TMI Blog1985 (7) TMI 48X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of Rs. 78,000 being fees paid to M/s. Indopal British Consulting Enterprises was not a revenue expenditure ? (4) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing relief under section 80M on the net amount of dividend and not on the gross amount of dividend ? " The necessary relevant facts which give rise to these questions are as under : The assessment year under reference is 1971-72. The assessee is limited company, which carries on business, inter alia, of manufacturing and sale of cement. It has got its factory situated at village Seeka, near Jamnagar. The assessee claimed before the Income-tax Officer development rebate at the rate of 40% on pontoons, since in the submission of the assessee-company, the pontoons, for all intents and purposes, were ships. This claim did not find favour with the Income-tax Officer, who was of the opinion that pontoons could not be treated as ships, since they are incapable of movement by themselves because they have no engines. He, therefore, allowed development rebate at the rate of 25% instead of 40%, treating pontoons as " plant Another claim which has given rise to question No. 2 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r opinion. As regards the two questions referred to us at the instance of the assessee, a few relevant facts may be noticed again. A question arose in the course of the assessment of the year under reference in respect of admissibility of the expenses to the tune of Rs. 78,000 paid by the assessee company to M/s. Indopal Limited, a consulting enterprise, for execution of industrial projects, for preparing feasibility report, for a shipyard, etc. The assessee claimed this as a revenue expense which claim did not find favour with the Income-tax Officer, who held that it was of a capital nature, inasmuch as it was incurred for the purpose of setting up of a shipyard project, which of course did not materialise and was not laid out wholly and exclusively for purposes of the business. The assessee, therefore, carried the matter in appeal before the Appellate Assistant Commissioner, where it was contended on behalf of the assessee-company that it owned and engaged a large fleet of crafts for the movement of raw materials such as sea-sand and also for loading of finished products into the steamers, and in order to increase the manoeuvrability of the fleet, the consultancy firm was engag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 68-69 to 1970-71, the Tribunal has allowed the appeal and directed that section 80M relief is allowance on net basis, with the result that the assessee has sought reference which was granted, the Reference No. being 160 of 1976, to this Hon'ble Court. That reference was not disposed of by this court at the time when the appeal of the Department was allowed in respect of the assessment year 1971-72, with which we are concerned in this reference. It is in this context, when the claim of the assessee was disallowed, that the assessee sought reference of the second question, which has been granted as question No. 4 and which has been set out above. At the outset, we may say that question No. 2, which is at the instance of the Commissioner of Income-tax, Gujarat, and question No. 4, which is at the instance of the assessee, are admittedly covered by the decision of this court. Question No. 2 is covered by the decision of this court against the Revenue in CIT v. Shree Digvijay Cement Co. Ltd. [1983] 144 ITR 532. We have, therefore, to answer question No. 2 in the affirmative, i.e., in favour of the assessee and against the Revenue. Similarly, question No 4 is covered by the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hile rejecting this counter-submission, he recorded his finding in the following terms : " In the Income-tax Rules, depreciation has to be allowed on ships which are ocean ships or inland ships. In the category of inland ships as per the Income-tax Rules 4(b), item (iii) (sic) is described as Iron or steel flats for cargo". It is evident from item (iii) that the flats for cargo are categorised under inland ships, pontoons in the case of the appellant company are used for transporting cargo and, in my opinion, the pontoons clearly fall within the category of ship. " The Appellate Tribunal while agreeing with the view of the Appellate Assistant Commissioner referred to the classification under the head " Ships " as set out in the rules governing depreciation. In this connection, the Tribunal referred to rule 5 of the Income-tax Rules, 1962, where ships have been classified into two broad categories, namely, (1) ocean-going ships, and (2) vessels ordinarily operating in inland waters. Now, this second category of vessels for inland navigation are further sub-divided into sub-categories, namely, (1) speed boats, and (2) other vessels. The Tribunal referred to the dictionary meaning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at they should be self-propelled is not warranted from the scheme of the classification adopted by the Legislature in the Income-tax Rules. We, therefore, answer question No. 1 referred to us at the instance of the Commissioner, that pontoons are covered by the expression " ships " and, therefore, they are entitled to development rebate at the rate of 40%. We answer the question accordingly in favour of the assessee and against the Revenue. That takes us to the consideration of question No. 3 which is at the instance of the assessee. We are again faced with the same vexed question which is, as observed by Bhagwati J., in Empire late Co. Ltd. v. CIT [1980] 124 ITR 1 (SC) present " a difficult problem and continually baffled the courts, because it has not been possible, despite occasional judicial valour, to formulate a test for distinguishing between capital and revenue expenditure which will provide an infallible answer in all situations." In spite of it being often said that the line of demarcation has been found to be very thin and each case depends on its own facts and circumstances, it is desirable in order to avoid common pitfalls to remind ourselves of what should be the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure incurred was a part