T.P. Mukerjee, J. - (1.)The present reference under Sec. 66(1) of the Income Tax Act, 1922, hereinafter referred to as "the Act", raises the question of disallowance of certain pre -incorporation expenses incurred by the promoters of the company. The material facts are these :
M/s. Security. Printers of India (P.) Ltd., hereafter referred to as "the assessee", was incorporated on April 6, 1957, with a view to execute jobs of security printing such as printing of cheques, drafts, fixed deposit receipts and life papers for Indian banks. The printing of these forms was never before done in India in printing presses. The Indian branches of foreign banks used to get their security printing jobs executed by M/s. W. W. Sprague and Co. Ltd. of London, hereafter referred to as "the London company". Mr. M.C. Khunna, managing director of Job Press Ltd., Kanpur, conceived the idea of executing these jobs in India in collaboration with the London company. Accordingly, he entered into an agreement with the London company to float a private company, limited by shares, to be named and styled M/s. Security Printers of India (P.) Ltd. This company, as already stated, was incorporated on April, 6, 1957. It was agreed that a representative of the London company would be appointed as a director of the assessee -company to look after the security arrangements. The shares of this company were held as under :

(2.)Mr. W.J. Harffey was the director representing the London company and Mr. M.C. Khunnah was the director of the assessee -company representing the Khunnah group.
(3.)The assessee -company fell to be assessed for the first time in the assessment year 1958 -59. In this assessment a sum of Rs. 70,437 was disallowed by the Income Tax Officer being pre -incorporation expenses of the company which were capital in nature. The break up of this amount is given below under appropriate heads:
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