1980 (8) TMI 30 - HC - Income Tax

Court grants revenue deduction for foreign tour expenditure, directs Commissioner to bear costs.

The court ruled in favor of the assessee on both issues. The foreign tour expenditure was allowed as a revenue deduction since it enhanced the utilization ... New Industrial Undertaking, Tax Holiday For New Industrial Undertaking Issues Involved:1. Whether the foreign tour expenditure incurred by the assessee on its director for appointing foreign engineers for manufacturing aerial ropeways is allowable as revenue deduction.2. Whether, under rule 19(5) of the Income-tax Rules, 1962, half of the profits had to be added for the computation of capital for determining relief under section 84 of the Income-tax Act, 1961.Issue-wise Detailed Analysis:Issue 1: Foreign Tour Expenditure as Revenue DeductionThe primary question was whether the foreign tour expenditure incurred by the assessee on its director for appointing foreign engineers to start manufacturing aerial ropeways could be classified as a revenue deduction. The Income Tax Officer (ITO) initially disallowed this expenditure, considering it a capital expense, as it was for a new line of activity. The Appellate Assistant Commissioner (AAC) upheld this view. However, the Tribunal reversed this decision, stating that the manufacture of aerial ropeways was an extension of the existing activities of the assessee, utilizing existing resources more effectively.The Tribunal's findings were based on the fact that no new machinery was required, and the financial resources and management remained unchanged. The Tribunal concluded that the expenditure was for better utilization of existing resources, thus qualifying as revenue expenditure. This view was supported by precedents such as CIT v. Alembic Glass Industries Ltd. [1969] 71 ITR 752 and Sayaji Iron & Engineering Works P. Ltd. v. CIT [1974] 96 ITR 240, where expenditures aimed at improving efficiency and utilizing existing resources were deemed revenue expenses. The Supreme Court's decision in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 further reinforced that expenditures facilitating better operation of existing business structures, without adding to fixed capital, are revenue in nature.Issue 2: Computation of Capital for Section 84 ReliefThe second issue concerned the computation of capital for determining relief under section 84 of the Income-tax Act, 1961. Specifically, whether half of the profits should be added to the capital employed as per rule 19(5) of the Income-tax Rules, 1962. The Tribunal, following the precedent set in CIT v. Elecon Engineering Co. Ltd. [1976] 104 ITR 510, held that one-half of the profits should indeed be added to compute the capital for section 84 relief. This decision was based on the legislative intent to use the average capital employed throughout the year as the basis for tax concessions, ensuring a uniform approach to calculating capital employed.Conclusion:- Question 1: The foreign tour expenditure incurred by the assessee was allowed as a revenue deduction, as it was for better utilization of existing resources without adding to the fixed capital.- Question 2: Half of the profits should be added to the capital employed for determining relief under section 84, in line with the decision in CIT v. Elecon Engineering Co. Ltd.The judgment favored the assessee on both counts, and the Commissioner was ordered to pay the costs of the reference to the assessee.