Project report is capital, market survey mixed; assigned debt allowed as bad debt u/ss 37(1), 36(1)(vii)

HC held that expenditure on preparation of a project report for a proposed new fertilizer unit constitutes capital expenditure and is not deductible u/s 37(1). As regards market survey expenditure, HC laid down that if the survey was exclusively to assess marketability of a new product (triple super phosphate) for a new project, it is capital in nature; if it was a general survey to improve the existing fertilizer business, it is revenue expenditure. This issue was remanded to the Tribunal for factual determination. HC further held that the assigned debt, arising from unpaid sale price already credited as income, had become irrecoverable and qualified as a deductible bad debt u/s 36(1)(vii), answering the question in favour of the assessee.

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Issues Involved:
1. Deductibility of expenditure for preparation of a project report and market survey u/s 37(1) of the Income-tax Act, 1961.
2. Deductibility of a debt taken over by the assessee-company as a bad debt u/s 36(1)(vii) of the Income-tax Act, 1961.
3. Deductibility of the same debt as a trading loss u/s 28(i) of the Income-tax Act, 1961.

Summary:

Issue 1: Deductibility of Expenditure for Project Report and Market Survey u/s 37(1)
The court examined whether the expenditure of Rs. 2,50,000 for a project report and Rs. 1,20,000 for a market survey related to setting up a unit at Saladipura, Rajasthan, should be considered capital or revenue expenditure. The court referred to the principles laid down in Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC), which distinguish capital expenditure from revenue expenditure based on the nature and purpose of the expenditure. The court concluded that the expenditure for the project report was capital in nature as it was incurred to decide whether to acquire new profit-making assets of enduring nature. However, the nature of the market survey expenditure was not clear. If the market survey was general, it would be revenue expenditure; if it was exclusively for triple super phosphate, it would be capital expenditure. The matter was referred back to the Tribunal for further examination.

Issue 2: Deductibility of Debt as Bad Debt u/s 36(1)(vii)
The court considered whether the debt of Rs. 5,80,403, taken over by the assessee-company from Messrs. Nanavati and Co. (P.) Ltd. under a deed of assignment, was deductible as a bad debt. The court noted that under clause 15 of the agreement dated November 28, 1961, the assessee-company had undertaken liability for bad and doubtful debts for supplies made at its instance. The income from sales to Messrs. New Kaiser-I-Hind Mill was included in the assessee's accounts. Therefore, the debt was recoverable by the assessee-company as its own debt and was justified in treating it as a bad debt. The court held that the debt was deductible as a bad debt for the assessment year 1970-71 u/s 36(1)(vii).

Issue 3: Deductibility of Debt as Trading Loss u/s 28(i)
In view of the affirmative answer to question No. 2, the court found it unnecessary to address question No. 3 regarding the deductibility of the same debt as a trading loss u/s 28(i).

Conclusion:
The court concluded that the expenditure for the project report was capital in nature, while the nature of the market survey expenditure required further examination. The debt of Rs. 5,80,403 was deductible as a bad debt u/s 36(1)(vii), and the question of its deductibility as a trading loss was not addressed.

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