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High Court of Punjab and Haryana, Chandigarh

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Commissioner of Income Tax-I, Ludhiana v. M/s. Shreyans Industries Limited, Ludhia - ITA-277-2004 [2006] RD-P&H 10327 (10 November 2006)

ITA No.277 of 2004 1

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH

ITA No.277 of 2004

Date of decision: 8.11.06

Commissioner of Income Tax-I, Ludhiana

....Petitioner

versus

M/s. Shreyans Industries Limited, Ludhiana ....Respondent

CORAM: HON'BLE MR. JUSTICE ADARSH KUMAR GOEL
HON'BLE MR. JUSTICE RAJESH BINDAL

Present: Mr. SK Garg Narwana, Advocate, for the appellant.

Mr. OS Bajpai, Advocate with Mr. VN Jha, Advocate, for the respondent.

JUDGMENT:

This appeal has been preferred by the revenue against the order dated 27.2.2004 passed by the Income Tax Appellate Tribunal, Chandigarh Bench 'B', Chandigarh in ITA No.597/Chandi/99 & 529/Chandi/99, for the assessment year 1996-97, proposing following substantial questions of law:- "i) Whether on the facts and circumstances of the case the Hon'ble Income Tax Appellate Tribunal was justified in law in allowing the expenditure of Rs.70,79,862/- incurred by the assessee under the head "building account", for the construction of drainage for disposal of effluents by treating the same, as revenue expenditure, by ignoring the facts that the assessee has acquired an asset of enduring benefit in nature and enjoys exclusive right for the usage of the same? ii) Whether on the facts and circumstances of the case the Hon'ble Income Tax Appellate Tribunal was justified in holding that the amount of TDS is a part of circulatory capital of the assessee and in allowing the amount of Rs.2,04,259/- being TDS certificates from banks as revenue expenditure without appreciating the fact that the amount in question was never employed in trading operation of the business?" The assessee was running a paper mill which generated effluents. It was under an obligation to arrange discharge of the said effluents. An agreement ITA No.277 of 2004 2

was reached with the Forest department allowing the assessee to build a drain for discharge of effluents in Tallewal drain. The assessee built such a drain by spending Rs.70,79,862/-. The assessee claimed the said amount as revenue expenditure, which was disallowed but the CIT(A) allowed the said claim which has been upheld by the Tribunal. It was observed by the Assessing Officer: "4.1 I have carefully gone through the judgments relied upon by the assessee on the basis of which it has claimed the expenditure of Rs.70,79,862/- incurred by it on the construction of pipeline for disposal of effluents, as "revenue expenditure". However, on close scrutiny it is seen that the facts involved in the cases cited by the assessee, are different from the facts of the present assessee's case, on the following counts:-

(i) In the case of this assessee, it has exclusive right to use the drainageithing & pipeline constructed by it for draining out the effluents. The said pipeline has been constructed by it for draining out the effluents. The said pipeline has been constructed for the benefit of the assessee only. However, in the cases of the judgments relied upon by the assessee, those assessees had no exclusive right for use of the asset which came into existence:-

a) In the case of M/s.L.H. Sugar Factory & Oil Mills (P) Ltd., the assessee had made

contributions for the construction of Road & Dam which was not being exclusively used by the said assessee. The said properties were to be the properties which were being used by the public also.

b) In the case of M/s. Panyam Cement & Mineral industries Limited, the assessee company had made contributions for the construction of a Bridge over the Railway Crossing near its factory. Needless to say that the Bridge over a railway crossing is to be used by the public including the employees of the assessee making the said construction of the bridge. Moreover, the bridge so constructed did not become the property of the said assessee, but it was the property of the Railway Department.

c) In the case of M/s. Navsari Cotton & Silk Mills Ltd., the said assessee made

contribution/payment to the Municipality for repairing the drainage pipeline which belonged to the municipality and was not the property of the assessee company.

d) In the case of M/s. Luxmijee Sugar Mills Co.

