Kerala High Court
Commissioner Of Income-Tax vs Kerala State Industrial Development ... on 31 January, 1989
Equivalent citations: [1990]182ITR62(KER)
Author: K.S. Paripoornan
Bench: K.S. Paripoornan
JUDGMENT K.S. Paripoornan, J.
1. These references are at the instance of the Revenue. The respondent in all these referred cases is the Kerala State Industrial Development Corporation Ltd., Trivandrum. The question that falls for consideration in Income-tax References Nos. 42 to 47 of 1982 relates to the assessment years 1974-75, 1975-76, 1970-71, 1971-72, 1972-73 and 1973-74. The question that falls for consideration in Income-tax Reference No. 104 of 1983 relates to the assessment year 1967-68.
2. At the instance of the Revenue, the following two questions of law have been referred in Income-tax References Nos. 42 to 47 of 1982 for the decision of this court :
"1. Whether, on the facts and in the circumstances of the case, the expenses incurred in investigation, research and feasibility study are revenue expenditure or capital expenditure ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal is right and reasonable in holding that the above expenditure is not a capital expenditure having any enduring benefit to the assessee ?"
3. The respondent is a limited company. It is wholly owned by the Government of Kerala. The object of the company is promotion of industries and advancement of industrial development in the State. It is so achieved and facilitated by investigation, research and feasibility studies into the possibilities of starting various types of industries in different parts of the State, furnishing the information so gathered to entrepreneurs to encourage them to start industries on the basis of investigation, research and feasibility study results, by financing them by way of loans, share participation and standing guarantees for due performance. The assessee-company derives income from interest on loans, dividend from shares and guarantee commission received on financial assistance given to entrepreneurs. The objects embodied in the memorandum of association of the company show that the assessee had been carrying on the activities as a promoter of industry as well as a financing institution as stated above. In the course of carrying out the objects aforesaid, investigation regarding the possibilities of establishing new industrial units in the State should be explored. During the relevant accounting periods, the assessee had undertaken iron ore investigation, ilmenite research, lime-stone investigation industrial survey, leather tanning project, etc., and incurred expenses therefor which included expenses for construction of roads. Such expenses were incurred in connection with the investigation into, the possibility of starting various types of industries in the State by making available the information to various entrepreneurs to start new industries. The company is authorised to carry on all kinds of exploration business. It is also authorised to search for projects, examine and explore mines and grounds supposed to contain minerals or precious stones. In order to enable new entrepreneurs to start industries or persuade them to undertake prospective industries, feasibility reports are essential. The expenses incurred on investigation, research and feasibility studies in respect of those industries which materialise are collected from the entrepreneurs and treated as profits of the years in which they are received. During the relevant assessment years, the respondent/assessee claimed deduction of the expenditure incurred on account of investigation, research and feasibility studies laid out wholly and exclusively for the business of the assessee. The Income-tax Officer disallowed the claim. The Appellate Assistant Commissioner confirmed the disallowance for the assessment years 1970-71, 1971-72 and 1972-73. The claim of the assessee was allowed for the years 1973-74, 1974-75 and 1975-76. The assessee as well as the Revenue filed appeals from the aforesaid orders before the Income-tax Appellate Tribunal. The Appellate Tribunal disposed of the said appeals by orders dated June 6, 1974, for the year 1970-71, and by order dated March 27, 1975, for the other assessment years. There was a reference to this court at the instance of both the assessee and the Revenue in Income-tax References Nos. 45 of 1978 and 46 to 48 of 1978. The Tribunal was directed to dispose of the appeals afresh. Accordingly, the matter was heard by the Appellate Tribunal again and a common consolidated order was passed on February 12, 1981. The Appellate Tribunal, after referring to the facts stated above, categorically found that, without incurring the expenditure in question, it would not have been possible for the assessee to carry on the business. It was further found that whenever the investigations materialised by an entrepreneur starting an industry on the basis of the information made available by the assessee, the assessee collected the expenses incurred by them for the year in which the same materialised and included the same as their income in the year of receipt. The Appellate Tribunal also found that the income of the assessee being the interest, guarantee commission and dividends derived from industries started by entrepreneurs with the information made available to them by the assessee, the expenses on investigation, research and feasibility report are incurred with the object of creating the possibilities of enlargement of its income. On these premises, it was held that the expenditure incurred, on the above count, is a revenue expenditure laid out wholly and exclusively for the purpose of the business of the assessee and so admissible as deduction under Section 37(1) of the Income-tax Act in computing the income under "profits and gains of business."
4. The above conclusion of the Appellate Tribunal is assailed by the Revenue. In the questions formulated by the Income-tax Appellate Tribunal for the decision of this court, only the conclusion of the Appellate Tribunal, namely, that the expenditure incurred in investigation, research and feasibility study are revenue expenditure, is questioned. Of course, the conclusion that it is not a capital expenditure is also assailed.
