M/S Mangalam Cement Limited, Aditya Nagar v. Asst. Commissioner Of Income Tax, Circle-1, Kota

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 310 / 2017 M/S Mangalam Cement Limited, Aditya Nagar-326520, Morak,Tehsil Ramganjmandi, Dist. Kota Through Its Senior GeneralManager (Commercial) Shri Vinay Kumar Jain ----Appellant Versus Asst. Commissioner of Income Tax, Circle-1, Kota ----Respondent _____________________________________________________ For Appellant(s) : Mr. Sanjay Jhanwar with Ms. Archana For Respondent(s) : Ms. Parinitoo Jain with Ms. Shiva Goyal _____________________________________________________ HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYASOrder 09/01/2018 1.By way of this appeal, the appellant has challenged thejudgment and order of the Tribunal whereby the Tribunal haspartly allowed the appeal of the assessee dismissing the appeal ofthe department as also in ITA No.425/JP/2014, 616/JP/2016 &713/JP/2016 dated 29.06.2017. 2.This Court while admitting the appeal on 16.11.2017, framed following substantial question of law:- “a) Whether under the facts and circumstancesof the case and in law the ld. ITAT has not erredin sustaining disallowance of expenditure ofRs.96.85 lacs incurred by the petitioner out ofthe existing business funds on abandonedproject?” 3.The Tribunal while considering the matter has discussedin Paras 38.3, 38.4 & 38.5, reads as under: “38.3 The company in the meanwhile hasincurred expenditure of Rs. 96.85 lacs inconnection with the clinker grinding unit atAligarh, the details of which are as under:- Rates and Taxes Rs. 3,74,757/- Lease Rent Rs. 1,12,852/- MGU Industrial Land Maintenance Rs. 7,38,662/-Security Charges Rs. 7,07,704/- Bill of Gannon Dunkerley & Co. Ltd. For Rs. 184.03 Lacs Rs. 77,51,000/-towards mobilization, setting up of facility anddemobilization settled for Rs. 77.51 Lacs 38.4 In view of the said decision of theBoard of Directors for abandoning the settingup of the clinker unit at Aligarh, the aboveexpenditure of Rs. 96.85 lacs was charged toP&L A/c and claimed as deduction u/s37(1)/28 as the expenditure was incurred incourse of the business and no new asset wascreated by incurring such expenditure.However, the AO by relying on the decision ofSupreme Court in case of Swadeshi CottonMills 63 ITR 65 where the amount paid forbreach of contract in respect of purchase oftextile machinery was held to be notallowable, disallowed the claim of theassessee. 38.5 The Ld. CIT(A) after relying on thevarious case laws, confirmed the disallowanceby holding that expenses of Rs. 96,84,975/-incurred towards the setting up of the clinkergrinding unit at Aligarh cannot be allowed asrevenue expenses and are treated as capital innature. He also did not accepted thealternative claim of assessee that depreciationshould be allowed on such expenditure byholding that the project did not come intoexistence and as such the expenses claimedby the appellant did not result in creation ofbusiness asset on which depreciation can beclaimed.” and ultimately after considering the law has observed Para 38.9, reads as under: 38.5 The Ld. CIT(A) after relying on thevarious case laws, confirmed the disallowanceby holding that expenses of Rs. 96,84,975/-incurred towards the setting up of the clinkergrinding unit at Aligarh cannot be allowed asrevenue expenses and are treated as capital innature. He also did not accepted thealternative claim of assessee that depreciationshould be allowed on such expenditure byholding that the project did not come intoexistence and as such the expenses claimedby the appellant did not result in creation ofbusiness asset on which depreciation can beclaimed.” and ultimately after considering the law has observed Para 38.9, reads as under: “38.9 We have heard rival contentions,perused the material available on record andgone through the orders of the authoritiesbelow. We find that the Ld. CIT (A) hasgiven a finding of fact that a new Unit hasbeen established and the expenses incurredin establishing a new Unit are capital innature and accordingly disallowed the claimof the assessee. The Ld. Counsel for theassessee insisted that it is an extension tothe earlier unit. We do not see any meritinto the contention of the assessee asadmittedly even if the assessee’s newprojects are in the same line of business,expenses relating to new projects are capitalin nature and not allowable as revenue asheld by the Hon’ble Bombay High Court incase of J.K. Chemical Ltd. 80 Taxman 19(Bom.). We, therefore, find no infirmity inthe order of Ld. CIT (A), the same isaffirmed. The ground of the assessee isdismissed.” 