1982 (4) TMI 48 - HC - Income Tax

Summary

Issues Involved:
1. Deductibility of legal expenses incurred by the assessee-company.
2. Classification of expenditure as capital or revenue.
3. Computation of gross total income for the purpose of deductions under section 80-I.
4. Inclusion of borrowed funds in the capital employed for relief under section 80J.

Issue-Wise Detailed Analysis:

1. Deductibility of Legal Expenses:
The Tribunal allowed Rs. 35,000 as deductible business expenditure out of Rs. 50,000 incurred by the assessee-company for contesting the Government's order terminating the managing agency of M/s. Govan Brothers (P.) Ltd., disallowing the remaining Rs. 15,000. The Tribunal found that the expenditure was incurred mainly for the purpose of the assessee's business and did not bring into existence any fresh benefit of an enduring nature. However, it noted that M/s. Govan Brothers (P.) Ltd. should have shared a fair proportion of this expenditure. The court, referencing decisions such as Sree Meenakshi Mills Ltd. v. CIT and CIT v. Birla Cotton Spinning and Weaving Mills Ltd., concluded that the entire amount was liable to be treated as an allowable deduction, as the expenditure was laid out wholly and exclusively for the purpose of the business.

2. Classification of Expenditure as Capital or Revenue:
The assessee incurred Rs. 24,022 for alterations and repairs to rented buildings to make them fit for use as bonded warehouses. The Tribunal classified this expenditure as capital expenditure and disallowed it. The court, however, found this view erroneous, citing that the buildings were rented and the expenditure did not result in a benefit of enduring nature. The court referenced cases such as Girdhari Dass and Sons v. CIT and CIT v. Bhagat Industries Corporation Ltd., concluding that the expenditure was revenue in nature and thus allowable.

3. Computation of Gross Total Income for Deductions under Section 80-I:
The assessee, being a priority industry, claimed deductions under section 80-I(1). The ITO and the Tribunal computed the deduction incorrectly by allowing deductions under sections 80J and 80K before determining the gross total income. The court clarified that the gross total income should be computed before making any deductions under Chapter VI-A, resulting in a gross total income of Rs. 2,54,304 for the purpose of section 80-I(1).

4. Inclusion of Borrowed Funds in Capital Employed for Relief under Section 80J:
The ITO had deducted borrowed funds amounting to Rs. 1,96,691 in computing the capital employed for the purpose of allowing relief under section 80J. The court referenced decisions such as CIT v. U.P. Hotel & Restaurant Ltd. and Kota Box Mfg. Co. v. ITO, declaring Rule 19A(3) of the Rules framed under the Act ultra vires, and concluded that borrowed capital must be included in the capital employed.

Conclusion:
1. Questions Nos. 1 and 2: The entire claim of Rs. 55,463 was an allowable deduction.
2. Question No. 3: The expenditure of Rs. 24,022 was revenue in nature and allowable.
3. Question No. 4: The gross total income for section 80-I(1) should be Rs. 2,54,304.
4. Question No. 5: Borrowed funds should be included in the capital employed for section 80J relief.

The assessee is entitled to costs assessed at Rs. 250.