Patna High Court
Chhabirani Agro Industrial ... vs Commissioner Of Income-Tax on 17 December, 1990
Equivalent citations: [1991]191ITR226(PATNA)
JUDGMENT G.C. Bharuka, J.
1. These two references have been made by the Income-tax Appellate Tribunal under Section 256(1) of the Income-tax Act, 1961. Since both the reference applications involve common questions of law, these are disposed of by a common judgment. The questions of law referred for the opinion of this court are as follows :
"(i) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to deduction of the bank guarantee commission and the expenses incurred on maintaining offices at Varanasi and Durgawati ?
(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in upholding the addition on account of interest on the fixed deposit ?"
2. The assessee-company was incorporated under the provisions of the Companies Act, 1956, on July 11, 1969. From the memorandum of association of the company, it transpires that this company was established, inter alia, with the object of (i) carrying on business of manufacturing vanaspati products, ghee, etc., and (ii) for purchasing, taking on lease or acquiring otherwise mines and quarry mineral rights and/or sale and deal in coal, etc. Pursuant to these objects, the company entered into an agreement on January 17, 1970, with M/s. D. Emet (India) Private Limited for purchase of a complete vanaspati plant on turnkey basis for Rs. 54.69 lakhs. 10 per cent, of this amount was to be paid in advance and the balance was to be paid in seven yearly instalments to be covered by deferred payment guarantee. The plant was to be commissioned within 18 months from the date of the agreement, i.e., before July 17, 1971. The company paid 10 per cent. of the price as advance and for the balance it arranged an irrevocable deferred payment guarantee from the Bank of Baroda. For securing this guarantee, the assessee had to deposit Rs. 5 lakhs with the bank. It had also to pay bank guarantee commission being Rs. 51,030 during the assessment year 1973-74. For various reasons, the plant could not be commissioned during the previous years relevant to the assessment years in question, namely, assessment years 1972-73 and 1973-74.
3. As per its objects, on July 2, 1970, the assessee-company also entered into a separate agreement to act as an agent of Pure Searsole Collieries for a period of ten years. During the two assessment years in question, the company earned a total income of Rs. 1,40,709 as commission from this venture.
4. The assesses-company had also set up offices at Durgawati where the vanaspati plant was to be set up and also at Varanasi for general administration of its business. It incurred expenses to the tune of Rs. 18,041 and Rs. 23,966 for maintenance of its offices during the relevant assessment years. It may also be relevant to state here that, as stated above, the company had deposited Rs. 5 lakhs with the Bank of Baroda for securing the guarantee but since there was no fixed period for the said deposit and the rate of interest was dependent on the period of deposit, the interest accrued on these deposits was not construed as income during these two years by the company.
5. While making the assessment, the Income-tax Officer disallowed the expenditure relating to the two offices and the bank guarantee commission on the ground that these are capital expenses and added the accrued interest on the aforesaid fixed deposit to the income of the two years. The company challenged the action of the Assessing Officer in appeals but lost on these counts both before the Appellate Assistant Commissioner as well as the Tribunal.
6. So far as the two disallowances are concerned, the submission of Mr. Rameshwar Prasad, learned senior counsel for the company, is that since there was unity of control in the two ventures, namely, (i) coal agency and (ii) intended vanaspati manufacturing unit, the two items of expenditure had been wrongly disallowed. On the other hand, learned counsel for the Revenue has submitted that the expenditure in question had been incurred in relation to the vanaspati manufacturing unit which had not been, admittedly, set up during the two periods in question. Therefore, the outgoings should be treated as capital expenditure and, as such, cannot be allowed in view of Section 37(1) of the Act. Both sides have relied on various authorities in support of their contentions.
7. At first, I would like to deal with the disallowance of the bank guarantee commission. Admittedly, this commission was paid to the Bank of Baroda in respect of its cost for securing their guarantee to the manufacturers of vanaspati plant. Therefore, the incurring of this expenditure is solely attributable to the acquisition of the plant as an asset of enduring benefit. In the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, at page 175, it has been held by.the Supreme Court that:
"The accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition."
8. Since the bank guarantee commission in question was paid for the purpose of acquiring the plant, it has to be treated as an integral part of its cost.