4.Learned counsel for appellant has contended that the Tribunal has seriously committed error in not considering theexpenses which are incurred for the purpose of establishing theproject which ultimately into project and has been abandoned.Therefore, the capital expenditure has not been established sincethe project was not over. In that view of matter, all expenseswhich incurred are of revenue nature. He has relied upon thefollowing decisions: 1. Commissioner of Income Tax vs. SeshasayeePaper and Boards Ltd., [2000] 243 ITR 421 (Madras), wherein it has been observed as under: “5. We have carefully considered thesubmissions of counsel. We have already set outthe facts and circumstances of the case in detailwhich indicate that the assessee after initiallyrequesting" for the construction of the secondsiding decided to abandon the second sidingproject during the course of construction of the 1. Commissioner of Income Tax vs. SeshasayeePaper and Boards Ltd., [2000] 243 ITR 421 (Madras), wherein it has been observed as under: “5. We have carefully considered thesubmissions of counsel. We have already set outthe facts and circumstances of the case in detailwhich indicate that the assessee after initiallyrequesting" for the construction of the secondsiding decided to abandon the second sidingproject during the course of construction of the second siding by the railways. Accordingly, theassessee wrote to the authorities not to proceedwith the project. At that precise point of time,when the railways was informed by the assesseethat the project need not be carried on, certainexpenses were incurred by the railways.Therefore, when the assessee took the decisionto abandon the project, and requested therailways not to proceed with the second siding,the assessee has accepted that it would bear theexpenditure incurred till then and since theassessee was maintaining the mercantile systemof accounting, the liability towards theexpenditure incurred by the railways hadaccrued on that date. No doubt, it is true thatthe railways by a letter dated September 26,1972, had informed the assessee about thequantum of the amount incurred by the railwayswhich the assessee was asked to bear, but itcannot be said that only by virtue of that letterof the railways, the liability to bear the cost hadaccrued against the assessee. In our opinion, atthe point of time, when the assessee took aconscious decision not to proceed with theconstruction and informed the railways, theassessee had agreed to bear the liability for theexpenses involved till then. What was done bythe railways subsequently was the quantificationof the liability and the railways merely by asubsequent letter informed the assessee theamount of the liability which the assessee had tobear. In other words, the railways, on the basisof the letter of the assessee merely quantifiedthe liability and did not create any new liabilitywhich was not agreed to by the assessee earlier.Therefore, we are of the view that the liabilityhas accrued during the previous year relevant tothe assessment year 1972-73 and the Tribunalwas correct in holding that the assessee wasentitled to the deduction of the liability for theassessment year 1972-73 Since we are holdingon the facts of the case that the liability hasaccrued during the previous year for theassessment year 1972-73, it is unnecessary toconsider the decision relied upon by counsel forthe assessee. We, therefore, hold that theTribunal was correct in holding that the sum ofRs. 42,512 incurred by the assessee on accountof centage and other expenses paid to SouthernRailways was laid out for the purposes ofbusiness and arose during the assessment year1972-73 and, accordingly, we answer the firstquestion also in the affirmative, in favour of theassesses and against the Revenue. The assesses will be entitled to costs in the sum of Rs. 750(rupees seven hundred and fifty only).” 2.Indo Rama Synthetics (I) Ltd. vs.Commissioner of Income Tax, [2011] 333 ITR18 (Delhi), wherein it has been observed as under: will be entitled to costs in the sum of Rs. 750(rupees seven hundred and fifty only).” 2.Indo Rama Synthetics (I) Ltd. vs.Commissioner of Income Tax, [2011] 333 ITR18 (Delhi), wherein it has been observed as under: “10. We may point out at this stage that thisCourt in CIT v. Monnet Industries Ltd. (2009)221 CTR (Del) 266 : (2008) 16 DTR (Del) 307treated the interest borrowed on capital asbusiness expenditure when the amount wasborrowed for setting up a new plant. That wasa case where the assessee was already in thebusiness of ferro alloys plant and it had set upsugar plant. Still, the interest paid on borrowedcapital was treated as revenue expenditure byapplying the test of common management andcommon funds, in as much as, there was acommon board of directors controlling the twoplants, which operated from the head officelocated at New Delhi and funds of the twoplants were common. On this basis, it wasopined that there was intermingling andinterlacing of funds. The fact that the twodivisions are located at different sites did notaffect the outcome since marketing of the finalproducts of both divisions was carried outunder the supervision and control of the sameset of executives at the head office. This judgment is an answer to the wrongapproach adopted by the authorities below bynot treating the expenditure as revenueexpenditure only because the unit was to beset up in Karnataka, which was geographicallyat a distance from the existing unit. 11. We are supported in our view by yetanother judgment of the Supreme Court in thecase of Veecumsees v. CIT (1996) 133 CTR(SC) 500 : (1996) 220 ITR 185 (SC). That wasalso a case where the assessee was carrying onjewellery business commencing exhibition ofcinematographic films. Capital was borrowedfor constructing cinema theatre and interest onborrowed capital was treated as businessincome (sic-expenditure) deductible underSection 36(1)(iii) of the IT Act, 1961. We, thus, answer question No. 1 in favour ofthe assessee and against the Revenue. 12. Insofar as the second question is concerned, the facts leading to the saidquestionarerecapitulatedbelow. 