Income Tax Appellate Tribunal - Hyderabad
Income-Tax Officer vs Deepak Nitrite Ltd. on 4 March, 1987
Equivalent citations: [1987]22ITD374(HYD)
ORDER
P.J. Goradia, Accountant Member
1. Two grounds raised in this appeal are as under --
1. On the facts and in the circumstances of the case and in law, the learned CIT (Appeals) erred in allowing the foreign tour expenses of Rs. 98,946 as revenue expenditure.
2. The learned CIT (Appeals) erred in holding that the book value of Research and Development capital assets, should be included in capital employed for the purpose of Section 80J.
2. In this case, the assessment was completed Under Section 143(9) read with Section 144B of the IT Act. The relevant facts and the decision of the IAC as stated in the instructions Under Section 1 44B are reproduced here-below--
The ITO has proposed to disallow the following foreign tour expenses--
Rs.
1. Shri N.N. Tangri, Additional Chief Engineer,F.C.I. 17,354
2. Shri D.P. Khungar, Chief Engineer, F.C.I. 17,354
3. Shri A.K. Dasgupta, Works Manager of thecompany. 17,354
4. Shri A.K. Dasgupta, Works Manager of thecompany. 36,014
5. Shri O.K. Mehta, Mg. Director 37,5491 25,625 He has held that these persons had visited foreign countries (Australia & U.S.A.) for ascertaining the suitability of the plant to manufacture ammonia/methanol. As the expenses were incurred for the purpose of a new product and for installation of a new plant, the ITO held it to be capital expenditure and accordingly disallowed the same. He has also held that no depreciation is allowable on this as no tangible asset has come into existence. The assessee's representative has argued that the expenditure was incurred for assessing the suitability of the existing plant over there in Australia to be purchased by the aasessee for the manufacture of Ammonia/Methanol which is their important feed material for manufacturing sodium nitrite and sodium nitrate. According to him, the expenditure was for preserving the business, especially when the assessee-company's agreement with M/s. G.S.F.C. Ltd. for the supply of this material is to come to an end in the near future and the effort in establishing the plant to manufacture ammonia is a part and parcel of the existing business of the company and as such it was claimed that the expenditure is not a capital expenditure and is allowable as revenue expenditure. It was argued that the Managing Director Shri O.K. Mehta visited the other foreign countries also for export promotion of the company's products as the Govt. of India had banned the import of Sodium Nitrite and had decided to give 10 % cash incentives against the export of this product. It was, therefore, argued that the expenses incurred by Shri O.K. Mehta at least are allowable as revenue expenses. Prom the copies of the application filed for release of foreign exchange from the Reserve Bank of India, it is seen that the company was holding a letter of intent for the manufacture of 20,000 tonnes of Methanol for which it had decided to implement this scheme by importing a second-hand plant. For this purpose they located one used plant in Australia which can produce Methanol and Ammonia combined and for this purpose, the Works Manager and Techical Adviser of the company had visited the said plant in the month of June, 1976. As the Govt. of India wanted that an independent survey should be made by any Indian Engg. Co., who are well versed with such type of industries, the assessee-company appointed Planning and Development Division of Fertilizer Corporation of India for this work and requested them to depute two of their senior people for the survey. The Fertilizer Corporation of India had deputed Shri D.P. Khungar, Chief Engineer and Mr. N.N. Tangri, Additional Chief Engineer for this work. Thus, the Works Manager, the Managing Director as well as the Technical Adviser of the company had visited Australia for inspecting the plant intended to be imported. The Managing Director has also visited other countries for exploring the possibility of export of Sodium Nitrite as seen from the application dated 24-4-1976 to the Reserve Bank of India. In view of this, it is clear that the foreign tour expenses were mainly incurred for the silicon for purchase of a new plant from Australia for the manufacture of Ammonia/Methanol.
