Punjab Alkalies & Chemicals Limited v. Commissioner Of Income Tax, Chandigarh

ITA No. 297 of 2010 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Punjab Alkalies & Chemicals Limited Versus Commissioner of Income Tax, Chandigarh ITA No. 297 of 2010 Date of Decision: 2.8.2010 ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL.HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. Arun Nehra, Advocate for the appellant. ADARSH KUMAR GOEL, J. 1.This order will dispose of ITA Nos. 295, 296 and 297 of2010. All the appeals involve common questions of law. 2.ITA No. 297 of 2010 has been filed by the assessee underSection 260A of the Income Tax Act, 1961 (in short “the Act”) againstorder dated 28.7.2009 passed by the Income Tax Appellate Tribunal,Chandigarh Bench “A” (hereinafter referred to as “the Tribunal”) in ITANo. 1085/Chd/2008 for the assessment year 2004-05 proposing to raisethe following substantial questions of law:- (i)Whether in the facts and circumstances of thecase the expenses incurred by the assesseeon the replacement of membranes is a revenueexpenditure or the same can be treated to becase the expenses incurred by the assesseeon the replacement of membranes is a revenueexpenditure or the same can be treated to be (ii) (iii) (iv) the deferred revenue expenditure by spreadingover a period of 3 years and whether the sameis allowable as a deduction in the year in whichit was incurred? Whether the Income Tax Appellate Tribunalwas justified in treating the expenditureincurred on replacement of membranes as acapital expenditure especially when there is noextra capacity generated and the expenseincurred is only for replacement of old andworn out membranes? Whether the Income Tax Appellate Tribunalwas justified in relying upon the irrelevant factthat the assessee had shown the expenditureincurred on the replacement of membranes inits books of account as deferred revenueexpenditure? Whether in the facts and circumstances of thecase the amount of Rs.18,07,00/- due to theassessee from PNFC which has been orderedto be wound up by this Hon'ble Court by itsorder dated 21.07.2000, is a “doubtful debt”particularly in view of the fact that on the saleof assets of PNFC by O.L. there are absolutelyno chances of any unsecured creditor like theassessee to get any amount? ITA No. 297 of 2010 (v)Whether in the facts and circumstances of thecase the action of the authorities in orderingthe initiation of penalty proceedings underSection 271 (1)(c) of the Income Tax Actagainst the appellant/assessee are justified?” 3.The assessee is engaged in manufacture of Caustic Sodaand other inorganic chemicals. It claimed expenditure under the head“Replacement of Membrane”. The stand of the assessee was that asper the production technology electrolyzer consists of (1) Anode, (2)Cathode, (3) Membrane and various other separations. There are 2compartments. In the first compartment is Anode and in the secondcompartment is Cathode. Membrane is used as separator betweenAnode compartment and Cathode compartment. As per the manualand the warranty clause the life of Membrane is only 3 years. TheAssessing Officer allowed the said expenditure to the extent of 1/3[rd]which was amount written off every year having regard to the life of theitem in question. The said finding has been affirmed by the CIT (A) aswell as by the Tribunal. Claim of the assessee for writing off doubtfuldebts was not allowed. The debts have not been written off. Penaltyproceedings have been initiated but are still pending. 4.The finding recorded by the CIT (A) on the issue ofreplacement of membrane is as under:- “9.I have carefully considered the submissions ofthe assessee and also perused the assessmentorder. I find that the Assessing Officer has given afinding that the assessee has changed its method of accounting in the relevant previous year to reduce itsprofits. The relevant Para is reproduced as under:- 4.The finding recorded by the CIT (A) on the issue ofreplacement of membrane is as under:- “9.I have carefully considered the submissions ofthe assessee and also perused the assessmentorder. I find that the Assessing Officer has given afinding that the assessee has changed its method of accounting in the relevant previous year to reduce itsprofits. The