SEN, J. - (1.) THE Tribunal has made a statement of the case in respect of the asst. yr. 1976-77 for which the relevant year of account is the year ended on 31st March,1976. Four of the six questions are at the instance of the assessee and two at the instance of the Revenue. The questions referred at the instance of the assessee are ad under:- "1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the surtax liability of Rs. 2,66,405 is not deductible in computing the income from business under the provisions of the IT Act,1961, ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the liability for gratuity of Rs. 17,15,175 is not allowable even when no provision has been made in the books of account ? 3. Whether, the Tribunal was justified in holding that the amounts of Rs. 9,26,963 as freight and Rs. 1,641 as insurance are not covered for weighted deduction under S. 35B of the IT Act, 1961 ?" 4. Whether, on the facts and in the circumstance of the case, the Tribunal was right in confirming the disallowances made by the CIT (A) and thereby restricting the claim of Rs. 1,87,978 to only Rs. 1,08,155 being the proportionate H.O. expenses under S. 35B of the IT Act, 1961?" The questions referred at the instance of the Revenue are as under:- "1. Whether on the facts and in the circumstances of the case, the Tribunal was justified in deleting Rs. 22,221 being the legal expenses incurred by the assessee for amalgamation of one of the subsidiary, a company with it on the premise that the same expenditure did not create any benefit on an enduring nature to the assessee and, therefore, a revenue expenditure ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the revaluation of closing stock was not proper ?" Question No. 1 raised at the instance of the assessee is now concluded by a judgment of this Court in the case of Molins of India Ltd. vs. CIT (1985) 49 CTR (SC) 193 : (1983) 144 ITR 317. Following that judgment, this question will have to be answered in the affirmative and in favour of the Revenue. Question No. 2 raised at the instance of assessee is also covered by a decision of the Supreme Court in the case of Shree Sajjan Mills Ltd. vs. CIT (1986) 53 CTR (SC) 418 : (1985) 156 ITR 585. In view of the principles laid down in the judgment, question No. 2 is also to be answered in the affirmative and in favour of the Revenue. Question No. 3 raised at the instance of the assessee is also covered by judgment of this Court in the case of Bharat General & Textiles Industries Ltd. vs. CIT (1985) 153 ITR 747. Following the principles laid down in the judgment, the third question raised by the assessee is also to be answered in the affirmative and in favour of the Revenue. Question. No. 4 raised by the assessee relates to allowance of proportionate share of head office expenses. The facts relevant for this question, which have been brought on record, go to show that the assessee had adopted a certain method of calculating the proportionate head office expenses, which it claimed, should be allowed as its business expenditure. While going through the details of the proportionate head office expenses, claimed as deductible by the assessee, the CIT (A) held that the claim for Management and Commercial Consultant's remuneration, selling and distribution expenses, interest and depreciation could not be allowed under the provisions of S. 35B (b) (ii) (v) (vi) of the IT Act. The CIT (A) held as under:- "In view of the decision of the Special Bench of the Tribunal or propionate head of office expenses incurred by the appellant-company for the activities mentioned in S. 35B (b) (ii) (vi) would be admissible for weighted deduction. However, going through the details of the proportionate head office expenses amounting to Rs. 36,11,112, it is seen that the following expenses cannot be related to the activities mentioned in 35B (b) (ii) (v) (vi) :- Management and Commercial Consultant's remuneration Rs. 90,000 Out of this amount a sum of Rs. 1,21,861 has to be excluded as the appellant in their computation of Rs. 36,11,112 had separately deducted this amount from the total head office proportionate expenses being interest not attributable to the export business. Since the entire interest amount is held to be not relating to the activities under consideration this separate deduction is called for. Therefore while computing weighted deduction on proportionate head office expenses the ITO should take the following figures: Rs. 36,11,112-Rs. 17,51,324+ Rs. 1,21,861=Rs. 19,81,649 The ITO should allow weighted deduction under S. 35B on this amount of proportionate head office expenses applying the ratio of export sales to total sales." On appeal, the Tribunal affirmed the order of the CIT (A) . In our view the Tribunal has not committed any error in principle in deciding the controversy. What should be the quantum of exact allowance has been calculated and it has not been demonstrated how the calculation is erroneous. Under the above circumstances, question No.4 will also have to be answered in affirmative and in favour of the Revenue.
