Bombay High Court
National Organic Chemical Industrial ... vs Commissioner Of Income-Tax on 10 February, 1993
Equivalent citations: [1993]203ITR410(BOM)
Author: Sujata Manohar
Bench: Sujata V. Manohar
JUDGMENT Mrs. Sujata Manohar, J.
1. The assessee-company is a chemical manufacturing concern which manufactures petro-chemicals under technical and financial agreements with foreign collaborators. The petro-chemical complex of the assessee-company consists of several plants which have been completed stage by stage from time to time.
2. The assessment year concerned is 1971-72 for which the previous year is the calendar year 1970. During the previous year, the assessee constructed a jetty at Shahbag in Thane District in the Panvel Creek. The jetty was for the purpose of handing storage and transportation of materials manufactured or handled by the assessee or its agents. The assessee incurred an expenditure of Rs. 6,41,193 for the purpose of construction of this jetty in the relevant previous year. The jetty was constructed under a licence granted to the assessee by the Government of Maharashtra. Under the terms of the agreement, the property in the jetty was always to be that of the Government of Maharashtra. The assessee, however, was given a right to use the jetty without payment of any charges for a period of three years from the date of its completion. After the expiry of the period of three years, the assessee was required to pay to the Government the fees in that behalf at the discretion of the Government. The jetty was also to be made open to the public to be used by it when the same was not being used by the assessee. The assessee also agreed, during the tenure of the agreement, to keep the jetty in good order.
3. The assessee wrote off in its profit and loss account for the assessment year 1971-72 an amount of Rs. 2,13,731 being one third of the cost of the jetty on the ground that it was allowed free use of the jetty for a period of three years. However, before the Income-tax Officer, the assessee claimed that the whole of the expenditure of Rs. 6,41,193 should be allowed as business expenditure. In the alternative, the assessee claimed before the Income-tax Officer one-third of the expenditure as deduction. These contentions were negatived by the Income-tax Officer. In appeal before the Appellate Assistant commissioner, it was held that the expenditure was of a capital nature and since the jetty did not belong to the assessee, it was not entitled to any depreciation. The other contentions were also negatived by the Appellate Assistant Commissioner. The Tribunal, however, held that by the construction of the jetty the assessee had obtained permanent loading and unloading facilities and hence it was to be construed as expenditure of a capital nature. Since the jetty did not belong to the assessee, the assessee could not claim any depreciation. The second material contention relates to the computation of capital for the purpose of section 80J and the relief to be granted under that section. The Tribunal has held that the following amounts being liabilities of the assessee in the year in question were liable to be deducted while calculating the capital employed for the purpose of granting relief under section 80J :
Rs.
Banks 9,56,23,341
Public deposits 1,35,46,702
Current liabilities 2,97,41,538
Provisions for taxation 4,50,000
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13,93,61,581
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From these findings and the judgment, the following questions are referred to us at the instance of the assessee :
"(1) Whether, on the facts and in the circumstances of the case and having regard to the provisions of section 80J, the Tribunal was right in holding that the assessee's liabilities amounting to Rs. 13,93,61,581 should be deducted in the computation of capital for purposes of relief under that section ?
(2) Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 6,41,193 on the construction of a jetty was an admissible deduction in arriving at the business income of the company ?
(3) If the answer to the second question is in negative, whether on the facts and in the circumstances of the case, the Tribunal was justified in not allowing one-third of the above amounts as revenue expenditure in view of the stipulation in the agreement with the Government of Maharashtra that the assessee was given the right to use the jetty without payment of any charge to the Government for a period of three years ?
(4) If the answer to the third question is in the negative, whether on the facts and in the circumstances of the case, the Tribunal was justified in refusing to allow depreciation on the cost of the jetty to the assessee ?"
4. In respect of question No. 1, it is an accepted position that in view of the decision of the Supreme Court in the case of Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308, question No. 1 must be answered in the affirmative and in favour of the Revenue.
5. Question Nos. 2 to 4 relate to the expenditure incurred by the assessee for the construction of the jetty. In the case of CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257, the Supreme Court dealt with a case here a tripartite agreement was entered into between the Government the municipality and the respondent company. Under this agreement the company under took (i) to supply water to the municipality and provide water pipelines, (ii) to supply electricity for street lighting in the municipality and put up a transmission line for this purpose and (iii) to concrete the main road from the factory to the railway station. The installations and accessories were the assets of the municipality and not of the respondent-company. The advantage secured by the respondent by incurring the expenditure was absolution or immunity from liability to pay municipal rates or taxes for a period of 15 years. The Supreme Court held that the expenditure incurred by the company was revenue in nature and was deductible in computing the profits of the company. The Supreme Court, in this connection has held that what one has to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management an conduct of the assessee's business to be carried on more effectively 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. Hence, the Supreme Court said that looking to the commercial advantage secured by the respondent company the expenditure should be considered as revenue expenditure.
6. In the case of CIT v. Excel Industries Ltd. [1980] 122 ITR 995 (Bom), the assessee-company had laid an overhead service line of supply of electricity to its factory. The service line remained the property of the electricity board. The court said that the payment made to the electricity board towards the cost of laying the overhead service line constituted revenue expenditure and was an allowable deduction.
7. In the case of CIT v. National Machinery Manufacturers Ltd. [1991] 191 ITR 483 (Bom), the assessee-company was engaged in manufacturing machinery. It required water for industrial production. The assessee entered into an agreement with the Maharashtra Industrial Development Corporation for water supply connection. The assessee paid to M. I. D. C. Rs. 4.5 lakhs as charges for laying the pipeline. The court held that the sum of Rs. 4.5 lakhs by the assessee to the M. I. D. C. was revenue expenditure. The present case is very similar to the above three cases. The assessee by spending Rs. 6,41,193 has obtained the facility of a jetty for the purpose of transportation of materials required by it. It has got the benefit of the use of the jetty without payment for a period of three years and thereafter it can use the jetty on payment of fees though on a preferential basis. The expenditure is incurred for commercial consideration and it is not incurred for the purpose of securing any capital assets. Applying the ratio of the above three cases, the expenditure of Rs. 6,41,193 is revenue is nature, incurred with a view of obtaining a commercial advantage and for facilitating trading operations. Hence, question No. 2 which is referred to us is answered in the affirmative and in favour of the assessee.
8. In view of our answer to question No. 2, it is not necessary to answer questions Nos. 3 and 4.
9. No order as to costs.