1973 (8) TMI 6 - HC - Income Tax

Assessee s claim for two of his expenditure items mentioned hereinafter being allowed as revenue expense - first item relates to the assessee s proposal to construct a building which however had to be abandoned as the land meant for the building was acquired by the Government. All the same the assessee had to pay a sum of Rs. 10, 000 to Architects for the preparation of the plan for construction of the building. The assessee claimed this to be revenue expenditure but the Income-tax Officer rejected this claim - second item relates to the payment of a sum of Rs. 2, 00, 000 to the Maharastra Government as grant for the development of the port of Redi. This payment was claimed as part of the total expenditure incurred for facilities to labourers so as to improve the business of the assessee-company. The Income-tax Officer disallowed the claim as he considered the payment to be in the nature of a loan in the beginning and also because he was of the view that it was not for any specific purpose connected with the assessee s business

Issues Involved:
1. Whether the fee of Rs. 10,000 paid to Messrs. LUC Durrant, architects, for the preparation of a plan for construction of a building was an allowable deduction in computing the income under the head 'Profits and gains of business'.
2. Whether the payment of Rs. 2,00,000 by the assessee-company to the Maharashtra Government can be said to be an expenditure laid out wholly and exclusively for the purposes of the assessee's business in computing the income chargeable under the head 'Profits and gains of business'.

Issue-Wise Detailed Analysis:

1. Fee of Rs. 10,000 Paid to Architects:
The assessee, a government company, paid Rs. 10,000 to Messrs. LUC Durrant, architects, for preparing a plan for constructing a building at Lodi Road. This project was abandoned as the land was acquired by the Government. The assessee claimed this amount as a revenue expenditure. The Income-tax Officer, Appellate Assistant Commissioner, and the Income-tax Appellate Tribunal all disallowed this claim, categorizing it as a capital expenditure.

The court referenced principles from Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, which state that outlay is capital when it is made for the initiation, extension, or substantial replacement of equipment in a business. The court concluded that the expenditure was intended to bring into existence an asset or advantage for the enduring benefit of the trade, thus categorizing it as a capital expenditure. The court also noted that the subsequent abandonment of the project did not alter the nature of the expenditure. Therefore, the fee paid to the architects was not an allowable deduction under 'Profits and gains of business'.

2. Payment of Rs. 2,00,000 to Maharashtra Government:
The assessee paid Rs. 2,00,000 to the Maharashtra Government for the development of the port of Redi and for providing facilities to laborers. The Income-tax Officer disallowed this claim, viewing it as an outright grant not connected with the assessee's business.

The court examined the connotation of "for the purposes of business" as per section 10(2)(xv) of the Indian Income-tax Act, 1922. The court referenced several cases, including Commissioner of Income-tax v. Malayalam Plantations Ltd., which held that the expression is broader than "for the purpose of earning profits" and includes expenditures necessary for the business's operation, rationalization, and modernization.

However, the court found that the payment was an outright grant and not connected with the price structure of the ore purchased or the quantity exported. The laborers who benefited from the amenities were not employees of the assessee, and there was no direct connection between the expenditure and the assessee's business. The court concluded that the expenditure was not laid out wholly and exclusively for the purpose of the assessee's business and was too remote to be considered relevant. Therefore, the payment of Rs. 2,00,000 was not an allowable deduction under 'Profits and gains of business'.

Conclusion:
Both questions were answered in the negative, in favor of the revenue and against the assessee. The court held that neither the fee of Rs. 10,000 paid to the architects nor the payment of Rs. 2,00,000 to the Maharashtra Government were allowable deductions in computing the income under the head 'Profits and gains of business'.

← Previous Next →