Commissioner Of Income Tax, Udaipur v. M/S. Hindustan Zinc Ltd, Udaipur.(D.b.income Tax Appeal

COMMISSIONER OF INCOME TAX, UDAIPUR VS. M/S. HINDUSTAN ZINC LTD, UDAIPUR.(D.B.INCOME TAX APPEAL NO. 52/02) Date of Judgment :- 30, January,2009. HON'BLE MR.JUSTICE A.M.KAPADIAHON'BLE MR.JUSTICE SANGEET LODHA Mr.K.K.Bissa, for the appellant.Mr. Anjay Kothari, for the respondent. -'BY THE COURT:(PER HONBLE MR.SANGEET LODHA,J.) 1.This appeal under Section 260 A of the Income Tax Act,1961( in short “the Act of 1961” hereinafter) is directed againstorder dated 16.10.01 passed by the Income Tax AppellateTribunal,Jodhpur Bench,Jodhpur ( in short “ITAT” hereinafter) ,whereby an appeal filed by the Revenue against the order dated20.2.94 passed by the Commissioner of Income Tax (Appeal),Udaipur ( in short “CIT(A)” hereinafter) setting aside the orderpassed by the Assessing Officer( in short “AO” hereinafter) dated28.10.93 to the extent of disallowing certain expenditure, standsdismissed. 2.The return for the Assessment Year 1991-92 was filed bythe assessee on 13.12.91 showing a total income ofRs.3,41,99,319/-. However,a revised return was filed by theassessee on 4.1.93 showing loss of Rs.43,72,27, 027/-. In the revised return , the assessee claimed deduction u/s. 37 of theAct of 1961 on account of investment in construction ofGhosunda Dam as revenue expenditure. The expenditure wasincurred by the asessee in construction of part of the Daminasmuch as, it required large quantity of water for day to dayoperation of its super smelter located at Chanderia. The AOdisallowed the same on the ground that the expenditure incurredin construction of Ghosunda Dam was of capital nature. Thatapart, the deduction claimed by the assessee in respect ofexpenditure on the Guest House was also disallowed by the AO. 3.Aggrieved by the aforesaid order passed by the AO , theassessee preferred an appeal before the CIT(A). The CIT(A)arrived at the finding that the expenditure made by the assesseewhich facilitates that the business should go on more profitablywould be a revenue expenditure. The learned CIT(A) opined thatit does not make any change in the profit earning structure ofthe company nor it bring into existence any asset of the capitalnature. Accordingly, the expenditure incurred as aforesaid wastreated to be allowable revenue expenditure.The expensesclaimed by the assessee company in respect of the Guest Housewere also allowed by the CIT(A) relying upon his own decision inthe case of assessee for preceding assessment year. 4.On further appeal by the Revenue, the order passed by theCIT(A) as aforesaid has been confirmed by the ITAT. The ITAT arrived at the finding that the object and effect of theexpenditure incurred by the assessee company in construction ofthe Ghosunda Dam is facilitating the assessee's trade operationand enabling the management to conduct business moreefficiently or more profitably, therefore, the same are allowabledeductions. Accordingly, the ITAT declined to interfere with theorder passed by the CIT(A). Relying upon the decision of thevarious High Courts, the expenses incurred by the assesseecompany in respect of the Guest House were also held to beallowable deduction by the ITAT. Hence, this appeal at theinstance of Revenue . 5.The appeal was admitted by this Court on the followingsubstantial questions of law arising from the order impugnedpassed by the learned ITAT:- (1) Whether on the fact and in the circumstances ofthe case the ITAT was justified in law in upholding theorder of CIT(A) deleting the disallowance ofRs.15,21,30,864/- being expenditure on constructionof Gosunda Dam holding that the expenditure was ofrevenue nature ignoring the facts brought on recordby the Assessing Officer including the fact that theexpenditure in question related to period prior tocommissioning of Chandaria Smelter and thejudgment of the Supreme Court reported in 84 ITR277 ? 