TMI Blog1992 (10) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred an expenditure of Rs. 1,20,000. This expenditure of Rs. 3,70,000 was disallowed by the Income-tax Officer on the ground that it was capital expenditure. The Appellate Assistant Commissioner and the Tribunal have, however, allowed this expenditure as revenue expenditure. The assessee-company had also entered into an agreement dated November 28, 1961, with Messrs. Nanavati and Co. (P.) Ltd. as sole distributors of certain chemicals manufactured by the assessee. Under the terms of this agreement, the assessees were required to supply to the sole distributors their products on consignment basis for distribution to the various customers to whom sales had been effected by the sole distributors. The bills for such consignments were made out in favour of the sole distributors. The sole distributors prepared their bills in respect of such sales for their customers. The sole distributors were entitled to receive from the assessee-company a rebate of five per cent. of the sale price. The payment in respect of the goods so sold and received by the sole distributors from their customers and the payments of the invoice value was made by the sole distributors to the assessee-company a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equested Messrs. Nanavati and Co. (P.) Ltd. to assign to it the said debt of Rs. 5,80,403 due and payable to Messrs. Nanavati and Co. (P.) Ltd. by the mill-company. The Tribunal has held that the sum of Rs. 5,80,403 was deductible as a bad debt for the assessment year 1970-71. In respect of these findings, the following three questions of law have been referred to us under section 256(1) of the Income-tax Act, 1961 : " 1. Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 3,70,000 incurred by the assessee-company for preparation of a project report and market survey concerning triple super phosphate was deductible as revenue expenditure under section 37(1) of the Income-tax Act, 1961 ? 2. Whether, on the facts and in the circumstances of the case, the debt of Rs. 5,80,403 taken over by the assessee-company from Messrs. Nanavati and Co. (P.) Ltd. in terms of the deed of assignment dated June 30, 1969, was deductible as a bad debt for the assessment year 1970-71 in terms of section 36(1)(vii) of the Income-tax Act, 1961 ? 3. Whether, on the facts and in the circumstances of the case, the aforesaid sum of Rs. 5,80,403 was deductible as a trading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unding a note of caution, the Supreme Court has said (at page 45) : "It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations, it is difficult to lay down a test which would apply to all situations. One has therefore got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure. . . ." In the case of CIT v. Shri Digvijay Cement Company Ltd. [1986] 159 ITR 253, the Gujarat High Court was required to consider a case where the assessee-company which carried on the business of manufacture and sale of cement, had incurred expenditure in obtaining a feasibility report for setting up a shipyard. The report was not favourable and no shipyard was, in fact, established. The High Court said that the expenses incurred for the feasibility report were capital in nature. The expenses had been incurred with a view to deciding whether an asset or advantage of almost permanent nature should be brought into existence or not. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with a proposed factory in Rajasthan. The court said that the expenditure related to the feasibility of expanding the assessee's existing business and, therefore, these expenses were deductible as revenue expenditure. In our view, one cannot decide whether the expenditure is capital in nature or revenue in nature simply by relating it to setting up a new business or expanding an existing business. Even for the latter purpose capital expenditure may have to be incurred. Expansion of existing business can be done in several ways. It can be done by improving sales, by improving distribution channels, by advertising, or it can be done by acquiring additional plant and machinery and thereby increasing production. The nature of expansion will determine whether the expenditure incurred is of a capital nature or revenue nature. We, therefore, do not agree with the view taken by the Calcutta High Court in so far as it suggests that all expenditure incurred for expanding existing business would necessarily have to be considered as revenue expenditure. One has to take into account all the circumstances of the case while deciding whether the expenditure can be considered as revenue expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case as a market survey in connection with the project at Rajasthan. The Appellate Assistant Commissioner, in his order, has described this expenditure as "for conducting market survey for demand of fertilisers". (Paragraph 5 of the Appellate Assistant Commissioner's order dated June 1, 1973). The Tribunal in its order has said that the expenditure incurred by the assessee on project report and market survey relating to the second unit of the same business still constituted revenue expenditure. The nature of the survey which was conducted is not very clear. If one bears in mind the fact that the assessee was already carrying on the business of manufacturing fertilisers, a market survey relating to the demand for fertilisers including single super phosphate which the assessee was already manufacturing, and triple super phosphate which was proposed to be manufactured, can be looked upon as a market survey for the more efficient conduct of the assessee's existing business. The expenses incurred in connection with such a market survey can be considered as revenue expenditure. If, on the other hand, the market survey was entirely for the purpose of determining the marketability of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roducts manufactured by the assessee, its expense would be revenue in nature. Question No. 2 : The facts relating to question No. 2 have already been set out. Under clause 15 of the agreement dated November 28, 1961, the assessee-company had undertaken liability for bad and doubtful debts in respect of supplies made by the sole distributors at the instance of the assessee-company. Although clause 15 requires the assessee-company to give such directions for sale in writing, this is a provision for avoiding any dispute between the assessee and the sole distributor. There is no dispute as between the assessee and the sole distributor that the supplies made to Messrs. New Kaiser-I-Hind Mill were at the instance of the assessee-company. It is also clear from the facts that income from the sales made to New Kaiser-I-Hind Mill was included in the accounts of the assessee-company as income of the assessee-company. In view of this position, when under the deed of assignment dated June 30, 1969, the debt of Rs. 5,80,403 was taken over by the assessee-company in consideration of obligations incurred under the agreement dated November 28, 1961, and Re. 1, the debt was recoverable by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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