TaxTMI 
TaxTMI 
1993 (10) TMI 47
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....89. We do so, since these income-tax references arise from the assessment years 1973-74 and 1974-75 and the common question has been decided by the Tribunal in other income-tax references, following the decision by the Tribunal for the assessment years 1973-74 and 1974-75. Income-tax References Nos. 105 and 106 of 1989 : These two references are at the instance of the Revenue. They relate to the assessment years 1973-74 and 1974-75. The references are under section 256(2) of the Income-tax Act. The questions referred for the opinion of this court are these : " 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that an amount of Rs. 95,911 was an allowable item of expenditure for the assessment year 1973-74? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that an amount of Rs. 3,18,903 was an allowable item of expenditure for the assessment year 1974-75? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the various machines installed during the relevant period did not constitu....
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.... the cone winder, no additional capacity is created. As regards the second item, viz., the second hand drafting system, the Tribunal found that this also does not bring in any new asset. It is found that the assessee had a similar drafting system. This system was found to be unserviceable. So replacement was necessary. This is only a part of the machinery and in the circumstances no new asset had been brought into existence. The clear finding of the Tribunal is that what has been done is a repair on account of unserviceability. In regard to item No. 3, metallic card clothing, the Tribunal found that the whole system had not been changed. What the company has done is to substitute certain parts with more modern parts to ensure less wastage. The Tribunal found that no new asset is brought into existence by the metallic card clothing. It found that the whole system had not been changed. The assessee is still carrying on with the same carding frame with the same numbers of spindles and the same capacity and what they have done is to substitute certain parts with more modern parts so that there is less wastage. Modernisation if it could be so-called, that is because, as the directors in....
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....ing the blade type spindles to the plug type. The number of spindles has not been increased and that this was required in the process of modernisation as the plug type spindles were able to run at high speed and it required less energy. The use of plastic bobbins had reduced the accidents caused by wooden bobbins. The introduction of the simplex machine was found to be consequent to the other changes brought about in the spindles and consequent to modernisation of the machinery. Further, the Tribunal found that by the introduction of the simplex machine, no new asset had been brought into existence. Finally, the Tribunal found that all the expenditure incurred by the company for the years 1973-74 and 1974-75 to the tune of Rs. 95,111 and Rs. 4,38,191, respectively, are deductible revenue expenditure. The company had incurred expenditure on similar items for the subsequent years covered by the other income-tax references and for the assessment years 1974-75 to 1980-81, the company spent a total amount of a little more than Rs. 45 lakhs. Counsel for the Department submitted that the Tribunal ought to have considered all the appeals together and ought to have found that huge exp....
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....r current repairs under section 10(2)(v) of the Act. It is pertinent to note the following observations : "The High Court observed that certain moving parts of the machinery had because of 'wear and tear' to be periodically replaced, and when it was found that the old type of replacement parts were not available in the market, the assessee introduced the Casablanca conversion system, but thereby there was merely replacement of certain parts which were a modified version of the older parts. Counsel for the Commissioner has not challenged these findings and the answer to the second question recorded in the affirmative by the High Court, must be accepted." The above-quoted observation was pressed into service by counsel for the Department to distinguish the cases we are now considering from Mahalakshmi Textile Mills' case [1967] 66 ITR 710 (SC). The facts of a case to be considered may have their own pattern, but that cannot dissuade the court from applying the principle or dictum, the parameter or test applied in a similar set of facts and circumstances in the precedent cited for guidance, and more so when the precedent cited is a decision of the Supreme Court. We c....
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....um or the manner of the payment which would prove decisive. (emphasis added). If the object of making the payment is to acquire a capital asset, the payment would partake of the character of a capital payment even though it is made not in a lump sum but by instalments over a period of time. On the contrary, payment made in the course of and for the purpose of carrying on business or trading activity would be revenue expenditure even though the payment is of a large amount and has not to be made periodically. In the Madras case, CIT v. Kasturi Mills Ltd. [1981] 129 ITR 12, the Madras High Court held that there is no merit in the argument that though individual items of expenditure are held to be revenue expenditure, if one considers the entirety of the expenditure as a whole, it will be a capital expenditure. The court observed that once individual items can be considered as revenue, the sum total of it cannot be treated as capital. We do not think it will be proper for us to consider the largeness of the total expenditure for the different assessment years for the purpose of determining the nature of the expenditure as to whether it is capital or revenue expenditure. Of cours....