13. The appellant company had engaged theservices of McKinsey & Co., an internationalfirm of consultants for carrying out a detailedstudy on the various aspects relating to theoperations of the appellant company and tosuggest measures for improving theoperational efficiency and profitability of theappellant company. Based on a review of thecost-benefit analysis, the said assignment forcarrying out the detailed operational efficiencyand profitability study was, however,terminated shortly after the mandate had beengiven. In respect of the work already done bythe said McKinsey & Co. until the date of thetermination of the mandate, a sum of Rs.74,04,128 was paid by the appellant to thesaid McKinsey & Co. In the previous yearrelevant to the asst. yr. 2000-01, the saidpayment was claimed deduction by theappellant. 14. Vide order dt. 31st Dec, 2002 passed bythe AO under Section 143(3) of the Act, theAO, being of the view that the appellant hadfailed to establish that the payment made toM/s McKinsey & Co. was revenue in nature andthat since the appellant itself had treated thesaid expenditure as deferred revenueexpenditure, disallowed the said expenditure ofRs. 74,04,128 holding the same to be capitalexpenditure. 15. Appeals preferred by the appellant beforethe CIT(A) as well as the Tribunal weredismissed and this is how the appellant hasfiled the present appeal under Section 260A ofthe Act raising the aforesaid question of law. 14. Vide order dt. 31st Dec, 2002 passed bythe AO under Section 143(3) of the Act, theAO, being of the view that the appellant hadfailed to establish that the payment made toM/s McKinsey & Co. was revenue in nature andthat since the appellant itself had treated thesaid expenditure as deferred revenueexpenditure, disallowed the said expenditure ofRs. 74,04,128 holding the same to be capitalexpenditure. 15. Appeals preferred by the appellant beforethe CIT(A) as well as the Tribunal weredismissed and this is how the appellant hasfiled the present appeal under Section 260A ofthe Act raising the aforesaid question of law. 16. The argument of the appellant before theTribunal, and before us, was that the purposeof the said operational efficiency andprofitability study was to improve and enhancethe nature and profits of the appellantcompany. It was also submitted that the saidexpenditure was not incurred with a view toacquiring any capital asset or enduringadvantage in the capital field. The Tribunal,however, rejected this submission of theappellant on the ground that there was nowritten agreement between the appellant andM/s McKinsey & Co. based on which the Tribunal could have ascertained the scope ofthe study and that it was only in a situationwhere the assignment had actually beencompleted and put in practice that the Tribunalcould have determined whether the said study,in fact, resulted in enhancing the productivityand profitability of the company. Since theassignment was, in fact, never completed andput into practice, the Tribunal came to theconclusion that the appellant had not been ableto prove that the payment of consultancy feewas for enhancing productivity and profitabilityof the appellant company. The Tribunal,accordingly, concluded that the aforesaidexpenditure in respect of consultancy fee paidto M/s McKinsey & Co. could not be treated asrevenue expenditure.” 3. Commissioner of Income Tax-II, Mumbai vs.Rajesh Khanna, [2012] 28 taxmann.com 415(Bombay), wherein it has been observed as under: “3. The ITAT has deleted the disallowance ofexpenditure made by the assessing officer byrelying upon its decision in the assessee’s owncase for assessment year 1993-94. Counsel forthe revenue states that he has been informed bythe concerned officer that no appeal has beenfiled by the revenue against the decision of theITAT in the assessee’s own case for assessmentyear 1993-94. No fault in the decision of theITAT relating to assessment year 1993-94 ispointed out. In this view of the matter, no faultcan be found with the decision of the ITAT indeleting the addition made by the assessingofficer. The appeal is accordingly dismissed withno order as to costs.” 4. Binani Cement Ltd. vs. Commissioner ofIncome Tax, [2016] 380 ITR 116 (Calcutta),wherein it has been observed as under: 11. Following the judgment in the case ofGajapathi Naidu (supra) the question to beasked is when did the expenditure claimed byway of deduction arise? There would have beenno occasion to claim the deduction if the work-in-progress had completed its course. Becausethe project was abandoned the work-in-progressdid not proceed any further. The decision toabandon the project was the cause for claimingthe deduction. The decision was taken in therelevant year. It can therefore be safelyconcluded that the expenditure arose in therelevant year. 5. Maharaja Shri Umaid Mills Ltd. (No.2) vs.Commissioner of Income Tax, [1989] 175 ITR72 (Raj.), wherein it has been observed as under: 11. Following the judgment in the case ofGajapathi Naidu (supra) the question to beasked is when did the expenditure claimed byway of deduction arise? There would have beenno occasion to claim the deduction if the work-in-progress had completed its course. Becausethe project was abandoned the work-in-progressdid not proceed any further. The decision toabandon the project was the cause for claimingthe deduction. The decision was taken in therelevant year. It can therefore be safelyconcluded that the expenditure arose in therelevant year. 