TaxTMI 
TaxTMI 
2017 (5) TMI 1628
X X X X Extracts X X X X
X X X X Extracts X X X X
....capital assets? (ii) Whether the ITAT was justified in holding that Explanation 1 to Section 41(1) of the Act was not retrospective in nature and thus, was not applicable to the present assessment year? (iii) Whether the ITAT was right and justified in treating the payment of expenses amounting to Rs. 4,50,84,615/- as revenue expenditure even when the same were capitalized and entered as pre-operative expenses by the assessee itself in its books of accounts? (iv) Whether the ITAT was justified in deleting the addition of Rs. 16,00,000/-, being liability in respect of leave and licence fees payable to Kanoria Industries Ltd. written back by the assessee, inspite of the specific provisions of Section 41(1) and its Explanations? (v) Whether the ITAT was justified in allowing the expenses of Rs. 50,000/-, as Labour Welfare expenses even when the assessee has failed to show that the said amount was wholly and exclusively utilized for business purposes? (iv) Whether the ITAT was justified in deleting the disallowance of Rs. 43,032/-, being 1/5th of depreciation on vehicle, disallowed on account of personal use, even when no justification was p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the fact that the same is incentive which has been received by the assessee. The Tribunal in para 11.4 observed as under. "11.4 Considering the arguments advanced by the parties in view of the orders of the lower authorities, material available on record as well as the decision relied on by the Ld. AR, we are not inclined to interfere with the first appellate order, as the ld. CIT (A) has rightly deleted the addition with the observation and finding on the issue at page no. 6 and 7 of the first appellate order, relevant extract of which are being reproduced hereunder for a ready reference. ".......... According to this incentive scheme the incentive was given in sugar projects to make them viable, the repayment of loan has to be by surplus funds generated through higher free sale of levy sugar the extra amount collected is meant to be utilized for repayment of loan. The submission of the appellant is that he is collecting this amount with an obligation to make repayment of term loan advanced by Central Financial Institutions & therefore it cannot be treated as part of his income. He relied on SC case in CIT Vs. Bijali Cotton Mills P. Ltd. 116 ITR 60 & also in CIT ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the following words in the section are important "the assessee had obtained, whether in cash or in any other manner whatsoever any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him". Thus, the section contemplates the obtaining by the assessee of an amount either in cash or in any other manner whatsoever or a benefit by way of remission or cessation and it should be of a particular amount obtained by him. Thus, the obtaining by the assessee of a benefit by virtue of remission or cessation is sine qua non for the application of this section. The mere fact that the assessee has made an entry of transfer in his accounts unilaterally will not enable the department to say that section 41 would apply and the amount should be included in the total income of the assessee. The reasoning of the High Court is correct and we are in agreement with the same. 6. Learned counsel also referred to the judgment of the Bombay High Court in CIT v. Bennett Coleman & Co. Ltd. The Bench held that it was difficult to accept the contention of the assessee that cessation of liabilit....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... enough to refer to the decision of this court in Bombay Dyeing & Manufacturing Co. Ltd. v. State of Bombay & Ors. 1958 SCR 1122. If that principle is applied, it is clear that mere entry in the books of account of the debtor made unilaterally without any act on the part of the creditor will not enable the debtor to say that the liability has come to an end. Apart from that, that will not by itself confer any benefit on the debtor as contemplated by the section." 7. Other decision on the issue is reported in Chief Commissioner of Income Tax Vs. Kesaria Tea Co. LTD.: (2002) 254 ITR 0434, wherein it has been observed as under: "4. It may be noted that the provision was made in the books of account towards purchase tax which was under dispute and the benefit of deduction from business income was availed of in the past years in relation thereto. The same was sought to be reversed by the assessee during the year ending on 31.3.1985 for whatever reason it be. The question is whether the circumstances contemplated by Section 41(1) exists so as to enable the Revenue to take back what has been allowed earlier as business expenditure and to include such amount in the income of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in CIT v. Suguli Sugar Works(P) Ltd.: [1999]236ITR518(SC) . We, therefore, find no substance in the contention advanced on behalf of the appellant. Incidentally, we may mention that the controversy relates to the period anterior to the introduction of Explanation 1 to Section 41(1)." 