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.... ready solution to the problem. There is no litmus test to say that a particular expenditure is revenue expenditure or capital expenditure. 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. We think that we should also outline a few tests formulated by courts since we feel that it might help us to arrive at a correct decision of the controversy now raised in these cases between the assessee and the Revenue. Lord Cave L. C. in Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155, 192 said: "....when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital." The above decision has been referred to in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC). The court observed that the parenthetical clause is significant and that the test has to be applied giving....
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....ed out by Lord Radcliffe in Commr. of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC), the line of demarcation is difficult to draw and leads to subtle distinctions between profit that is made "out of" assets and profit that is made "upon" assets or "with" assets. It is significant to note that Bhagwati J. made it plain and clear in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC) that there may be cases where expenditure, though referable to or in connection with fixed capital, is nevertheless allowable as revenue expenditure. His Lordship has given an illustrative example of the expenditure incurred in preserving or maintaining capital assets. Finally his Lordship said that the test is therefore clearly not one of universal application. Counsel for the Department submitted that if the expenditure is one pertaining not to the area of profit-earning process but referable to the profit-earning machinery or apparatus, then the expenditure is in the nature of capital expenditure. He has referred to Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 (SC). We will be adverting to that decision later. At the moment we only say that Bhagwati J. has said t....
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....even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage 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". Counsel for the assessee submitted that the expenditure incurred brought about an advantage but that advantage consists merely in facilitating the assessee's manufacturing operations and process and the conduct of the business is to be carried on more effectively or more profitably. There is no new asset and that is the finding of the Tribunal. Counsel also submitted that even if the assessee has gained enduring benefit, considering the nature of the advantage, the expenditure incurred cannot be considered as in the nature of capital expenditure. Now we shall refer to the decision in Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 (SC). The case related to the acquis....
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....l microbiology and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in this fast-changing area of medical science.... The rapid strides in science and technology in the field should make us a little slow and circumspect in too rapidly pigeon-holding an outlay such as this as capital". (emphasis added). The Supreme Court further observed that in the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue expenditure arises, it is well nigh impossible to formulate any general rule, even in the generality of cases, sufficiently accurate and reasonably comprehensive to draw any clear line of demarcation. Further, the Supreme Court observed that some broad and general tests have been suggested from time to time to ascertain on which side of the line the outlay in any particular case might reasonably be held to fall. The Supreme Court cautioned that these tests are generally efficacious and serve as useful servants ; but as masters they tend to be over-exacting. The tests of once for all payment and enduring benefit, the Supreme Court observed, are not to be treated as someth....
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....ow considering and Alembic Chemical Works' case [1989] 177 ITR 377 (SC) in so far as in Alembic Chemical Works' case, the expenditure incurred pertained to the area of the profit-earning process while the expenditure incurred in the cases we are considering is on profit-earning machinery or apparatus. It is not very correct to make such a distinction in these cases. In these cases also, the process adopted as found by the Tribunal is not a new venture but only an improvement of the existing facilities by replacing worn out and unserviceable parts of the unit. No profit-earning machinery was sought to be supplanted. We are of the opinion that it is not an expenditure for the acquisition of profit-earning machinery or apparatus. In Alembic Chemical Works'case [1989] 177 ITR 377 (SC), the Supreme Court was emphasising the fact that the expenditure incurred which was found to be a revenue expenditure was for the improvisation of the process and technology in some areas of the enterprise and was supplemental to the existing business and further that it never amounted to a new or fresh venture. It was also taken note of that the expense incurred for obtaining the agreement....
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....uring advantage. In a case of this kind what matters is the nature of the advantage for which the money was spent. This money was spent to remove antiquated restrictions which were preventing profits from being earned. It created no new asset. " In the same decision, Lord President (Clyde) further observed : "The benefit was essentially of a revenue character because the company became able more easily to finance its day-to-day transactions, and more efficiently to carry on its day-to-day manufacture". We may now refer to what Dixon J. said in Hallstorm's Property Ltd. v. Federal Commissioner of Taxation, 72 CLR 634 : " 'what is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business-point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process'. The question must be viewed in the larger context of business necessity or expediency. If the outgoing expenditure is so related to the carrying on or the conduct of the business that it may be regarded as an integral part of the profit-earning process and ....
