purpose of carrying on of the business, it is an allowable deduction or an allowable expenditure. In other words, it is a revenue expenditure. The correct position, in this connection, is that when the director or the managing director or a technical personnel of a company goes on foreign tour in connection with the acquisition of capital asset and collaboration for expansion of the business of the company, then such expenses would be capital in nature. Further that travelling expenses on tour abroad for making negotiations or training in the manufacture of steel or in pursuance of the foreign collaboration agreement or for purchase of new machinery are also in the nature of capital expenditure and they have to be disallowed. On the contrary, if the expenditure is incurred for technical know-how of the principal business run by the assessee, it has to be treated as revenue expenditure on tours as it is for the purpose of securing knowledge and information. In this case, the Tribunal on the basis of the material that is on the record has come to the conclusion that the purpose of visiting the U.S.A. by the managing director, Shri P.S. Murdia, was to study the feasibility of a steel deal, which was required by the assessee in order to increase the profits. In connection with the business, the assessee company also wanted to start a Test Bench at Udaipur but that did not materialise. The assessee company was dealing in machinery, hardwares, steel furniture, millgin stores, etc., and in connection with its business, it received certain enquiries from M/s. Hindustan Zinc Ltd., Udaipur. The Hindustan Zinc Ltd., Udaipur, wanted supply of such goods on a particular type of steel which was not available in India and so the assessee company after correspondence with the U.S.A. company sent its managing director for finding out the availability of such material. In these circumstances, it cannot be said that the managing director was sent to find out the feasibility of starting a new business. The object of sending the managing director to the U.S.A. was to enable it to effect supply of specified commodities with a particular steel or material and this would have increased the income or profit of the assessee company. The managing director was sent in connection with acquiring know-how for manufacture of a particular type of machinery with a particular kind of steel and, therefore, there is no question of bringing into existence an asset of enduring nature. The Tribunal has correctly stated that the assessee company by sending its managing director to the U.S.A. only wanted to augment its income and in such a case, the expenditure incurred by the assessee on the foreign tour of its managing director to the U.S.A. wasof a revenue nature and was, thus, an allowable expenditure under Section 37(1) of the Act.

9. The aforesaid conclusion of ours stands fortified by the decisions mentioned hereunder.

10. A Division Bench of the Gujarat High Court in CIT v. Alembic Glass Industries Ltd. [1969] 71 ITR 752, while considering the question of capital expenditure or business expenditure in connection with an expenditure on obtaining the benefit of technical assistance for running the assessee's business more efficiently so as to earn more profits with the improved knowledge and technique which trainees had acquired, held that a payment made with a view to obtain the benefit of technical assistance for running the assessee's business more efficiently so as to earn more profit and not by way of transfer of fruits of research, once and for all can be treated as an item of revenue expenditure.

11. In Security Printers of India (P.) Ltd. v. CIT : [1970]78ITR766(All) , the travelling expenses of the directors were incurred to secure orders for the purpose of carrying on the business of the company and to study the techniques adopted in foreign countries with respect to the business of the assessee. A question, arose as to whether it was an allowable expenditure under Section 10(2)(xv) of the Indian Income-tax Act, 1922 ('the old Act'). The Division Bench consisting of R. S. Pathak J., as he then was, and T.P. Mukerjee J. of the Allahabad High Court held that any expenditure incurred by a director or an agent of a company to secure orders for the purpose of carrying on the business of the company is entirely of a revenue nature and such expenditure or any part thereof does not bring into existence any asset of enduring benefit for the company. It was ruled that the expenditure incurred by a businessman or his agent in foreign tours to acquaint himself with new and modern techniques is revenue in character and such expenditure is incurred only with a view to earn greater profits in a competitive market and not to acquire a new asset.

12. In Sayaji Iron and Engineering Works P. Ltd. v. CIT : [1974]96ITR240(Guj) , in order to acquire the technical know-how and also for the purpose of studying and obtaining training in the manufacture of conveyor leaders, two directors and the production manager of the company went to Germany. The Tribunal disallowed the expenditure. On a reference, it was held that the expenditure had been incurred for a limited purpose, namely, to get an idea as to the design of a hoist and study new and modern techniques of manufacturing process involved therein and no capital asset had been brought into existence or was intended to be brought into existence as a result. The expenditure was held to be not of a capital expenditure. The principle laid down in Sayaji Iron and EngineeringWorks' case : [1974]96ITR240(Guj) is that the expenditure incurred in connection with acquiring know-how for manufacturing of electric hoists was allowable as business expenditure.

13. The expenditure was incurred on the foreign tour of the director for the purpose of expansion of business of the company in Karamchand Premchand Pvt. Ltd. v. CIT [1982] 137 ITR 209 , While considering the question whether it was capital or revenue expenditure, it was held that when the object for which the assessee had incurred the expenses is to increase its own income by expanding the existing business or starting a new business for the managed company, then in doing so the assessee does not acquire any capital asset nor had any benefit of an enduring nature accrued to it. Reference was made therein to Tata Sons Ltd. v. CIT : [1950]18ITR460(Bom) , wherein it was observed that while deciding the question whether a particular deduction claimed by the assessee company as a deduction is an expenditure laid out or expended wholly and exclusively for the purpose of its business, one has not to take an abstract or academic view of what is proper expenditure laid out or expended wholly and exclusively for the purpose of one's business but one has got to take into consideration questions of commercial expediency and the principle of ordinary commercial trading and the main consideration that has got to weigh with the court is whether the expenditure was a part of the process of profit-making and further that if the expenditure helps or assists the assessee in making or increasing the profits, then undoubtedly that expenditure would be expended wholly and exclusively for the purpose of business.

