1987-VIL-490-KER-DT
Equivalent Citation: [1987] 166 ITR 769, 65 CTR 9, 33 TAXMANN 489
KERALA HIGH COURT
Date: 27.02.1987
CATALYSTS AND CHEMICALS INDIA (WEST ASIA) LIMITED
Vs
COMMISSIONER OF INCOME-TAX
BENCH
Judge(s) : K. P. RADHAKRISHNA MENON., T. KOCHU THOMMEN
JUDGMENT
The judgment of the court was delivered by
K. P. RADHAKRISHNA MENON J.-At the instance of the assessee, the following question has been referred:
" Whether, on the facts and circumstances of the case, in the computation of capital for the purpose of relief under section 80J, should not the Tribunal have determined the same without deducting not only the loans and borrowings but also current liabilities and provision ?"
Counsel for the assessee as well as the Revenue conceded that this question is covered against the assessee by two decisions of the Supreme Court: Bombay Steam Navigation Co. (1953) Private Ltd. v. CIT [1965] 56 ITR 52 and Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308. The question accordingly is answered against the assessee and in favour of the Revenue.
The questions stated hereunder are referred at the instance of the Revenue:
" 1. Whether, on the facts and in the circumstances of the case, should the loans be deducted while computing the capital for the purpose of relief under section 80J of the Income-tax Act, 1961 ?
2. Whether, on the facts and circumstances of the case, the amount to be paid for the technical know-how to the U.S.A. Co. is includible as capital employed for the purpose of deduction under section 80J ?
3. Whether, on the facts and in the circumstances of the case, the assessee is entitled to claim a deduction of Rs. 20,663 ?"
Of the three questions, question No. 1, according to counsel for the Revenue and the assessee, is liable to be answered against the assessee in the light of the decision in Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308 (SC). We accordingly answer the same against the assessee and in favour of the Revenue.
Regarding question No. 2, the facts relevant and requisite lie in narrow compass. Catalysts and Chemicals Inc., a foreign company, in U.S.A. with whom the assessee is having a collaboration agreement, has provided the assessee with the " know-how, patents and rights on the use of trade marks relating to all catalysts excepting certain type of catalysts mentioned in the agreement " and towards which the assessee had to pay a sum of Rs. 14,25,000 during the assessment year 1972-73 and Rs. 6,00,000 during the assessment year 1973-74. These amounts had not been paid at the relevant time. They, therefore, constituted debts owed by the assessee and if that be so, the same were liable to be deducted from the aggregate of the amounts representing the value of the assets as on the first day of the computation period of the undertaking, while determining the capital employed by the assessee, for the purpose of the deduction under section 80J (see sub-section (3) of section 80J). The said dues are on a par with moneys borrowed and hence the same cannot be said to be capital employed in the industrial undertaking. This view of ours is fortified by the decision of the Supreme Court in Lohia Machines Limited's case [1985] 152 ITR 308. The question, therefore, is answered against the assessee and in favour of the Department.
To understand this judgment in regard to question No. 3, it is necessary to state briefly the essential facts pertaining to the said question. The assessee-company had produced before the Income-tax Officer an adjustment account claiming a deduction of Rs. 20,663, representing the freight and customs duty the assessee had to pay on certain catalysts imported by one Coromandel Fertilisers, Vizag, with whom the assessee admittedly was having business transactions, from CCI, Louisvilla, U.S.A. This claim was based on commercial expediency and principles of ordinary commercial trading. The Income-tax Officer entered the finding that the above expenditure made by the assessee " has no connection with its business and in no way it is incidental to its business " and disallowed the claim. On appeal, the Appellate Assistant Commissioner upheld the above finding and as a consequence thereof dismissed the appeal the appellant had filed. The Appellate Tribunal, on the other hand, accepted the case of the assessee, namely, that the expenditure can be sustained on the grounds of commercial expediency and principles of ordinary commercial trading and, as such, is an allowable deduction under section 37 of the Income-tax Act. The above question arises from the said order of the Appellate Tribunal.
The law applicable in such circumstances is well settled as is seen from the decisions of the Supreme Court in Eastern Investments Ltd. v. CIT [1951] 20 ITR 1, CIT v. Chandulal Keshavlal & Co. [1960] 38 ITR 601 and Sassoon 1. David and Co. (P.) Ltd. v. CIT [1979] 118 ITR 261.
Viscount Cave L.C. in Atherton v. British Insulated & Helsby Cables Ltd. [1925] 10 Tax Cas 155 (HL), has stated thus (at page 191):
" It was made clear in the above cited cases of Usher's Wiltshire Brewery v. Bruce [1914] 6 Tax Cas 399 and Smith v. Incorporated Council of Law Reporting [1914] 6 Tax Cas 477 that a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade; ........"
This observation has been noted with approval by the Supreme Court and, therefore, the said observation is also relevant in the context.
