Bombay High Court
Godfrey Phillips India Ltd. vs Commissioner Of Income-Tax on 31 March, 1993
Equivalent citations: [1994]206ITR23(BOM)
JUDGMENT DR. B.P. Saraf, J.
1. This is a reference under section 256(1) of the Income-tax Act, 1961, made by the Income-tax Appellate Tribunal both at the instance of the assessee as well as the Revenue. The questions referred by the Tribunal pertain to the assessment years 1972-73, 1973-74 and 1974-75. Six questions have been referred at the instance of the assessee and four questions at the instance of the Revenue. All these questions are set out below :
At the instance of the assessee :
Assessment year 1972-73 :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the applicant's liability for the payment of surtax under the Companies (Profits) Surtax Act, 1964, is not deductible in computing the income of the applicant under the Income-tax Act, 1961 ?"
Assessment year 1973-74 :
"(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the legal expenses incurred in connection with the amalgamation of Messrs. D. Macropolo and Co. Ltd. with the applicant company abovenamed should be treated as capital expenditure ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the applicant's liability for the payment of surtax under the Companies (Profits) Surtax Act, 1964, is not deductible in computing the income of the applicant under the Income-tax Act, 1961 ?
(4) Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that an appeal did not lie on the facts and in the circumstances of the present case and/or that an appeal did not lie in respect of interest under section 214 ?"
Assessment year 1974-75 :
"(5) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the applicant's liability for the payment of surtax under the Companies (Profits) Surtax Act, 1964, is not deductible in computing the income of the applicant under the Income-tax Act, 1961 ?
(6) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the legal expenses incurred in connection with the amalgamation of Messrs. D. Macropolo and Company Limited with the applicant company abovenamed should be treated as capital expenditure ?"
At the instance of the Commissioner :
Assessment year 1972-73 :
"(7) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law holding that the reimbursement of medical expenses to the employees by the employer does not constitute a perquisite within the meaning of section 40A(5) of the Income-tax Act ?"
Assessment year 1973-74 :
"(8) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that house rent allowance paid in cash to the employees in terms of the service conditions and irrespective of the actual expenditure incurred on house rent cannot be treated as perquisite within the meaning of section 40A(5) of the Income-tax Act ?"
Assessment year 1974-75 :
"(9) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that house rent allowance paid in cash to the employees in terms of the service conditions and irrespective of the actual expenditure incurred on house rent cannot be treated as perquisite within the meaning of section 40A(5) of the Income-tax Act ?"
(10) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provisions of section 40A(5) could not be applied to the remuneration/perquisites paid to the directors of the assessee-company ?"
2. It is an agreed position that all the above questions, except questions Nos. 2 and 6 referred at the instance of the assessee, are covered by various decisions of this court. We shall therefore first dispose of those eight questions in the light of the various decisions as follows :
Question Nos. 1, 3 and 5 :
disputes raised in all these three cases have been decided by this court in Lubrizol India Ltd. v. CIT [1991] 187 ITR 25. Following the same, these three questions are answered in the affirmative, i.e., in favour of the Revenue and against the assessee.
Question No. 4 :
This question is covered by the decision of this court in Income-tax Reference No. 444 of 1977 decided on December 1, 1992 (Caltex Oil Refining (India) Ltd. v. CIT [1993] 202 ITR 375). Following the same, we answer it in the negative i.e., in favour of the assessee and against the Revenue.
Question No. 7 :
This question is covered by the decision of this court in CIT v. Mercantile Bank Limited [1988] 169 ITR 44. Following the same, we answer it in the negative (sic) and in favour of the assessee.
Question Nos. 8 and 9 :
These two question are covered by the decision of this court in CIT v. Indokem P. Ltd. [1981] 132 ITR 125. Following the same, we answer both these questions in the affirmative, i.e., in favour of the assessee and against the Revenue.
Question No. 10 :
This question is also covered by the decision of this court in Income-tax Reference No. 20 of 1978 decided on November 17, 1992 CIT v. Hico Products Pvt. Ltd. (No. 1) [1993] 201 ITR 567. Following the same, it is answered in the affirmative, i.e., in favour of the assessee and against the Revenue.
3. Having answered the above questions, we are left with only two question for decision, viz., questions Nos. 2 and 6. Both these questions relate to the controversy in regard to the nature of the expenditure incurred by the assessee in connection with the amalgamation of Messrs. D. Macropolo and Company Limited with the assessee-company. These expenses were legal expenses incurred in connection with the amalgamation. The Tribunal held it to be a capital expenditure. The assessee has come in reference to this court from the order the Tribunal. According to it, it is a revenue expenditure and an allowable deduction under section 37 of the Act.
