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Gujarat State Export Corporation Limited v. Commissioner Of Income-Tax.
Structured Summary of the Provided Opinion
Factual and Procedural Background
The Tribunal referred questions under s. 256(1) of the Income-tax Act, 1961 for assessment years 1974-75 and 1975-76. The assessee is the Gujarat Export Corporation Ltd., engaged in export business from Gujarat State. For assessment year 1974-75 the assessee claimed (a) deduction of Rs. 7,500 paid as an entrance fee to the Sports Club of Gujarat Ltd., and (b) deduction of surtax payable as business expenditure under s. 37(1) of the IT Act. The ITO rejected both claims: the entrance fee was not wholly and exclusively for business and the surtax provision was not a business expenditure. The CIT upheld the ITO's findings but gave different reasoning: he held the entrance fee to be capital expenditure and the surtax not allowable as expenditure for carrying on business. The Tribunal confirmed the CIT. On application of the assessee the Tribunal's questions were referred to the Court for opinion.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the surtax liability is not deductible while computing total income?
- Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in rejecting the claim of the assessee that payment of entrance fee to the Sports Club of Gujarat Ltd. is expenditure of revenue nature and holding that the payment conferred upon the assessee a benefit or an advantage of enduring nature and, therefore, expenditure of capital nature?
- Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the surtax liability is not deductible while computing total income? (question referred for assessment year 1975-76)
Arguments of the Parties
Assessee's Arguments
- The entrance fee for becoming a member of the sports club is not capital expenditure.
- The payment was made for business expediency and was required for entertaining both Indian and foreign customers.
Revenue's Arguments
- The entrance fee cannot be treated as revenue expenditure because it has an enduring effect — the membership is not for a limited period and confers benefit for years to come.
- With respect to surtax, it is not a deductible business expenditure (the Revenue opposed treating surtax as deductible under s. 37).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| S. L. M. Maneklal Industries Ltd. vs. CIT (1988) 172 ITR 176 (Guj) | Held that surtax stands on the same footing as income-tax and is a tax on total income; therefore surtax is not an expenditure laid out wholly and exclusively for business and not allowable under s. 37. | The Court relied on this decision to conclude that payment of surtax is not an allowable deduction under s. 37 and to answer Question No. 1 in favour of the Revenue. |
| CIT vs. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC) : TC 16R. 347 | Considered whether estate duty paid by an assessee-company was an expenditure wholly and exclusively for business; held estate duty was a statutory duty unconnected with business and not deductible under s. 10(2)(xv). | Referred to as supporting authority for treating surtax (a tax on total income) as not an allowable business deduction. |
| Alembic Chemicals Works Co. Ltd. vs. CIT (1989) 177 ITR 377 (SC) | Discussed criteria for distinguishing capital and revenue expenditure; emphasised purpose, intended object and effect of outlay considered in a commonsense way with business realities. | The Court applied these principles in determining that the entrance fee was not capital expenditure but revenue in nature. |
| City of Lond Contract Corporation vs. Styles (1887) 2 Tax Cases 239 | Drawn distinction: outlay on "acquisition of the concern" is capital; outlay in "carrying on the concern" is revenue. | Used as a foundational principle to analyse whether the entrance fee was for acquisition (capital) or for carrying on business (revenue). |
| Assam Bengal Cement Companies Ltd. vs. CIT (1955) 27 ITR 34 (SC) : TC 16R. 841 | Stated that expenditure made to acquire or bring into existence an asset/advantage for enduring benefit is capital; expenditure for running the business is revenue; aim and object determine character. | Quoted and applied to test whether the entrance fee produced an enduring benefit (capital) or was for running the business (revenue). |
| CIT vs. Associated Cement Companies Ltd. (1980) 172 ITR 257 (SC) | Observed that expenditure incurred for obtaining an advantage of enduring benefit may nevertheless be on revenue account; the enduring benefit test may break down in some cases. | Relied upon to support the view that even if membership gives an advantage of enduring benefit in a commercial sense, it may still be revenue expenditure. |
Court's Reasoning and Analysis
The Court addressed the questions in two parts.
