Citation Codes

Equivalent Citations

citation codes

Case Number

Income-tax Reference No. 773 of 1979

Judges

Ajit Kumar Sengupta
Bhagabati Prasad Banerjee, JJ.

Acts

provisions of section 52(2) of the Income-tax Act, 1961,
section 40(a)(v)/40A(5) of the Income-tax Act, 1961,
section 256(1) of the Income-tax Act, 1961,
rule 3 of the Income-tax Rules, 1962.14.
rule 3(a) of the Income-tax Rules, 1962.
rule 3 of the Income-tax Rules, 1962,
rule 3 of the Income-tax Rules.
section 40(c)(iii),

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Smart Summary

Structured Summary of the Opinion (Ajit Kumar Sengupta, J.)

Factual and Procedural Background

The Commissioner of Income-tax referred six questions of law to this Court under section 256(1) of the Income-tax Act, 1961, concerning the assessee for the assessment years 1971–72, 1972–73 and 1973–74. The reference arose after assessments in which the Income-tax Officer made additions treating certain employer expenditures as perquisites or otherwise not deductible under provisions such as section 40(a)(v)/40A(5) and related provisions. The Appellate Assistant Commissioner and, on further appeal, the Income-tax Appellate Tribunal considered issues including the valuation basis for perquisites (notably house rent), classification of reimbursements (medical, club bills), allowance of legal expenses relating to transfer of the registered office, and the allowability of actuarial provision for gratuity. Several of the referred questions were identified as being concluded by earlier decisions of this Court or the Supreme Court; two questions required fresh consideration by the Court.

Legal Issues Presented

Whether, for the assessee for accounting years 1971–72, 1972–73 and 1973–74, the disallowance under section 40(a)(v)/40A(5) in respect of rent should be computed according to the formula in rule 3 of the Income-tax Rules, 1962, rather than on the basis of the actual expenditure incurred by the assessee in providing accommodation to employees?
Whether reimbursement of medical expenses by the assessee to its employees is to be considered a perquisite, benefit or amenity for the purpose of section 40(a)(v)?
Whether expenses of club bills reimbursed by the assessee to its employees should be excluded from the computation of total expenditure for the purpose of the disallowance under section 40(a)(y)?
Whether expenditure incurred by the assessee by way of legal expenses pertaining to the transfer of its registered office from Calcutta to New Delhi is an allowable revenue expenditure for the accounting period relevant to assessment year 1972–73?
Whether provision for gratuity estimated on actuarial basis is an allowable revenue deduction in computing the income of the assessee for the accounting period relevant to assessment year 1972–73?
Whether, in the absence of proof of understatement of the consideration, the Income-tax Officer could invoke the provisions of section 52(2) of the Income-tax Act, 1961, for computing capital gains on transfer of 2,600 shares of Kalinga Tubes Ltd. by the assessee in the accounting period relevant to assessment year 1973–74?

Arguments of the Parties

Assessee's Arguments

Miss Manisha Seal (for the assessee) relied on the Court's decision in Commissioner of Income-Tax, West Bengal v. Britannia Industries Co. Ltd. (1982) 135 ITR 35, arguing generally that there should not be two different standards for assessment in respect of the employee and the employer and that it is equitable that the amount assessed as a perquisite in the hands of the employee correspond to the amount taken into account in the hands of the employer.
In relation to the legal expense for opinion on shifting the registered office, the assessee contended the Rs. 1,000 paid was an expense incurred for carrying on business and not a capital expenditure for shifting the head office.

