TaxTMI 
TaxTMI 
2016 (8) TMI 229
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....laimed for franchise income as discussed above 50,88,343/- Interest on Government Loan as discussed above 17,55,632/- Thiruvalluvar statue expenses as discussed above 45,34,350/- Prior period expenses as discussed above 8,20,616/- Government grants as discussed above 5,42,20,000/- Similar order was passed for the assessment year 2006-07 and the assessing officer has made the following additions: 30% deduction claimed from income from lease/ franchise of hotels 41,47,414/- Thiruvalluvar statue expenses as discussed above 45,34,350/- Loss on sale of assets 3,14,286/- Depreciation on coaches 7,45,813/- Grants from Government 1,88,97,000/- 4. Being aggrieved by the same, Tamil Nadu Tourism Development Corporation has filed two appeals in I.T.A.Nos.436/07-08 and 246/08-09 respectively. I.T.A.No.436/07-08 was partly allowed and I.T.A.No.246/08-09 was allowed, on all the grounds raised in the appeal. 5. Aggrieved by the order of C.I.T.Appeal No.436/07-08 dated 19.01.2010 for the assessment year 2005-2006 and C.I.T.(Appeal) No.246/08-09 dated 20.01.2010, for the assessment year 2006-2007, the Commissioner of Income Tax, Chennai filed ITA Nos.550 and 55....
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....the fact that the expenses incurred for providing protective coating to the statue with poly silicon has extended the 'life' of the statue and therefore the expenses resulting in an advantage of enduring benefit ought to have been classified as capital expenditure? 3. Whether in the facts and circumstances of the case, the Tribunal was right in holding that the receipt of grants by the assess from the Central Government capital in nature? 4. Is not the Tribunal wrong in applying the facts of the AY 2005-06 to the AY 2006-07 and holding the receipt of grants by the assessee as capital in nature when in respect of the AY 2006-07, the grants were received by the assessee was for improving its existing infrastructure and not for bringing into existence any new asset? 5. Has not the Tribunal erred in overlooking the fact that the grants received by the assessee was for improving existing facilities and therefore the proposed expenditure for which money was received was only revenue in nature? 6. Whether the Tribunal is right in ignoring the fact that the money received by the assessee for meeting revenue expenditure has not been utilised by the assessee and therefore the....
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....he receipt was revenue in nature. He also added that the Tribunal failed to note that though money was received by the assessee for meeting its revenue expenditure for improving the existing facilities, and the Tribunal has failed to consider that the assessee had not utilised the same, and therefore, has to be treated only as a revenue receipt and added to the income of the year of receipt. 12. Inviting the attention of this court to the observation of the Tribunal that insofar as the grants given by the Government of India is concerned, the proposed projects were dropped and that the funds were directed to be kept as trust so that the same can be spent for other alternative projects as directed by the Government from time to time and in the above said circumstances, when the Tribunal itself expressed an opinion that it was not in a position to give a clear finding as to how the grants were expended, learned senior standing counsel for Income Tax department prayed that the matter be remitted to the original authority for fresh adjudication. 13. Per contra, Mr.M.Vijayaraghavan, learned counsel for the respondent submitted that M/s.Tamil Nadu Tourism Development Corporation Limite....
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....ram Iyengar & Sons (P) Ltd reported in 186 ITR 276 SC, C.I.T. vs. Chemicals and Plastics Ltd reported 292 ITR 0115 Mad and CIT vs. Saw Pipes Ltd reported in 300 ITR 35 (Del), Mr.M.Vijayaraghavan, learned counsel for the respondent submitted that when expenditure was incurred on the asset not owned by the assessees, then the same has to be construed only as a revenue expenditure. At this juncture, he reiterated that the statue is not owned by M/s.Tamil Nadu Tourism Development Corporation Limited, Chennai/respondent/ assessee. 16. Learned counsel for the respondent submitted that both the Appellate Authority and the Tribunal, concurrently and rightly, both on facts and law, held that the department was not correct in disallowing the claim of the assessee, according to him, the well considered orders stated supra, cannot be termed as perverse, warranting interference. 17. On the substantial question of law relating to government grant, Mr.M.Vijayaraghavan, learned counsel for the respondent/assessee submitted that during the assessment year 2005 - 2006, the assessee received Rs. 478.70 Lakhs and Rs. 188.97 Lakhs, for the assessment year 2006-2007. It is the further submission of th....
