TMI Blog2017 (5) TMI 1628X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Apart from that, that will not by itself confer any benefit on the debtor as contemplated by the section. Payment of interest used for purchased of capital assets - Held that:- The issue is squarely covered by the decision of Supreme Court in the case of Empire Jute Co. LTD. Vs. Commissioner of Income Tax [1980 (5) TMI 1 - SUPREME COURT] wherein held if payment has to be made for securing additional power every week, such payment would also be part of the cost of operating the profit making structure and hence in the nature of revenue expenditure, even though the effect of acquiring additional power would be to augment the productivity of the profit-making structure. On the same analogy payment made for purchase of loom hours which would enable the assessee to operate the profit-making structure for a longer number of hours than those permitted under the working time agreement would also be part of the cost of performing the income earning operations and hence revenue in character. Pre-operative expenses - Held that:- The issue in the case of Commissioner Income Tax Vs. Smt. Jyoti Devi[2008 (7) TMI 954 - RAJASTHAN HIGH COURT] - Appeal decided in favour of assessee. - D.B. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts? (ii) Whether the ITAT was justified in deleting the addition of ₹ 24,53,779/- being liability in respect of leave and licence fees payable to Kanoria Industries Ltd. Written back by the assessee, inspite of the specific provisions of Section 41(1) and its Explanations? (iii) Whether the ITAT was right and justified in treating the payment of upfront fees to IDBI of ₹ 5,51,250/- as revenue expenditure even when the capital borrowed was used for purchase of capital assets? Appeal No. 137 / 2008 (i) Whether the ITAT was right and justified in holding the amount of ₹ 24,72,912/-, being incentive received on sugar quota allocated for free sale, as capital receipt ignoring the fact that receipt earned during business operations through higher price sale can only be termed as revenue receipt (ii) Whether the ITAT was justified in deleting the addition of ₹ 1,27,76,000/- and ₹ 2,28,08,000/-, being liabilities in respect of interest on sugar and cane price difference respectively, written back by the assessee inspite of the specific provisions of Section 41(1) and its Explanations? Appeal No. 91 / 2008 (i) Whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 ITR 830. According, to assessee this is an amount which ultimately is to be utilized to encourage the entrepreneur to opt for extension. This similar issue came up for consideration by ITAT, A Bench Calcutta in ITA No. 2032 2033 in case of CIT Vs. Balrampur Chini Mills Ltd. where it was held that realization through additional free sale of sugar quota under the Sampat Incentive Similarly in case of CIT (Spl. Range) Ghaziabad of M/s Simbhaoli Sugar Mill Ltd. the Delhi Bench in a Third member decisions in ITA No. 1439/D/90 also held that incentive by the appellant under the Sampat Incentive Scheme relating to expansion of project was in the nature of capital receipt the addition made by Ld. AO of ₹ 24,72,912/- is directed to be deleted. In the case of CIT Vs. Ponni Sugars Chemicals Ltd. (Supra) it is held that if the true character of the incentive is to enable the assessee to meet the capital cost, then that true character should have been given full recognition and the fact that the receipt is subsequent to the commencement of production is not to be allowed to stand in the way of its proper treatment as a receipt in the capital filed meant to meet a capital c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lateral act, but it will depend upon the facts of each case. The Bench pointed out that there may be cases where the liability is not barred by operation of law, but in such cases bilateral act of the parties will be necessary to bring about cessation of liability. According to the Bench, if the recovery had become barred by limitation by operation of law, unilateral expression of intention of the debtor not to treat the amount any more as liability might be sufficient to bring about a cessation of the liability. The Bench also accepted the alternative argument that where an assessee had written off his time barred liability from his accounts and transferred the amount to his profit and loss account thereby treating it as his income, he could not be permitted to turn round when the question of inclusion of such amount in his income under section 41(1) of the act arose. The Bench distinguished the judgment in Kohinoor Mills Co. Ltd. v. CIT, by observing that there was no cessation of liability in that case despite the expiry of period of limitation to enforce the same. The Bench said that the assessee could not get rid of his liability when called upon to meet either by the emplo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Section 41(1) in the context of the facts obtaining in the present case, the following points are to be kept in view : (1) In the course of assessment for an earlier year, allowance or deduction has been made in respect of trading liability incurred by the assessee; (2) Subsequently, a benefit is obtained in respect of such trading liability by way of remission or cessation thereof during the year in which such event occurred; (3) in that situation the value of benefit accruing