TMI Blog1981 (4) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... ouses/bungalows including furniture, sanitary and electrical installations in Rourkela Township. It would be appropriate, in our opinion, to describe the heading of the contract which was as follows; " Contract for the Expansion of Coke Oven Plant at Rourkela, Orissa, India, on a 'Turn-Key' basis including design, supply, civil engineering works, erection, putting into operation, demonstration of performance and supervision of maintenance." While we are on the subject-matter of the contract, we must emphasise that this was one transaction and that was clarified by the expression that it was a contract on a " turn-key basis ". The nature of the contract, as we shall presently note, would provide us the real key to the solution of the problem before us. It will be necessary to refer, in view of the contentions urged before us, to the relevant provisions of the said contract. Clause 3 of the said contract, principal whereof was the Hindusthan Steel Ltd., hereinafter referred to as HSL, was as follows; " The contractor shall design, supply, execute the complete civil engineering works, erect and put into operation and provide the technical `know-how' connected with proper and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rk, including cost of erection personnel and provisions of erection tackle, tools and equipment and material necessary for erection and the, cost of their insurance, freight to and from erection site and Customs Duty and any other duties and taxes for the same, are included in the contract price for erection." Sub-clause (ii) of cl. 15 provides, inter alia, as follows: " The contractor agrees that after completion of the work, the purchaser will be given the first option to take over such tools and tackles on the basis of their depreciated value. In this event, the purchaser shall also be entitled to deduct suitable sums for such of the defects which require modification for the efficient working of such tools and tackles." It is also material to refer to sub-cl. (iii) of the said cl. 15 which is in the following terms: " All removable property including fixtures erected or acquired by the contractors for carrying out the erection/construction of the plant or in connection thereof and all furniture excluding refrigerators, air-conditioning units, radios and record players, will become the property of the purchaser without any further payment as soon as the contractor ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge, telephones, stationary and other office requirements." Sub-clause (xi), inter alia, provided as follows: "(xi) Furnishing the bungalows to be erected by the contractor." The expression "furnishing the bungalows to be erected by the contractor " seems to be a little mistaken, because, the obligation of the contractor was not to erect the bungalow which was to be furnished by the contractor, but the bungalows had to be erected and supplied or provided for by the principals. Sub-clause (xvi) provided as follows: " (xvi) Building of temporary quarters for the accommodation of workers. These will remain contractor's property and can be dismantled and removed upon completion of the contract unless the purchaser decided to purchase these quarters from the contractor. The price will not exceed Rs. 70,000." Clause 26 stipulated-The principals, that is to say, Hindustan Steel Ltd. agreed to Dr. G. Otto Co., being the assessee herein entrusting all Indian supplies and services to their Indian Associates, M/s. Kalinga Otto (Private) Ltd., who should also be the recipients of all rupee payments on behalf of the contractor. It was clarified that this however did not relieve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee on rent. Therefore, the cost of furnishing the quarters is a capital expense and it is disallowed: Rs. 1,38,501." For the subsequent year he more or less reiterated the same reasons and observed as follows: " (d) In contract expenses account, assessee has claimed as revenue expenses Rs. 54,578 which expenses were incurred for painting and for providing furniture, furnishing, crockery, electrical fittings and fans in the houses belonging to M/s. Hindusthan Steel Ltd. which were let out to the assessee-company for its engineers. According to the contract with M/s. Hindusthan Steel Ltd., all irremovable property including fixture, erected by the assessee for carrying out the construction of the plant and all furniture, excluding refrigerators, air-conditioning units, radios and record players will become the property of the M/s. Hindusthan Steel Ltd. without any further payment as soon as the assessee completed the contract work. On account of this clause, namely that the furniture and fittings will ultimately go to M/s. Hindusthan Steel Ltd. without any further payment, assessee has submitted that these expenses incurred by them for furniture, etc., are revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ef of Rs. 1,30,130 under this head" The Tribunal agreed with the reasonings of the AAC in substance and, inter alia, observed as follows: "5. We have carefully considered the rival submissions of the parties as well as perused the aforesaid contract, and we do not find any merit in the submissions made on behalf of the Deptt. From the aforesaid clauses of the agreement, it is clear to us that they have to be read along with the entire contract as a whole. Under the contract, the assessee had undertaken the expansion of the coke oven plant as well as construction of houses/bungalows including furniture, sanitary and electrical installations in Rourkela Township. In order to get this contract, both H.S.L. as well as the assessee had stipulated various obligations and rights of each of the parties. H.S.L. was under an obligation to make available suitable unfurnished quarters to the assessee for its staff, while, the assessee was under an obligation to furnish them according to its requirement and on the completion of the contract it was required to hand over the furniture and fittings as well as electrical installations to H.S.L. without claiming any payment thereof. The