2003 (11) TMI 6 - HC - Income Tax

Construction costs for textile institute allowed as revenue expenditure under tax law

Commissioner of Income-Tax Versus Raj Spinning And Weaving Mills Ltd.

The Tribunal's decision to allow the expenditure incurred for the construction of a textile institute as revenue expenditure was justified as it did not ... Expenditure on construction of building - Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law to come to the conclusion that the expenditure on construction of textile institute building was a business expenditure allowable as revenue expenditure when the facts that the assessee got a permanent right to nominate its employee for training in further years was not controverted by the assessee?' - Expenses wholly and exclusively incurred for the purpose of the business of the assessee and was not in the nature of capital expenditure. Therefore, the same is allowable as revenue expenses under section 37(1) of the Income-tax Act, 1961. The Tribunal was justified in reaching this conclusion Issues Involved:1. Whether the Tribunal was justified in allowing the expenditure incurred for the construction of a textile institute as revenue expenditure.2. Whether the Tribunal was right in concluding that the expenditure on the construction of the textile institute building was a business expenditure allowable as revenue expenditure.Detailed Analysis:Issue 1: Justification of Allowing Expenditure as Revenue ExpenditureRelevant Facts and Arguments:- The assessee-company, engaged in manufacturing synthetic yarn and fabrics, constructed a building for a textile institute on land provided by the Rajasthan Government.- The construction cost was spread over several assessment years, with Rs. 2,16,000 spent in the relevant assessment year 1990-91.- The assessee claimed these expenses as revenue expenses for business expenditure deduction.- The Assessing Officer and the Commissioner of Income-tax (Appeals) disallowed the claim, categorizing the expenditure as capital in nature.- The Tribunal, following its earlier decision for assessment years 1986-87 and 1987-88, allowed the expenses as revenue expenses, citing Supreme Court and Bombay High Court precedents.Legal Precedents and Reasoning:- Supreme Court in Sassoon J. David and Co. P. Ltd. v. CIT [1979] 118 ITR 261 and Bombay High Court in CIT v. Rajaram Bandekar [1994] 208 ITR 503: These cases supported the Tribunal's decision.- CIT v. Royal Calcutta Turf Club [1961] 41 ITR 414: Contribution to a jockey training school was deemed revenue expenditure as no capital asset of enduring nature was created.- Lakshmiji Sugar Mills Co. P. Ltd. v. CIT [1971] 82 ITR 376: Expenses for road construction for business facilitation were held as revenue expenditure.- CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257 (SC): Installation of water pipelines, which became municipal property, was considered revenue expenditure as it facilitated business operations.- CIT v. Bombay Dyeing and Manufacturing Co. Ltd. [1996] 219 ITR 521: Construction of tenements for workers through the State Housing Board was revenue expenditure as no capital asset was acquired by the assessee.- CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468: Reconstruction of leased premises was revenue expenditure as no capital asset was acquired by the assessee.Conclusion:- The Tribunal's decision was justified as the expenditure did not result in the acquisition of a capital asset by the assessee. The building constructed was owned by the State, and the expenditure was for the purpose of facilitating the assessee's business by training its workers, thus qualifying as revenue expenditure.Issue 2: Tribunal's Conclusion on Business ExpenditureRelevant Facts and Arguments:- The assessee had a permanent right to nominate its employees for training at the institute, which was not contested.- The Revenue argued that the expenditure was capital in nature as it resulted in an asset of enduring nature handed over to the State Government and was not exclusively for the assessee's business.Legal Precedents and Reasoning:- Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1: The test of enduring benefit is not conclusive; expenses facilitating business operations without expanding profit-making apparatus are revenue in nature.- Royal Calcutta Turf Club [1961] 41 ITR 414: Expenditure for training jockeys was revenue expenditure as it was for business preservation.- T.V. Sundaram Iyengar and Sons P. Ltd. [1990] 186 ITR 276 (SC): Purchase of land for workers' housing was revenue expenditure as no capital asset was acquired by the assessee.- Palani Andavar Mills Ltd. v. CIT [1977] 110 ITR 742 (Mad): Construction of a school building for employees' children was revenue expenditure.- CIT v. Rupsa Rice Mill [1976] 104 ITR 249 (Orissa HC): Donation for a primary health center for workers was revenue expenditure.Conclusion:- The Tribunal correctly concluded that the expenditure was business expenditure allowable as revenue expenditure. The construction facilitated the training of the assessee's workers, enhancing business efficiency without acquiring a capital asset.Final Judgment:- The High Court dismissed the appeal, affirming that the expenses incurred by the assessee for constructing the building for the textile institute were wholly and exclusively for business purposes and were not capital expenditure. The Tribunal's decision to allow the expenses as revenue expenditure under section 37(1) of the Income-tax Act, 1961, was upheld.