ITA No.277 of 2004 3

Ltd., the assessee made certain contributions to the Cane Development Council for the

construction and development of the roads between the various Sugarcane producing centres and the Sugar factories. The said roads did not belong to the said assessee making the payments.

(ii) In the cases relied upon by the assessee, those assessees had made contributions to different agencies for carrying out certain works. "M/s L.H.

Sugar Factory & Oil Mills (P) Ltd. had made contributions to the U.P. State Govt., M/s Panyam Cement & Mineral Industries Ltd. had made payment to Railway Authorities, M/s Navsari Cotton & Silk Mills Ltd., had made payments to Municipal Authorities and M/s Luxmijee Sugar Mills Co. Ltd.

had made payment to the Cane Development Council.

However, in the case of the present assessee, it has not made payment to any other agency rather it has incurred the expenses itself for the construction of the drainage pipeline to discharge its effluents. The drainage pipeline constructed by the assessee company is not a public property, but an exclusive property/assets of the assessee for discharging the effluents from its factory.

4.1 Keeping those facts in view, the judgments relied upon by the assessee are not applicable and relevant in the case of this assessee. Moreover, the assessee has itself debited an amount of Rs.70,79,862/- to the "Building A/c". Since the benefit accrued by the assessee for its business by constructing the said pipeline, is a benefit of enduring nature and a tangible asset in the form of drainage pipeline has come into existence, the amount of Rs.70,79,862/- incurred by the assessee on the construction of pipeline cannot be allowed as "revenue expenditure" and same is capitalized under the head, "Building A/c" as has been done by the assessee in its books of account. Accordingly, the assessee is allowed depreciation @ 5% on this amount of Rs.70,79,862/- as it is allowable in the case of building. The allowable depreciation in respect of this amount comes to Rs.3,53,993/- for which necessary effect is given in the computation of total taxable income. The depreciation has been allowed @ 5% only as the said pipeline has been used by the assessee for a period of less than 180 days during the previous year relevant for the assessment year 1996-97."

Basis of the finding of the Tribunal is that the assessee neither acquired ownership of the land nor unlimited use thereof; there is no increase in the profit earning capacity of the assessee; the assessee did not acquire any enduring benefit; the assessee was required to keep the drain in a condition that there is no seepage or leakage of effluents.

ITA No.277 of 2004 4

Finding of the Tribunal is as under:-

"Thus, we are of the opinion that by incurring an expenditure on the construction of drain on the forest land, the assessee has neither acquired any capital asset nor benefit of enduring nature in the commercial sense. The fact that assessee was allowed exclusive use of land for discharge of effluents was immaterial as the assessee can use such land only for a limited purpose. It is also not relevant whether the benefit for using the drain for discharge of effluents was to run for a number of years or for a short period. The expenditure incurred has neither increased the profitability of the assessee nor its production.

The expenditure so incurred was necessarily for the purpose of its business and is allowable as revenue expenditure. We, therefore, confirm the order of Ld. CIT(A) and dismiss this ground of appeal of the revenue."

Learned counsel for the revenue submitted that the view taken by the Tribunal was erroneous as the assessee had benefit of enduring nature by the expenditure in question and had acquired a right to discharge its effluents, which is a right of enduring nature.

Learned counsel for the assessee supported the findings of the Tribunal and submitted that "enduring benefit" test is not conclusive and if the advantage merely facilitated business operation, expenditure would be revenue expenditure and "Long period" test is also not conclusive. He relied upon judgments cited in the order of the Tribunal and also gave a list of following judgments in support of his submissions:-

1. Assam Bengal Cement v. CIT [1955] 27 ITR 34 (SC)

2. Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC)

3. L.H.Sugar Factory and Oil Mills P. Ltd. v. CIT [1980] 125 ITR 293 (SC)

4. CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257 (SC)

5. Alembic Chemical v. CIT [1989] 177 ITR 377 (SC)

6. Bikaner Gypsums v. CIT [1991] 187 ITR 39 (SC)

7. CIT v. Bombay Dyeing [1996] 219 ITR 521 (SC)

ITA No.277 of 2004 5

8. CIT v. Kirkend Coal Co. [1966] 60 ITR 537 (Patna)

9. CIT v. Belgachi Tea Co. Ltd. [1975] 99 ITR 99 (Cal.)

10.CIT v. J.A.Trivedi Bros.