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....t the surplus income, such portion can be treated as income of the Corporation and that too, only for the year, for which the Government has permitted the Corporation to utilise any amount of the project as income. 20. Learned counsel for the respondent further added that till the Government issues appropriate orders enabling the Tourism Development Corporation to retain any portion of the grant as its income, the same can be treated as income of the Corporation in the year, in which the Government grants permission. It is also his submission that at the time of grant, there is an attendant obligation to utilise the entire amount for the project contemplated by the Government. No part of the same will constitute as income of the Corporation. According to him, merely because the Corporation could not give particulars as to how the grants were to be utilised in the future, it does not mean that the grant should be treated as income of the corporation in the first year only. 21. Learned counsel for the respondent further submitted that during the subject assessment years, the Government have not permitted the Corporation to treat any of the amount given by it by way of grant, either....
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....4.00 Lakhs). As the entire expenditure incurred in Thiruvalluvar statue was of recurring nature and no capital expenditure is involved the expenditure may be allowed. Moreover all expenditure incurred towards Thiruvalluvar statue are of maintenance nature only as TTDC has been entrusted with the task of maintaining the Thiruvalluvar statue only by virtue of government order and as such TTDC does not have any ownership towards the Thiruvalluvar statue. I have considered the arguments of the assessee, but the contentions are not acceptable. As such there is no income directly derived from the statue by the Corporation but is an unrefutable fact that the Thiruvalluvar statue is a capital asset to the corporation through which a portion of income is earned. It is clear from the reply that the expenditure is capital in nature as a huge portion of it was spent for poly silicon coating by which the life of the statue can be increased. Thus cannot be allowed as deduction as it is a capital expenditure" 25. For the Assessment year 2005 - 2006, the Assessing Officer disallowed the maintenance charges of Rs. 34,00,000/-, as capital expenditure. Citing the very same reasons for the Assessmen....
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....s also requested the Managing Director, Poompuhar Shipping Corporation separately to hand over the amount to the TTDC. I am therefore to request you to issue instructions to the official concerned to take over the maintenance of statue from the Tourist Officer, Kanniyakumari. Early action may also be taken to collect the amount from Poompuhar Shipping Corporation. This may be treated as 'Most Urgent'. Sd/- V.Ramadoss, Commissioner of Tourism Incharge. Copy to: The District Collector, Kanniyakumari at Nagercoil The Tourist Officer, Kanniyakumari The Secretary to Government, Information and Tourism Department, Fort St. George, Chennai - 600 009. A reading of the above said letter fortifies the contention of the respondent/assessee that maintenance of Thiruvalluvar statue has been entrusted to Tamil Nadu Tourism Development Corporation Ltd, from the year 2002 onwards and for maintenance of the statue, Poompuhar Shipping Corporation, has been collecting a sum of Rs. 20/- as ticket fee from the tourists, and Rs. 5/- has been earmarked for the maintenance of Thiruvalluvar statue by Tamil Nadu Tourism Development Corporation. As per the letter dated 22.06.2002....
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....ble Supreme Court held in the negative. The Apex Court further held that no doubt the advantage secured for the business existing was of long duration inasmuch as it would last so long as roads continued to be in motorable condition, but it was not an advantage in the capital filed, because no tangible or intangible asset was acquired by the assessee nor was there any addition to or expansion of the profit-making apparatus of the assessee. 31. In respect of enduring benefit, it is also worthwhile to extract the judgment of the Hon'ble Apex Court in Empire Jute Co. Ltd. vs. CIT reported in (1980) 124 ITR 1 (SC), as follows: "There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading op....
