2010 (8) TMI 456 - HC - Income Tax

Expenses for setting up new sugar units deemed revenue, allowable as deductions.

The court held that the expenses incurred for setting up new sugar units in Orissa were revenue in nature and allowable as deductions under Sections ... Capital or revenue expenditure - Revised return - It is the case of the appellant that all the expenses relating to a sum of ₹ 6,84,78,570 in respect of the Baramba Sugar Mill and Dhenkanal Sugar Mill were covered by the Explanation to Section 37(1) or 37(2B) of the Act - Applying the principles, the expenses which were in a sum of ₹ 6,84,78,570/- were all expenses which were incurred by way of salaries, wages, bonus, provident fund contribution, workmen welfare expenses, power, fuel and water, manufacturing expenses, rent for office building etc., were all expenses which were incurred for the purpose of running of the business and it cannot be held to be by way of investment - Decided in the favour of the assessee Issues Involved:1. Whether the expenditure on setting up new sugar units in Orissa was allowable as revenue expenditure.Detailed Analysis:1. Nature of Expenditure on New Sugar Units:The core issue was whether the expenses incurred for setting up new sugar units in Orissa (Baramba and Dhenkanal) were to be treated as revenue expenditure or capital expenditure. The assessment year in question was 1992-1993. The respondent had three manufacturing divisions: Sugar, Distillery, and Foundry, with the new units being part of the Sugar Division.2. Appellate Authority's Findings:The respondent claimed the expenses as revenue expenditure, arguing that the Baramba unit was taken over on a 'Management Contract' and the Dhenkanal unit was in the process of being established. The Commissioner of Income Tax (Appeals) noted that the expenses were for cane development, traveling, interest, administrative costs, lease rents, etc., which were in the nature of revenue expenses. The Commissioner relied on various precedents and directed the verification of the expenses to allow the claim in full.3. Tribunal's Decision:The Tribunal upheld the Commissioner's decision, stating that the expenses for setting up the new sugar factories were for the expansion of the existing business, not for starting a new one. The Tribunal also noted that a similar issue was previously decided in favor of the respondent for the assessment year 1991-92.4. Revenue's Appeal:The Revenue contended that the expenses were capital in nature, citing that they were of enduring benefit. They relied on multiple judicial precedents to support their argument that such expenditures should be treated as capital expenditure.5. Respondent's Argument:The respondent countered that the expenses were for the expansion of the existing sugar business and were revenue in nature. They provided detailed expenditure statements for Baramba and Dhenkanal units, emphasizing that the expenses were for running the business and not for creating a new asset. They also argued that interest on capital was deductible as revenue expenditure under Section 36(1)(iii) of the Income Tax Act until the proviso came into effect on 01.04.2004.6. Court's Analysis:The court examined the details of the expenses and found them to be revenue in nature. The expenses included salaries, wages, bonus, provident fund contributions, workmen welfare expenses, power, fuel, manufacturing expenses, rent, insurance, repairs, traveling, administrative expenses, and financial charges.7. Legal Provisions:The court referred to Sections 36 and 37 of the Income Tax Act. Under Section 36(1)(iii), interest on capital borrowed for business purposes is deductible. Section 37 allows for the deduction of any expenditure not being in the nature of capital expenditure or personal expenses, laid out wholly and exclusively for business purposes.8. Judicial Precedents:The court cited several precedents, including:- Assam Bengal Cement Co. Ltd. Vs. Commissioner of Income Tax: Differentiating capital and revenue expenditure based on whether the expenditure brings into existence an asset or advantage of enduring benefit.- Ballimal Naval Kishore Vs. Commissioner of Income Tax: Expenditure for obtaining a new asset or advantage is capital expenditure.- Deputy Commissioner of Income Tax Vs. Core Health Care Ltd.: Interest on borrowed capital for business purposes is deductible, irrespective of whether the capital is used for acquiring a capital or revenue asset.9. Conclusion:The court concluded that the expenses incurred were for the purpose of running the business and not for creating a new asset. The expenditures were revenue in nature and thus allowable as deductions under Sections 36(1)(i) & (iii) and 37(1) of the Act. The appeal by the Revenue was dismissed, and the question of law was answered in favor of the respondent, affirming the orders of the Commissioner of Income Tax (Appeals) and the Tribunal.