14. In CIT v. National Rayon Corpn. Ltd. : [1985]155ITR413(Bom) , the assessee company had incurred expenditure on the foreign tour of its managing director for discussing foreign exchange aspect with the foreign supplier of plant and machinery for its new project. Section 37(1) of the Act came up for consideration whether such expenditure was of capital or revenue nature. It was held that unless the expenditure is directly related to a capital asset acquired or to be acquired in the near future, it cannot be said to have brought about an enduring benefit and to be of a capital nature. The principal purpose of the visit of the managing director was to reduce the foreign exchange component in the expenditure to be incurred in setting up the plant and so the expenditure incurred was allowable as a revenue expenditure. We are in respectful agreement with the view expressed in the aforesaid decisions.

15. We are disposed to think that the expenditure of Rs. 11,039 incurred by the assessee on the foreign tour of its managing director, Shri P.S. Murdia, was allowable as revenue expenditure under Section 37(1) of the Act in the relevant assessment year 1976-77.

16. Now, we advert to the decisions relied upon by the learned counsel for the Revenue. In Dalmia Dadri Cement Co. Ltd. v. CIT , the expenditure which was incurred was in connection with the purchase and inspection of the machinery to be purchased by the company. The tour was so integral and closely linked to the machinery to be purchased that the learned judges of the Punjab & Haryana High Court held it to be a capital expenditure. This decision is clearly distinguishable on facts.

17. Saraswati Industrial Syndicate Ltd. v. CIT is beside the point. In that case, the purpose of the foreign tour undertaken by the managing director of the assessee company was for the acquisition of capital assets in the form of collaboration for expansion of the business of the company or consultation with their former colloborators for expansion of the manufacturing capacity of the company and that according to the learned judges was an advantage of enduring nature and would have become a source of income for the assessee company. Dalmia Dadri Cement Co.'s case was applied which we have already said is distinguishable on facts. Saraswati Industrial Syndicate's case is also of no avail to the learned counsel for the Revenue.

18. So far as Hyderabad Allwyn Metal Works Ltd, v. CIT : [1975]98ITR555(AP) is concerned, the assessee in that case was manufacturing refrigerators, steel furniture and building bus bodies. The expenditure which was claimed to be revenue expenditure was incurred in connection with one of its directors going on a tour to Japan because the assessee intended to manufacture scooters, motor-cycles, light and heavy three-wheelers. The court was of the view that if it is an expenditure incurred in connection with the business already carried on, it can be construed to be revenue expenditure as it is intended to bring in more profits, but if it is a new venture that they were seeking to start, even though it may not have ended successfully at that stage, it is for the initiation of a new line of business, and when the business is started, would be of enduring benefit to the assessee, It is, therefore, in the nature of capital expenditure and not revenue expenditure. Having read the decision of the Andhra Pradesh High Court in Hyderabad Allwyn Metal Works Ltd.'s case : [1975]98ITR555(AP) , we have not been able to persuade ourselves to subscribe to the aforesaid statement made in that case, as, in our opinion, unless the expenditure is directly related to a capital asset acquired or to be acquired in the near future, it cannot be said to have brought about an enduring benefit and to be of a capital nature. We, with profound respect, express our dissent with the view taken therein. Here we may state that this decision wasdissented from by the Bombay High Court in National Rayon Corpn Ltd. v. CIT : [1985]155ITR413(Bom) . The only authority remains to be considered is Cooper Engineering Ltd. v. CIT : [1982]135ITR597(Bom) . In that case, on facts, it was found there was no evidence on record to show the purpose for which the expenditure on foreign tour was actually incurred and, therefore, it was opined that disallowance of 2/3rds of the amount spent by the assessee on the foreign tour of its technical director was justified. In that connection, it was observed as under (at p. 602) :

'It is one thing to mention the purpose for which the tour is sought to be undertaken in documents which are prepared prior to the commencement of the tour. It is a different thing to attribute the expenses actually incurred to the said purpose or purposes, for the purpose for which the tour is undertaken may not actually be achieved and the moneys may be spent for a different purpose. It is necessary, therefore, that the relevant evidence is placed on record to prove the purpose for which the expense is actually incurred. As pointed out by the Appellate Assistant Commissioner, there is admittedly no such evidence on record. In the circumstances, we are more than satisfied that the Income-tax Officer could not be said to be wrong in disallowing 2/3rds of the said expense as revenue expenditure.'

19. The decision in this case was rendered on its peculiar facts. The four decisions relied on by the learned counsel for the Revenue are not applicable to this case.

20. For the reasons aforesaid, the view taken by the Tribunal in its order dated December 10, 1979, that the sum of Rs. 11,039 spent on the foreign tour of the managing director of the assessee is a business expenditure and as such should be allowed is correct. In our opinion, the Tribunal was right in holding it as an allowable revenue expenditure. The question referred to us is answered in the affirmative, i.e., in favour of the assessee and against the Revenue.

21. The parties shall bear their own costs of this reference.

22. The Tribunal be informed under Section 260(1) of the Act.


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