Revenue's / Other Party References

Mr. Moitra (for Revenue) drew attention to the decision in CIT v. Jamshedpur Engineering and Machine Manufacturing Co. Ltd. (Patna High Court), where legal fees in connection with shifting the head office were treated as part of shifting expenses and held not to be revenue in nature.
The Appellate Assistant Commissioner and the Tribunal took and articulated positions: the Appellate Assistant Commissioner treated perquisite disallowance under section 40A(5) as applying where total employer expenditure providing benefit exceeds one-fifth of salary; he treated house rent differently because actual rent paid was known and ascertained. The Tribunal directed valuation for disallowance on the basis of the formula in rule 3 of the Income-tax Rules, 1962, following practice in Benches of the Tribunal.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Indian Leaf Tobacco Development Co. Ltd. v. CIT, [1982] 137 ITR 827	Used to conclude the second question: classification of reimbursement of medical expenses as a perquisite under section 40(a)(v).	The Court followed this decision and answered question 2 in the affirmative and in favour of the assessee.
Commissioner Of Income-Tax v. Johnston Pumps (India) Ltd., [1988] 172 ITR 333	Used to conclude the third question about club bill reimbursements and their exclusion from computation of total expenditure for disallowance under section 40(a)(y).	The Court followed this decision and answered question 3 in the affirmative and in favour of the assessee.
Commissioner Of Income-Tax (Central-I) v. Eastern Spinning Mills Ltd., [1980] 126 ITR 686	Used to conclude the fifth question about allowability of actuarial provision for gratuity as revenue deduction.	The Court followed this decision and answered question 5 in the affirmative and in favour of the assessee.
K.P. Varghese v. ITO, [1981] 131 ITR 597 (SC)	Considered for whether section 52(2) can be invoked in absence of proof of understatement of consideration for capital gains computation.	The Court followed the Supreme Court decision, answered question 6 in the negative and in favour of the assessee.
Commissioner Of Income-Tax, West Bengal v. Britannia Industries Co. Ltd., [1982] 135 ITR 35	Considered for the general principle that there should not be two different standards for valuation of a perquisite in the hands of employer and employee; in that case an equitable formula was used for free car perquisite where apportionment data was unavailable.	The Court considered the decision but held it did not lay down a general rule applicable where actual employer expenditure is known; it treated Britannia as limited to circumstances where apportionment was not possible and an estimate was necessary.
Bombay Burmah Trading Corporation Ltd. v. CIT, [1984] 145 ITR 793 (Bombay HC)	Addressed application of rule 3 and held that for section 40(c)(iii) actual expenditure incurred could be the relevant figure and there was no warrant to limit the employer's expenditure to the perquisite value in the employee's hands.	The Court relied on the Bombay High Court's reasoning to support the view that actual expenditure by the employer should be taken into account when it is known and ascertained.
CIT v. Jamshedpur Engineering and Machine Manufacturing Co. Ltd., [1986] 157 ITR 730 (Patna HC)	Held that legal expenses forming part of shifting head office expenses were not revenue in nature; treated legal fees as part of capital/shifting expenses.	The Court considered this decision (relied on by Revenue) but disagreed with the Patna High Court's view and held that the modest legal fee for an opinion (Rs. 1,000) was revenue in nature for the purpose of carrying on the business.
CIT v. Modi Spinning and Weaving Mills Co. Ltd., [1973] 89 ITR 304 (All)	Referenced in the context of the Jamshedpur decision and as part of the appellate history in that case.	The Court noted its use in the Jamshedpur/Patna proceedings but the present Court did not adopt the Patna High Court's conclusion.
Sitalpur Sugar Works Ltd. v. CIT, [1963] 49 ITR (SC) 160	Held that expenditure in shifting business to a more advantageous place could be capital where the advantage was enduring; used in Patna HC's reasoning that shifting expenses were capital in nature.	The Court analysed Sitalpur, observed its principle about enduring advantage and capital nature, but distinguished the present facts: the Rs. 1,000 legal opinion fee was held to be incurred for carrying on the business and therefore revenue in nature.

Court's Reasoning and Analysis

The Court proceeded in two stages: first, it identified which of the six referred questions were already conclusively answered by prior decisions; second, it examined the remaining questions requiring particular consideration (questions 1 and 4).

Concluded questions (by judicial precedent): The Court noted that questions 2, 3, 5 and 6 were concluded by earlier decisions (Indian Leaf Tobacco; Johnston Pumps; Eastern Spinning Mills; and K.P. Varghese respectively) and therefore answered those questions by following the cited authorities. The Court recorded its answers for those questions as being in the assessee's favour in accordance with the precedents.

