1981 (4) TMI 28 - HC - Income Tax

Summary

Issues Involved:
1. Whether the particular expenditure should be allowed as a revenue expenditure or not.
2. Interpretation of the agreement between Hindustan Steel Ltd. and the assessee-company.
3. Determination of whether the expenditure brought into existence an asset or an advantage of enduring nature.

Issue-wise Detailed Analysis:

1. Whether the particular expenditure should be allowed as a revenue expenditure or not:

In this reference under s. 256(1) of the I.T. Act, 1961, the High Court was tasked with determining whether the expenditure incurred by the assessee-company should be classified as revenue expenditure. The assessee-company, which was involved in executing contracts, had entered into an agreement with Hindustan Steel Limited (HSL) for the expansion of a coke oven plant and the construction of houses/bungalows, including furniture, sanitary, and electrical installations. The contract was on a "turn-key" basis, meaning the contractor was obligated to deliver a completely erected plant, put it into operation, and provide technical "know-how" for maintenance. The expenditure in question was incurred for furnishing the bungalows provided by HSL for the assessee's engineers. The Income Tax Officer (ITO) had disallowed these expenses, treating them as capital expenses. However, the Appellate Assistant Commissioner (AAC) and the Tribunal accepted the assessee's claim for deduction, treating the expenses as revenue expenditure.

2. Interpretation of the agreement between Hindustan Steel Ltd. and the assessee-company:

The contract between HSL and the assessee-company stipulated various obligations for both parties. HSL was to provide unfurnished quarters to the assessee, while the assessee was required to furnish these quarters. According to the contract, all irremovable property, including fixtures and furniture (excluding certain items like refrigerators and air-conditioning units), would become the property of HSL without further payment upon completion of the contract. The ITO disallowed the expenses, arguing that the cost of furnishing the quarters was a capital expense. However, the AAC and the Tribunal found that the expenditure was incurred as part of the contractual obligations and was necessary for earning income from the contract. They concluded that the expenses should be treated as revenue expenditure.

3. Determination of whether the expenditure brought into existence an asset or an advantage of enduring nature:

The High Court examined whether the expenditure incurred by the assessee brought into existence an asset or an advantage of enduring nature. The principles for determining whether an expenditure is capital or revenue are well-settled. If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, it is considered capital expenditure. However, if the expenditure is incurred for running the business or working it with a view to produce profits, it is revenue expenditure. The Court noted that the expenditure in question was incurred in the course of discharging obligations under the contract and did not result in the acquisition of any asset or advantage of enduring nature for the assessee. The furniture and fittings provided by the assessee were to be handed over to HSL upon completion of the contract, and the benefit of the expenditure did not extend beyond the performance of the contract. Therefore, the Court concluded that the expenditure was revenue in nature.

Conclusion:

The High Court upheld the Tribunal's decision, concluding that the expenditure incurred by the assessee for furnishing the bungalows provided by HSL was revenue expenditure. The Court emphasized that the expenditure was incurred as part of the contractual obligations and was necessary for earning income from the contract. The benefit of the expenditure did not extend beyond the performance of the contract, and the assessee did not acquire any asset or advantage of enduring nature. Therefore, the expenditure was rightly accepted as revenue expenditure. The question referred to the Court was answered in the affirmative and in favor of the assessee.