to the assessee is deemed to be the profit and gains of business which otherwise would not be his income; and (4) such value of benefit is made chargeable to income tax as the income of the previous year wherein such benefit was obtained. The High Court, agreeing with the Tribunal, rightly held that the resort to Section 41(1) could arise only if the liability of the assessee can be said to have ceased finally without the possibility of reviving it. On the facts found by the Tribunal, the Tribunal as well as the High Court were well justified in coming to the conclusion that the purchase tax liability of the assessee had not ceased finally during the year in question. Despite the finality attained by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the point of view of the receiver and vice versa. Therefore, the decision in Maheshwari Devi Jute Mills' case (supra) cannot be regarded as an authority for the proposition that payment made by an assessee for purchase of loom hours would be capital expenditure. Whether it is capital expenditure would have to be determined having regard to the nature of the transaction and other relevant factors. But, more importantly, it may be pointed out that Maheshwari Devi Jute Mills' case (supra) proceeded on the basis that loom hours were a capital asset and the case was decided on that basis. It was common ground between the parties throughout the proceedings, right from the stage of the Income-tax Officer upto the High Court, that the right to work the looms for the allotted hours of work was an asset capable of being transferred and this Court therefore did not allow counsel on behalf of the Revenue to raise a contention that loom hours were in the nature of a privilege and were not an asset at all. Since it was a commonly accepted basis that loom hours were an asset of the assessee, the only argument which could be advanced on behalf of the Revenue was that when the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his decision cannot, therefore, be regarded as an authority compelling us to take the view that the amount paid for purchase of loom hours was capital and not revenue expenditure. The question is res Integra and we must proceed to examine it on first principle. 5. It is quite clear from the terms of the working time agreement that the allotment of loom hours to different mills constituted merely a contractual restriction on the right of every mill under the general law to work its looms to their full capacity. If there had been no working time agreement, each mill would have been entitled to work its looms uninterruptedly for twenty four hours a day throughout the week, but that would have resulted in production of jute very much in excess of the demand in the world market, leading to unfair competition and precipitous fall in jute price and in the process, prejudicially affecting all the mills and therefore with a view to protecting the interest of the mills who were members of the Association, the working time agreement was entered into restricting the number of working hours per week for which each mill could work its looms. The allotment of working hours per week under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. One celebrated test is that laid down by Lord Cave, L.C. in British Insulated and Helsby Cables Ltd. v. Atherton 10 TC 155 where the learned Law Lord stated : .When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, 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.'' 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 I.T.R. 241 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 incurred for obtaining advantage, of enduring benefit, may, nonethe- less, be on revenue account and the test of enduring benefit may break down. It is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Now as 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 Radeliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. (supra), 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 never-the-less 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 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 cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit earning apparatus of the assessee. It was an expenditure for operating or working the looms for longer working hours with a view to producing a larger quantity of goods and earning more income and was therefore in the nature of revenue expenditure. We are conscious that in law as in life, and particularly in the field of taxation law, analogies are apt to be deceptive and misleading, but in the present context, the analogy of quota right may not be inappropriate. Take a case where acquisition of raw material is regulated by quota system and in order to obtain more raw material, the assessee purchases quota right of another. Now it is obvious that by purchase of such quota right, the assessee would be able to acquire more raw material and that would increase the profitability of his profit making apparatus, but the amount paid for purchase of such quota right would indubitably be revenue expenditure, since it is incurred for acquiring raw material and is part of the operating cost. Similarly, if payment has to be made for securing additional power every week, such payment would also be part of the cost of operating the profit making structure and hence in the nature of revenue e ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