4. Before examining the legal aspect of the controversy, it is expedient to set out the relevant facts of the case relating to the expenditure which is the subject-matter of the controversy. The controversy relates to two assessment years, viz., 1973-74 and 1974-75. During the previous year relevant to the assessment year 1973-74, the assessee incurred legal expenditure amounting to Rs. 50,456 in connection with the amalgamation of Messrs. D. Macropolo and Company Limited with the assessee. An expenditure to the tune of Rs. 46,506 was also incurred in the next year in the very same connection. It may be observed that Messrs. D. Macropolo and Company Limited, which was amalgamated with the assessee, was the sole distributor of the assessee-company's product. This company was amalgamated with the assessee-company. The above amounts of expenditure incurred in connection with the amalgamation were claimed by the assessee-company to be revenue expenditure. The claim was based on the ground that the above company was amalgamated with the assessee so that the distribution, marketing and selling of the assessee's products which had so far been carried on by the amalgamating company could be carried out by the assessee itself. It was contended that the amalgamation, the was done keeping in mind the fact that, by the amalgamation, the services of the experience staff and existing distribution organisation of Messrs. D. Macropolo and Company Limited would become available to the assessee-company which would ultimately result in increased profitability. The amalgamation was approved by the High Court and it took effect from June 30, 1969. The legal expenses were incurred on the solicitors for bringing about the amalgamation. Such expenditure, according to the assessee, was revenue expenditure and, as such, it was claimed to be a business expenditure allowable as a deduction in the computation of its business income for the assessment years 1973-74 and 1974-75. The Income-tax Officer disallowed the expenditure on the ground that the expenditure in question related to the proceedings for acquiring a capital asset and was capital expenditure. It may be noted that, in the earlier years, similar legal expenses were not claimed by the assessee itself as a deduction. When asked by the Income-tax Officer as to why it was not claimed in the past and was claimed for the first in the years under consideration, the assessee's reply was that it was a mistake on its par not to have claimed the same in the earlier years. The Income-tax Officer, however, did not agree with the contention of the assessee and, accordingly, did not allow the claim for deduction of the above two amounts. The matter was taken up in appeal by the assessee before the Appellate Assistant Commissioner of Income-tax ("the A.A.C."). The Appellate Assistant Commissioner rejected the contention of the assessee and confirmed the order of the Income-tax Officer on this count.
5. The assessee took this issue to the Tribunal along with some other issues by way of appeal against the order of the Appellate Assistant Commissioner. Before the Tribunal, it was contended that the expenditure was incurred in the course of carrying on the existing business as the object of the amalgamation was to take over the distribution apparatus so as to manage its business more profitably and efficiently. It was, therefore, contended that the legal expenses should be allowed as a revenue expenditure. The Tribunal did not accept the above contention of the assessee. According to the Tribunal, the expenditure had not been incurred by the assessee in the day to day operations of its business. On the contrary, it was associated with an important change in the framework of the assessee-company. The Tribunal also referred to the averments made by the assessee itself in its application before the High Court for the approval of amalgamation and observed that it was clear from those averments that, as a result of the amalgamation, the assessee came into possession of a distribution organisation which was an enduring advantage to the assessee-company. In that view of the matter, the Tribunal affirmed the finding of the Income-tax Officer and the Appellate Assistant Commissioner and rejected the appeal of the assessee. Hence this reference.
6. Learned counsel for the assessee submitted before us that the legal expenses incurred by the assessee on amalgamation with another company cannot be held to be a capital expenditure. In support of this contention, reliance was placed on the decisions of the Madras High Court in Addl. CIT v. W. A. Beardsell and Co. (P.) Ltd. [1981] 130 ITR 159, CIT v. Bush Boake Allen (India) Ltd. [1982] 135 ITR 306 and Madras Race Club v. CIT [1985] 151 ITR 675. Reliance was also placed on the observations of this court in CIT v. Glaxo Laboratories (India) Ltd. [1990] 181 ITR 59, where it has been stated that to decide whether an expenditure is revenue or capital, attention should be paid to the object and not to the effect of the expenditure. Reference was also made to a decision of the Calcutta High Court in CIT v. Ashoka Marketing Limited [1990] 181 ITR 493. Counsel for the assessee also referred to the decision of the Supreme Court in CIT v. Associated Cement Cos. Ltd. [1988] 172 ITR 257.
