Bombay High Court
Modi Street vs The Deputy Commissioner Of on 26 September, 2008
Author: S.J.Kathawalla
Bench: S.Radhakrishnan, S.J.Kathawalla
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mgj
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
O.O.C.J.
Income Tax Appeal No. 606 of 2003
Chemical Terminal Trombay Ltd. )
a company having its registered )
office at Bombay House, 24, Homi)
Modi Street, Bombay 400 001 )..Appellant
(Org.Appellant)
vs.
The Deputy Commissioner of )
Income Tax Special Range-34, )
Bombay having his office at )
Aayakar Bhavan, Maharshi Karve
Marg, Bombay 400 020
)
)..Respondent
(Org.Respondent)
Mr.F.I.Irani i/b Mr.A.K.Jasani for appellant.
Mr.P.S.Sahadevan for respondent.
CORAM: Dr.S.RADHAKRISHNAN &
S.J.KATHAWALLA JJ.
26th September,2008
J U D G M E N T :(Per S.J.KATHAWALLA J.)
1. This appeal is filed by Chemical Terminal Trombay Ltd. (assessee) impugning the order dated 9th April, 2003 passed by the Income Tax Appellate Tribunal, Mumbai Bench "I", Mumbai (ITAT) in Income Tax Appeal No.4078/Mum/96 for the Assessment Year 1990-91.
2. At the time of admission of this appeal, the appeal was admitted on two substantial questions of ::: Downloaded on - 09/06/2013 13:54:46 ::: -2- law which are set out hereunder:
1. Whether the ITAT erred in holding that the Appellant's interest income of Rs.6,09,699/- and dividend income of Rs.17,98,828/- were to be excluded in determining the Appellant's entitlement to the deduction under Section 32AB of the Act?
2.
Whether the ITAT, in any event, failed to appreciate that as per proposed projects for the manufacture of Plastic Processing Machines and for the manufacture of Polyster Polyols and Polymers (which were the subject of the market surveys/feasibility reports) did not materialise, the said expenditure of Rs.1,48,000/- incurred by the Appellant for obtaining the feasibility reports/market surveys could not be regarded as capital expenditure but had to be regarded as a deductible revenue expense as the Appellant's fixed capital had not been altered by the said expenditure?
::: Downloaded on - 09/06/2013 13:54:46 ::: -3-3. Before commencement of final arguments in this appeal, the learned Advocate for the Assessee fairly pointed out to this Court that question no.1 above has already been answered by the Division Bench of this Court in favour of the Revenue and against the Assessee in the case of Commissioner of Income Tax Vs. Parle Biscuits Ltd. reported in (2006) 282 ITR 547 (Bom). The learned Advocate for the Assessee further fairly submitted that this Court may, therefore, answer the said question no.1 in favour of the Revenue. We have gone through the decision of this Court in Commissioner of Income Tax Vs.Parle Biscuits Ltd. (supra) and have noted that the issue raised in question no.1 above is answered in favour of the Revenue. In view thereof, we, at the out set, answer question no.1 set out in paragraph 2 above in favour of the Revenue and against the Assessee.
4. What remains for our determination, therefore, is question no.2 set out in paragrapah 2 above.
5. The facts which are relevant for deciding question no.2 set out in paragraph 2 above are ::: Downloaded on - 09/06/2013 13:54:46 ::: -4- briefly set out hereunder.
a) The Assessee is admittedly in the business of providing storage facility for liquid chemicals.
During the relevant year, the Assessee engaged two group of consultants for advising it of possible diversion of its business activities. The Assessee, therefore, engaged M/s Creative Plastic Consultants for advising as to the prospects of setting up of an industry for manufacturing of plastic processing machines and also engaged the services of M/s Tata Economic Consultancy Services for advising on setting up of an industry for manufacture of Polyster polyols and polymers. For this feasibility study, the Assessee incurred an expenditure of Rs.1,48,000/-
b) The Assessee on 31st December, 1990 filed a return declaring income of Rs.1,06,18,638 for the previous year ended on 31st March, 1990, inter alia, claiming expenditure on feasibility study of Rs.1,48,000/- The A.O. by his order dated 28th July, 1992 disallowed the expenditure on feasibility study of Rs.1,48,000/- The ground for rejection given by the A.O. was that there was no ::: Downloaded on - 09/06/2013 13:54:46 ::: -5- connection between incurring of the said expenditure and current business of the Assessee.