rights ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be to first ascertain by reference to the document under which the obligation for incurring the expenditure is created and thereafter to apply the principle embalmed in the decisions of those facts, judicial statements on the facts of a particular case can never assist courts in the construction of an agreement or a statute which was not considered in those judgments or to ascertain what the intention of the Legislature was, What we must look at is the contract or the statute or the decree, in relation to its terms, the obligation imposed and the purpose for which the transaction was entered into." The principles so far as applicable in adjudicating these problems in India are well settled and have been reiterated by the Supreme Court in the case of Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34. There, discussing the various English as well as Indian authorities, the Supreme Court referred to the observations of the Full Bench of the Lahore High Court in the case of In re: Benarsidas Jagannath [1947] 15 ITR 185, where Mr. Justice Mahajan, speaking for the Full Bench of the Lahore High Court, had laid down the principles applicable in determining a question of this nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expression " enduring or abiding benefit " is not a static expression. An asset or an advantage may endure for the duration of the business of an assessee or for the duration of the contract. There is no dispute, as we have noticed that the expenditure was incurred in the course of the discharge of the obligations under the contract. The only question is whether by incurring the expenditure in discharge of the obligations under the contract, the assessee acquired any asset or advantage of an enduring nature, enduring in the sense in which the expression has to be understood. The expression " enduring " is not perpetual. It is also, not strictly transient but a via media, which, having regard to the reality of the transaction, has to be found out in deciding whether the advantage or the benefit is of an enduring or lasting nature. Learned advocate for the Revenue drew our attention to the different clauses which we have set out before and sought to urge that the benefit would certainly endure for the duration of the contract. The officers of the contractor would have the use and the benefit for the business and carry on business there during the period the contract lasted. He also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, then it was primarily incurred for carrying on the business. In a decision in the case of CIT v. Belgachi Tea Co. Ltd. [1975] 99 ITR 99 (Cal), the assessee, a tea grower, had claimed under " repairs account " a sum of Rs. 19,748 as cost of repairs to the fencing of a tea gardens. The ITO was of the view that the new fencing was fixed with new pillars and, therefore, a major portion of the expenditure was capital expenditure and he had disallowed on estimate a sum of Rs. 12,000. On second appeal, the Appellate Tribunal had allowed the claim. We held that in that case, the assessee's business was to carry on the business of tea growing and the business could not be carried on unless there was proper fencing. We further noticed that incurring the expenditure was in connection with the carrying on of the business by the assessee. We noted that if the predominant and main purpose of incurring the expenditure was the carrying on of the business, the incidental advantage of the expenditure, in that the property was more secured and thereby the assessee gained an advantage, which was of some endurance, could not affect its revenue character. Learned advocate for the assessee stressed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d it cannot be said that the Government had not been willing to meet them half-way." The context in which these observations came to be made was entirely different. The assessee-company during the first world war was manufacturing explosives for the Minister of Munitions, but owing to the dangerous situation of the works this was discontinued and in October, 1917, an arrangement was entered into with the Minister of Munitions and ultimately embodied in a written agreement dated April 22, 1918, under which the assessee-company agreed to transferring the works forthwith into a plant suitable for the manufacture of calcium nitrate to be sold to the Minister on stated terms. The Minister undertook to recoup to the company the whole cost of conversion up to a maximum sum of pound 15,000, which was the company's estimate of the cost in the conditions then prevailing. The agreement was to continue in force until determined by the Minister by one month's notice, which might be given immediately on the termination of the hostilities, but the agreement was not otherwise to expire before December 31, 1918. The converted works, except any existing plant and buildings incorporated therein an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of the cost of the new fittings less the price realised for the old fittings sold or alternatively an allowance for obsolescence computed in the usual manner (Rule 7, Cases I and II, Schedule D). Both the claims were rejected by the General Commissioners on appeal. It was held that the assessee was not entitled to deduct the cost of the new fittings less the price realised for the old. There at p. 486 of the report again Lord President Clyde made the following interesting observations: " The propriety, and the practice, of charging the cost of supplying implements, utensils, or articles employed for the purposes of the trade to revenue must vary according to the character of the trade, and partly perhaps according to the financial circumstances of the trader. Trading implements, utensils, and similar articles taking these descriptions in their ordinary connotation have to be supplied, repaired and altered from time to time, in order to enable the trade to be carried on and profits to be earned ; and in many businesses, expenditure on these things is a usual incident of their conduct and properly recurs in every year, or at least