1968 (10) TMI 31 - HC - Income Tax

Exepnditure - spent by the assessee-company in the earlier years as expense for procuring and execution of Project - legal expenses incurred in defending the monopoly right enjoyed by the assessee-company under an instrument of assignment of lease - allowability for deduction u/s 10(2)(xv) of the Indian Income-tax Act

Issues Involved:
1. Deductibility of expenses incurred in earlier years under section 10(1) or section 10(2)(xv) of the Indian Income-tax Act, 1922.
2. Accrual of profit on sales in Part A State versus Part B State.
3. Entitlement to tax concessions for book debts under the Part B States (Taxation Concessions) Order, 1950.
4. Deductibility of legal expenses incurred in defending monopoly rights under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Detailed Analysis:

Issue 1: Deductibility of Expenses Incurred in Earlier Years
The assessee-company claimed a deduction of Rs. 82,504 spent in earlier years for securing and executing a contract with the Sindri Fertilizer Project. The Tribunal disallowed this deduction as the expenses were not incurred in the accounting year ending on 31st March, 1951.

The court addressed three arguments from the assessee:
1. Method of Accounting: The assessee argued that under section 13 of the Act, income, profits, and gains should be computed according to the method of accounting regularly employed by the assessee. The court noted that the assessee did not employ a recognized method of accounting (cash or mercantile) and there was no finding that the method of carrying forward expenses was regularly employed by the assessee.
2. Single Venture Argument: The assessee contended that the expenses related to a single venture (the Sindri contract) and should be deductible in the year the contract was completed. The court rejected this argument, distinguishing the case from Gustad Dinshaw Irani v. Commissioner of Income-tax, noting that the assessee was engaged in regular business activities, not a single venture.
3. Section 10(1) Argument: The assessee argued that under section 10(1), profits and gains cannot be computed without allowing for expenses incurred in earning those profits. The court referred to Calcutta Co. Ltd. v. Commissioner of Income-tax, noting that the expenditure must be incurred in the year of assessment unless a recognized method of accounting is employed.

The court concluded that the expenses were not allowable as deductions in the assessment year 1951-52, answering the question in the negative.

Issue 2: Accrual of Profit on Sales in Part A State versus Part B State
The Tribunal held that profits on sales of Rs. 8,73,568 accrued in Part A State and thus were not eligible for tax concessions under the Part B States (Taxation Concessions) Order, 1950.

The court analyzed the nature of the contracts and the method of performance:
1. Contracts for Unascertained Goods: Gypsum was appropriated to contracts at Jamsar, and railway receipts were drawn in the buyer's name, moving at the buyer's risk.
2. Passing of Property: The court held that the property in the goods passed to the buyer at Jamsar, meaning profits accrued at Jamsar.

The court concluded that there was no material before the Tribunal to support the finding that profits accrued in Part A State, answering the question in the negative.

Issue 3: Entitlement to Tax Concessions for Book Debts
The assessee claimed tax concessions for book debts under the Part B States (Taxation Concessions) Order, 1950. The Tribunal disallowed the claim, holding that the profits on sales not received within the relevant year and standing as book debts were not eligible for concessions.

The court, having answered the previous question (Issue 2) in the negative, did not find it necessary to address this issue further.

Issue 4: Deductibility of Legal Expenses
The assessee incurred legal expenses of Rs. 7,453 in defending its monopoly right under an assignment of lease. The Tribunal held that these were capital expenses and not deductible under section 10(2)(xv).

The court noted that the litigation aimed to secure new assets (additional gypsum deposits) and considered it a capital expenditure. The court agreed with the Tribunal's view, answering the question in the affirmative.

Conclusion:
- Reference No. 12/63:
- Question 1: Answered in the negative.
- Question 2: Answered in the negative.
- Question 3: Not answered.
- Reference No. 13/63:
- Question 1: Answered in the negative.
- Question 2: Not answered.
- Question 3: Answered in the affirmative.

Parties were ordered to bear their own costs.

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