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TMI Blog1993 (10) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... d 106 of 1989. We do so, since these income-tax references arise from the assessment years 1973-74 and 1974-75 and the common question has been decided by the Tribunal in other income-tax references, following the decision by the Tribunal for the assessment years 1973-74 and 1974-75. Income-tax References Nos. 105 and 106 of 1989 : These two references are at the instance of the Revenue. They relate to the assessment years 1973-74 and 1974-75. The references are under section 256(2) of the Income-tax Act. The questions referred for the opinion of this court are these : 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that an amount of ₹ 95,911 was an allowable item of expenditure for the assessment year 1973-74? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that an amount of ₹ 3,18,903 was an allowable item of expenditure for the assessment year 1974-75? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the various machines installed during the releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1110 Pullies used in spiding machines 13,215 Simplex machine conversion materials 66,690 Total 4,38,191 The expenses incurred for the years 1973-74 and 1974-75 were discussed by the Tribunal item by item. In regard to the first item of expenditure for the year 1973-74, the Tribunal found that wax assembly is to give a thin layer of wax coating to the outer surface of yarn. Although this represents an additional part fitted to the cone winder, no additional capacity is created. As regards the second item, viz., the second hand drafting system, the Tribunal found that this also does not bring in any new asset. It is found that the assessee had a similar drafting system. This system was found to be unserviceable. So replacement was necessary. This is only a part of the machinery and in the circumstances no new asset had been brought into existence. The clear finding of the Tribunal is that what has been done is a repair on account of unserviceability. In regard to item No. 3, metallic card clothing, the Tribunal found that the whole system had not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erved that the Supreme Court has held that it is revenue expenditure, and so, the Tribunal cannot come to a different conclusion on identical facts. In regard to the expenditure of ₹ 55,475 on life spindles, the Tribunal found that it is similar to the expenditure already considered for the assessment year 1973-74 and for reasons given therein, this expenditure also has to be considered as revenue expenditure. In regard to the expenditure amounting to ₹ 56,977 for introducing plug typed spindles and plastic bobbins, the Tribunal found that it had been incurred in changing the blade type spindles to the plug type. The number of spindles has not been increased and that this was required in the process of modernisation as the plug type spindles were able to run at high speed and it required less energy. The use of plastic bobbins had reduced the accidents caused by wooden bobbins. The introduction of the simplex machine was found to be consequent to the other changes brought about in the spindles and consequent to modernisation of the machinery. Further, the Tribunal found that by the introduction of the simplex machine, no new asset had been brought into existence. Finall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing jockey-pulleys for converting the original band-drivers to tape drivers and other additions and alterations in the drafting mechanism. The assessee claimed in the alternative that the amount laid out was in any event expenditure for current repairs allowable under section 10(2)(v) of the Indian Income-tax Act, 1922. The court observed that the Tribunal had evidence before it from which it could be concluded that by introducing the Casablanca conversion system, the assessee made current repairs to the machinery and plant and the sum of ₹ 93,215 was allowable as an expenditure incurred for current repairs under section 10(2)(v) of the Act. It is pertinent to note the following observations : The High Court observed that certain moving parts of the machinery had because of 'wear and tear' to be periodically replaced, and when it was found that the old type of replacement parts were not available in the market, the assessee introduced the Casablanca conversion system, but thereby there was merely replacement of certain parts which were a modified version of the older parts. Counsel for the Commissioner has not challenged these findings and the answer to the secon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he largeness of the sum that is important but the nature of the expenditure. In M. K. Brothers P. Ltd. v. CIT [1972] 86 ITR 38, the Supreme Court has considered this aspect of the matter and said that the answer to the question as to whether the money paid is a revenue expenditure or capital expenditure depends not so much upon the fact as to whether the amount paid is large or small or whether it has been paid in lump sum or by instalments, as it does upon the purpose for which the payment has been made and expenditure incurred. It is the real nature and quality of the payment and not the quantum or the manner of the payment which would prove decisive. (emphasis added). If the object of making the payment is to acquire a capital asset, the payment would partake of the character of a capital payment even though it is made not in a lump sum but by instalments over a period of time. On the contrary, payment made in the course of and for the purpose of carrying on business or trading activity would be revenue expenditure even though the payment is of a large amount and has not to be made periodically. In the Madras case, CIT v. Kasturi Mills Ltd. [1981] 129 ITR 12, the Madras Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is capital and if it is going to recur every year it is revenue. Finally, in 1926, Viscount Cave L. C. made