5. Maharaja Shri Umaid Mills Ltd. (No.2) vs.Commissioner of Income Tax, [1989] 175 ITR72 (Raj.), wherein it has been observed as under: “4. The only surviving question now is questionNo. (2) quoted above. The assessee carries on abusiness in textiles. It claimed a deduction of Rs.90,000 spent by it for obtaining a survey andfeasibility report regarding a polythene plantfrom an expert in the field with a view to set upa polythene plant. However, the assessee'sapplication for permission to set up thepolythene plant was rejected by the MRTPauthorities so that no further step could betaken in that direction. The assessee claimeddeduction on the ground that the proposedpolythene plant was to manufacture packingmaterial required for the assessee's productsmanufactured in the existing business and, thattherefore, the expenditure was incurred whollyand exclusively for the purpose of the assessee'sbusiness. This claim was disallowed by theIncome Tax Officer and thereafter by theAppellate Assistant Commissioner as well as theTribunal. The aforesaid question No. (2) hasbeen referred at the instance of the assessee inthis situation. 5. In our opinion, necessary facts on the basis ofwhich the aforesaid question No. (2) has to beanswered have not been determined by any ofthe lower authorities including the Tribunal. Thetest to be applied for deciding whether this is anallowable expenditure or not was indicated bythe Supreme Court in Setabganj Sugar Mills Ltd.v. CIT [1961]41ITR272(SC) , as under (p.274): "The question whether, on the application of thesettled tests, different ventures carried on by anindividual or a company form the same businessis a mixed question of law and fact. Certainprinciples are applied to determine whether onthe facts found, a legal inference can be drawnthat the different ventures constitute separatebusinesses or viewed together, can be said toconstitute the same business. These principleswere stated by Rowlatt J. in Scales v. GeorgeThompson and Co. Ltd. [1927] 13 TC 83. Thelearnedjudgeobserved: '. . . the real question is, was there anyinterconnection,anyinterlacing,any interdependence, any unity at all embracingthosetwobusinesses.'The learned judge also observed that what onehas to see was whether the different ventureswere so interlaced and so dovetailed into eachother as to make them into the same business.These principles have to be applied to the facts,before a legal inference can be drawn that aparticular business is composed of separatebusinesses, and is not the same one." 6. This was reiterated in Standard Refinery andDistillery Ltd. v. CIT [1971]79ITR589(SC) . '. . . the real question is, was there anyinterconnection,anyinterlacing,any interdependence, any unity at all embracingthosetwobusinesses.'The learned judge also observed that what onehas to see was whether the different ventureswere so interlaced and so dovetailed into eachother as to make them into the same business.These principles have to be applied to the facts,before a legal inference can be drawn that aparticular business is composed of separatebusinesses, and is not the same one." 6. This was reiterated in Standard Refinery andDistillery Ltd. v. CIT [1971]79ITR589(SC) . 7. The decisions cited at the bar, including theGujarat High Court decision relied on by theTribunal, in reality, apply the above testindicated by the Supreme Court for deciding thequestion on the facts of that particular casts. Itis obvious that the same test has to be appliedfor answering this question in the present caseas well. In other words, it is to bo decided onthe facts of this case as to whether the proposedpolythene plant was so interconnected orinterlaced with the existing textile business ofthe assessee and the two were so dovetailedinto each other as to make them the samebusiness. If that be so, and the answer is in theaffirmative, then the assessee could be entitledto the deduction, otherwise not. We do not findthe necessary facts being determined by eitherthe Income Tax Officer or the Appellate AssistantCommissioner or the Tribunal on the basis ofwhich this question can be decided by applyingthe test indicated. This question cannot,therefore, be answered at this stage withoutnecessary facts and the Tribunal will have todecide the same afresh after determin ing thenecessary facts giving opportunity, if necessary,to the parties, to adduce further evidence forthis purpose.” and contended that since the project has not been materialisedit has required to be accepted as revenue expenses. 5.Counsel for respondent has supported the order ofthe Tribunal and contended that in view of the observationsmade by the Supreme Court in case of Swadeshi Cotton Mills Co. Ltd. vs. Commissioner of Income Tax, [1967] 63 ITR 65 (SC), wherein it has been observed as under: “3. On the facts put forward by the appellantitself and accepted by the Tribunal and the HighCourt, it is clear that the sum of Rs. 35,000claimed as deduction under section 10(2)(xv)was really paid for breach of contracts in respectof purchase of textile machinery which wouldhave been a capital asset. The payment was,therefore made to avoid a larger capitalexpenditure that would not have served theinterests of the appellant-company. Such apayment made is clearly in the nature of acapital expenditure and not an expenditureincurred wholly or exclusively for the purpose ofthe business. The payment was neither made