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TMI Blog1982 (1) TMI 100X X X X Extracts X X X X X X X X Extracts X X X X ..... cost of plant and machinery an expenditure of Rs. 16.49 lakhs had been incurred which was directly related to the installation of the plant and machinery and the same was capitalised and included in the initial cost of the plant. Further the assessee-company claimed capital expenditure of Rs. 5,25,781 as deferred revenue expenditure in terms of section 35D out of which the ITO accepted the claim to the extent of Rs. 4,80,942 and allowed deduction for one-tenth thereof. There was further expenditure of Rs. 7,69,110 with which we are concerned in the present appeal. The circumstances under which this expenditure was incurred are as follows : The assessee-company's factory was located in the industrial area at Porbandar of the Gujarat Industrial Development Corporation ("GIDC" for short). There was no arrangement for supply of power in that area. Since the undertaking of the assessee was power intensive, at the assessee's request, it was arranged that Gujarat Electricity Board (GEB) would establish a sub-station at Porbandar laying down power line from Ramavav to Porbandar and the expenditure incurred thereon which was Rs. 19.80 lakhs was to be shared equally by GIDC and GEB, i.e., R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as raised with the permission of the Commissioner (Appeals) by which deduction for the entire amount was claimed as revenue expenditure and learned Commissioner (Appeals), for the reasons recorded in paragraph 3 which is reproduced below, allowed the claim of the assessee for the deduction of the entire amount as revenue expenditure: "3. I note that the appellant's requirement of power for its manufacturing process at the Porbandar factory is very substantial. To meet this requirement it was necessary to lay a power line from Ranavav to Porbandar and to establish a sub-station at Gujarat Industrial Development Corporation, Industrial Area, Porbandar. The Gujarat State Electricity Board agreed to erect these facilities if the cost thereof was shared between it and the GIDC equally. The appellant agreed to incur 2/3rd of the amount that might fall to the share of GIDC under this arrangement. This sum amounted to Rs. 6,60,000 which was paid on 10-3-1975 which date falls in the current accounting year ending 30-6-1975. In addition to this amount, the company also paid Rs. 1,90,110 to Gujarat Electricity Board for laying of power line from their sub-station to the company's sub-statio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issioner (Appeals). Emphasising the fact that the service line laid down by the Gujarat Electricity Board remained the asset of the said Electricity Board, it was urged that by incurring the said expenditure the assessee-company neither acquired any asset nor any benefit of enduring nature. The learned counsel stated further that the expenditure had been incurred in order to enable the assessee-company to carry on its business and that the capital structure of the assessee-company was not at all affected by it and, therefore, the learned Commissioner (Appeals) had rightly treated it as expenditure of revenue character. Reference was made in support of this view to the decision of the Bombay High Court in the case of CIT v. Excel Industries Ltd. in which Their Lordships held that since the service line remained the property of the Electricity Board, the assessee did not acquire any capital asset or an enduring benefit or advantage and that object of making the payment was purely one of commercial expediency. The learned counsel also derives support from the Supreme Court decision in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1, another Supreme Court decision in L.H. Sugar Factory an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and may be treated as revenue expenditure even if by incurring the same any benefit of enduring character has been derived. In the latter type of cases the expenditure apparently would not be in the course of the business and would be for the purpose of setting up of the business and, therefore, any such expenditure incurred before the business is actually commenced, will not be admissible as business expenditure. 11. The revenue has referred to the Supreme Court decisions in Assam Bengal Cement Co. Ltd. v. CIT and Sitalpur Sugar Works Ltd. v. CIT and to the Kerala High Court decision in CIT v. T.C.C. Ltd. but all these decisions relate to existing businesses. These decisions, therefore, would not be helpful. In the same way the various cases which have been relied upon on the assessee's behalf are also cases of existing businesses and therein it has been held that even if benefit has been derived, the expenditure incurred has to be treated as business expenditure as the object of incurring the expenditure was to run the business more efficiently and profitably. The expenditure, it has been held, relate to the profit earning apparatus. These decisions also, therefore, cannot help ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f manufacture was installed. Obtaining land on lease, placing orders for machinery and raw materials were merely operations for the setting up of the business. On the facts of the case, it was held, the business could not be said to be set up until July 1966 when the machinery had been installed and the factory was ready to commence business. The revenue expenditure incurred before that date would not be a permissible deduction in the assessment for the assessment year 1966-67. 13. The Bombay High Court in Bhodilal Menghraj Co. (P.) Ltd. v. CIT [1979] 119 ITR 968 has considered the same issue. In that case the assessee-company established a factory for manufacture of tools and the factory went into production in August, 1961. The assessee had earlier approached the Gujarat Electricity Board for getting power supply and on 14-7-1960 the Board agreed to provide necessary supply of electricity on the condition that the assessee paid a sum of Rs. 92,400 towards the estimated cost of laying new single circuit line and even though the cost was fully borne by the assessee, the service line would remain the property of the Board and would be maintained by the Board. The assessee paid t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue is that in the case of an assessee following mercantile system of accounting, expenditure has to be claimed in the previous year in which it is incurred or liability arises in view of the Supreme Court decision in the case of Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363. The date of actual payment of the amount representing the expenditure has no relevance at all. In the present case the assessee itself claimed, on mercantile basis, deduction for the expenditure in the previous year ending 30-6-1974, relevant for the assessment year 1975-76. The deduction of claiming the expenditure again in the assessment year 1976-77, did not arise. In this context the learned counsel for the assessee has invited our reference to certain observations occurring at pages 388-389 of the Gujarat High Court in the case of CIT v. Gujarat Mineral Development Corpn. These, in our view, are not relevant being on entirely different facts. On this score also the claim of the assessee deserved to be rejected. 15. Yet another aspect of the issue is that in the case of a newly set up concern, the expenditure incurred prior to the commencement of business, can be either capitalised and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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