The principles deducible from these rulings are: The payment made or expenditure incurred though not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency and principles of ordinary commercial trading and in order indirectly to facilitate the carrying on of the business will be treated as money expended wholly and exclusively for the purpose of the trade. It is immaterial even if a third party also benefits thereby. However, the claim will be disallowed if the expenditure was incurred to foster the business of another only or was " made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business ".
It, therefore, follows that if an expenditure claimed as a deduction satisfies the requirements made mention of above, the same will be allowed as a deduction falling under section 37 of the Income-tax Act.
It is in this background that the point requires to be considered. At the very outset, we would observe that the findings discernible from the order in this regard are not under challenge. Some of the undisputed facts are: The assessee-company went into production only in September, 1970. At the relevant time, the assessee-company was having an order to supply its products (catalysts) of the value of Rs. 4,19,745 to Coromandel Fertilisers. The Coromandel Fertilisers had imported 347 cft. of C-11-7 catalysts from a U.S. Company. This U.S. Company was having business connection with the assessee as a collaborator. The imported goods were delivered to Coromandel Fertilisers at Madras. On verification, Coromandel Fertilisers found that the quality of the said goods was unsatisfactory and, therefore, it decided to return the unused catalysts (182 cft) to the U.S. Company. The assessee-company which was then having the transaction aforesaid with Coromandel Fertilisers, came to know of the decision of Coromandel Fertilisers to return the goods. The assessee-company then volunteered to spend for the return of the goods to the American company. The correspondence between the assessee-company and the Coromandel Fertilisers reveals this. The assessee-company accordingly, as is seen from its letters dated August 20, 1970, November 24, 1970, and May 12, 1971, agreed that the value of the unused goods could be adjusted against the amounts due to it from Coromandel Fertilisers in connection with the transaction aforesaid. On the strength of the said agreement, Coromandel Fertilisers returned the unused 182 cft. catalysts back to the company in the United States and intimated to the assessee about the same as seen from the letter dated April 10, 1971. This was the state of affairs when Coromandel Fertilisers accepted the quotation of the assessee for the sale of C-18-1 catalysts, by its letter dated November 24, 1970. This letter shows that Coromandel Fertilisers had placed an order for the supply of 640 cft C-18-1 catalysts with the assessee-company. The purchase order is dated August 13, 1971. The sale price including sales tax was fixed at Rs. 4,19,745. From the enclosure sent along with the purchase order, it is seen that a sum of Rs. 20,663 was claimed as an adjustment towards freight and customs duty, etc., Coromandel Fertilisers had to pay in connection with the return of the unused catalysts to the company in America.
Considering these facts, the Tribunal has found as follows:
"Even if we are to consider the case of the assessee for a deduction, we are of the opinion that the assessee-company should succeed since it appears to be a deduction allowed as a matter of commercial expediency. It is now well settled that in order to claim a deduction, it is enough to show that the money was expended not of necessity and with a view to a direct and immediate benefit but voluntarily and on the grounds of commercial expediency and in order indirectly to facilitate the carrying on of the business. The facts we have narrated above would show that there was no necessity for the assessee-company to reduce their price as required by Coromandel Fertilisers but such a reduction would facilitate the carrying on of the business. The carrying on of the business necessarily implies looking into the future by the businessman. As a potential and regular customer, the business requirements dictated that the assessee should take over the expenses involved in the shipment of the unused catalysts to America.
We are satisfied that there is no extra-commercial consideration involved in this payment. A case was sought to be made out that the assessee's collaborator in U.S. was liable for this payment and the assessee has merely taken over this liability since the U.S. firm was holding 50% of the shares and was a collaborator. There is no material to say that the assessee agreed for the reimbursement at the instance of the U.S. firm. Regarding the point made that the assessee-company was a monopolist and, therefore, it was unnecessary for them to make these reimbursements, we need only point out that the necessity for the expenditure is not a criterion nowadays. It is enough if the businessman considers that such an expenditure is commercially expedient. This had been well brought out in various decisions of which we will quote one, viz., the decision of the Allahabad High Court in Addl. CIT v. Symonds Distributors (P.) Ltd. [1977] 108 ITR 947, wherein certain amount of commission voluntarily forgone was allowed as a deduction on the ground of commercial expediency "
Learned counsel for the Revenue, however, submitted that in the absence of a written agreement between Coromandel Fertilisers and the assessee-company, authorising the assessee-company to spend the amount in question, the expenditure cannot be treated as one allowable on the basis of commercial expediency. We are of the view that this argument, in the light of the principles emerging from the decisions of the Supreme Court, is liable to be rejected. As already noted, a sum of money expended not of necessity and with a view to an immediate benefit to the trade but voluntarily and on the grounds of commercial expediency and not incurred for fostering business of another or with some improper or oblique purposes, will be treated as money expended wholly and exclusively for the purpose of the trade. It appears to us that the facts found by the Tribunal bring the payment in question within the description mentioned above. We do not find any way to interfere with the conclusions of the Tribunal based on the findings which have become final.
For the reasons stated above, the question is answered in the affirmative, in favour of the assessee and against the Revenue.
We direct the parties to bear their respective costs in these tax refer red cases. A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.
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