Income Tax Appellate Tribunal - Madras
Gurudev Engineers (P.) Ltd. vs Income-Tax Officer on 30 May, 1990
Equivalent citations: [1990]34ITD297(MAD)
ORDER
P.K. Ammini, Judicial Member
1. This appeal by the assessee relates to the assessment year 1984-85.
2. The facts giving rise to this appeal are as follows : The assessee is a Private Limited Company, which is registered with Directorate General of Technical Development for undertaking consultancy for Chlor Alkali Industries. According to the assessee, as on date, it was the only company registered with the Directorate General of Technical Development for undertaking Ion Exchange Membrane Cell Caustic Soda Plants. Incidentally, Ion Exchange Membrane Cell Technology is the latest technology in the Caustic-Chlorine field and the assessee is doing the detailed engineering work for the first IEM caustic soda plant coming up in India at Pond cherry. They have also submitted their offers to quite few companies in India for putting up IEM Caustic soda plants. The publication 'WORLD CHLOR ALKALI OUTLOOK 1980-1990' by M/s. Charles H. Kline & Co. Inc., 330 Passaic Avenue, Fairfield, New Jersey 07006, U.S.A. is an authoritative book on the entire caustic-chlorine industry world over - the latest development on the techr uses, market etc. It is stated that acquiring this book would help the asse be abreast of the latest developments in this industry. The cost of the book $ 5,500.00 (equivalent to Rs. 56,771).
3. During the accounting year ended on 31-3-1984 relevant for the assessment year under consideration, the assessee purchased the above book (WORLD CHLOR ALKALI OUTLOOK 1980-1990). The permission for remittance in foreign currency of US $ 5,500, being the cost of the above book, was also granted to the assessee by Reserve Bank of India, as per their letter dated 30th October, 1983. The book is available in 5 Volumes. The survey, conducted worldwide and completed in April 1982, required over six man years of professional effort by a team of six marketing research specialists on the Kline staff and by two associated organizations. It analyses the technical, environmental, and commercial trends affecting the industry and forecasts supply and demand to 1985 to 1990. Alternate cases are developed to analyze the implications of future uncertainties and to assess their probability of occurrence. The survey and analysis is based primarily on information obtained in a series of in-depth interviews with 433 persons in 316 organizations in 28 countries throughout the world, all conducted during the period April through December 1981. The survey also included (1) a search of recent technical and trade literature; (2) an examination of suppliers' product literature; and (3)an analysis of financial and business reports, statistical data from Government, trade associations and industry, and other published material. The results of the survey are presented in a five-volume report as follows :
Volume One World Summary Volume Two United States and Canada Volume Three Latin America and the Caribbean Volume Four Europe Volume Five Asia, Africa and Oceania
Each of the regional volumes covers (1) the overall supply and demand for the chlor-alkali products, their capacity and production, consumption, prices, and principal consumers and suppliers; (2) an analysis of the major end-use industries in which they are employed; and (3) the important countries in each region - their production and consumption of chlor-alkalis and their foreign trade. Final chapters describe the major suppliers and summarize future consumption and production.
4. The assessee was also permitted by Government of India, Ministry of Industry, Department of Industrial Development, New Delhi, by its letter dated 20th December, 1982, to offer technical consultancy services in the following fields :
(I) SPECIALISED PLANTS FOR CHLOR-ALKALI INDUSTRY :-
(i) Feasibility report
(ii) Process know-how
(iii) Design
(iv) Lay-out erection
(v) Productivity
vi) Management
(vii) Turnkey Projects
(viii) Development aspects, and
(ix) Costing.
5. On 14-12-1984, the assessee filed its return of income, for the assessment year under consideration, declaring an income of Rs. 69,720. The assessee claimed for the deduction of the cost of the book "The World Chloralkali Outlook 1980-1990', Rs. 56,771 as revenue expenditure. The Income-tax Officer denied the claim holding that it was a capital expenditure and added the same to the total income of the assessee and the assessment was completed on a total income of Rs. 92,790 on 24-10-1986. The assessee was aggrieved by this assessment and went in appeal to the Commissioner of Income-tax (Appeals).
