Itta/107/2003 Of The Commissioner Of Income Tax v. M/S.nagaarjuna Fertilizers And Chemicals

*THE HON’BLE SRI JUSTICE L.NARASIMHA REDDYAND*THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM+I.T.T.A.No.107 of 2003 % Dated 17.09.2014 Commissioner of Income Tax ….Appellant $ M/s. Nagarjuna Fertilizers and Chemicals Ltd. ….Respondent ! Counsel for the appellant : Sri S.R.Ashok^ Counsel for respondents : Sri S.Ravi < GIST: > HEAD NOTE: ? Cases referred: 1. 53 ITR 165 THE HON’BLE SRI JUSTICE L.NARASIMHA REDDYANDTHE HON’BLE SRI JUSTICE CHALLA KODANDA RAMI.T.T.A.No.107 of 2003 JUDGMENT: (Per LNR,J) This appeal under Section 260-A of the Income Tax Act, 1961 is directed against the order, dated 01.08.2002 passedby the Hyderabad Bench ‘A’ of the Income Tax appellateTribunal in I.T.A.No.572/Hyd/1998, which in turn is referable tothe assessment year 1993-94. The respondent established a Fertiliser Plant in the year 1991-92. The construction was concluded on 31.07.1992 andthe manufacturing activity commenced immediately thereafter. Inthe returns submitted by the respondent, for the assessmentyear 1993-94, the expenditure incurred for establishing GreenBelt was shown and the corresponding depreciation under therelevant provisions of law was claimed. The Assessing Officerrefused to treat it as capital investment, much less as part ofplant and machinery and disallowed depreciation, which wasclaimed at Rs.6,12,1,2,792/-. Aggrieved by that, the respondentapproached the Commissioner (Appeals). Through his order,dated 22.05.1998, the Commissioner confirmed the view takenby the Assessing Officer. Thereupon, the respondent filed theI.T.A. before the Tribunal. Through the order under the presentappeal, the Tribunal held that the expenditure incurred for thearrangement of Green Belt answers the description of ‘revenueexpenditure’ and since it was incurred before thecommencement of production and business, it can becapitalised. However, it proceeded further and directed that theamount so capitalised shall be treated under the heading of“plant and machinery”. The Revenue is in appeal before usfeeling aggrieved by the order passed by the Tribunal. Sri S.R.Ashok, learned Senior Standing Counsel for theappellant submits that by no stretch of imagination, the GreenBelt, which is arranged in compliance with the norms stipulatedby the Pollution Control Board, can be treated as ‘plant andmachinery’. He contends that when a building, where plant andmachinery is arranged cannot be treated as part of the plant andmachinery, the question of the trees, or land, on which they aregrown, being treated as part of it does not arise. He furthersubmits that whatever may have been the justification for theTribunal in holding that the amount spent for the Green Belt canbe capitalised, there is absolutely no justification for bringing itunder the heading of ‘plant and machinery’. He contends thatthe view expressed by the Tribunal that the expenditure inquestion can be capitalised, is opposed to law. Sri S.Ravi, learned senior counsel appearing for therespondent, on the other hand, submits that according to theLaw, that governs the establishment of fertiliser factories, arrangement of Green Belt, of a particular area and description isa prerequisite and in that view of the matter, the Green Beltdeserves to be treated as part of ‘plant and machinery’. Hecontends that even if for any reason, the Green Belt cannot betreated as part of ‘plant and machinery’, the expenditure incurredtherefor deserves to be capitalised and that the view taken bythe Tribunal in that regard warrants no interference. Sri S.Ravi, learned senior counsel appearing for therespondent, on the other hand, submits that according to theLaw, that governs the establishment of fertiliser factories, arrangement of Green Belt, of a particular area and description isa prerequisite and in that view of the matter, the Green Beltdeserves to be treated as part of ‘plant and machinery’. Hecontends that even if for any reason, the Green Belt cannot betreated as part of ‘plant and machinery’, the expenditure incurredtherefor deserves to be capitalised and that the view taken bythe Tribunal in that regard warrants no interference. As a measure to control pollution, Laws are enactedordaining that whenever an industry that has the potential ofpolluting the air or ground water, are established, the concernedmanagement shall be under obligation to provide a Green Belt ofthe specified area, as a measure to control the damage or toreplenish the loss in terms of pollution of air and atmosphere. Itis in this context, that the respondent was required to arrange fora Green Belt of considerable area. The purchase of land andplantation of trees thereon, naturally involves fairly