1963 PLP 1029 (PTD)

S. 10(2)(ii), (xi), (xv)-Bad debt Expenditure incurred for purpose of floating company which was never formed Re payment of expenditure incurred for managed company waived by assessee Repairs Amounts spent for improvement of building taken on lease. The assessee, which had as one of its objects the promotion of new companies and obtaining the managing agency of the companies so promoted, incurred large sums by way of preliminary expenditure to explore the possibilities of floating a proposed cement manufacturing company, which was, however, never formed. The assessee claimed the sums so expended as admissible deduction in computing its profits : Held, (i) that the provisions of section 10(2)(xi) of the Income-tax Act, 1922 did not apply, because neither when the moneys were expended nor at any time thereafter was there a contract between the assessee and any other person that the assessee should get back the money ; there came into existence no debtor with a liability to pay the debt ; (ii) on the facts, that there was no material on the record to hold that the money was spent in the usual course of the assessee's business with the hope of re imbursement after the proposed company was formed, and the Tribunal was justified in rejecting the claim under section 10(2)(xv). The assessee took certain buildings on lease and expended moneys to improve them and make them fit for use as guest houses to accommodate its guests and claimed the moneys so spent as deductions in computing its profits : Held, on the facts, that the assessee was not entitled to the deduction as it had failed to place material before the Tribunal to sustain its claim that the moneys had been expended on "current repairs" within the scope of section 10(2)(ii) of the Income tax Act. The assessee had spent the sum of Rs. 6,240 in connection with the promotion of a textile mill company managed by it. It waived its claim to the amount as the company was in bad straits and was not a financial success and claimed the amount as a deduction in computing its profits ; Held, on the facts, that the assessee was not entitled to the deduction as there was no proof that the waiver was for adequate business consideration and that the assessee had failed to prove that the debt was irrecoverable to bring its claim within the scope of section 10(2)(xi) of the Income tax Act. If a claim properly arising under section 10(2)(xi) cannot be upheld under that subsection, it cannot be brought again under section 10 (2) (xv). Bansilal Abirchand Spinning and Weaving Mills v. Commissioner of Income tax (1957) 31 I T R 427 ref. STATEMENT OF CASE In compliance with the directions of the High Court in C. M. P. Nos. 3634, 3635 and 3636 of 1956, dated August 6, 1956, we state the case, agreed to by both the parties and refer it to the High Court. 'the questions of law on which the Tribunal has been directed to state the case are : "(1) Whether, on the facts and in the circumstances of this case, the sums of Rs. 20,555, Rs. 32,554 and Rs. 33,180 laid out by the assessee during the previous years for the assessment for the years 1948-49, 1949-50 and 1950-51, respectively, in prospecting for raw materials for floating new companies, can constitute admissible deduction either under section 10 (2) (iv) or under section 10(2)(xi) of the Act? (2) Whether, on the facts and in the circumstances of this case, the sums of Rs. 9,560, Rs. 2,835 and Rs. 3,143 spent by the assessee in improving the guest house during the previous years for the assessment years 1948-49, 1949-50 and 1950-51, respectively, can be allowed as a proper deduction in computing the profits assessable to income tax under section 10 (2) of the Act ? (3) Whether, on the facts and in the circumstances of the case, the sum of Rs. 6,240 being the outlay incurred by the assessee in connection with the promotion of the Virudhunagar Textile Mills Ltd. during the previous year to the assessment year 1948 49, is a permissible deduction from the profits assessable to income tax under section 10(2) of the Indian Income tax Act ?" We shall, therefore, confine ourselves, as far as possible, to the facts relevant to those questions. 2. The assessee is a private limited company consisting of share holders drawn exclusively from the families of the following two persons A. V. Thomas, S. S. Natarajan. By virtue of its memorandum and articles of association, the business of the assessee company was mainly to act as managing agents, managers and secretaries of other companies ; it included promotion of other companies too. The memorandum and articles of association form part of the case. They are not printed but copies thereof are undertaken by the assessee to be produced before their Lordships at the time of hearing. 3. The Loyal Textiles and Virudhunagar Textiles were two companies which the assessee managed during the years covered by this reference, as their managing agents. They were appointed to the office by the articles of association of the two companies themselves. 