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.... " The facts of each case, the attending circumstances revolving round the expenditure, the aim, object and purpose of the same, their impact on the assessee, particularly in matters relating to the future of the assessee's trade and business, whether it could be sustained on ordinary canons of commercial expediency simpliciter, whether it is a step in aid of future expansion or prolongation of life of an existing business, whether it is to secure an enduring benefit, whether the expenditure constitutes conceivable nucleus to form the foundation for the posterior profit earning, whether the expenditure could be viewed as an integral part of the conduct of the business and to avoid the inroads and incursions into its concrete present and potential future, are all some of the main instances which have a bearing on the decision, whether in a given case, the expenditure is capital or chargeable to Revenue. On the whole, an objective application of the judicial mind to the facts of each case is necessary." (Emphasis supplied) 36. In Commissioner of Income Tax vs. Saw Pipes Ltd. reported in (2008) 300 ITR 0035, on the facts and circumstances of the case, a Hon'ble Division Ben....
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....e Corporation was directed by the Government of Tamil Nadu to properly maintain the Thiruvalluvar statue and when the asset being, fully owned Government of Tamil Nadu Undertaking is bound by the orders of the Government, and when the business of the Corporation was to develop tourism, vide Common Order dated 12.08.2013 in ITA Nos.550 and 551/Mds/2010, the Income Tax Tribunal, held that as the expenditure incurred by the assessee for the purpose of maintenance of the statue is recurring in nature and the same is only a revenue expenditure. The Tribunal further held that it has to be seen that the statue Thiruvalluvar is a public property and not the property of the assessee corporation. Therefore, under no stretch of imagination, expenditure can be treated as capital, and so saying the Tribunal has concurred with the orders of the Commissioner of Income Tax (Appeals) and accordingly, rejected the contentions of the revenue. 39. Benefit of enduring nature is not the sole or exclusive test to decide, whether a particular expenditure is a capital or revenue. In Empire Jute Co. Ltd. vs. CIT reported in (1980) 124 ITR 1 (SC),, the Hon'ble Apex Court held that when expenditure is di....
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....y the application of the principle of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on, or conduct of, the business that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character the possession of which is a condition for the carrying on of the business, the expenditure should be regarded as a revenue expenditure incurred wholly and exclusively for the purposes of the business." (iii) In CIT v. Cominco Binani Zinc Ltd., reported in [1993] 204 ITR 56, the Calcutta High Court held that, "In the case of Empire Jute Co. Ltd., v. CIT, [1980] 124 ITR 1 (SC), following the decision of Lord Radcliffe in Commr. of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC), it was held by the Supreme Court at page 10 of the said report (124 ITR 1) that it would be misleading to suppose that, in all cases, securing a benefit for the business would be, prima facie, capital expenditure "so long as the benefit is not so transitory as to have no endurance at all". There may be cas....
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....erived an enduring business advantage by expending the amount. In all these cases, the expenses have been looked upon as having been made for the purpose of conducting the business of the assessee more profitably or more successfully. In the present case also, since the asset created by spending the said amounts did not belong to the assessee but the assessee got the business advantage of using modern premises at a low rent, thus saving considerable revenue expenditure for the next 39 years, both the Tribunal as well as the High Court have rightly come to the conclusion that the expenditure should be looked upon as revenue expenditure." 40. A capital expenditure is an expenditure incurred on the acquisition of a capital asset, by which, expenditure incurred, the value of the asset is increased and consequently, there is an enhancement in the earning capacity of the assessee. The asset would be charged to depreciation, if the assessee is the owner of the asset. The amount spent by the assessee, on the capital asset, should be a long term investment, to generate financial gains to the assessee, for future years. Whereas, the revenue expenditure incurred by the assessee is only for t....