forthe purpose of earning profits, nor for thepurpose of furthering, protecting or continuingits business which was to be carried on from dayto day. The payment was made with the objectof avoiding an unnecessary investment in capitalassets, and was an amount which wasaltogether outside the account of profits andgains, in the computation of which deductionsare allowable for expenditure incurred whollyand exclusive for earning those profits andgains. It is, therefore, clear that this amountcould not have been claimed has a legitimatededuction under section 10(2)(xv) of theIncome-tax Act. Our view is supported by theobservations of Rowlatt J. in "Countess Warwick"Steamship Co. Ltd. v. Ogg. The appealconsequently has no force and is dismissed withcosts.” and also the decision of Gujarat High Court in case of Commissioner of Income Tax vs. Shri Digvijay CementCompany Ltd., 1986 ITR 253, wherein it has been observed as under: and also the decision of Gujarat High Court in case of Commissioner of Income Tax vs. Shri Digvijay CementCompany Ltd., 1986 ITR 253, wherein it has been observed as under: 13. That takes us to the consideration ofquestion No. 3 which is at the instance of theassessee. We are again faced with the samevexed question which is, as observed byBhagwati J., in Empire Jute Co. Ltd. v. CIT[1980]124ITR1(SC) present "a difficult problemand continually baffled the courts, because it hasnot been possible, despite occasional judicialvalour, to formulate a test for distinguishing between capital and revenue expenditure whichwill provide an infallible answer in all situations."In spite of it being often said that the line ofdemarcation has been found to be very thin andeach case depends on its own facts andcircumstances, it is desirable in order to avoidcommon pitfalls to remind ourselves of whatshould be the approach in resolving thisquestion. In Abdul Kayoom v. CIT[1962]44ITR689(SC) , Hidayatullah J., speakingfor the majority court, observed as under(p.703) : "...... none of the tests is either exhaustive oruniversal. Each case depends on its own facts,and a close similarity between one case andanother is not enough, because even a singlesignificant detail may alter the entire aspect. Indeciding such cases, one should avoid thetemptation to decide cases (as said by Cordozoin The Nature of the Judicial Process, p.20) bymatching the colour of one case against thecolour of another. To decide, therefore, on whichside of the line a case falls, its broadresemblance to another case is not at alldecisive. What is decisive is the nature of thebusiness, the nature of the expenditure, thenature of the right acquired, and their relationinter se, and this is the only key to resolve theissue in the light of the general principles, whicharefollowedinsuchcases."14. Bearing in mind this warning, it would stillbe advisable to refer to the broad tests whichhave been enunciated by the Supreme Court asearly as in 1955 in Assam Bengal Cement Co.Ltd. v. CIT, where the Supreme Court wasconcerned with the nature of payment ofprotection fees for protection of the miningrights in the land leased by the Govt. of Assam,in consideration of which the Govt. undertooknot to grant to any person any lease, permit orprospecting licence for limestone in a group ofquarries without a condition that the limestoneshould be used for the manufacture of cement.In that context, the Supreme court, on aconspectus of the entire relevant case law thenexisting, laid down three tests for determiningas to whether the amount of expenses wasrevenue or capital in nature. These broad testsareasunder: 1. Outlay is deemed to be capital when it ismade for the initiation of a business, for extension of a business, or for a substantialreplacementofequipment. 2. Expenditure may be treated as properlyattributable to capital when it is made not onlyonce and for all, but with a view to bringing intoexistence an asset or an advantage for theenduring benefit of a trade. The enduring benefitor the permanent character means acquisition ofthe asset or the right having enough durabilityto justify its being treated as a capital asset. 3. Whether the expenditure incurred was a partof fixed capital of the business or a part of itscirculatingcapital. capital. 15. The Supreme Court digested these principlesfrom the Full Bench decision of the Lahore HighCourt in Benarsidas Jagannath, In reMANU/LA/0001/1946. After digesting thesetests, the Supreme Court, speaking throughBhagwati J.(as he then was), elaborated as tohow these tests are to be applied. Thiselaboration is in the following terms (p.45 of 27ITR): 3. Whether the expenditure incurred was a partof fixed capital of the business or a part of itscirculatingcapital. capital. 15. The Supreme Court digested these principlesfrom the Full Bench decision of the Lahore HighCourt in Benarsidas Jagannath, In reMANU/LA/0001/1946. After digesting thesetests, the Supreme Court, speaking throughBhagwati J.