1996 (2) TMI 374 - SC - Income Tax

Whether the Tribunal was right in law in holding that the professional charges paid by the assessee-company to its Solicitors for effecting the amalgamation of Nawrosjee Wadia Ginning & Pressing Company with it, was of revenue nature and should be allowed as a deduction in the computation of its total income ? Whether the Tribunal was justified in law in holding that the assessee-company was entitled to a deduction for a sum of ₹ 2,25,000 in respect of the contribution made by it to the Maharashtra Housing Board towards the construction of tenements for its workers ? Held that - Appeal dismissed. The expenditure incurred towards professional charges of the Solicitors firm for the services rendered in connection with the said amalgamation was in the course of carrying on of the assessee s business and, therefore, deductible as a revenue expenditure. The amount was advanced to the Government which purchased the land in its own name and the buildings constructed thereon became property of the Government - and not of the assessee. The High Court was justified in rejecting the application under section 256(2).

Summary

Issues:
1. Deductibility of professional charges paid for amalgamation under Income-tax Act, 1961.
2. Allowance of deduction for contribution made towards construction of tenements for workers.

Issue 1: Deductibility of professional charges for amalgamation:
The case involved an appeal against the rejection of an application under section 256(2) of the Income-tax Act, 1961, regarding the deductibility of professional charges paid for the amalgamation of two companies. The Tribunal upheld the assessee's claim that the expenditure on legal fees for amalgamation was revenue in nature, as it was necessary for the smooth conduct of the business. The Tribunal distinguished between revenue and capital expenditure by emphasizing that the amalgamation was essential for the efficient operation of the business. The Supreme Court relied on precedents, including the Bombay Steam Navigation Co. case, to support the deductibility of the expenses as revenue expenditure. The Court concluded that the legal charges for amalgamation were incurred in the course of carrying on the assessee's business and hence deductible.

Issue 2: Allowance of deduction for contribution to construction of tenements:
The second question revolved around the allowance of a deduction for a contribution made by the assessee to the Maharashtra Housing Board for constructing tenements for its workers. The Tribunal held that the expenditure did not create a capital asset for the assessee, as the tenements remained the property of the Housing Board. It further found that the expenditure was incurred to ensure a contented labor force and enhance business efficiency. The counsel for the revenue relied on the Travancore Cochin Chemicals case, arguing that providing better housing to workers conferred an enduring benefit and thus should be treated as capital expenditure. However, the Court, citing the L.H. Sugar Factory case and T.V. Sundaram Iyengar & Sons case, opined that the expenditure was revenue in nature, as it was incurred for the welfare of employees and did not result in the ownership of the tenements by the assessee. The Court agreed with the Tribunal's finding and dismissed the appeals, upholding the rejection of the application under section 256(2) of the Income-tax Act, 1961.