Gujarat State Export Corporation Ltd. Vs. Commissioner of Income Tax - Court Judgment

Excerpt:
(i) direct taxation - surtax - sections 10 (2) and 37 of income tax act, 1961 - whether surtax liability deductible while computing total income - surtax stands on same footing as income tax in as much as it is also a tax on total income computed under act after its adjustment under surtax act - so surtax is not expenditure laid out wholly and exclusively for the purpose of business and is not an allowable deduction under section 37. (ii) entrance fee - whether payment of entrance fee to sports club is revenue expenditure or capital expenditure - by paying entrance fee for sports club assessee had no intention to acquire any capital asset or take advantage of enduring benefit of business - it is in nature of advantage in the commercial sense but it is not an advantage in the capital field - so payment of entrance fee for becoming member of sports club cannot be termed as capital expenditure - held, entrance fee to sports club is revenue expenditure. head note: income tax business expenditure--surtax liability held : surtax stands on the same footing as income-tax inasmuch as it is also a tax on the total income computed under the it act after its adjustment under the surtax act. therefore, surtax is not an expenditure laid out wholly and exclusively for the purpose of business and is not an allowable dedcution under s. 37. therefore, not deductible while computing the total income.--s. l. m. maneklal industries ltd. v. cit (1988) 172 itr 176 (guj) followed. conclusion : surtax is not an expenditure wholly and exclusively for business, hence is not an allowable business expenditure. application : scheme of surtax stands scrapped. citation : income tax act 1961 s.37(1) capital or revenue expenditure--entrance fee to sports club--essential for running the business. held : by paying the entrance fee for a sports club, the assessee had no intention to acquire any capital asset or take advantage for the enduring benefit of the business. by commonsense standard, it can be stated that it is for running the business or for bettering the conduct running the business.--alembic chemical works co. ltd. v. cit (1989) 177 itr 377 (guj) and cit v. associated cement companies ltd. (1988) 172 itr 257 (sc) followed. conclusion : payment of entrance fee for becoming member of the sports club cannot be termed as a capital expenditure. application : also to current assessment years. citation income tax act 1961 s.37(1) - - it was expenditure for the business expediency and the amount was required to be spent for entertaining its indian as well as foreign customers.m.b. shah, j.1. the tribunal has referred the following questions for our opinion under s. 256(1) of the it act, 1961 for asst. yrs. 1974-75 and 1975-76. 2. for asst. yr. 1974-75, the following questions are referred : '1. whether, on the facts and in the circumstances of the case, the tribunal was right in law in holding that the surtax liability is not deductible while computing total income 2. whether, on the facts and in the circumstances of the case, the tribunal was right in law in rejecting the claim of the assessee that payment of entrance fee to the sports club of gujarat ltd. is expenditure of revenue nature and holding that the payment conferred upon the assessee a benefit or an advantage of enduring nature and, therefore, expenditure of capital nature ?' for asst. yr. 1975-76, the following question is referred : '1. whether, on the facts and in the circumstances of the case, the tribunal was right in law in holding that the surtax liability is not deductible while computing total income ?' 3. the aforesaid questions arise in the background of the facts that the assessee the gujarat export corporation ltd. is doing the business of export of various articles from gujarat state. 4. in the asst. yr. 1974-75, it had claimed deduction for an amount of rs. 7,500 paid by it to the sports club of gujarat ltd. towards entrance fee. the ito has rejected the said claim on the ground that this expenditure cannot be considered wholly and exclusively for the business purposes. the assessee also claimed deduction for surtax payable as business expenditure under s. 37(1) of the act. that claim was also rejected on the ground that the provision for surtax is not a business expenditure. 5. in appeal, the cit upheld the findings of the ito, however, for different reasons. he held that payment of entrance fee for becoming permanent member of sports club was capital expenditure and that payment of surtax cannot be said to be expenditure incurred for carrying on business. the tribunal confirmed the aforesaid view of the cit. hence, on the application of the assessee, the questions are referred. question no. 1 6. this question pertains to surtax liability. this court, in the case of s. l. m. maneklal industries ltd. vs . cit : [1988]172itr176(guj) held that surtax stands on the same footing as income-tax, inasmuch as, it is also a tax on the total income computed under the it act after its adjustment under the surtax act. therefore, surtax is not an expenditure laid out wholly and exclusively for the purpose of business and is not an allowable deduction under s. 37 of the it act, 1961. for this purpose, the court referred to various decisions including the decision of the supreme court in the case of cit vs . malayalam plantations