(as he then was), elaborated as tohow these tests are to be applied. Thiselaboration is in the following terms (p.45 of 27ITR): "In cases where the expenditure is made for theinitial outlay or for extension of a business or asubstantial replacement of the equipment, thereis no doubt that it is capital expenditure. Acapital asset of the business is either acquired orextended or substantially replaced and thatoutlay whatever be its source whether it isdrawn from the capital or the income of theconcern is certainly in the nature of capitalexpenditure. The question however arises forconsideration where expenditure is incurredwhile the business is going on and is notincurred either for extension of the business orfor the substantial replacement of its equipment.Such expenditure can be looked at either fromthe point of view of what is acquired or from thepoint of view of what is the source from whichthe expenditure is incurred. If the expenditure ismade for acquiring or bringing into existence anasset or advantage for the enduring benefit ofthe business, it is properly attributable to capitaland is of the nature of capital expenditure. If, onthe other hand, it is made not for the purpose ofbringing into existence any such asset oradvantage but for running the business orworking it with a view to produce profits, it is arevenue expenditure. If any such asset oradvantage for the enduring benefit of the business is thus acquired or brought intoexistence, it would be immaterial whether thesource of the payment was the capital or theincome of the concern or whether the paymentwas made once and for all or was madeperiodically. The aim and object of theexpenditure would determine the character ofthe expenditure whether it s a capitalexpenditure or a revenue expenditure. Thesource or the manner of the payment wouldthen be of no consequence. It is only in thosecases where this test is of no avail that one maygo to the test of fixed or circulating capital andconsider whether the expenditure incurred waspart of the fixed capital of the business or partof its circulating capital. If it was part of thefixed capital of the business, it would be of thenature of capital expenditure and if it was part ofits circulating capital, it would be of the natureof revenue expenditure. These tests are thusmutually exclusive and have to be applied to thefacts of each particular case in the mannerindicated above. It has been rightly observedthat in the great diversity of human affairs andthe complicated nature of business operations, itis difficult to lay down a test which would applyto all situations. One has therefore got to applythese criteria one after the other from thebusiness point of view and come to theconclusion whether on a fair appreciation of thewhole situation, the expenditure incurred in aparticular case is of the nature of capitalexpenditureorrevenueexpenditure..."16. It was pointed out by the Supreme Court inEmpire Jute Co.'s case [1980]124ITR1(SC) ,that each case must necessarily turn on its ownfacts and no infallible test can be laid down sincethe tests are useful as illustrations of somegeneral principles. The principle is equallyrecognised that the test whether expenditure isincurred with a view to obtain an advantage ofenduring benefit may break down in certaincircumstances. Every advantage of enduringnature acquired by the assessee would not ruleout the expenses incurred for gaining thisadvantage from the category of revenueexpenses. What is material to consider in suchcases is the nature of advantage in a commercialsense and whether the advantage is in thecapital field; it would be only then that theexpenditure would be disallowable on anapplication of the tests. On the other hand, ifsuch advantage consists merely in facilitatingthe assessee's trading operations or enabling it to carry on the business operations efficiently orprofitably, the expenditure would be entitled tobe treated on revenue account (See Empire JuteCo.'scase[1980]124ITR1(SC)]. 17. A Division Bench of the Madras High Court inCITv.AshokLeylandLtd.[1969]72ITR137(Mad) , summed up the varioustestssuccinctlyasunder: to carry on the business operations efficiently orprofitably, the expenditure would be entitled tobe treated on revenue account (See Empire JuteCo.'scase[1980]124ITR1(SC)]. 17. A Division Bench of the Madras High Court inCITv.AshokLeylandLtd.[1969]72ITR137(Mad) , summed up the varioustestssuccinctlyasunder: "The word 'capital' connotes permanency andcapital expenditure is, therefore, closely akin tothe concept of securing something tangible orintangible property, corporeal or incorporealrights, so that they could be of a lasting orenduring benefit to the enterprise in issue.Revenue expenditure, on the other hand, isoperational in its perspective and solely intendedfor the furtherance of the enterprise Thisdistinction, though candid and well accepted, yetis susceptible to modification under peculiar anddistinct circumstances. Thus, the facts of eachcase, the attendant circumstances revolvinground the expenditure, the aim, object andpurpose of the same, their impact on theassessee, particularly in matters relating to thefuture of the assessee's trade and business,whether it could be sustained on ordinarycanons of commercial expediency simpliciter,whether it is a step-in-aid of future expansion orprolongation of life of an existing business,whether it is to secure an enduring benefit,whether the expenditure constitutes conceivablenucleus to form the foundation for posteriorprofit earning, whether the expenditure could beviewed as an integral part of the conduct of thebusiness and to avoid inroads and incursionsinto its concrete present and potential future,are all some of the main incidents which have abearing on the decision whether, in a given case,the expenditure is capital or chargeable torevenue. On the whole, an objective applicationof a judicial mind to the facts of each case isnecessary." 