COMMISSIONER OF INCOME-TAX VS KAMAL AND CO., 1994 PTD-RAJASTHAN-HIGH-COURT-INDIA 1210 (1992)

(a) Income-tax---

----Business expenditure---General principles---Expenditure on construction of fountain in traffic island---Expenditure was for advertising name of firm and line of business it carried on---Deductible---Indian Income Tax Act, 1961, S.37.

In order to consider whether expenditure is for business purposes, it is not necessary that the expenditure should result in direct profit. If it is reasonably expected to benefit the business, it will be considered as business expenditure. The only restriction which has been placed under section 37 of the Income Tax Act, 1961, is that the expenditure should not be in the nature of capital expenditure or personal expenses of the assessee and that the said expenditure must have been expended wholly and exclusively for the purpose of business.

(b) Income-tax---

----Appeal to Appellate Tribunal---Firm---Advances to partners without charging interest---Partnership deed providing for charging of interest---New contention raised before tribunal that advances had been made from deposits received by firm for vehicles on which no interest was payable---Revenue should be given opportunity to be heard regarding new contention---Matter remanded---Indian Income Tax Act, 1961.

The assessee had claimed an expenditure of Rs.15,865 in respect of construction of a fountain at Urban Improvement Trust .Circle at Jaipur as advertisement expenses. The Assessing Officer disallowed the claim but the Tribunal allowed it.

The Income Tax Officer found that the assessee-firm had advanced loans to partners without interest although the partnership deed provided for the charge of interest. The Assessing Officer charged interest on the advances and added it to the income of the assessee and this was upheld by the Appellate Assistant Commissioner. A new plea was taken before the Income Tax Appellate Tribunal that the assessee had huge deposits which were received while booking vehicles and no interest was paid on such deposits and that the advances to partners had been made from these deposits. The Tribunal held that it was open to the assessee to use the deposits issued at the time of booking of the vehicles in any manner and the assessee could not be compelled to charge interest on such advances as the deposit itself did not bear any interest. The interest was accordingly deleted. On a reference:

Held(i) that the expenditure was incurred for construction of a fountain resulting in beautification of a traffic island. The assessee had incurred this expenditure in order to advertise the name of the firm and the line of business it carried on. The property constructed did not belong to the assessee and there could not have been any other object in incurring the expenditure except commercial expediency. The Tribunal was justified in coming to the conclusion that. the expenditure was incurred as a business expenditure.

(ii) that the Tribunal had proceeded merely on the assumption that the assessee could use deposits received at the time of booking of vehicles in any manner and could not be compelled to charge interest on such advances to partners as the deposit itself did not bear interest. This finding could not have been given without affording an opportunity of hearing to the Revenue where it could have been examined as to what was the extent of the deposits received details of the deposits and their. nexus with the advancement of loans to the partners. The Tribunal was not justified in coming to the conclusion that the addition of interest was not justified.

CIT v. Associated Cement Companies Ltd. (1988) 172 ITR 257 (SC); Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1(SC); Godavari Sugar Mills Ltd. v. (No.l) v. CIT (1991) 191 ITR 311 (Bom.); John Smith and Son v. Moore (1921) 12 TC 266 (HL); Mohan Meakin Breweries Ltd. v. CIT (No.l) (1979) 118 ITR 101(HP) ref.

G.S. Bapna for the Commissioner.

Anant Kasliwal for the Assessee:

JUDGMENT

V.K. SINGHAL, J: --The Income Tax Appellate Tribunal has referred the following two questions of law arising out of its order, dated 17th June, 1979 in respect of the assessment year 1975-76:

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amount of Rs.15,865 incurred on the construction of one fountain at Urban Improvement Trust Circle, Jaipur, was a business expenditure and it could not be considered as a capital expenditure?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the addition of Rs.9,619 made by the Income Tax Officer on account of interest on debit balance in the accounts of the partners?"

The brief facts of the case are that the assessee has claimed an expenditure of Rs.15,865 in respect of construction of a fountain at Urban Improvement Trust Circle at Jaipur as advertisement expense. The Income Tax Officer was of the opinion that such a huge expenditure at a place which is far-off (about 5 kilometers from the place of business of the assessee) and at a secluded place was not at all essential for attracting business expediency. It was held that the expenditure was in the nature of capital expenditure and it being permanent structure, the claim was disallowed.