5. It should be noticed that the Income-tax Appellate Tribunal, as a final fact-finding authority, after examining all facts, inclusive of the objects embodied in the memorandum of association of the respondent-company and the activities carried on by it, has categorically found in para 9 of its order dated February 12, 1981, that, without incurring the expenditure in question, it would not have been possible for the assessee to carry on the business. In the same paragraph, after adverting to the nature of the investigations, research and feasibility studies made by the respondent-company, the Appellate Tribunal has found that the expenses on this count are incurred with the object of creating the possibilities of enlargement of its income. These crucial findings of fact are not challenged by the Revenue by formulating appropriate questions.
6. In answering the questions referred to us, we will have to proceed on the basis that the findings of fact, namely, that without incurring the expenditure in question it would not have been possible for the assessee to carry on the business and that the expenses incurred on this count under investigation, research and feasibility study are incurred with the object of creating the possibilities of enlargement of its income, are accepted by both the parties. In the light of the above findings, the answer to the questions referred to us are obvious. The expenses incurred under investigation, research and feasibility studies can only be business expenditure or revenue expenditure. They are not capital expenditure.
7. As to whether, in a particular case, an expenditure incurred by the assessee for the purpose of the business is really a business expenditure or a capital expenditure is a mixed question of fact and law. The ultimate conclusion may be one of law. But, that question can be answered only on the basis of the findings of fact, namely, the activity or business carried on by the assessee, the purpose for which the expenses were incurred and its nexus to the ultimate activity carried on by the assessee. On those aspects, the Tribunal has entered definite and categorical findings, namely, that, without incurring the expenditure in question, it would not have been possible for the assessee to carry on the business and the expenses under investigation, research and feasibility report are incurred to augment or enlarge the income of the assessee. These findings are based on materials. It was not shown to us that these findings entered by the Appellate Tribunal, in para 9 of its order, are in any way perverse or irrational or based on "no material". On the basis of the above findings of fact, the conclusion is irresistible that the expenses incurred in investigation, research and feasibility studies are only revenue expenditure and not capital expenditure. In this context, the decision of the Madras High Court in CIT v. Seshasayee Bros. Pvt. Ltd. [1981] 127 ITR 218 and the decision of the Karnataka High Court in CIT v. Karnataka State Industrial and Investment Development Corporation [1987] 163 ITR 657 are relevant.
8. Therefore, we answer question No. 1, referred to us, in the affirmative, in favour of the assessee and against the Revenue. We answer question No. 2 also in the affirmative, against the Revenue and in favour of the assessee.
9. Income-tax References Nos. 42 to 47 of 1982 are disposed of with the above answers.
10. We now come to Income-tax Reference No. 104 of 1983. Herein, at the instance of the Revenue, the following question has been referred for the decision of this court :
"Whether, on the facts and in the circumstances of the case, the amount of Rs. 26,507 paid by the assessee to the Labour and Industrial Bureau is an allowable deduction ?"
11. The matter relates to the assessment year 1967-68. The Appellate Tribunal, by order dated December 14, 1982, held that the amount of Rs. 26,507 is an allowable deduction. In rendering the said decision, the Appellate Tribunal followed its earlier decision dated February 12, 1981 in I. T. A. Nos. 399 (Coch.) of 1971-72, 601 (Coch.) of 1972-73 and 257 (Coch.) of 1973-74, for the assessment years 1970-71, 1971-72 and 1972-73. The Appellate Tribunal held that, in its earlier order, it has categorically held that the deduction of amounts claimed being the share of the grant to the Labour and Industrial Bureau, whose functions are similar to that of the assessee, is a revenue expenditure. It was held that the control and management of the Bureau had been transferred to the assessee-corporation with the liability to share the expenditure treated as a grant. In this perspective, the item of expenditure was held to be incidental to the business activities of the assessee and so an allowable deduction. Whether the amount paid to the Bureau which is carrying on the same functions as that of the assessee is entitled to the deduction, when the liability to share the expenditure treated as grant was made is largely one of fact. The Tribunal has also found that this item of expenditure is incidental to the business activities of the assessee. This factual question is not the subject-
matter of a separate question ; nor has it been assailed in the question formulated for the decision of this court. So, we are of opinion that, on the facts found by the Appellate Tribunal, the conclusion is inevitable that the amount paid by the assessee to the Labour and Industrial Bureau is an allowable deduction.
12. We answer the question in the affirmative, in favour, of the assessee and against the Revenue. Income-tax Reference No, 104 of 1983 is disposed of as above.
13. A copy of this judgment under the seal of this court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.