COMMISSIONER OF INCOME TAX Vs. J K INDUSTRIES P LTD

JUDGEMENT

(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 :

(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.