COMMISSIONER OF INCOME TAX Vs. AUROFOOD PRIVATE LIMITED

JUDGEMENT

(1.) AT the instance of the Revenue, under section 256(1) of the Income -tax Act, 1961 (hereinafter referred to as "the Act"), the following two questions of law have been referred to this court for its opinion

(2.) THE assessee is a private limited company. In the course of the assessment proceedings for the assessment year 1973 -74 (accounting period ending December 31, 1972), the assessee claimed that an expenditure of Rs. 24, 384 should be allowed as revenue expenditure falling under section 37(1) of the Act, though such expenses were incurred for increasing the authorised share capital of the company. Further, the assessee also put forward a claim for deduction under section 80J of the Act in respect of a biscuit plant in which machinery of the value of Rs. 4, 03, 601 was installed during the year 1972. The claims so made by the assessee were rejected by the Income -tax Officer, on the ground that the expenditure of Rs. 24, 384 had been incurred for improving the capital and so, the expenditure would be capital expenditure and not revenue and that, as even according to the statement of the assessee, the biscuit plant was installed during the year, the plant was not in operation on the first day of the computation period, viz., January 1, 1972, and, as such, the claim for deduction under section 80J of the Act was not in order. On appeal by the assessee before the Appellate Assistant Commissioner, he took the view that the expenses had been incurred by the assessee in the amendment of the memorandum and articles for the purpose of increasing the authorised capital of the assessee -company, and that too was in fulfilment of a statutory requirement for the purpose of carrying on the business of the assessee and the expenditure incurred could be regarded as for carrying on the business and would, thus, be revenue expenditure. However, the Appellate Assistant Commissioner concurred with the view that as the biscuit plant was installed only during the year 1972, there was no question of allowing the deduction under section 80J with effect from January 1, 1972, which was the first day of the computation period and, therefore, the claim for deduction, as made by the assessee, under section 80J of the Act, read with rule 19A of the Income -tax Rules, 1962, was not quite in order. Eventually, the appeal was allowed partially. On further appeals by the Revenue as well as the assessee before the Tribunal, it held that the expenditure of Rs. 24, 384 incurred by the assessee cannot be considered as capital, but one incurred in connection with, and incidental to, the carrying on of the business of the company and the expenditure was rightly treated to be not of a capital nature. Adverting to the claim made by the assessee under section 80J of the Act in its appeal, the Tribunal proceeded to hold that merely because the duration of the period between the commencement of the production and the ending of the accounting year, is not a full year, that would not justify the denial of the relief under section 80J to the assessee, as the assessee would be entitled to the relief so long as the assessee had earned profits from the new industrial undertaking and the assessee should not lose the benefit of such relief for the first of the five years of assessment for which it would be entitled to such a relief. In the view so taken, the Tribunal dismissed the appeal preferred by the Department and allowed the assessee's appeal. That has given rise to the two questions of law set out earlierThe assessee had incurred an expenditure of Rs. 24, 384 for the purpose of securing an amendment of the memorandum of articles with a view to increase the authorised capital of the assessee. The Income -tax Officer disallowed the expenditure on the ground that it had been incurred for improving the capital and, therefore, the expenditure is of capital nature and not revenue expenditure. On the other hand, the Appellate Assistant Commissioner found that the expenditure was incurred by the assessee for the purpose of its business and the carrying on of the business and, therefore, the expenditure would partake of the character of revenue expenditure and allowable under section 37(1) of the Act and this view was also affirmed by the Tribunal. We are of the view that the Tribunal was right in the view it took. That the assessee had incurred the expenditure for the purposes mentioned by it had not been disputed. It may be that the expenditure incurred by the assessee ultimately resulted in the securing of an alteration of the memorandum of articles by the assessee leading to an increase in the capital of the assessee -company, but the expenditure incurred in that manner cannot be considered as capital expenditure, or, as the Income -tax Officer treated it, as an expenditure for increasing capital, which would be capital expenditure. According to the provisions of the Companies Act, various particulars have to be furnished and notices issued and fees paid under several heads and if as an entity under the Companies Act, the assessee had wanted to carry on business, it had necessarily to comply with the provisions of the Companies Act, as otherwise, it would have exposed itself to penalties as well. The expenditure incurred cannot also be regarded as capital expenditure, as the incurring of such expenditure cannot be stated to have given any enduring benefit to the company. When it is resolved that there should be an increase in capital, it may, in a sense, justifiably be said that the capital of the company got increased, but the incurring of the expenditure for amending the memorandum or articles and also for complying with the other formalities under the Companies Act, has to be regarded as having been incurred in the fulfilment of the statutory formalities incidental to the carrying on of the business of the assessee as a company. We may also, in this connection, make a brief reference to CIT v. Kisenchand Chellaram (India) P. Ltd. 1981 (130) ITR 385, 1980 (16) CTR 248, 1980 (16) CTR(Mad) 248. In that case, the assessee incurred an expenditure of Rs. 2, 350 towards fee, etc., for increasing the capital of the company and claimed it as a deduction under section 37(1) of the Act. Without any reason, that claim of the assessee was negatived by the Income -tax Officer, though on appeal, the Appellate Assistant Commissioner held that the expenditure could not be stated to have been incurred wholly and exclusively for purposes of the business.

