2003 (10) TMI 19 - HC - Income Tax

Claim of the assessee-respondent for deduction of amount of bottling fee payable under the Rajasthan Excise Act 1950 and the relevant rules framed thereunder - allowances of the assessee s claim to depreciation in respect of the assessee s research and development assets relating to the assessee s business - assessee has claimed deduction of Rs. 2, 77, 867 as revenue expenditure for replacing the old transformer by a new transformer as an essential part of the plant and machinery already installed

Issues Involved:
1. Deduction of unpaid bottling fee under section 43B of the Income-tax Act, 1961.
2. Depreciation on research and development assets related to a closed business unit.
3. Treatment of expenditure on the purchase of a new transformer as capital or revenue expenditure.

Issue-wise Detailed Analysis:

1. Deduction of Unpaid Bottling Fee:
The first issue concerns whether the unpaid amount of bottling fee, upon furnishing a bank guarantee, qualifies as actual payment under section 43B of the Income-tax Act, 1961, allowing for deduction even if not paid before the due date of filing the return under section 139(1). The Tribunal had allowed the deduction based on the bank guarantee furnished by the assessee, treating it as actual payment. However, the court referred to a prior judgment (CIT v. Udaipur Distillery Company Ltd.) which held that furnishing a bank guarantee does not equate to actual payment. The court further elaborated that bottling fees, under the Rajasthan Excise Act, 1950, are not fees in a technical sense as part of taxation but are a consideration for the State parting with its exclusive privilege to deal in potable liquor. Therefore, such fees do not fall within the purview of section 43B and should be allowed as revenue expenditure when the liability arises, even if the payment is made later.

2. Depreciation on Research and Development Assets:
The second issue pertains to the allowance of depreciation on research and development assets related to a closed business unit of the assessee. The Tribunal had previously ruled in favor of the assessee, allowing depreciation on these assets as they were part of the overall business assets and used for the remaining business operations. The court upheld this view, affirming that the assets continued to form part of the block of assets and were used for the ongoing business, thus qualifying for depreciation.

3. Treatment of Expenditure on New Transformer:
The third issue addresses whether the expenditure on purchasing a new transformer should be treated as capital or revenue expenditure. The Assessing Officer and the Commissioner of Income-tax (Appeals) had treated it as capital expenditure, citing that the old transformer was still part of the block of assets. However, the Tribunal found it to be a case of replacement for the efficient running of the existing plant and classified it as revenue expenditure. The court supported this view, referencing several judicial precedents, including the Supreme Court's decision in CIT v. Mahalakshmi Textile Mills Ltd., which held that replacement of parts for efficient running of a plant constitutes revenue expenditure. The court concluded that the purchase of the transformer was for maintenance and repairs, thus qualifying as revenue expenditure, and that the old transformer's retention did not alter this classification.

Conclusion:
The appeal was dismissed, with the court affirming the Tribunal's decisions on all three issues:
1. Bottling fees are not governed by section 43B and should be allowed as revenue expenditure when the liability arises.
2. Depreciation on research and development assets related to a closed business unit is allowable.
3. Expenditure on a new transformer for the efficient running of the existing plant is revenue expenditure.

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