Madras High Court
M/S.Chemplast Sanmar vs The Assistant Commissioner Of on 7 August, 2018
Author: T.S.Sivagnanam
Bench: T.S.Sivagnanam
In the High Court of Judicature at Madras Dated : 07.8.2018 Coram :
The Honourable Mr.Justice T.S.SIVAGNANAM and The Honourable Mrs.Justice V.BHAVANI SUBBAROYAN Tax Case Appeal No.859 of 2008 M/s.Chemplast Sanmar Limited, Chennai-86. ...Appellant Vs The Assistant Commissioner of Income Tax, Company Circle-I(3), Chennai. ...Respondent APPEAL under Section 260A of the Income Tax Act, 1961 against the order dated 08.5.2007 in ITA No.1013/Mds/2005 on the file of the Income Tax Appellate Tribunal, 'A' Bench, Chennai for the assessment year 2000-01.
For Appellant : Mr.Vikram Vijayaraghavan For Respondent : Mrs.R.Hemalatha, SSC Judgment was delivered by T.S.SIVAGNANAM,J Heard the learned counsel for the appellant as well as the learned Senior Standing Counsel for the respondent.
2. This appeal by the assessee is directed against the order by the Income Tax Appellate Tribunal, 'A' Bench, Chennai in ITA.No.1013/Mds/2005 dated 08.5.2007 for the assessment year 2000-01.
3. The assessee is engaged in the business of manufacture of PVC and caustic soda and also in the business of shipping. For the assessment year 2000-01, they filed return of income on 30.11.2000 admitting 'NIL' income under normal computation and Rs.9,67,19,274/- under the provisions of Section 115JA of the Income Tax Act, 1961 (the Act for brevity) and paid tax to the tune of Rs.3,72,36,920/- under Section 115JA of the Act. The said return was processed under Section 143(1) of the Act. Subsequently, a notice under Section 148 was issued and the assessment under Section 143(3) read with Section 147 of the Act was completed on 31.3.2004 determining the total income of Rs.1,10,36,000/- under normal computation and Rs.10,82,98,335/- under Section 115JA of the Act. While completing the assessment, the Assessing Officer made certain adjustments, of which, we are concerned only with regard to expenditure on the textile project amounting to Rs.2,38,25,283/-.
4. During the previous year relevant to the assessment year 2000-01, the appellant intended to start a textile business and since the project did not materialize, the appellant decided to abandon the project and in view of the same, they incurred an expenditure of Rs.2,38,25,383/- and treating the expenditure as revenue expenditure, it was returned in the books in the previous assessment year relevant to the assessment year 2000-01. The Assessing Officer, by order dated 31.3.2004, while considering the preoperative expenses of taxable project, held that the act of the assessee in debiting the capital expenditure to its profit and loss account is not in accordance with the provisions of law and accordingly, disallowed the same. In other words, the Assessing Officer rejected the claim of the assessee on the ground that the expenditure was capital in nature.
5. The assessee preferred an appeal before the Commissioner of Income Tax (Appeals) [for short the CIT(A)] contending that though a new unit was to produce a different product from that of the existing unit, the decisive factors for allowance are unity of control, management and common fund, etc., and that the assessment is for the company as a whole and not unit wise and the expenditure that could be normally allowed should be allowed even if the same is incurred for a new project. The asseseee pointed out that the expenditure were revenue expenses because they related to salaries of existing employees, rent, insurance, rates and taxes, traveling and conveyance, repairs and maintenance and miscellaneous expenditure. The Assessing Officer held that the textile project, which the assessee intended to start, being totally a new project distinguished from the manufacturing of PVC and caustic soda and the business of shipping, in which the assessee is currently engaged, the entire expenditure has to be treated as a capital expenditure.
6. The CIT (A) relied upon the decision of the Hon'ble Division Bench of this Court in the case of EID Parry (India) Ltd. Vs. CIT [reported in (2002) 257 ITR 0253] and held that since the expenditure was incurred for the purpose of setting up a new project, which was subsequently abandoned, the nature of expenditure will not change from capital to revenue.
