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TMI Blog1982 (4) TMI 112X X X X Extracts X X X X X X X X Extracts X X X X ..... pital expenditure as it was merely an addition to the tube well. 3. On appeal, it was found by the CIT (A) that the pipes were of the length of about 2/3rd of a mile and, therefore, the old pipes were substantially replaced. On this basis, he considered that the expenditure was capital in nature in the light of decisions reported in Hylan Ltd. vs. CIT (1973) 87 ITR 310 (AP) and CIT Bombay vs. Ballimal Nawal Kishore (1979) 119 ITR 292 (Bom) at pages. 297-298. 4. At the time of hearing, the ld. counsel of the assessee maintained that the expenditure was incurred by the assessee towards replacement of old pipes and two case laws cited by the CIT (A) for disallowing the claim were not applicable to the facts of the assesses case. The ld. Deptl. Rep. on the other hand, relied on the decisions of the Courts cited by the CIT(A) and supported the orders of the authorities. After due consideration of the facts of the case, we have to observe that the expenditure under consideration consisted of two items, namely, the cost of galvanised pipes of Rs. 40,058 and further expenditure of Rs. 17,035 for fitting them with a tube well for the purpose of irrigation. There can be no doubt about th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Mavji and Co. reported in (1980) 15 CTR (SC)154 : (1980) 122 ITR 49 (SC). In view of the principles laid down by the Supreme Court in the cases cited supra, the claim of the assessee is to be allowed as revenue expenditure. 5. The next ground relates to the disallowance of Rs. 54,810 incurred on tea leaf house. The assessee has replaced the netting and matting of the bed on which tea is spread out on account of corrosion and damage occurred over the years. The bamboo mats which were spread on netting for the withering purposes were replaced by thinner hessian cloth which would allow more air for withering purposes. The ITO disallowed the expenditure treating it as capital expenditure while in appeal, the CIT(A) was of the view that there has been substantial replacement of the whole asset and improvement thereof. Following the test applied by him in connection with the claim for pipes and fittings, he upheld the disallowance holding the expenditure as capital expenditure. However, he has directed allowance of depreciation on such expenditure. 6. At the time of hearing the ld. counsel for the assessee submitted that the tea leaf house was as old as tea garden which was purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounted to 60 per cent of the total fencing For this reason, he came to the conclusion that the whole or substantially whole part of the old asset was replaced and the fencing practically became non-existent. Following his decision in respect of the claims relating to tea leaf house and pipes, he upheld the disallowance of the expenditure treating it as capital expenditure. 10. At the time of hearing, the ld. counsel for the assessee submitted that the case laws relied upon by the CIT(A) for disallowing the fencing expenses were not applicable. On the other hand, he relied on the decision of the Calcutta High Court in the case of CIT vs. Belgachi Tea Co. Ltd. reported in (1975) 99 ITR 99 (Cal) wherein the cost of repairs to fencing of the tea gardens was held as revenue expenditure on the basis that the pre-dominant and the main purpose of incurring expenditure was to carry on the business and incidental advantage of that expenditure even though of some endurance could not affect the Revenue character of the expenditure. Further, he pleaded that even if the expenditure is not treated as repairs but it deserves to be allowed under s. 37 as incidental to business. The ld. Deptl. Rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not created the reserve, the action of the ITO in rejecting the claim for the asst. yr. 1974-75 was upheld. 14. At the time of hearing, the ld. counsel for the assessee relied on the decision of the Andhra Pradesh High Court in the case of CIT vs. Agro insecticides & Allied Industries reported in (1981) 127 ITR 796 (AP) wherein the Hon'ble High Court, relying on the Board's Circular No. 189 dt. 30th Jan., 1976 has held that the assessee could not be denied the benefit of the development rebate merely because the reserve was not created during the year of installation of the machinery. It was further contended that the Board's Circular is binding on the authorities and, therefore, the assessee is entitled to the development rebate. The learned departmental representative, on the other hand, contended that the total income assessed was Rs. 97,276 and, therefore, the assessee ought to have created the statutory reserve and for this reason, he supported the orders of the authorities. 