It was also held by the A.O. that in order to diversify into the field of manufacturing of either machinery for plastic processing or for manufacturing Polyster Polyols, the Assessee would have to acquire infrastructure and commence the business activity which has no connection whatsoever with its present activity of storage of chemicals in tanks. Such expenditure undertaken during the year is essentially in the nature of preliminary expenses connected with the proposed setting up of an industrial undertaking, as it constitutes preparation of feasibility report, project report and market survey and has no connection whatsoever with the present business activities. The A.O. also relied on the decision of this Court in the case of Trade Wings Ltd. Vs. Commissioner of Income Tax reported in 185 ITR 267 (Bom) wherein this Court has held:
"The second question relates, having regard to the statement of the case, to expenditure incurred on exploring the feasibility of a new line of business. The ::: Downloaded on - 09/06/2013 13:54:46 ::: -6- assessee's existing business is of a travel agency. The expenditure was incurred in exploring the feasibility of setting up a hotel in Goa. The Tribunal held that the expenditure incurred in connection with the feasibility of a new business venture was not an admissible deduction. Upon the facts that are before us, we are in agreement that a travel agency business does not include hoteliering. We answer the igsecond question in the affirmative and in favour of the Revenue."
c) Being aggrieved by the order of the A.O. dated 28th July, 1992, the Assessee preferred an appeal before the CIT(A). CIT(A) by its order dated 25th March, 1996 confirmed the order passed by the A.O.
d) Being aggrieved by the order of CIT(A) dated 25th March, 1996, the Assessee preferred an appeal before ITAT. The ITAT by its order dated 9th April, 2003 rejected the ground of Assessee's appeal regarding disallowance of expenditure on the feasibility study.
::: Downloaded on - 09/06/2013 13:54:46 ::: -7-e) The Assessee being aggrieved by the ITAT's order dated 9th April, 2003, preferred the present appeal.
6. The learned Advocate for the Assessee submitted before us that the proposed project of the Assessee was merely diversification of the Assessee's existing business and as such the expenditure incurred thereon was of revenue in nature and in any event, the proposed project and the Assessee's existing business were expected to have unity of control or management and funding because of which they were to be regarded as part of the very same business as the Assessee's existing business.
Without prejudice to the said contention, it was also submitted that the project ultimately did not materialise and, therefore, the expenditure on the market survey/feasibility report could not be regarded as of a capital nature as no capital asset ultimately came into existence and a fixed capital of the Assessee remained unchanged. In support of these contentions, the learned Advocate for the Assessee relied on the following decisions.
i) Empire Jute Co. Ltd. Vs. Commissioner of ::: Downloaded on - 09/06/2013 13:54:46 ::: -8- Income Tax (1980) 124 ITR 1 (SC)
ii) Produce Exchange Corporation Ltd. Vs. Commissioner of Income Tax (Central) Calcutta (1970) 77 ITR 739 (SC)
iii) Commissioner of Income Tax Vs. Anjani Kumar Co. Ltd. (2003) 259 ITR 114 (Raj) (DB).
iv) Commissioner of Income Tax Vs. Graphite India Ltd.
(1996) 221 ITR 420. (Cal)(DB)
7. The learned Advocate appearing for the Revenue has reiterated the reasoning given in the order passed by the A.O. and confirmed by the CIT(A) as well as Tribunal. He has, therefore, submitted that expenditure incurred by the Assessee on market survey/feasibility report are required to be treated as "capital expenditure" and not "revenue expenditure" as contended by the Assesee.
8. We have considered the arguments advanced by the learned Advocate for both the parties and the case law cited by the learned Advocate for the Assessee and we are of the view that the issue ::: Downloaded on - 09/06/2013 13:54:46 ::: -9- involved in present appeal is squarely covered by the decision of the Division Bench of this Court in Commissioner of Income Tax Vs. J.K.Chemicals Ltd.
(1994) 207 ITR 985 and we are in respectful agreement with the said decision.