5.The appeal was admitted by this Court on the followingsubstantial questions of law arising from the order impugnedpassed by the learned ITAT:- (1) Whether on the fact and in the circumstances ofthe case the ITAT was justified in law in upholding theorder of CIT(A) deleting the disallowance ofRs.15,21,30,864/- being expenditure on constructionof Gosunda Dam holding that the expenditure was ofrevenue nature ignoring the facts brought on recordby the Assessing Officer including the fact that theexpenditure in question related to period prior tocommissioning of Chandaria Smelter and thejudgment of the Supreme Court reported in 84 ITR277 ? (2)Whether on the facts and in the circumstancesof the case the ITAT was justified in law in upholdingthe order of the CIT(A) reducing the disallowance ofRs.15,40,667/- made by the Assessing Officer inrespect of expenditure on guest house toRs.4,07,522/- even though expenses allowed are notallowable under the specific provisions of Section 37 (4) and 37(5) of the Income Tax Act? 6.It is contended by the learned counsel for the Revenuethat the assessee has received enduring and lasting benefits outof the investment made by it in construction of the Dam .According to the learned counsel for the Revenue thecontroversy involved in this appeal stands covered by decision ofthe Hon'ble Supreme Court in the matter of “M/s. DevidasVithaldas & Co. vs. CIT”, 84 ITR , 227 wherein it has beencategorically held that where expenditure is for bringing intoexistence a new asset or an advantage of an enduring natureand is made once and for all for procuring enduring benefits shallbe treated to be expenditure of capital nature. It is furthersubmitted by the learned counsel that the assessee has notclaimed this expenditure as revenue in nature in the originalreturn and that apart, in its book of account , the assessee hastreated the investment as capital expenditure therefore, thequestion of treating the said expenditure as revenue expendituredoes not arise. Regarding the Guest House expenses, it issubmitted by the learned counsel that the expenditure incurredtowards rents, repairs and maintenance of the premises /accommodation used for the purpose of the Guest House of thenature indicated in sub-section (4) of Section 37 are notallowable expenditure. In this regard, the learned counsel hasrelied upon the decision of the Hon'ble Supreme Court in the matter of “Britannia Industries Ltd. vs. Commissioner of IncomeTax & Anr.”, (2005) 278 ITR 546(SC). 7.Per contra, the learned counsel appearing on behalf of therespondent-assessee submitted that admittedly, the supersmelter plant established by the assessee company requiredlarge quantity of water for its day to day operation. The learnedcounsel submitted that the Dam is not an asset owned by theassessee company but the same is owned by the StateGovernment. The learned counsel submitted that as a matter offact, the Dam was initially constructed by the State Governmentand the assessee company has only modified the saidconstruction. The learned counsel urged that the expenditure asaforesaid has been made by the assessee company just tofacilitate that the business should go no more profitablytherefore, by all means, the expenditure incurred deserves to betreated a revenue expenditure. In support of his contentions, thelearned counsel has relied upon the decisions of the Hon'bleSupreme Court in the matters of “Commissioner of Income Tax ,Bombay City -I vs. Associated Cement Companies Ltd.”, (1988)172 ITR, 257 & “Commissioner of Income Tax vs. BombayDyeing and Manufacturing Co.Ltd.”, (1996) 219 ITR, 521 and adecision of this Court in the matter “Commissioner of IncomeTax vs. Rajasthan Spinning and Weaving Mills Ltd.”, (2005) 272ITR, 487. In regard to the guest house expenses, the learned counsel for the respondent assessee also does not dispute thatthe matter stands covered by the decision of the Hon'bleSupreme Court in Britannia Industries Ltd.'s case (supra). 8.We have considered the rival submissions and perused thematerial on record. 9.There is no quarrel with the proposition of law advanced bythe learned counsel for the Revenue that where expenditure ismade for bringing into existence a new asset or an advantage ofan enduring nature and is made once and for all for procuringenduring benefits shall be treated to be expenditure of capitalnature. The word “capital” connotes permanency and capitalexpenditure is therefore, closely akin to concept of securingsomething tangible or intangible property or corporeal orincorporeal right so that they could be of a lasting or enduringbenefit to the enterprise in issue. Revenue expenditure on theother hand is operational in its perspective and solely intendedfor furtherance of the enterprise. This distinction though candidand well accepted, yet is susceptible to modification underpeculiar and distinct circumstances. (CIT vs. Ashok Leyland Ltd.,(1969) 72 ITR 137. 