Patna High Court
Addl. Commissioner Of Income-Tax vs Ram Bahadur Thakur & Co. on 8 November, 1978
Equivalent citations: [1979]116ITR698(PATNA)
JUDGMENT Shiveshwar Prasad Sinha, J.
1. At the instance of the department, the Income-tax Appellate Tribunal, Patna Bench, Patna, has referred the undermentioned question of law under Section 256(1) of the I.T. Act, 1961 (hereinafter to be referred to as "the Act"), for opinion of this court:
"Whether, on the facts and in the circumstances of the case, the assessee was entitled for deduction of Rs. 1,04,290 as business expenditure ?
2. The facts as stated by the Tribunal are as under :
The assessee, a registered firm, besides doing business in mica mining, did business in manganese ore. Manganese ore was being exported outside India and this business was being conducted from Calcutta. During the relevant accounting year ending on March 31, 1962, the busines's of manganese ore came to be fully controlled by the State Trading Corporation of India (hereinafter to be called "the Corporation"). The assessee then entered into a contract with the said Corporation on October 18, 1960, to import paper on its behalf, against which it would be entitled to export manganese ore. It was a barter system under which paper would be imported of the value of the manganese ore exported. In terms of the said agreement dated October 18, 1960, the assessee opened a letter of credit with the Bank of Tokyo, Japan. The paper that was imported was supplied to the Government of India through the said Corporation on cost and no profit basis. The payment towards the price of the paper imported was made by the Bank of Tokyo and as the assessee could not receive the value of the paper supplied to the Government of India in time and could not, therefore, repay the Bank of Tokyo in time, the bank charged interest as well as letter of credit commission, the two together totalling a sum of Rs. 1,27,250. The assessee was reimbursed only to the extent of Rs. 22,960, leaving a balance of Rs. 1,04,290 uncovered. This amount was claimed by the assessee as an expenditure laid out and expended wholly and exclusively for the purpose of the business.
3. The ITO disallowed the claim on the ground that it was not an expenditure incidental to the business inasmuch as the assessee's business was to export manganese ore and the loss was suffered on import of paper which was not the assessee's business.
4. On appeal, the AAC held that the transaction of importing paper was incidental to the assessee's business of export of manganese ore and, consequently, the said amount of Rs. 1,04,290 expended by the assessee was an expenditure incidental to the assessee's own business and was allowable as such.
5. The department being aggrieved by the AAC's order preferred an appeal to the Tribunal and the said order was challenged on the ground that the payment of interest and of the letter of credit commission was not necessitated by business needs and consequently could not be deducted as a business expenditure.
6. The Tribunal found as a fact that the assessee's business in manganese ore was fully controlled by the Government of India and had it not agreed to import paper for the Government of India, it would not have got the licence to export manganese ore. The export of manganese ore was thus not only related to the assessee's export activities but was also dependent upon the import of paper. The Tribunal held that the business of import of paper was quite incidental and related to the export business of manganese ore and both of them constituted the same business. The Tribunal, therefore, upheld the order passed by the AAC and dismissed the departmental appeal.
7. It is on these facts that the aforementioned question has been referred for the opinion of this court.
8. Mr. Rajgarhia appearing for the department submitted that since the paper business was carried on under a barter system in which the assessee could neither earn a profit nor suffer any loss, the loss, if any, could not be incidental to the business. He further submitted that it was for the Corporation to pay the value of the paper ; for the default made by the Corporation in paying the price of the paper in time, the assessee could not take upon itself the loss suffered by way of payment of interest and letter of credit commission. If, however, the assessee took upon itself to suffer the interest and letter of credit commission and not to realise it from the Corporation in the hope of getting future benefit in the shape of good business, the expenditure, if at all, partook the character of an enduring benefit and was, therefore, a capital expenditure.
9. Mr. Jain appearing for the assessee has rightly pointed out that the question relating to the nature of the expenditure as to whether it was capital or revenue had not been the subject-matter of discussion at any stage of the case. The only test which was applied to the assessee's claim to deduct that expenditure was whether the same was incidental to the assessee's business. It has, therefore, been submitted that the question as now raised by the learned counsel for the department ought not to be permitted to be raised.