6. The Commissioner (Appeals) after considering the submissions of the assessee, held as under:
This book is a storehouse of information in the field of activity of the assessee. It also gives various technological process used in the industry in various countries. It has been admitted before me that this book gives international information necessary for carrying out day-to-day business activity of the assessee. It is, therefore, clear that the book is a plant in the assessee's business. Therefore, this plant will be entitled to depreciation at the general rate available to plant and machinery. The cost of the book has to be capitalised and therefore disallowed as a capital expenditure.
Accordingly, the Commissioner (Appeals) directed the Income-tax Officer to add the cost of book as capital expenditure and allow depreciation on the same at the general rate as available to the plant and machinery, and dismissed the appeal of the assessee.
7. The assessee is in second appeal before the Tribunal. According to the assessee, the Commissioner of Income-tax (Appeals) ought to have allowed the sum of Rs. 56,771 incurred by the assessee on the purchase of the book 'World Chlor Alkali Outlook 1980-1990' as a revenue expenditure. The CIT(Appeals) has wrongly classified this item of expenditure in the purchase of books as 'plant' under Section 43(3). The CIT(Appeals) has failed to appreciate that the definition 'Plant' includes books does not follow that all books are plant. The CIT(A) failed to appreciate that the expenditure of Rs. 56,771 incurred in the purchase of technical book is to facilitate the assessee's trading operations or enabling the management to conduct the business more efficiently. The CIT(Appeals) failed to appreciate that the assessee is engaged in consultancy services and for any consultant the books and journals are revenue expenditure. In support of his contention, the learned counsel placed reliance on the decision of the Supreme Court in the case of Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377/43 Taxman 312 wherein it is held that-
The idea of 'once for all' payment and 'enduring benefit' are not to be treated as something akin to statutory conditions; nor are the notions of 'capital' or 'revenue' a judicial fetish. What is capital expenditure and what is revenue are not eternal varieties but must needs be flexible so as to respond to the changing economic realities of business. The expression 'asset or advantage of an enduring nature' was evolved to emphasize the element of a sufficient degree of durability appropriate to the context.
There is also no single definite criterion which, by itself, is determinative whether a particular outlay is capital or revenue. The 'once for all' payment test is also inconclusive. What is relevant is the purpose of the outlay and its intended object and effect, considered in a common-sense way having regard to the business realities. In a given case, the test of 'enduring benefit' might break down.
Accordingly, the counsel for the assessee submitted that the orders of the tax authorities should be set aside and the claim of the assessee should be allowed.
8. On the other hand, the learned departmental representative, Shri S.K. Jha, supported the view of the Commissioner of Income- tax (Appeals) and also placed reliance on the decision of the Supreme Court in Alembic Chemical Works Co. Ltd. 's case (supra). According to him, what is relevant is the purpose of the outlay and its intended object and effect considered in a common-sense way having regard to the business realities. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. So according to him, the order of the Commissioner of Income-tax (Appeals) should be upheld.
9. On a careful consideration of the rival submission of the parties to the dispute, we hold that the cost of the book The World Chloralkali Outlook 1980-1990 is a revenue expenditure and is an allowable deduction under Section 37 of the Income-tax Act, 1961. The assessee purchased the book with a view to acquire know-how technology in consultancy. In this case, the assessee has established a leading consultancy engineering firm even prior to the purchase of the book and offering technology consultancy service to various industries. The assessee has filed a copy of the profit and loss account for the year ended 31st March, 1984. The Professional & Consultancy charges paid is shown at Rs. 1,12,305 and the Service Charges received is shown at Rs. 3,40,000. The assessee has claimed for deduction of the cost of the book of Rs. 56,771, which is shown in the aforesaid account under the head 'Miscellaneous expenses', the details of which are filed. The amount of Rs. 56,771 is shown against Books & Periodicals. The assessee has claimed this amount of Rs. 56,771 as revenue expenditure under Section 37 of the Act. It is well settled that for a claim of deduction of expenditure under Section 37, it should be expended wholly and exclusively for the purpose of business or profession as the case may be. The fact that an item of expenditure is wholly and exclusively laid out for the purpose of business, by itself, is not sufficient to entitle its allowance in computing the income chargeable to tax. In addition, the expenditure should not be in the nature of a capital expenditure. The question arises whether the cost of this book is a capital expenditure or revenue expenditure. If it is a revenue expenditure, then alone the assessee is entitled to deduction under Section 37 of the Act. The Supreme Court in the case of Gotan Lime Syndicate v. CIT[1966] 59 ITR 718, referred to the test expressed by Viscount Cave, in the case of British Insulated & Helsby Cables Ltd. v. Atherton [1925] 10 Tax Cas. 155 (HL) which read as under: -
But 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, I think that 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." and observed -
This illustration shows that it is not in every case that an expenditure in respect of an advantage of an enduring nature is capital expenditure. The reason underlying the illustration is that the payments made to enter into a forward contract have relation to the raw material eventually to be obtained. Viscount Cave acknowledged that in certain cases an expenditure for obtaining an enduring advantage need not be capital expenditure for he inserted the words 'in the absence of special circumstances leading to an opposite conclusion' within brackets.
