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Issues:
1. Whether the expenditure incurred for water treatment plant and fume extraction plant is capital in nature for the assessment year 1986-87? Analysis: The case involved a limited company engaged in steel manufacturing that claimed the expenditure on installing a water treatment plant and fume extraction plant as revenue expenditure for the assessment year 1986-87. The Assessing Officer disallowed the claim, considering it as capital expenditure. The first appellate authority upheld the decision. However, on further appeal, the Appellate Tribunal found that the plants were installed to improve existing systems' efficiency and profitability, not to enhance steel production. The water treatment plant aimed to provide pure water due to insufficient supply from the municipality, while the fume extraction plant was installed for health hazard prevention and statutory compliance, not to increase production volume. The court referred to the Supreme Court's decision in Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377, which provided guidelines to distinguish between capital and revenue expenditure. The Supreme Court emphasized that the distinction must respond to changing economic realities and business needs. It highlighted that the enduring benefit test might not be definitive in all cases, and the purpose and effect of the outlay should be considered in a common-sense manner based on business realities. In the Alembic case, the Supreme Court ruled that payments made for improving existing business operations, such as process and technology enhancements, are revenue in nature and deductible in computing business profits. Applying the principles laid down by the Supreme Court in the Alembic case, the High Court agreed with the Appellate Tribunal's view that the expenditure on the water treatment plant and fume extraction plant was revenue expenditure. Therefore, the court answered the question posed in favor of the assessee and against the Revenue, allowing the deduction for the expenditure incurred on the plants for the assessment year 1986-87.
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