1. Surtax liability (Question No. 1 for both assessment years): The Court followed the decision in S. L. M. Maneklal Industries Ltd., which held that surtax is on the same footing as income-tax and is a tax on total income computed under the IT Act after adjustments under the Surtax Act. That decision, supported by the Supreme Court's reasoning in CIT vs. Malayalam Plantations Ltd. (regarding estate duty as a statutory obligation unconnected with business), led the Court to conclude that surtax is not an expenditure laid out wholly and exclusively for the purpose of business and therefore is not deductible under s. 37 of the IT Act. On that basis the Court answered Question No. 1 in the affirmative for the assessment years in question.
2. Entrance fee to Sports Club (Question No. 2): The Court applied the established capital-versus-revenue tests: whether the outlay was for acquisition of an asset or advantage for enduring benefit (capital) or for carrying on the business (revenue). Relying on Alembic Chemicals and earlier authorities (City of Lond Contract Corporation; Assam Bengal Cement), the Court emphasised consideration of the purpose, intended object and effect of the expenditure in a commonsense way with regard to business realities. It also observed, following Associated Cement Companies, that the "enduring benefit" test may not be decisive in every case. Applying these tests, the Court concluded that the entrance fee did not evidence an intention to acquire a capital asset or an enduring business advantage; rather it was incurred for running and bettering the conduct of the business (for entertaining customers, etc.). Accordingly, the Tribunal erred in treating the entrance fee as capital expenditure.
Holding and Implications
Holding:
Question No. 1: Answered in the affirmative for both assessment years 1974-75 and 1975-76 — in favour of the Revenue and against the assessee.
Question No. 2: Answered in the affirmative — in favour of the assessee and against the Revenue.
Implications:
- Direct effect on the parties: The Court sustained the non-deductibility of surtax under s. 37 (favouring Revenue) and held that the entrance fee paid to the Sports Club was revenue expenditure (favouring the assessee) — thereby overturning the Tribunal's view that the entrance fee was capital in nature.
- Procedure: The reference was disposed of accordingly with no order as to costs.
- Precedential impact: The Court applied existing authorities to resolve the questions; the opinion does not purport to lay down a new general principle beyond the application of cited precedents.
1. The Tribunal has referred the following questions for our opinion under s. 256(1) of the IT Act, 1961 for asst. yrs. 1974-75 and 1975-76.
2. For asst. yr. 1974-75, the following questions are referred :
""1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the surtax liability is not deductible while computing total income ?"
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in rejecting the claim of the assessee that payment of entrance fee to the Sports Club of Gujarat Ltd. is expenditure of revenue nature and holding that the payment conferred upon the assessee a benefit or an advantage of enduring nature and, therefore, expenditure of capital nature ?"
For asst. yr. 1975-76, the following question is referred :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the surtax liability is not deductible while computing total income ?"
3. The aforesaid questions arise in the background of the facts that the assessee the Gujarat Export Corporation Ltd. is doing the business of export of various articles from Gujarat State.
4. In the asst. yr. 1974-75, it had claimed deduction for an amount of Rs. 7,500 paid by it to the Sports Club of Gujarat Ltd. towards entrance fee. The ITO has rejected the said claim on the ground that this expenditure cannot be considered wholly and exclusively for the business purposes. The assessee also claimed deduction for surtax payable as business expenditure under s. 37(1) of the Act. That claim was also rejected on the ground that the provision for surtax is not a business expenditure.
5. In appeal, the CIT upheld the findings of the ITO, however, for different reasons. He held that payment of entrance fee for becoming permanent member of Sports Club was capital expenditure and that payment of surtax cannot be said to be expenditure incurred for carrying on business. The Tribunal confirmed the aforesaid view of the CIT. Hence, on the application of the assessee, the questions are referred. Question No. 1
6. This question pertains to surtax liability. This Court, in the case of S. L. M. Maneklal Industries Ltd. vs. CIT (1988) 172 ITR 176 (Guj) held that surtax stands on the same footing as income-tax, inasmuch as, it is also a tax on the total income computed under the IT Act after its adjustment under the Surtax Act. Therefore, surtax is not an expenditure laid out wholly and exclusively for the purpose of business and is not an allowable deduction under s. 37 of the IT Act, 1961. For this purpose, the Court referred to various decisions including the decision of the Supreme Court in the case of CIT vs. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC) : TC 16R. 347. In that case, the Supreme Court considered the question as to whether the estate duty paid by the assessee-company was an expenditure incurred wholly and exclusively for the purpose of its business. The Court held that payment of estate duty by the assessee was as a statutory agent with a view to discharging a statutory duty unconnected with the business, though the occasion for the imposition arose because of the territorial nexus afforded by the accident of its doing business in India. The Court, thereafter held that the estate duty paid by the assessee was not an allowable deduction under s. 10(2)(xv) of the Act. In view of the aforesaid decision of this Court in the case of S. L. M. Maneklal Industries Ltd. (supra), payment of surtax is not an allowable deduction under s. 37 of the Act. Hence, question No. 1 for both the assessment years requires to be answered in the affirmative, i.e., in favour of the Revenue and against the assessee.