2.1 In respect of ground No. 2 the relevant facts together with the decision of the IAC as found in para 5 of the instructions are as under--
As regards the claim for inclusion of R & D building, the assessee's representative has stated that these are the assets of the company and were existing on the first day of the accounting year and, therefore, these items should be included in the capital employed. Rule 19A(2) provides that the value of the assets on the first day of the computation period shall be their written down value. The term "written down value" is denned in Section 43(6) which, is (i) in the case of the assets acquired in the previous year, the actual cost to the assessee, and (ii) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him. "'Actual cost" is also denned in Section 43(1) which provides that the actual cost to the assessee shall be the actual cost as reduced by the amount of any deduction allowed under Clause (iv) of sub-section (1) of Section 35. Since 100% cost has been allowed to the assessee Under Section 35(l)(iv), the actual cost to the assessee in this case would be nil. The ITO is, therefore, justified in taking the value of these assets at nil for the purpose of relief Under Section 80J.
3. On appeal, the Commissioner (Appeals) concerning the first ground passed the following order in para 3 extracted below --
Next ground of appeal is directed against the disallowance of Rs. 98,946 out of foreign tour expenses. In para 4 of the assessment order, details of total claim of Rs. 1,25,625 for expenses on foreign tours are given. Out of that total claim, the ITO has allowed a sum of Rs. 26,679 only which has resulted in the disallowance of Rs. 98,946, The corresponding additions were upheld by me in assessment years 1978-79 and 1979-80 but the ITAT Ahmedabad Benches has accepted the appellant's plea that the foreign tour expenses are allowable as revenue expenses. On that basis, I would delete the said addition of Rs. 98,946.
3.1 In respect of the second ground the order passed by the Commissioner (Appeals) in para 6 is reproduced below--
Next ground of appeal is directed against the exclusion of the book value of Research & Development capital assets in quantification of capital base for computation of relief Under Section 80J. Now the point taken is that relief Under Section 35 is allowed for encouraging research and development activities and that 100 % deduction for the cost of capital asset of R & D is not allowed by way of depreciation. In appellant's case, the cost of assets stands in the books and. is included in the assets side of the balance-sheet. In my opinion, this is a valid claim and hence, the ITO is directed to include the values of R & D equipments and R & D building in the capital base for quantification of relief Under Section 80J.
4. At the time of hearing, the learned Departmental Representative submitted that in assessee's own case for two years similar issue as in ground No. I was decided in favour of the assessee but it appeared that decision of the Supreme Court rendered years back was not considered or placed before the Bench. It was submitted that in recent decision in CIT v. Jalan Trading Co. (P.) Ltd. [1985] 155 ITR 536 various decisions of the Supreme Court rendered earlier were considered and it was held that If the expenditure was meant for' bringing into existence an asset or advantage of enduring benefit it was to be treated as of capital nature. Besides, whether the expenditure incurred was fruitful or not was not relevant for consideration for various tests. Reliance was placed on the decision in the case of Indian Oxygen Ltd. v. CIT [1987] 164 ITR 466 (Cal.). Various other decisions on the aspect of purpose of expenditure being material for consideration for which reliance was placed on CIT v. S.L.M. Maneklal Industries Ltd. [1977] 107 ITR 133 (Guj.), Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC) and in the case of Fancy Corpn. Ltd. v. CIT [1986] 50 OTR (Bom.) 140. Even if the purpose was permanent supply of ammonia the same was to be taken as enduring benefit.
4.1 In respect of the second ground it was submitted that the manner in which the assets were shown in the balance sheet for the purpose of accounts was not at all relevant for the issue under consideration. It was the cardinal principle of interpretation that statute as a whole was required to be considered and consistent approach has to be obtained. The language of Section 80J amended retrospectively was very much clear on the aspect of computation of capital according to which only the amounts of written down value were required to be considered. Besides, Section 43(1) of the Act specifically referred to the manner in which the actual cost was required to be taken and in this case 100% having been allowed only the nil value is required to be considered for the purpose of assets comprised in R & D Department. Reliance was placed on CIT v. Sundaram Fastners Ltd. and CIT v. Mahindra Sintered Products Ltd. [1986] 24 Taxman 55 (Bom.).