In respect of adding of interest while examining the building loan account, the Income Tax Officer has found that there was an opening debit balance of Rs.1,18,442. This amount belonged to two of the partners, namely, Shri Daya Nidhi and Shri Ish Nidhi, who have taken this loan for construction of a joint property. There was credit balance in the account of Daya Nidhi as well as Ish Nidhi and after adjusting the same, it was found that the net debit balance of Rs.56,221 was in the account of Daya Nidhi and Rs.31,221 in the account of Ish Nidhi which is liable to interest at one percent. per month in accordance with clause 6 of the partnership deed, dated April 7, 1974. The said clause reads as under:

"That no interest shall be paid to any partner on his credit balance in the books of the firm. But in the case of debit balance, interest at one percent. per month shall be charged by the firm on the amount standing to his debit."

The Income Tax Officer charged interest on the said amount and added it to the income of the firm and levied tax thereon.

Against this order an appeal was preferred to the Appellate Assistant Commissioner and. it was submitted that the fountain was constructed with a view to advertise the products in which the firm is dealing. It was also pointed out that a board stowing the name of the firm and the names of the product was also put up near the fountain constructed by the firm. The Appellate Assistant Commissioner was of the view that the construction of the fountain was at the instance of U.I.T., Jaipur, and was done for the beautification plan of the traffic islands undertaken by the Urban Improvement Trust. The Appellate Assistant Commissioner came to the conclusion that the said fountain was constructed by Shri K.C. Kasliwal on behalf of the firm and that there is no element of publicity or advertisement involved in the said project. Similarly, the board affixed does not help the assessee to prove that it was an expenditure in the nature of advertisement. The amount spent on the construction of the fountain was held as not connected with the business of the firm and the disallowance was upheld. Regarding charging of interest on the debit balance of the two partners, the same was upheld in view of clause 6 of the partnership deed.

Against this order, the second appeal was preferred to the Income Tax Appellate Tribunal, Bombay Bench `D' Camp, Jaipur. The Tribunal came to the conclusion that the expenditure has resulted in beautification of the traffic island and the assessee had incurred this expenditure in order to advertise the name of the firm and the products of the business which was carried on. The firm had incurred this expenditure in the course of carrying on its business and it was not in the nature of a personal expenditure incurred by the firm or its partners. It was found that there are many subtle ways in which advertisement and publicity is carried on in these days and the present case is one of the ways in which a businessman advertises his business and tries to improve its public image so as to result in better outturn in his business. It was found that a plaque in the traffic island was put up which showed that the same was constructed with the co-operation of the assessee-firm. The expenditure was held to be business expenditure and the addition was deleted.

In respect of interest, it was held that on the debit balance, no interest was charged in the past and it is not shown that any borrowed capital had been diverted to this joint account without payment of interest. The contention of the assessee before the Tribunal was that no connection between the interest? bearing loan taken by the assessee and the debit balance in the joint account has been proved and there was huge deposit for booking of the vehicles which was not bearing any interest. The Tribunal held that it was open to the assessee to use the deposits issued at the time of booking of the vehicles in any manner and the assessee could not be compelled to charge interest on such advances as the deposit itself did not bear any interest. The interest, was accordingly deleted.

The submission of learned counsel for the Revenue is that the expenditure is not a business expenditure but was a capital expenditure and that the interest was payable on the debit balance in accordance with the terms of the partnership deed. The submission of Mr. Kasliwal on behalf of the respondent is that whether the expenditure is capital or revenue in nature is not relevant for the purpose of determining as to whether the expenditure is on advertisement and for that purpose reliance was placed on the decision of the Himachal Pradesh High Court in Mohan Meakin Breweries Ltd. v. CIT (No.1) (1979) 118 ITR 101. Reliance was also placed on the judgment of the Bombay High Court in Godavari Sugar Mills Ltd. (No.l) v. CIT (1991) 191 ITR 311, wherein it was held that the mere fact that the expenditure was also motivated by charity would not justify any disallowance.

