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TMI Blog1987 (3) TMI 132X X X X Extracts X X X X X X X X Extracts X X X X ..... . Shri A.K. Dasgupta, Works Manager of the company. 36,014 5. Shri C.K. Mehta, Mg. Director 37,549 ------------------------ 1,25,625 ------------------------ He has held that these persons had visited foreign countries (Australia U.S.A.) for ascertaining the suitability of the plant to manufacture ammonia/methanol. As the expenses were incurred for the purpose of a new product and for installation of a new plant, the ITO held it to be capital expenditure and accordingly disallowed the same. He has also held that no depreciation is allowable on this as no tangible asset has come into existence. The assessee's representative has argued that the expenditure was incurred for assessing the suitability of the existing plant over there in Australia to be purchased by the assessee for the manufacture of Ammonia/Methanol which is their important feed material for manufacturing sodium nitrite and sodium nitrate. According to him, the expenditure was for preserving the business, especially when the assessee-company's agreement with M/s. G.S.F.C. Ltd. for the supply of this material is to come to an end in the near future and the effort in establishing the plant to manufactur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the assets of the company and were existing on the first day of the accounting year and, therefore, these items should be included in the capital employed. Rule 19A(2) provides that the value of the assets on the first day of the computation period shall be their written down value. The term " written down value " is defined in sec. 43(6) which is (i) in the case of the assets acquired in the previous year, the actual cost to the assessee, and (ii) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him. " Actual cost " is also defined in sec. 43(1) which provides that the actual cost to the assessee shall be the actual cost as reduced by the amount of any deduction allowed under clause (iv) of sub-section (1) of section 35. Since 100% cost has been allowed to the assessee u/s. 35(1)(iv), the actual cost to the assessee in this case would be nil. The ITO is, therefore, justified in taking the value of these assets at nil for the purpose of relief u/s. 80J." 3. On appeal, the Commissioner (Appeals) concerning the first ground passed the following order in para 3 extracted below : " Next ground of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reliance was placed on CIT v. S.L.M. Maneklal Industries Ltd. [1977] 107 ITR 133 (Guj.), Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC) and in the case of Fancy Corpn. Ltd. v. CIT [1986] 50 CTR (Bom.) 140. Even if the purpose was permanent supply of ammonia the same was to be taken as enduring benefit. 4.1 In respect of the second ground it was submitted that the manner in which the assets were shown in the balance sheet for the purpose of accounts was not at all relevant for the issue under consideration. It was the cardinal principle of interpretation that statute as a whole was required to be considered and consistent approach has to be obtained. The language of sec. 80J amended retrospectively was very much clear on the aspect of computation of capital according to which only the amounts of written down value were required to be considered. Besides, sec. 43(1) of the Act specifically referred to the manner in which the actual cost was required to be taken and in this case 100% having been allowed only the nil value is required to be considered for the purpose of assets comprised in R D Department. Reliance was placed on CIT v. Sundaram Fastners Ltd. [1984] 40 CTR (Mad.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r scientific research. In the case under consideration the assets continued to be used for scientific research. Even otherwise since the assets are not entitled to depreciation the actual cost is required to be adopted for the purpose of capital base. 6. We have gone through the entire material to which our attention was drawn. We have also considered the various judicial pronouncements to which our attention was drawn together with the settled law on the subject. In our opinion, both the grounds are required to be decided in favour of the assessee. The reasons are as follows : 6.1. In respect of ground No. 1 one thing is quite clear looking to the entire material and the submissions made at the Bar that whole strategy of attempts over a long period involving expenditure emanated from acute need felt by the assessee to find an alternative source of supply of liquid ammonia, the basic raw material for running of the assessee's business. It is also an uncontroverted fact that the assessee had strained relations with the only supplier viz. Gujarat State Fertilizer Co. Ltd., Baroda mainly because of the higher demands in respect of the price, etc. and matters ultimately carried t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, therefore, the expenditure had direct connection with the sale and purchase of the capital asset. Trip was only to find out viability and suitability of plant and that too as desired by Government to enable it to take proper decision on approval. This being the position it cannot be said that the expenditure had direct connection with the purchase of the capital asset so as to form part of actual cost of capital asset according to the principles laid down in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC). The subsequent events that the project in mind was abandoned further supports the finding that the expenditure cannot directly be related to bringing into existence the capital asset. As long as this position remains the nexus of the expenditure remains with the main objective of ensuring the adequate supply of raw material and the nexus is not broken so as to take it out of revenue field. Such nexus with the object is broken only when the expenditure can directly and appropriately be classified as related to acquisition of capital asset so as to form part of cost. An assessee may undertake such trips any number of times over number of years and every time the expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated that each case must necessarily turn on its own facts and no infallible test can be laid down since the tests are useful as illustrations of some general principles. It further stated that the principle was equally recognised that the test whether expenditure is incurred with a view to obtain an advantage of enduring benefit may break down in certain circumstances. Every advantage of enduring nature acquired by the assessee would not rule out the expenses incurred for claiming this advantage from the category of revenue expenses. What is material to consider is the nature of advantage in commercial sense and whether the advantage is in the capital field. The decision further states that if the advantage consists merely in facilitating the assessee's trading operations or enable the assessee to carry on the business efficiently or profitably the expenditure would be on revenue account. Other useful ratios of the judicial decisions considered in Indian Oxygen Ltd.'s case would also be worth-noting and they are stated hereunder :--- " Bombay Steam Navigation Co. (1953) Pvt. Ltd. v. CIT [1965] 56 ITR 62 (SC) : This decision was cited for the proposition laid down by the Suprem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n period of the undertaking or of the business of the hotel to which this section applies shall first be ascertained in the following manner :--- (i) in the case of assets entitled to depreciation, their written down value ; (ii) in the case of assets acquired by purchase and not entitled to depreciation, their actual cost to the assessee ; (iii) ........ (iv) ........ (v) ........ Explanation 1 : In this clause, " actual cost " has the same meaning as in clause (1) of section 43. Explanation 2 ........ Explanation 3 : In this clause and in clause (V), " written down value " has the same meaning as in clause (6) of section 43." Reading the language of the section it permits aggregate of the values of the assets in the manner laid down as per various sub-clauses. Sub-clause (i) extracted above refers to assets entitled to depreciation. In the case under consideration it is an admitted position that the assets are not entitled to depreciation. Therefore, the same is not applicable. Clause (ii) refers to assets not entitled to depreciation for which actual cost to the assessee is required to be included. The actual cost is referred to in clause (1) of Sec. 43. The c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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