2007 (1) TMI 146 - HC - Income Tax

Deduction of expenses related to obtaining fixed deposits from the public - Allowed as Revenue Or Capital Expenditure - Depreciation on stand by spare parts even though they were not taken for use during the year - HELD THAT - Undisputedly as found in the order of the Appellate Tribunal the stand-by items are assets acquired by the assessee and kept in readiness for use whenever the machinery that is regularly used goes out of action or requires repairs. In CIT v. Vayithri Plantations Ltd. 1980 (1) TMI 27 - MADRAS HIGH COURT which arose out of an almost similar set of facts seeking grant of development rebate. In that case the assessee company completed the construction of building and the installation of machinery before March 31 1971 but could not start regular manufacture with the aid of that machinery because of frequent labour unrest and the assessee claimed development rebate in respect of the machinery but the Assessing Officer rejected the claim on the ground that the machinery in respect of which the claim had been made had only been installed and had not been used in the year of account and hence the amount would be allowed as a deduction in the next year when the machinery was actually brought into use. However the Commissioner as well as the Tribunal directed the grant of allowance. Applying the ratio as laid down above to the facts of the case we are of the view that the assessee is entitled to depreciation on spare parts which are stand-by items even though they were not taken for use during the accounting year. Accordingly the first question of law is answered in the affirmative and against the Revenue. Fixed deposits from the public - We are of the view that when the Tribunal has recorded a finding that the expenses relating to obtaining fixed deposits are closely linked with the business requirement of the assessee such expenses are allowable expenses. We therefore hold that the Tribunal was right in holding that the expenses for obtaining fixed deposits from the public is revenue in nature. Accordingly we answer the second question in the affirmative and against the Revenue. In fine both the questions are answered in the affirmative and against the Revenue. The appeal stands dismissed.

Summary

Issues:
1. Whether depreciation should be allowed on spare parts which are stand-by items even though they were not taken for use during the year?
2. Whether the expenses related to obtaining fixed deposits from the public is a revenue expenditure liable for deduction?

Analysis:

Issue 1 - Depreciation on Stand-by Spare Parts:
The Revenue appealed against the order of the Income-tax Appellate Tribunal, which allowed depreciation on stand-by spare parts for the assessment years 1986-87 and 1987-88. The Commissioner of Income-tax (Appeals) had already held in favor of the assessee regarding depreciation on stand-by items. The High Court referred to relevant legal precedents, including CIT v. Viswanath Bhaskar Sathe and Liquidators of Pursa Ltd. v. CIT, to establish that machinery can be considered 'used' even when kept ready for use. Applying this reasoning, the High Court concluded that the assessee is entitled to depreciation on stand-by spare parts, even if not used during the accounting year.

Issue 2 - Expenses Related to Obtaining Fixed Deposits:
The second issue involved the deduction of expenses related to obtaining fixed deposits from the public as revenue expenditure. The Tribunal allowed these expenses, considering them closely linked to the business requirement of funds. The High Court analyzed legal precedents such as India Cements Ltd. v. CIT and CIT v. Mahindra Ugine and Steel Co. Ltd. to determine the nature of such expenses. It was established that if expenses are incurred for securing the use of money for a certain period and are wholly and exclusively for the purpose of the business, they qualify as revenue expenditure. Based on this analysis, the High Court upheld the Tribunal's decision, ruling that the expenses for obtaining fixed deposits from the public are revenue in nature and thus deductible.

In conclusion, the High Court answered both issues in the affirmative, dismissing the Revenue's appeal and ruling in favor of the assessee.