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TMI Blog2014 (10) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee filed their return of income on 31.12.1991 declaring loss of Rs. 3,17,55,920/-, which was revised to Rs. 3,65,06,041/- on 9.11.1992. The revision was on account of depreciation claimed. 4. The Assessing Officer, on the issue in question, in the Assessment Order dated 10.02.1994 has observed that for the previous year ending 31.03.1991, an amount of Rs. 3.89 Crores had been capitalized or kept apart for allocation towards three deep drilling rigs. Out of the said three rigs, one was commissioned in February, 1991 and the remaining two were commissioned in the subsequent year. The Assessing Officer held that the respondent assessee had capitalized the cost of acquisition and deployment of the three additional rigs in the books of account but had claimed the aforesaid expenditure as revenue in nature on the plea that the expenses incurred were for extension of existing business and not for setting up of a new business. The Assessing Officer disallowed the claim and treated the aforesaid amount of Rs. 3.89 Crores as capital expenditure as it pertained to acquisition of plant and machinery namely the three rigs. The aforesaid amount included the expenditure incurred on salaries pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oportionate amount and not the actual amount which had been reflected in the books for setting up whole or part of the rigs. The Tribunal observed that the entries in the book of accounts would not be definitive on the issue whether the amount should be capitalized or treated as revenue expenditure. 7. The findings recorded by the Tribunal make it apparent that the new rigs purchased by the assessee were financed. The financing cost was allowed as revenue expenditure. The new oil rigs were a new capital asset. Thereafter, the rigs had to be installed for the purpose of making them operational. The assessee had deployed their workers and technicians to whom salaries were paid to make the rigs operational. The business of the respondent assessee was continuous and ongoing. The business required constant deployment, installation and re-installation of the rigs, which upon purchase or on shifting from an location to the other had to be made functional. The rigs, no doubt, constitute capital asset, but, we do not think, the expenditure incurred on the salary paid to the employees can be treated as capital expenditure. 8. The business undertaken by the assessee, as already noticed, was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of profits on one hand and the process by which an organisation operates to obtain regular returns on the other, but with a warning that business structure or entity may assume almost infinite variety of shapes and, therefore, it may be difficult to comprehend. 10. The Delhi High Court in CIT versus J.K. Synthetics Limited, (2009) 309 ITR 371 (Delhi) after referring to the case law on the subject had set out the test or principles, which read as under:- "An overall view of the judgments of the Supreme Court, as well as of the High Courts would show that the following broad principles have been forged over the years which require to be applied to the facts of each case : (i) the expenditure incurred towards initial outlay of business would be in the nature of capital expenditure, however, if the expenditure is incurred while the business is on going, it would have to be ascertained if the expenditure is made for acquiring or bringing into existence an asset or an advantage of an enduring benefit for the business, if that be so, it will be in the nature of capital expenditure. If the expenditure, on the other hand, is for running the business or working it with a view to produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or, ―once for all", (e) whether on expiry of the licence the licensee is required to return back the plans and designs obtained under the licence to the licensor even though the licensee may continue to manufacture the product, in respect of which "access" to knowledge was obtained during the subsistence of the licence. (f) whether any secret or process of manufacture was sold by the licensor to the licensee. Expenditure on obtaining access to such secret process would ordinarily be construed as capital in nature ; (vi) the fact that the assessee could use the technical knowledge obtained during the tenure of the licence for the purposes of its business after the agreement has expired, and in that sense, resulting in an enduring advantage, has been categorically rejected by the courts. The courts have held that this by itself cannot be decisive because knowledge by itself may last for a long period even though due to rapid change of technology and huge strides made in the field of science, the knowledge may with passage of time become obsolete ; (vii) while determining the nature of expenditure, given the diversity of human affairs and complicated nature of business ; the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect. 17. The second test which can be applied was fixed and circulating capital test. Fixed capital being what the owner turns to profit by keeping it in his ossession; circulating capital is what the assessee makes profit by parting or letting the product/asset change masters/hands. This test could be applied when the acquisition of asset clearly falls within one of the two categories but the test would breakdown where the expenditure does not fall easily within the specified category. The demarcation line between assets out of which profits were earned and the profit made upon assets or with assets, was thin and difficult to draw in several cases. It was observed that purchase of loom hours was not like circulating capital (labour, raw material, power etc.), but "loom hours" were also not a part of fixed capital. Revenue"s contention that purchase of loom hours was for acquisition of source of profit or income and, therefore, capital expenditure, was rejected on the ground that source of profit or income was the profit making apparatus which had remained untouched. There was no enlargement of permanent structure or capital assets. Primarily and essentially the expenditure was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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