Question 1 (valuation basis for house-rent perquisite and disallowance): - The factual matrix: The Income-tax Officer made additions treating employer expenditures as perquisites not deductible under section 40A(5) / section 40(a)(v). The Appellate Assistant Commissioner viewed disallowance under the relevant provision to apply when employer expenditure providing any benefit or amenity to employee exceeded one-fifth of salary. For house rent, actual rent paid by company for different flats was known and ascertainable. - The Tribunal's position: Although rule 3 of the Income-tax Rules, 1962, applies to valuation of perquisites in the hands of employees, Benches of the Tribunal had been taking the view that the Rule 3 formula "may conveniently be adopted" when computing perquisites for making disallowance under section 40(a)(v)/40A(5) in the employer's assessment. The Tribunal thus directed the ITO to compute disallowances by applying the formula in rule 3. - The Court's analysis: The Court examined Britannia Industries and Bombay Burmah authorities. It accepted that Britannia provided an equitable formula in a situation where apportionment of use (business v. personal) was not possible and an estimate had to be made. However, the Court emphasized that where the actual amount expended by the employer for providing the perquisite is known and ascertained (as with the house rents in this case), the formula in rule 3 is inapplicable. Additionally, rule 3 applies specifically to computing the value of perquisites for assessing them in the hands of employees and does not, by its terms, apply to computation for disallowance under section 40(a)(v)/40A(5) in the employer's assessment. The Court concluded that the Tribunal was not justified in directing computation on the lines of rule 3 and that the disallowance should be restricted to the actual expenditure incurred by the assessee in providing accommodation.

Question 4 (allowability of legal fees for opinion on transfer of registered office): - Facts: The assessee paid Rs. 1,000 as legal fees for consultation/opinion regarding transfer of its registered office from Calcutta to New Delhi. The Tribunal held that this expense was necessary for carrying on the company's business and thus revenue in nature; it was not expenditure for the actual shifting of head office. - Revenue's reliance: Mr. Moitra relied on the Patna High Court decision in CIT v. Jamshedpur Engineering, where legal fees forming part of shifting expenses were treated as capital in nature (not revenue). - The Court's analysis: The Court engaged with the Patna High Court's reliance on Sitalpur Sugar Works Ltd. v. CIT (SC). It explained Sitalpur's principle: expenditure incurred in shifting business to a more advantageous place could be capital where it produces enduring advantage (i.e., setting up capital in better shape). However, the Court reasoned that the test must focus on the predominant purpose of the expenditure. If the predominant purpose is intimately connected with carrying on the business, incidental advantageous effects do not change a revenue character into capital. The Court distinguished the modest legal opinion fee of Rs. 1,000 from expenses of actual shifting; it held that the legal opinion pertained to carrying on the business and therefore was a revenue expense. The Court rejected the view that every expenditure connected with shifting or opinions related to business decisions must be capital in nature.

Holding and Implications

Core disposition: The reference questions were answered by the Court, largely in favour of the assessee, as follows.

Question 1: The Court held that the disallowance under section 40(a)(v)/40A(5) in respect of rent should be computed on the basis of the actual expenditure incurred by the assessee in providing accommodation to employees and not by applying the formula in rule 3 of the Income-tax Rules, 1962. (Answered in favour of the assessee.)
Question 2: Following Indian Leaf Tobacco Development Co. Ltd., the Court answered this question in the affirmative and in favour of the assessee (reimbursement of medical expenses is to be considered a perquisite for the purposes of section 40(a)(v), as concluded by that authority).
Question 3: Following Commissioner Of Income-Tax v. Johnston Pumps (India) Ltd., the Court answered this question in the affirmative and in favour of the assessee (expenses of club bills reimbursed should be excluded from the computation of total expenditure for the purpose of disallowance under section 40(a)(y), as per that decision).
Question 4: The Court answered this question in the affirmative and in favour of the assessee — the legal expense of Rs. 1,000 paid for obtaining a legal opinion in connection with transfer of the registered office was held to be a revenue expenditure and allowable.
Question 5: Following Commissioner Of Income-Tax (Central-I) v. Eastern Spinning Mills Ltd., the Court answered this question in the affirmative and in favour of the assessee (provision for gratuity estimated on actuarial basis is an allowable revenue deduction).
Question 6: Following K.P. Varghese v. ITO (Supreme Court), the Court answered this question in the negative and in favour of the assessee (the ITO could not invoke section 52(2) in the absence of proof of understatement of consideration).

