SANKAR PRASAD MITRA, J. - (1.) IN this reference under s. 66(1) of the INdian IT Act, 1922, the respondent is a private limited company which acts as the managing agent of several public limited companies like the Aluminium Corporation of INdia Ltd., Bihar Mines Ltd., J.: K. Steel Ltd. and Hoyle's Paints Ltd. The assessment year involved is 1959-60, the corresponding previous year being the financial year ended 31st March, 1959. During the relevant period one of the directors of the respondent was sent to Europe to explore the possibilities of technical and financial collaboration with foreign concerns in the matter of manufacture of paints (this is the business of Hoyle's Paints Ltd.) and hoist-cranes and conveyingequipments (later on manufactured by J. K. Steel Ltd.) and also to acquire generally available technical knowledge about manufacture of paints, wire-ropes, hoops and box-strapping. The total expense of the foreign tour came to Rs. 33,009. The respondent claimed it as business expense; but the ITO disallowed the claim mainly on the ground that such expense was not incurred for the purpose of the respondent's business, i.e., the managing agency.
(2.) THE AAC held that the expenses in question should be borne by the managed companies on whose behalf the respondent had incurred the expenses and, as such, the amount involved could not be charged to the respondent's accounts. THE AAC suo motu considered the question whether the expenditure was of a revenue nature or capital in character. He came to the conclusion that, since the purpose of the foreign trip was to explore the possibilities of technical collaboration and financial assistance, the expenditure incurred was of a capital nature. Before the Tribunal the respondent contended that the foreign tour expenses were not of a capital nature and should have been held to be laid out wholly and exclusively for the purpose of its business. THE Tribunal considered the provisions of s. 10(2)(xv). With regard to the first part of the question, namely, whether the amount spent partook of a capital nature or not, the Tribunal's finding was that such expenditure never brought into existence any asset of an enduring nature to the respondent and the tour being undertaken in the ordinary course of business with a view to improve the conditions of the managed companies, which undoubtedly helped the respondent itself in earning higher managing agency commission in future years, the expenses incurred could not be treated to be of a capital nature. THE other part of the question was decided entirely on the facts. THE Tribunal held that the expenses had been laid out by the respondent wholly and exclusively for the purpose of the business carried on by the respondent. In the present reference the following question has been framed for the opinion of this Court : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the foreign tour expenses of Sri H. S. Singhania incurred by the assessee-company is not of a capital nature ?" Mr. Mitter, learned counsel for the CIT, drew our attention to the Tribunal's order at page 12 of the paper-book. THE Tribunal has stated that the director concerned was sent abroad with the following objects : "(1) To explore the possibilities of technical collaboration for obtaining latest and up-to-date technology in relation to the manufacture of paints which was the business of Hoyle's Paints Ltd; (2) To carry on negotiations with foreign concerns for technical and financial participation in the matter of manufacture of hoist-cranes and conveying-equipments which J. K. Steel Ltd. proposed to undertake; and (3) To acquire generally available technical knowledge about manufacture of paints, wire- ropes, hoops and box-strappings." Learned counsel says that the first object enumerated above may be related to revenue expenditure. So far as the third object is concerned, the expenditure incurred for acquiring technical knowledge about manufacture of paints may also be related to revenue expenditure; but the expenditure incurred for gaining knowledge about wire-ropes, hoops and box-strappings would be of a capital nature. Mr. Mitter says further that the second object wholly relates to capital expenditure. In other words, having regard to the different purposes for which the expenditure was incurred, as aforesaid, this case, according to learned counsel for the CIT, cannot come within the scope of s. 10(2)(xv) of the Act, that is to say, it cannot be urged that the expenditure was laid out or expended wholly and exclusively for the purpose of the assessee's business. Counsel for the CIT referred to the case of Dr. P. Vadamalayan vs. CIT (1960) 40 ITR 501. Here the assessee was a leading surgeon with a lucrative practice. He spent a sum of Rs. 19,538 towards a tour abroad, in the course of which he visited a number of hospitals and clinics in the U. K. and the U. S. A. to study the latest technique in surgery and treatment. The AAC allowed deduction of only the sum of Rs. 9,769 which was found to be wholly and exclusively incurred for the purpose of the assessee's profession under s. 10(2)(xv), the balance being treated as the assessee's personal expenses. The Tribunal held that this sum was a capital expenditure but did not disturb the finding that it was incurred wholly and exclusively for the purpose of the assessee's profession. The Madras High Court held that the said sum of Rs. 9,769 was not capital expenditure and was allowable under s. 10(2)(xv). According to the Madras High Court, the expenditure