8. Therefore the issue is answered in favour of assesssee and against the department 9. Issue No. 3 : It relates to payment of interest used for purchased of capital assets. The same is squarely covered by the decision of Supreme Court in the case of Empire Jute Co. LTD. Vs. Commissioner of Income Tax: (1980) 124 ITR 0001, wherein it has been held as under: "4. In the first place it is not a universally true proposition that what may be a capital receipt in the hands of the payee must necessarily be capital expenditure in relation to the payer. The fact that a certain payment constitutes income or capital receipt in the hands of the recipient is not material in determining whether the payment is revenue or capital disbursement qua the payer. It was felicitously pointed out by Macnaghten, J. in Race Course Betting Control Board v. Wild 22 TC 182 that a "payment may be a revenue payment fr....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... court as a valid principle, but it was pointed out that it had no application in the case before the court, because though loom hours were an asset, they could not from their very nature be let out while retaining property in them and there could be no grant of temporary right to use them. The court therefore concluded that this was really a case of sale of loom hours and not of exploitation of loom hours by permitting user while retaining ownership and, in the circumstances, the amount received by the assessee from sale of loom hours was liable to be regarded as capital receipt and not income. It will thus be seen that the entire case proceeded on the commonly accepted basis that loom hours were an asset and the only issue debated was whether the transaction in question constituted sale of this asset or it represented merely exploitation of the asset by permitting its user by another while retaining ownership. No question was raised before the court as to whether loom hours were an asset at all nor was any argument advanced as to what was the true nature of the transaction. It is quite possible that if the question had been examined fully on principle, unhampered by any pre-deter....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd these would be liable to be deducted from the number of working hours per week otherwise allotted to it. The purchase of loom hours by a mill had therefore the effect of relaxing the restriction on the operation of looms to the extent of the number of working hours per week transferred to it, so that the transferee mill could work its looms for longer hours than permitted under the working time agreement and increase its profitability. The amount spent on purchase of loom hours thus represented consideration paid for being able to work the loom for a longer number of hours. It is difficult to see how such payment could possibly be regarded as expenditure on capital account. 6. The decided cases have, from time to time, evolved various tests distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all embracing formula which can provide a ready solution to the problem; no touchstone has been devised. Every case has to be decided on its own facts keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. But a few tests formulated by the court may be referred to....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... or expansion of the profit making apparatus of the assessee. The income earning machine remains what it was prior to the purchase of loom hours. The assessee is merely enabled to operate the profit making structure for a longer number of hours. And this advantage is clearly not of an enduring nature. It is limited in its duration to six months and, moreover, the additional working hours per week transferred to the assessee have to be utilised during the week and cannot be carried forward to the next week. It is, therefore, not possible to say that any advantage of enduring benefit in the capital field was acquired by the assessee in purchasing loom hours and the test of enduring benefit cannot help the Revenue. Another test which is often applied is the one based on distinction between fixed and circulating capital. This test was applied by Lord Haldane in the leading case of John Smith & Son v. Moore 12 TC 266 where the learned law Lord draw the distinction between fixed capital and circulating capital in words which have almost acquired the status of a definition. He said : "Fixed capital (is) what the owner turns to profit by keeping it in his own pos....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of this source of profit or income therefore represented expenditure of capital nature. Now it is true that if disbursement is made for acquisition of a source of profit or income, it would ordinarily, in the absence of any other countervailing circumstances, be in the nature of capital expenditure. But we fail to see how it can at all be said in the present case that the assessee acquired a source of profit or income when it purchased loom hours. The source of profit or income was the profit making apparatus and this remained untouched and unaltered. There was no enlargement of the permanent structure of which the income would be the produce or fruit. What the assessee acquired was merely an advantage in the nature of relaxation of restriction on working hours imposed by the working time agreement, so that the assessee could operate its profit-earning structure for a longer number of hours. Undoubtedly, the profit earning structure of the assessee was enabled to produce more goods, but that was not because of any addition or augmentation in the profit making structure, but because the profit making structure could be operated for longer working hours. The expenditure incurred for....