18. It should also be borne in mind that theexpenditure would be attributable to capital if itis made with a view to bringing an asset oradvantage into existence and, therefore, it is notnecessary that the expenditure should have thatresult. It is the object that matters. [See Anglo-Persion Oil Co. Ltd. v. Dale [1931] 16 TC 253;CITv.ManeklalIndustriesLtd.[1977]107ITR133(Guj) and State TradingCorporationofIndiav.CIT [1974]94ITR496(Delhi) ]. It is in the backgroundof this settled legal position that we have toconsider as to whether the expenses incurred bythe assessee-company for obtaining feasibilityreport for setting up the shipyard at Seeka wasin the nature of revenue expenses as claimed bythe assessee. Since the Appellate AssistantCommissioner has emphasised that theseexpenses were entailed with a view to increasethe manoeuvrability of the fleet of ships that theassessee company had, it would be apermissible deduction on account of revenueexpenses. The Tribunal, on the other hand, heldthat the impugned expenditure was directlylinked with the construction of shipyard with aview to facilitating better manoeuvrability ofcountry crafts and, therefore it was anexpenditure incurred with a view to obtain anadvantage of enduring nature. As we have tofind out, inter alia, the object of the expenses,we requested the learned advocate for theassessee company to produce the feasibilityreport for setting up a shipyard at Seeka. The learned advocatecalled for this report which referred to theagreement between the company and theconsultancy firm, M/s. Indopal Limited. He alsoproduced the relevant agreement in this behalf.We have taken the agreement as well as thefeasibility report on record with the consent ofcounsel for the Revenue as well as the learnedadvocate for the assessee company andcollectively marked them as annexure "F". Theagreement indicates that the consultants wereengaged to prepare within the agreed period, afeasibility report for a ship building yard atSeeka in accordance with the scope indicated inenclosure No. 2 with a view to enable theassessee company to arrive at a decisionregarding the development of a ship-buildingyard. Enclosure No. 2 gives broadly the scope ofthe feasibility report. The scope, inter alia,covers the topics as description of shipyardproposed to be developed, including the vesselsto be constructed, stagewise programme ofship-building facilities proposed and thepossibility of using these facilities to overhaulmaterials and equipments necessary forconstruction, schedule of project execution,description of machinery required to be installed,stagewise financial and economic aspects, costof project including civil construction,mechanical equipment erection, cost of utilities, power, water, etc., recommendation of shipyardmanagement,personnelandtechnicaladministration and evaluation of cost of shipproduction. In pursuance of this agreement, theconsultancy firm, M/s. Indopal Limited,submitted a report where they have set out themain points in respect of which the firm wasrequired to prepare the report. The said Pointshavebeenlistedasunder: 1. To find the investment requirement forconstructing a shipyard workship for reparingships of 20,000 DWT capacity when initially theshipyard is equipped with the minimum essentialmachinery. 2. To find the number of ships that can berepairedintheaboveshipyard. 3. To find if it is feasible to build ships in thisshipyard. 4. If the shipyard is to be altered for shipbuildingpurposes, then what would be the cost ofinvestmentanditsprofitability. 5. Up to what extent ship-building and repairscapacity can be expanded and its economics. 6. The maximum size of ships that can be builtinfuture. 19. The report consists of three parts. Part Irelates to site condition, Part lI pertains to repairyard and Part III to expansion possibilities. It isnot necessary to go into details of these parts.Suffice it for our purposes to bear in mind thatthe assessee company has called for thisdetailed report so as to enable it to arrive at adecision regarding the development of ship-building yard at Seeka. The aim and object ofthe expenses which is in the nature of consultingfees for preparing this feasibility report cannotbe said to be clearly for initiation of a business,for extension of a business or for substantialreplacement of equipment. In other words, itwould not fall within the first test laid down inAssam-BengalCementCo.'scase[1955]27ITR34(SC) . The expenses have beenincurred while the business of manufacturingcement is going on. It is an admitted positionthat it is not incurred either for the expansion ofbusiness of manufacturing cement or for thesubstantial replacement of its equipments The question, therefore, shall have to be examinedfrom the angle of the second test which hasbeen laid down in Assam-Bengal Cement Co'scase [1955]27ITR34(SC) . Such expenditurecan be looked at from the pot of view of what isacquired or from the point of view of what is theSource from which the expenditure is incurred.If the expenses are not entailed in running thebusiness or working it with a view to produceprofits, but have been entailed with the purposeof bringing into existence an asset or advantageof enduring benefit, the question of the Sourceof the expenditure would be of no consequence.It is only when the second