largeexpenditure. The depreciation to the extent of Rs.6,12,1,2,792/-was claimed by treating the Green Belt as part of plant andmachinery. The Assessing Officer did not allow the depreciationand the same view was taken by the Commissioner in appeal. The Tribunal has undertaken extensive discussionregarding the nature of the expenditure that is incurred forarranging the Green Belt. After referring to the relevant provisionsand some decisions, may be of the Tribunal itself, the followingview was expressed: Thus, the expenditure in question being in therevenue field, cannot be capital expenditure. Once a viewis taken that the expenditure in question is not a capitalexpenditure, the question whether the green belt is ‘plant’or not become infructuous and hence, need not be goneinto. For this reason alone the entire arguments of the ld.Counsel for the assessee that green belt is ‘plant’ fails andall the case law cited become distinguishable. Thus, thisrevenue expenditure was mandatory and is incurred by theassessee prior to commencement of business. Two things emerge from the order of the Tribunal. The firstis that the expenditure incurred for arranging Green Belt does notqualify to be treated as capital expenditure or plant andmachinery. The second is that since the expenditure, thoughrevenue in nature, was incurred before the commencement of the business/production, the said amount can be capitalised.The Tribunal did not stop at that. It directed that the same betreated under the heading of ‘plant and machinery’. The relevantparagraph reads: “Keeping in view the factual matrix of this case and theabove proposition laid down by the honourable apex court, weare of the considered opinion that the expenditure in questionis to be allocated to the asset and capitalised under the ‘plantand machinery’ and depreciation allowed at the admissiblerates on the same. Order accordingly.” As regards the first part of the ultimate direction issued bythe Tribunal, even the respondent does not have any seriousobjection, though it has a demur. Once it is not in dispute thatthe expenditure for arranging Green Belt was incurred before thecommencement of production and in the process of creatingasset, it deserves to be capitalised. The controversy however isabout such amount being treated under the heading of ‘plant andmachinery’. The Tribunal, in a way, accepted the contention ofthe respondent that the Green Belt was treated as plant andmachinery in the insurance policies and the same analogy canbe adopted in the context of taxation also. In the process, itmade an attempt to take assistance from the judgment of theHon’ble Supreme Court in Commissioner of Income Tax vs. As regards the first part of the ultimate direction issued bythe Tribunal, even the respondent does not have any seriousobjection, though it has a demur. Once it is not in dispute thatthe expenditure for arranging Green Belt was incurred before thecommencement of production and in the process of creatingasset, it deserves to be capitalised. The controversy however isabout such amount being treated under the heading of ‘plant andmachinery’. The Tribunal, in a way, accepted the contention ofthe respondent that the Green Belt was treated as plant andmachinery in the insurance policies and the same analogy canbe adopted in the context of taxation also. In the process, itmade an attempt to take assistance from the judgment of theHon’ble Supreme Court in Commissioner of Income Tax vs. M ir Mohd. Ali[[1]]. We find that the reason adopted by theTribunal is a bit far-reaching. The subject matter of thejudgment of the Supreme Court was totally unrelated to thecontext of the present case. When the field of income tax isgoverned by its own norms, in the form of rules and notifications,if not the provisions of the Act itself, for classification of items ofexpenditure and the like, there was absolutely no basis to adoptthe one, which was indicated in an insurance policy, which hasabsolutely nothing to do with taxation. We therefore partly allow the appeal, setting aside that partof the order of the Tribunal, which directed that the expenditureincurred for arranging the Green Belt by the respondent betreated under the heading of ‘plant and machinery’. However, itis directed that the said amount shall qualify for capitalisation inthe process of creating assets. The miscellaneous petition filed in this appeal shall also stand disposed of. There shall be no order as to costs. ____________________ L.NARASIMHA REDDY, J ________________________ CHALLA KODANDA RAM, J Date: 17.09.2014Note: L.R.Copy to be marked.JSU THE HON’BLE SRI JUSTICE L.NARASIMHA REDDYAND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A.No.107 of 2003 JSU [1]53 ITR 165 Date: 17.09.2014