In CIT v. Associated Cement Companies Ltd. (1988) 172 ITR 257 (SC), where the assessee was a manufacturer of cement and incurred expenditure for providing water pipelines and electricity facilities to the municipality in lieu of municipal taxes, it was held by the apex Court that since the entire expenditure concerned installations and accessories which came to the ownership of the municipality, it was revenue in nature.

Reliance was placed on the decision in Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1 (SC), wherein it was observed that it is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to be considered is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The following tests were laid down in this case:

(1) Test of enduring benefit.---It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to be considered is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future.

(2) Fixed/circulating capital.---While considering this distinction between fixed and circulating capital, the observation of Lord Haldane in the leading case of John Smith and Son v. Moore (1921) 12 TC 266, 282 (HL)---"Fixed capital as what the owner turns to profit by keeping it in his own possession; circulating capital as what he makes profit of by parting with it and letting it change masters" was considered and it was observed that an expenditure incurred in preserving or maintaining a capital asset would be a revenue expenditure.

For the purpose of considering as to whether the expenditure is for business purposes, it is not necessary that the expenditure should result in direct profit. If it is reasonably expected to benefit the business, even then it will be considered as business expenditure. Similarly even if a third party is benefited, it will not disentitle the expenditure and the only restriction which has been placed under section 37 is that the expenditure should not be in the nature of capital expenditure or personal expenses of the assessee and that the said expenditure has been expended wholly and exclusively for the purpose of business. It is not the case of the Revenue that it was an expenditure in the nature of personal expenses of the assessee. Various tests have been laid down including expenditure incurred once and for all, expenditure for procuring an enduring benefit, fixed capital and circulating capital, etc. But, none of the tests can be said to be a conclusive one. The facts of each and every case are to be seen. In the present matter, the expenditure was incurred for construction of a fountain which has been considered by the Income Tax Appellate Tribunal as resulting in beautification of a traffic island and the assessee has incurred this expenditure in order to advertise the name of the firm and the line of business it has carried on. The property constructed does not belong to the assessee and there could not have been any other object in incurring the expenditure except commercial expediency. The finding given by the Tribunal is that the expenditure was incurred in the course of carrying on its business and is not in the nature of personal expenses. The financial results can be achieved by proper publicity and advertisement and particularly in respect of an expenditure of which the assessee is not the owner and which was with the object 4f improving the sales and the image of the firm and the Income Tax Appellate Tribunal was justified in coming to the conclusion that the expenditure was incurred as a business expenditure.

Regarding the point of charging of interest, a new plea was taken before the Income Tax Appellate Tribunal that the assessee had huge deposits which were received while booking the vehicles and no interest was paid on such deposits. The Income Tax Appellate Tribunal has given no finding that the debit balance in the names of the two partners is in respect of such deposits nor has it correlated the receipt of the deposit and payment of loan to the partner. The Tribunal has proceeded merely on the assumption that the assessee could use the deposits received at the time of booking of the vehicles in any manner and could not be compelled to charge interest on such deposits. This finding could not have been given without affording an opportunity to the Revenue where it could have been examined as to what is the extent of the deposits received, details of the deposits and their correlation/nexus, with the advancement of loan to the partners. It could have been possible that, if the assessee has received any money without payment of any interest, then the same amount or part thereof could have been advanced without charging any interest. But a correlation/nexus has to be established. Regarding the condition in the partnership deed, no finding has been given. It could be possible that the partners may agree subsequently not to charge interest or there may be a number of other circumstances but, in order to arrive at a correct conclusion, the entire facts should have before the Income Tax Appellate Tribunal or the Tribunal should have sent the matter back to the Income Tax Officer for examination and passing of an appropriate order in this regard. In these circumstances, we are of the opinion that the Tribunal was not justified in coming to the conclusion that the addition of interest is not justified. It would be open to the Tribunal to hear the matter afresh in this regard and pass proper order in accordance with law.

In these circumstances, question No.l is answered in favour of the assessee and question No.2 is returned unanswered with the direction that the Tribunal shall determine the liability afresh on the basis of evidence before it or may send it to the Income Tax Officer for deciding the issue in accordance with the law.

M.B.A./228/T.F.????????????????????????????????????????????????????????????????????????????????? Question answered.