Motor Sales, Lucknow v. Commissioner Of Income-Tax, U.P

1. The Income-tax Appellate Tribunal has, referred the following question under Section 66(1) of the Indian Income-tax Act, 1922 ;

" Whether, on the facts and in the circumstances of the case, the sum of Rs. 7,242 paid by the assessee to the Tata Locomotive Engineering Co. Ltd. was rightly held to be a capital expenditure in the hands of the assessee ?"

2. The assessee is a registered firm. It carries on business as a dealer in motor vehicles. During the relevant period it was a dealer of Tata Engineering and Locomotive Co. Ltd. (Telco), under an agreement with that company, for the sale of Mercedes Benz trucks. The agreement required the assessee to maintain at its own expense an organisation for the sale of vehicles, providing for maintenance of show rooms, service centres, repair shops, etc., and an adequate staff of trained salesmen and a staff of trained technical service personnel. According to the statement of the case, the training was actually imparted by Telco which charged the assessee on that account. It is said that under the training scheme, Telco proposed to build a hostel for the apprentices and to recover the entire cost of the hostel from its several dealers. The assessee paid Telco a sum of Rs. 7,242 during the accounting year ending December 31, 1960, and claimed that amount as a deduction from its assessable profits for the assessment year 1961-62. The Income-tax Officer was of the view that the payment was made as the assessee's contribution towards the construction of the hostel, that the hostel would be the property of Telco and that, therefore, it was not a business expenditure. Accordingly, he rejected the assessee's claim.

3. The assessee appealed to the Appellate Assistant Commissioner. He allowed the claim on the ground that although the sum of Rs. 7,242 was a contribution towards the construction of the hostel it was not an expense of a capital nature but was a revenue expense incurred in connection with the business of the assessee.

4. The Income-tax Officer appealed to the Income-tax Appellate Tribunal. The Tribunal set aside the order of the Appellate Assistant Commissioner and restored that of the Income-tax Officer, holding that the Sum of Rs. 7,242 was a capital expenditure.

5. At the instance of the assessee, the Tribunal has now made the present reference.

6. When the reference first came on for hearing before this court, it was felt that the statement of the case submitted by the Tribunal was incomplete and accordingly a supplementary statement of the case was called for. The supplementary statement contains a number of documents. There is considerable dispute between the. parties whether the documents were part of the record before the Tribunal when it heard and disposed of the appeal. After hearing the parties on the merits of the reference, it seems to us unnecessary for the purpose of disposing of the reference to refer to any, of the documents accompanying the supplementary statement. The facts set out in the supplementary statement have been gathered from a number of documents, including those to which objection has been taken on behalf of the Commissioner. For the purpose of the case before us, therefore, we propose to confine ourselves to the facts contained in the original statement of the case.

7. It is admitted between the parties that the assessee had entered into an agreement with Telco for the sale of Mercedes Benz trucks, that under that agreement the assessee was obliged to maintain at its own expense an organisation for the sale of the vehicles, and this included an adequate staff of trained salesmen and a staff of trained technical personnel. The assessee, it appears, entered into an understanding with Telco for the training of the assessee's apprentices, and in consideration Telco recovered from the assessee an amount which Telco intended to apply to the construction of a hostel for such apprentices. The assessee was bound to have a staff of trained technical personnel. That was an essential condition of the agreement. It considered that the best training for the purpose could be had by its personnel from Telco itself. It, therefore, agreed to pay to Telco for the services rendered by it. No doubt, the amount so received by Telco was intended to meet the cost of construction of the hostel, and the hostel was to be Telco's property. And when the assessee made the payment, it was aware that it would be so applied by Telco. But so far as the assessee was concerned, it paid to. Telco for the training imparted to the apprentices sent by the assessee. It paid the amount as training charge, and so far as the assessee is concerned, it remained a training charge, even though Telco applied it to the construction of the hostel and the assessee knew that it would be so applied. This aspect of the case was presented before the Tribunal and reference was made to a debit note dated January 6, 1961, prepared by Telco mentioning that the expenses were " in respect of training dealer's apprentices calculated at Rs. 34 per chassis ". A copy of the document is annexure " E " to the original statement of the case. The Appellate Assistant Commissioner had held that the amount represented payment made by the assessee to Telco in respect of the training scheme. That finding was not upset by the Tribunal. But, the Tribunal proceeded on the basis that under the training scheme the assessee was obliged to contribute towards the construction of the hostel. What the Tribunal omitted to consider was that the entire object of the scheme was the training of the assessee's apprentices and it was for that reason that payment was made by the assessee. There is no dispute that if Telco had not undertaken to train the assessee's apprentices there would have been no obligation on the assessee to pay the amount. We cannot ignore that payment was made because Telco had undertaken to train the assessee's apprentices.