(2.) NOW I shall examine the two question raised by the Revenue. The first question relates to the expenses incurred for the purpose of amalgamation of one of the subsidiary of the assessee- company with the assessee itself. The facts found by the Tribunal of this aspect of the matter are as under:- "The assessee incurred Rs. 22,221 by way of legal expenses in bringing about amalgamation of Joyshree Exporters Ltd., a 100 per cent subsider of the assessee company, with it. The assessee claimed the aforesaid expenditure to be revenue expenditure. The above claim was rejected by the ITO as well as by CIT (A) , who held the said expenditure to be capital expenditure. The assessee assailed the above finding of the authorities below on the ground that no advantage of educing nature flowed to the assessee form the said expenditure, that the said expenditure was incurred by the assessee-company with a view to smooth running and control of the business and that therefore it was allowable in its entirety in accordance with the ratio of decisions reported in 130 ITR 159 and 135 ITR 306. Above claim of the assessee was accepted by the Tribunal by observing, inter alia, as follows:- 9. Joyshree Exports Ltd. Was 100 per cent subsidiary of the assessee-company. The subsidiary company was doing export business. The assessee-company was not able to manage the subsidiary company separately and consequently, both the companies were amalgamated in order to have smooth business as and control. The expenditure of Rs. 22,221 was incurred on amalgamation. The decision cited by CIT (A) in 117 ITR 505 is on a different issue. The issue is covered by the decisions which are directly on the point and the High Court has held that the amalgamation expenses are of Revenue nature. Consequently, the disallowance or Rs. 22,221 is deleted." It is well settled that if an expenditure relates to the structure of the company or profit-making apparatus of the company, then such expenses cannot be allowed as revenue expenditure. In the Selling & distribution expenses Rs. 73,350 Interest Rs. 15,55,790 Depreciation Rs. 41,975 Rs. 17,61,324 instant case, as wholly owned subsidiary of the assessee-company has been amalgamated with the assessee-company. The result of the expenditure has been to bring about an amalgamation between the two companies. Whether one of the wholly owned subsidiary was amalgamated with the parent company or not does not make any difference in the principle. The object of the expenditure was to bring about a change in the structure of the company. If the purpose and object of incurring the expenditure is to alter the framework of the structure under which the assessee was carrying on its business and affected the profit-making apparatus, then the expenditure would be of capital in nature.
(3.) IN the instant case the nature and purpose of incurring the expenditure was to bring about an amalgamation between the assessee and another company. The question was gone at length by this Court in the case of Bengal & Assam investors Ltd. vs. CIT (1985) 142 ITR 156, in which it was held by Sabyasachi Mukharji, J. (As His Lordship then was ) that the legal expenditure incurred for the purpose of bringing about an amalgamation between the two companies was of capital nature, even though ultimately no amalgamation was brought about by the expenditure. In that case, it was held that "It is also necessary to reiterate that whether the expenditure yielded any result or proved abortive is not always a determinative factor. What is determinative of the question is the object and purpose of incurring the expenditure. Any expenditure which facilitates only the business to go on more profitably or to make earning of the profit would undoubtedly be a revenue expenditure. But the difficulty arises where the expenditure, apart from yielding profit, brings in an asset of an enduring nature or makes such basic alterations in the profit earning structure of the company of the very structure of the company that could be considered to be bringing into existence an asset of an enduring nature. The purpose and object irrespective of whether it succeeded or not in the instant case appears to us was to alter the framework of the structure under which the assessee was carrying on the business. If that is true purpose of incurring the expenditure, then in our opinion, it would have affected the very structure of the profit earning machinery and it should, therefore, be considered as an expenditure on the capital side......"(P. 168) ;