Commissioner Of Income Taxchennai v. M/S.southern Petrochemical Industriescorporation Ltd.,Madras-32

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 29.1.2007 CORAM THE HON'BLE MR.JUSTICE P.D.DINAKARANANDTHE HON'BLE MRS.JUSTICE CHITRA VENKATARAMAN T.C.(A) Nos.74 and 75 of 2003 Commissioner of Income TaxChennai .. Appellant Vs. m/s.Southern Petrochemical IndustriesCorporation Ltd.,Madras-32..Respondent Appeal under Section 260A of the Income Tax Act, 1961 against theorder of the Income Tax Appellate Tribunal, Madras 'C' Bench dated25.2.2003 in ITA No.3589 & 1088 (Mds)/90 for the assessment years 1986-87& 1987-88 against the order passed by Commissioner of Income Tax (Appeals)II Madras - 34, dated 29.08.1990, 26.10.1989 in IT/WT/GT/Appeal No.60/90-91 and 23/89/90 against the assessment order of Assistant Commissioner ofIncome-Tax, Central Circle II (S) Madras - 34 dated 29.03.1990 and14.03.1999 in PAN/G.I.R.No.47-031-CY-0851/87-88 respectively. For Appellant:Mrs.Pushya Sitaraman, Sr.SC for IT. For Respondent :Mr.R.Vijayaraghavan J U D G M E N T (Delivered by P.D.DINAKARAN, J.) The Revenue has preferred the above tax case appeal against the orderof the Income-tax Appellate Tribunal dated 25.2.2003 in ITA No.1088 &3589/Mds/1990 for the assessment years 1986-87 and 1987-88 raising thefollowing substantial questions of law for consideration: 1. Whether in the facts and circumstances of the case, theTribunal was right in holding that depreciation should beallowed on stand by spare parts even though they were not takenfor use during the year? https://hcservices.ecourts.gov.in/hcservices/ 2. Whether in the facts and circumstances of the case, theTribunal was right in holding that the expenses related toobtaining fixed deposits from the public is a revenueexpenditure liable for deduction? 2. The facts, in brief, are as under: 2.1. The assessment years with which we are concerned are 1986-87 and1987-88. The assessee filed its returns, inter alia, claimingdepreciation on standby items such as, spare parts in respect of criticalparts of plant and machinery for both the assessment years. In so far asthe assessment year 1987-88 is concerned, the assessee claimed deductionof expenses relating to the issue of fixed deposits as revenueexpenditure. The assessing officer, however, rejected the said claims ofthe assessee. 2.2. On appeal, the Commissioner of Income-tax (Appeals), as regardsdepreciation on stand-by items, held that they must be treated asmachinery being put to use in the business of the assessee anddepreciation should be allowed on them. In respect of deduction onexpenses relating to obtaining fixed deposits, the Commissioner of Income-tax (Appeals) held that the expenses were relatable to issue of fixeddeposits from public in order to augment working capital of the assesseeand the expenses incurred for raising working capital is revenueexpenditure and accordingly, deleted the addition made by the assessingofficer. 2.3. The Appellate Tribunal, on appeal by the Revenue, held that thedepreciation should be granted on standby items and the expenses relatingto fixed deposits should also be allowed as revenue expenditure. 2.4. Aggrieved by the order of the Appellate Tribunal, the Revenuehas come forward with the appeals raising the questions of law referred toabove. 3.1. Regarding the 1[st] question, viz.,"Whether in the facts and circumstances of the case, theTribunal was right in holding that depreciation should beallowed on stand by spare parts even though they were not takenfor use during the year?" at the outset, we are of the view that the question is not happily framedand we reframe the question as under: "Whether in the facts and circumstances of the case, theTribunal was right in holding that depreciation should beallowed on spare parts which are standby items even though theywere not taken for use during the year?" 2.4. Aggrieved by the order of the Appellate Tribunal, the Revenuehas come forward with the appeals raising the questions of law referred toabove. 3.1. Regarding the 1[st] question, viz.,"Whether in the facts and circumstances of the case, theTribunal was right in holding that depreciation should beallowed on stand by spare parts even though they were not takenfor use during the year?" at the outset, we are of the view that the question is not happily framedand we reframe the question as under: "Whether in the facts and circumstances of the case, theTribunal was right in holding that depreciation should beallowed on spare parts which are standby items even though theywere not taken for use during the year?" 3.2. Undisputedly, as found in the order of the Appellate Tribunal,the standby items are assets acquired by the assessee and kept inreadiness for use whenever the machinery that is regularly used goes outof action or requires repairs. Before going into the the questionwhether depreciation on standby items is allowable, it is useful to referthe law on this subject. 3.3. Section 32 of the Act reads as follows:"32. Depreciation – (1) In respect of depreciation of (i) buildings, machinery, plant or furniture being tangibleassets; (ii) know-how, patents, copyrights, trademarks, licences,franchises or any other business or commercial rights ofsimilar nature, being intangible assets acquired on or afterthe 1[st] day of April 1998, owned wholly or partly, by the assessee and used for the purposeof the business or profession, the following deductions shallbe allowed -- ..." 