1972 (3) TMI 14 - HC - Income Tax

Whether can be said to have complied with the provisions of proviso (b) to section 10(2)(vib) of the Indian Income-tax Act, 1922, and was, therefore, entitled to allowance of development rebate on the plant and machinery installed after January 1, 1958 ? - Whether expenditure of Rs. 3,000 towards the fees of a lawyer for drafting a special resolution and making amendments to the articles of association was an admissible expenditure within the meaning of section 10(2)(xv) of the Indian Income-tax Act, 1922 ?

Summary

Issues Involved:
1. Compliance with proviso (b) to section 10(2)(vib) of the Indian Income-tax Act, 1922, for allowance of development rebate on plant and machinery.
2. Admissibility of Rs. 3,000 expenditure towards lawyer's fees for drafting a special resolution and amending articles of association under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Detailed Analysis:

Issue 1: Compliance with Proviso (b) to Section 10(2)(vib) for Development Rebate

Facts and Circumstances:
The assessee, a public limited company, claimed a development rebate under section 10(2)(vib) of the Indian Income-tax Act, 1922, on plant and machinery worth Rs. 7,62,609, installed between January 1, 1958, and April 30, 1958. The Income-tax Officer rejected the claim as the assessee did not debit its profit and loss account and create a reserve as required by proviso (b) to section 10(2)(vib) at the close of the accounting period. The Appellate Assistant Commissioner upheld this decision. However, the Tribunal allowed the claim, stating that the assessee was entitled to the benefit of section 10(2)(vib).

Resolution and Tribunal's Decision:
The Tribunal accepted the assessee's contention that even though the statutory conditions were belatedly fulfilled, the claim should be allowed as the statutory requirement was met before the assessment was taken up. The Tribunal held that accounts could be reopened for necessary adjustments inadvertently left out, and since the adjustments were made before the consideration of the claim by the Income-tax Officer, the assessee complied with the requirements.

Court's Analysis:
The court reviewed various precedents, including:
- Commissioner of Income-tax v. Veeraswami Nainar: The Madras High Court emphasized that the reserve should be made at the time of making up the profit and loss account, and later adjustments were not permissible.
- Indian Overseas Bank Ltd. v. Commissioner of Income-tax: The Madras High Court rejected the claim as the reserve set apart was not specified for the purpose of section 10(2)(vib).
- Veerabhadra Iron Foundry v. Commissioner of Income-tax: The Andhra Pradesh High Court allowed the claim as the necessary entries were made before the assessment was finalized.
- Radhika Mills Ltd. v. Commissioner of Income-tax: The Madras High Court held that entries could be made only if profits were available, and if profits were already distributed, no reserve could be created.
- Commissioner of Income-tax v. Mazdoor Kisan Sakhari Samiti: The Rajasthan High Court allowed the claim if entries were made before the completion of assessment proceedings.

Supreme Court's Observations:
The Supreme Court in Indian Overseas Bank Ltd. affirmed the Madras High Court's decision, emphasizing that the reserve must be created at the time of making up the profit and loss account and that entries were not an idle formality.

Final Judgment:
The court concluded that the statute does not specify a period within which the entries must be made and that they can be made after the close of the account year. The court held that the shareholders could amend the profit and loss account in a subsequent meeting if sufficient profits were available. Since the assessee created the development reserve by drawing upon undistributed profits in the general reserve, the court held that the assessee complied with proviso (b) to section 10(2)(vib). Therefore, the first question was answered in the affirmative, entitling the assessee to the development rebate.

Issue 2: Admissibility of Rs. 3,000 Expenditure under Section 10(2)(xv)

Facts and Circumstances:
The assessee claimed a deduction of Rs. 3,000 paid to a lawyer for drafting a special resolution and suggesting amendments to the articles of association. The Income-tax Officer, Appellate Assistant Commissioner, and Tribunal held that the expenditure was capital in nature as it brought an enduring benefit to the assessee.

Court's Analysis:
The court observed that the expenditure was incurred to align the articles of association with changes in company law, ensuring the company continued to function legally. The court determined that the expenditure was incurred wholly and exclusively for the purpose of the business and was not capital in nature.

Final Judgment:
The court held that the expenditure of Rs. 3,000 was an admissible expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922. Therefore, the second question was answered in the affirmative.

Costs:
The assessee was entitled to costs assessed at Rs. 200, with counsel's fee assessed in the same figure.

Conclusion:
Both questions referred were answered in the affirmative, granting the assessee the development rebate and allowing the deduction of the lawyer's fees.