incurred by the assessee could at best be said to be expenditure incurred by a surgeon to keep abreast of the latest technique in surgery and treatment and to maintain his efficiency in his profession, and such an expenditure was not an expenditure of a capital nature. Mr. Mitter submitted to us that this case shows that the said sum was allowed as a revenue expenditure because the surgeon concerned had incurred expenditure to maintain his efficiency in the business he was conducting; but if he had incurred any expenditure to initiate any new business or profession or to purchase equipments for initiating any new business, it would not have been allowed as revenue expenditure. The next case on which counsel for the CIT relied was the case of Seshasayee Brothers Ltd. vs. CIT (1961) 42 ITR 568. In this case a director of the assessee was deputed by the company managed by it to attend a conference of medical manufacturers at London. The managed company bore his expenses to the extent of Rs. 9,995. The assessee claimed that advantage was taken of this opportunity to depute the director to visit other countries to acquaint himself with the manufacturing conditions and the assessee had spent a sum of Rs. 14,625 for the director's tour. But the assessee failed to furnish details of the places the director had visited and the Department and the Tribunal could not decide what the object of the visit was. The Madras High Court held that, although the Tribunal was not right in holding that the experience, if any, gained by the director was a benefit of an enduring nature and the expenditure was capital in nature, yet the Tribunal was justified in coming to the conclusion that the assessee failed to establish that the sum of Rs. 14,625 was expenditure laid out wholly and exclusively for the purpose of the business. The amount was not, therefore, an allowable deduction.
(3.) IT seems to us that this case is of no assistance in deciding the issue raised in this reference. Here the assessee has not failed to furnish any details or particulars asked for. Mr. Mitter then referred us to a case decided by the Gujarat High Court. This was the case of Ambica Mills Ltd. vs. CIT (1964) 54 ITR 167 (Guj). The assessee-company which was a manufacturer of textiles authorised a tour by the director and the superintendent of the company's mills for two purposes, namely, (i) to make an on the spot study of the latest developments in the manufacture, designing and processing of cloth in the United Kingdom and other countries; and (ii) to make a report on their return on the work done by them as to the latest developments in the manufacturing, designing and processing of textiles seen by the representatives, and, recommend as to whether the latest developments should be adopted and for that purpose, to purchase new machinery which would bring an enduring benefit to the assessee-company and which also would bring about a change in the methods of manufacturing, designing and processing. After their visit, the assessee-company did import this new improved and modern machinery for the purpose of being used in running its textile mills. The Tribunal came to the conclusion that the object of this tour was to replace the old and out-of-date or obsolete machinery used in the textile mills of the assessee-company by the more modern ones and that the expenditure incurred in these circumstances related to the fixed framework of the profit-making apparatus of the assessee- company and not to its carrying on of the business and was, therefore, a capital expenditure. The Gujarat High Court held that the finding of fact by the Tribunal, though of an intermediate fact as to the object of the two tours, cannot be said to be either perverse or not based on evidence or lacking in sanctity and, therefore, the High Court would not be justified in interfering with it. On the facts it was not possible for the High Court to say that the tours were undertaken as study tours merely to get acquainted with new methods of production and new machinery or only for adding to the knowledge of the assessee- company's representatives and, therefore, the expenses incurred were revenue expenditure. The Gujarat High Court has observed that a tour undertaken for the purpose of a preliminary survey of new methods of manufacturing, designing or processing and of new machinery with a view to purchase them, even if not immediately but at a later stage, would be one for the purpose of bringing into existence a capital asset and such expenditure would, therefore, be capital expenditure. On this decision of the Gujarat High Court, Mr. Gouri Mitter has urged that some of the objects of the tour as set out by the Tribunal in the instant case clearly indicate a desire to acquire new machinery and also to bring into existence new businesses of the managed companies. The expenses of the tour should, therefore, be treated as capital expenditure. Learned counsel then came to the Supreme Court decision in Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34 (SC). At page 45 the Supreme Court observes : "If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure." Counsel for the Revenue has urged that a close examination of the objects for which the tour was undertaken by Sri H. S. Singhania as set out by the Tribunal would reveal that the expenditure was not wholly or exclusively for running the business of the managed companies or working them with a view to produce the profits. The expenditure, therefore, should be treated as a capital expenditure.;