7. We have carefully considered the submissions of counsel for the assessee in the light of the facts of the case and the decisions referred to above. Various tests have been laid down by the Supreme Court and the High Courts from time to time for the purpose of determining whether a particular expenditure is revenue expenditure or expenditure of capital nature. We have discussed the same at some length in our judgment in Income-tax Reference No. 33 of 1980 Kirloskar Oil Engines Ltd. v. CIT [1994] 206 ITR 13 delivered today. We do not propose to reiterate the same. It will suffice for the present to state that none of the tests is either exhaustive or universal. Each case depends on its own facts. Even case depends on its own facts. Even a close similarity between two cases is not enough because, as observed by Hidayatullah J. (as his Lordship then was) in K. T. M. T. M. Abdul Kayoom v. CIT , a single significant detail may make a material difference and change the entire aspect. There is, however, no dispute that, if a particular expenditure or payment result in an enduring benefit to the assessee or acquisition of any asset or benefit of a permanent nature (in the absence of special circumstances lending to an opposite conclusion), the expenditure cannot be held to be revenue expenditure but it would be an expenditure of capital nature. Legal expenses per se can neither be revenue not capital. It will depend on the facts of each case. The purpose for which the expenses have been incurred will be the relevant factor. If the expenses have been incurred in the course of running the business or for protecting the business, it will be a revenue expenditure but if it is in connection with the acquisition of a benefit of enduring nature or an asset of permanent character, then the legal expenditure would partake of the character of capital expenditure. This proposition is well brought out in the decision of the Supreme Court in Dalmia Jain and Co. Ltd. v. CIT [1971] 81 ITR 754, where dealing with litigation expenses, it was observed (at page 757) :
"The question for decision is whether the litigation expenses incurred by the assessee were for the purposes of creating, curing or completing the assessee's title to capital or whether it was for the purpose of protecting its business. If it is the former, then the expenses incurred must be considered as capital expenditure, then the expenses incurred must be considered as capital expenditure. But, on the other hand, if it is held that the expenses were incurred to protect the business of the assessee, then it must be considered as a business loss. The principle which has to be deduced from decided cases is that, where the expenditure laid out for the acquisition or improvement of a fixed capital asset is attributable to capital, it is a capital expenditure but if it is incurred to protect the trade or business of the assessee then it is a revenue expenditure. In deciding whether a particular expenditure is capital or revenue in nature, what the courts have to see is whether the expenditure in question was incurred to create any new asset or was incurred for maintaining the business of the company. If it is the former, it is capital expenditure; if it is the latter, it is revenue expenditure. "
8. In this background, we may first examine some of the decisions on which reliance was placed by counsel for the assessee.
9. We may first refer to the decision of the Madras High Court in Addl. CIT v. W. A. Beardsell and Co. (P.) Ltd. [1981] 130 ITR 159. In that case, the company which was a managing agent of another company applied to the High Court for approval of a scheme of amalgamation and, after obtaining the court's orders, effected the amalgamation. The assessee-company's share of the legal expenses which were incurred in the process was claimed as an admissible deduction being in the nature of revenue expenditure. The expenditure was not allowed by the income-tax authorities on the ground that it was capital in nature. The Tribunal held it to be a revenue expenditure. On reference, the finding of the Tribunal was upheld by the High Court as it was of the opinion that the expenditure in question had been incurred by the assessee in their capacity as persons carrying on the business with the object of carrying on their business to their advantage and not for acquitting any capital asset of an enduring nature. This decision was followed by the same court in CIT v. Bush Boake Allen (India) Ltd. [1982] 135 ITR 306, where also legal and court expenses incurred by the assessee were treated as revenue expenditure. The same decision was again followed in Madras Race Club v. CIT [1985] 151 ITR 675 (Mad). We have considered the above decisions of the Madras High Court. These decisions are based on the factual finding arrived at therein that no asset of capital or enduring nature had been acquired by the assessee. The observations in the above case have to be read in the light of the above finding as also the decisions of the Supreme Court and the principles enunciated therein. The general observations in these decisions should not be read too broadly. They should be read in the context in which they were made. We are of the opinion that the Madras High arrived at the conclusion in those cases that the expenditure was revenue expenditure in view of the specific finding of fact that no enduring benefit had accrued to the assessee as a result of the amalgamation. That being so, the above judgments are not applicable to the facts of the present case.
10. Reference may be made in this connection to a decision of the Calcutta High Court in Bengal and Assam Investors Ltd. v. CIT [1983] 142 ITR 156, where also the question whether legal expenses incurred in connection with a scheme of amalgamation were capital expenditure or revenue expenditure came up for consideration. This was a case where, though steps were taken for amalgamation and legal expenditure was incurred in connection therewith, the amalgamation did not fructify. The expenditure was claimed by the assessee as a revenue expenditure. The High Court considered the contention of the assessee and observed that what is determinative of the question is the object and purpose of incurring the expenditure. The court came to a finding that the purpose and object of the expenditure incurred in connection with the amalgamation, irrespective of whether it succeeded or not, was to alter the framework of the structure under which the assessee was carrying on business. It was, therefore, held that it should be considered as an expenditure of capital nature. This decision, in out opinion, has applied the correct test for determining the controversy and we find ourselves in agreement with it.