5. The learned representative of the assessee submitted that the issue was almost covered by decision in assessee's own case in ITA No. 192/Ahd/82 for asst. year 1978-79 and ITA No. 911/Ahd/83 for asst. year 1979-80 where similar issue on similar facts was considered and decided in favour of the assessee. He then again reiterated factual history in respect of the events developed from time to time in respect of the supply and purchase of the liquid ammonia from Gujarat State Fertilizer Corporation and the uncertainties connected therewith. The purpose was to ensure the adequate supply of liquid ammonia and for this purpose the assessee-company had been trying hard to find out alternative sources of supply and for this purpose was making various inquiries including going on for a project of manufacturing liquid ammonia. Again, it was emphasised that the assessee never wanted to have backward integration in assessee's business. The plant for which the tour was undertaken was a second-hand plant having a capacity of only 192 tons a day of manufacturing liquid ammonia together with methanol. Usually the normal size of the plant is that manufacturing 1,350 tons per day of ammonia. The Australian project which was visited was abandoned and further efforts were made which ultimately resulted in the foreign collaboration with USA-based company and the same was undertaken by a separate company promoted by the assessee and this way the assessee was ensured of adequate supply of the basic raw material.
5.1. In respect of the ground No. 2 it was stated that the scientific research was related to the business and that was an admitted fact. The 100% deduction from the actual cost was granted not by way of depreciation but by way of incentive deduction Under Section 35 of the Act. It was neither accelerated depreciation because otherwise it will lose the character of incentive deduction. An incentive is one which it is granted to the assessee over and above the actual cost to the assessee. Therefore, for the purpose of Section 80J the actual cost of the asset's comprised in R & D Department could not be reduced. The Explanation 1 to Section 43(1) did not apply to the case under consideration because the Explanation is applicable to a case where the asset is used in the business after it has ceased to be used for scientific research. In the case under consideration the assets continued to be used for scentific research. Even otherwise since the assets are not entitled to depreciation the actual cost is required to be adopted for the purpose of capital base.
6. We have gone through the entire material to which our attention was drawn. We have also considered the various judicial pronouncements to which our attention was drawn together with the settled law on the subject. In our opinion, both the grounds are required to be decided in favour of the assessee. The reasons are as follows :
6.1. In respect of ground No. 1 one thing is quite clear looking to the entire material and the submissions made at the Bar that whole strategy of attempts over a long period involving expenditure emanated from acute need felt by the assessee to find an alternative source of supply of liquid ammonia, the basic raw material for running of the assessee's business. It is also an uncontroverted fact that the assessee had strained relations with the only supplier viz. Gujarat State Fertilizer Co. Ltd., Baroda mainly because of the higher demands in respect of the price, etc. and matters ultimately carried to litigation and arbitration. A prudent businessman would always undertake enormous efforts in the direction to ensure adequate supply of raw material as the case would be of survival or closure. Such objective being in mind the assessee would normally undertake inquiries with regard to alternative supply of ammonia in case of need with manufacturers or traders or even to go for manufacture of the same for captive consumption depending upon alternatives available. Broadly any expenditure for undertaking this exercise would be wholly for the purpose of the business. Indeed it is not the case of the revenue that the impugned expenditure is not incurred wholly and exclusively for the purpose of business. The case of the revenue is that the expenditure is relatable to the purpose of acquiring capital asset and hence capital in nature irrespective of the fact whether the expenditure was fruitful or not. In such controversially fluid background one shall have to ascertain the approach required to be adopted for the purpose of finding out whether the expenditure can be called capital expenditure laid out for the acquisition of capital asset. Otherwise, the expenditure would be ipso facto revenue expenditure, since the object was to ensure the adequate supply of raw material and, therefore, would be forming part of profit-earning process of the assessee-company. By deductive theory of logic, that expenditure which can appropriately be classified as capital expenditure, is required to be excluded from the character of revenue expenditure for the purpose of deduction Under Section 37 of the Act and therefore what is required to be done is to carve out only that part of the expenditure from the whole of the expenditure incurred for the purpose of business that amount which is primarily and directly related to the acquisition of capital asset or benefit of enduring nature in the capital field. The rest of the expenditure retains character of allowable expenditure. Let us approach the problem with above reasoning. To fulfil the object pertaining to revenue a trip was undertaken with a purpose to find out the possibility of acquiring