1984 (8) TMI 41 - HC - Income Tax

Court rules in favor of assessee on scientific research, employee defense, and foreign tour expenses.

The court ruled in favor of the assessee on all three issues: scientific research expenses were allowed under section 35(2) of the Income-tax Act, ... Business Expenditure, Scientific Research Expenditure Issues Involved:1. Scientific research expenses u/s 35(2) of the Income-tax Act, 1961.2. Allowability of expenditure incurred for the defense of an employee.3. Allowability of revenue expenditure on foreign tours.Summary:Issue 1: Scientific Research Expenses u/s 35(2)The first question addressed whether expenses incurred by the assessee in the E.D.C. Plant and Pulp Pilot Plant were scientific research expenses related to its business and thus allowable u/s 35(2) of the Income-tax Act, 1961. Both parties agreed that this issue was governed by the decision in CIT v. National Rayon Corporation Ltd. [1983] 140 ITR 143, where the identical question was answered affirmatively in favor of the assessee. Consequently, the court answered the first question in the affirmative and in favor of the assessee without detailed discussion.Issue 2: Expenditure on Defense of an EmployeeThe second question involved the allowability of Rs. 17,800 spent by the assessee in defending its chief executive, Shri Mahant, in criminal proceedings. Mahant had fired shots at a crowd after dismissing an employee, leading to his prosecution. The Tribunal had disallowed the expenditure, but the court considered various precedents, including CIT v. Dhanrajgirji Raja Narasingirji [1973] 91 ITR 544 and Hingir Rampur Coal Co. Ltd. v. CIT [1971] 81 ITR 633, which supported the allowability of such expenses if incurred to protect the business interests. The court concluded that the expenditure was incurred wholly and exclusively in the interest of the assessee's business and was thus deductible.Issue 3: Revenue Expenditure on Foreign ToursThe third question pertained to the allowability of Rs. 48,947 incurred on foreign tours of the managing director and works manager. The trips aimed to negotiate and reduce the foreign exchange component for setting up a nylon yarn plant. The ITO, AAC, and Tribunal had disallowed the expenditure, considering it capital in nature. However, the court referred to the observations in Antifriction Bearings Corporation Ltd. v. CIT [1978] 114 ITR 335 and other relevant judgments, concluding that unless the expenditure was directly related to acquiring a capital asset, it could not be considered capital expenditure. The court held the expenditure to be allowable as revenue expenditure.Conclusion:The court answered all three questions in the affirmative and in favor of the assessee, directing the Revenue to pay the costs of the reference.