TMI Blog2012 (8) TMI 160X X X X Extracts X X X X X X X X Extracts X X X X ..... JUSTICE R.V. EASWAR, JJ. For Appellant : Sh. N.P. Sahni and Sh. Ruchesh Sinha, Advocates. For Respondent : Sh. S. Ganesh, Sr. Advocate with Sh. V.P. Gupta, Sh. Basant Kumar and Sh. Naveen Kumar, Advocates. MR. JUSTICE S. RAVINDRA BHAT 1. The question of law framed in this appeal by the assessee, impugning an order of the Income Tax Appellate Tribunal ( ITAT ) dated 16-10-2009, in ITA No. 1039/Del/2009, is as follows: Was the Tribunal justified in deleting the loss claimed in respect of the advance given to M/s Kaveri Engineering Industries Ltd for supply of chlorine gas cylinders, in the circumstances of the case 2. The facts necessary to decide this appeal are that the assessee manufactures fertilizers, power, cement, PVC, Chloro Alkali products and also trades in fertilizers, seeds and pesticides. It uses a special type of cylinder in which chlorine is filled in and supplied to its customers. It was regularly purchasing such cylinders from M/s Kaveri Engineering Industries Ltd. for several years. The assessee used to advance amounts in the course of its business, to the said supplier, to ensure timely supply of cylinders. M/s Kaveri Engineering Indust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a very dangerous chemical. In our view such loss has fallen upon the assessee as revenue loss and the same should have been allowed as deduction while computing the profits and gains of business, having regard to the ratio laid down by the Supreme Court in the cases of Badrdas Daga Vs. CIT (supra); and Calcutta Discount Co. Vs. CIT (supra). Respectfully following the aforesaid decisions the issue is decided in favour of the assessee. Ground raised by the assessee is accordingly allowed. 13. In the result, assessee s appeal is allowed and the revenue s appeals are dismissed. 4. Counsel for the revenue submitted that a proper application of the decision in Mysore Sugars would have meant that the advances were investment, and had to be in the nature of capital expenditure, which did not qualify for disallowance. It was urged that the supplied cylinders would have entitled the assessee to depreciation. It was argued that the advance was for the purpose of acquiring an asset of an enduring nature, and not revenue expenditure. Reliance was placed on the following passage of the said decision: If an expenditure comes within any of the enumerated classes of allowances, the case c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver certain blende, it may be at prices to be settled hereafter, and that this was really nothing more than an advance on account of the price of that blende, there would be a great deal to be said in favour of the Appellants...It is impossible to look upon this as an ordinary business transaction of an advance against goods to be delivered...I can come to no other conclusion but that this was an investment of capital in the Welsh Company, and was not an ordinary trade transaction of an advance against goods..." The second case, Charles Marsden Sons Ltd. v. Commissioners of Inland Revenue (1919) 12 Tax Cas. 217, is under the excess profits duty in England, and the question arose in the following circumstances : An English company carried on the business of paper making. To arrange for supplies of wood pulp, it entered into an agreement with a Canadian company for supply of 3,000 tons per year between 1917-1927. The English company made an advance of 3,000 against future deliveries to be recouped at the rate of 1 per ton delivered. The Canadian company was to pay interest in the meantime. Later, the importation of wood pulp was stopped, and the Canadian company (appropriately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances of a given case. It was submitted that the cylinders in this case were in the nature of stock in trade, essential for day to day functioning of the assessee s business. Without these, the chlorine manufactured by it cannot be supplied to its customers. The customers used cylinders are taken back, and then refilled. It was submitted that merely because the rules admitted a high rate of depreciation which led the assessee to claim it, cannot be held to preclude its contention the advances in this case were not capital, and could be validly written off. 7. Learned counsel relied on the decisions reported as Alembic Chemical Works v CIT 1989 (77) CTR 1 and Empire Jute Co Ltd v Commissioner of IT 1980 (17) ITR (SC) 113 and submitted that there can be no iron clad rule for determining whether an advance given, but not recovered, is in the nature of capital expenditure which cannot be written off in the course of business. 8. Before analysing the law, it would be necessary to notice that the order of the AO reveals that to claim a bad debt of Rs. 2,26,73,164/-. The assessee had issued a letter of intent dated 16.12.1994 for supply of 1500 Chlorine cylinders to Kaveri Engineerin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to acquire an asset of an enduring nature for the benefit of the business, or was it an outgoing in the doing of the business ? If money be lost in the first circums-tance, it is a loss of capital, but if lost in the second circumstance, it is a revenue loss. In the first, it bears the character of an investment, but in the second, to use a commonly understood phrase, it bears the character of current expenses. Yet, such bright line tests have, over the years not been considered to be decisive, or accurate in deciding if an expenditure leads to an enduring capital advantage. In Empire Jute Co Ltd (supra) the dominant considerations were spelt out in the following terms: "This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion and, as pointed out by Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC), 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. There may be cases where expenditure, even if inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rns to profit by keeping it in his own possession ; circulating capital as what he makes profit of by parting with it and letting it change masters. " Now so long as the expenditure in question can be clearly referred to the acquisition of an asset which falls within one or the other of these two categories, such a test would be a critical one. But this test also sometimes breaks down because there are many forms of expenditure which do not fall easily within these two categories and not infrequently, as pointed out by Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC), the line of demarcation is difficult to draw and leads to subtle distinctions between profit that is made " out of " assets and profit that is made " upon " assets or " with " assets. Moreover, there may be cases where expenditure, though referable to or in connection with fixed capital, is nevertheless allowable as revenue expenditure. An illustrative example would be of expenditure incurred in preserving or maintaining capital assets. This test is, therefore, clearly not one of universal application. But even if we were to apply this test, it would not be p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an advantage for the enduring benefit of trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital." The Supreme Court quoted Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation which indicated the distinction between capital and revenue expenditure, to the following effect: "The business structure or entity or organization may assume any of an almost infinite variety of shapes and it may be difficult to comprehend under one description all the forms in which it may be manifested . . ." And further observations to this effect: ". . . There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part and (c) the means adopted to obtain it ; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final prov ..... X X X X Extracts X X X X X X X X Extracts X X X X
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