Dalmia Dairy Industries Ltd. vs Commissioner Of Income ...
1999 Latest Caselaw 932 Del

ORDER

D.K. Jain, J.

1. In these two sets of three references each, at the instance of the assessee, the Income Tax Appellate Tribunal has referred the following question under Section 256(2) of the Income-tax Act, 1961 (for short 'the Act') for the opinion of this Court :

"Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenditure (Rs. 4,520/- in 1967-68, Rs. 1,19,816/- in 1968-69 and Rs.1,02,440/- in 1969-70) incurred by the assessee in pursuing its claim against the National Bank of Pakistan before the International Chamber of ommerce was capital expenditure and has to be disallowed in the computation of the taxable income?."

2. Since, except for the difference in the amount of expenditure, the question in respect of assessment years 1970-71 to 1972-73 is the same, it is needless to set out the question referred in the second set of reference.

3. The question referred and the statements of case drawn up by the Tribunal, in substance, being similar for all six years, this judgment will govern all the references. The first set of reference (ITR's 214 to 216/80) relate to the assessment years 1967-68 to 1969-70 and the second set (ITR's 301 to 303/78) pertain to the assessment years 1970-71 to 1972-73. The accounting period of the assessee ended on 30th September of each of the previous calender years.

4. The assessee M/s. Dalmia Dairy Industries Limited (formerly known as M/s. Dalmia Cement Limited) is a public limited company incorporated in India and has been engaged in manufacture and sale of cement and also had dealings in shares and securities. It had two cement factories, one at Shanti Nagar, karachi and the other at Dandot, both in Pakistan. Under a sale deed executed on 30th September, 1964, read with the agreement dated 24th July, 1962 and supplementary agreement dated 2nd November, 1962 the Pakistan factories stood transferred to M/s Pakistan Progressive Cement Industries Limited, Karachi(for short 'the PPCIL') with effect from 1st October, 1962. The total consideration for the sale was fixed at Rs. 2,33,66,678/- on which interest at 6% per annum was to run from 1st October, 1962. According to the terms of the sale, the sale price and interest was to be satisfied by export of cement by the PPCIL to the assessee company in Delhi. The supply of cement in satisfaction of the purchase price and interest was to be completed within three years from 19th December, 1964, being the date on which first despatch instructions were received by the PPCIL from the assessee company. In accordance with the sale deed, the assessee was entitled to receive cement from Pakistan and sell it here in India. But due to hostilities between India and Pakistan and prohibitory proclaims/orders by the Pakistan Government cement as stipulated in the sale agreement was not supplied by the PPCIL to the assessee.

5. Since the PPCIL had failed to supply cement in terms of the sale deed, the assessee company filed a claim against the National Bank of Pakistan, who had furnished bank guarantees on behalf of the PPCIL for due performance of the said agreement, before the International Chamber of Commerce and incurred legal and traveling expenses during the previous years relevant to the assessment years 1967-68 to 1972-73.

6. The Income-tax Officer did not allow the aforesaid expenditure on the ground that these expenses were incurred for realising the capital on sale of the company's factories and the expenditure was of capital nature. He rejected the assessee's argument that these expenses were incurred in salvaging the assets in the running business and not for realising the capital. Assessee's appeal to the Appellate Assistant Commissioner was unsuccessful.

7. Aggrieved, the assessee took the matter in further appeal to the Tribunal. In its main order for the assessment years 1967-68 to 1969-70, which was followed in assessment years 1970-71 to 1972-73, the Tribunal took the view that the expenditure in connection with the company's case before the International Chamber of Commerce had rightly been disallowed as capital expenditure because the expenditure had been incurred to recover the sale proceeds of capital assets of the company and it was not an expenditure to protect any running business of the company, the business in respect of these factories having been closed in Pakistan on the sale of factories vide sale deed dated 30th September, 1964. Accordingly, the assessee's appeals were dismissed.

8. On Tribunal's refusal to make a reference under Section 256(1) of the Act, pursuant to the directions issued by this Court, the question set out hereinabove has been referred.

9. We have heard Mr. N.R. Khaitan for the assessee and Mr. Sanjiv Khanna for the Revenue.

10. Learned counsel for the assessee submits that: (i) the expenditure in question having been incurred by the assesses to realise a debt consisting of price of cement and interest thereon, it is allowable as revenue expenditure and (ii) the same having been incurred wholly and exclusively for the purpose of assessee's business, it is allowable under Section 37 irrespective of the fact whether it is capital or revenue in nature. In aid of the second proposition, reliance is placed on a decision of the Allahabad High Court in Saharanpur Electric Supply Company Limited Vs. CIT (1971) 82 ITR 405.

11. On the other hand, Mr. Khanna, learned standing counsel for the Revenue, while supporting the view taken by the Tribunal, has contended that the assessee having sold its business in Pakistan long time back, the litigation expenses cannot be said to be expenditure incurred by the assessee for the purpose of its business. It is submitted that the expenditure was incurred by the assessee to realise the value of its fixed assets in Pakistan and, therefore, it has to be treated as capital expenditure.

12. Although, from the format of the question, we find that the question we are required to answer is whether the expenditure in question is capital or revenue in nature but since learned counsel for the assessee has urged a contention that irrespective of the fact whether the expenditure is revenue or capital in nature, the same having been incurred wholly and exclusively, for the purpose of assessee's business, it is allowable, we shall briefly deal with the argument.