(3.) THE computation of, capital even for purposes of section 84 of the Act was governed by rule 19 of the Income -tax Rules. The controversy that arose was whether the six per cent. per annum incentive by way of tax relief for a period of five years should be on the capital as computed or should be computed as restricted to the period, during which the business was carried on during the relevant year. Referring to the practice of administration of an earlier similar provision in section 15C of the Indian Income -tax Act, 1922, and the rules of interpretation in fiscal statutes, particularly of those conferring an exemption or relief, it was pointed out that the words "per annum" had been used only with a view to ensure that the assessee got relief for each of the five years, during which the relief under section 84 of the Act is available, the said six per cent. on the capital employed, and those words could not be understood as contrasted with any broken period. In that view, the claim of the assessee in that case who actually utilised the machinery only for a period of nine months was countenanced at the rate of six per cent. on the capital as computed under rule 19 of the Income -tax Rules. The principle of the aforesaid decision was applied to a case arising under section 80J of the Act in CIT v. Mysore Petro Chemical Ltd. 1984 (145) ITR 416, 1984 (16) TAXMAN 276, 1984 (2) TLR 245 (Kar). The assessee, in that case, claimed relief under section 80J of the Act for the assessment year 1977 -78, though the assessee started production only on May 16, 1976, and the accounting period ended on June 30, 1976. Prorata relief for a month and a half was made available to the assessee by the Income -tax Officer. However, the Commissioner and the Tribunal took the view that the assessee was entitled to the full deduction and on a departmental reference, the order of the Tribunal was affirmed. While holding so, the Karnataka High Court referred to CIT v. Simpson and Co. 1988 (122) ITR 283 (Mad) and the fact that special leave petitions to appeal against that decision had also been refused by the Supreme Court in S. L. P. (Civil) Nos. 8411 and 8412 of 1980 dated December 31, 1981, and finally held that the terms "per diem", " per mensem" and "per annum" indicate the period for which the rate is prescribed and do not necessarily imply that there shall be pro -rating. It was also further pointed out that the relief at the rate of 6 per cent. or 7 1/2 per cent. per annum, as provided under section 80J of the Act and that too for a period of five years, is in the nature of an incentive and though the availability of such relief would depend upon the capital employed in the commencement of production, there is no scope for pro -rating for the period of productive operation. In this state of the interpretation of section 80J, the Central Board of Direct Taxes issued Circular No. 378 dated March 3, 1984 (See [1984] 149 ITR(St) 1), referring to CIT v. Simpson and Co. 1980 (122) ITR 283, 1980 (4) TAXMAN 24 (Mad) and CIT v. Mysore Petro -Chemical Ltd. 1984 (145) ITR 416, 1984 (16) TAXMAN 276, 1984 (2) TLR 245 (Kar) and stated that in view of those decisions, the deduction under section 80J should not be reduced proportionately with reference to the period for which the business of the undertaking, ship or the hotel was not carried on during the relevant previous year. In view of the clear circular of the Central Board of Direct Taxes, which, it is not disputed, would govern the case of the assessee also, we have to hold that the Tribunal was quite right in the view it took. Learned counsel for the assessee also invited our attention to the decisions in CIT v. Godrej Soaps P. Ltd. 1988 (169) ITR 537, 1987 (63) CTR 114, 1987 (32) TAXMAN 422(Bom) CIT v. Carter Wallace Ltd. 1989 (177) ITR 349, 1989 (42) TAXMAN 102, 1990 (2) TLR 215 (Bom) CIT v. Kansal Hosiery Works 1989 (179) ITR 225(P and H) CIT v. Plastic Dela Footwear 1988 (174) ITR 357, 1988 (70) CTR 171, 1988 (41) TAXMAN 98 (Raj) and CIT v. Rallis India Ltd. 1988 (174) ITR 550, 1988 (72) CTR 215, 1988 (41) TAXMAN 156 (Cal).