TaxTMI 
TaxTMI 
2020 (1) TMI 178
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed thus: The respondent/assessee is a Company engaged in manufacture of fertilizers and cement. The respondent filed its return for the Assessment year 1995-96 on 2nd November 1995, which was revised on 27th March 1997, declaring income of Rs. 68,02,32,080/-. It appears that the case was selected for scrutiny and notices under Section 143(2) and 142(1) of the Income Tax Act (Act for short) were issued calling for various details, which were supplied by the respondent. The Assessing Officer (AO) by an order dated 24.03.1998 completed the assessment in the following terms: (i) The expenditure of Rs. 2,01,000/- on foreign travel of the wives of the Directors of the Company was disallowed. (ii) Insofar as interest of Rs. 1,97,91,197/- on the loan for capital borrowed for setting up of Argon Gas Plant is concerned, the assessee claimed the interest paid on such borrowing as a revenue expenditure. The AO did not agree with the claim and held that such interest on borrowed capital is part of the actual cost as defined in Section 43(1) Explanation 8 of the Act. (iii) Insofar as payment of Rs. 7,09,10,000/- to Texmaco for the purposes of having continuous suppl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....). The ITAT held that the amount could not be added as income, which order was ultimately confirmed by the Hon'ble Supreme Court. Before the Hon'ble Supreme Court following substantial question of law arose for determination: Whether interest paid in respect of borrowings on capital assets not put to use in the concerned financial year can be permitted as allowable deduction under Section 36(1)(iii) of the Income Tax Act 1961 ? 7. On behalf of the Revenue, reliance was placed on Explanation 8 to Section 43(1) of the Act, in order to claim that the assessee was not entitled to claim deduction for interest on the borrowings, particularly when the machines were not put to use during the assessment year under consideration. It was contended that the provisions of Section 36(1)(iii) were required to be harmoniously construed with Explanation 8 to Section 43(1) of the Act regarding actual cost. According to the Revenue, the provisions of Section 36(1)(iii) being general in nature had to give way to the special provisions contained in Explanation 8 to Section 43(1) of the Act. 8. The Hon'ble Supreme Court held that interest on money borrowed for the purposes of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....btained by the respondent, eight years of the mining lease was remaining. The respondent claimed before the AO that the the payment having been made for procurement of raw material for its cement manufacturing business was allowable as revenue expenditure. The respondent therefore amortised the amount over eight years in its books of account. The AO refused to accept the claim on the ground that the amount was spent for obtaining an advantage of enduring nature and was thus a capital expenditure. The CIT (Appeals) has concurred with the finding of the AO. It was held that the respondent has spent the amount towards purchase of an enduring source being the right of winning and taking away the limestone deposits. It was held that payment was made to buy "long lasting source of raw material, which would yield such material for years to come". It was further held that there is a clear difference between the price paid to buy raw material and the price paid towards buying long lasting source of material and the former can be held as a revenue expenditure, while the later has to be held as a capital expenditure. 10. The CIT (Appeals) placed reliance on the decision of the Hon'ble ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... is made for the supply of raw materials, the expenditure will be in the nature of revenue expenditure. Therefore, as the facts speak for themselves, in the present case there is no reason to hold the amount of Rs. 7,09,10,000/- is not capital expenditure in nature. 12. We have heard the learned Counsel for the parties. Perused record. 13. It is submitted by Ms. Razaq, the learned Counsel for the appellant that the respondent has acquired mining rights held by Texmaco for ensuring uninterrupted supply of raw material which is a benefit of an enduring nature. It is submitted that over and above the consideration paid for acquiring the lease hold rights, the respondent was also paying the royalty to the government of Andhra Pradesh. It is submitted that the case is squarely covered by the decision in the case of R.B. Seth Moolchand Suganchand. It is submitted that the reliance placed by the ITAT on the decision in the case of Pingle Industries Ltd. is misplaced. It is submitted that the only reasoning articulated by the ITAT while upsetting the concurrent finding of the AO and the CIT (Appeals) is as contained in para 11 of the order, which is cryptic. It is submitted that exce....