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PETITIONER: THE COMMISSIONER OF INCOME TAX, BOMBAY

       Vs.

RESPONDENT: BOMBAY DYEING & MANUFACTURING COMPANY LIMITED

DATE OF JUDGMENT:       29/02/1996

BENCH: JEEVAN REDDY, B.P. (J) BENCH: JEEVAN REDDY, B.P. (J) MUKHERJEE M.K. (J)

CITATION:  1996 SCC  (3) 496        JT 1996 (6)    68  1996 SCALE  (2)812

ACT:

HEADNOTE:

JUDGMENT:                          O R D E R      These appeals are preferred against the judgment of the Bombay High  Court rejecting  an application  under  Section 256(2) of  the Income  Tax Act.  The revenue had applied for referring the following two questions for the opinion of the High Court:      "(i) Whether  on the  facts and  in      the circumstances  of the case, the      Tribunal professional  charges paid      by  the  assessee  company  to  its      Solicitors   for    effecting   the      amalgamation  of   Nawrosjee  Wadia      ginning & pressing company with it,      was of revenue nature and should be      allowed  as   a  deduction  in  the      computation of its total income?      (ii) Whether, on  the facts  and in      the circumstances  of the case, the      Tribunal was  justified in  law  in      holding that the ‘assessee-company’      was entitled  to a  deduction for a      sum of  Rs.2,25,000/- in respect of      the contribution  made by it to the      Maharashtra Housing  Board  towards      the constrain  of tenements for its      workers." The facts concerning the first question are the following: a company named Nawrosjee Wadia Ginning & Pressing Company was amalgamated with the assessee-company. In that connection an expenditure of  Rs.10,350/- was  incurred  by  the  assessee company towards the professional charges paid to the firm of Solicitors. In  the assessment  proceedings the  said amount was claimed  as a  revenue expenditure.  The assessee’s case was that  Nawrosjee Wadia  Ginning &  Pressing  Company  was engaged in  the same  business as  the  assessee.  In  other

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words,   the   business   of   both   the   companies   were "complimentary". The directors of both the companies thought that it  would be  advantageous if  both the  companies  are amalgamated.  Accordingly,  a  scheme  of  amalgamation  was evolved. It  was submitted  that the legal expenses incurred in connection  with the  said amalgamation are in the nature of revenue expenditure. The Income Tax Officer did not agree nor did  the Appellate  Assistant Commissioner.  On  further appeal, the  Tribunal upheld  the assessee’s  contention. It disagreed with the Revenue’s contention that inasmuch as the said amalgamation  resulted  in  acquisition  of  the  other company by the assessee, which acquisition was in the nature of acquisition  of  a  capital  asset,  the  legal  expenses incurred in  that  behalf  partake  the  nature  of  capital expenditure. The  Tribunal was  of the opinion that "as both the companies  were carrying  on complimentary  business and their  amalgamation   was  necessary   for  the  smooth  and efficient conduct  of the  business", it  is an  expenditure laid out  wholly and  exclusively for  the  purpose  of  the business of  the assessee.  In view  of the said finding and also in  view of  the decision of this Court in Bombay Steam Navigation  Company   Private  Limited  v.  Commissioner  of Income-Tax, Bombay  (56 I.T.R.  52), we  are of  the opinion that the  Tribunal was right in its conclusion. The decision in Bombay  Steam Navigation also pertains to amalgamation of two shipping  companies. The  assessee-company took over the assets of  the other  company and  part  of  the  price  was treated  as   a  loan  secured  by  a  promissory  note  and hypothecation of  all movable  properties  of  the  assessee company. The  loan was  to carry  simple interest  at 6  per cent. The  question that  arose in the said case was whether the interest  paid upon  the said  loan  was  deductible  as revenue expenditure.  It was  held by this Court that it was an expenditure  deductible under  Section 10(2)(xv)  of  the Income Tax  Act. It was held that transaction of acquisition of the  asset was  closely related  to the  commencement and carrying on  of  the  assessee’s  business  and,  therefore, interest paid on the unpaid balance of the consideration for the assets  acquired  had,  in  the  normal  course,  to  be regarded as  expenditure for  the purpose  of  the  business which was  carried on  in the  accounting  periods.  In  the course of  the judgment  this Court  referred to the earlier decision of  this Court in State of Madras v. G.J.Coelho (53 I.T.R. 186)  wherein it  was held  that the  interest on the amount borrowed  for acquiring a capital asset is deductible as revenue  expenditure.  It  is  true,  that  in  the  said decision  this   Court  re-affirmed   the  well  established principle that  any expenditure  laid out  for acquiring  an asset of a permanent character would be capital expenditure, held at  the same  time that  inasmuch as the acquisition of the other  company was  in the  course of carrying on of the assessee’s  business,   the  interest   paid   thereon   was deductible under  Section 10(2)(xv) of the Act. In this case too,  the   Tribunal  has   recorded  a   finding  that  the acquisition of  Nawrosjee Wadia  Ginning &  Pressing Company was necessary  for the  smooth and  efficient conduct of the assessee’s   business.    Following   the   ratio   of   the aforementioned decisions  of the  Court, we  hold  that  the expenditure incurred  towards professional  charges  of  the Solicitors firm for the services rendered in connection with the said  amalgamation was  in the  course of carrying on of the assessee’s  business and,  therefore,  deductible  as  a revenue expenditure.  In this  view of the matter, it is not necessary for  us to  deal with  the other  decisions  cited before us on this question.