ltd. : [1964]53itr140(sc) . in that case, the supreme court considered the question as to whether the estate duty paid by the assessee-company was an expenditure incurred wholly and exclusively for the purpose of its business. the court held that payment of estate duty by the assessee was as a statutory agent with a view to discharging a statutory duty unconnected with the business, though the occasion for the imposition arose because of the territorial nexus afforded by the accident of its doing business in india. the court, thereafter held that the estate duty paid by the assessee was not an allowable deduction under s. 10(2)(xv) of the act. in view of the aforesaid decision of this court in the case of s. l. m. maneklal industries ltd. (supra), payment of surtax is not an allowable deduction under s. 37 of the act. hence, question no. 1 for both the assessment years requires to be answered in the affirmative, i.e., in favour of the revenue and against the assessee. question no. 2 7. with regard to question no. 2, even though the amount involved is small, the learned advocate for the assessee vehemently contended that, by no standard, it can be said that the entrance fee for becoming member of a sports club is capital expenditure. it was expenditure for the business expediency and the amount was required to be spent for entertaining its indian as well as foreign customers. as against this, learned advocate, mr. shelat, for the revenue vehemently submitted that the aforesaid expenditure cannot be termed as revenue expenditure, as it has enduring effect because the said entrance fee is not paid for a limited period and the assessee is to get benefit of membership for years to come. 8. for deciding the question as to whether the expenditure is of capital nature or revenue nature, one of the relevant criteria is whether it is for acquisition of concern or assets or whether the expenditure is for carrying on concern or for running the business. if the aim and object of the expenditure is for carrying on the concern, then it is a revenue expenditure. hence, in our view, it would be difficult for us to accept the contention of the revenue that the entrance fee paid by the assessee for getting the membership of the sports club can be termed as capital expenditure. the question as to whether a particular expenditure is a capital expenditure or a revenue expenditure is dealt with in detail by the supreme court in the case of alembic chemicals works co. ltd. vs . cit : [1989]177itr377(sc) . the court referred to various decisions particularly the decision in the case of city of lond contract corporation vs. styles (1887) 2 tax cases 239 wherein broad area of distinction is pointed out. it is held in that case that the outlay on the 'acquisition of the concern' would be capital while an outlay in 'carrying on the concern' is revenue. the court further referred to the following observations in the case of assam bengal cement companies ltd. vs . cit : [1955]27itr34(sc) 'if the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. if, on the other hand, it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits, it is a revenue expenditure. the aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure.' applying the aforesaid test, in our view, it is apparent that, by paying the entrance fee for a sports club, the assessee had no intention to acquire any capital asset or take advantage for the enduring benefit of the business. by commonsense standard, it can be stated that it is for running the business or for bettering the conduct of its business. in the case of alembic chemical works co. ltd. (supra), the court further observed that whether a particular outlay is capital or revenue is required to be determined after taking into consideration various aspects and the relevant criterion is the purpose of the outlay and its intended object and effect, considered in a commonsense way having regard to the business realities. further, with regard to the test of enduring benefit, the court observed that in a given case, the test of 'enduring benefit' might break down. for this purpose, the court relied upon the following observations in the case of cit vs. associated cement companies ltd. (1980) 172 itr 257 'there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down.' applying the aforesaid criterion, in our view, it is apparent that the payment of entrance fee for becoming member of the sports club cannot be termed as a capital expenditure. it is in the nature of an advantage in the commercial sense but it is not an advantage in the capital field. hence, the tribunal erred in law in rejecting the claim of the assessee that payment of entrance fee to the sports club of gujarat ltd. is expenditure of revenue nature and holding that the payment conferred upon the assessee a benefit or an advantage of enduring nature and, therefore, it is expenditure of capital nature. therefore, question no. 2 requires to be answered in the affirmative for the asst. yr. 1974-75 in favour of the assessee and against the revenue. 9. in the result, question no. 1 is answered in the affirmative for both the asst. yrs. 1974-75 and 1975-76 in favour of the revenue and against the assessee and for asst. yr. 1975-76 question no. 2 is answered in the affirmative, i.e., in favour of the assessee and against the revenue. reference stands disposed of accordingly with no order as to costs.