7. Aggrieved by the same, the assessee preferred an appeal before the Tribunal. The Tribunal concurred with the findings of the CIT (A) and held that the textile project was totally a new project for the assessee, as they were engaged in the manufacture of PVC and caustic soda and also in the business of shipping and that the Hon'ble Division Bench of this Court in the decision in EID Parry (India) Ltd., held that the expenditure incurred in attempt to commence production of new article can only be construed as capital expenditure. Thus, the appeal filed by the assessee was rejected. Aggrieved by the same, the assessee has preferred this appeal.
8. This appeal was admitted on 08.7.2008 on the following substantial question of law :
Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenditure incurred towards a new project which was abandoned subsequently is capital in nature and hence, not an allowable deduction ?
9. Mr.Vikram Vijayaraghavan, learned counsel for the appellant submits that the expenses, which were incurred, were neither capital nor personal in nature and therefore, should have been treated as revenue expenditure. He would further submit that the Tribunal ought to have appreciated that though a new unit was to produce a different product from that of the existing units, the decisive factors for allowance are unity of control, management and common fund, etc. He would also submit that the assessment was for the assessee company as a whole and not unit wise and that the expenditure, which would normally be allowed, should be allowed even if the same was incurred for a new project.
10. The learned counsel for the appellant distinguishes the decision in EID Parry (India) Ltd., by contending that the question, which fell for consideration before the Hon'ble Division Bench, was as to whether the expenditure incurred by the assessee in connection with the establishment of a new methanol project in the earlier years (1975-1978), which was ultimately abandoned, was not an allowable deduction for the assessment year 1981-82. It was pointed out that the Hon'ble Division Bench considered the fact that such expenditure incurred by it for a new project, which was in the nature of capital expenditure, remains as such and by claiming it in a subsequent year as revenue expenditure, the assessee cannot convert as to what was capital expenditure into revenue expenditure. Hence, the decision in EID Parry (India) Ltd., is factually distinguishable.
11. Reliance is placed on the decision of the Division Bench of this Court, to which, one of us (TSSJ) was a party, in the case of M/s.Tamil Nadu Magnesite Ltd. Vs. ACIT [TCA.Nos.907 and 908 of 2007 dated 05.6.2018] and a reference is made to the findings in paragraph 28 of the said judgment. Reliance is also placed on the decision of the Hon'ble Division Bench of the High Court of Delhi in the case of Jay Engineering Works Ltd. Vs. CIT [(2009) 311 ITR 0405] and it is submitted that the nature of new business is not a decisive test and what is required is unity of control, management, etc.
12. Reliance is further placed on the decision of the Hon'ble Supreme Court in the case of Produce Exchange Corporation Ltd. Vs. CIT [reported in (1970) 77 ITR 0739] for explaining the meaning of the expression 'same business' for the purpose of Section 24(2) of the Act and the decisive test to be applied. Reliance is again placed on the decision of the Hon'ble Division Bench of this Court in the case of CIT Vs. Sakthi Sugars Ltd. [reported in (2011) 339 ITR 0400] to point out the decisions, which have been laid down for identifying an expenditure and to examine as to whether it is a capital expenditure or revenue expenditure. Referring to Section 70 of the Act, it is submitted that the said provision deals with set off of loss from one source against income from another source under the same head and therefore, what is important is the source and nothing else.
13. On the above grounds, the learned counsel for the assessee submits that the CIT (A) as well as the Tribunal erroneously applied the decision in the case of EID Parry (India) Ltd., which is factually distinguishable and the expenses, which have been incurred as set out in the order passed by the CIT (A), will clearly show that they are revenue expenditure and that the CIT (A) as well as the Tribunal applied the wrong test, came to a wrong conclusion and prayed for answering the substantial question of law in favour of the assessee.
14. Per contra, the learned Senior Standing Counsel for the Revenue points out that the issue relating to unity of control, management and common fund, etc., was never raised before the CIT (A) or before the Tribunal and that a new ground cannot be raised before this Court for the first time in this appeal. Therefore, the assessee should not be permitted to canvass such a ground. Referring to the decision in the case of Jay Engineering Works Ltd., it is further submitted that the Courts pointed out that there may be several permutations and combinations that may arise for determining whether the expenditure is revenue or capital and each case may be dealt with on the principles, which have been laid down and accepted by the Courts.