Question No. 2
7. With regard to question No. 2, even though the amount involved is small, the learned advocate for the assessee vehemently contended that, by no standard, it can be said that the entrance fee for becoming member of a sports club is capital expenditure. It was expenditure for the business expediency and the amount was required to be spent for entertaining its Indian as well as foreign customers. As against this, learned advocate, Mr. Shelat, for the Revenue vehemently submitted that the aforesaid expenditure cannot be termed as revenue expenditure, as it has enduring effect because the said entrance fee is not paid for a limited period and the assessee is to get benefit of membership for years to come.
8. For deciding the question as to whether the expenditure is of capital nature or revenue nature, one of the relevant criteria is whether it is for acquisition of concern or assets or whether the expenditure is for carrying on concern or for running the business. If the aim and object of the expenditure is for carrying on the concern, then it is a revenue expenditure. Hence, in our view, it would be difficult for us to accept the contention of the Revenue that the entrance fee paid by the assessee for getting the membership of the sports club can be termed as capital expenditure. The question as to whether a particular expenditure is a capital expenditure or a revenue expenditure is dealt with in detail by the Supreme Court in the case of Alembic Chemicals Works Co. Ltd. vs. CIT (1989) 177 ITR 377 (SC). The Court referred to various decisions particularly the decision in the case of City of Lond Contract Corporation vs. Styles (1887) 2 Tax Cases 239 wherein broad area of distinction is pointed out. It is held in that case that the outlay on the 'acquisition of the concern' would be capital while an outlay in 'carrying on the concern' is revenue. The Court further referred to the following observations in the case of Assam Bengal Cement Companies Ltd. vs. CIT (1955) 27 ITR 34 (SC) : TC 16R. 841 :
"If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If, on the other hand, it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits, it is a revenue expenditure. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure."
Applying the aforesaid test, in our view, it is apparent that, by paying the entrance fee for a sports club, the assessee had no intention to acquire any capital asset or take advantage for the enduring benefit of the business. By commonsense standard, it can be stated that it is for running the business or for bettering the conduct of its business.
In the case of Alembic Chemical Works Co. Ltd. (supra), the Court further observed that whether a particular outlay is capital or revenue is required to be determined after taking into consideration various aspects and the relevant criterion is the purpose of the outlay and its intended object and effect, considered in a commonsense way having regard to the business realities. Further, with regard to the test of enduring benefit, the Court observed that in a given case, the test of 'enduring benefit' might break down. For this purpose, the Court relied upon the following observations in the case of CIT vs. Associated Cement Companies Ltd. (1980) 172 ITR 257 (SC) :
"There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down."
Applying the aforesaid criterion, in our view, it is apparent that the payment of entrance fee for becoming member of the sports club cannot be termed as a capital expenditure. It is in the nature of an advantage in the commercial sense but it is not an advantage in the capital field. Hence, the Tribunal erred in law in rejecting the claim of the assessee that payment of entrance fee to the Sports Club of Gujarat Ltd. is expenditure of revenue nature and holding that the payment conferred upon the assessee a benefit or an advantage of enduring nature and, therefore, it is expenditure of capital nature. Therefore, question No. 2 requires to be answered in the affirmative for the asst. yr. 1974-75 in favour of the assessee and against the Revenue.
9. In the result, question No. 1 is answered in the affirmative for both the asst. yrs. 1974-75 and 1975-76 in favour of the Revenue and against the assessee and for asst. yr. 1975-76 question No. 2 is answered in the affirmative, i.e., in favour of the assessee and against the Revenue. Reference stands disposed of accordingly with no order as to costs.
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