9. Learned counsel for the company has placed reliance on a decision of the Madras High Court in the case of Sivakami Mills Ltd. v. CIT [1979] 120 ITR 211 in support of his contention that the bank guarantee commission is a revenue expenditure. In this case, the assessee-company had purchased some machinery on deferred payment terms and had obtained a guarantee from a bank in favour of the sellers of the machinery, in lieu whereof the bank charged certain commission. The High Court took the view that the payment of guarantee commission was a revenue expenditure. The reasons assigned are, (i) it is the option of the assessee to evolve the mode of capitalising the cost of the capital asset, (ii) the rule of determining the cost of the capital assets laid down in Challapalli's case [1975] 98 ITR 167 (SC) will apply only for the period prior to the commencement of production, (iii) the bank guarantee commission was paid only, as a business exigency and as such was an integral part of the conduct of the business, and (iv) the guarantee commission per se does not itself bring into existence any asset of enduring nature.
10. With respect, I find myself unable to agree with this view. In view of the law laid down by the Supreme Court in Challapalli's case [1975] 98 ITR 167, laying down the mode of determining the cost of a capital asset, it is now no more open to evolve new principles in this regard. Once it has been authoritatively held that "all expenditure necessary to bring such assets into existence and put them in working condition" will form part of the cost of the asset, it is wholly irrelevant whether the asset was acquired prior to the commencement of business or subsequent to such commencement. It is also fallacious to say that it is still at the option of the assessee to capitalise or not to capitalise the expenses directly incidental to the acquisition of such assets. I may also indicate here that all the expenses made for acquisition of a capital asset are always related to the conduct of the business, none the less such expenses are capital in nature.
11. In the present case, the bank guarantee commission was paid as an unavoidable incidence of bringing into existence the plant in question ; therefore, this is necessarily an integral part of the cost of the capital asset in question. A similar view has been taken by the Gujarat High Court in the case of CIT v. Vallabh Glass Works Ltd. [1982] 137 ITR 389. With respect, I entirely agree with this view. Consequently, I hold that the instant bank guarantee commission is a capital expenditure and is not admissible under Section 37(1) of the Act.
12. So far as office expenses are concerned, in my view, these have been wrongly disallowed, The Tribunal has taken the view that since the vanas-pati manufacturing unit had not yet been set up and no office was required for carrying on the business of coal agency, these expenses are not allowable under Section 37(1) of the Act. In the present case, admittedly, during the periods under consideration, the assessee-company was carrying on business of coal agency in consonance with its objects. Carrying on business of manufacturing vanaspati was also within the objects of the company. Therefore, these were only different ventures which the company was entitled to undertake for carrying on its business. Even for coal agency business, it was required to have an office for maintaining books of account and other connected activities. The company had maintained common books of account in respect of its ventures of coal agency as well as with regard to setting up of the vanaspati manufacturing unit. The income earned out of coal agency has been spent in various forms in the process of setting up of the new venture. In the case of Setabganj Sugar Mills Ltd. v. CIT [ 1961 ] 41 ITR 272, the Supreme Court has held (headnote) :
"In order to determine whether different ventures can be said to constitute the same business what one has to see is whether there was any interconnection, any interlacing, any interdependence, any unity embracing the ventures, whether the different ventures were so interlaced and so dovetailed into each other as to make them the same business."
13. In the case of Produce Exchange Corporation Ltd, v. CIT [1970] 77 ITR 739 (SC), it has been held that the nature of two businesses is not the decisive test for determining whether the two lines of businesses constitute the same business or not. Applying these tests, I have no hesitation in holding that the two ventures constitute the same business because there is common management, common books of account, common funds and common place of business. These factors clearly establish an interconnection, interdependence and unity embracing the ventures. Therefore, the expenses incurred in connection with the offices at Durgawati and Varanasi are revenue expenses which are allowable in computing the income of the assessee.
14. So far as question No. 2 is concerned, it is a matter of record as noticed by the Tribunal itself that the period of deposit of Rs. 5 lakhs with the Bank of Baroda was not certain. Since the rate of interest payable on the bank deposits was dependent on the period of deposit, the quantum of interest which can be said to have accrued on the said deposit was not ascertainable during the periods under consideration. In this view of the matter, there was no occasion on the part of the assessee-company to include the supposed quantum of accrued interest in its income. It was open to the assessee-company to treat the entire amount of interest as income of the year during which it was computed and paid. The Tribunal has erred in holding that the Income-tax Officer had rightly added the alleged accrued interest as income of the periods in question on a hypothetical and proportionate basis.
15. In view of the reasons as stated above, my answer to the first question, in respect of the bank guarantee commission is in favour of the Department and, in respect of the office expenses, it is against the Department. The second question is answered in the negative and in favour of the assessee.
There will be no order as to costs.
16. Let a copy of this judgment be sent to the Assistant Registrar of the Income-tax Appellate Tribunal, Patna Bench, Patna.
G.G. Sohani, C.J.
17. I agree.