in most ordinary years, as a debt against rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ton Hotel Ltd., [1942] 24 TC 453. There, the assessee-company was the tenant of a fully licensed hotel, the lease providing that the tenant should pay all charges imposed in respect of the licences by virtue of the Licensing (Consolidation) Act, 1910. On the renewal of the licence in March, 1934 and in March, 1937, sums in respect of monopoly value were imposed, payable in instalments. The company appealed against the assessments under Schedule D for the years 1938-39 and 1939-40, claiming that the instalments of monopoly value should be deducted in computing the assessments. The Commissioners allowed the appeal. It was held by the Court of Appeal that the instalments were capital sums, and that they did not lose their capital nature because the company had undertaken to pay these under its lease, and that they were not admissible deductions for income-tax purposes. Lord Greene M.R. observed at p. 459 of the report as follows: " It appears to me that there can be no difference in principle between a payment out and out for monopoly value and a payment in respect of term. Each licence granted for a term must stand by itself, since an application for its renewal falls to be treate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same purpose as a sea-wall protecting the buildings from the waves of the sea. The distinction lies in the fact, the building belonged to the assessee and the protection that was afforded was of a permanent nature but the curtains were provided to decorate the bungalows. In that context, therefore, we have to note the observations of Vaisey J., at page 491 of the report upon which learned advocate for the Revenue, relied. There Vaisey J. observed as follows: " Now it seems to me to be reasonably plain that we have here the case of a new construction resulting in a new tangible erection or structure. Before this operation was carried out, at a cost of pound 500, the land where it touched the sea was no doubt just the ordinary ground and earth or mould which, as we know, was continually being eroded; and what the Appellant Company did was really to build up between the land and the sea that is, of course, the sea at high tide which I suppose is really the only difficult time-a new sea-wall. It is true that it was not a sea-wall of concrete or brick or anything of that kind but none the less it was solid structure. It cost pound 500. It was a barrier of wood piles and brushwood and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eliance was also placed on certain other English decisions and our attention was drawn to the observations in the case of Pitt v. Castle Hill Warehousing Co. Ltd. [1979] 49 TC 638 where at page 645, Mr. Justice Megary had expressed the same doubt about the phrase " no new capital asset had been created ". Now, this observation of Mr. Justice Megary, in the context of the controversy that arose in that case, in the sense, whether the assets created assets at all or a capital asset or a new asset at all which were really assets in exchange for something, which came up for consideration in that case, need not detain us because of the nature of the expenditure in the instant case and the obligations in discharge of which the expenditure had been incurred. In this context, it is also not very material, as we have mentioned before, to consider whether there be any advantage or there be any benefit or the question if there be any advantage or any benefit apart from the income for the performance of the obligations under contract, was it tangible or intangible ? Reliance was also placed on certain observations in the case of Odeon Associated Theatres Ltd. v. Jones [1970] 48 TC 257. There, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est of durability is satisfied, but I do not wish to rest on this narrow ground; indeed, I do not think that it is sound reasoning to do so. I agree entirely with Lord Denning M. R. that if one considers the business reality here, or, in the words of Dixon J. what the expenditure is calculated to effect from a practical and business point of view, the payments were made for rights (reinforced by the lease-sub-lease method) of exclusive supply of petrol to certain filling stations for periods varying from five years to 21 years. It is the durability of this complex right which has to be considered, and we must squarely face the question whether such an advantage is sufficiently enduring in the context of Regent's trade to qualify as a capital asset, or whether it has such transient qualities that it ought properly to be regarded as 'day to day' or 'current', and so, revenue expenditure. It seems to me an undue abstraction to segregate the leasehold or real element in this complex and to apply to it special rule or test which may exist in relation to such assets in other contexts; and, relevant, no doubt, though the lease-sub-lease framework is, it requires to be demonstrated that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lties inherent in it have been so fully analysed by the judicial Committee in the Nchanga's case 1964 AC 948 ; [1965] 58 ITR 241 (PC) and by others of your Lordships that I shall not take up time by a further discussion of them. More comprehensible is Henrikson v. Grafton Hotel Ltd. [1942] 24 TIC 453, where it was held in the Court of Appeal that a payment in respect of so-called monopoly value on the renewal for three years of a licence was a capital payment. The subject-matter of the payment there, though of a special character (but what asset is not ?) was in the game area as the ties in the present case, and Lord Greene M.R. said: `The thing that is paid for is of a permanent quality although its permanence, being conditioned by the length of the term, is short lived' ; and he regarded the fact that the licence had to be renewed every three years as irrelevant-there was 'a false appearance of periodicity' about them. Lastly, there are certain cases concerned with open cast mining: Knight v. Calder Grove Estates [1954] 35 TC 447; Stow Bardolph Gravel Co. Ltd. v. Poole [1954] 35 TC 