Madras High Court
Cit vs Sun Paper Mills Ltd. on 29 March, 2001
Equivalent citations: [2001]253ITR709(MAD)
Author: R. Jayasimha Babu
Bench: R. Jayasimha Babu
JUDGMENT
R. Jayasimha Babu J.
The revenue is before us challenging the view of the Tribunal that the expenditure incurred by a manufacturer of paper in using the water discharged from its factory after its use in the industrial process to the adjoining land owned by the assessee, and used for growing crops with the aid of that water, constitutes business expenditure and is deductible as such. The assessment year with which we are concerned is 1975-76.
Though the claim had initially been disallowed by the Income Tax Officer, it had been allowed in part to the extent of Rs. 15,000 by the Commissioner (Appeals) who did so on the ground that effluent discharge, must necessarily take place by operations which prevent its flow to the river on the banks on which the factory was situated in order that the river may not be polluted, and that such discharge had necessarily to be on lands whether or not agricultural. The expenditure incurred on such discharge was estimated by the Commissioner at Rs. 15,000 and was therefore allowed.
The assessee having taken up the matter in further appeal, the Tribunal had allowed the entire amount of Rs. 71,151 claimed by the assessee which included the entire cost of cultivation carried on in the lands on which the water from the assessee's factory had been discharged.
Counsel for the assessee sought to support the view of the Tribunal by contending that the expenditure, deduction of which had been claimed was merely incidental to the carrying on of the business of the assessee, and was an item in respect of which the assessee was entitled to claim deduction.
Counsel invited our attention to certain rulings of the Supreme Court with regard to the extent to which the expenditure incurred by the assessee can be regarded as business expenditure. Counsel referred to the case of Indian Aluminium Co. Ltd. v. CIT (1972) 84 ITR 735, in which a Constitution Bench of the apex court held, with regard to the claim by the assessee for deducting the wealth-tax for the property owned by it and which was used by it for the purpose of business, that when a person has a dual capacity of a trader-cumowner and he pays tax for the property which is used for the purpose of trade, the payment should be taken in the capacity of a trader according to the ordinary commercial principles. That qualification was made by the court to the law that had been stated by the apex court in Travancore Titanium Products Ltd. v. CIT (1966) 60 ITR 277, wherein it had been held that " . . to be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business, i.e., between the expenditure and the character of the assessee as a trader and not as an owner of assets, even if they are the assets of the business."
Reliance was placed by counsel to the case of Sassoon J, David and Co. Pvt. Ltd. v. CIT (1979)118 ITR 261 (SC), wherein a claim for deducting the amount towards the retrenchment compensation paid to the employees of a business which was sold was allowed, as the industry that was sold continued to function after such sale, and the expenditure so incurred which resulted in the reduction of the wage bill, was one which had been incurred on the ground of commercial expediency and in order indirectly to facilitate the carrying on of its business. Such expenditure, it was held, was allowable as a deduction even if it were to be assumed that the motive behind the payment of compensation was that the terms of the agreement between the buyer and the seller for the sale of the shares of the company should be satisfied. The court observed that the expression "wholly and exclusively" used in section 10(2)(xv) of the Indian Income Tax Act, 1922, does not mean "necessarily" and that ordinarily it is for the assessee to decide whether any expenditure should be incurred in the course of his or her business. The expenditure so incurred may have been incurred voluntarily and if it is incurred for promoting the business and to earn profits, the expenditure would be deductible even though there was no compelling necessity and even if somebody other than the assessee also is benefited by the expenditure.
The case next referred to was the case of CIT v. Walchand and Co. (R) Ltd. (1967) 65 ITR 381 (SC), wherein it was held that in applying the test of commercial expediency for determining whether the expenditure was wholly or exclusively laid out for the purpose of the business of the assessee, the reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the revenue. The court held that it was generally for the employer to decide the quantum of the remuneration payable to the employee.
The last case relied on was Sri Venkata Satyanarayana Rice Mill Contractors Co. v. CIT (1997) 223 ITR 101 (SC) wherein the court held that payment made by the assessee to a fund which was constituted to promote public welfare and contribution to which was voluntary but was nevertheless required from the assessee at the time the assessee sought a permit for the movement of his goods from the State, would constitute expenditure incidental to the carrying on of the business of the assessee, and such expenditure was required to be regarded as having been motivated purely by commercial consideration. The court held that as long as the payment is made for the purpose of business, and the payment made is not by way of penalty for infraction of any law, the same would be allowable as a deduction.
The fact that the expenditure which is laid out wholly and exclusively for the purposes of business need not have been essential or necessary for the business, and may have been incurred voluntarily, and the fact that the quantum of the expenditure also was a matter which was for the assessee to decide upon normally, does not entitle an assessee to claim as deduction expenditure incurred in carrying on an activity which is not part of his business and which has no direct or indirect link with the business carried on by it. Cultivation of paddy and coconuts is not the business of the assessee. The assessee is engaged in the manufacture of paper. The fact that it had found it advantageous to use the effluent from its factory for productive purposes by letting it out on the vacant land owned by it, and use that water for cultivating crops does not render the expenditure on cultivation, business expense of the assessee. Such expenditure on cultivation was not an expenditure which was capable of being regarded as incidental to the carrying on of the business of the company. Before an expenditure can be regarded as incidental there must be a link which is demonstrable as between the business carried on and the subject-matter on which the expenditure had been incurred. The cultivation of paddy and coconut has no nexus with the business of manufacture of paper.
As the assessee would have incurred penalties, had the water been discharged into the river which flowed nearby, the steps taken by the assessee to ensure the discharge of the water away from the river and on to the land owned by the assessee can be regarded as expenditure incidental to the carrying on of its business and the Commissioner (Appeals) rightly took that factor into account and allowed the expenditure incurred in letting the water out and regulating its flow. As the assessee had not installed an effluent treatment plant, and had also not treated the effluents, in any other manner, no deduction could be claimed as costs of effluent treatment.
The Tribunal was, therefore, in error in holding that the expenditure incurred on growing crops with the aid of untreated water let out from the factory premises was expenditure, which should be regarded as business expenditure of the assessee. The first question' referred to us as to whether, on the facts and in the circumstances of the case the Appellate Tribunal was right in holding that the expenditure of Rs. 71,152 was incurred by the assessee mainly as effluent disposal and hence it was in the nature of business expenditure laid out wholly and exclusively for the purpose of the business, is answered in favour of the revenue and against the assessee, with the qualification that the amount which had been allowed as deductible expenditure by the Commissioner (Appeals) shall remain undisturbed.
The second question' is returned unanswered as that question does not survive for consideration in view of the answer to the first question. The assessee is liable to pay cost in the sum of Rs. 1,500 to the revenue.