a modified formulation of the theory of enduring benefit of a trade in the oftquoted decision in British Insulated and Helsby Cables Ltd. v. Atherton [1926] AC 205. We are dealing with this case a little elaborately. If we scan through the decided cases, it can be seen that from time to time courts evolved various tests for distinguishing between capital and revenue expenditure but no one test is paramount or conclusive. It is difficult to have an all embracing formula which can provide a ready solution to the problem. There is no litmus test to say that a particular expenditure is revenue expenditure or capital expenditure. Every case has to be decided on its own facts, keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. We think that we should also outline a few tests formulated by courts since we feel that it might help us to arrive at a correct decision of the controversy now raised in these cases between the assessee and the Revenue. Lord Cave L. C. in Atherton v. British Insulated and Helsby Cables Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xed capital and circulating capital, the words which have almost acquired the status of a definition. His Lordship said : ...fixed capital is what the owner turns to profit by keeping it in his own possession, circulating capital is what he makes profit of by parting with it and letting it change masters. Again in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC), Bhagwati J. examined the test given by Lord Haldane and said : But this test also sometimes breaks down because there are many forms of expenditure which do not fall easily within these two categories and not infrequently, as pointed out by Lord Radcliffe in Commr. of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC), the line of demarcation is difficult to draw and leads to subtle distinctions between profit that is made out of assets and profit that is made upon assets or with assets. It is significant to note that Bhagwati J. made it plain and clear in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC) that there may be cases where expenditure, though referable to or in connection with fixed capital, is nevertheless allowable as revenue expenditure. His Lordship has given an illustr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he advantage of not being liable to pay municipal rates, taxes, etc., which the assessee-company secured by reason of making the expenditure in question was for a period of fifteen years and hence it could be said to be an advantage of an enduring nature, so that the expenditure incurred in acquiring the same would be regarded as capital expenditure. The second point is relevant for the case at hand. The Supreme Court observed that it is difficult to accept such a case. Referring to Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1, 10 (SC), the Supreme Court observed that there may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test . Counsel for the assessee submitted that the expenditure incurred brought ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of setting up a new plant and a new process ; and (iii) that the outlay was incurred for a complete replacement of the equipment of the business inasmuch as a new process with a new type of plant was to be put up in place of the old process and old plant. On a reference, the High Court held that the sum of ₹ 2,39,625 was not a revenue expenditure, but the Supreme Court disagreed with the decision of the High Court and reversed the same. It is significant to note that in considering the case, the Supreme Court has observed that it would be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in this fast-changing area of medical science.... The rapid strides in science and technology in the field should make us a little slow and circumspect in too rapidly pigeon-holding an outlay such as this as capital . (emphasis added). The Supreme Court further observed that in the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue expenditure arises, it is well nigh impossible to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee. It was emphasised that the production of penicillin which was the established line of business of the assessee, was sought to be improved upon with the use of an improved process of fermentation with new penicillin producing strains isolated and developed by Meiji so as to increase the unit yield of penicillin per millilitre of the culture medium. So, the process of a plant and the expenditure incurred for increasing the yield of the production of penicillin per millilitre was held to be a revenue expenditure. Of course, counsel for the Department submitted that a distinction has to be drawn with the cases we are now considering and Alembic Chemical Works' case [1989] 177 ITR 377 (SC) in so far as in Alembic Chemical Works' case, the expenditure incurred pertained to the area of the profit-earning process while the expenditure incurred in the cases we are considering is on profit-earning machinery or apparatus. It is not very correct to make such a distinction in these cases. In these cases also, the process adopted as found by the Tribunal is not a new venture but only an improvement of the existing facilities by replacing worn out and unserviceable parts of the uni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplication of any single legal principle. For this proposition, his Lordship referred to the decision in Strick v. Regent Oil Co. Ltd. [1965] 43 TC 1 ; [1966] AC 295 (HL). We may quote a passage of Lord Reid from the same case : The main argument for the Crown was that by obtaining the new charter the company obtained an enduring advantage in the shape of a better administrative structure. Of course they obtained an advantage : companies do not spend money either on capital or income account unless they expect to obtain an advantage. And money spent on income account, for example, on durable repairs, may often yield an enduring advantage. In a case of this kind what matters is the nature of the advantage for which the