a capital asset. The purchase of the capital asset was not yet certain nor the trip was undertaken at the negotiation stage for purchase. Nor there is material to find that the owner of the capital asset had advertised for the sale of capital asset and, therefore, the expenditure had direct connection with the sale and purchase of the capital asset. Trip was only to find out viability and suitability of plant and that too as desired by Government to enable it to take proper decision on approval. This being the position it cannot be said that the expenditure had direct connection with the purchase of the capital asset so as to form part of actual cost of capital asset according to the principles laid down in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SO). The subsequent events that the project in mind was abandoned further supports the finding that the expenditure cannot directly be related to bringing into existence the capital asset. As long as this position remains the nexus of the expenditure remains with the main objective of ensuring the adequate supply of raw material and the nexus is not broken so as to take it out of revenue field. Such nexus with the object is broken only when the expenditure can directly and appropriately be classified as related to acquisition of capital asset so as to form part of cost. An assessee may undertake such trips any number of times over number of years and every time the expenditure incurred cannot be related to the acquisition of the capital asset solely because the purpose of trip was to find out possibility of capital asset when there is no challenge to laying out the expenditure wholly and exclusively for the purpose of business. Purpose of expenditure is the test, and the cause giving rise to expenditure in this context is to be ignored. In this view of the matter, we are of the opinion that expenditure is laid out wholly and exclusively for the purpose of business required to be treated as allowable revenue expenditure and not a capital expenditure. We shall now turn to certain judicial pronouncements. The submission of the learned Departmental Representative that probably the Supreme Court decision rendered long time back was neither placed before the Bench nor considered in earlier appeals of assessee cannot be of much help to the revenue because the issue under consideration is such that each case has to be decided on the facts of each case and decisions even of Supreme Court cannot be universally applied to the facts of all cases. In this regard, the observations of the Supreme Court in K.T.M.T.M Abdul Kayoom v. C1T [1962] 44 ITR 689 where the majority of their Lordships observed on page 703 are worth noting --
...none of the tests is either exhaustive or universal. Each case depends on its own facts, and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation to decide cases (as said by Cordozo in The Nature of the Judicial Process, p. 20) by matching the colour of one case against the colour of another. To decide, therefore, on which side of the line a case falls, its broad resemblance to another case is not at all decisive. What is decisive is the nature of the business, the nature of the expenditure, the nature of the right acquired, and their relation inter se, and this is the only key to resolve the issue in the light of the general principles, which are followed in such cases.
Above shall deal with the contention raised by the learned Departmental Representativ e regarding the decision in assessee's own case for the two years considered by the 1TAT earlier. Similar view was also expressed by their Lordships of the Supreme Court in the case of Empire Jute Co. Ltd. (supra) when it was stated that each case must necessarily turn on its own facts and no infallible test can be laid down since the tests are useful as illustrations of some general principles. It further stated that the principle was equally recognised that the test whether expenditure is incurred with a view to obtain an advantage of enduring benefit may break down in certain circumstances. Every advantage of enduring nature acquired by the assessee would not rule out the expenses incurred for claiming' this advantage from the category of revenue expenses. What is material to consider is the nature of advantage in commercial sense and whether the advantage is in the capital field. The decision further states that if the advantage consists merely in facilitating the assessee's trading operations or enable the assessee to carry on the business efficiently or profitably the expenditure would be on revenue account. Other useful ratios of the judicial decisions considered in Indian Oxygen Ltd.'s case (supra) would also be worth-noting and they are stated hereunder --
Bombay Steam Navigation Co. (1953) Pvt. Ltd. v. CIT [1965] 56 ITR 52 (SC) : This decision was cited for the proposition laid down by the Supreme Court that if an expenditure is made in respect of a transaction which is so closely related to the business that it could be viewed as an integral part of the conduct of the business, the same may be regarded as revenue expenditure laid out wholly and exclusively for the purpose of the business. The Supreme Court further held that the question whether a particular expenditure is revenue expenditure incurred for the purpose of the business must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure was 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 the acquisition of an asset or a right of permanent character the possession of which is a condition to the carrying on of the business, the expenditure may be regarded as revenue expenditure.
