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TMI Blog1980 (8) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... us year being the calendar year 1966. The assessee before us is limited company. It was manufacturing engineering equipments of various kinds. In the year of account, relevant for this reference, one of its directors, Mr. S.I. Patel, was sent abroad by the company for selection of some foreign engineers with a view to start manufacture of aerial ropeways. The aerial ropeways were for transporting of machines as well as human beings. The assessee had not manufactured aerial ropeways earlier. The ITO noted that in the directors' report it was clarified that the company had decided to start designing and manufacture of aerial ropeways for passenger traffic and handling materials on a turnkey basis to overcome the effects of competition and with a view to diversify its activities. The ITO, however, held that this was entirely a new line of activity and disallowed the expenditure claimed for the foreign tour expenses of the director as capital expenditure, the foreign tour expenses being in the sum of Rs. 16,948. The assessee went in appeal before the AAC on this and on some other points but the AAC confirmed the order of the ITO so far as this item of foreign tour expenditure was conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Engineering Co. Ltd. [1964] 104 ITR 510 (Guj) was the case of the very same assessee as is before us. That case was in respect of assessment year 1964-65. In that case, it was held (headnote) : "Section 84 of the Act (now section 80J) provided for tax holiday for new industrial undertakings or hotels and exempted the income thereof to the extent of six per cent. of the capital employed in the business of the new industrial undertakings or hotels, computed in the manner prescribed by rule 19 of the Income-tax Rules, 1962. The legislative intent as expressed in rule 19, having regard to the scheme of the entire rule, is that to effectively extend the concession of the tax holiday, the average capital employed throughout the year in an industrial undertaking or hotel should form the basis for such concession. This basis appears to emerge from the comparison of the phraseology employed in sub-rules (1) and (5) of rule 19. The Legislature has adopted two different concepts in sub-rules (1) and (5), namely, the valuation or the cost of the assets and the average amount of capital employed. It may be that, in a given case, profit or loss might be invested in, or debited to, the financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xchange. This activity of ours is likely to be very beneficial. The company has already appointed two foreign engineers and is now in a position to offer aerial ropeways for material handling and passenger traffic, indigenously designed and manufactured. " The Tribunal further founded that this highly sophisticated method of conveying or transporting goods and human beings was not in the same line as the business that was carried on till then by the assessee. It was also a different type of conveying or transport. It was also not made clear why this venture had to be given up after the appointment of the foreign engineers. However, in the view of the Tribunal, the main consideration was whether the assessee embarked upon a new line of manufacture altogether or whether this was only a more effective utilisation of the existing resources. The Tribunal held that the assessee wanted to use the existing machinery for manufacturing aerial ropeways. There was nothing to show that fresh financial resources were required or whether such resources had to come from another fund. There was nothing to show that a separate management had to be set up for this venture of manufacturing aerial ro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estion was not made for the initiation of the business or for expansion of the business or for a substantial replacement of the equipment of the business, nor was it an expenditure for acquiring or bringing into existence an asset or an advantage of an enduring nature to the business but was made for running the business with a view to produce more profits and with view to run the business more efficiently so as to produce higher profits, the expenditure amounted to revenue expenditure. In that case it was observed at pages 759-760 of the report: "According to the said affidavit, it was not necessary for the assessee-company to purchase any new machinery for this purpose. In fact, for this purpose no new machinery was required nor was any purchased for this purpose. The result was an improved article of the same nature as the company was already making by the pressing method. It is thus clear that, as a result of the expenditure incurred by the company, the technicians were made more efficient so that they were able to discharge their duties in the company's employment better and the training was for the purpose of acquiring knowledge of the practical working of the manufacture of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a particular lifting capacity and that it intended to manufacture electric hoists with a different design so as to increase the lifting capacity and in order to acquire a technical know-how and also for purposes of studying manufacturing process of such items as well as for manufacturing of conveyor leaders, that these two directors and the production manager went to Berlin. Before these three persons went abroad, the assessee-company and Messrs. Veb Maschinenfabrik and Eisengieseerai Dessan as represented by Limex Ltd. entered into an agreement for technical collaboration, though by the consent of both the parties to the said agreement, it was not acted upon. In other words, therefore, the two directors and the production manager went abroad for purposes of finding out whether it would be profitable for the company to adopt a new design of hoists with increased lifting capacity which they intended to manufacture." The High Court held that having regard to the nature of the trip for which the expenses in question were incurred in the case before the High Court, it could not be successfully established as was sought to be done by the revenue, that these expenditure were not for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, according to the Supreme Court, is whether there is any addition to the fixed capital of the company by reason of the expenditure incurred. It may not be an immediate addition or it may be even an anticipated addition to the fixed capital but if the expenditure is merely incurred for running the profit-making apparatus or income-earning machine more efficiently and in a better manner or better utilisation of the profit-making apparatus, then, it is not an expenditure of a capital nature. To use the language used by this court in CIT v. Alembic Glass Industries Ltd. [1969] 71 ITR 752, if the expenditure is incurred so that the methods of production already employed by the assessee were rendered more efficient so that better material handling equipment, namely, aerial ropeways, could be manufactured by the company with its existing plant and machinery, the expenditure could never be said to be an expenditure of a capital nature. Mr. Raval, for the revenue, has drawn our attention to some of the other decisions of this court where, from the nature of things, the expenditure could not be considered to be of a revenue nature. In Ambica Mills Ltd. v. CIT [1964] 54 ITR 167 (Guj), the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture on foreign tours was held to be of a capital nature. We respectfully agree with that conclusion in Ambica Mills' case. In Hyderabad Allwyn Metal Works Ltd. v. CIT [1975] 98 ITR 555, Division Bench of the Andhra Pradesh High Court was concerned with the following facts: The assessee-company was manufacturing refrigerators, steel furniture and was also carrying on the business of building bus bodies. The expenditure incurred by it in connection with one of its directors going on a tour of Japan with the object of negotiating a technical collaboration with a Japanese company for the manufacture of scooters, etc., was in question before the High Court and the dispute was whether this was revenue expenditure or capital expenditure and it was held that the expenditure was in the nature of capital expenditure and not revenue expenditure as it was not incurred in connection with the expansion of the old business. What the assessee-company sought to start was a new line of business and the expenditure thereon should be treated as capital expenditure and not business expenditure. We respectfully agree with the conclusion of the learned judges of the Andhra Pradesh High Court because ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by determining whether the expenditure in question was incurred for a more efficient use or better utilisation of the existing processes and techniques employed by the company or whether the expenditure was incurred for the purpose of acquiring new machinery or new plant or addition, even though remotely or at a distant future, to the fixed capital of the company. If the expenditure fell in the first category, namely, in the category of better utilisation of the existing income-earning apparatus of the company, it has always been treated as in the three different cases pointed out above as revenue expenditure. If, on the other hand, it is incurred for the purpose of adding, immediately or in future, to the fixed capital of the company and buying new machinery or installing new machinery so that the fixed capital of the company would increase, then, it has always been treated as capital expenditure. In the instant case, as has been found by the Tribunal, there was no proposal to increase the fixed capital of the company. All the existing designing techniques and processes known and in the possession of the assessee-company were to be employed for the purpose of manufacturing aer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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