Direct consequences and procedural outcome:

The disallowance in respect of house rent must be calculated by reference to the actual rent paid by the company for the accommodation provided to employees, not by applying rule 3 formula.
The legal fee of Rs. 1,000 for obtaining a legal opinion on shifting the registered office is allowable as a revenue expenditure.
The Court stated there will be no order as to costs.
Leave was given to file the vakalatnama within a fortnight from the date of the judgment.
The Court followed prior decisions for the other referred questions and did not purport to lay down any novel general principle beyond the application and distinctions made in this judgment; accordingly, the decision primarily governs the parties before the Court on the referred questions.

Note: This summary is confined strictly to the content and statements contained in the provided opinion and does not introduce material or interpretive content beyond what the Court expressly stated.

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Commissioner Of Income-Tax v. Ashoka Marketing Ltd.

Ajit Kumar Sengupta, J.:— At the instance of the Commissioner of Income-tax, the following six questions of law have been referred to this court under section 256(1) of the Income-tax Act, 1961, for the assessment years 1971–72, 1972–73 and 1973–74:

“(1) Whether, on the facts and in the circumstances of the the case, the disallowance to be made under section 40(a)(v)/40A(5) of the Income-tax Act, 1961, in the case of the assessee for the accounting years 1971–72, 1972–73 and 1973–74 in the matter of rent should be on the line of the formula laid down in rule 3 of the Income-tax Rules, 1962, and not on the basis of the actual expenditure incurred by the assessee for providing accommodation to the employees in each of the said years?

(2) Whether, on the facts and in the circumstances of the case; the reimbursement of medical expenses by the assessee to its employees is to be considered as perquisite, benefit or amenity for the purpose of section 40(a)(v) of the Income-tax Act, 1961?

(3) Whether, on the facts and in the circumstances of the case, the expenses of the club bills reimbursed by the assessee to its employees should be excluded from the computation of the total expenditure for the purpose of the disallowance under section 40(a)(y) of the Income-tax Act, 1961?

(4) Whether, on the facts and in the circumstances of the case, the expenditure incurred by the assessee by way of legal expenses pertaining to the transfer of its registered office from Calcutta to New Delhi is an allowable revenue expenditure in computing the total income of the asses see for the accounting period relevant to the assessment year 1972–73?

(5) Whether, on the facts and in the circumstances of the case, the provision for gratuity estimated on actuarial basis is an allowable revenue deduction in computing the income of the assessee for the accounting period relevant to the assessment year 1972–73?

(6) Whether, on the facts and in the circumstances, of the case, the Income-tax Officer, in the absence of proof of understatement of the consideration, could invoke the provisions of section 52(2) of the Income-tax Act, 1961, for the purpose of computing the capital gains in respect of the transfer of 2,600 shares of Kalinga Tubes Ltd. by the assessee in the accounting period relevant to the assessment year 1973–74?”

2. It is not in dispute that some of the questions are concluded by decisions of this court or of the Supreme Court. Only two questions would require consideration in this case. Before dealing with these questions, the questions which are concluded are answered first. The second question is concluded by the decision of this court in Indian Leaf Tobacco Development Co. Ltd. v. CIT, [1982] 137 ITR 827.

3. Following the said decision, we answer the second question in the affirmative and in favour of the assessee.

4. The third question is also concluded by the decision of this court in Commissioner Of Income-Tax v. Johnston Pumps (India) Ltd., [1988] 172 ITR 333.

5. Following the said decision, we answer the third question in the affirmative and in favour of the assessee.

6. The fifth question is also concluded by the decision of this court in Commissioner Of Income-Tax (Central-I) v. Eastern Spinning Mills Ltd., [1980] 126 ITR 686.