Hyderabad Allwyn Metal Works Ltd. v. CIT [1975] 98 ITR 555(AP): In this case, a director of the assessee had gone to Japan with the object of negotiating a technical collaboration agreement with a Japanese company for the manufacture of scooters which the assessee did not manufacture till then. On the facts, it was held by the Andhra Pradesh High Court that as the expenditure was incurred to start a new line of business and which had no connection with the expansion of the old business, the expenditure should be treated as capital and not as business expenditure.
Antifriction Bearings Corporation Ltd. v. CIT [1978] 114 ITR 335 (Bom.): In this case, the Bombay High Court held that payment made for obtaining know-how in a business provided in a restricted manner for a restricted use to the assessee and where no transfer and acquisition of any asset was involved must be held to be a revenue expenditure even if incidentally some machinery had been selected as proper and suitable for the project. The travelling expenses incurred by the representatives of the assessee in this connection should also be treated as revenue expenditure.
6.2 We shall now deal with the second ground whether the values of the assets should also be included in the capital base for computation of relief Under Section 80J. The relevant portion of the statute embodied in Section 80J(1A) is as under :--
(II) The aggregate of the amounts representing the values of the assets as on the first day of the computation period of the undertaking or of the business of the hotel to which this section applies shall first be ascertained in the following manner --
(i) in the case of assets entitled to depreciation, their written down value;
(ii) in the case of assets acquired by purchase and not entitled to depreciation, their actual cost to the assessee;
(iii) ...
(iv)...
(v)...
Explanation 1 : In this clause, "actual cost" has the same meaning as in Clause (1) of Section 43.
Explanation 2 :...
Explanation 3 : In this clause and in Clause (V), "written down value" has the same meaning as in Clause (6) of Section 43.
Reading the language of the section it permits aggregate of the values of the assets in the manner laid down as per various sub-clauses. Sub-Clause (i) extracted above refers to assets entitled to depreciation. In the case under consideration it is an admitted position that the assets are not entitled to depreciation. Therefore, the same is not applicable. Clause (il) refers to assets not entitled to depreciation for which actual cost to the assessee is required to be included. The actual cost is referred to in Clause (1) of Section 43. The controversy arises because of the Explanation 1 to the said clause. The relevant portion of the Explanation is as under --
Explanation 1 : Where an asset is used in the business after it ceases to be used for scientific research related to that business and a deduction has to be made under Clause (i), Clause (ii) or Clause (iii) of Sub-section (1) or Sub-section (1A) of Section 32 in respect of that asset, the actual cost of the asset to the assessee shall be the actual cost to the assessee as reduced by the amount of any deduction allowed under Clause (iv) of Sub-section (1) of Section 35.
The Explanation is applicable only when the asset is used in the business after it has ceased to be used for scientific research. It is not the case here and, therefore, clearly the said Explanation cannot govern the case. Similarly Clause (6) of Section 43 prescribes as under --
written down value" means-
(a) in the case of assets acquired in the previous year, the actual cost to the assessee ;
(b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him....
The language contained in this clause also would require deduction only on account of depreciation actually allowed and, therefore, the language supports the case of the assessee rather than the revenue. In our opinion, therefore, the language of the statute does not prohibit the claim made by the assessee. The fact that no such clear provision is made in the statute in respect of the deduction from the amount of the actual cost where the assessee has taken the benefit of 100 % deduction Under Section 35 itself supports the proposition that the values of such assets are required to be included in the amounts of capital employed which it appears is intended as incentive to the assessee to continue the assets to be used for research right from the day of purchase. We entirely agree with the submission made by the learned Departmental Representative that manner in which the assets are shown in the balance sheet cannot govern the language of the statute. We are also in agreement with the submission made on behalf of the revenue that interpretation of the language of statute is required to be so made which will serve the purpose for which the enactment is made and that is why our interpretation as above. We are also in agreement with the submission that the scheme of the Act has to be considered and while doing so we do not find anything in the statute to debar the assessee from the claim made.
6.3 In view of the foregoing discussion, we find no reason to interfere with the decision taken by the Commissioner (Appeals).
7. In the result, the appeal is dismissed.