9. In the case of Commissioner of Income Tax Vs. J.K.Chemicals Ltd. (supra), the Assessee company was carrying on business of manufacture of fertiliser. It had a factory at Mumbai where it manufactured ig a fertiliser known as "Single super phosphate". The Assessee contemplated setting up of a unit at Rajasthan for production of more concentrated type of the same fertiliser known as "Triple Super Phosphet". In connection with setting up of this unit at Rajasthan, the Assessee obtained a project report and incurred expenditure of Rs.2,50,000/- This expenditure was disallowed by the Income Tax Officer on the ground that it was not a capital expenditure. The Appellate Assistant Commissioner and Tribunal had, however, allowed the expenditure as the revenue expenditure. The Revenue had, therefore, preferred an appeal before this Court. The Assessee placed emphasis on the fact that the Assessee Company was already carrying ::: Downloaded on - 09/06/2013 13:54:46 ::: -10- on the business of manufacturing fertiliser including "single super phosphate". Therefore, his project for setting up of another unit in Saladipura in Rajasthan for manufacturing "triple super phosphate" should be viewed only as an expansion of its existing business. The Department, on the other hand, laid emphasis on the fact that what the Assessee Company proposed to manufacture in the unit at Rajasthan was "triple Super Phosphate" and not "single super phosphate".
The Department contended that it is a new item and, therefore, the unit at Rajasthan has to be viewed as undertaking a new business on the part of the Assessee. The Department has also emphasised the location of the new project at a place different from the place where the Assessee Company had its existing factory.
10. On behalf of the Assessee in CIT Vs. J.K.Chemicals Ltd. (supra), attention of this Court was drawn to a decision of the Calcutta High Court in a similar case of Kesoram Industries and Cotton Mills Ltd. Vs. CIT (1992) 196 ITR 845 (Cal), where the Assessee had a cement unit in Andhra Pradesh. It incurred miscellaneous ::: Downloaded on - 09/06/2013 13:54:46 ::: -11- expenditure and legal charges in connection with the proposed factory in Rajasthan. The Calcutta Court said that the expenditure related to the feasibility of expanding the Assessee's existing business and, therefore, these expenses were deductible as revenue expenditure. This Court did not agree with the view taken by the Calcutta High Court in so far as it suggests that all expenditure incurred for expanding existing business would necessarily have to be considered as a revenue expenditure.
ig Disagreeing with the said view taken by the Calcutta High Court, this Court has stated "in our view, one cannot decide whether the expenditure is capital in nature or revenue in nature simply by relating it to setting up a new business or expanding an existing business. Even for the latter purpose capital expenditure may have to be incurred. Expansion of existing business can be done in several ways. It can be done by improving sales, by improving distribution channels, by advertising or it can be done by acquiring additional plant and machinery and thereby increasing production. The nature of expansion will determine whether the expenditure incurred is of a capital nature or revenue nature.
::: Downloaded on - 09/06/2013 13:54:46 ::: -12-We, therefore, do not agree with the view taken by the Calcutta High Court in so far as it suggests that all expenditure incurred for expanding the existing business would necessarily have to be considered as a revenue expenditure. One has to take into account all circumstances of the case while deciding whether the expenditure can be considered as a revenue expenditure or capital expenditure. (Vide Assam Bengal Cement Co. Ltd.
V. CIT (1955) 27 ITR 34 (SC). The aim and object of the expenditure would determine the character of the expenditure whether it is capital expenditure or revenue expenditure."
11. Therefore, in CIT Vs. J.K.Chemicals Ltd.
(supra) this Court reversed the decision of the Tribunal allowing expenditure incurred on obtaining the project report for setting up a unit at Rajasthan for production of more concentrated type of fertiliser as a revenue expenditure in the following terms.
"Looking to the circumstances of the present case, in our view, it is not really material to decide whether the project at ::: Downloaded on - 09/06/2013 13:54:46 ::: -13- Rajasthan should be viewed as establishing a new business by the assessee or as an extension of its existing business. This fact may be relevant in the circumstances of a given case, but is not so in the present case, because it is an accepted position that if the assessee were to set up its unit at Rajasthan, it would have to acquire land, plant and machinery and incur capital expenditure in that connection for setting up its unit at Rajasthan. The project report which the assessee obtained from Messrs.Dorr Oliver (India) Ltd. was for the purpose of setting up such a unit at Rajasthan. In other words, the expenditure incurred for the project was incurred by the assessee company in order to decide whether to acquire some profit making assets for the purposes of its business which would be of an enduring nature. The expenses incurred for the project report have, therefore,to be viewed as being capital in nature. Simply because the assessee had a running business of manufacturing fertilisers, it cannot be ::: Downloaded on - 09/06/2013 13:54:46 ::: -14- said that the expense for obtaining such a project report was a part of the expenses incurred by the assessee for running its business. It was clearly an expenditure incurred for ascertaining whether to acquire new assets of some durability for the purpose of earning profits."