[1979] 117 ITR 983 (Bom.)

11. CIT v. Singareni Collieries Co. Ltd. [1980] 121 ITR 466 (AP)

12. Hindustan Times Ltd. v. CIT [1980] 122 ITR 977 (Delhi)

13. CIT v. Navasari Cotton & Silk Mills Ltd. [1982) 135 ITR 546 (Guj.)

14. CIT v. Hingir Rampur Coal [1983] 140 ITR 73 (Bom.)

15. CIT v. Makhan Sarmah Savapandit [1989] 180 ITR 35 (Gauhati)

16. CIT v. Bharat Commerce & Industries Ltd. [1990] 184 ITR 90 (Delhi)

17. CIT v. Jagatjit Disstilling & Allied Industries Ltd. [1996] 60 ITR 308 (Pun)

18.CIT v. Lake Palace Hotels & Motels P. Ltd.

[2002] 258 ITR 562 (Raj.)

19. CIT v. Arunachal Pradesh Forest Corpn. [2003] 264 ITR 279 (Gauhati)

Besides a few judgments cited by learned counsel for the assessee, rendered by Hon'ble the Supreme Court, there are number of other judgments laying down various tests which though are not exhaustive, but certainly a guideline for application thereof in the facts and circumstances of the case in hand.

The same are summarised as under:

In Assam Bengal Cement's case (supra), the assessee claimed payment of lease money as revenue expenditure which was not allowed. It was observed:-

ITA No.277 of 2004 6

"In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or the income of the concern is certianly in the nature of capital expenditure. The question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either by extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. 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. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then of no consequence."

In Assam Bengal Cement's case, several tests for determining the nature of expenditure were discussed and following passage from the judgment of the Full Bench of Lahore High Court in Re: Benarsidas Jagannath, (1942) 10 ITR Suppl.1 at page 6, was approved:-

"It is not easy to define the term `capital expenditure' in the abstract or to lay down any general and satisfactory test to discriminate between a capital and a revenue expenditure. Nor is it easy to reconcile all the decisions ITA No.277 of 2004 7

that were cited before us for each case has been decided on its peculiar facts. Some broad principles can, however, be deduced from what the learned Judges have laid down from time to time. They are as follows:

1. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment: vide Lord Sands in Commissioners of Inland Revenue v. Granite City Steamship Company, (1927) 13 Tax Case, at p.14.

In City of London Contract Corporation v. Styles, (1887) 2 Tax Case, 239 at p.243, Bowen L.J. observed as to the capital expenditure as follows: "You do not use it `for the purpose of' your concern, which means, for the purpose of carrying on your concern, but you use it to acquire the concern."

2. Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade: vide Viscount Cave, L.C., in Atherton v. British Insulated and Helsby Cables Ltd., (1920) 10 Tax Case 155. If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. Thus, if labour saving machinery was acquired, the cost of such acquisition cannot be deducted out of the profits by claiming that it relieves the annual labour bill, the business has acquired a new asset, that is, machinery.

The expressions `enduring benefit' or `of a permanent character' were introduced to make it clear ITA No.277 of 2004 8

that the asset or the right acquired must have enough durability to justify its being treated as a capital asset.

3. Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. Fixed capital is what the owner turns to profit by keeping it in his own possession. Circulating or floating capital is what he makes profit of by parting with it or letting it change masters. Circulating capital is capital which is turned over and in the process of being turned over yields profit or loss. Fixed capital, on the other hand, is not involved directly in that process and remains unaffected by it."

The above passage shows that broadly, the tests for determining expenditure to be capital or revenue are:- (i) Acquisition of business as against acquisition of rights to carry on business.

(ii) Spending once and for all Enduring Benefit test .

(iii) Object Test.

