Advocate Akhilesh Kumar Sah
Inaugural expenses of a business are not specifically mentioned as revenue expenditure under the Income-tax Act. Section 37(1) incorporates in general (subject to its explanation which is inserted in the IT. Act by the Finance (No. 2) Act 1998 retrospectively i.e. w.e.f. 1-4-1962) that any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expends wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”. Therefore to make eligible for deduction under section 37(1) of any expenditure which is not allowed categorically as deduction under the I.T. Act an assessee shall have to bring that expenditure on the lines mentioned in the section 37(1). The learned law lord in Atherton vs. British Insulated and Helsby Cables Ltd. (1925) 10 TC 155 (HL) (at page 191) stated as follows:
“A sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business may be yet be expended wholly and exclusively for the purpose of the trade”.
In CIT vs. Tata Iron & Steel Co. Ltd. (1977) 106 ITR 363 (Bom) the assessee claimed deduction of certain expenditure as publicity and advertisement expenses, being the amount spent by it on the publication of a brochure which was brought out at the time of its golden jubilee. Held, that the AT had found that the brochure gave a tone of respectability to the assessee-company and added to the prestige and good name of the company. Therefore, the brochure was in the nature of publicity or advertisement. This was s pure finding of fact and the view of the Tribunal that the same was a revenue expenditure was also correct.
In CIT vs. Merck Sharp And Dohme of India Ltd. (1983) 140 ITR 332 (Bom) the assessee co. set up a new plant for augmenting its production of pharmaceutical products and in connection with the foundation stone laying ceremony of the factory, the assessee incurred certain expenditure on account of printing invitation cards, construction of a shamiana, hiring of furniture and transport, and claimed the same as business expenditure. The ITO disallowed the claim of the assessee. The AAC found that the expenditure was incurred in the course of business carried on by the assessee and allowed the claim of the assessee. On further appeal, the Tribunal confirmed the order of the AAC. On reference HC affirmed the decision of the Tribunal & held the expenditure incurred in connection with the foundation stone laying ceremony was allowable as business expenditure.
In CIT vs. Nirlon Synthetic Fibres & Chemicals Ltd. (1982) 137 ITR 1 (Bom) it was observed that expenditure incurred on inauguration ceremony of factory is a compelling necessity in modern times, it is a formality which an assessee has to incur after the business is set-up therefore it is an allowable deduction in terms of section 37(1).
The Calcutta High Court, in CIT vs Hindustan Aluminium Corporation Ltd. (1989) Taxation 94(3) – 142, 76 CTR (Cal) 183, has held that expenditure incurred in connection with inauguration of factory is allowable as business expenditure. It (Calcutta HC) observed in the above cited case that the modern trend is to get a factory or a branch inaugurated by the Prime Minister of Minister or V.I.P., as the case may be. It is the real nature and quality of the payment which would prove decisive, Any payment made in the course of and for the purpose of carrying on business or trading activity would be revenue expenditure. The expenditure in connection with the inauguration is intimately connected with the business of the assessee. It can be compared with the expenditure that may be incurred in opening a new branch of a going concern. It does not pertain to the commencement of new business. By this expenditure, advertisement is made to the public regarding the factory of the assessee and it is made for the purpose of expending the existing business. By that process, no new asset is required.
Also, the Rajasthan High Court, in Sunil Synchem Ltd. vs. CIT (1994) 205 ITR 298, held that the inaugural function of a unit is exclusively for the purposes of business and the business normally comes into existence before the inauguration which is only a formal function (See also Delhi Cloth & General Mills Co. Ltd. vs. CIT (1992) 198 ITR 500 (Del) :113 Taxation 351.
Looking to the above, it looks to the well settled that inaugural expenses of the business concern are the deductible expenses under section 37 (1), while computing income of a person. But it does not mean that inaugural expenses are deductible in each case and may be of any amount. These expenses should be reasonable looking to the size of business, necessity & also the facts and circumstances of the case.