15. We have duly considered the rival contention urged on behalf of both the parties. As per audited statement of accounts, the assessee had incurred net loss of Rs. 3,03,936 in the previous year relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kely that the total income would be computed by the ITO in a positive figure depending upon the disallowance or rejection of books of account. Keeping in view the observation of the Hon'ble Calcutta High Court, it would be unreasonable to expect an assessee to create reserve out of loss which would amount to imposing a burden, which in the case of Calcutta High Court was not the object of cl.(vib) of s. 10(2) of the 1922 Act. The Bombay High Court has also held in the case of India Oil Co. Ltd. vs. S. Rajagopal, ITO (1973) 92 ITR 241 (Bom) that there is no obligation on the part of the assessee to create a reserve as a condition merely for carrying over the development rebate without it being actually allowed to him by setting off the rebate against assessed profits. No reserve is acquired to be created by the assessee in the year of installation or use of the plant and machinery irrespective of the profits as a condition precedent to the actual allowance of development rebate in the subsequent years in which there are assessed profits. The Bombay High Court has followed the decision of the Calcutta High Court in the case cited in (1973) 87 ITR 501 (Cal) and the case of Radhika Mil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e IT Act, 1961 did not permit the creation of illusory reserve as a condition precedent for carrying forward the development rebate to the succeeding years when profits were earned. In view of the above decisions of the Courts as well as the factual position, the claim of the assessee is to be allowed. 16. The 5th ground relates to disallowance of Garden Nursery expenses of Rs. 82,316. The assessee claimed nursery expenses of Rs. 82,316 by debiting it to the Profits & Loss Accounts. The claim was rejected by the ITO as the procedure adopted by the assessee this year was different from that adopted in the earlier years. The procedure hitherto adopted by the assessee was that the expenditure on nurseries was kept in a separate account as pre-paid expenses and when the plants from the nursery were transplanted or consumed, the amount will be transferred to the Profit and Loss Accounts. In other worded, the actual consumption of plant of the nursery would be transferred and claimed as a revenue expenditure from Profit & Loss Account. The deviation in the procedure for this year appears to have been pointed out by the auditors. The explanation of the assessee before the ITO was that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt for that job, does not appear to be valid inasmuch as even in respect of subsequent years, the assessee was able to pinpoint the particulars regarding division-wise number of plants replanted, the cost thereof and the value for plant. In other words, even without appointing a separate Accountant, the assessee company was in a position to maintain quantitative details of plants and the value thereof and the consumption of the plants. This could not be possible without employing any person on that job. Simply because it requires separate maintenance of accounts and the appointment of an Accountant does not, in our opinion, amount to reasonable and bona fide cause for deviating from the procedure regularly followed hitherto before. Even if the claim is admitted to be bona fide, as has been held by the Hon'ble High Court at Calcutta in the case of Reform Flour Mills P. Ltd. cited, there was no question of change of method of accounting in respect of a particular item of expenditure which was not permissible. Further, on merits it is to be observed that cost of nurseries forms an integral part of "actual cost of planting" defined in s. 33A(7) and is regulated by s. 33A of the IT Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ep. has emphasised the facts that there was no evidence to show that the claim had become bad during the year of account and, therefore, he supported the orders of the authorities on this point. 24. After due consideration of the rival contentions urged on behalf of both the parties, we hold that the assessee has not established by evidence that the claim has become bad and that too in the year of account relevant to the asst. yr. 1975-76. Consequently disallowance is confirmed. 25. The 7th ground relates to disallowance out of miscellaneous expenses and legal charges. At the time of hearing, the claim regarding legal charges was not pressed and, therefore, only the claim regarding miscellaneous expenses survives. The assessee claimed Rs. 3,099 and Rs. 2,152 as entertainment expenses relating to Borsillah Tea Estate and Tea Warehouse Department respectively. The ITO disallowed the same as entertainment expenses without going into the merits thereof. The order of the CIT(A) does not show that this claim was not dealt with by him and, therefore, this ground does not arise out of the order of the CIT(A). It is open to the assessee to agitate the matter before him. Since the matter ..... X X X X Extracts X X X X X X X X Extracts X X X X
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