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    Now coming  to the  second question  the finding of the Tribunal is that the amount of Rs.2,25,000/- was contributed by the  assessee to  the Maharashtra  Housing Board  towards construction of  tenements for the company’s workers. It was contended by  the assessee  that the  said  expenditure  was incurred why and exclusively on the welfare of the employees and, therefore, constitutes legitimate business expenditure. The  Income   Tax  Officer   and  the   Appellate  Assistant Commissioner  rejected  the  plea.  The  Tribunal,  however, upheld  the   assessee’s   contention   holding   that   the expenditure in  question brought  into existence  no capital asset to  the assessee-company as the tenements remained the property and  the assets of the Housing Board. The assessee- company acquired  no ownership rights in the said tenements, it held.  The Tribunal  found  further  that  there  was  no obligation on  the assessee-company  to provide  its workers tenements constructed  by the  Housing Board  and  that  the benefit of  better and cheaper housing in this case obtained by the  industrial workers  of the  assessee-company did not constitute a  direct benefit  of an  enduring nature  to the assessee. The  expenditure, it observed, was incurred merely with a view to carry on the business of the assessee-company more efficiently by having a contented labour force.      Dr.V.Gaurishankar, learned  counsel  for  the  Revenue, places strong  reliance upon  the decision  of this Court in Tranvancore-Cochin  Chemicals  Limited  v.  Commissioner  of Income-Tax, Kerala  (106 I.T.R.  900). The facts of the case are the  following: The  assessee-company was  receiving and despatching  material  required  for  its  purposes  through trucks. The  approach road  to its  premises was not a pucca road and  was  causing  difficulties  and  inconvenience  on several   occasions.   Along   with   three   other   public undertakings, the  assessee approached the Kerala Government for laying  a new  road to  that area.  While the Government bore the cost of acquisition of land and part of the cost of construction of  the road, the remaining cost was met by the four companies  including the  assessee.  The  question  was whether the  said expenditure  is allowable  was  a  revenue expenditure. This  Court held  that by  having the  new road constructed for the improvement of transport facilities, the appellant  had   acquired  an  enduring  advantage  for  its business and,  therefore, the  expenditure incurred  by  the assessee was of a capital nature. Dr. Gauri Shankar says the principle of  the said decision is equally applicable herein inasmuch as  provision for  better housing to the assessee’s workers was  ultimately a benefit- and an enduring benefit - to the  assessee. On the other hand, the learned counsel for the assessee  brought to our notice a later decision of this Court in  L.H.Sugar  Factory  and  Oil  Mills  (P)  Ltd.  v. Commissioner of  Income-Tax, U.P.  (125  I.T.R.  293)  where after discussing  the  facts  and  the  principle  of  t  he decision in  Tranvacore Cochin  Chemicals case  it has  been held that the ratio of the said decision must be confined to the peculiar  facts of  that case alone for reasons assigned in that  behalf. The  decision in  L.H.Sugar Factory and Oil Mills case  was also  a case  where certain  expenditure was incurred towards  part of  the cost  of construction  of the roads in the area around the factory and it was held that it was a business expenditure. Our attention is also invited to an other  of this  Court in  the Commissioner of Income Tax, Madras v.  T.V. Sundaram  Iyengar and  Sons Private  Limited (186 I.T.R  276) wherein  it has  been held  that the amount advanced by  the assessee for construction of houses under a subsidized industrial  scheme for  its employees  is in  the nature of  a revenue  expenditure. In  this  case  too,  the

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amount was  advanced to  the Government  which purchased the land in  its own  name and the buildings constructed thereon became property of the Government - and not of the assessee. Having regard  to the  facts of the appeals before us and in the light  of the findings recorded by the Tribunal we think that the  principle of  L.H. Sugar  Factory  and  Oil  Mills (Supra) and  Commissioner of  Income-Tax, Madras  (Supra) is more appropriate  than the  principle  in  Travancore-Cochin Chemicals (Supra).      We are,  therefore, of  the opinion that the High Court was justified in rejecting the application under Section 256 (2) of  the Income  Tax Act.  The appeals  are dismissed. No costs.