1995 (11) TMI 7 - HC - Income Tax

Articles Or Things, Capital Or Revenue Expenditure, Collaboration Agreement, Concessional Rate, Industrial Company, Investment Allowance

Issues Involved:
1. Whether the expenditure incurred on asphalting of roads constitutes revenue expenditure.
2. Whether the payment of $13,500 regarding process know-how is revenue expenditure.
3. Whether the investment allowance on the plant and machinery installed in the hatchery division is permissible.
4. Whether the assessee is an industrial company even though its activities do not amount to manufacture.

Issue-Wise Detailed Analysis:

1. Expenditure on Asphalting of Roads:
The first issue concerns the admissibility of a deduction of Rs. 3,31,043 incurred by the respondent for asphalting existing roads within its premises. The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision that this expenditure is business expenditure and not capital expenditure. The Tribunal found that the asphalted area, covering internal roads within a 55-acre premise, was an improvement of existing roads rather than the creation of new roads. The Supreme Court's ruling in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 was cited, emphasizing that not all enduring benefits are capital expenditures if they facilitate business operations without creating new capital assets. The court concluded that the expenditure was revenue in nature, answering the first question against the Revenue.

2. Payment for Process Know-How:
The second issue pertains to the payment of $13,500 for process know-how related to a biovaccine unit. The Tribunal found that $13,500 of the total $30,000 paid under a collaboration agreement was for services to maximize plant productivity, which it treated as revenue expenditure. The Tribunal relied on the Full Bench decision in Praga Tools Ltd. v. CIT [1980] 123 ITR 773, which supported the classification of such payments as revenue expenditure. The court found no error in the Tribunal's decision, answering the second question against the Revenue.

3. Investment Allowance on Plant and Machinery:
The third issue is whether the respondent is entitled to the deduction under section 32A for plant and machinery in the hatchery division. The court referred to CIT v. Sri Venkateswara Hatcheries (P.) Ltd. [1988] 174 ITR 231, which concluded that the production of chicks using plant and machinery qualifies as the production of "articles or things" under section 32A. The Revenue's contention, based on CIT v. N. C. Budharaja and Co. [1993] 204 ITR 412, that chicks are not "articles or things" was rejected. The court reaffirmed that chicks, being movable and marketable, fall within the scope of section 32A, answering the third question against the Revenue.

4. Classification as an Industrial Company:
The fourth issue depends on the resolution of the third issue. Since the court affirmed that the production of chicks qualifies under section 32A, it followed that the respondent is an industrial company. This conclusion aligns with the precedent set in Sri Venkateswara Hatcheries' case [1988] 174 ITR 231 (AP), which held that an entity engaged in producing articles is an industrial company under the Finance Acts of 1977 and 1979. Therefore, the fourth question was answered against the Revenue.

Conclusion:
The court answered all four questions against the Revenue and in favor of the assessee, affirming the Tribunal's decisions on each issue. The referred case was disposed of with no costs.

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