of fixed capital of the business or a part of its circulating capital. The Supreme Court digested these principles from the Full Bench decision of the Lahore High Court in Benarsidas Jagannath, In re [1947] 15 ITR 185. After digesting these tests, the Supreme Court, speaking through Bhagwati J. (as he then was), elaborated as to how these tests are to be applied. This elaboration is in the following terms : " In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or the income of the concern is certainly in the nature of capital expenditure. The question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the poi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 gaining this advantage from the category of revenue expenses. What is material to consider in such cases is the nature of advantage in a commercial sense and whether the advantage is in the capital field; it would be only then that the expenditure would be disallowable on an application of the tests. On the other hand, if such advantage consists merely in facilitating the assessee's trading operations or enabling it to carry on the business operations efficiently or profitably, the expenditure would be entitled to be treated on revenue account (See Empire jute Co.'s case [1980] 124 ITR 1 (SC)]. A Division Bench of the Madras High Court in CIT v. Ashok Leyland Ltd. [1969] 72 ITR 137 at page 143, summed up the various tests succinctly as under : " The word 'capital' connotes permanency and capital expenditure is, therefore, closely akin to the concept of securing something tangible or intangible property, corporeal or incorporeal rights, so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d expenditure was directly linked with the construction of shipyard with a view to facilitating better manoeuvrability of country crafts and, therefore it was an expenditure incurred with a view to obtain an advantage of enduring nature. As we have to find out, inter alia, the object of the expenses, we requested the learned advocate for the assessee company to produce the feasibility report for setting up a shipyard at Seeka. The learned advocate called for this report which referred to the agreement between the company and the consultancy firm, M/s. Indopal Limited. He also produced the relevant agreement in this behalf. We have taken the agreement as well as the feasibility report on record with the consent of counsel for the Revenue as well as the learned advocate for the assessee company and collectively marked them as annexure " F ". The agreement indicates that the consultants were engaged to prepare within the agreed period, a feasibility report for a ship building yard at Seeka in accordance with the scope indicated in enclosure No. 2 with a view to enable the assessee company to arrive at a decision regarding the development of a ship-building yard. Enclosure No. 2 gives ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of manufacturing cement is going on. It is an admitted position that it is not incurred either for the expansion of business of manufacturing cement or for the substantial replacement of its equipments. The question, therefore, shall have to be examined from the angle of the second test which has been laid down in Assam-Bengal Cement Co.'s case [1955] 27 ITR 34 (SC). Such expenditure can be looked at from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. If the expenses are not entailed in running the business or working it with a view to produce profits, but have been entailed with the purpose of bringing into existence an asset or advantage of enduring benefit, the question of the source of the expenditure would be of no consequence. It is only when the second test fails that we may have to examine as to whether the expenditure incurred was part of the fixed capital or part of the circulating capital. The bone of contention between the parties is that nothing tangible has been achieved or intended to be achieved by calling for the feasibility report. As contended by the assessee, it was only with a view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est of bringing the asset or advantage of enduring nature break down in the circumstances? As pointed out by Bhagwati J., in Empire jute Co.'s case [1980] 124 ITR 1 (SC), what is material 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 on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account. The factual context before the Supreme court in Empire jute Co.'s case [1980] 124 ITR 1, was that the assessee company had purchased loom hours from four different jute manufacturing concerns for a sum of Rs. 2,03,255 during the previous year relevant to the assessment year 1960-61, and claimed to deduct the said amount as revenue expenses. The Tribunal held that the expenses were revenue in nature and hence qualified for permissible deduction. The High Court held that the amount paid by the assessee company was in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee company to decide regarding the development of ship-building yard. The relevant clauses of the said agreement are clauses 1. 1. and 1.2, which read as under: " 1. 1. The consultant shall within a period of 6 (six) months from the date hereof work out a feasibility report for a ship-building yard at Seeka, in accordance with the scope indicated in the Enclosure No. 2 annexed hereto. 1.2. The consultants shall within the said period submit the feasibility report to the clients to enable the clients to arrive at a decision regarding the development of the ship-building yard." It is no doubt true that a decision for development of the ship-building yard was to be taken on the basis of the feasibility or otherwise in the report that was to be submitted by the consultancy firm. None the less, the sole purpose which prompted the assessee company to call for such a report is with a view to decide as to whether they should or should not establish and develop a ship-building yard. In other words, the expenses have been entailed with a view to decide as to whether the advantage or asset of an almost permanent nature or of an enduring benefit should be brought into existence or no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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