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TMI Blog2006 (11) TMI 187X X X X Extracts X X X X X X X X Extracts X X X X ..... on the facts and circumstances of the case the hon'ble Income-tax Appellate Tribunal was justified in law in allowing the expenditure of Rs. 70,79,862 incurred by the assessee under the head 'building account', for the construction of drainage for disposal of effluents by treating the same, as revenue expenditure, by ignoring the facts that the assessee has acquired an asset of enduring benefit in nature and enjoys exclusive right for the usage of the same ? 2. Whether, on the facts and circumstances of the case, the hon'ble Income-tax Appellate Tribunal was justified in holding that the amount of TDS is a part of circulatory capital of the assessee and in allowing the amount of Rs. 2,04,259 being TDS certificates from banks as revenue expenditure without appreciating the fact that the amount in question was never employed in trading operation of the business ?" 2. The assessee was running a paper mill which generated effluents. It was under an obligation to arrange discharge of the said effluents. An agreement was reached with the Forest Department allowing the assessee to build a drain for discharge of effluents in Tallewal drain. The assessee built such a drain by spending Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roads between the various sugarcane producing centres and the sugar factories. The said roads did not belong to the said assessee making the payments. (ii) In the cases relied upon by the assessee, those assessees had made contributions to different agencies for carrying out certain works. L. H. Sugar Factory and Oil Mills P. Ltd. had made contributions to the U. P. State Govt., Panyam Cement and Mineral Industries Ltd. had made payment to the Railway authorities, Navsari Cotton and Silk Mills Ltd. had made payments to the Municipal authorities and Luxmijee Sugar Mills Co. Ltd. had made payment to the Cane Development Council. However, in the case of the present assessee, it has not made payment to any other agency rather it has incurred the expenses itself for the construction of the drainage pipeline to discharge its effluents. The drainage pipeline constructed by the assessee-company is not a public property, but an exclusive property/asset of the assessee for discharging the effluents from its factory. 4.2 Keeping those facts in view, the judgments relied upon by the assessee are not applicable and relevant in the case of this assessee. Moreover, the assessee has itself debit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tribunal was erroneous as the assessee had the benefit of enduring nature by the expenditure in question and had acquired a right to discharge its effluents, which is right of enduring nature. 6. Learned counsel for the assessee supported the findings of the Tribunal and submitted that "enduring benefit" test is not conclusive and if the advantage merely facilitated business operation, expenditure would be revenue expenditure and "long period" test is also not conclusive. He relied upon judgments cited in the order of the Tribunal and also gave a list of the following judgments in support of his submissions : (1) Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC). (2) Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC). (3) L. H. Sugar Factory and Oil Mills P. Ltd. v. CIT [1980] 125 ITR 293 (SC). (4) CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257 (SC). (5) Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 (SC). (6) Bikaner Gypsums Ltd. v. CIT [1991] 187 ITR 39 (SC). (7) CIT v. Bombay Dyeing and Manufacturing Co. Ltd. [1996] 219 ITR 521 (SC). (8) CIT v. Kirkend Coal Co. [1966] 60 ITR 537 (Patna). (9) CIT v. Belgachi Tea Co. Ltd. [1975] 99 ITR 99 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence." 9. In Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC), several tests for determining the nature of expenditure were discussed and the following passage from the judgment of the Full Bench of the Lahore High Court in Benarsidas Jagannath, In re [1947] 15 ITR 185 (Lahore) was approved (page 198) : "It is not easy to define the term 'capital expenditure' in the abstract or to lay down any general and satisfactory test to discriminate between a capital and a revenue expenditure. Nor is it easy to reconcile all the decisions that were cited before us for each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l is capital which is turned over and in the process of being turned over yields profit or loss. Fixed capital, on the other hand, is not involved directly in that process and remains unaffected by it." 10. The above passage shows that broadly, the tests for determining expenditure to be capital or revenue are : (i) Acquisition of business as against acquisition of rights to carry on business. (ii) Spending once and for all enduring benefit test. (iii) Object test. 11. In spite of the above tests having been laid down as far back as in the year 1942, the difficulty continues to arise in application of the tests and it has been often held that the tests cannot be accepted as universal and peculiar features of each case have to be kept in mind. 12. In K. T. M. T. M. Abdul Kayoom v. CIT [1962] 44 ITR 689 (SC). It was observed (page 703) : ". . . none of the tests is either exhaustive or universal. Each case depends on its own facts, and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation to decide cases (as said by Cordozo) by