1981 (1) TMI 129 - AT - Income Tax

Summary

Issues:
1. Disallowance of expenses incurred on travelling abroad in connection with the existing business.

Analysis:
The appeal before the ITAT CALCUTTA-B related to the assessment year 1977-78, challenging the disallowance of expenses for travelling abroad in connection with the existing business. The assessee had claimed Rs. 10,000 as travelling expenses for a visit to Japan with the intention of establishing a manufacturing unit with foreign collaboration for producing Gaskets, an essential motor part. However, the negotiations did not materialize into an agreement, and the application for a license was rejected by the Government of India. The ITO disallowed the expenses, stating that it was not an allowable expenditure for the existing business.

Upon appeal to the CIT (Appeals), it was revealed that the assessee had installed machinery worth Rs. 13,739 in the accounting years 1969-70 and 1970-71. The CIT (Appeals) noted that the application for a license was rejected, and there was no evidence to establish that the expenses were incurred in the normal course of business activity. Consequently, the disallowance was upheld.

During the proceedings, the assessee argued that the expenses for concluding a foreign collaboration agreement should be considered a revenue expenditure, citing decisions from the Allahabad High Court and Bombay High Court. Alternatively, it was contended that the claim should be considered under section 350 of the IT Act. The Departmental Representative, however, argued that the expenditure was capital in nature as it was related to establishing a new manufacturing business rather than the existing business of the assessee.

After considering the submissions, the ITAT concluded that the expenditure could not be accepted as the assessee's aim was to establish a new business for manufacturing Gaskets, which did not materialize. The ITAT emphasized that the expenses were incurred for a new line of business, not for the existing business operations. Citing the decision of the Bombay High Court in AAC-Vickers Babcock Ltd. vs. CIT, the ITAT held that the expenditure was capital in nature as it aimed to bring into existence a new manufacturing business. Consequently, the appeal was dismissed.