money was spent. This money was spent to remove antiquated restrictions which were preventing profits from being earned. It created no new asset. In the same decision, Lord President (Clyde) further observed : The benefit was essentially of a revenue character because the company became able more easily to finance its day-to-day transactions, and more efficiently to carry on its day-to-day manufacture . We may now refer to what Dixon J. said in Hallstorm's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sult is that we come to the opinion that the answer to the questions referred should be on the basis that the expenditure in question incurred by the assessee was for the better conduct and improvement of the existing business on a scheme of modernisation and not for a fresh and new venture and the object of modernisation was for facilitating the assessee's trading operations and for the conduct of the assessee's business to be carried on more efficiently and to update the facilities on the lines of the modern trends in the business and should therefore be held to be revenue expenditure. Accordingly, we answer questions Nos. 1 and 2 in the affirmative and in favour of the assessee. The other questions Nos. 3 to 6 are also answered in favour of the assessee and against the Revenue. Now, we shall consider separately the other connected cases. Income-tax Reference No. 426 of 1985: The reference is at the instance of the Revenue, under section 256(2) of the Income-tax Act, 1961. This is in respect of the assessment year 1975-76 of the same assessee in Income-tax References Nos. 105 and 106 of 1989. The questions referred are these: 1. Whether, on the facts and in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilar for the year in question, the Tribunal did not see any ground for holding a different view. In the result, the Tribunal held that the expenditure of ₹ 7,56,802 is a revenue expenditure. We have considered at length the question whether the expenditure incurred for similar items for modernisation by repair and renovation is revenue expenditure or capital expenditure in Income-tax References Nos. 105 and 106 of 1989. We have held that it is revenue expenditure. In this view, we have to answer question No. 3 in the affirmative, in favour of the assessee and hold that the Tribunal was right in law in coming to the conclusion that an amount of ₹ 7,56,802 was an allowable item of expenditure for the assessment year 1975-76. Questions Nos. 1 and 2 relate to computation of incremental liability for gratuity and as to whether the Tribunal was right in law in allowing the claim of ₹ 34,152 representing incremental liability for gratuity. The question whether incremental liability is a concept germane to section 40A(7)(b)(ii) of the Income-tax Act was considered by this court in the decision in CIT v. Chembra Peak Estates Ltd. [1990] 185 ITR 556. This court hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, the assessee's production was adversely affected and on representations made to the Kerala State Electricity Board the assessee was directed to construct an independent 11 KV feeder at their own cost as per the letter of the Chief Engineer dated April 17, 1974. The assessee remitted a sum of ₹ 50,000 towards the estimated cost of constructing an independent 11 KV feeder from Viyyur sub-station to their factory premises. It is contended that the expenditure was in respect of laying of H. T. overhead power line through public road for a total length of 6 miles. The line thus drawn does not belong to the assessee and it was contended that it is not a depreciable asset of the company and so it has to be allowed as a revenue expenditure. The Revenue contended that the expenditure had been incurred by the assessee for acquiring an enduring benefit by the construction of an independent 11 KV feeder and so it is an expenditure of capital nature and it is not allowable. The case of the Revenue before us also is that the expenditure incurred is of a benefit of enduring nature. Counsel for the assessee submitted that the expenditure incurred for drawing a new electricity line ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Reference No. 383 of 1985 : This reference is at the instance of the Revenue. The question referred in this case is : Whether, on the facts and in the circumstances of the case, the expenditure incurred under the head 'Power house cable replacement' of ₹ 4,02,552 was not of a capital nature, resulting in a durable benefit to the assessee ? The case of the assessee is that the electrical inspector after inspection of the wiring installations in the factory, had intimated on July 6, 1972, various defects in the electrical installations and that the assessee was forced to carry out the suggestions mentioned in the inspection report. This involved the replacement of certain switch boards and electrical cables even though the same had not become that much old to be replaced. The assessee's claim is that the expenditure constituted current repairs and an allowable deduction under the Act. The Tribunal held that the substitution in a machine of new parts for old and worn out parts was in the nature of current repairs on revenue account, that the replacement of defective parts was carried out as required by the electrical authorities and that it was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Conversion materials - Assessment year 1977-78: Rs. Doubling machine conversion wooden holders. 