T.P. Mukerjee, J. - (1.) THE present reference under Section 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 : JUDGEMENT_766_ITR78_1970Html1.htm
(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. 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: JUDGEMENT_766_ITR78_1970Html2.htm The Income-tax Officer regarded all these items of expenditure as: preliminary expenses of a capital nature incurred to establish the company and he disallowed the entire sum of Rs. 70,437, as stated above.
(3.) THE assessee-company appealed against the disallowance made by the Income-tax Officer. THE Appellate Assistant Commissioner found that the expenses were all of a revenue nature and as they had been incurred by the promoters of the assessee-company in connection with the business which was subsequently taken over by the company on its incorporation, they were allowable as business expenses. Against the decision of the Appellate Assistant Commissioner the department field an appeal to the Tribunal and it was contended that, as the company had no existence prior to its incorporation, no part of the pre-incorporation expenses could be allowed in its assessment. THE Tribunal found that before the assessee-company was incorporated, its promoters had not only made preliminary arrangements for obtaining orders for security printing, but it had also actually commenced trading operations. It was demonstrated before the Tribunal that an import licence was granted by the Import Controller in the name or M/s. Security Printers of India (P.) Ltd. for the period from July, 1955 to July, 1956, though, in point of fact, the company was incorporated in April, 1957. Furthermore, orders of the value of Rs. 3,60,000 were actually secured by Mr. Harffey, between June, 1955, and November, 1956, and the first consignment of printed cheques was delivered in March, 1957. THE Tribunal held that inasmuch as receipts resulting from these transactions which had taken place before the incorporation of the assessee-company had been included in its first assessment for the year 1958-59, the revenue expenses attributable to those receipts should also be allowed in that assessment. In the opinion of the Tribunal, however, a part of the sum of Rs. 23,549 incurred by Mr. W.J. Harffey as travelling expenses and also a part of Rs. 15,455 expended by Mr. M.C. Khunnah in connection with his trip to England should be regarded as capital in nature as the assessee-company derived, more or less, enduring benefit thereby. The Tribunal estimated the amount at Rs. 20,000 and, while setting aside the order of the Appellate Assistant Commissioner, directed that the disallowance should be restricted to this amount in place of Rs. 70,437 disallowed by the Income-tax Officer.;