13. The case of the assessee is that the expenditure on litigation having been expended for realising the value of the cement and interest thereon, it is an expenditure incurred exclusively for the purpose of assessee's business and is allowable under Section 37 of the Act. Section 37 provides that any expenditure, not being in the nature of capital expenditure, laid out wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head profits and gains of business or profession. Thus, in order to be deductible as a business expenditure, the amount in question must fulfill twin conditions, namely, (i) the expenditure must be laid out wholly and exclusively for the purpose of assessee's business and (ii) it should not be an expenditure of a capital nature. fulfillment of both the conditions is sine qua non for qualifying for deduction under Section 37 of the Act. In this view of the matter, we have no hesitation in rejecting the contention of learned counsel for the assessee that whenever an expenditure is incurred in the course of the business it has to be revenue in nature. Section 37 of the Act itself postulates a contingency of an expenditure incurred wholly and exclusively for the purpose of the business to be of capital nature.

14. Even otherwise, we also feel that the expenditure in question does nor fulfill even the aforesaid first condition. Though the scope and ambit of the expression "for the purpose of business" is very wide and may include expenditure of diverse nature but as observed by the Supreme Court in CIT, Kerala Vs. Malayalam Plantations Ltd. (1964) 53 ITR 140, while construing the corresponding provisions of Section 10(2)(xv) of the Indian Income Tax Act, 1922, howsoever wide the meaning of the expression "for the purpose of the business" 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". In other words, only that expenditure is allowable under Section 37 which is intimately and directly connected with the actual running of the assessee's business activity. It has to be shown that not only the expenditure was wholly and exclusively laid out but it was so laid out for the purpose of the assessee's normal business activity.

15. In the instant case, admittedly, the expenditure incurred for pursuing its claim against National Bank of Pakistan is in connection with the assessee's business ventures in Pakistan, which stood transferred to PPCIL with effect from 1st October, 1962. Since then the assessee did not have any business in Pakistan which it could be said to be "carrying on" during the relevant previous year, its business operations in Pakistan having come to a close. The contention of learned counsel for the assessee that since the litigation expenses were incurred to recover the sale price of the cement which was to be supplied to satisfy the sale consideration of the two factories and, therefore, the same having been incurred wholly and exclusively for the purpose of assessee's business are allowable under Section 37, is without any merit and we accordingly reject it. Support to this view is lent by a decision of the Bombay High Court in Associated Cement Companies Limited Vs. CIT (1996) 221 ITR 215 where almost a similar claim of the assessee for the expenditure incurred in litigation for determination of sale price of one of its business in Pakistan to Pakistan Government was held to be not deductible under Section 37 of the Act, In our view, the ratio of this decision squarely applies to the facts at hand. With respect, we are unable to subscribe to the view taken by the Allahabad High Court in Saharanpur Electric Supply Company Limited (supra) holding that once it was found that the litigation expenses pertain to the recovery of business assets, the expenditure becomes admissible under Section 10(2)(xv) of the 1922 Act.

16. We now take up the main question viz., whether the expenditure in question is a revenue expenditure or capital expenditure. It is indeed a vexed question and has often presented difficulties in solution despite the fact that attempts have been made time and again by the Supreme Court and High Courts to evolve various principles to distinguish a capital expenditure from revenue expenditure but it has not been possible to lay down any exhaustive test to determine the question. Referring to the observation in CIT West Bengal-II Vs. Coal Shipments P. Ltd. in M.K.

Brothers (P) Limited Vs. CIT, Kanpur (1972) 86 ITR 38, the Supreme Court observed as under:-

"The answer to the question as to whether the money paid is a revenue expenditure or capital expenditure depends not so much upon the fact as to whether the amount paid is large or small or whether it has been paid in lumpsum or by installments, as it depends upon the purpose for which the payment has been made and expenditure incurred. It is the real nature and quality of the payment and not the quantum or the manner of the payment which would prove decisive. If the object of making the payment is to acquire a capital asset, the payment would partake of the character of a capital payment even though it is made not in lumpsum but by installments over a period of ime."

17. Relying on M.K. Brothers' case (supra), in J.K. Cotton Manufacturers Limited Vs. CIT. Lucknow (1975) 101 ITR 221, their Lordship of the Supreme Court formulated certain tests to determine as to when on the facts and circumstances of a particular case, the expenses disbursed by an assessee amount to capital expenditure or revenue expenditure. One of the tests so laid is that the items of disbursement relatable to a fixed asset or capital may be regarded as of capital nature whereas the circulating capital or stock in trade would be treated as revenue expenditure.

18. Thus, answer to the question would necessarily depend on the question whether the expenditure on litigation with National Bank of Pakistan pertained to a capital asset or a trading asset. Admittedly assessee's business activities in Pakistan having come to a close with the sale of its factories there vide sale deed dated 30th September,1964, the main object and purpose for which the expenditure in question was expended was to realise the sale consideration of its fixed assets in Pakistan in cash or in kind and, therefore, the said expenditure related directly to its fixed assets. Tested on the touchstone of the broad principle culled out in J.K. Cotton Manufacturer's case (supra), it has to be held that the expenditure in question was of capital nature. The character of the expenditure would not change merely because the sale consideration of the capital asset was to be received in kind in the form of cement and not in hard cash. We are, therefore, of the firm view that no fault can be found with the aforenoted conclusion arrived at by the Tribunal and we uphold the same.

19. In the light of the above discussion and in view of the facts as noticed by the Tribunal, we are of the opinion that the question referred must, therefore, be answered in the affirmative i.e. in favour of the Revenue and against the assessee. The references are answered accordingly.

20. However, in the facts and circumstances of the case, the parties shall bear their own costs.