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....ions Nos. 1 and 2 in the affirmative and in favour of the assessee. The other questions Nos. 3 to 6 are also answered in favour of the assessee and against the Revenue. Now, we shall consider separately the other connected cases. Income-tax Reference No. 426 of 1985: The reference is at the instance of the Revenue, under section 256(2) of the Income-tax Act, 1961. This is in respect of the assessment year 1975-76 of the same assessee in Income-tax References Nos. 105 and 106 of 1989. The questions referred are these: " 1. Whether, on the facts and in the circumstances of the case, the manner and method of computation of incremental liability for gratuity by the Tribunal are right in law ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in allowing the claim for Rs. 34,152 representing incremental liability for gratuity ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that an amount of Rs. 7,56,802 was an allowable item of expenditure for the assessment year 1975-76 ?" Question No. 3 is identical to the questions that have been answered in Income-ta....
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....ount of Rs. 7,56,802 was an allowable item of expenditure for the assessment year 1975-76. Questions Nos. 1 and 2 relate to computation of incremental liability for gratuity and as to whether the Tribunal was right in law in allowing the claim of Rs. 34,152 representing incremental liability for gratuity. The question whether incremental liability is a concept germane to section 40A(7)(b)(ii) of the Income-tax Act was considered by this court in the decision in CIT v. Chembra Peak Estates Ltd. [1990] 185 ITR 556. This court held that the incremental liability is not a concept germane to section 40A(7)(b)(ii) of the Income-tax Act. In this view, we hold that the Tribunal was not justified in holding that the assessee was entitled to deduction of Rs. 34,152 for the assessment year 1975-76 though it did not exceed 8-1/3 per cent. of the salary of the employees. A similar view was expressed in CIT v. Periya Karamalai Tea and Produce Co. Ltd. [1987] 167 ITR 32 (Ker). We answer questions Nos. 1 and 2 in the negative against the assessee and in favour of the Revenue. Income-tax References Nos. 60 of 1983, 383 of 1985 and 384 of 1985: These references are with respect to the as....
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....set of the company and so it has to be allowed as a revenue expenditure. The Revenue contended that the expenditure had been incurred by the assessee for acquiring an enduring benefit by the construction of an independent 11 KV feeder and so it is an expenditure of capital nature and it is not allowable. The case of the Revenue before us also is that the expenditure incurred is of a benefit of enduring nature. Counsel for the assessee submitted that the expenditure incurred for drawing a new electricity line was for carrying on the business efficiently and effectively and, as such, it is a revenue expenditure and an allowable deduction. Counsel also submitted that even if it is an asset of an enduring nature it is not an asset of the assessee and so the expenditure incurred is an allowable deduction. Counsel referred us to the decisions in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC), Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 (SC) and Mahalakshmi Textile Mills' case [1967] 66 ITR 710 (SC) ; AIR 1968 SC 101, for persuading us that the expenditure incurred for installing a new electricity line is for carrying out the business of the assessee-company in a m....
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....lacement of certain switch boards and electrical cables even though the same had not become that much old to be replaced. The assessee's claim is that the expenditure constituted current repairs and an allowable deduction under the Act. The Tribunal held that the substitution in a machine of new parts for old and worn out parts was in the nature of current repairs on revenue account, that the replacement of defective parts was carried out as required by the electrical authorities and that it was not a case of substitution of new machinery and that it was clearly in the nature of current repairs. The question referred is identical to the question we have already answered in Income-tax References Nos. 105 and 106 of 1989. In the result, we answer the question in the affirmative, in favour of the assessee and against the Revenue. Income-tax Reference No. 384 of 1985: This is a reference at the instance of the Revenue. The question referred is : "Whether, on the facts and in the circumstances of the case, there was any material to hold that the modernisation expenses of Rs. 5,18,184 were incurred by the assessee for replacing worn-out parts ?" The Tribunal has considered t....
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..... switch with cable and box fuse, etc. replacements 2,17,223.50 7,61,086.75" Similarly, the details of the conversion materials for the year 1978-79 are given. The details are these : "Conversion materials - Assessment year 1978-79: Rs. Blow Room machine Krishna Beater Lags 7,100.70 Spg. machine tin roll new flanges 613.60 Spg. machine lift conversion for 8 frames 17,160.00 Spg. machine lift conversion for 8 frames 3,244.80 Realing Tin roll conversion for 10 sets 5,685.40 L/R plug type spindle complete set 400 Nos. 26,732.16 Spg. machines SKF drafting conversion 6 sets 3,85,053.27 Spg. machine rings 45 mm dia. 2 flags 200 Nos. 27,368.65 Metallic card clothing Cylinder, Deffer and Border Wire (S.H.) 8 sets 20,938.67 Carding machine Flats, Rapp-o-tops seconds - 2 sets 3,853.20 4,97,750.45" For the assessment year 1977-78, the assessee has incurred an expenditure of Rs. 7,61,086.75 and for the assessment year 1978-79 an amount of Rs. 4,97,750.45. The Tribunal has recorded a finding that no new plant has been installed as urged by the Department in its grounds of appeal, but only the....