3.4. In CIT v. Viswanatha Bhaskar Sathe (5 ITR 621), the Bombay HighCourt had an occasion to deal with section 10(2)(vi) of the Income-taxAct, 1922 which is similar to section 32 of the Income-tax Act, 1961. Inthat case, the factory of the assessee was not employed in the work ofginning and the assessee claimed depreciation. While interpreting theword, 'used' found in section 10(2)(vi) of the 1922 Act, the Bombay HighCourt held as under: "But I think that the word 'used in this section may begiven a wider meaning and embraces passive as well as activeuser. Machinery which is kept idle may well depreciate,particularly during the monsoon season. It seems to me that theultimate test is, whether, without the particular user of themachinery relied upon, the profits sought to be taxed could havebeen made and as I read the agreement in the case, the profitsof the assessee during the year under assessment could not havebeen earned except by his maintaining his factory in goodworking order and that involves the user of the factory and themachinery." 3.5. In Liquidators of Pursa Ltd. v. Commissioner of Income-tax(Appeals) (25 ITR 265), in construing the expression 'used for thepurposes of the business' found in section 10(2)(iv) of the 1922 Act, theSupreme Court observed as follows: "The words 'used for the purposes of the business' insection 10(2)(iv) of the Indian Income-tax Act, 1922, mean usedfor the purpose of enabling the owner to carry on the businessand earn profits in the business. In other words, the machinery or plant must be used for the purposes of that business which isactually carried on and the profits of which are assessableunder section 10(1). 3.5. In Liquidators of Pursa Ltd. v. Commissioner of Income-tax(Appeals) (25 ITR 265), in construing the expression 'used for thepurposes of the business' found in section 10(2)(iv) of the 1922 Act, theSupreme Court observed as follows: "The words 'used for the purposes of the business' insection 10(2)(iv) of the Indian Income-tax Act, 1922, mean usedfor the purpose of enabling the owner to carry on the businessand earn profits in the business. In other words, the machinery or plant must be used for the purposes of that business which isactually carried on and the profits of which are assessableunder section 10(1). The word 'used' has been read in some of the pool cases ina wide sense so as to include a passive as well as active user.It is not necessary, for the purposes of the present appeal, toexpress any opinion on that point on which the High Courts haveexpressed different views. It is however, clear that in orderto attract the operation of clauses (v), (vi) and (vii) themachinery and plant must be such as were used in whatever sensethat word is taken at least for a part of the accounting year.If the machinery and plant have not at all been used at any timeduring the accounting year no allowance can be claimed underclause (vii) in respect of them and the second proviso alsodoes not come into operation". 3.6.1. The above cases came to be referred before this Court inC.I.T. v. Vayithri Plantations Ltd. (128 ITR 675) which arose out ofalmost similar set of facts seeking grant of development rebate. In thatcase, the assessee company completed the construction of building andinstallation of machinery before 31.3.1971, but could not start regularmanufacture with the aid of that machinery because of frequent labourunrest and the assessee claimed development rebate in respect ofmachinery, but the assessing officer rejected the claim on the groundthat the machinery in respect of which the claim had been made had onlybeen installed and had not been used in the year of account and hence,the amount would be allowed as a deduction in the next year when themachinery was actually brought into use. However, the Commissioner as wellas the Tribunal directed the grant of allowance. 3.6.2. In such circumstances, this Court, after elaboratelydiscussing the point, held as follows: "... the machinery could be 'used' for the purposes of thebusiness so long as it is kept ready for such user. Any'forced idleness' of the machinery cannot disentitle theassessees from getting the benefit of the allowance. In thepresent case, from the directors' report, which have alreadybeen extracted and the contents of which are not at all indispute, it is clear that the assessee was prevented from usingthe machinery because of the frequent labour unrest. In thesecircumstances, we consider that, in the present case, theassessee would be eligible for the allowance as the machinerywas kept ready for use and in that sense had been 'used' forthe purpose of that business, as contemplated under theprovision." 3.7. Applying the ratio as laid down above to the facts of the case,we are of the view that the assessee is entitled to depreciation onspare parts which are standby items even though they were not taken foruse during the accounting year. Accordingly, the 1[st] question of law isanswered in the affirmative and against the Revenue. 4.1. The second question, viz., "Whether in the facts and circumstances of the case, theTribunal was right in holding that the expenses related toobtaining fixed deposits from the public is a revenueexpenditure liable for deduction?"deals with the deduction of expenses relating to obtaining fixed depositsfrom the public as revenue expenditure. The Tribunal, finding that suchexpenses are closely linked with the business requirement of funds,allowed the claim of the assessee. 