1. This tax case arises out of a reference made by the Income-tax Appellate Tribunal, Madras Bench, under Section 256(1) of the I.T. Act, 1961, at the instance of the revenue.
2. The asssesees in this case are M/s. W.A. Beardsell & Co. (P.) Ltd., Madras, represented by their successors, Mettur Industries Ltd., Madras. The year of assessment is 1968-69. M/s. W.A. Beardsell & Co. Were the managing agents of M/s. Mettur Industries Ltd. Since the latter's incorporation in 1936. The managing agents were handling the sales of Mettur Industries, as their sole distributors. In view of the manufacturing experience of M/s. Mettur Industries Ltd., and the managerial experience of M/s. Beardsell & Co. In sales and distribution, an amalgamation of both the companies was considered to be advantageous to both of them. Therefore, instead of renewing the managing agency agreement, both the companies filed an application before the High Court under Section 394 of the Companies Act for approval of the scheme of amalgamation of the two companies and succeeded in that application. The share of M/s. Beardsell & Co. In the legal expenses for getting the scheme of amalgamation approved by the High Court came to Rs. 11,915. This amount was claimed by the successor-company as an item of revenue expenditure. The ITO disallowed the expenditure, because he thought that it was of the same nature as was incurred in the issue of shares at the initial floatation of the company and because the amalgamation of the companies resulted in an enduring advantage to the assessees by reducing the overhead costs, etc. The ITO held that the expenditure was in the nature of a capital expenditure. This view of the ITO was confirmed by the AAC on appeal. The AAC observed in his order thus:
' The appellant's amalgamation with Mettur Industries Ltd. Affected the entire capital structure of the company in that the shareholders had to exchange their existing shares with shares of Mettur Industries Ltd. In a certain agreed proportion. The expenditure being of the same nature as is incurred in the issue of shares at the initial floatation of a company, it will be held to be capital in nature. It would not also be correct to say that the amalgamation did not bring any enduring advantage to the appellant. The amalgamation reduced the overhead costs by securing that functions in common between the two companies were performed by the same staff. The disallowance of the legal expenses connected with amalgamation is therefore, upheld. '
3. The assessees went up before the Income-tax Appellate Tribunal, Madras Bench. The Tribunal held thus :
'(1) The amalgamation expenses were incurred not for the purposes of bringing into existence any asset or advantage, but for running the business with a view to get more profits.
(2) Since the expenditure was incurred to rationalise the administration of the business with a view to earn more profits, the expenditure is revenue in character.
(3) Since the Amalgamation expenses arc related to the carrying on or the conduct of the business, the expenditure can be regarded as an integral part of the profit-earning process and hence it is revenue expenditure.
(4) Beardsell's incurring amalgamation expenses were certainly for carrying' on the business by getting itself amalgamated with MetturIndustries Ltd. And since the expenditure was incurred by Beardsell in its capacity as a person carrying on the business, the amalgamation expenses should be allowed as revenue expenditure.
(5) Since the expenditure was incurred by W.A. Beardsell & Co. And related to a period when it was carrying on the business, the expenditure claimed should be allowed. '
4. On the above findings, the Tribunal allowed the appeal of the asses-sees. At the instance of the revenue, the following question has been referred for the opinion of this court:
' Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the legal expenditure of Rs. 11,915 incurred by M/s. Beardsell & Co. (P.) Ltd. For getting itself amalgamated with M/s. Mettur Industries Ltd. Represented revenue expenditure '
5. The Tribunal has relied upon the decision of the Supreme Court in CIT v. Malayalam Plantations Ltd. : 53ITR140(SC) , in coming to the conclusion that the expenditure is revenue expenditure. The Supreme Court has pointed out in that case that the expression ' for the purpose of the business ' is wider in scope and may take in not only the day to day running of a business but also the rationalization of its administration and may also comprehend many other acts incidental to the carrying on of the business. The tests laid down by the Supreme Court for ascertaining whether the expenditure was for the purpose of the business are that the expenditure should be incurred for carrying on the business and that the assessees should have incurred it in their capacity as persons carrying on the business. Under the scheme of amalgamation, all the proprietary rights and powers of M/s. Beardsell & Co. As also all their liabilities and duties stand transferred to Mettur Industries Ltd. To be held by the latter in addition to their own. The expenditure has been incurred by M/s. Beard-sell & Co. In their capacity as persons carrying on the business with the object of carrying on their business to their advantage. The expenditure could not be stated to have been incurred for acquiring any capital assets of an enduring nature. The expenditure has been incurred with the object of getting more profit and it relates to a period when the assessee-company was carrying on its business. We are, therefore, of the opinion that the Tribunal rightly held that the expenditure was revenue in character and should have been allowed by the assessing authority. We, accordingly, answer the question referred to us against the revenue and in favour of the assessees. The assessees will have the costs of this reference.