Commissioner of Income-Tax v. Mihir Textiles Ltd. — 1993 DIGILAW 226 (GUJ)

JUDGMENT : Y.B. Bhatt, J. The pertinent and relevant facts, in brief, are as under : 2. The relevant assessment year is 1972-73. The assessee is a company engaged in the manufacture of textile goods. 3. The assessee had claimed deduction of Rs. 45,000 as allowance and expenditure in respect of a shop in Mulji Jetha Market at Bombay, in respect of which the assessee had obtained tenancy rights. The Revenue claimed that the acquisition of tenancy rights is a benefit of an enduring nature and that the expenditure was of a capital nature. This finding was confirmed by the Appellate Assistant Commissioner on appeal. 4. Another question raised by the assessee is with regard to an expenditure of Rs. 80,000 incurred by the assessee in making payment to the Textile Commissioner for its failure to export the aforesaid cloth in terms of the bond executed by the assessee. This amount was added back as being in the nature of payment of interest. On appeal, the Appellate Assistant Commissioner deleted the said addition. 5. The next item of dispute is pertains the expenses incurred by the assessee in the sum of Rs. 2,676 being the expenses incurred in connection with the issue of bonus shares. The Income-tax Officer added back the said amount treating it as capital expenditure. On appeal, the addition was deleted by the Appellate Assistant Commissioner by holding that it was in the nature of revenue expenditure. 6. The present reference thus raises the following questions : At the Revenue's instance : "Whether, on the facts and in the circumstances of the case, the payment of Rs. 80,000 paid by the assessee to the Textile Commissioner on account of its failure to meet its export obligation as respects sanforised cloth is allowable as business deduction under section 37(1) of the Income- tax Act, 1961 ?" At the assessee's instance : "1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that a sum of Rs. 45,000 being the amount paid for transfer of tenancy rights in the shop at Mulji Jetha Market, Bombay, is expenditure of capital nature ? 2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the expenditure of a sum of Rs. 45,000 being the amount paid for transfer of tenancy rights in the shop at Mulji Jetha Market, Bombay, is expenditure of capital nature ? 2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the expenditure of a sum of Rs. 2,676 incurred at the time of issue of bonus shares is expenditure of a capital nature ? 3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that the payment of Rs. 70,392 as bank guarantee commission is expenditure of capital nature ?" 7. We take first for consideration the question raised at the Revenue's instance, viz., whether, in the facts and circumstances of the case, the payment of Rs. 80,000 paid by the assessee to the Textile Commissioner would be allowable as a business deduction. 8. To our mind, this question does not require any lengthy debate inasmuch as the same is covered by a number of decisions on the point. On this point, we have a decision of this court in the case of CIT v. Tarun Commercial Mills Co. Ltd. [1977] 107 ITR 172. This decision clearly lays down the principle that the sum to be paid in default of fulfilling the export obligation, no doubt described as a penalty, in the ultimate analysis, it is the substance of the transaction between the parties which had to be considered for the purpose of determining as to what is the nature and import of the scheme. Therefore, the amount which was required to be paid to the Textile Commissioner for non-fulfilment of the assessee's export obligation was a business expenditure incurred wholly and exclusively for the purpose of the assessee's business. The same principle has been reiterated by another decision of this court in the case of CIT v. Bharat Vijay Mills Ltd. [1981] 128 ITR 633. Thus, there cannot be any controversy on this aspect of the matter. Under the circumstances, this question is required to be answered in the affirmative, viz., the payment made by the assessee, in the facts and circumstances of the case, is allowable as a business deduction under section 37(1) of the Income Tax Act, 1961. 9. Thus, there cannot be any controversy on this aspect of the matter. Under the circumstances, this question is required to be answered in the affirmative, viz., the payment made by the assessee, in the facts and circumstances of the case, is allowable as a business deduction under section 37(1) of the Income Tax Act, 1961. 9. We now come to question No. 1 referred at the assessee's instance, viz., the treatment to be given to the payment of Rs. 45,000 made by the assessee for the purpose of acquiring tenancy rights in the shop in question, and as to whether the same is an expenditure of a capital nature. Even this aspect is covered by a number of decisions. The Madhya Pradesh High Court in the case of CIT v. Lucky Bharat Garage [1988] 174 ITR 526, has held that, when the assessee in question made payment which represented the acquiring of tenancy rights, the assessee in fact acquired a right to possession which was of an enduring nature and, therefore, such expenditure incurred for the acquisition of such a right was capital in nature. A similar view has been taken by the Calcutta High Court in the case of Chloride India Ltd. v. CIT [1981] 130 ITR 61. In this decision, it has been held that, on the facts of the case, the amount was paid for acquiring a right to possession which right was a capital of enduring nature and as such the amount of payment made was to be treated as capital expenditure. This court in the case of Rajabali Nazarali and Sons v. CIT [1987] 163 ITR 7 has considered in detail and reiterated the above principle. This decision holds that a lease creates an interest in immovable property and transfer of leasehold rights which are protected by the provisions of rent restriction statutes, is nothing but a transfer of a capital asset. The price paid to acquire such leasehold rights can only be held to be