relevant Para is reproduced as under:- “The above reply shows that assessee haschanged its method of accounting in therelevant previous year to reduce its profit asdeclared by profit/loss account. The saidadjustment has been done by assessee incomputation sheet where full capital expensesrelated to addition of membranes and openingbalance both are claimed. This claim cannotbe accepted as the membranes used byassessee are capital in nature and have a lifeof 3 years as noticed by the Auditors. Hencethe expenses in this account is allowable onlyto the tune of benefits/utilization of the assets.Hence only 1/3[rd] of the addition to membrane isallowed as revenue expense and the balanceof the claim is disallowed. The disallowanceon this account comes to Rs.2,09,91,401/-(2,44,76,754/- - 1/3[rd] of 1,04,56,059/-).” 10.The Hon'ble ITAT, Ahmedabad has discussedvarious case laws which have also been relied uponby the assessee. So I need not discuss these caselaws individually. Moreover, there is no single caselaw which is directly on the facts in the present case.There are the case laws pertaining to the facts in individual cases. It is a settled law that the decisionis given by the Hon'ble Courts with reference to thequestion of law and the facts of that case. There isno case law which has been relied by the assesseepertains to the replacement of membrane. I am inagreement with the reasons given by the AssessingOfficer because of the following reasons:- (i)The assessee has claimed the saidexpenditure only in the computation of income.(ii)In the earlier assessment years, the assesseehas been claiming the expenditure in the spanof 3 assessment years. This shows that theassessee himself admits that such expenditurehas been enduring benefits. (iii) The ratio of the decision of Hon'ble ITATAhmedabad in the case of Amtrex AppliancesLtd., 94 TTJ 396 (Ahm) is clearly applicable tothe facts of the case. The relevant finding isgiven in Para 8.8 of the order, which isreproduced as under:- “8.8The assessee debited only 1/5[th] amountof the expenditure in its P&L a/c of the yearunder consideration and has spread over thesaid expenditure over a period of five yearswith a view to avoid presentation of distortedpicture of the profits to its shareholders. Such (iv) spreading over of the said expenditure over aperiod of five years was made by the assesseein accordance with the accepted accountingpractice which is in no way contrary to anyspecific provisions contained in the IT Act. Onthe other hand, such spreading over of theexpenditure resulting in enduring benefit is inconformity with the aforesaid principles laiddown by the Hon'ble Supreme Court in thecase of Madras Industrial Investment Corpn.We, therefore, do not find any infirmity in theorder passed by the CIT (A) directing the AO toallow deduction in respect of the aforesaidamount in the same manner as has beenadopted by the assessee for purpose ofdebiting the said expenditure in its P&L a/cprepared as per the books of account regularlymaintained by the appellant-company.” As regards the contention of the assessee thatif there are two different views, the view whichis in favour of the assessee should be adoptedas held by Hon'ble Supreme Court in the caseof Vegetable Products Ltd. [(1973) 88 ITR 192](SC). The same also does not hold good inthe present case also. This is for the reasonthat the issue of replacement of membrane has (v) As regards the contention of the assessee thatif there are two different views, the view whichis in favour of the assessee should be adoptedas held by Hon'ble Supreme Court in the caseof Vegetable Products Ltd. [(1973) 88 ITR 192](SC). The same also does not hold good inthe present case also. This is for the reasonthat the issue of replacement of membrane has (v) never come up before any Court wherein theHon'ble Court has given its definite opinion.Once we see the facts of this particular case,the conclusion is obvious that the assesseehas himself claimed the expenditure in its profit& loss account only to the extent of 1/3[rd]. It is also pertinent to note the decision ofHon'ble ITAT, Chandigarh in ITA/273/Chandi/2008, A.Y. 04-05 in the case of M/s Dr.Morepen Ltd., Chandigarh wherein Hon'bleITAT on a similar issue has taken note ofdecision of Hon'ble ITAT Ahmedabad (supra).Although the decision in the case of Dr.Morepen Ltd. is decided in favour of theassessee but the relevant observations asgiven by Hon'ble ITAT in Para-6 of the order byreferring the case of Amtrex Appliances Ltd.