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....wned by the Tamil Nadu Tourism Development Corporation Ltd. Corporation has been entrusted with the only work of maintenance of the statue from out of the contribution made by Poompuhar Shippping Corporation. Business of the Corporation is tourism. Though Mr.M.Swaminathan, learned counsel for the appellant submitted that the Tribunal went wrong in adjudging the issue, with reference to the ownership of the statue and should have confined itself only to the issue as to whether, the expenditure incurred is capital or revenue, in the light of the judgments extracted supra, as to how ownership or acquisition of capital asset, but the expenditure incurred, has a bearing on the decision, as to whether the expenditure is capital or revenue, submissions to the contra, cannot be countenanced. Maintenance of the statue, may endure some benefit towards the conduct of the assessee's business, but the expenditure incurred cannot, at any rate, to be said as an advantage to the assessee in its capital field and thus the expenditure would be capital in nature, so as to disallow the expenditure incurred for maintenance of Thiruvalluvar statue by security charges, electricity charges, establishm....
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....leased to the Commissioner (Tourism) Government of Tamil Nadu for "Erection of Ropeway at Kodaikanal in Tamil Nadu" vide sanction No.5-PSW(19)/2004 dated 26.3.2004. (copy enclosed). The balance amount of Rs. 213.62 lakh (Rs.238.00 lakh minus Rs. 24.38 lakh) would be adjusted against some other project in the future." 49. Now let us consider as to how the Assessing Officer has dealt with the issue relating to grants from Government. Grants from Government As per the notes and accounts (schedule (9), Point No.6), the assessee has received a sum of Rs. 542.20 Lakhs from various sources for which the breakup is as follows: Government of India grant Rs. 478.70 lakhs HADP grant Rs. 18.50 lakhs WGDP grant Rs. 45.00 lakhs The assessee was asked for explanation about the grants the assessee submitted a reply stating that "the amount received by TTDC from the government cannot be treated as grant in the absence of government order for the same as we have sought government clarification, these receipts cannot be treated as revenue receipts and added to income in the absence of government clarification as to the nature of the government assistance. In the a....
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....dering the same, the Commissioner of Income Tax (Appeals), Chennai has noticed that a sum of Rs. 238 Lakhs each was granted for ropeways at Ooty and Kodaikanal from the total grant of Rs. 5,42,20,000/-, the projects relating to Rs. 4,76,00,000/- has been dropped as per G.O. dated 04.12.2008. Further, grants totalling to Rs. 63.5 Lakhs has been converted into equity shares by Government of Tamil Nadu. Thus, additions of Rs. 476 lakhs i.e. (Rs.238 x 2) lakhs of the Government of India grants on capital projects has been dropped and Rs. 63.5 lakhs relating to grant of Government of Tamil Nadu converted into equity shares. 52. Insofar as the Assessment year 2006 - 2007, grant received by the assessee was Rs. 256.72 lakhs. The break-up figures are as under: Government of India Rs.188.97 lakhs HADP Grant Rs. 37.75 lakhs Govt. of TN Grant Rs. 30.00 lakhs In the absence of any Government clarification, the Assessing Officer has treated the grant as revenue receipts. 53. However, after considering the materials produced, the Appellate Authority, has found that a sum of Rs. 1,88,97,000/- was received for capital projects, like restoration of properties damaged by tsunami....
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....usiness, for capital investment, is one of capital receipt. The nature of receipt is determined by the character, in the hands of the recipient. 56. The Tribunal has further held that the grants are not given for meeting the day-to-day expenses of the assessee corporation. On the aspect of grant, the Tribunal has also recorded that the grant has already been converted into equity capital. Therefore, it would not take partake the character of income. Tribunal has recorded a finding that the proposed projects were dropped and further observed that the funds are directed to be kept in trust so that the same can be spent for other alternative projects as directed by the Government from time to time and also expressed a note that there was no clear picture. Though on the basis of the said observation, Mr.M.Swaminathan, learned counsel for the Revenue seeks for a remand, is not inclined to order for the reason that clause 12 of letter dated 04.12.2008 of the Ministry of Tourism, Government of India, makes it abundantly clear that the State Government will not keep the amount released by the Central Government unutilised, for more than six months. In case the funds cannot be utilised for....