test fails that we mayhave to examine as to whether the expenditureincurred was part of the fixed capital or part ofthe circulating capital. The bone of contentionbetween the parties is that nothing tangible hasbeen achieved or intended to be achieved bycalling for the feasibility report. As contended bythe assessee, it was only with a view to enablethe assessee company to decide whether itshould go for setting up of the shipyard that thisreport has been called for. On the other hand,the Revenue has emphasised that it is of noconsequence whether the decision has beentaken or, for that matter, the shipyard was, infact, established. Even if the expenses areentailed with a view to bring into existence anasset or advantage of enduring nature, they arenot qualified to be treated as revenue expenses.The learned advocate for the assessee tried toimpress upon us that this test of bringing intoexistence an asset of enduring benefit breaksdown under certain circumstances and that testcannot in all situations clinch the issue. Thecourt has to examine this question from theview-point of the commercial expediency, and ifthe assessee company with an immediate objectof increasing the manoeuvrability of the fleet ofits crafts called for this feasibility report, with noultimate view of setting up a shipyard, it cannotbe held as was done by the Tribunal, that theseexpenses were entailed with a view to bring intoexistence some asset or advantage of enduringnature. The learned counsel for the Revenue, inthis connection, invited our attention to theprovision contained in section 35D of the IncomeTax Act, 1961, which has been inserted by theTaxation Laws (Amendment) Act, 1970, witheffect from April 1, 1971. It provides foramortisation of certain preliminary expenseswhich, inter alia, includes expenses forpreparation of feasibility report. The learned counsel for the Revenue, therefore, urged thatsince in some cases, this expenditure which is inthe nature of capital may not be permissible andwould be treated for all purposes as personalexpenses, the Legislature has provided forwriting off capital expenditure of such a natureover a period of years. Having regard to thescope of agreement between the assesseecompany and the consultancy firm which wasassigned the work of preparing the feasibilityreport for setting up the shipyard at Seeka, weare of the opinion that the assessee companyintended to bring into existence an asset whichis of a permanent or at least an enduring nature.It cannot be gainsaid that the expenses incurredfor preparation of feasibility report is with a viewto bring this asset into existence. The only shortquestion which is to be answered is, does thetest of bringing the asset or advantage ofenduring nature break down in thecircumstances ? As pointed out by Bhagwati J.,in Empire Jute Co.'s case [1980]124ITR1(SC) ,what is material to consider is the nature of theadvantage in a commercial sense and it is onlywhere the advantage is in the capital field thatthe expenditure would be disallowable on anapplication of this test. If the advantage consistsmerely in facilitating the assessee's tradingoperations or enabling the management andconduct of the assessee's business to be carriedon more efficiently or more profitably whileleaving the fixed capital untouched, theexpenditure would be on revenue account. Thefactual context before the Supreme court inEmpire Jute Co.'s case [1980]124ITR1(SC) , wasthat the assessee company had purchased loomhours from four different jute manufacturingconcerns for a sum of Rs. 2,03,255 during theprevious year relevant to the assessment year1960-61, and claimed to deduct the said amountas revenue expenses. The Tribunal held that theexpenses were revenue in nature and hencequalified for permissible deduction. The HighCourt held that the amount paid by the assesseecompany was in the nature of capitalexpenditure and, therefore, not a permissiblededuction. In that background, the SupremeCourt ruled that by the purchase of the loomhours no new asset was created and there wasno addition to or expansion of the profit-makingapparatus of the appellant and the acquisition ofadditional loom hours did not add to the fixedcapital of the appellant; the permanent structureof which the income was the product or fruit remained the same; it was not enlarged nor didthe appellant acquire a source of profit orincome when it purchased the loom hours. Theexpenditure incurred for the purpose ofoperating the looms for longer working hourswas primarily and essentially related to theoperation or working of the looms whichconstituted the profit-making apparatus of theappellant and was expenditure laid out as part ofthe process of profit-earning. It is no doubt truethat the Supreme Court in Empire Jute Co.'scase [1980]124ITR1(SC) , did say that the testof enduring benefit is not an immutable and acertain test since it may break down undercertain circumstances. We have not been able toappreciate how this ruling can be pressed intoService on behalf of the assessee company forpurposes of establishing that he test has, in fact,broken down under the facts and circumstancesof the case. It is no doubt, as stated above, nota certain and conclusive test, but none the lessit is one of the tests which has to be applied andwhat the court has to bear in mind is that in theultimate analysis what is the aim and object ofthe expenses. The learned advo