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TMI Blog2012 (8) TMI 160X X X X Extracts X X X X X X X X Extracts X X X X ..... gularly 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 Industries Ltd. went into liquidation. The assessee approached the liquidators but despite its efforts, could not recover the money from the liquidators. The assessee therefore wrote off such outstanding advances, as business loss and claimed it as deduction while computing its income for the year in question. The assessee wrote off the balances in its books of account. According to it, those advances were made in the course of business and had to be considered as losses arising in the course of business and the profits under Section 28 are to be computed after deducting loss and expenses incurred for the purpose of business, unless such expenses or losses are expressly or by necessary implication disallowed by the Act. The AO did not accept this contention, and held that the outstanding amount had the character of an investment, on the basis of his appreciation of the observations of the Supreme Court, in C.I.T. v Mysore Sugar Co. Ltd 46 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 can be considered under the appropriate class; but there may be an expenditure which, though not exactly covered by any of the enumer-ated classes, may have to be considered in finding out the true assessable profits or gains. This was laid down by the Privy Council in Commissioner of Income-tax v. Chitnavis (1932) L. R. 59 I. A. 290 ; [1932] 2 Com. Cas. 464, and has been accepted by this court. In other words, section 10(2) does not deal exhaustively with the deductions, which must be made to arrive at the true profits and gains. To find out whether an expenditure is on the capital account or on revenue, one must consider the expenditure in relation to the business. Since all payments reduce capital in the ultimate analysis, one is apt to consider a loss as amounting to a loss of capital. But this is not true of all losses, because loosed in the running of the business cannot be said to be of capital. The questions to consider in this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e an advance of GBP3,000 against future deliveries to be recouped at the rate of GBP 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 called the Ha! Ha! Company) neither delivered the pulp nor returned the money. Rowlatt J. held this to be a capital expenditure not admissible as a deduction. He was of opinion that the payment was not an advance payment for goods, observing that no one pays for goods ten years in advance, and that it was a venture to establish a source and money was adventured as capital. The last case to which we need refer to illustrate the distinction made in such cases is Reid's Brewery Co. Ltd. v. Male (1891) 3 Tax Cas. 279. The brewery company there carried on, in addition to the business of a brewery, a business of bankers and money-lenders making loans and advances to their customers. This helped the customers in pushing sales of the product of the brewery company. Certain sums had to be written off and the amount was held to be deductible. Pollock B. said : "Of course, if it be capital invested, then it comes within the express provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing 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 Engineering. That letter of intent was confirmed by purchase order dated 14.7.95. The purchase order was later on amended by letter dated 27.11.1996; resultantly the quantity of chlorine cylinders to be supplied was reduced - from 1500 to 595. Against the payments made, 208 chlorine cylinders were supplied for the total sum of Rs. 97,33,048/-. Besides the 208 chlorine cylinders supplied (valued at Rs. 97,330,48/-) a separate purchase order was issued by the assessee to M/s Kaveri Engineering for supply of chlorine tanks. The payment towards this was Rs. 65,44,588/-. Out of the amount advanced - Rs.3,89,50,800/-, 208 chlorine cylinders (worth Rs. 97,33,048/-) were supplied. Apart from advance for chlorine tanks worth Rs.65,44,588/- the amount outstanding against M/s Kaveri Engg. was Rs.2,26,73,164/-. (Rs.3,89,50,800 - Rs. 1,62,77,636/-). The assessee's stand was that the chlorine cylinders were in the nature of store items and M/s Kaveri Engg., defaulte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o endurance at all. There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. 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, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. But even if this test were applied in the present case, it does not yield a conclusi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l application. But even if we were to apply this test, it would not be possible to characterise the amount paid for purchase of loom hours as capital expenditure, because acquisition of additional loom hours does not add at all to the fixed capital of the assessee. The permanent structure of which the income is to be the produce or fruit remain, the same; it is not enlarged. We are not sure whether loom hours can be regarded as part of circulating capital like labour, raw material, power, etc., but it is clear beyond doubt that they are not part of fixed capital and hence even the application of this test does not compel the conclusion that the payment for purchase of loom hours was in the nature of capital expenditure." In Alembic Chemical Works (supra) it was observed that: "The fact that an item of expenditure is wholly and exclusively laid out for purposes of the business, by itself, is not sufficient to entitle its allowance in computing the income chargeable to tax. In addition, the expenditure should not be in the nature of a capital expenditure. In the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... joyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment . . ." 10. In Regent Oil Co. Ltd. v. Strick (Inspector of Taxes) [1966] AC 295, the Court of Appeal emphasised the futility of a strict application of and exclusive dependence on any single principle in the search for the true position and pointed out the difficulty arising from taking too literally the general statements made in earlier cases and seeking to apply them to a different case which their authors certainly did not have in mind. 11. It seems, to this Court, therefore, from a reading of the above decisions that whether expenditure is of a capital nature or revenue, depends on the facts and circumstances in a given case. Especially, whether a particular expenditure is a revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and by applying the principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so tied to carrying on of the business that it might be regarded as an integral part of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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