1968 (5) TMI 9 - HC - Income Tax

Foreign tour expenses incurred by managing agent - not of a capital nature but are of revenue nature

Issues Involved:
1. Whether the foreign tour expenses incurred by the director of the respondent company are of a capital nature or revenue nature.
2. Whether the expenses were incurred wholly and exclusively for the purpose of the respondent's business.

Issue-wise Detailed Analysis:

1. Nature of Expenditure: Capital or Revenue

The respondent, a private limited company acting as the managing agent for several public limited companies, incurred foreign tour expenses amounting to Rs. 33,009 for one of its directors. The Income-tax Officer disallowed the claim, stating the expenses were not for the respondent's business. The Appellate Assistant Commissioner (AAC) held that the expenses should be borne by the managed companies and categorized the expenditure as capital in nature since it aimed at exploring technical collaboration and financial assistance.

The Tribunal, however, found that the expenditure did not bring into existence any asset of an enduring nature for the respondent. The tour was undertaken in the ordinary course of business to improve the conditions of the managed companies, which would help the respondent earn higher managing agency commissions in future years. Hence, the Tribunal concluded the expenses were not of a capital nature.

2. Purpose of Expenditure: Wholly and Exclusively for Business

The Tribunal also determined that the expenses were laid out wholly and exclusively for the respondent's business. This was challenged by the Commissioner, who argued that the expenses were not entirely for the respondent's business but also for acquiring new technical knowledge and initiating new business ventures, which could be considered capital expenditure.

The High Court analyzed various precedents cited by the Commissioner, including:
- Dr. P. Vadamalayan v. Commissioner of Income-tax: The expenditure was allowed as revenue because it was incurred to maintain efficiency in the surgeon's existing practice.
- Seshasayee Brothers Ltd. v. Commissioner of Income-tax: The expenditure was disallowed because the assessee failed to prove it was wholly and exclusively for business purposes.
- Ambica Mills Ltd. v. Commissioner of Income-tax: The expenditure was deemed capital as it aimed to acquire new machinery, bringing an enduring benefit to the business.
- Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax: The Supreme Court distinguished capital expenditure as one that brings into existence an asset or advantage of enduring benefit.
- Mysore Kirloskar Ltd. v. Commissioner of Income-tax: The expenditure was capital as it was for acquiring "know-how" for new production.

The High Court observed that the managing agent incurred the expenses to increase its own earnings by improving the managed companies' conditions, leading to higher commissions. This objective was to produce conditions for increased income, not to create an enduring asset. The High Court referenced Tata Sons Ltd. v. Commissioner of Income-tax, where similar principles were applied, and the expenditure was allowed as it aimed to increase the managing agent's commission.

Conclusion:

The High Court concluded that the foreign tour expenses incurred by the respondent were not of a capital nature. The managing agent spent the amount to create possibilities for increased income, which is a revenue expenditure. The Tribunal's decision was upheld, and the expenses were deemed laid out wholly and exclusively for the respondent's business. The answer to the reference question was in the affirmative, and the applicant was ordered to pay the costs of the reference.

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