Delhi High Court
Jay Engineering Works Ltd. vs Commissioner Of Income Tax on 5 October, 2007
Equivalent citations: (2007)212CTR(DEL)562
Author: Madan B. Lokur
Bench: Madan B. Lokur, S. Muralidhar
JUDGMENT Madan B. Lokur, J.
1. At the instance of the assessed, the following questions have been referred for our opinion under Section 256(1) of the Income Tax Act, 1961 (for short the Act) in respect of the assessment year 1979-80:
1. Whether on the facts and in the circumstances of the case and in law the Tribunal was justified in holding that the pre-operative expenditure of Fuel Injection Equipment Project amounting to Rs.20,14,158/- was a capital expenditure?
2. Whether on the facts and circumstances of the case, Tribunal was right in deleting the addition of Rs.41,666/- on the ground that the same was not disallowable Undre Section 37(3) read with rule 6B
2. With regard to the second question, the tax effect of the amount in question is quite inconsequential and, therefore, we decline to answer this question and return the reference unanswered.
3. The first question is really the only substantive question that would require our consideration.
4. The assessed is a company which manufactures fans and sewing machines at various units, including in Hyderabad. The assessed decided to expand its activities and, therefore, undertook a Fuel Injection Equipment Project (for short the Project) in Hyderabad. In respect of this Project, the assessed incurred an expenditure of Rs.1.56 crores out of which it spent Rs.1.35 crores towards acquisition of plant and machinery. This amount is not in dispute. The balance amount consisting of Rs.20,41,158/- is in dispute and the break up of this amount is as follows:
Particulars Amounts/Rs.
1. Testing Charges 51,021
2. Interest/Commitment Charges 7,39,019
3. Bank Commission 2,82,944
4. L.C. Opening 88,461
5. Salary/Perquisites/Motor Car upkeep 1,16,254
6. Foreign traveling 6,25,304
7. Consultants Fees 1,09,000
8. Miscellaneous Expenses
traveling Charges of IFCI 457
Stamp - ICICI 45
Consultancy fees to Dev Sons for
existing Machines 1,050
Interview Charges 27,603
Total 20,41,158
5. According to the Inspecting Assistant Commissioner (the Assessing Officer) the above expenditure is in the nature of expenses incurred in connection with the setting up of a new line of business and, therefore, it should have been capitalized. In other words, the Assessing Officer rejected the contention of the assessed that the expenditure incurred was revenue in nature. The view taken by the Assessing Officer was upheld by the Commissioner of Income Tax (Appeals) as well as by the Income Tax Appellate Tribunal (for short the Tribunal).
6. During the course of hearing, neither learned Counsel required us to go into each item of expenditure which aggregate to the sum of Rs.20,41,158/-. Indeed, we do not think it necessary to do so because there is broad agreement that the said items of expenditure are pre-operative in relation to the Project and the only question that is required to be decided is whether the expenditure falls in the category of revenue expenditure or in the category of capital expenditure.
7. Among the decisions cited, the first was India Cements Ltd. v. Commissioner of Income Tax, Madras . In this decision, a large number of cases have been referred to by the Supreme Court and two important conclusions flow out from a reading of this decision. The first is that the law as contained in the English Income Tax Act has no relevance to cases arising under the Indian Income Tax Act. This is of some importance because the Tribunal, while deciding against the assessed, has relied upon Atherton v. British Insulated and Helsby Cables Ltd. (1925) 10 Tax Cases 155. The second important conclusion is the approval of the law laid down by the Supreme Court in its earlier decision in Bombay Steam Navigation Co. Ltd. v. Commissioner of Income Tax [1965] 56 ITR 52 wherein it was observed as follows:
Whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing 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 of the carrying on of the business, the expenditure may be regarded as revenue expenditure.
8. Keeping the above conclusions in mind, learned Counsel took us through several other decisions rendered by various Courts including this Court.
9. In Prem Spinning and Weaving Mills Company Ltd. v. Commissioner of Income Tax, U.P. , the assessed was a limited company running a spinning and weaving mill as well as a new project of straw-board manufacturing factory. The question before the Court was whether the expenditure incurred for the new venture was a revenue expenditure or not. The Allahabad High Court noted that control over the existing spinning mill as well as the new project of straw-board manufacturing factory was in the hands of the assessed and it was effectively one establishment controlling both the units. The business of the two units were interconnected; the profit and loss account of the company embraced the business of the straw-board manufacturing factory and the balance sheet represented the financial picture of the company after taking into consideration the affairs of both the units. Relying upon Produce Exchange Corporation Ltd. v. Commissioner of Income Tax , it was held that unity of control is a decisive test and not the nature of the two lines of business. It was further held that if the management, the trading organization, the administration, the funds and the place of business were common, then it cannot be said that the two ventures are two different businesses carried on by the same company.
10. In Commissioner of Income Tax, Gujarat II v. Alembic Glass Industries Ltd. , the assessed was a company manufacturing glass at Baroda. The assessed desired to set up a new glass manufacturing unit in Bangalore and the question that arose was whether the amount spent for the undertaking in Bangalore should be taken on the revenue account or on the capital account. The Gujarat High Court took into consideration the fact that the business organization, administration and fund of both the units of the assessed are common; there was, therefore, complete interconnection, interlacing and interdependence between the two units. The fact that the Bangalore unit is many miles away from Baroda was of no consequence since the head office at Baroda controlled the affairs of both the units.
