1987 (8) TMI 52 - HC - Income Tax

Tax treatment of company expenditures, compliances and scope of 'regular assessment' - mixed rulings largely favour Revenue, some assessee wins

Whether 'regular assessment' in s.214 means only original assessment or subsequent appellate orders: court applied precedent that the term does not favour ... Advance Tax, Business Expenditure, Capital Expenditure, Depreciation Issues: (i) Whether the words 'regular assessment' in section 214 refer only to the original assessment or also to an order passed pursuant to an appellate order; (ii) Whether surtax under the Companies (Profits) Surtax Act, 1964 is deductible in computing total income for AY 1973-74; (iii) Whether technical fees paid to Warner Lambert constituted revenue expenditure; (iv) Whether prepaid expenses and prepaid insurances constitute assets for calculating capital under rule 19A; (v) Whether depreciation under section 32(1) is allowable on scientific research assets whose cost was earlier deducted under section 35; (vi) Whether Rs. 18,000 paid as legal and consultation fees in connection with issue of bonus shares was deductible as revenue expenditure for AY 1973-74; (vii) Whether Rs. 22,500 paid as fees to the Registrar of Companies for increasing authorised capital was deductible as revenue expenditure for AY 1973-74.Issue (i): Whether the words 'regular assessment' in section 214 refer only to the original assessment or also to an order passed pursuant to an appellate order.Analysis: The Court follows its earlier decision in Nizam's Religious Endowment Trust v. ITO and concludes the question on that authority.Conclusion: Answered against the assessee and in favour of the Revenue.Issue (ii): Whether surtax under the Companies (Profits) Surtax Act, 1964 is deductible in computing total income for AY 1973-74.Analysis: The Court applies the precedent of Vazir Sultan Tobacco Co. Ltd. v. CIT to the question.Conclusion: Answered against the assessee and in favour of the Revenue.Issue (iii): Whether technical fees paid to Warner Lambert constituted revenue expenditure.Analysis: The Court adheres to its earlier ruling in CIT v. Warner Hindustan Ltd. that such technical fees are capital in nature.Conclusion: Answered against the assessee and in favour of the Revenue.Issue (iv): Whether prepaid expenses and prepaid insurances constitute assets for calculating capital under rule 19A.Analysis: Following CIT v. Warner Hindustan Ltd., the Court determines the treatment of prepaid items for rule 19A purposes.Conclusion: Answered in favour of the assessee.Issue (v): Whether depreciation under section 32(1) is allowable on scientific research assets whose cost was earlier deducted under section 35.Analysis: The Court applies the retrospective amendment to section 35(2)(iv) effected by the Finance (No.2) Act, 1980 and its effect on allowability of depreciation.Conclusion: Answered against the assessee and in favour of the Revenue.Issue (vi): Whether Rs. 18,000 paid as legal and consultation fees in connection with issue of bonus shares was deductible as revenue expenditure for AY 1973-74.Analysis: Applying the Supreme Court decision in Empire Jute Company Ltd., the Court examines whether the expenditure created an enduring benefit or enlarged the profit-making apparatus; it finds the payment was for legal advice preliminary to the issue and did not create a new asset or expand fixed capital.Conclusion: Answered in favour of the assessee.Issue (vii): Whether Rs. 22,500 paid as fees to the Registrar of Companies for increasing authorised capital was deductible as revenue expenditure for AY 1973-74.Analysis: Relying on the principle in Empire Jute Company Ltd. and the House of Lords decision in IRC v. Carron Company, the Court finds that mere increase in authorised capital did not enlarge issued or fixed capital; the expenditure facilitated business operations and did not create enduring benefit.Conclusion: Answered in favour of the assessee.Final Conclusion: The Court resolves the referred questions with mixed results: several issues answered against the assessee (in favour of Revenue) by following earlier authorities or retrospective amendment, while the specific payments for legal/consultation fees related to bonus issue and fees for increase of authorised capital are held deductible (in favour of the assessee); one question on weighted deduction under section 35B(1)(b) is left unanswered and remitted to the Income-tax Officer for verification.Ratio Decidendi: The decisive legal principle is that expenditure is capital only if it confers an enduring benefit or enlarges the capital/profit-making apparatus; absence of creation of a new asset or enduring advantage points to revenue treatment.