4. With the intention of promoting another company under the name and style of Arcot Cement Company, the assessee engaged chemists and other experts during the year ended April 30, 1941, to investigate into the possibilities and prospects of such a floatation. The actual exploration continued over the next two years too. The following are the details of expenses incurred by the assessee in this quest for the various years in question : Year ended 30-4-47 30-4-48 30-4-49 (1) (2) (3) (4) Rs. Rs. Rs. Payment to Madhava Rao (for travelling expenses) 10,500 21,500 1,500 Consultation fees 7,500 6,500 6,000 Laboratory expenses 1,103 665 1,601 Prospecting expenses 716 1,034 1,260 Salaries 13,947 Laboratory expenses 225 Rent 304 204 521 Travelling 1,106 Salaries 4,931 Soda ash investigation 22 Other expenses 432 251 195 Geologists' expenses 1,143 Director's and Geologists' expenses (soda ash investigation) 129 Salary to Natarajan (Liaison Officer for Textile control) 3,000 20,555 32,554 33,180 5. The aforesaid Arcot Cement Company was never formed as the floatation idea had to be given up, the proposition having been found to be unworkable. 6. The assessee claimed the aforesaid expenses in its accounts for the aforesaid years, the respective "previous years" for the assessment years 1948-49, 1949-50 and 1950-51. The Income tax Officer disallowed the claims for all the years for the following reasons reproduced from his order for the assessment year 1948-49 : "These experiments were for promoting Arcot Cement Company. Actually that company was started but the cost of the experiments was not carried forward to that company's account as preliminary expenditure, nor did the assessee get any income for promoting the company. The assessee has promoted certain other companies also but no income was received by the assessee by way of promotion. In these circumstances, the expenses connected with the promotion of companies cannot be allowed. The assessee contends that companies were promoted with a view to securing managing agency. Even so it should have either got from the companies concerned income for promoting them or in the alternative transferred the expenses to the companies concerned. The mere fact that it was trying to become the managing agents of certain companies does not make the expenses of promotion admissible. They are preliminary or capital in nature and they have to be disallowed. The assessee has also paid travelling expenses of Rs. 10,500 to one Mr. Madhava Rao. He is not in assessee's employ but a person at Delhi, whose help the assessee seeks. He helps the assessee to get licences for floating new companies for importing machinery, etc. The expenses are very heavy and cannot be mere travelling expenses. There are no details for the expenses. I cannot therefore allow these expenses. Further since they appear to have been incurred in connection with the promotion of companies, they are capital in nature and will be disallowed." 7. The assessee appealed to the Appellate Assistant Commissioner against all the aforesaid assessments. The Appellate Assistant Commissioner held that there was no promotion fee stipulated and accordingly the promotion in question was not a regular business of the assessee ; the expenses had been incurred with a view to get the managing agency and therefore capital. He accordingly dismissed all the appeals. His full reasoning is contained in the following paragraph extracted from the order for the assessment year 1948-49 : " . . . . I find that the appellants were not entitled to any remuneration or commission for the work which they did towards the promotion of these companies. It cannot therefore be admitted that it was a regular business of the appellants to promote new companies. The fact is that the appellants were making experiments and spending money to help some new companies to come into existence. The only motive of the appellants was to secure subsequently the managing agencies of these companies, in which case probably they would be properly compensated for the expenses incurred by them in promoting companies. On the facts of the case it is evident that these expenses were incurred for the purpose of acquiring a right either in the shape of managing agency or certain other control in the affairs of these new companies. I therefore agree with the Income tax Officer that these expenses cannot be treated as revenue expenses under the Income tax Act which can be set off against the appellant's income of this year." 8. The assessee thereupon appealed to the Tribunal against all the aforesaid years. The Tribunal found that the expenses had not been proved in full. Nevertheless, it considered the claims of the assessee under both the alternatives of sections 10 (2) (xv) and 10 (2) (xi). As the outlay would have been recoverable from the companies, if they had been formed at the time the various outlays were made, they could not, in the opinion of the Tribunal, be said to have been wholly and exclusively laid out for the purpose of the assessee's business ; they had been laid out only for the intended companies' business. In the opinion of the Tribunal, the claim as bad debts under section 10 (2) (xi) was equally unavailing as the company was' not formed at all and accordingly there was no stranger as debtor to recover the advances from, and accordingly there was no bad debt to consider. For these reasons, the Tribunal dismissed the contention in all the appeals. Paragraph 4 of the Tribunal's order containing the above decision is annexed hereunto as Annexure "A" and forms part of the case. The above are the facts which cover question No. 1 set out in paragraph 1 above. 