1971 (3) TMI 24 - HC - Income Tax

Royalty paid on net sales to party for obtaining recognition of Himachal Pradesh Education Department to become able to sell its text books in the territory of Himachal Pradesh - amount spent helped assessee in expansion of business so it was capital in nature and not allowable under section 10(2)(xv) of the Indian Income-tax Act 1922

Summary

Issues Involved:
1. Whether the sum of Rs. 5,349 paid by the assessee to M/s. Ranbir Bros., Kanpur, was a business expenditure of a revenue nature.
2. Whether the assessee's business of printing and publishing books was a newly established industrial undertaking entitled to the exemption from tax under section 15C of the Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Business Expenditure of Revenue Nature:

The first issue revolves around whether the sum of Rs. 5,349 paid by the assessee to M/s. Ranbir Bros., Kanpur, qualifies as a business expenditure of a revenue nature. The assessee, a registered firm engaged in publishing books, sought recognition from the Himachal Pradesh Education Department for its textbooks. To achieve this, the assessee entered into an agreement with M/s. Ranbir Bros., who were to use their influence to secure the recognition. In return, the assessee agreed to pay a royalty of 6 1/2% on the net sales of the approved books. The recognition was obtained, and the assessee paid Rs. 5,349 during the relevant accounting period, claiming it as a deductible expense. The Income-tax Officer rejected this claim, classifying it as capital expenditure, a decision upheld by the Appellate Assistant Commissioner. However, the Tribunal allowed the claim, deeming it revenue expenditure, leading to the current reference.

The court analyzed whether the expenditure was capital or revenue in nature, referencing the Supreme Court's principles in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax. These principles state that if the expenditure is made for acquiring or bringing into existence an asset or advantage of enduring benefit, it is capital expenditure. Conversely, if it is for running the business or producing profits, it is revenue expenditure. The court noted that the recognition allowed the assessee to expand its business into a new territory, providing an enduring benefit. Therefore, despite the payment being in the form of a royalty, the court held that the expenditure was capital in nature and not deductible under section 10(2)(xv) of the Act. The first question was answered in the negative, favoring the department.

2. Newly Established Industrial Undertaking:

The second issue pertains to whether the assessee's business of printing and publishing books qualifies as a newly established industrial undertaking eligible for tax exemption under section 15C of the Act. Previously, the assessee got its books printed externally but started printing in its own press during the relevant assessment year. Despite indications that the assessee had a press in the earlier year, the Tribunal's appellate order and the case statement suggested that the printing press was established for the first time in the relevant year.

The court examined whether the assessee's business constituted an industrial undertaking and if it met the requirements of section 15C, specifically clause (i) of sub-section (2), which excludes undertakings formed by the reconstruction of existing businesses. The court referenced the definitions and interpretations of "reconstruction" from Stroud's Judicial Dictionary and the Bombay High Court's judgment in Commissioner of Income-tax v. Gaekwar Foam and Rubber Co. Ltd. The court concluded that the assessee's business was a continuation of its previous publishing activities, merely altering the printing method. Thus, it was a reconstruction of an existing business, not a new industrial undertaking.

Consequently, the court held that the assessee was not entitled to the tax exemption under section 15C, answering the second question in the negative, favoring the revenue.

Conclusion:

Both questions were answered in the negative, against the assessee and in favor of the revenue. The assessee was ordered to pay the costs of the revenue, with counsel's fee fixed at Rs. 250.