2006 (8) TMI 172 - HC - Income Tax

Whether Tribunal was right in holding that the expenditure incurred for shifting of the factory is a revenue expenditure shifting was due to opposition by public against letting out of the sewage water - impugned expenses is not merely for enduring advantage but for the reason of its magnitude viz. for the very survival of the factory and such an expenditure is to be held as a revenue expenditure order of tribunal is justified

Summary

Issues:
1. Determination of whether the expenditure incurred for shifting the factory from one location to another constitutes revenue or capital expenditure.

Analysis:
The High Court of Madras deliberated on the substantial question of law regarding the nature of expenditure for shifting a factory from Kovilpatti to Cuddalore. The Assessing Officer initially disallowed the claim of the assessee, treating it as capital expenditure, citing precedents like Sitalpur Sugar Works Ltd. v. CIT and CIT v. Bimetal Bearings Ltd. The Commissioner of Income-tax (Appeals) upheld this decision. However, the Income-tax Appellate Tribunal reversed this ruling, deeming the expenditure as revenue in nature. The Revenue then appealed the Tribunal's decision.

The bone of contention was whether the shifting of the factory was solely for the greater advantage of the trade, justifying it as capital expenditure. The court examined past judgments such as Sitalpur Sugar Works Ltd. v. CIT and CIT v. Bimetal Bearings Ltd., which emphasized enduring benefit as a hallmark of capital expenditure. The court also referred to Atherton's case, stating that expenditure leading to an enduring benefit must be considered capital expenditure.

In analyzing the facts, the court noted that the shifting had not provided a better business atmosphere for the assessee but had actually disadvantaged them by losing proximity to a key job work provider. The court highlighted that the shift was necessitated by public opposition to sewage water discharge, a circumstance external to the assessee's management. The court differentiated this external pressure from internal issues like labour unrest, which typically lead to capital expenditure.

The court emphasized that the enduring advantage must be relative to the survival of the factory in its existing location. It stressed that the test of enduring benefit should not be applied blindly, especially in cases where survival itself is at stake. Referring to CIT v. Madura Coats Ltd., the court noted that mere convenience and efficiency improvements do not necessarily constitute enduring advantages.

Conclusively, the court held that the expenditure for shifting the factory was not merely for enduring advantage but for the survival of the factory itself, making it revenue expenditure. Therefore, the court dismissed the appeal, finding no substantial question of law to consider.