12. In the said decision of CIT Vs. J.K.Chemicals Ltd. (supra), this Court has also taken cognisance of the decision in CIT Vs. Shri Digvijay Cement Company Ltd. (1986) 159 ITR 253 in the following terms.
"In the case of CIT v. Shri Digvijay
Cement Company Ltd. (1986) 159 ITR 253,
the Gujarat High Court was required to
consider a case where the assessee company
which carried on the business of
manufacture and sale of cement, had
incurred expenditure in obtaining a
feasibility report for setting up a
shipyard. The report was not favourable
and no shipyard was, in fact, established.
The High Court said that the expenses
::: Downloaded on - 09/06/2013 13:54:46 :::
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incurred for the feasibility report were
capital in nature. The expenses had been
incurred with a view to deciding whether an asset or advantage of almost permanent nature should be brought into existence or not. It was, therefore, capital in nature and not deductible. The Court said that one has to look to the reasons for the expenditure and it was not necessary that the expenditure did ultimately produce any result. The Gujarat High Court also relied upon the decision of the Supreme Court in Assam Bengal Cement Co. Ltd. V. CIT (1955) 27 ITR 34."
13. As stated earlier, we are in complete agreement with the decision of this Court in CIT Vs. J.K.Chemicals Ltd. (supra). We would also make it clear that to allow deduction to Assessee under section 37 one cannot stop after determining whether the expenditure incurred is a business expenditure or not. Under section 37 only that expenditure can be allowed to be deducted as is laid down or incurred wholly and exclusively for the purpose of business or profession so long as it ::: Downloaded on - 09/06/2013 13:54:46 ::: -16- is not in the nature of capital expenditure.
Therefore, citing of case law determining only the issue pertaining to "one business" or "existing business" will not help in determining the issue of an expenditure being capital or revenue in nature.
14. In the case in hand, the Assessee who is in the business of providing storage facility for liquid chemicals has incurred expenditure for obtaining the market survey/feasibility report from the agency for the proposed project for manufacture of plastic processing machine and for manufacture of Polyster polyols. To determine whether this expenditure is capital expenditure or revenue expenditure, it is not really material to decide whether the project should be viewed as establishing a new business by the Assessee or expansion/diversification of his existing business, because if the Assessee was to set up this project for manufacture of plastic processing machine and for manufacture of Polyster Polyols, it would have to acquire land, plant and machinery and incur capital expenditure in that connection for setting up its project. The project reports which the Assessee obtained from M/s Creative Plastics ::: Downloaded on - 09/06/2013 13:54:46 ::: -17- Consultants and Tata Economic Consultance Services were for the purpose of setting up such projects.
Therefore, expenditure incurred for the project was incurred by the Assessee in order to decide whether to acquire some profit making asset for the purpose of its business which would be of enduring nature.
The expenditure incurred in the project report has, therefore, to be viewed as being capital in nature.
It was clearly an expenditure incurred for
ascertaining whether to acquire new asset of some
durability
for the purpose of earning profit.
Whether the project ultimately materialised or not
is of no consequence. As held in the case of CIT
Vs. Shri Digvijay Cement Company Ltd. (supra),
and accepted by this Court in CIT Vs.
J.K.Chemicals Ltd. (supra), one has to look to the
reasons for expenditure and it was not necessary
that the expenditure did ultimately produce any
result. In view thereof, the submissions made on
behalf of the Assessee stands rejected. The case
law cited by the learned Advocate for the Assessee
is also of no assistance to the assessee.
15. Under the circumstances, we are of the view that the Tribunal is correct in confirming the ::: Downloaded on - 09/06/2013 13:54:46 ::: -18- decision of the A.O. as well as the CIT(A) to the effect that the expenditure of Rs.1,48,000/-
incurred by the Assessee for obtaining the feasibility report/market survey had to be regarded as capital expenditure. We, therefore, answer question no.2 set out in paragraph 2 above in negative i.e. in favour of the Revenue and against the Assessee.
(S.J.KATHAWALLA J.) (Dr.S.RADHAKRISHNAN J.) ::: Downloaded on - 09/06/2013 13:54:46 :::