9. The assessee took up on a monthly tenancy, a building in Poonamalle High Road, Madras, during the year ended 30th April 1947, the "previous year" for the assessment year 1948 49, with a view to opening a guest house in Madras for the assessee's customers. As the house was found to be in a dilapidated state, it expended Rs. 14,560 to bring it into a proper state of repairs to serve the purpose intended. Details of this outlay are annexed hereunto as Annexure "B" and form part of the case. 10. Out of the aforesaid outlay, the landlord accepted Rs. 5,000 and the balance of Rs. 9,560 was written off as an expense of the year. 11. On the same property, the assessee spent Rs. 2,138 for similar renovation and repairs during the next year ended April 30, 1948. 12. During the following year ended April 30, 1949, the assessee took up No. 2, Victoria Crescent Road, as an additional guest house. In this year, the outlay on the two guest houses is as follows : Rs. Poonamalle High Road Paid to Techno Engineering Company for work done previously 2,525 Victoria Crescent Road To make it suitable for occupation as a guest house 618 Total 3,143 13. The Income tax Officer treated all the aforesaid outlays as initial repairs and capital and accordingly added them back to the assessments of 1948-49, 1949-50 and 1950-51, in which they were respectively claimed. The Appellate Assistant Commissioner also upheld the disallowance and dismissed the three appeals that were filed before him. 14. In the appeals to the Tribunal that followed, the Tribunal dismissed the assessee's contention for the following reasons : " . . . . The assessee is only a monthly tenant and the expenses in question incurred on a stranger's property in a substantial measure for additions and alterations to the premises cannot be said to be current repairs. The outlay is clearly capital and has been rightly disallowed." 15. The aforesaid facts cover question No. 2 set out in paragraph 1 above. 16. The assessee promoted and in due course was appointed as the managing agents of the Virudhunagar Textile Mills Ltd., which was incorporated on July 27, 1946, through its own articles of association. Towards the promotion of this company, the assessee had spent Rs. 6,240 made up of as follows : Amount Rs. Fees to Vaidyanatha Iyer, chartered account ant, in connection with, capital issues 1,050 Expenses for collection of share subscription 5,190 Total 6,240 17. Against the claim of the assessee of the aforesaid outlay in its assessment for 1948 49, the Income tax Officer has written as follows "Similarly, remarks apply to an amount of Rs. 1,050 paid to Mr. Vaidyanatha Iyer & Co., included in general charges. It was for obtaining licence and is capital in nature. It had been ascertained from the auditors that an amount of Rs. 6,240 was incurred for promoting Virudhunagar Textile Mills, Ltd., and that the expenses were included under establishment, printing and stationery, postage, travelling, registration and general charges. For the reasons mentioned already in connection with the Arcot Cement Company, the expenses of promotion of Virudhunagar Textile Mills Ltd. will also be disallowed. The company quotes the case of Commissioner of Income tax v. Tata Sons Ltd. (1939) 7 I T R 195. The facts of this case, however, are quite different. Tata Sons Ltd. were in urgent need of funds and entered into an agreement with a financier. The question was whether the payment to financier was an admissible deduction but in the case under consideration, the assessee has incurred expenses for promoting certain companies. The decision of Tata Sons does not, therefore, apply in this case." The assessee's appeal to the Appellate Assistant Commissioner against the aforesaid decision of the Income tax Officer was unsuccessful. 18. The same contention was raised before the Tribunal in the appeal that followed which the Tribunal dismissed in the following words: " . . It is admitted that the aforesaid expenses are legitimately debitable to and recoverable from the managed company. It is, however, stated that as the company was in bad straits and was not a financial success, the assessee company thought it fit and proper to waive its claim thereof. There is, however, no proof that the alleged waiver is for adequate business considerations and accordingly we uphold the disallowance." T. V. Balakrishnan for the Assessee. S. Ranganathan for the Commissioner.