11. Reference may also be made to the decision of the Calcutta High Court in CIT v. Ashoka Marketing Limited [1990] 181 ITR 493. This case, in our opinion, is not of much assistance because here the controversy related to the allowability of expenditure incurred on obtaining legal opinion on shifting of the head office of the assessee. A sum of Rs. 1,000 had been paid for that purpose. We do not think that the payment of Rs. 1,000 by way of legal expenses for obtaining opinion can be compared with the expenditure incurred in carrying out amalgamation of two companies. In the instant case, even according to the assessee itself, the object and purpose of the amalgamation was to take over the existing distribution organisation of a marketing company. It is also an admitted position that distributed of the products of the assessee-company was earlier done by the marketing company, Messrs. Macropolo and Co. Ltd., which was an independent business establishment. As a result of the amalgamation, the entire business establishment with its well-established marketing network came into the hands of the assessee which, according to the assessee itself, was the main purpose of the amalgamation. The Tribunal considered all these relevant factors and came to a definite finding that, as a result of the amalgamation, there was a radical alteration in the framework of the business of the assessee-company. In trust and substance, the purpose of the assessee was to acquire the running business of distributorship of the marketing company which was an independent business. The fact that the acquisition was intended to increase the profitability of the assessee cannot convert the capital expenditure into revenue expenditure. That will be stretching the "profitability test" too far. There is a thin line of demarcation between capital and revenue expenditure because the object of every business concern or assessee who is carrying on business is to increase or enhance its profits. That, by itself, cannot convert expenditure incurred for acquiring a capital asset or benefit of enduring nature or setting up plant or machinery into revenue expenditure. As earlier stated, no test is of universal application. Its application will depend upon the facts circumstances of each case. In order to hold a particular expenditure to be revenue expenditure, the nexus between the expenditure and the profitability should be direct and proximate. In the instant case, there is no such direct nexus. The object and purpose of the amalgamation is to acquire the distribution net work of the other company which is a capital asset and an advantage of enduring nature. The expenditure in question resulted in the addition to or expansion of the profit-making apparatus of the assessee. That being so, the above test has no application to the facts of the case before us.
12. Before we conclude, it may be appropriate to refer to the decision of the Supreme Court in CIT v. Associated Cement Cos. Ltd. [1988] 172 ITR 257 on which reliance was placed by counsel for the assessee in support of his contention that the expenditure in question is revenue expenditure. The dispute before the Supreme Court in the above case was regarding the allowability of an expenditure of Rs. 2,09,459 incurred by the assessee towards installation of water pipelines and accessories outside the factory premises which were to belong to and be maintained by the municipality. Since it was not disputed that the entire expenditure concerned installations and accessories which came into the ownership of the municipality, the High Court held that the expenditure was revenue in nature and deductible in computing the profits of the company. It was this decision of the High Court which was affirmed by the Supreme Court. It is clear from the following observation of the Supreme Court at page 261 :
"It is true that certain water supply lines did come to be laid as a result of the expenditure incurred, but the facts on record, which we have referred to above, clearly how that these water pipelines on which the expenditure in question was incurred were not assets of the assessee, but assets of the Shahabad Municipality and hence it was not as if the expenditure resulted in bringing into existence any capital asset for the company. The only advantage derived by the assessee by incurring the expenditure was that it obtained an absolution or immunity, under normal conditions, from levy of certain municipal rates and taxes and charges."
13. It was in view of the above observations that it was held by the Supreme Court (At page 263) :
"As a result of the expenditure incurred, there was no addition to the capital assets of the assessee-company and not change in its capital structure. The pipelines, etc., which might have been regarded as capital assets and which came into existence as a result of the expenditure incurred did not belong to the assessee-company but to the municipality. In these circumstances, applying the principles laid down in Empire Jute Co.'s case , the expenditure is clearly liable to be allowed as deductible from the profits under section 10(2)(xv) of the Indian Income-tax Act. [Section 37(1) of the 1961 Act]."
14. This decision of the Supreme Court apparently has no application to the facts of the present case.
15. In view of the foregoing discussion, we are of the clear opinion that the legal expenses incurred in connection with the amalgamation of Messrs. D. Macropolo and Co. Ltd. with the assessee-company have been rightly held by the Tribunal to be capital expenditure. Accordingly, we answer both the questions, viz., questions Nos. 2 and 6 in the affirmative, i.e., against the assessee and in favour of the Revenue. Under the facts and circumstances of the case, we make no order as to costs.