15. By referring to the decision in the case of M/s.Tamil Nadu Magnesite Ltd., it is submitted by the learned Senior Standing Counsel for the Revenue that what is required to be considered is the nature of advantage in a commercial sense and when it is in the capital field, then the expenditure would be disallowable on an application of the test laid down therein. Thus, if the expenditure is for enduring benefit, it is capital in nature.
16. The learned Senior Standing Counsel for the Revenue places reliance on the decision of the Full Bench of the Delhi High Court in the case of Indo Rama Synthetics (I) Ltd. Vs. CIT [reported in (2011) 333 ITR 18]. Referring to a decision, which has been quoted in the said judgment, it is pointed out that if the expenditure is incurred with a view to bringing an asset or advantage into existence, it will be treated as a capital expenditure. It is also submitted that Section 70 of the Act can have no application to the case on hand, as the said provision commences with the words 'save as otherwise provided in this Act'. This expression would mean that except as otherwise provided under the Act and the said provision cannot be called in question and the only provision, which deals with preoperative expenditure where amortization is permissible, is Section 35D of the Act.
17. The learned Senior Standing Counsel for the Revenue also places reliance on the decision of the Honble Division Bench of this Court in the case of M/s.Mascon Technical Services Limited now known as B.T. System & Services Limited Vs. CIT III, Chennai [TCA.No.2699 of 2006 dated 23.7.2013] to support the contention that the expenditure incurred by the assessee was capital in nature.
18. We have heard the learned counsel or the parties and perused the materials placed on record.
19. The CIT (A) and the Tribunal affirmed the disallowance made by the Assessing Officer in the assessment order dated 31.3.2004 on the sole ground that when the assessee, which was engaged in the business of shipping and the manufacture of PVC and caustic soda, wanted to set up a new project, the incurred expenditure for a new project that was a different line of business, which was subsequently abandoned, will have to be treated as a capital expenditure and not a revenue expenditure in the light of the decision in the case of EID Parry (India) Ltd.
20. We have to first decide as to whether the decision in the case of EID Parry (India) Ltd., would apply to the case of the appellant.
21. In the decision in the case of EID Parry (India) Ltd., the assessee set up a new project for manufacture of methanol at Ennore. It incurred an expenditure on that account for over a period of time all of it prior to the assessment year 1981-82 (subject year). The amount spent for the project on various items such as engineering fee, travel expenses, interest, salary for employees working in the project, legal fees, etc., for the period from 1975 to 1978 aggregated to Rs.37,55,159/-. The assessee sought to claim those items as deductible items as expenditure for the assessment year 1981-82. The undisputed fact in the said case was that the expenditure has been incurred prior to the assessment year in question. The assessees case that they subsequently abandoned the project does not on that score convert what was an expenditure in the nature of capital expenditure into a revenue expenditure and that setting up of a new project was clearly in the capital field and not in that of the revenue. The abandonment of that project is the abandonment of a project, on which, capital expenditure had been incurred. Further, the expenditure incurred on that capital project was not something, which could be regarded as revenue expenditure laid out exclusively and wholly for the purposes of business of the assessee, as what the assessee was trying to start was a new business for the manufacture of a new product and the expenditure incurred therein was clearly capital expenditure and not revenue expenditure. This Court pointed out that such expenditure incurred by it for a new project, which was in the nature of capital expenditure remains such and by claiming it in a subsequent year as revenue expenditure, the assessee cannot convert what was capital expenditure into revenue expenditure. Thus, the question, which was referred for a decision, was as to whether the expenditure incurred by the assessee in connection with establishment of a new methanol project in the earlier years, which project was ultimately abandoned was not an allowable deduction for the assessment year 1981-82 and accordingly, this Court answered the question in favour of the Revenue and against the assessee.
22. We find that the facts in the case of EID Parry (India) Ltd., are wholly different and not applicable to the case on hand. Therefore, we are fully convinced that both the CIT (A) as well as the Tribunal wrongly applied the decision in the case of EID Parry (India) Ltd., which revolved around a different factual matrix.
23. The assessees case is that the decisive factors for allowance are unity of control, management and common fund, etc.
24. The Revenue pointed out before us that such an issue was never raised before the CIT (A) nor before the Tribunal and cannot be permitted to raise for the first time before this Court.