10. I think Mr. Jain, learned counsel for the assessee, is right in saying that the allowability or otherwise of the said sum of Rs. 1,04,290 has not been considered at any stage of the case from the angle as to whether it was a capital expenditure. The said claim has been considered from only one angle, namely, whether it was an expenditure incurred by the assessee in relation to its business. Such being the position, the argument made by the learned counsel for the department relating to the nature of the expenditure must be left out of consideration. Fact of the matter is that even the question of law, which has been referred to this court for opinion, does not raise any such issue.
11. Coming now to the question referred to this court, it involves a decision on the point as to whether the sum of Rs. 1,04,290 was a business expenditure. In other words, what is required to be decided is whether the said sum had been expended by the assessee wholly and exclusively for the purpose of its business. The expression "for the purpose of the business" is of a wide amplitude covering various activities which a trader would perform to keep its business going. The Supreme Court in the case of CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC), while observing that the scope of the expression "for the purpose of the business" may include various activities of the trader, has, however, restricted the meaning of the expression by saying that it is only that expenditure which is incurred on the business in the capacity of a person carrying on the business which falls within the category of expenses incurred for the purpose of the business. The actual observation made by their Lordships is to the following effect (p. 150):
"The expression 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits'. Its range is wide: it may, take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery ; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title ; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business,"
12. In the instant case, the facts found are that, (i) the payment of interest and of the letter of credit commission was incidental to the assessee's business in manganese ore, (ii) the expenditure had actually been incurred by the assessee during the relevant previous year, and (iii) the expenditure had been incurred for the purpose of running its export business in manganese ore. The conclusion that would naturally follow from these premises would be that the expenditure for payment of interest and of letter of credit commission was an expenditure for the purpose of business.
13. Learned counsel for the department, however, has argued that the said expenditure occurred not because of the export of manganese ore but while importing paper and that, in any event, it was not part of the assessee's obligation to suffer that part of the expenditure.
14. It is true that the said expenditure had to be incurred to make good the price of the paper that was imported by the assessee, but to say that the business of import of paper was something other than the business of export of manganese ore would not be correct. It is an admitted fact that the business of exporting manganese ore could not have been done by the assessee, the commodity having come under the full control of the Corporation, unless the assessee agreed to import paper in lieu of the export of manganese ore. The agreement dated October 18, 1960, clearly indicates that the main aim of the assessee in agreeing to import printing paper was to promote its business in export of manganese ore. Under the said agreement, the assessee was permitted to export manganese ore and to import printing paper in lieu thereof to the extent that their values balanced each other. It would, therefore, be wrong to think that the expenditure incurred, though for the purpose of paying up the value of the printing paper imported, was not an expenditure incurred for the purpose of manganese ore business.
15. It has been urged that it was no part of the assessee's obligation to bear such an expenditure as the one in question--rather the expenditure should have been borne by the Corporation. This part of the argument is not at all borne by any of the terms of the said agreement dated 18th October, 1960. All that the agreement says is that the purchase of the printing paper shall be of such value as may balance the value of the total exports of manganese ore. The printing paper imported is, however, required to be supplied through the Corporation at cost. There is no stipulation that the over-head cost in the import of printing paper shall be borne by the Corporation. The argument made by the learned counsel for the department must, therefore, fail.
16. Now, therefore, the established facts being that,--
(i) the paper import business and the manganese ore export business are so inter-connected as to form one single business,
(ii) the expenditure was incidental to the assessee's business in manganese ore, the profit of which was being computed,
(iii) the amount in question was spent by the assessee as a trader in manganese ore for the purpose of that business, and
(iv) the expenditure was incurred during the relevant previous year, it follows that the expenditure in question was clearly admissible as a business expenditure.
17. The question is accordingly answered in the affirmative and against the department. There would be no order as to costs.
S. Sarwar Ali, J.
18. I agree.