1,820.00 Reeling 21/2 dia. pipe tin roll complete set 2,820.00 Simplex Machine Creel conversion for 3 machines 7,749.00 Doubling machine conversion for 2 machines 1,305.71 Doubling machine conversion for 2 machines 13,497.00 Double machine conversion for 2 machines 1,600.00 Head stock fibre wheel conversion for machines 14,375.00 Simplex machine UTM 620 conversion materials for 2 machines 1,16,063.76 Toyod Spinning Machine SKF drafting PK 225 conversion materials 3,84,632.00 Cable terminals, switch board, T.P.N. switch with cable and box fuse, etc. replacements 2,17,223.50 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances are similar for these two assessment years under appeal also, we do not see any reason to interfere with the orders of the Commissioner of Income-tax (Appeals) . We have already considered the question referred for the assessment years 1973-74 and 1974-75 and held that the question has to be answered in favour of the assessee. Whether the items considered in the previous years are similar to the items considered in the relevant year is a question of fact. In this view, we have to answer the question referred in these two tax references in the affirmative and in favour of the assessee. Income-tax Reference No. 379 of 1985 : This reference is also of the same assessee for the assessment year 1974-75. The reference is at the instance of the Revenue. The questions referred are: 1. Whether, on the facts and in the circumstances of the case, the manner and method of computation of incremental liability for gratuity by the Tribunal are right in law ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in allowing the claim of ₹ 84,142 representing incremental liability for gratuity ? In Income-tax Reference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction. In this view, we have to answer the first question in the affirmative in favour of the assessee and against the Revenue. Question No. 2 relates to bonus paid in excess of the statutory bonus to the employees. The Commissioner of Income-tax (Appeals) deleted the disallowance made by the Income-tax Officer of ₹ 1,52,073 being excess claim under the item, bonus, under which the assessee was bound to pay bonus at the rate of 15 per cent. of the salary. The Income-tax Officer held that the maximum bonus that can be allowed under the first proviso to section 36(1)(ii) of the Income-tax Act was only 8.33 per cent. Holding so, he disallowed the excess payment of ₹ 1,52,073. The Commissioner of Income-tax (Appeals) accepted the contention of the assessee that the payment of bonus was contractual and customary and that it was not therefore hit by the first proviso to section 36(1)(ii) of the Income-tax Act. The Tribunal held that the first proviso to section 36(1)(ii) of the Income-tax Act will not attract the payment of contractual bonus and held that what has been done by the Commissioner of Income-tax (Appeals) is correct. In CIT v. Kerala Agra Industries Corp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,87,681 disallowed by the Income-tax Officer and allowed by the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) in allowing the assessee's claim relied on the order of the Tribunal dated August 29, 1982, in Income-tax Appeal No. 328/(Coch) of 1980 for the assessment year 1976-77. As his decision is in accordance with the order of the Tribunal in the assessee's own case for an earlier year we find no reason to interfere with the action of the Commissioner of Income-tax (Appeals) . The Commissioner of Income-tax (Appeals) in his order has stated that the assessee had four Toyoda simplex machines which were used for converting draw frame silver to roves. They were 1949 models. On account of the wear and tear and the sheet age of the machines many parts had become unserviceable. Hence, extensive repairs were carried out for the machinery at a total cost of ₹ 8,77,572. It is understood that a new machine would cost not less than ₹ 5 lakhs and the extent of repairs carried out constituted 50 per cent. of the total machinery in terms of volume and 30 per cent. in terms of weight. These were all imported machines and they had been repaired ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hew Industries [1987] 166 ITR 611 (Ker) and Income-tax Reference No. 185 of 1985 (CIT v. P. Balakrishna Pillai, International Cashew Traders [1990] 182 ITR 449 (Ker)) and Income-tax Reference No. 399 of 1985 (CIT v. Kumar Industries [1990] 183 ITR 156 (Ker)). Income-tax Reference No. 52 of 1986: This is a reference at the instance of the same assessee for the assessment year 1979-80. The question referred is Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the surcharge of ₹ 2,97,034 payable under the Kerala State Electricity Supply (Kerala State Electricity Board-Licensee's Areas) Surcharge Order, 1968, cannot be deducted as an expenditure while computing the taxable income for the assessment year 1979-80, on the ground that the liability to pay the surcharge did not arise during the accounting year 1978 relevant to the assessment year 1979-80 ? The assessee is following the mercantile system of accounting. The liability to pay surcharge arose on the issue of the Surcharge Order in 1968. The assessee did not even contest the claim initially and was satisfied with watching the outcome of writ petitions filed by other cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 1 and 2 are answered in the negative, against the assessee and in favour of the Revenue. Question No. 3 is answered in the affirmative and in favour of the assessee. Income-tax Reference No. 60 of 1983 : Question referred is answered in the negative and in favour of the assessee. Income-tax Reference No. 383 of 1985 : Question referred is answered in the affirmative in favour of the assessee and against the Revenue. Income-tax Reference No. 384 of 1985: Question referred is answered in the affirmative and in favour of the assessee. Income-tax References Nos. 66 and 67 of 1986: We answer the common question in the affirmative and in favour of the assessee. Income-tax Reference No. 379 of 1985: Question referred is answered in the negative, in favour of the Revenue and against the assessee. Income-tax Reference No. 87 of 1986: Question No. 1 is answered in the affirmative, in favour of the assessee and against the Revenue. We have declined to answer question No. 2. Income-tax Reference No. 84 of 1986: Question No. 1 is answered in the affirmative, in favour of the assessee and against the Revenue. We have declin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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