4.1. The second question, viz., "Whether in the facts and circumstances of the case, theTribunal was right in holding that the expenses related toobtaining fixed deposits from the public is a revenueexpenditure liable for deduction?"deals with the deduction of expenses relating to obtaining fixed depositsfrom the public as revenue expenditure. The Tribunal, finding that suchexpenses are closely linked with the business requirement of funds,allowed the claim of the assessee. 4.2. For deciding the issue that the expenses relating to obtainingfixed deposits are closely linked with the business requirement of theassessee, it is apposite to have a cursory look on the decided case-lawson this point. In India Cements Ltd. v. C.I.T. (60 ITR 52), whiledeciding the nature of the amount spent towards stamps, registrationfees, lawyer's fees, etc., for obtaining loan, the Supreme Court observedas follows: "A loan may be intended to be used for the purchase of rawmaterial when it is negotiated, but the company may, afterraising the loan, change its mind and spend it on securingcapital assets. Is the purpose at the time the loan isnegotiated to be taken into consideration or the purpose forwhich it is actually used? ..... the purpose for which the newloan was required was irrelevant to the consideration of thequestion whether the expenditure for obtaining the loan wasrevenue expenditure or capital expenditure. To summarise this part of the case, we are of the opinionthat: (a) the loan obtained is not an asset or advantage of anenduring nature; (b) that the expenditure was made for securingthe use of money for a certain period; and (c) that it isirrelevant to consider the object with which the loan wasobtained." Observing so, the Supreme Court held that the act of borrowing money wasincidental to the carrying on of business, the loan obtained was not anasset or an advantage of enduring nature, the expenditure was made forsecuring the use of money for a certain period and it was irrelevant toconsider the object with which the loan was obtained and therefore, theamount spent was not in the nature of capital expenditure and was laidout or expended wholly and exclusively for the purpose of the assessee'sbusiness and was therefore allowable as a deduction. The Apex Court alsoheld that obtaining capital by issue of shares is different from obtainingloan by debentures. 4.3. The Bombay High Court in C.I.T. v. Mahindra Ugine and Steel Co.Ltd. (250 ITR 696) considered the allowability of stamp duty paid ondebenture issue as business expenditure and held that the expenditure isrevenue in nature. In that case, attack was made by the Revenue on thestrength of section 35D of the Act which deals with amortisation ofcertain preliminary expenses, and the Bombay High Court held that "Section 35D deals with amortisation of certain preliminaryexpenses. Under section 35D(1)(ii), it is laid down that afterthe commencement of the business any expenditure as described insection 35D(2), which is incurred in connection with theextension of the industrial undertaking or with regard tosetting up a new industrial unit then the assessee shall beallowed a deduction at an amount equal to one-tenth of suchexpenditure for each of the ten successive previous yearsbeginning with the previous year in which the business commencesor the previous year in which expansion of the industrialundertaking is completed, etc. In the present case, on thefacts, the Tribunal has found that the object of the debentureissue was to meet the working capital requirement of theassessee and, therefore, the expenditure was considered to be arevenue expenditure." 4.4. In C.I.T. v. Investment Trust of India Ltd. (264 ITR 506) thisCourt held that the expenditure on advertisements in newspapers invitingfixed deposits from the public is allowable in the words: 4.4. In C.I.T. v. Investment Trust of India Ltd. (264 ITR 506) thisCourt held that the expenditure on advertisements in newspapers invitingfixed deposits from the public is allowable in the words: "In view of the provisions contained in section 58A of theCompanies Act, 1956, the assessee company had to advertise thenotice calling for deposits and if there was any breach, theassessee was liable to be proceeded against under the relevantprovisions of the 1956 Act. Section 37(3A) was introduced tocurb extravagant and socially wasteful expenditure onadvertisement at the cost of the exchequer. The assessee hadincurred the expenditure on advertisements for collecting fixeddeposits and the advertisements were statutory advertisementsand therefore, the provisions of section 37(3A) read withsection 37(3B) were not applicable to the said expenditure." 4.5. Considering the ratio laid down in the above said decisions, weare of the view that when the Tribunal has recorded a finding that theexpenses relating to obtaining fixed deposits are closely linked with thebusiness requirement of the assessee, such expenses are allowableexpenses. We therefore hold that the Tribunal was right in holding thatthe expenses for obtaining fixed deposits from the public is revenue innature. Accordingly, we answer the second question in the affirmative andagainst the Revenue. In fine, both the questions are answered in the affirmative andagainst the Revenue. The appeal stands dismissed. No costs. Sd/Asst.Registrar /true copy/ na Sub Asst.Registrar To 1.The Assistant Registrar,Income Tax Appellate Tribunal Rajaji Bhavan, III Floor, Besant Nagar, Chennai - 90. 2.The Commissioner of Income-Tax (Appeals-II), Madras.343. The Asst. Commissioner of Income-tax, Central Circle II(5),Madras. 4. The Commissioner of Income Tax,Chennai. 1 cc To Mr.Pushya Sitaraman, Advocate, SR.5617. 1 cc To M/S.R.Vijayaraghavan, Advocate, SR.5593. T.C.(A) Nos.74 and 75 of 2003 GK(CO)RVL 02.03.2007