Inspite of the above tests having been laid down as far back as in the year 1942, the difficulty continues to arise in application of the tests and it has been often held that the tests cannot be accepted as universal and peculiar features of each case have to be kept in mind.

In Abdul Kayoom v. CIT, (1962) 44 ITR 689, it was observed: "...none of the tests is either exhaustive or universal. Each case depends on its own facts and close similarity between one case and another is not enough, because even a single ITA No.277 of 2004 9

significant detail may alter the entire aspect. In deciding such cases one should avoid the temptation to decide cases (as stated by Cordozo in the nature of the judicial process) by matching the colour of one case against the colour of another.

To decide, therefore, on which side of the line the case falls, its broad resemblance to another case is not at all decisive.

What is decisive is the nature of the business, the nature of the expenditure, the nature of the rights acquired and their relations, inter se and this is the only key to resolve the issue in the light of the general principles, which are followed in such cases."

In Bombay Steam Navigation Co. (1953) Private Ltd. v.

Commissioner of Income-Tax, Bombay, (1965) 56 ITR 52, it was observed that it is not easy ordinarily to evolve a test for ascertaining whether in a given case, expenditure is capital or revenue. The determination of question depends on the facts and circumstances of each case by application of principle of commercial trading. If the out-going or 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 and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition to the carrying on of the business, the expenditure may be regarded as revenue expenditure.

In Lakshmiji Sugar Mills Co. P. Ltd. v. Commissioner of Income- Tax, New Delhi, (1971) 82 ITR 376, it was held that 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 profit, it is revenue expenditure. It was further held that in the diverse nature of business operation, it is difficult to lay down a test which would apply to all situations. The criteria has to be applied from the business point of view and on a fair appreciation of the whole situation. In this ITA No.277 of 2004 10

case, the company, which was engaged in the manufacture and sale of sugar, paid contribution to the government for development of roads between sugarcane producing centres and sugar mills to facilitate transportation of sugarcane. In view of the fact that there was no finding by the Tribunal that the roads were to be altogether newly made or that the assessee was to get an enduring benefit from these roads, the expenditure was held to be revenue in nature.

In R. B. Seth Moolchand Suganchand v. Commissioner of Income- Tax, New Delhi, (1972) 86 ITR 647 (SC), payment of licence fee and tender money for mica-mining right for a period of 20 years for extraction of mica was held to be in the nature of capital expenditure, as this amount was paid for acquiring a right of enduring nature to extract and remove the mica.

In Commissioner of Income-Tax, Madras v. Ashok Leyland Ltd., (1972) 86 ITR 549, it was held that the line that divides revenue expenditure from capital expenditure is oftentimes very thin. It will not be correct to say that by avoiding certain business expenditure, the company can be said to have acquired enduring benefits or acquired any income yielding asset. The payment to remove the possibility of a recurring disadvantage was held to be revenue in nature.

In Mewar Sugar Mills Ltd. v. Commissioner of Income-Tax, Rajasthan, (1973) 87 ITR 400, while dealing with the proposition to consider as to whether the expenditure in question was revenue or capital, in the facts of the case, payment of royalty at the rate of 2% on the price of sugarcane manufactured was held to be revenue in nature. As the same was directly related to the sugar manufactured, the royalty in question was not paid for getting some additional capital asset or even an enduring benefit.

In J. K. Cotton Manufacturers Ltd. v. Commissioner of Income-Tax, Lucknow, (1975) 101 ITR 221, while considering the issue, Hon'ble the Supreme Court laid down as under:

"Several tests that have been evolved over the years by this Court as also the other High Courts may be briefly formulated as follows: ITA No.277 of 2004 11

(1) Bringing into existence an asset or advantage of enduring nature would lead to the inference that the expenditure disbursed is of a capital nature. These terms, such as "asset" or "advantage of enduring nature" are, however, purely descriptive rather than definitive and no rule of universal application can be laid down.

Ultimately, the question will have to depend on the facts and circumstances of each case, namely, quality and quantum of the amount, the position of the parties, the object of the transaction which has impact on the business, the nature of trade for which the expenditure is incurred and the purpose thereof, etc.

