1971 (7) TMI 33 - HC - Income Tax

Whether, on the facts and in the circumstances of the case, the amount of Rs. 36,966 charged to the assessee-company by Messrs. Oriental Carpet Manufacturers (London) Ltd. was not an allowable deduction under section 10(2)(xv) of the Income-tax Act, 1922? - Held that amount is allowed as deductible expenditure.

Summary

Issues Involved:
1. Whether the amount of Rs. 36,966 charged to the assessee-company by Messrs. Oriental Carpet Manufacturers (London) Ltd. was an allowable deduction under section 10(2)(xv) of the Income-tax Act, 1922.

Detailed Analysis:

1. Nature of the Expenditure:
The primary issue was whether the expenditure incurred by the parent-company (Messrs. Oriental Carpet Manufacturers (London) Ltd.) and charged to the assessee-company could be considered as an allowable deduction under section 10(2)(xv) of the Income-tax Act, 1922. The parent-company provided various services to its subsidiaries, including the assessee-company, such as arranging overdraft facilities, standing surety for loans, advancing interest-free loans, and providing technical and business advice. The expenses incurred by the parent-company were proportionately distributed among its subsidiaries based on their paid-up capital.

2. Assessment by Income-tax Authorities:
The Income-tax Officer disallowed the claim of the assessee-company, stating that the expenses were incurred by the parent-company for its own purpose to ensure proper supervision and control over its investments in subsidiaries, ultimately aiming to earn dividends. This decision was upheld by the Appellate Assistant Commissioner, who affirmed the Income-tax Officer's reasoning.

3. Tribunal's Findings:
The Income-tax Appellate Tribunal, Delhi Bench "B", allowed the assessee-company's claim. The Tribunal noted that two conditions must be satisfied for the deduction under section 10(2)(xv): the expenditure should be wholly and exclusively for the purpose of the business, and it should not be of a capital nature. The Tribunal found that the parent-company's services were essential for the assessee-company's business operations, and without such services, the assessee-company would have had to incur higher expenses to establish its own office or appoint an agent in London. The Tribunal concluded that the expenditure was indeed for the assessee-company's business purposes and was of a revenue nature.

4. Department's Argument:
The department argued that the expenditure was incurred by the parent-company to earn higher profits from its investments, implying that it was for the parent-company's business. The department relied on the case of Odhams Press Ltd. v. Cook, where it was held that the expenses of a subsidiary company should not be treated as the expenses of the parent-company. However, the Tribunal found that the facts of the present case were different and that the expenditure was incurred for the assessee-company's business.

5. Court's Analysis:
The court analyzed the observations from the Odhams Press case and found that they did not support the department's contention. The court noted that the parent-company did not carry on any business itself and only earned dividends from its investments in subsidiaries. The services provided by the parent-company to the subsidiaries were essential for their business operations and were akin to a common agent incurring expenses on behalf of multiple principals. The court found no distinction between the present case and the hypothetical scenario where principals share the expenses of a common agent.

6. Conclusion:
The court concluded that the Tribunal was correct in allowing the deduction under section 10(2)(xv) of the Income-tax Act, 1922. The expenditure was incurred wholly and exclusively for the assessee-company's business and was not of a capital nature. The court answered the question in the negative, in favor of the assessee and against the department. No order as to costs was made due to the difficult nature of the question involved.

Question answered in the negative.