7. Following the said decision, we answer the fifth question in the affirmative and in favour of the assessee.

8. The sixth question is concluded by the decision of the Supreme Court in K.P Varghese v. ITO, [1981] 131 ITR 597.

9. Following the said decision, we answer the sixth question in the negative and in favour of the assessee.

10. The facts relating to the first question is that the Income-tax Officer, in the assessments of the assessee for the years under consideration, made diverse additions as being perquisites to the employees not allowable under section 40A(5) of the Act (and not allowable under section 40(a)(v) of the Act). The Appellate Assistant Commissioner has held that, under the said provision, any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite to any employee to the extent such expenditure exceeds one-fifth of the amount of salary payable to the employee, shall not be deducted in computing the income chargeable under the head “Profits and gains of business”.

11. As far as house rent is concerned, the position, according to him, was different. The actual rent paid by the company for the different flats was separately known and ascertained. Therefore, there was no question of restricting it to 10% or 12% as laid down in rule 3(a) of the Income-tax Rules, 1962. These percentages were laid down for purposes of valuation of rent-free residential accommodation enjoyed by the employees. In the case of the employer, the amount to be taken into account is the actual rent incurred.

12. On further appeal, the Tribunal held as follows:

“We have heard both the representatives of the assessee and the Department. It is true that rule 3 of the Income-tax Rules, 1962, applies only to the computation of the value of the perquisite provided to an employee for the purpose of assessing the same in his hands and the said rules do not, in turn, apply to the computation of the value of the perquisite for the purposes of making the disallowance under section 40(a)(v)/40A(5) of the Act in the assessment of the employer-company. However, the Benches of the Tribunal have been consistently taking the view that, in computing the value of the perquisites provided to the employees, the formula laid down in rule 3 of the Income-tax Rules, 1962, may conveniently be adopted, though that rule does not, in turn, apply.”

13. The Tribunal, therefore, directed the Income-tax officer to work out the disallowances to be made under section 40(a)(v)/40A(5) of the Act for valuing the perquisites on the basis of the formula laid down in rule 3 of the Income-tax Rules, 1962.

14. This direction is impugned in this reference. The question that arises for consideration is whether the method of computation of the perquisite should be the same for the purposes of assessment of the employee as well as for the purposes of assessment of the employer-company.

15. Miss Manisha Seal, learned advocate, appearing for the assessee has submitted that this court, in Commissioner Of Income-Tax, West Bengal v. Britannia Industries Co. Ltd., [1982] 135 ITR 35, while considering the question whether the value of the perquisite of free car provided to the employees should be computed, has laid down, in general terms, that there cannot be two different standards for assessment in respect of the employee and the employer and it is also equitable that what the payer gives is what the receiver receives. She, therefore, submits that the same principle should apply in all cases of computation of the perquisite in the hands of the assessee-company.

16. This case was considered at length by the Bombay High Court in Bombay Burmah Trading Corporation Ltd. v. CIT, [1984] 145 ITR 793. There, the Tribunal took the view that, for the purposes of section 40(c)(iii), actual expenditure incurred was the only expenditure which could be taken into consideration and there was no warrant for the view to limit the expenditure to the extent of the value of the perquisite in the hands of the employees.

17. The Bombay High Court observed as follows (at page 798):

“It appears that the foundation of the arguments advanced before us. by Mr. Munim lies in a decision of the Calcutta High Court in Commissioner Of Income-Tax, West Bengal v. Britannia Industries Co. Ltd., [1982] 135 ITR 35. If the facts of the Calcutta case are carefully gone into, it would appear that, in that case, it was not possible either for the assessee or the Department to positively find as to what part of the expenditure could be attributable to the perquisite in the form of free use of the car which was also used for business purposes. This apportionment in respect of the use of the car for the personal use by the employees and for business purposes posed a difficulty in that case and the judgment shows that recourse was, therefore, taken to rule 3 of the Rules.”