459; H. J. Rorke Ltd. v. Commissioners of Inland Revenue [1960] 39 TC 194. In two of them the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expenditure which was and which was not incurred solely for the purpose of earning the profits or gains. It was observed by his Lordship that the conclusions were to be reached that in the particular case whether the expenditure were incurred for the purpose of earning profit. The facts of that case again were entirely different from the instant case. There, the purchaser of a business undertook to the vendor, as one of the terms of the purchase, that he would pay a certain sum annually to a third party irrespective of whether the business yielded any profit or not and in that context it was held that it was difficult to say that the annual payments were made solely for the purpose of business and it would make no difference that the annual sum should be paid out of the particular receipt of the business irrespective of the earning of any profit from the business as a whole. Learned advocate for the Revenue also drew our attention to the decision of the Bombay High Court in the case of CIT v. Menora Hosiery Works Pvt. Ltd. [1977] 109 ITR 714. He also drew our attention to the observations of Tulzapurkar J., at pages 723-724 of the report. There, the assessee had the benefit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tright in the course of the business activity as distinguished from deriving income from exploitation of one's assets. It is, therefore, clear that the contention on behalf of the assessee that the furniture constituted his stock-in-trade must be rejected." But, in the instant case, if we apply the test, that is to say, whether the assessee was dealing in the furniture or curtains or the fixtures which had to be fitted in the bungalows, then it could not be applied. But certainly it was true that the assessee had to provide for those, that is to say, furniture, fixtures and the curtains, etc., were to be fitted to the bungalow in the discharge of its obligations under the contract. Therefore, the test that his Lordship had indicated, in our opinion, would be destructive of the Revenue's contention in the instant case. Our attention was also drawn to the observations of the Privy Council in the case of Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1964] AC 948 [1965] 58 ITR 241, at pages 251-252, which reads as follows: " Again, courts have stressed the importance of observing a demarcation between the cost of creating, acquiring or enlarging the permanent (wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere to be for the group, it implemented its own production programme accordingly. It is not in evidence, how the mine's working was adapted to the small increase of the planned total that was involved. There is nothing to suggest that there was required any structural enlargement of the mine. In any event, it was not for that that the pound 1,384,569 was paid. In considering allocations of expenditure between the capital and income accounts, it is almost unavoidable to argue from analogy, An instance is taken which seems to fall beyond dispute on one or other side of the line and it is argued that the case under review is in substance more akin to that than to any comparable instance which falls beyond argument on the opposite side. Applying this method, their Lordships think that Nchanga's expenditure has no, true analogy with expenditure for the purposes of acquiring a business or the benefit of a long term or 'enduring' contract. On the other hand, it does bear a fair comparison with a monetary levy on the production of a given year. What Nchanga did was to charge its 1958/1959 production with the payment of this money in order to settle its share of the group's production pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e their lien against the assets of the assessee company's business, but that cannot be regarded as a ground for holding that the expenditure fell within section 10(2)(xv). Even in respect of liability wholly unrelated to the business it would be open to a creditor to sequester the assets of the assessee's business and such sequestration may result in stoppage of the operation of the business. Expenditure for satisfying liability unrelated to the business, even if incurred for avoiding danger apprehended or real to the conduct of the business, cannot be said to be revenue expenditure. Nor can it be said that because a liability has some relation to the business which is carried on, expenditure incurred for satisfaction of such liability is always to be regarded as falling within section 10(2)(xv). Whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the application of 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 related to the carrying on or conduct o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xclusively for the purpose of the plantation. In this connection, it is pertinent to note that what the Act purports to tax is agricultural income and not agricultural receipts. From the agricultural receipts must be deducted all expenses which in ordinary commercial accounting must be debited against the receipts ....... In principle, we do not see any distinction between interest paid on capital borrowed for the acquisition of a plantation and interest paid on capital borrowed for the purpose of existing plantations: both are for the purposes of the plantation.' The test laid down by this court, therefore, was that expenditure made under a transaction which is so closely related to the business that it could be viewed as an integral part of the conduct of the business, may be regarded as revenue expenditure laid out wholly and exclusively for the purposes of the business." Our attention was also drawn to the decision of the Supreme Court in the case of CIT v. Kirkend Coal Co. [1970] 77 ITR 530, where the Supreme Court reiterated its previous observations. Our attention was drawn to the decision of the Madras High Court in the case of CIT v. T.V. Sundaram Iyengar P. Ltd. [1974 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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