TMI Blog1994 (12) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... ital asset should be allowed as an expenditure allowable under section 37 of the Income-tax Act, 1961 ? " The assessee is a private limited company. The assessee wanted to set up a project for manufacturing chemical process and pumps in the medium scale sector. In that connection on August 6, 1973, the assessee placed an order with the Heavy Engineering Corporation Limited, Ranchi, for the manufacture and supply of a horizontal boring machine. Later, the assessee cancelled the order placed by it. But, the Heavy Engineering Corporation Limited insisted on damages by way of interest and storage charges. The assessee paid a sum of Rs. 48,175 by way of interest and storage charges. The assessee claimed that this sum is a revenue expenditure f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch was to be carried on from day to day. The payment was made with the object of avoiding an unnecessary investment in capital assets and was in the nature of a capital expenditure. Learned standing counsel relied on a decision of the Delhi High Court in Edward Keventer (S.) Pvt. Ltd. v. CIT [1971] 81 ITR 126. According to the facts arising in that case, pending a writ petition filed by the assessee-company in relation to the land belonging to it notified by the Government for compulsory acquisition, the assessee-company entered into an agreement with Delhi Glass Works for taking on lease for a period of thirty years the land measuring about 30 acres together with offices, bungalows, staff, workmen and other members. Under the agreement if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sted the bankers to cancel the letter of credit, but were told that the letter of credit could not be cancelled without the consent of the manufacturers. The manufacturers refused to release the letter of credit. A compromise was entered into whereby the letter of credit was released on payment of 15,000 pounds to the manufacturers. On those facts, the Delhi High Court held that the amount of Rs. 20,00,348 represented capital expenditure and was not a permissible deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922. The expenditure for the acquisition of a plant was surely of a capital nature and any loss suffered in that transaction would naturally be of a capital nature. Learned standing counsel also relied on a decision i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... added to the fixed capital of the assessee and would have become a part of its capital assets. As the expenditure was incurred in attempting to obtain a capital asset by boring the well, there can be little doubt that the expenditure was in the nature of capital expenditure. On the other hand, in order to support his contention that the damages claimed by the assessee were in the nature of revenue expenditure and, therefore, liable as a deduction, learned counsel for the assessee relied on a decision in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1, wherein the Supreme Court held that the expenditure incurred for the purpose of operating the looms for longer working hours was primarily and essentially related to the operation or working of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure is allowable as revenue expenditure. According to the facts arising in the present case, the assessee placed an order with the Heavy Engineering Corporation, Ranchi, to purchase a horizontal boring machine on September 21, 1973, and paid an advance for the said purchase. Due to flexibility of the price, the assessee cancelled the order on February 17, 1974, and the company claimed interest and storage charges amounting to Rs. 48,175. The point for consideration is whether the damages paid by the assessee to the Heavy Engineering Corporation can be considered as a revenue expenditure. In Swadeshi Cotton Mills Co. Ltd. v. CIT (No. 2) [1967] 63 ITR 65 (SC), the Supreme Court held that the damages paid for the non-fulfilment of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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