10.But then, in absence of the statutory definition of the“capital and revenue expenditure” no universal test can be laiddown so as to determine the nature of expenditure. As laid downby the Hon'ble Apex Court in the matter of “Empire Jute Company Ltd. vs. CIT” (1980) 124 ITR, 1, there may be caseswhere expenditure , even if incurred for obtaining an advantageof enduring benefit, may nonetheless be on the revenue accountand the test of enduring benefit may break down. It is not everyadvantage of enduring nature acquired by an assessee thatbrings the case within the principle laid down in this test. What ismaterial to consider is the nature of the advantage in acommercial sense and it is only where the advantage in thecapital field that the expenditure would be disallowable on anapplication of this test. If the advantage consists merely infacilitating ,the assessee's trading operations or in enabling themanagement in the conduct of the assessee's business to becarried on more efficiently or more profitably while leaving thefixed capital untouched , the expenditure would be on revenueaccount, even though the advantage may endure for anindefinite future. The test of enduring benefit is, therefore, not acertain or conclusive test and it cannot be applied blindly andmechanically without regard to particular facts andcircumstances of a given case. 11. In Rajasthan Spinning & Weaving Mills Ltd.'s case (supra),the Division Bench of this Court after due consideration of thevarious decisions of the Hon'ble Supreme Court and High Courtsincluding the decision of the Supreme Court in AssociatedCement Companies Ltd.'s case (supra), decision of the Bombay High Court in Bombay Dyeing & Manufacturing Company Ltd.'scase (supra) and the decision of the Hon'ble Supreme Court inthe matter of “CIT vs. Madras Auto Service (P) Limited “ (1998)233 ITR, 468, opined as under:- 11. In Rajasthan Spinning & Weaving Mills Ltd.'s case (supra),the Division Bench of this Court after due consideration of thevarious decisions of the Hon'ble Supreme Court and High Courtsincluding the decision of the Supreme Court in AssociatedCement Companies Ltd.'s case (supra), decision of the Bombay High Court in Bombay Dyeing & Manufacturing Company Ltd.'scase (supra) and the decision of the Hon'ble Supreme Court inthe matter of “CIT vs. Madras Auto Service (P) Limited “ (1998)233 ITR, 468, opined as under:- “From the aforesaid judgments of the Supreme Court, itis apparent that merely because the amount spent hasbeen used for construction of a building or structure ofpermanent nature is not the decisive test for holding theexpenses to be capital outlay or revenue outlay. The twotests emerging from the aforesaid decisions are thatfirstly where the building or construction of anypermanent structure is brought into existence that is byitself not sufficient to hold the expenses to be capitalnature invariably. Where such construction does notresult in acquisition of any capital assets to the trade ofthe assessee or the property does not become theproperty of the assessee, it does not result in acquisitionof capital assets of enduring nature by the assessee.Secondly, it is also clearly discernible that if suchexpenses are incurred for the purposes of business forderiving any benefit whether to preserve the business orto facilitate the running of the business more smoothly orto make the business more profitable or to secure anyother advantage for the assessee's business or incurringexpenditure by seeking exemption from or reduction inincurring of other expenses which would have beenordinarily allowable as revenue expenditure of theassessee's business, such expenses are to be treated ashaving been incurred wholly and exclusively for thebusiness of the assessee and revenue expenditure. Suchexpenses cannot be construed as a capital expenses.” 12.Adverting to the facts of the present case, admittedly, theassessee's super smelter plant requires adequate quantity ofwater for its operation and unless and until, water is available ,the super smelter plant would not function and would not be ableto produce any items. Admittedly, the Ghosunda Dam has been constructed by the State Government and the assessee hasmade expenditure for its alteration so as to ensure sharing of thewater with the State Government without having any right orownership in the Dam or the water. Even, the assessee's shareof water is also determined by the State Government. Thus, theexpenditure incurred by the assessee for commercial expediencyrelates with carrying on of business and falls within suchexpenditure as prudent businessman may incur for the purposeof the business. The operational expenses incurred by theassessee solely intended for furtherance of the enterprise can beno means be treated as expenditure of capital nature. 