“The decision of the Calcutta High Court cannot be read as an authority that, in all cases, for the purpose of section 40(c)(iii), the value of the perquisite in the hands of the employees, computed in accordance with relevant rules, must be ascertained (at page 799). In order to disallow an expenditure incurred by a company in the provision of any benefit, etc., to an employee, it is not necessary that the value of the perquisite, etc., in the hands of the employee computed in accordance with the relevant rules must exceed one-fifth of the salary; For that purpose, it is the entire expenditure incurred by the employer that has to be taken into account (headnote).”

18. We are also of the view that the decision in Britannia Industries Co. Ltd., [1982] 135 ITR 35 (Cal) did not lay down any general principle that, in all cases, the value of the perquisite provided to an employee should be taken in the hands of the employer-assessee for the purpose of section 40(c)(iii) at the same figure as it was taken in the hands of the employee. In determining the value of the perquisite of free car provided to an employee, the total use of car, the use of the car for personal work of the employee and all incidental details have to be ascertained. In the absence of available data, an estimate has to be made of the expenses relating to the maintenance and running of the car for the personal use of the employee. In that context, this court, in Britannia Industries' case laid down an equitable formula for determination of value of such perquisite. But where the actual amount expended by the company for providing the perquisite is known to the assessee-company, the question of making any estimate in such case does not arise. In this case, the house rent was paid by the company for the flats provided to the executives. The actual rent paid by the company for the different flats were known and ascertained. In such a case, rule 3 of the Income-tax Rules, 1962, can have no manner of application. Further, rule 3 applies only to the computation of the value of perquisite provided to an employee for the purpose of assessing the same in his hands. This rule does not apply to the computation of the value of perquisite for making the disallowance under section 40(a)(v)/40A(5) of the Act in the assessment of the employer company. The formula laid down in rule 3 cannot be applied for computation of the value of the perquisite provided by the employer in this case in the form of rent for accommodation provided to the executives.

19. In our view, the Tribunal was not right in directing the Income-tax Officer to proceed on the lines of the formula laid down in rule 3 of the Income-tax Rules. The Tribunal should have restricted the disallowance on the basis of the actual expenditure incurred by the assessee for providing accommodation to the employees.

20. For the reasons aforesaid, the first question is answered by saying that the disallowance to be made under section 40(a)(v) of the Act in the case of the assessee should be on the basis of the actual expenditure incurred by the assessee for providing accommodation to the employees and not on the lines of the formula laid down in rule 3 of the Income-tax Rules, 1962.

21. The other question which remains to be considered is the fourth question. The facts relating to this question are that legal fee was paid to the lawyer for consultation regarding the transfer of the assessee's registered office from Calcutta to New Delhi. The Tribunal held that this expenditure was necessary for the purpose of carrying on the business of the assessee-company and so it is an expenditure laid out wholly and exclusively for the purpose of carrying on the business. The expenditure is only Rs. 1,000 which was incurred by way of legal expenses and is not expenditure for shifting of its head office from Calcutta to New Delhi.

22. Mr. Moitra has drawn our attention to a decision in CIT v. Jamshedpur Engineering and Machine Manufacturing Co. Ltd., [1986] 157 ITR 730 (Pat). There, the assessee incurred Rs. 3,000 on account of payment to lawyers in connection with the shifting. The company incurred huge expenses in shifting its head office. One of the items of expenditure was a sum of Rs. 3,000 incurred on account of payment to the lawyers. The Income-tax Officer rejected the claim holding that the expenditure incurred on account of shifting of the head office was expenditure of a capital nature. According to the Appellate Assistant Commissioner, the expenditure was revenue in nature and not capital in nature. He, therefore, allowed the appeal holding that the assessee was entitled to deduction of that amount. The Income-tax Appellate Tribunal, on the basis of the judgment in CIT v. Modi Spinning and Weaving Mills Co. Ltd., [1973] 89 ITR 304 (All) affirmed the conclusion of the Appellate Assistant Commissioner and held that the assessee had been rightly allowed deduction of the sum of Rs. 3,000 spent on account of lawyer's fees. The question which was referred to the High Court was whether the expenses incurred in shifting the headquarters of the company to West Bengal is revenue or capital expenditure. The High Court, relying on the decision in Sitalpur Sugar Works Ltd. v. CIT, [1963] 49 ITR (SC) 160 and after considering the reasons why the shifting of the company was made and the advantage derived from shifting, held that expenses incurred on account of shifting of the head office cannot be held to be on revenue account. There is no discussion in the judgment why the expenditure on the legal fees should not be allowed. It was treated as part and parcel of the shifting expenses. The Patna High Court held as follows (at page 733):