matching the col ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture. 15. In R. B. Seth Moolchand Suganchand v. CIT [1972] 86 ITR 647 (SC), the payment of licence fee and tender money for mica-mining right for a period of 20 years for extraction of mica was held to be in the nature of capital expenditure, as this amount was paid for acquiring a right of enduring nature to extract and remove the mica. 16. In CIT v. Ashok Leyland Ltd. [1972] 86 ITR 549 (SC), it was held that the line that divides revenue expenditure from capital expenditure is often times very thin. It will not be correct to say that by avoiding certain business expenditure, the company can be said to have acquired enduring benefits or acquired any income yielding asset. The payment to remove the possibility of a recurring disadvantage was held to be revenue in nature. 17. In Mewar Sugar Mills Ltd. v. CIT [1973] 87 ITR 400 (SC), while dealing with the proposition to consider as to whether the expenditure in question was revenue or capital, in the facts of the case, payment of royalty at the rate of 2 per cent. on the price of sugarcane manufactured was held to be revenue in nature. As the same was directly related to the sugar manufactured, the royalty in question was not paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ships." (emphasis1 supplied) 19. Travancore-Cochin Chemicals Ltd. v. CIT [1977] 106 ITR 900 (SC), the expenditure made for construction of a new road in the area, where factory was located, to improve transport facility was held to be capital in nature. 20. In Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC), the assessee as a member of an association was bound to operate its loom for particular hours per week but it purchased time allotted to other mills. It was held that even where expenditure is incurred for "enduring benefit", the expenditure may be revenue expenditure unless the advantage is in the "capital field". If advantage was merely facilitating assessee's trading operation or enabling it to efficiently or more profitably run its business, leaving the fixed capital untouched, the expenditure will be revenue expenditure. It was observed that there was no addition to the profit-making apparatus of the assessee. 21. In L. H. Sugar Factory and Oil Mills P. Ltd. v. CIT [1980] 125 ITR 293 (SC), it was held as under : "The test for determining whether the expenditure in question is of capital or revenue nature is : When an expenditure is made, not only once and for all, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cipal rates or taxes for 15 years. 24. In Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 (SC), the assessee acquired technical know-how and made lump sum payment which was held to be revenue expenditure. It was observed that even after the agreement, the product continued to be the same and mere improvement in or updating fermentation process was not inconsistent with utility of existing infrastructure of the assessee. It was further observed that there was no single definite criteria to determine whether expenditure was capital or revenue. "Once for all" payment test was inconclusive. 25. In Bikaner Gypsums Ltd. v. CIT [1991] 187 ITR 39 (SC), expenditure involved was for removing of a restriction which obstructed the business of mining. The same was held to be expenditure in the course of business and was revenue expenditure since no capital asset was acquired. 26. In CIT v. Sarabhai Management Corporation Ltd. [1991] 192 ITR 151, the hon'ble Supreme Court held that the expenditure made by an assessee on renovation of the property owned by him to confirm the requirement of a prospective tenant was held to be revenue in nature. 27. In CIT v. Indian Oxygen Ltd. [1996] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure are as follows : (1) Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment ; (2) Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether ; (3) Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital." 34. In CIT v. I. A. E. C. (Pumps) Ltd. [1998] 232 ITR 316 (SC), while reiterating the principles for determination of the nature of expenditure, the hon'ble Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We are of the view that the enduring benefit test will be fully applicable to the facts of the present case. The judgments of the hon'ble Supreme Court relied upon learned counsel for the assessee are distinguishable. Setting up of a system/plant and creation of other infrastructure in an industrial unit is always a capital expenditure and the right acquired by the assessee in the present case for creation of channel to discharge effluents is nothing else but capital in nature. The right acquired by the assessee to discharge effluents was not merely a facility for carrying on the business but such facility became available to the assessee with right and advantage of enduring nature. The expenditure in question enabled the assessee to use the drain for all times to come and even to transfer such a right. Distinguishing features noticed by the hon'ble Supreme Court in the above judgments to exclude the enduring benefit test do not exist in the present case. The assessee having incurred expenditure for acquiring a permanent right, the said expenditure could not be treated as revenue expenditure. Object test is also, thus, satisfied. 41. It is further relevant that for use of the righ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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