13.Keeping in view the object and purpose of the expenditureand totality of the facts and circumstances of the case noticedabove, in our considered opinion, the benefit received by theassessee company on account of the expenditure incurredcannot be said to be an advantage in the capital field. We are inagreement with the view taken by the CIT(A) and affirmed bythe learned ITAT that the object and effect of the expendituremade by the assessee is to facilitate it trade operation andenable the management to conduct business more efficiently ormore profitably. Therefore, the question no. 1 (supra) deservesto be answered in affirmative i.e. in favour of the assessee andagainst the Revenue. 14.Regarding the Guest House expenses, it is the common 13.Keeping in view the object and purpose of the expenditureand totality of the facts and circumstances of the case noticedabove, in our considered opinion, the benefit received by theassessee company on account of the expenditure incurredcannot be said to be an advantage in the capital field. We are inagreement with the view taken by the CIT(A) and affirmed bythe learned ITAT that the object and effect of the expendituremade by the assessee is to facilitate it trade operation andenable the management to conduct business more efficiently ormore profitably. Therefore, the question no. 1 (supra) deservesto be answered in affirmative i.e. in favour of the assessee andagainst the Revenue. 14.Regarding the Guest House expenses, it is the common ground between the parties that the matter is squarely coveredby the decisions of the Hon'ble Supreme Court in BritanniaIndustries Ltd.'s case (supra). In the said case, the Hon'bleSupreme Court while considering the question as to whether theexpression “premises & buildings” referred to in Section 30 and32 and used for the purposes of business operation wouldinclude within its scope and ambit , the expression “residentialaccommodation in nature of guest house” used in sub-sections(3), (4) and (5) of Section 37 of the Act of 1961, observed asunder:- “While the two expressions can be similarly interpreted,a distinction has been sought to be introduced for thepurposes of section 37 by specifying the nature ofbuilding to be a guest-house. In our view, the intentionof the Legislature appears to be clear and unambiguousand was intended to exclude the expenses towardsrents,repairsandalsomaintenanceofpremises/accommodation used for the purposes of a--guesthouse of the nature indicated in subsection(4) ofsection 37.When the language of a statute is clear andunambiguous, the courts are to interpret the same in itsliteral sense and not to give it a meaning which wouldcause violence to the provisions of the statute. If theLegislature had intended that deduction would beallowableinrespectofalltypesofbuildings/accommodations used for the purposes ofbusiness or profession, then it would not have felt theneed to amend the provisions of section 37 so as tomake a definite distinction with regard to buildings usedas guest-houses as defined in sub-section(5) of section37 and the provisions of sections 31 and 32 would havebeen sufficient for the said purpose.” 15.In this view of the matter, the question no. 2 deserves to be decided in favour of the Revenue and against the assessee. Aditya/- Accordingly, it is held that the CIT(A) was not justified inreducing the Guest House expenses disallowed by the AO fromRs.15,40,667/- to Rs.4,07,522/-. 16.In the result, the appeal preferred by the Revenue is partlyallowed. The order passed by the ITAT treating the expenditureincurred by the assessee in construction of the Ghosunda Damas revenue expenditure is affirmed. However, the order passedby the CIT(A) reducing the guest house expenses disallowed bythe AO from Rs.15,40,667/- to Rs.4,07,522/- affirmed by thelearned ITAT is set aside and the order passed by the AO in thisregard is restored. Consequently, the guest house expensesclaimed by the assessee at Rs. 15,40,667/- shall standdisallowed. No order as to costs. (SANGEET LODHA),J. (A.M.KAPADIA),J.