10. In this case, the assessee purchased the book in furtherance of the consultancy business already started. The assessee may have derived an advantage by purchasing this book but it did last not more than a few years, since by that time new technology in the field of the business of the assessee may be discovered and the market study may well become outdated. It is also not in every case that an expenditure in respect of addition of enduring nature is capital because there can be special circumstances leading to the opposite conclusion as pointed out in the observations of Viscount Cave in British Insulated & Helsby Cable Ltd.'s case (supra), approved of by the Supreme Court. The question whether the expenditure is capital or not depends upon the facts of each case. There is no absolute test for the demarcation of the expenditure of revenue and of capital.
11. In the case of Alembic Chemical Works Co. Ltd. (supra), relied on by the assessee, it is held that -
In the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises, it is well nigh impossible to formulate any general rule, even in the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation. However, some broad and general tests have been suggested from time to time to ascertain on which side of the line the outlay in any particular case might reasonably be held to fall. These tests are generally efficacious and serve as useful servants; but as masters they tend to be over exacting.
The question in each case would necessarily be whether the tests relevant and significant in one set of circumstances are relevant and significant in the case on hand also. Judicial metaphors are narrowly to be watched, for, starting as devices to liberate thought, they end often by enslaving it.
The idea of 'once for all' payment and 'enduring benefit' are not to be treated as something akin to statutory conditions; nor are the notions of' capital' or 'revenue' a judicial fetish. What is capital expenditure and what is revenue are not eternal varieties but must needs be flexible so as to respond to the changing economic realities of business. The expression 'asset or advantage of an enduring nature' was evolved to emphasize the element of a sufficient degree of durability appropriate to the context. There is also no single infinitive criterion which, by itself, is determinative whether a particular outlay is capital or revenue. The 'once for all' payment test is also inconclusive. What is relevant is the purpose of the outlay and its intended object and effect, considered in a common-sense way having regard to the business realities. In a given case, the test of 'enduring benefit' might break down.
12. In view of the above, we have to see that the cost of this book is a revenue or a capital expenditure. We have already stated that the assessee purchased this book only for the consultancy business and is highly necessary for the purpose of business of the assessee. Moreover, this book will not serve as an all time precedent as sometimes certain law books may do. This is only a ready-made market survey for improving the business of the assessee in consultancy. Hence, in our view, this is a revenue expenditure and the cost of the book has to be allowed as a deduction under Section 37 of the Act. Therefore, the view of the Commissioner of Income-tax (Appeals) that this is only "plant" and the assessee is entitled only to depreciation available under Section 43(3) is not correct. So we set aside the finding of the Commissioner of Income-tax (Appeals) and hold that the cost of this book has to be treated as revenue expenditure and an allowable deduction Under Section 37 of the Act. Accordingly, the Income-tax Officer is directed to allow the deduction of Rs. 56,771 being the cost of the book, viz., 'The World Chloralkali Outlook 1980-1990' and amend the assessment order.
13. In the result, the appeal filed by the assessee is allowed.