8. The Tribunal has referred to the circumstance that Telco charged the assessee for the boarding of the apprentices and their uniform. We do not see how that is relevant. The Tribunal has also observed that the narrative in the debit note, namely, "expenses in respect of training dealers' apprentices " is ambiguous because it could include either the cost of imparting training to the apprentices or contribution to the construction of the hostel. We see no ambiguity here. The recital is clear. The payment is charged on account of training the apprentices. So the assessee understood it and for that reason paid it. And Telco so received it. Its employment for construction of the hostel was a matter merely of application of the fund so received.

Can it be said then that the amount paid by the assessee is not a revenue expenditure ?

9. In Bombay Steam Navigation Co. (1953) (Pte.) Ltd. v. Commissioner of Income-tax, [1965] 56 I.T.R. 52, [1965] 1 S.C.R. 770 (S.C.) the assessee took over the assets of the Scindia Steam Navigation Co. Ltd. and agreed that the price was to be satisfied partly by allotment of fully paid up shares and the balance was to be treated as loan secured by promissory notes and hypothecation of the assessee's immovable properties. The balance remaining unpaid carried simple interest at 6%. Subsequently, the agreement was modified but for the purposes of the point before us the modification is not material. The assessee paid interest on the balance outstanding and claimed deduction of that interest under Section 10(2)(iii) or Section 10(2)(xv) of the Indian Income-tax Act, 1922. The Supreme Court held that the interest paid by the assessee was business expenditure allowable as a deduction under Section 10(2)(xv), The transaction of acquisition of the assets was closely related to the commencement and carrying on of the assessee's business, and interest paid on the outstanding balance of the consideration for the assets acquired had, in the normal course, to be regarded as expended for the purpose of the business which was carried on. The Supreme Court observed :

" Whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on or conduct of the business, that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure-may be regarded as revenue expenditure........

The assessee-company had undoubtedly acquired the assets by pledging its credits. The assessee-company was formed for the purpose of taking over the business which the Scindias had acquired and for carrying on that business the assets with which the business was to be carried on were required. For obtaining those assets the assessee-company gendered itself liable for a sum of Rs. 51,56,000 and agreed to pay that sum with interest at the rate stipulated. The transaction of acquisition of the assets was closely related to the commencement and carrying on of the business. Interest paid on the amount remaining due must in the normal course be regarded as expended for the purpose of the business, which was carried on in the year of account. There is no dispute that if interest was paid for the purpose of the business, it was laid out or expended wholly and exclusively for that purpose."

10. In Commissioner of Income-tax v. Kirkend Coal Co., [1970] 77 I.T.R. 530 (S.C.), the Supreme Court was called upon to decide the question whether the amount spent by the assessee, which carried on the business of coal mining, for stowing operations was allowable as a business expenditure. The Tribunal had found as a fact that stowing was an operation carried out in the process of extraction of coal and unless it was carried out the extraction of coal was not possible. The Supreme Court held that the expenditure incurred in stowing operations was a revenue expenditure allowable under Section 10(2)(xv) of the Act.

11. The Andhra Pradesh High Court in Commissioner of Income-tax v. Krishna Rao, [1970] 76 I.T.R. 664 (A.P.) took the view that expenditure incurred by a businessman in keeping himself abreast of the latest techniques of his business was not a capital expenditure but was expenditure incurred wholly and exclusively for the business and, therefore, to be treated as business expenditure. One of the true tests, the court observed, was to find out whether the businessman when he expended the money, was acting reasonably in the interest of his own business uninfluenced by any irrelevant or extraneous considerations.

12. This court in Security Printers of India (P.) Ltd. v. Commissioner of Income-tax, [1970] 78 I.T.R. 766 (All.) held that expenditure incurred by a director of the assessee-company in connection with his trip to England, after the company had started its business, to acquaint himself with new and modern techniques of security printing was revenue in character. It was expenditure incurred with a view to earn greater profit in a competitive market and not to acquire a new asset.

13. So also in Commissioner of Income-tax v. Dr. M. S. Shroff, [1971] 80 I.T.R. 687 (Delhi.) the Delhi High Court treated expenditure incurred by a surgeon, who went on. tour in order to keep himself up-to-date in the techniques of his profession and visited several hospitals in various countries, as an admissible deduction under Section 10(2)(xv).