(supra) are reproduced as under:- “The learned DR, in the course of hisarguments has relied upon the decision of theAhmedabad Bench of the Tribunal in the caseof Amtrex Appliances Ltd. (supra). In thiscase, sale promotion expenditure has beenheld by the Tribunal to be allowable as 1/5[th]over a period of 5 years. It is thereforesubmitted by the learned DR that in the instant case also, sale promotion expenses be allowedon the same basis as adopted by theAssessing Officer. We have perused the saiddecision and find the same stands on analtogether different footing. In the case beforethe Ahmedabad Bench, the assesseehimself had debited only 1/5[th] amount of theexpenditure in its Profit and Loss accountof the year under consideration and spreadover the entire expenditure over a period of 5years. The assessee, however claimed theexpenditure as revenue expenditure in a singleyear while filing its return of income. Theexpenditure related to advertisement expensesfor launch of new products. The AssessingOfficer had disallowed the expenditure on theground that the expenses incurred in launchinga new product was a capital expenditure. TheCIT (Appeals) however while upholding thenature of the expenditure as revenue, yet heldthat the assessee was not justified in claimingthe expenditure in the single year by ignoringits own claim made in the Profit and lossaccount. Thus the Tribunal does not lay downany absolute proposition that sales promotionexpenses are allowable over a period of 5 years. It is seen that the said decision wasrendered on its own peculiar facts and cannotbe imported here. Thus, the said decisiondoes not help the Revenue in the instant case.”(emphasis supplied). In the present case also the assessee himselfdebited 1/3[rd] of expenditure in the profit & lossaccount. 11.Respectfully following the decision of Hon'bleITAT Ahmedabad wherein Hon'ble ITAT has followedthe decision of Hon'ble supreme Court in the case ofMadras Industrial Investment Corpn, 225 ITR 802(SC), I hold that action of the Assessing Officer wasjustified in making disallowance. The Hon'bleSupreme Court has introduced the concept of'deferred revenue expenditure to be claimed over aperiod of years. The contention of the assessee thatthere is no concept of deferred revenue expendituredoes not hold good.” 5.The above finding was affirmed by the Tribunal. 6.We have heard learned counsel for the appellant. 7.Contention raised by learned counsel for the appellant isthat the expenditure in question was in the nature of revenue as by thesaid expenditure no new asset came into existence and the expenditurewas of recurring nature necessary for carrying on the business.Reliance has been placed on the following judgments:- 5.The above finding was affirmed by the Tribunal. 6.We have heard learned counsel for the appellant. 7.Contention raised by learned counsel for the appellant isthat the expenditure in question was in the nature of revenue as by thesaid expenditure no new asset came into existence and the expenditurewas of recurring nature necessary for carrying on the business.Reliance has been placed on the following judgments:- 1.The Jagat Bus Service, Saharanpur v.Commissioner of Income Tax, U.P. (1950) 18 ITR13;Commissioner of Income Tax, U.P. (1950) 18 ITR13; 2.R.S. Radha Kishan Kapoor v. Commissioner ofIncome Tax, U.P. , (1963) 47 ITR 938;Income Tax, U.P. , (1963) 47 ITR 938; 3.Commissioner of Income Tax, Madras v. AshokLeyland Ltd., (1969) 72 ITR 137; and Leyland Ltd., (1969) 72 ITR 137; and 4.Commissioner of Income-Tax v. Cominco Binani Zinc Ltd., (1993) 204 ITR 56. 5.Punjab State Industrial Development Corporation Ltd. v. Commissioner of Income-Tax, (1997) 225ITR 792.ITR 792. 8.On the basis of this, it has been submitted that the entireexpenditure should have been allowed as revenue expenditure. 