payment on capital account, there being no revenue quality attributable to the same. Therefore, any payment received, whether by way of compensation or under any other nomenclature, for parting with a capital asset, viz., the demised premises, can only be described as a capital receipt. There are a number of other decisions on the point such as the decision of the Madras High Court in Ramakrishna and Co. Therefore, any payment received, whether by way of compensation or under any other nomenclature, for parting with a capital asset, viz., the demised premises, can only be described as a capital receipt. There are a number of other decisions on the point such as the decision of the Madras High Court in Ramakrishna and Co. v. CIT [1973] 88 ITR 406, the decision of the Madhya Pradesh High Court in CIT v. Project Automobiles [1987] 167 ITR 781 and the decision of the Calcutta High Court in CIT v. Hemraj Mahabir Prosad (P.) Ltd. [1989] 179 ITR 73. Thus, this question No. 1 at the instance of the assessee must be answered in the affirmative, i.e., the amount paid for transfer of tenancy rights in the shop is an expenditure of a capital nature. 10. This takes us to question No. 2 referred at the assessee's instance, viz., whether the amount of Rs. 2,676 being the expenses incurred in the issue of bonus shares is an expenditure of a capital nature. Here also, we find the question directly covered by a decision of this court in the case of Ahmedabad Mfg. and Calico Pvt. Ltd. v. CIT [1986] 162 ITR 800. The said decision, after considering the facts of the case and after considering the various questions arising from the issue of bonus shares, considered the effect of the issuance of bonus shares and its effect on the capital. It is held that such shares form an integral part of the permanent structure of the company and are not in any way connected with the working capital of the company which is utilised to carry on the day to day operations of the business. It would not be correct to say that no benefit whatsoever is derived by the assessee-company when its profits and/or reserves are converted into paid-up shares. Obviously, the augmentation of the paid-up capital by issuance of bonus shares would increase the creditworthiness of the assessee-company. Thus, when expenses are incurred in connection with the issue of bonus shares, such expenses are incurred by the company for its permanent structure and are directly connected with the acquisition of capital and an advantage of an enduring nature. Such expenses, therefore, are not deductible as revenue expenditure. Thus, when expenses are incurred in connection with the issue of bonus shares, such expenses are incurred by the company for its permanent structure and are directly connected with the acquisition of capital and an advantage of an enduring nature. Such expenses, therefore, are not deductible as revenue expenditure. Under the circumstances, this question must be answered in the affirmative, i.e., the expenses incurred by the assessee in connection with the issue of bonus shares are expenditure of a capital nature. 11. This takes us to the last question for consideration, viz., question No. 3, at the assessee's instance, as to whether payment of Rs. 70,392 by way of commission for obtaining a bank guarantee is an expenditure of a capital nature. Here too, no complexity is observed inasmuch as the same is also covered by a decision of this court in the case of CIT v. Vallabh Glass Works Ltd. [1982] 137 ITR 389. This decision notes that whether the particular expenditure is revenue expenditure or not has to be decided on well-established principles, and the relevant test to be applied for finding out whether a particular expenditure is revenue expenditure or not is to find out whether the expenditure is so related to the carrying on or conduct of the business that it may be regarded as an integral part of the profit-earning process. If the expenditure is so connected with the carrying on of the business that it may be regarded as an integral part of the profit-earning process, the expenditure should be treated as revenue expenditure. Any expenditure incurred for the acquisition of a capital asset or a right of a permanent character or a benefit or advantage of an enduring nature, should be treated as a capital expenditure. If the expenditure is an integral part of the cost of acquisition of a capital asset and not an integral part of the profit-earning process, such expenditure should be treated as a capital expenditure and not a revenue expenditure. Thus, after a detailed discussion, this court held that the payment of the bank guarantee commission to the bank and the expenditure incurred for obtaining the letter of credit were necessary items of expenditure to bring into existence certain capital assets and to put them in working condition. Thus, after a detailed discussion, this court held that the payment of the bank guarantee commission to the bank and the expenditure incurred for obtaining the letter of credit were necessary items of expenditure to bring into existence certain capital assets and to put them in working condition. These items of expenditure were incurred as an integral part of the cost price of the machinery and formed part of the cost of acquisition of the capital assets. This expenditure must thus be regarded as a capital expenditure. Thus, even this question is required to be answered in the affirmative, viz., the payment of Rs. 70,392 as bank guarantee commission is expenditure of a capital nature. 12. At this stage, learned counsel for the assessee makes a request that the Tribunal be directed to examine as to whether the benefit of depreciation and/or development rebate can be given to him on the aforesaid amounts, wherever applicable. While we do not propose to issue any mandatory directions, we merely observe that, if it is open to the Tribunal to do so, it may consider this aspect of the matter while giving effect to the present order. 13. This reference stands disposed of accordingly with no order as to costs.