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the Board for Industrial and Financial Reconstruction (BIFR) under Section 15 of the Sick Industrial Companies (Special Provisions) Act, 1985 and a scheme was sanctioned under Section 18(4) of the said Act on 06.08.1993 for its rehabilitation. However, the same could not be implemented. On Texmaco's suggestion, a revised proposal for its rehabilitation by transfer of the cement Plant to the respondent, which is a group company of Texmaco, was mooted. As an interim arrangement, prior to proposed transfer of the Cement Division under an agreement dated 5th January 1994 between Texmaco and the respondent, it was inter alia agreed that the respondent shall run and operate the Cement Plant at Yeraguntala, Andhra Pradesh for a period of three years from 1st January 1994 and thus, it was the respondent which was operating the cement Plant under the interim arrangement. The parties have accordingly entered into a Memorandum of Understanding (MoU) on 28th October 1994. The Plant was ultimately transferred to the respondent on 7th February 1995. The consideration for the transfer of the cement division includes Rs. 709.11 lakhs for takeover of lease, which Texmaco had with the Andhra Pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ount of lease was a capital expenditure in as much as the pillars of mica (before it is mined) cannot be said to be stock in trade. Accepting the claim made on behalf of the Revenue, the expenditure was held to be capital expenditure. 18. We find that the facts obtaining in the case of R.B. Seth Moolchand Suganchand have a close resemblance, with the facts herein, as rightly found by the CIT (Appeals) and the said decision would be applicable on all fours to the present case. 19. Coming to the case of Pingle Industries Ltd., it is significant to note that the said case has been considered by the Hon'ble Supreme Court in the case of R.B. Seth Moolchand Suganchand. Incidentally, Pingle Industries Ltd. was also a case of mining where the assessee had obtained a lease for excavating shahabadi stones for a period of twelve years for which an annual payment was agreed upon. The Court after taking a survey of several Indian and English cases for determining what is a capital expenditure and what is a revenue expenditure by a majority judgment held that the assessee by its long term lease, had acquired leasehold rights to win stones and that the stones "in situ" were not its stoc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....urface by mining operations, the expenditure incurred for acquiring such a right would be of a capital nature. But where the mineral has already been gotten and is on the surface, then the expenditure incurred for obtaining the right to acquire the raw material, that is, the mineral, would be a revenue expenditure laid out for the acquisition of stock-in-trade. (Emphasis supplied) 21. The Hon'ble Supreme Court further went on to hold as under: An expenditure incurred for acquiring a right to take away sand from the surface of river beds has been treated as if the sand was stock-in-trade-M.A. Jabbar Vs. Commissioner of Income Tax [1968] 68 ITR 493, in the same way as tendu leaves have been treated by the Privy Council in Mohanlal Hargovind's case. In the former case, Bhargava, J. indicated a number of factors which led to the conclusion that the expenditure incurred by the assessee in obtaining the lease was revenue expenditure for the purpose of obtaining stock-intrade and not capital expenditure which were: (1) that the lease was for a very short period of 11 months only; (2) that the sole right which was acquired by the assessee under the lease deed was to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d and been taken into their possession." 25. The Hon'ble Supreme Court in the case of Pingle Industries Ltd. expressed its concurrence with the view as expressed. The following observations in the context of what is held in the case of Mohanlal Hargovind's case are apposite. "We are in entire agreement that such a distinction is not only palpable but also sensible. The present case is a fortiori. Here, the stones are not lying on the surface but are part of a quarry from which they have to be extracted methodically and skillfully before they can be dressed and sold. These deposits are extensive, and the work of the assessee carries him deep under the earth. Such a deposit cannot be described as the stock-in-trade of the assessee, but stones detached and won can only be so described." 26. Thus, we find that the reliance placed by the ITAT on certain submissions advanced on behalf of the assessee in the case of Pingle Industries Ltd. is entirely misplaced. We find that the ITAT has failed to appreciate that in fact, in that case, a similar contention on behalf of the assessee as in the present case was negatived. 27. We would now propose to make a brief refe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s running a cement factory at Shahabad. The factory premises were included in the municipal area. A tripartite agreement was entered into between the government, the municipality and the Company whereby the Company had undertaken to supply water to the municipality and provide water pipeline, to supply electricity for street lighting and to put up a transmission line for laying of the main road from the factory to the railway station, in consideration of which the Company got exemption from paying tax for a period of fifteen years. As per the terms agreed, the pipeline was eventually to become the property of the municipality. It was in these circumstances held that the amount spent for providing the pipeline was a revenue expenditure as the advantage secured, namely, the exemption from paying municipal taxes for a period of fifteen years was only in the field of revenue. We find that the case is clearly distinguishable on facts. 32. In the case National Organic Chemical Industries Ltd., the assessee Company was in the business of manufacturing of chemicals. The company constructed a jetty under a licence granted by the government for the purpose of handling chemicals manufactur....