(2) An item of disbursement may be regarded as of a capital nature when it is relatable to a fixed asset or capital, whereas the circulating capital or stock-in-trade would be treated as revenue receipt.

Lord Haldane in John Smith & Son v. Moore, (1921) 12 TC 266 (HL) has aptly and adroitly explained the terms "fixed capital" and "circulating capital" thus:

"Fixed capital is what the assessee turns into profit by keeping it in his own possession and circulating capital is what he makes profit of by parting with it and letting it change masters."

(3) Expenditure relating to framework of business is generally capital expenditure.

(4) Another important and safe test that may be laid down particularly in cases where the managing agency is terminated would be to find out whether the termination of the agency is in terrorem or purely voluntary for obtaining substantial benefits. In other words, the decisive test to determine whether or not termination of the agency is in terrorem would be to find out if in such a case commercial expediency requires that the agency should be terminated as it had become onerous or it was creating difficulties or the agents were guilty of negligence etc. It will also include payments for retrenchment compensation or conferment of benefits on employees or termination of other disadvantages or onerous relationships." (Emphasis Supplied)

In Travancore-Cochin Chemicals Ltd. v. Commissioner of Income- Tax, Kerala, (1977) 106 ITR 900, expenditure made for construction of a new road in the area, where factory was located, to improve transport facility was held to be ITA No.277 of 2004 12

capital in nature.

In Empire Jute's case (supra), the assessee as a member of an association was bound to operate its loom for particular hours per week but it purchased time allotted to other mills. It was held that even where expenditure is incurred for "enduring benefit", the expenditure may be revenue expenditure unless the advantage is in the "capital field". If advantage was merely facilitating assessee's trading operation or enabling it to efficiently or more profitably run its business, leaving the fixed capital untouched, the expenditure will be revenue expenditure. It was observed that there was no objection to the profit-making apparatus of the assessee.

In M/s L.H.Sugar Factory's case (supra), it was held as under: "The test for determining whether the expenditure in question is of capital or revenue nature is: When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. But where there are special circumstances leading to a contrary conclusion, this test must yield. It would be misleading to suppose that in all cases securing a benefit for the business would be prima facie capital expenditure so long as the benefit is not so transitory as to have no endurance at all. If the advantage consists merely in facilitating the assessee's business operations or enabling management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. However, in cases where the question is whether a particular expenditure incurred by an assessee is on capital account or revenue account, the decision must ultimately depend on the facts of each case. No two cases are alike and quite often emphasis on one aspect or the other may tilt the balance in favour of capital expenditure or revenue expenditure."

In Scientific Engineering House P. Ltd. v. Commissioner of Income- ITA No.277 of 2004 13

Tax, Andhra Pradesh, (1986) 157 ITR 86, Hon'ble the Supreme Court held that the expenditure incurred by an assessee on documentation service rendered by a foreign collaborator by supplying drawings, designs, charts, plans etc. to the assessee for a lump sum payment under the collaboration agreement for manufacture of instrument on assessee's satisfaction was held to be capital in nature.

In Associated Cement's case (supra), the assessee entered into an agreement with the Municipality whereby the assessee was to supply water to locality by providing water pipelines and also electricity to the street lighting in the municipality and also to concrete the main road from factory to railway station and for consideration of not being liable to municipal rates and taxes for 15 years. It was held that the expenditure was revenue expenditure for the following reasons:- (i) It did not result in bringing into existence any capital asset for the company.

(ii) Only advantage was immunity from liability to pay municipal rates or taxes for 15 years.

In Alembic Chemical Works Co.'s case (supra), the assessee acquired technical know-how and made lump sum payment which was held to be revenue expenditure. It was observed that even after the agreement, the product continued to be the same and mere improvement in or updating fermentation process was not inconsistent with utility of existing infrastructure of the assessee. It was further observed that there was no single definite criteria to determine whether expenditure was capital revenue. "Once for all" payment test was inconclusive.

