RAJAGOPALAN J. - The first of the questions that was referred to this court under section 66(2) of the Indian Income-tax Act, 1922, ran :
'Whether, on the facts and in the circumstances of this case, the sums of Rs. 20,555, Rs. 32,554 Rs. 33,180 laid out by the assessee during the previous years for the assessment years 1948-49, 1949-50 and 1950-51 respectively, in prospecting for raw materials for floating new companies can constitute admissible deductions either under section 10(2) (xv) or under section 10(2) (xi) of the Act ?'
The assessee company had as one of its objects promotion of new companies and obtaining the managing agency of the companies so promoted. The claim of the assessee was that it incurred preliminary expenditure to promote a cement company to be known as Arcot Cement Co., and in the three years of account in question expended large sums to explore possibilities for successfully launching that contemplated cement company. Eventually the cement company was never formed. The moneys had been spent by the assessee. The assessee claimed these sums as lawful admissible deductions in computing its profits in the relevant assessment years.
There was really a paucity of material upon a consideration of which the question whether it is a lawful deduction can be answered. Certainly there is no scope for invoking section 10(2) (xi), because neither when the moneys were expended nor at any time thereafter was there a contract between the assessee company and any other person that the assessee should get back the money; in other words, that there came into existence a debtor with a liability to pay the debt.
Whether the requirements of section 10(2) (xv) are satisfied is the next question. Here again there is paucity of material. No doubt, the department and the Tribunal took the view that the expenditure was of a capital nature. Even if that conclusion was not warranted fully by the material on record, that does not help the assessee because the burden lay upon the assessee to establish that the amount should be deducted on the application of section 10(2) (xv). Merely to illustrate the point, we can point out that if the assessee expended these amounts to promote the Arcot Cement Co. with a view to get the managing agency of the company, the acquisition of managing agency would be acquisition of a capital asset, and any money expended even as preliminary to such acquisition would partake of an outlay on the acquisition of a capital asset. That the contemplated company was never formed and there was no occasion therefore to obtain the managing agency would not make any difference in principle or alter the character of the expenditure when the money was expended. If, however, the assessee expended the moneys with the expectation, even if there was no specific contract with anyone, of recovering those moneys, the position would obviously be different. If, for example, the assessee had produced evidence that in the past when it had incurred such preliminary expenses for promoting a company it got back the amount so expended from the companies as they were formed, the assessee could claim that they were expenses incurred by it in the normal course of conducting its own business, part of which was promoting new companies. But there was no such evidence in this case. We are referring to this aspect independent of the position whether the claim could be brought under section 10(2) (xi), because we have already pointed out that on the material on record there is no scope for invoking section 10(2) (xi). Though the Tribunal stated, 'if the companies had in fact been formed following such investigations, the advances in question are recoverable from the assets of such companies after formation', there was really no material placed by the assessee either before the Tribunal or before us to justify the finding that that was the normal course of its business, or even the finding that in expending monies for promoting the Arcot Cement Co. the assessee had every expectation of getting a reimbursement of the moneys so expended, quite independent of the question whether the managing agency of the proposed company should be secured or not.
Thus, if the money had been expended to facilitate obtaining the managing agency of the contemplated Arcot Cement Co. the expenditure would have been capital in nature. If the claim was that the money was expended in the usual course of its business, with the hope of being reimbursed after the proposed company was formed, there was really no material on which such a claim could be founded.
As we said, it is really paucity of material that hampers the assessee from pressing his claim that these are allowable items of expenditure. The Tribunal pointed out that the claim had not been proved in full, and with that statement we are in entire agreement. The claim was, therefore, rightly rejected.
The second question was : 'Whether, on the facts and in the circumstances of this case, the sums of Rs. 95,860, Rs. 2,835 and Rs. 3,143, spent by the assessee in improving the guest house during the previous years for the assessment years 1948-49, 1949-50 and 1950-51 respectively can be allowed as a proper deduction in computing the profits assessable to income-tax under section 10(2) of the Act ?'
Obviously, the claim was considered under section 10(2) (ii) of the Act.
No doubt, the assessee expended the moneys on two buildings of which he was a tenant. Having taken the buildings on lease, the assessee expended moneys to make them fit for use as guest house to accommodate the guests of the assessee company at Madras. Section 10(2) (ii) could apply only to repairs, and even then the requirement is that the assessee as a tenant must have undertaken to bear the cost of the repairs. Even the question as framed refers to the moneys being expended to improve the guest house. The finding of the Tribunal was that the assessee expended the moneys for additions and alterations to the premises. No doubt, annexure 'B' was filed showing some of the details for the moneys expended. But even annexure 'B' does not explain what were the items on which moneys were expended. In deciding whether the expenditure was on repairs or whether the expenditure was incurred to effect improvements of a capital nature to the building, the Tribunal was of the view that the outlay was clearly capital in nature. Even if the material on record was not enough to sustain that finding, the assessees claim has to fail, because he did not place material to sustain his claim that the moneys had been expended on current repairs. Learned counsel for the assessee relied upon the observations in Bansilal Abirchand Spinning and Weaving Mills v. Commissioner of Income-tax. But that in no way helps the assessee. It is no doubt true that, even if the need for repairs had arisen in the previous years and repairs were carried out subsequently, they would still be repairs and still be within the scope of section 10(2) (ii). But that decision relied upon by the learned counsel does not help us to answer the question whether the expenditure incurred by the assessee in this case was expenditure on current repairs or was expenditure in effecting improvements which was of a capital nature. It is for the assessee to prove that he was entitled to the deduction under section 10(2) (ii), and once again we have to point out that the material the assessee placed before the Tribunal was not enough to sustain that claim either in whole or in part. Learned counsel suggested that a further investigation and a further statement of the case might be called for; but unless the assessee could satisfy us that material was placed before the Tribunal on which the Tribunal could have found that at least a part of the claim was well founded there can be no justification for a further statement of the case. Obviously, the assessee is not entitled to a further opportunity of placing fresh material for answering the question.
The Tribunal was not in error in negativing the claim of the assessee under this head.
The third of the questions referred of this court ran :
'Whether, on the facts and in the circumstances of the case, the sum of Rs. 6,240 being the outlay incurred by the assessee in connection with the promotion of the Virudhunagar Textile Mills Ltd. during the previous years to the assessment year 1948-49 is a permissible deduction from the profits assessable to income-tax under section 10(2) of the Indian Income-tax Act ?'
The claim before Tribunal was that it was a debt recoverable from the Virudhunagar Textile Mills Ltd. The assessee held the managing agency of those mills. The claim put forward before the Tribunal as set out by the Tribunal in paragraph 5 of its judgment was :
'It is, however, stated that as the company was in bad straits and was not a financial success, the assessee company thought it fit and proper to waive its claim thereof.'
On that submission, the Tribunal was right in pointing out that there was no proof that the alleged waiver was for adequate business consideration. What the assessee had to prove to bring the claim under section 10(2) (xi) was that the debt was irrecoverable. Such evidence the assessee failed to furnish. If a claim properly arising under section 10(2) (xi) cannot be upheld under that sub-section, it cannot be brought again under section 10(2) (xv). Apparently, the Tribunal, when it referred to the absence of adequate business consideration, had section 10(2) (xv) in view. But independent of what the Tribunal said, the assessees claim has to fail, because there was no material placed to show that the debt was in fact irrecoverable.
All the three questions are answered against the assessee. As the assessee has failed, it will pay costs of this reference. Counsels fee Rs. 250.
Questions answered accordingly.