“It is true that it is connected with the business of the factory but a distinction has been made in regard to the expenses which are of enduring nature and the activities which are of recurring nature. In the instant case, we have no doubt that the advantages from the shifting of the head office, for the reasons indicated in the order of the Appellate Assistant Commissioner, were of enduring nature. The Tribunal was, therefore, not justified in allowing legal expenses as they were not revenue expenditure in nature.”

23. With great respect, we are unable to agree with the views expressed by the learned judges of the Patna High Court. The question is to be judged having regard to the extent of the expenses involved, the nature of expenses and the benefit and advantage derived by the said expenses. In Sitalpur Sugar Works Ltd. v. CIT, [1963] 49 ITR (SC) 160, the question was whether the expenditure on shifting the business to a more advantageous or better place is capital or revenue expenditure. It was held by the Supreme Court in that case that the expenditure was not incurred for the purpose of carrying on the concern but was incurred in setting up the concern with a greater advantage for the trade than it had in its previous set up. The expenditure was not incurred in earning profits but was incurred only for setting up its factory, that is, its capital, in better shape so that it might produce larger profits when worked. The expenditure incurred in dismantling and refitting the existing plant at a better site produced an advantage which enabled the trade to prosper and which could be expected to last for ever and was, therefore, capital expenditure. If the predominant and main purpose of incurring the expenditure is the carrying on of the business, the incidental advantage of that expenditure could not affect its revenue character. In the instant case, the assessee obtained the opinion of a lawyer in connection with the problem that may arise in case of actual shifting of the head office. This legal opinion, in our view, has nothing to do with the expenditure incurred for actual shifting of the head office. This expenditure is in connection with the carrying on of the business of the assessee. Before the Patna High Court, one of the items was lawyer's fees in connection with the shifting which was held to be capital expenditure. If the contention of the Revenue is accepted, then, in that case, all expenditure in connection with the shifting of an office would be on capital account. Similarly, any opinion that may be obtained by the assessee for the purpose of the business may be held to be a capital expenditure as it may affect the profit-making apparatus in the long run. If the contention of the Revenue is accepted, then, even if the opinion is obtained whether, in a particular case, a suit should be filed for protecting the plant and machinery or for the purpose of contesting the legal proceedings instituted by the financial institutions in respect of the plant and machinery hypothecated to such financial institutions or for the purpose of the renewal of lease of business premises, the expenditure would be capital expenditure as it pertains to the capital asset of the company. We are, however, unable to accept the contention. If, the predominant purpose or intention for incurring the expenditure is intimately connected with the carrying on of the business, the incidental advantage of the expenditure cannot affect the character of the expenditure and such expenditure should be allowed as revenue expenditure. In the instant case, a sum of Rs. 1,000 was paid for obtaining a legal opinion in connection with the shifting of the head office which, in our view, is for the purpose of carrying on the business and cannot, by any stretch of imagination, be held to be on capital account.

24. For the reasons aforesaid, we are of the view that the Tribunal is right in holding that the legal expense pertaining to the transfer of its registered office is a revenue expenditure and should be allowed.

25. We, therefore, answer the fourth question in the affirmative and in favour of the assessee. There will be no order as to costs. Leave is given to file the vakalatnama within a fortnight from date.

Bhagabati Prasad Banerjee, J.:— I agree.

Commissioner Of Income-Tax v. Ashoka Marketing Ltd.

Structured Summary of the Opinion (Ajit Kumar Sengupta, J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments

Revenue's / Other Party References

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income-Tax v. Ashoka Marketing Ltd.

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