9.We are unable to accept the submission. The AssessingAuthority, CIT (A) as well as the Tribunal held that expenditure was inthe nature of capital expenditure, having regard to the fact that the itemin question, i.e. membrane had life of 3 years and 8 years. The item inquestion is an equipment without which manufacturing is not possible.It is not an expenditure of the nature which is exhausted immediately.There is no single or rigid test for holding an expenditure to be revenueor capital. Generally enduring benefit of an expense, i.e. trade test ornew asset test or functional test may be employed for determining theexpenditure to be capital or revenue depending upon the nature of thebusiness carried and the nature of expenditure incurred.In the factsand circumstances of the case, the nature of expenditure cannot be held to be of revenue nature. At best, expenditure to the extent of 1/3[rd]could be held in the circumstances to be revenue expenditure in thecurrent assessment year and the remaining expenditure could not betreated to be revenue expenditure and allowed under Section 37 of theAct as permissible expenditure. 10.Reference is made to judgments on which reliance hasbeen placed by the learned counsel. The judgments relied upon aredistinguishable and do not advance the case of the assessee. 11.In the Jagat Bus Service's case (supra), the assesseewas in the business of running motor buses and lorries and theexpenditure in question was incurred for permission to run the motorvehicle, it was observed that the money was spent every year and thesame may be in the nature of revenue expenditure. However, in thepresent case, the expenditure incurred to the extent of 1/3[rd] thereofrelatable to this year, could be held to be in the nature of revenueexpenditure. 12.The question arose in R.S. Radha Kishan Kapoor's case(supra), regarding payment of amount to one of the retiree brothers byway of goodwill which was held to be in the nature of capitalexpenditure. 13.Issue in Ashok Leyland Ltd's case (supra), was inrespect of expenditure incurred for terminating managing agencyagreement which was allowed as a revenue expenditure. 14.Calcutta High Court in Cominco Binani Zinc Ltd's case(supra), was considering the issue relating to expenditure incurred forre-routing the pipelineconnection and to take the pipeline further upstream for getting saline-free water which was held to be in thenature of revenue expenditure in the facts and circumstances of thecase therein. 12.The question arose in R.S. Radha Kishan Kapoor's case(supra), regarding payment of amount to one of the retiree brothers byway of goodwill which was held to be in the nature of capitalexpenditure. 13.Issue in Ashok Leyland Ltd's case (supra), was inrespect of expenditure incurred for terminating managing agencyagreement which was allowed as a revenue expenditure. 14.Calcutta High Court in Cominco Binani Zinc Ltd's case(supra), was considering the issue relating to expenditure incurred forre-routing the pipelineconnection and to take the pipeline further upstream for getting saline-free water which was held to be in thenature of revenue expenditure in the facts and circumstances of thecase therein. 15.In Punjab State Industrial Development CorporationLtd's case (supra), the Apex Court held that fee paid to the Registrarof Companies for expansion of the capital base was capital expenditure.16.In the present case, the concurrent finding recorded by theauthorities clearly shows that the entire expenditure was not in thenature of revenue expenditure. Reliance has been placed by theauthorities on the judgment of the Hon'ble Supreme Court in MadrasIndustrial Investment Corporation Ltd. v. Commissioner of Income-tax, 225 ITR 802 (SC), wherein the expenditure was in the nature ofdiscount on debentures part of which was held to be expenditureproportionately as revenue expenditure. It was held that if theexpenditure was incurred wholly or exclusively for the purpose ofbusiness, the same could be entirely allowed in the year in which it wasincurred. But where only part of it could be attributed to the business inthe year in question, to that extent only the expenditure could be held tobe revenue expenditure. 17.We are of the opinion that in view of the finding recorded bythe authorities, the questions raised cannot be held to be substantialquestions of law. 18.The appeals are dismissed. (ADARSH KUMAR GOEL) JUDGE August 2, 2010gbs (AJAY KUMAR MITTAL)JUDGE