14. From all these decisions, the proposition which emerges is that, if expenditure is incurred for the purpose of increasing the profits while carrying on the business it must be treated as revenue expenditure. In the case before us, the assessee made payment to Telco on account of the training imparted by Telco to the assessee's apprentices. Trained personnel were necessary for the purpose of the assessee's business. It was necessary because a condition of the agency agreement with Telco required the assessee to have trained personnel. It was necessary also because the staff of trained personnel obviously induces better sales. There is no question here of the assessee acquiring any asset or advantage of an enduring nature. There is nothing to show that the personnel so trained were under bond to serve the assessee for a long term of years. In Commissioner of Income-tax v. Royal Calcutta Turf Club, [1961] 41 I.T.R. 414, 418 ; [1961] 2 S.C.R. 729 (S.C.), the assessee, whose business was to hold race meetings on a commercial basis, did not own any horse or employ any jockeys but being of opinion that there was a risk of jockeys becoming unavailable and that such unavailability would seriously affect its business it established a school for the training of Indian boys as jockeys. The Supreme Court held that the expenditure incurred by it on the running of the school was a permissible deduction under Section 10(2)(xv) of the Act, that it was not in the nature of a capital expense because no asset of an enduring nature was created thereby and that it was spent merely for the preservation of the business. The Supreme Court said ;

The question as to whether the expenses of running the school for jockeys is deductible has to be decided taking into consideration the circumstances of this case. The business of the respondent was to run race meetings on a commercial scale for which it is necessary to have races of as high an order as possible. For the popularity of the races run by the respondent and to make its business profitable it was necessary that there were jockeys of requisite skill and experience in sufficient numbers who would be available to the owners and trainers because without such efficient jockeys the running of race meetings would not be commercially profitable. It was for this purpose that the respondent started the school for training Indian Jockeys. If there were not sufficient number of efficient Indian Jockeys to ride horses its interest would have suffered, and it might have had to abandon its business if it did not take steps to make jockeys of the necessaiy calibre available. Therefore, any expenditure which was incurred for preventing the extinction of the respondent's business would, in our opinion, be expenditure wholly and exclusively laid out for the purpose of the business of the assessee and would be an allowable deduction.

15. In Commissioner of Income-tax v. Ciba of India Ltd., [1968] 69 I.T.R. 692 (S.C.) the amount paid by the assessee under an agreement to a Swiss company for having access to its technical knowledge and experience in the pharmaceutical field was regarded by the Supreme Court as revenue expenditure. It was pointed out that the assessee acquired under the agreement merely the right to draw, for the purpose of carrying on its business as a manufacturer and dealer of pharmaceutical products, upon the technical knowledge of the Swiss company for a limited period and that by making that technical knowledge available the Swiss company did not part with the assets of its business nor did the assessee acquire any asset or advantage of any enduring nature for the benefit of its business.

16. On behalf of the Commissioner, reliance has been placed on Mysore Kirloskar Ltd. v. Commissioner of Income-tax, [1968] 67 I.T.R. 23 (Mys.). In that case, the Mysore High Court held that an amount paid by the assessee in respect of " know-how " to be supplied to it when the " know-how " in question was to be utilised not for the purpose of manufacturing any machine that the assessee was already manufacturing but for the purpose of bringing into production new types of machines solely on the basis of the "know-how" supplied, and which " know-how " became the property of the assessee at the end of the period of agreement, was to be treated as capital expenditure. It seems to us that the facts of that case are clearly distinguishable in the instant case, there is no question of the assessee acquiring any " know-how " from Telco which would become its property subsequently. The assessee had entered into an agreement to sell vehicles manufactured by Telco; and for the purpose of'ensuring compliance with the agreement requiring the assessee to maintain a staff of trained personnel, it secured the training of its personnel from Telco and made payment, therefore, to it. It was open to the assessee to have its personnel trained from any other suitable centre. Our attention had not been invited to anything in the agreement binding the assessee to have its personnel trained by Telco. If it selected Telco for that purpose it was obviously persuaded by the circumstance that the vehicles in which it dealt with were manufactured by Telco.

17. In our opinion, the payment made by the assessee to Telco was payment made wholly and exclusively for the purpose of its business and it was not of a capital nature. The payment should have been allowed as a deduction under Section 10(2)(xv) of the Act.

18. We answer the question referred in the negative. The assessee is entitled to its costs which we assess at Rs. 200. Counsel's fee is assessed in the same figure.