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....o section 40A(7)(b)(ii) of the Income-tax Act. In the result, we answer the questions in the negative and in favour of the Revenue and against the assessee. Income-tax Reference No. 87 of 1986: This is also a reference of the same assessee for the assessment year 1979-80. The reference is at the instance of the Revenue. The questions referred are : "1. Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 4,90,021 incurred in connection with the modernisation of the factory is allowable as revenue expenditure ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the assessee is entitled to claim deduction towards bonus paid in excess of the statutory bonus? " The first question is the general question we have already considered in the other references. Since each case has to be decided on the particular facts of the case, we advert to certain facts of this case for answering the first question. The Tribunal has held in paragraph 5 of its order thus : "Grounds Nos. 1 and 2 in the appeal by the Department : These are to the effect that the Commissioner of Inc....
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....f the employee and the conditions of his service ; (ii) the profits of the business or profession for the previous year in question ; and (iii) the general practice in similar business or profession. All the three conditions enumerated in clauses (a) to (c) of the second proviso to section 36(1)(ii) must be satisfied in order that the payment which is not required by the Bonus Act is regarded as reasonable so as to warrant the deduction under section 36(1)(ii). The order of the Tribunal reveals that this specific aspect as to whether the bonus paid by the assessee may stand the test specified in section 36(1)(ii) of the Income-tax Act read along with the proviso has not been adjudicated by the Tribunal. In these circumstances, we decline to answer the question. We direct the Tribunal to consider the matter afresh in the light of the decisions in CIT v. Kerala Agra Industries Corporation [1990] 183 ITR 197 ; CIT v. Alikunju, M. A. Nazir, Cashew Industries [1987] 166 ITR 611 (Ker) and Income-tax Reference No. 185 of 1985. (CIT v. P. Balakrishna Pillai, International Cashew Traders [1990] 182 ITR 449 (Ker)) and Income-tax Reference No. 399 of 1985 (CIT v. Kumar Industries [1990] 18....
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....s relating to previous assessment years of the same assessee. We have already held that the expenditure incurred for replacement of unserviceable parts of the machines is revenue expenditure. In this view, we have to answer the question referred in the affirmative, in favour of the assessee and against the Revenue. We do so. The second question relates to the applicability of section 36(1)(ii) of the Income-tax Act. The Income-tax Officer disallowed the assessee's claim for deduction of a sum of Rs. 3,64,565 representing bonus by applying the first proviso to section 36(1)(ii) of the Income-tax Act. The Commissioner of Income-tax (Appeals) held that the bonus paid by the assessee was a customary bonus and hence it was not regulated by the provisions of the Payment of Bonus Act, 1965. He, therefore, allowed the assessee's claim. The Department filed an appeal and the Tribunal noted that the bonus was paid in terms of an agreement dated August 26, 1979, between the management and the workers and paid around the Onam festival. The Tribunal held that it was customary in point of time and contractual because it was in pursuance of an agreement. We have already considered t....
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....ting the liability. The Tribunal found that the ratio of the decision in L. J. Patel and Co. v. CIT [1974] 97 ITR 152 (Ker) is applicable to the facts of this case. The assessee did not take any step for payment of surcharge even though the order for levying surcharge was passed in 1968 and in the light of the order, the assessee was asked to pay electricity surcharge by the Kerala State Electricity Board. This court upheld the constitutional validity of the order passed by the Electricity Board by its judgment dated June 19, 1978. The assessee made a claim before the Income-tax Officer that the electricity surcharge to the tune of Rs. 2,97,034 had become payable during the relevant previous year ended on December 31, 1978. The question is whether the assessee is entitled to make such a claim. In CIT v. K. A. Karim and Sons [1982] 133 ITR 515 (Ker), a Full Bench of this court has held that where an assessee maintains his accounts on the mercantile system of accounting his liability to sales tax arises in the year in which he undertook the transactions liable to tax. The fact that steps were not taken for recovery of the tax and that a notification exempting certain transactio....