25. We have perused the grounds of appeal filed before the CIT (A) wherein a specific ground has been raised stating that the Assessing Officer ought to have appreciated that the decisive factors for allowance are unity of control, management, inter connection, inter lacing, inter dependent, common fund, etc. In other words, if the above factors are fulfilled, then the expenditure should be allowed even if the project is a new one. Therefore, it is incorrect on the part of the Revenue to contend that such a question was never raised before the CIT (A) nor before the Tribunal. Further, we find that the CIT (A) did not give any finding on such a ground raised by the assessee. Thus, we are entitled to examine the said question raised by the assessee before us.
26. In this regard, we are guided by the decision of the Honble Division Bench of the Delhi High Court in the case of Jay Engineering Works Ltd., which took into consideration all the relevant decisions on the point, some of which are identical to the facts of the present case in the sense that the assessee ran a particular line of business and wanted to start a different line of business, for which, expenditure was incurred and subsequently, the business was abandoned and the question was as to how the expenditure had to be treated. The Delhi High Court referred to the decisions of
(i) the Allahabad High Court in the case of Prem Spinning & Weaving Mills Co. Ltd. Vs. CIT [reported in (1975) 98 ITR 20],
(ii) the Honble Supreme Court in the case of Produce Exchange Corporation Ltd. Vs. CIT [reported in (1970) 77 ITR 739],
(iii) the Gujarat High Court in the case of CIT Vs. Alembic Glass Industries Ltd. [reported in (1976) 103 ITR 715],
(iv) again the Allahabad High Court in the case of CIT Vs. Expanded Metal Manufacturers [reported in (1991) 189 ITR 317],
(v) the Delhi High Court in the case of CIT Vs. Modi Industries Ltd. [reported in (1993) 200 ITR 341] and
(vi) again the Honble Supreme Court in the case of Veecumsees Vs. CIT [reported in (1996) 220 ITR 185].
27. After referring to the above referred to decisions, the High Court of Delhi, in the case of Jay Engineering Works Ltd., held as follows :
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.
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.
28. Thus, from the above decisions, it is clear that if unity of control, management and common fund are with the assessee, then it is no matter as to whether a totally different line of business is started by the assessee. Thus, unity of control is the decisive test and not the nature of two lines of business. In fact, the CIT (A) and the Tribunal failed to apply this decisive test and rather inclined to take note of the decision in the case of EID Parry (India) Ltd., and rejected the case of the assessee. We have held that the decision in the case of EID Parry (India) Ltd., is not applicable to the facts and circumstances of the case and in fact, it was distinguished in the decision in the case of Jay Engineering Works Ltd., as well.
29. Therefore, the proper test to be applied is not the nature of new line of business, which was commenced by the assessee, but unity of control, management and common fund.
30. In the instant case, we find that this issue was never disputed by the Assessing Officer or the CIT (A) or the Tribunal, as could be seen from the orders passed by the respective Authorities. The Authorities concurrently held that it is the assessee, who had commenced business and the assessee would mean the assessee company as a whole and not a different entity. Therefore, when there is commonality of control, management and fund, those would be the decisive factors to be taken into consideration and not the new line of business namely textile business.
31. Having held so, it may not be necessary for this Court to dwell upon the facts, which have been identical in the decision in the case of Sakthi Sugars Ltd., as, on facts, we are fully convinced that the decisive factors involved are unity of control, management and common fund.
32. In the decision in the case of Tamil Nadu Magnesite Ltd., the issue as to what would be the proper test to be applied to distinguish capital and revenue expenditure was considered and after referring to the decision of the Honble Supreme Court in the case of Empire Jute Co. Ltd. Vs. CIT [reported in (1980) 3 Taxmann 69] and other decisions on the point, it was held as follows :
20. To decide the substantial questions of law framed for consideration, we would have to apply the proper test, which would distinguish capital and revenue expenditure. This question came up for consideration before the Hon'ble Supreme Court in Empire Jute Co.(referred supra). It was pointed out that from time to time cases have evolved various tests for distinguishing between capital and revenue expenditure, but, no test is paramount or conclusive. Further, there is no all-embracing formula, which can provide a ready solution to the problem; no touchstone has been devised. It was pointed out that every case has to be decided on its own facts keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. After referring to the decision of Lord Radcliffe in CIT Vs. Nchanga Consolidated Copper Mines Ltd. reported in [1965] 58 ITR 241, it was held that 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".