In Bikaner Gypsums's case (supra), expenditure involved was for removing of a restriction which obstructed the business of mining. The same was held to be expenditure in the course of business and was revenue expenditure since no capital asset was acquired.

ITA No.277 of 2004 14

In Commissioner of Income-Tax v. Sarabhai Management Corporation Ltd.,(1991) 192 ITR 151, Hon'ble the Supreme Court held that the expenditure made by an assessee on renovation of the property owned by him to confirm the requirement of a prospective tenant was held to be revenue in nature.

In Commissioner of Income-tax, Calcutta v. Indian Oxygen Limited, AIR 1995 SC 1737, it was held by Hon'ble the Supreme Court that the amount paid by the assessee therein to a foreign company, which was not on account of outright purchase of any information, processes and inventions but was merely for use for a specified period, which could also be curtailed, was held to be revenue in nature.

In Bombay Dyeing's case (supra), the question was whether professional charges paid to a solicitor firm for services rendered in connection with the amalgamation was deductible as revenue expenditure. The plea of the assessee was upheld and the expenditure was held to be revenue expenditure.

In Madras Industrial's case (supra), the assessee issued debentures at a discount which was claimed as revenue expenditure and was allowed as such. It was observed that if outgoing or expenditure was so related to carrying on of business, it has to be treated as integral part of profit making and not for acquisition of an asset or a right of a permanent character, the expenditure could be treated as revenue expenditure.

In Punjab State Industrial Development Corporation Ltd. v.

Commissioner of Income-Tax, (1997) 225 ITR 792, while reviewing a number of earlier judgments on the issue, it was held that the expenditure on account of filing fee paid to the Registrar of Companies for expansion of capital base of the company was directly related to the capital expenditure incurred by the company and although incidentally that would help in the business of the company and may also help in profit making. The same view was followed in Brooke Bond India Ltd. v. Commissioner of Income-Tax, (1997) 225 ITR 798 and Commissioner of Income-Tax v. Kodak India Ltd., (2002) 253 ITR 445.

ITA No.277 of 2004 15

In Gobind Sugar Mills Ltd. v. Commissioner of Income-Tax, (1998) 232 ITR 319, expenditure incurred for acquisition of lease hold rights for setting up a sugar mill was held to be capital in nature.

In Commissioner of Income Tax v. Wavin (I) Ltd., (1998) 8 SCC 585, the expenditure incurred to obtain technical know-how from a foreign company on non-exclusive and non-transferable basis was held to be revenue in nature.

In Commissioner of Income-Tax v. Madras Auto Service (P.) Ltd., (1998) 233 ITR 468, it was held as under: "The general principles applicable in determining whether a particular expenditure is capital or revenue are as follows: (1) Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment; (2) Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether; (3) Whether for the purpose of the expenditure, any capital was withdrawn,or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital."

In Commissioner of Income-Tax v. I.A.E.C. (Pumps) Ltd., (1998) 232 ITR 316, while reiterating the principles for determination of the nature of expenditure, Hon'ble the Supreme Court held that payment made by the assessee to the firm-company merely as a licence fee is a revenue expenditure as the same was not the price for acquisition of any capital asset.

In Indore Municipal Corporation v. Commissioner of Income-Tax, ITA No.277 of 2004 16

(2001) 247 ITR 803, while dealing with an identical question for determination of expense on account of construction of metalled roads in trenching grounds for transport of night soil and compost, it was held that expenditure was incurred to gain enduring benefit. Accordingly, the same was held to be capital in nature.

Section 37(1) of the Act provides for permissible expenditure for computing income under the head "Profits and gains of business or profession".

The said provision is as under:-

"37(1) 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 expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession.":

Explanation for the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure."

Line of demarcation for distinguishing capital expenditure and revenue expenditure is very thin and it has not been found possible to formulate any universal rule for demarcating when expenditure can be held to be capital expenditure and when the same can be held to be revenue.

Applying the above tests to the present case, the crucial question is whether the assessee having not acquired the land or title to any asset or property, can be a ground to bring the case in exception to the enduring benefit test.

