Law: Income Tax Act, 1961

Section: 37

Income-tax----Capital or, revenue expenditure---Sale of factories in Pakistan---Sale consideration to be satisfied by export of cement---Cement not supplied--­Litigation expenses for realising value of cement and interest thereon---Not deductible as business expenditure---Expenditure related to fixed assets and was capital in nature---Indian Income Tax Act, 1961, S.37---[Saharanpur Electric Supply Co. Ltd. v. CIT (1971) 82 ITR 405 (All.) dissented from]. The assessee, a public limited company, sold both its cement factories at Pakistan. Under the terms of the sale, the sale price and interest was, to be satisfied by the export of cement by the Pakistan Progressive Cement Industries Ltd. (PPCIL) to the assessee-company in Delhi. The supply of cement in satisfaction of the purchase price and interest was to be completed within three years from December 19, 1964, being the date on which first despatch instructions were received by the PPCIL from the assessee-company. In accordance with the sale-deed, the assessee was entitled to receive cement from Pakistan and sell in India. But due to hostilities between India and Pakistan and prohibitory orders by the Pakistan Government, cement as stipulated in the sale agreement was not supplied by the PPCIL to the assessee. Since the PPCIL had failed to supply cement in terms of the sale-deed, the assessee-company filed a claim against the National Bank of Pakistan, which had furnished bank guarantees on behalf of the PPCIL for the performance of the said agreement, before the International Chamber of Commerce and incurred legal and travelling expenses during the previous years relevant to the assessment years 1967-68 to 1972-73. The Income-tax Officer as well as the Tribunal disallowed the expenditure as being capital in nature. On a reference: Held, that the expenditure incurred was in connection with the assessee's business ventures in Pakistan which stood transferred to the PPCIL and hence the assessee did not have any business which it could be said to be carrying on. Since the same was not incurred wholly and exclusively for the assessee's business it was not allowable under section 37 of the Income Tax Act, 1961. The…

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