1993 (3) TMI 21 - HC - Income Tax

Summary

Issues Involved:
1. Whether the expenditure of Rs. 36,259 in the assessment year 1971-72, and Rs. 13,879 in the assessment year 1972-73, though permissible as a deduction u/s 37(1) of the Income-tax Act, 1961, is an admissible item of expenditure being in the nature of entertainment expenditure within the meaning of section 37(2B)?
2. Whether the expenditure of Rs. 1,15,067 is a capital expenditure?

Summary:

Issue 1: Entertainment Expenditure
The first issue pertains to the assessment years 1971-72 and 1972-73. The court noted that this question is covered by previous decisions in CIT v. Shalt Nanji Nagsi [1979] 116 ITR 292 and CIT v. S.B. Anwar Begum [1988] 174 ITR 407. Following these precedents, the court answered the first question in the affirmative, i.e., in favor of the assessee and against the Revenue.

Issue 2: Capital Expenditure
The second issue relates to the assessment year 1972-73 and concerns the disallowance of a claim for deduction of Rs. 1,15,067 on the ground that it was capital expenditure. The assessee had entered into an agreement dated June 2, 1970, with Messrs. Farymann, a non-resident company, to pay DM 2,20,000 for the purchase of export rights and DM 70,000 for manufacturing rights and related drawings, designs, and specifications.

The Income-tax Officer disallowed the claim, considering it a capital expenditure. The Appellate Assistant Commissioner upheld this view, stating that the payment was for acquiring an asset of enduring nature. The Tribunal also supported this view, emphasizing that the payment was for acquiring export rights, which are a capital asset.

The assessee argued that the payment was a revenue expenditure aimed at increasing business profitability. However, the court referred to various tests and precedents to determine whether an expenditure is capital or revenue in nature. The court emphasized the importance of the "enduring benefit" test and the necessity to look at the true nature and character of the advantage in a commercial sense.

The court concluded that the payment for export rights was indeed for acquiring a capital asset, as it provided an enduring benefit. Thus, the expenditure of Rs. 1,15,067 was held to be capital expenditure.

Accordingly, the court answered the second question in the affirmative, i.e., in favor of the Revenue and against the assessee. There was no order as to costs.