Commissioner Of Income-Tax, Bombay City I v. Tata Iron & Steel Co. Ltd.

Vimadalal, J.:— This is a reference made by the Tribunal at the instance of the Commissioner in which the three questions set out in paragraph 8 of the statement of the case have been referred to us. The assessee is a well-known public limited company which is engaged in the business of production and sale of iron and steel. For the assessment year 1958-59, the assessee (accounting year ended March 31, 1958), among other deductions, claimed the following amounts:

(1) Rs. 3,28,591 as publicity and advertisement expenses, being the amount spent by it on the publication of a brochure which was brought out at the time of its golden jubilee;

(2) Rs. 16,525 and Rs. 1,750, being the legal expenses incurred in effecting certain alterations in the memorandum and articles of association of the company; and

(3) Rs. 1,78,277 being the deficit in obsolete machinery on actual verification.

2. Each of the three questions referred to us relates to these items.

3. As far as the first item of Rs. 3,28,591 is concerned, in my opinion, the question as to whether the brochure published on the occasion of the golden jubilee of the company could be said to be in the nature of publicity or advertisement, is a pure question of fact on which the Tribunal has taken a certain view, which, in my opinion, is conclusive. The Tribunal's view is that the brochure gives a tone of respectability to the house of the Tatas and that, in turn, undoubtedly adds to the prestige and good name of the company and creates a good impression about the company itself. The Tribunal had pointed out that advertisement expenses take various forms and that there was nothing objectionable in the subtle form of advertisement which was involved in the publication of the said brochure. As far as this question is concerned, therefore, I hold that it is a pure question of fact. In any event, I am of opinion that the view taken by the Tribunal is correct.

4. Question No. 2 relates to two items, one of Rs. 16,525 and the other of Rs. 1,750, being the legal expenses incurred for the purpose of amending the memorandum and articles of association of the assessee-company. As far as the item of Rs. 1,750 is concerned, Mr. Joshi has not pressed the same in view of the fact that it is covered by the decision of the Allahabad High Court in the case of Commissioner of Income-tax v. Modi Spinning and Weaving Mills Co. Ltd., [1973] 89 ITR 304 (All) and also by the decision of this court, dated 19th July, 1974, in Income-tax Reference No. 34 of 1965 (Commissioner of Income-tax v. Elphinstone Spg. & Weaving Mills Co. Ltd., [1975] 100 ITR 139 (Bom). I need not, therefore, say any more about this item. Mr. Joshi, however, strenuously contended that the item of Rs. 16,525, which related to the legal expenses incurred for the purpose of altering the memorandum and articles of association of the assessee-company in regard to contributions, inter alia, to political institutions, cannot be allowed as a deduction. Mr. Joshi's contention was that, at any rate, as far as the memorandum is concerned, what is sought to be done is to affect the permanent structure of the company and, therefore, the expenditure is in the nature of capital expenditure, the deduction of which should not have been allowed. The nature of those amendments can be gauged from the case of Jayantilal Ranchhoddas Koticha v. Tata Iron & Steel Co. Ltd., [1957] 27 Comp Cas 604 (Bom). The Tribunal has taken the view that by effecting slight alterations, no new asset or right has been created, but the alterations were needed due to the new legislation and were in the nature of “repairs” to the existing structure of the company without resulting in any improvement or extension of that structure. The Tribunal's view was that the expenditure was incurred for the purpose of the business and was, therefore, in the nature of revenue expenditure and the assessee company was entitled to the deduction of that item. In my opinion, the view taken by the Tribunal in that respect is correct and no fault can be found with regard to the same. The Tribunal has applied well-settled principles of law and has taken a view of the nature of the said expenditure, to which no exception can be taken. In my opinion, it is impossible to say that by the alterations effected in the memorandum any asset or advantage of an enduring nature has been created for the benefit of the company. I, therefore, hold that the said sum of Rs. 16,525 was rightly allowed as a deduction by the Tribunal.

5. That brings me to the item of Rs. 1,78,277, which is the subject-matter of the third question referred to us. As far as this item is concerned, it will be necessary to state a few facts. The method of accounting regularly adopted by the assessee-company was to claim obsolescence allowance in respect of discarded plants under section 10(2)(vii) of the Act, retaining, however, in the books 1% of the value of such discarded plants. When the discarded plants were eventually sold, the profit on sale was duly brought to account, after making an adjustment in regard to the value of the discarded assets retained as stated above. Over a period of years the debit raised in respect of the 1% value of the discarded plants got accumulated and could not be directly connected with the sales thereof made from time to time. During the year of account the assessee-company had obtained a surplus on sale of discarded plants of Rs. 7,89,211, and after making adjustment referred to above, had brought to account the sum of Rs. 6,06,361 as profit liable to tax under section 10(2)(vii) of the Act. The assessee also made a simultaneous claim for a deduction of Rs. 1,78,277 as representing the value of the discarded plant which had been retained in the books, but which on physical verification was found to be non-existent. It may be stated that such physical verification was made by the assessee-company from time to time at certain intervals. The said amount of Rs. 1,78,277 could not be claimed by the assessee-company as obsolescence allowance under section 10(2)(vii) of the Act, but it had claimed that amount as a deduction under section 10(1) of the Act. Mr. Joshi sought to contend that this amount is not allowable as a deduction under section 10(1) of the Act but, in my opinion, question No. 3 as framed does not raise that wider point but is restricted to the question as to in which assessment year the same could be allowed as a deduction. After some argument, Mr. Joshi very fairly himself veered round to that view of the question, having regard particularly to the application for reference which the Commissioner had himself made to the Tribunal. The Income-tax Officer took the view that in view of the correspondence produced by the assessee-company itself, it was clear that the total loss of the value of the discarded plants retained in the books had been finally ascertained as at the end of the accounting year, being the financial year ended 31st March, 1957, and it was, therefore, contended on behalf of the Commissioner that the deduction, if any, could not be claimed by the assessee in respect of this item in the accounting year under consideration, corresponding to the assessment year 1958-59, with which the court is concerned in the present case. I need not consider what should be the proper mode of accounting in this respect, for section 13 of the Indian Income-tax Act, 1922, lays down that income, profits and gains must be computed for the purposes of the Act in accordance with the method of accounting regularly employed by the assessee. Mr. Kolah has, therefore, contended that this is the way in which the assessee has, at all times, kept its accounts in regard to the item which I am now considering. Indeed, it would be difficult for a company which carries on business of the magnitude of the assessee-company to fix in which particular year a particular plant which was obsolete became nonexistent, or in which particular year the company became aware of the non-existence of a particular plant. The Tribunal has, in paragraph 22 of its order dated 2nd June, 1964, rightly stressed the method of accounting followed by the assessee-company and has come to the conclusion that the method could not be said to be unreasonable even if a better method could, perhaps, be visualised. I see nothing wrong in that view of the Tribunal, and, in my opinion, the allowing of this deduction by the Tribunal cannot be said to be against any provisions of law, having regard, particularly, to section 13 of the Indian Income-tax Act, 1922, to which I have already referred.

Desai, J.:— I agree and have nothing to add.

By the Court.— We answer the questions referred to us as follows:

Question No. 1.—In the affirmative.

Question No. 2.—In the affirmative in regard to both the amounts.

Question No. 3.—In the affirmative.

6. The Commissioner must pay to the assessee-company the costs of this reference.