11. Commissioner of Income Tax v. Expanded Metal Manufacturers was a case in which the assessed was engaged in the business of expanding of iron metal by a mechanical process and its supply. It started a new business of manufacturing of rubber products. Relying upon Prem Spinning and Weaving Mills Company Ltd., it was held that the expenditure incurred for setting up a unit for the manufacture of rubber products was a revenue expenditure.
12. In Commissioner of Income Tax v. Modi Industries Ltd. (No.3), the supplementary factors earlier laid down were reiterated viz. whether the management of the new business and the earlier business is the same and whether there is also unity of control and a common fund. The assessed in this case was engaged in the manufacture of various commodities like sugar, vanaspati, soaps, paints and varnish, torch and lantern and it was intending to diversify its activities by manufacturing a new commodity, that is, special alloy wire and billets. Based on the finding that the new business and the earlier business is the same, in a broad sense namely that the activity is of manufacture and that there is unity of control and a common fund, it was held that the business of manufacture of special alloy wire and billets was an extension of the existing business and not a new business. Consequently, the expenditure incurred was held to be a revenue expenditure.
13. Finally, in Veecumsees v. Commissioner of Income Tax , the assessed ran a jewellery business and then commenced business in the exhibition of cinematographic films. The assessed obtained loans for building a cinema theater and the question was whether the interest payable on the loans borrowed for the new business was a revenue expenditure or not. While answering the question in favor of the assessed, the Supreme Court found that the two businesses were composite in the sense that there was interconnection, interlacing or interdependence between the jewellery business and the cinema business.
14. On an appreciation of the law laid down by the various decisions referred to above, it is clear that the nature of the new business is not a decisive test for determining whether or not there is an expansion of an existing business. The nature of the business could be as distinct as a jewellery business and a business of cinematographic films; it could be as different as manufacture of metal alloys and manufacture of rubber products. What is of importance is that the control of both the ventures, the existing venture as well as the new venture, must be in the hands of one establishment or management or administration. The place of business of the existing business and the new business may not be in close proximity - it could be as far apart as Baroda and Bangalore. However, the funds utilised for the management of both the concerns must be common as reflected in the balance sheet of the company.
15. In other words, there may be several permutations and combinations that may arise for determining whether the expenditure is revenue or capital and each case must, of course, be dealt with on the broad principles that have been accepted by the Courts as are mentioned above.
16. Applying these principles to the present case, it is quite clear to us that the control over the two units is in the hands of the same management and administration. There is no doubt on this score and in fact, the annual report of the assessed, which has been shown to us by learned Counsel, makes a reference to the Project at Hyderabad. There can be no dispute from the facts that have been placed before us on record that the new venture was managed from common funds and there is the necessary unity of control leading to an interconnection, interdependence and interlacing of the two ventures such that it can be said that the fuel injection equipment project is only an extension of the existing business of the assessed and, therefore, the expenditure incurred by the assessed on this Project is a revenue expenditure.
17. Learned Counsel for the Revenue relied upon Challapalli Sugars Ltd. v. Commissioner of Income Tax, A.P. to contend that the expenditure incurred by the assessed, as mentioned above, is a part of the actual cost of its assets and, therefore, this amount needs to be capitalized and added to the cost of the fixed assets of the assessed.
18. There can, of course, be no quarrel with the proposition laid down by the Supreme Court in Challapalli Sugars Ltd. but the facts of that case are completely distinguishable in as much as that decision did not concern itself with an extension of an existing business but concerned itself with the setting up of a new business altogether. In fact, the Supreme Court distinguished the decision in India Cements Ltd. by observing that in India Cements Ltd. the assessed at the time when it raised the loan was a running concern. In Challapalli Sugars Ltd., the case of the assessed was that it had borrowed considerable sums of money for the installation of machinery and plant and that the interest should be added to the cost of plant and machinery. As such, while calculating depreciation admissible, the interest paid should be treated as a part of the cost of the machinery and plant to the assessed. The Income Tax Officer rejected the claim of the assessed and held that interest was an admissible item of revenue expenditure and no depreciation could be claimed thereon. The argument advanced on behalf of the assessed and which was accepted by the Supreme Court was that the interest for the period before the commencement of production (on money borrowed for the purposes of acquiring and installing the machinery and plant) should be included in the actual cost of the plant and as such capitalized for the purpose.
19. We are of the view that the decision in Challapalli Sugars Ltd. is clearly inapplicable to the facts of the present case. On the other hand, the law laid down by the Supreme Court in India Cements Ltd. would be applicable.
20. Learned Counsel for the assessed also relied upon E.I.D. Parry (India) Ltd. v. Commissioner of Income Tax to contend that the assessed cannot convert capital expenditure into revenue expenditure. We are unable to appreciate the relevance of this decision. The assessed has shown the cost of acquisition of plant and machinery amounting to Rs.1.35 crores as capital expenditure. It is only an amount of Rs.20,41,158/- that has been claimed as revenue expenditure and there is no question of converting capital expenditure into revenue expenditure.
21. Under the circumstances, we answer the question referred to us in the negative, in favor of the assessed and against the Revenue. The reference is disposed of accordingly.