Judgments of the Hon'ble Supreme Court referred to above clearly indicate that magnitude of the amounts spent and the period for which the benefit may be available to the assessee were not conclusive factors, though relevant. The ITA No.277 of 2004 17

acquisition of an asset or right of permanent character has been found to be one of the ingredients for holding an expenditure to be capital expenditure.

We are of the view that the enduring benefit test will be fully applicable to the facts of the present case. Judgments of the Hon'ble Supreme Court relied upon the learned counsel for the assessee are distinguishable. Setting up of system/plant and creation of other infrastructure in an industrial unit is always a capital expenditure and the right acquired by the assessee in the present case for creation of channel to discharge effluents is nothing else but capital in nature. Right acquired by the assessee to discharge effluents was not merely a facility for carrying on the business but such facility became available to the assessee with right and advantage of enduring nature. The expenditure in question enabled the assessee to use the drain for all times to come and even to transfer such a right. Distinguishing features noticed by the Hon'ble Supreme Court in above judgments to exclude the enduring benefit test do not exist in the present case. The assessee having incurred expenditure for acquiring a permanent right, the said expenditure could not be treated as revenue expenditure. Object test is also, thus, satisfied.

It is further relevant that for use of the right to transport its effluent through forest land, the assessee had transferred its own land. A copy of letter dated 6.11.1995 from the Government of India, Ministry of Environment and Forests to the Financial Commissioner-cum-Secretary (Forests) to Government of Punjab, Department of Forest & Wildlife has been produced before us vide which permission had been granted to the assessee to dig out the drain. A perusal of the letter shows that there is no time limit fixed for use of the benefit. It is further evident that the assessee had in fact, exchanged the land with the forest land for the purpose, which has been directed to be declared as protected forest/ reserve forest. It was further not disputed before us that though in the first year, when this drain was dug out, the capital expense made by the assessee was Rs. 70,79,862/- ITA No.277 of 2004 18

and during the subsequent years on the maintenance thereof, the expense was around Rs. 8 to 10 lacs, which was being allowed as revenue expenditure. From the appreciation of these facts as well, it is evident that the expense made by the assessee during the first year when the drain was dug out is nothing else but capital in nature as the same created an advantage for enduring benefit of the business.

The question is, answered in favour of the revenue and against the assessee.

Re:Q.No.(ii)

The Tribunal has recorded following finding on this aspect:- "23. We have heard both the parties and carefully considered the rival submissions with reference to facts, evidence and material on record. It is a fact that the assessee had offered gross amount of interest including TDS of Rs.2,04,259/- to tax in the Assessment year 1992-93. It is also a fact that the assessee was not allowed credit for the TDS of Rs.2,04,259/- for want of TDS Certificates. It is also a fact that inspite of best efforts, the assessee could not obtain TDS certificates.

Thus, it was a case of loss which has arisen to the assessee during the course of its business. In the case of Sutlej Cotton Mills Limited v. CIT(Supra), Hon'ble Supreme Court has held that what is material is the factors or the circumstances which cause loss and the true nature and character of loss. If the loss occurred during the course of carrying on the business, it is incidental to it and hence allowable. Admittedly, in this case, the assessee suffered loss during the course of carrying on its business. Therefore, same is allowable. Judgment of Hon'ble Supreme Court in the case of Sutlej Cotton Mills Limited v.

CIT supports the case of the assessee. We do not find any infirmity in the order of Ld. CIT(A). Same is upheld and this ground of appeal of the revenue is dismissed." In view of the finding of the Tribunal, the assessee having suffered loss, the expenditure had to be allowed as revenue expenditure.

The question is, thus, answered against the revenue and in favour of ITA No.277 of 2004 19

the assessee.

In view of the above conclusions, the appeal is partly allowed in above terms.

(Adarsh Kumar Goel)

Judge

November 8, 2006 (Rajesh Bindal)

'gs/mk Judge


Copyright

Reproduced in accordance with s52(q) of the Copyright Act 1957 (India) from judis.nic.in, indiacode.nic.in and other Indian High Court Websites

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