21. Further, it was held that there may be cases where expenditure even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It was pointed out that it is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of 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.
22. Further, it was pointed out that if the advantage consists merely in facilitating the assessee's trading operations or enabling the 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. Thus, it was held that the test of enduring benefit is not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.
23. Further, it was held that another test, which is often applied is the one based on distinction between fixed and circulating capital. This test was applied by Lord Haldane in the case of John Smith & Son vs. Moore 12 TC 266, where the learned Law Lord drew the distinction between fixed capital and circulating capital by holding that fixed capital is what the owner turns to profit by keeping it in his own possession; circulating capital is what he makes profit of by parting with it and letting it change.
33. The test laid down in the decision in the case of Tamil Nadu Magnesite Ltd., if applied to the case on hand, it has to be held that the expenditure incurred by the assessee was revenue expenditure.
34. The learned Senior Standing Counsel for the Revenue has referred to the decision in the case of Indo Rama Synthetics (I) Ltd. In fact, reference to the said decision was with regard to paragraph 8 wherein another decision was quoted. Ultimately, in paragraph 9, the Honble Full Bench of the Delhi High Court held in favour of the assessee concluding that the expenditure incurred was in the nature of salary, wages, repairs, maintenance, design and engineering fee, traveling and other expenses of administrative nature and they are to be treated as revenue expenditure. Therefore, the decision in the case of Indo Rama Synthetics (I) Ltd., supports the case of the assessee rather than the case of the Revenue.
35. While on this issue, we would like to point out that the CIT (A), in paragraph 6 of the order, referred to the various expenditure, which have been claimed by the assessee. We find that these expenditure are similar to the expenditure referred to in Indo Rama Synthetics (I) Ltd., which were held to be revenue expenditure. In fact, the Assessing Officer as well as the CIT (A) referred to these expenditure as preoperative expenses.
36. Interestingly, in paragraph 6.1 of the order of the CIT (A), it has been observed that all the heads, under which, expenditure relating to textile project was incurred, are generally revenue expenditure. It is not known as to what made the Authority to take a different decision after having accepted that they are revenue expenditure and however, ultimately, the CIT (A) concluded that on account of new line of business, the expenditure was a capital expenditure, which has been held by us as not a decisive test.
37. The learned Senior Standing Counsel for the Revenue has referred to the decision of the Honble Division Bench of this Court in the case of M/s.Mascon Technical Services Limited wherein the expenditure was incurred by the assessee for putting up publication for the purpose of widening its capital base and though the assessee contended that this expenditure was incurred so as to improve the cash availability, it was held that the fact remains that the expenditure incurred was only for the purpose of expansion of capital base and therefore, should be construed as capital expenditure and merely because after the expenditure was incurred, just before the public issue, by reason of the orders of the Security Exchange Bureau of India, the assessee could not go in for public issue and the efforts were aborted, the expenditure will not lose its character as capital expenditure. The facts in the case of M/s.Mascon Technical Services Limited are entirely different, as the expenditure was incurred for the purpose of widening the capital base and the assessee could not go in for public issue by reason of the orders of the Security Exchange Bureau of India and therefore, the efforts were aborted.
38. In the instant case, as admitted by the CIT (A), the preoperative expenses are all generally revenue expenditure and by applying a wrong test, which is not the decisive test, the Authorities had concurrently committed an error in treating the expenditure as capital expenditure.
39. For all the above reasons, the order passed by the Tribunal calls for interference and the substantial question of law, which has been framed for consideration, has to be necessarily answered in favour of the assessee and is accordingly answered in favour of the assessee and against the Revenue. In the result, the above tax case appeal is allowed. No costs.
07.8.2018 Speaking Order Index : Yes Internet : Yes To
1.The Income Tax Appellate Tribunal, Madras 'A' Bench.
2.The Assistant Commissioner of Income Tax, Company Circle-I(3), Chennai.
RS T.S.SIVAGNANAM,J AND V.BHAVANI SUBBAROYAN,J RS TCA.No.859 of 2008 07.8.2018