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TMI Blog2002 (5) TMI 203X X X X Extracts X X X X X X X X Extracts X X X X ..... section 154 on 30-3-1998 whereby the addition of Rs. 4,53,61,339 made by way of adjustment of part disallowance of the assessee's claim of Dry Dock expenses was deleted. On receipt of this order under section 154 the assessee withdrew the appeal which had been filed before the learned CIT(A) against the adjustments in the order of intimation dated 31-10-1997. Thereafter the Assessing Officer issued a notice under section 154 on 24-11-1998 stating that the intimation made under section 143(1)(a) on 31-10-1997 required rectification since "Loss on sale of investments Rs. 19,67,751 debited to P L A/c. is proposed to be adjusted under section 143(1)(a)/154(1)(b) as it is a capital loss". The assessee objected to this rectification and pointed out that as per Article 17 of Memorandum and Articles of Association of the company, to make investments in shares, securities, debentures, fixed deposits etc., was one of the business of the assessee-company. The assessee also argued that it had been taxed on dividend or interest income received on investments as business income as well as profit on sale of assets had been assessed as business income. Hence there was no logic in disallowing loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as originally made was deleted in an order under section 154 passed by the Assessing Officer, by order under section 154(1)(b) dated 30-3-1998. At that stage also, no such rectification to the intimation originally made was done. It was only during the course of assessment proceedings under section 143(3) that the Assessing Officer decided to treat it as capital loss and before completion of assessment under section 143(3) on 26-3-1999 the Assessing Officer made fresh order under section 154(1)(b) on 22-3-1999. Whether the loss arising to the assessee was a capital loss or revenue loss could not be determined without detailed consideration of the facts of the case and therefore it was not in the nature of prima facie adjustment. The learned counsel for the assessee referred to the judgment of Hon'ble Supreme Court reported in Investment Ltd. v. CIT [1970] 77 ITR 533 (SC) and argued that no firm conclusion in this respect could be drawn. Hence the adjustment was clearly outside the scope of section 143(1)(a) or for that matter section 154(1)(b). In support of this contention the learned counsel placed reliance on the judgment of Hon'ble Bombay High Court in the case of Khatau Junkar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount which was the normal practice in the shipping trade. However, for the purpose of computation of income for tax purposes the entire amount was allowable as deduction. During the course of assessment proceedings the Assessing Officer asked the assessee to show cause as to why the entire expenditure has been claimed as deduction. In reply, the assessee relied upon the judgment of Hon'ble Bombay High Court in the case of CIT v. Chowgule Co. (P.) Ltd. [1995] 214 ITR 523. The learned Assessing Officer found that the issue decided by the Hon'ble Bombay High Court was different from the issue under consideration. In the books of account the assessee had been regularly treating such expenditure as deferred revenue expenditure, as was found on reference to the returns of income for assessment years 1997-98 and 1998-99. The entire expenditure of Rs. 5,67,01,674 had not been incurred by the assessee for the year itself. The benefit and advantage of this expenditure was spread over number of years. There was no justification for the assessee not to follow its own accounts in the return of income. For this proposition, the Assessing Officer relied upon the judgments reported in Sardar C.S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argued that the expenditure was undoubtedly on repairs and therefore in the revenue field. The assessee had carried out extremely heavy repairs and for this reason, in the books of account the expenditure was spread over more than one accounting year. However, in the income-tax assessment proceedings the expenditure was allowable in toto because it was revenue expenditure. This fact had not been disputed by the Assessing Officer himself who allowed that part of the expenditure which had been debited to profit and loss account by the assessee. He lost sight of the fact that in the income-tax assessment there was no concept like deferred revenue expenditure. For this purpose the learned counsel for the assessee placed reliance on the judgments reported in Hindustan Commercial Bank Ltd. In re [1952] 21 ITR 353 (All.) and CIT v. Gujarat Mineral Development Corpn. [1981] 132 ITR 377 (Guj.). The learned counsel argued that the amount of expenditure incurred on repairs could not have entitled the Assessing officer to make only part allowance. For this purpose he placed reliance on the judgment of Hon'ble Bombay High Court in the case of Chowgule Co. (P.) Ltd. The learned counsel also ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oroughly gone into by the IAC before holding that it was not an expenditure of capital nature. The Tribunal further observed that the Commissioner had not given any reason as to why he considered the expenditure to be of capital nature except saying that the total expenditure on repairs together with the written down value of the ship had exceeded the original cost. The Tribunal therefore set aside the order of the CIT and restored the deduction as allowed by the Assessing Officer. At the instance of CIT the Tribunal referred the matter under section 256(1) to Hon'ble Bombay High Court for their esteemed opinion. Hon'ble High Court held that the approach of the Commissioner that the amount of expenditure on repairs together with the written down value of the ship exceeded the original cost was not correct. The original cost was not indicative of the value at the time when the repairs were undertaken. Hon'ble High Court further held that current repairs meant repairs undertaken in the normal course of user for the purpose of preservation, maintenance or for proper utilisation or for restoring it to original condition. Current repairs do not mean only petty repairs or repairs necessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r requires that the expenditure should not be of a capital nature. The question whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on, or conduct of the business, that it may be regarded as an integral part of the profit making process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure. Any liability incurred for the business of obtaining a loan would be revenue expenditure. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify an assessee who has incu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the businessman from that business, as aptly described in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 (SC) remains in the "womb of future". The measurement of periodic income is, to that extent, a matter of estimation and it is for the accuracy and reasonableness of such an estimation that principles of accounting inevitably come into picture. There would have perhaps been no difficulty if there was one and only one correct principle of method of accounting, or, in the alternative, if by force of law any single method of accounting had been prescribed for the purpose of computation of total income. However, for and upto assessment year 1996-97, provisions of section 145(1) have conferred a choice upon the taxpayers in the following words:-- "145. Method of accounting--(1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall be computed in accordance with the method of accounting regularly employed by the assessee: Provided that in any case where the accounts are correct and complete to the satisfaction of the Assessing Officer but the method employed is such that, in the opinion of the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Madras High Court in the case of Bangalore Woollen Silk Mills Co. Ltd. that an assessee cannot ask for different system of accounting for the purpose of his income-tax assessment. 13. In Keshav Mills Ltd. v. CIT [1953] 23 ITR 230 (SC), the Hon'ble Supreme Court held that the provisions of section 13 of 1922 Act (corresponding to section 145 of 1961 Act) was compulsory on the income-tax authorities and imposed upon them an obligation to accept the method of accounting regularly adopted by the assessee except in cases when the proviso to that section came into operation. The profits earned and credited in the books of account were to be taken as the basis for computation of income. In CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122 (SC), the Supreme Court reiterated that the Income-tax Officer is bound to compute the profits by appropriate adjustments from the accounts maintained by an assessee where a system of account is regularly employed: "The only departure made by section 13 of the Indian Income-tax Act from the legislation in England is that whereas under the English legislation, the Commissioner is not obliged to determine the profits of a business venture, accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method or system of accounting for writing his books of account and yet another method or system of accounting for the return of income filed by him. The provisions of section 13 of 1922 Act and section 145 of 1961 Act and various judgments of the Courts in India give clear legal recognition to the fact that unlike laws of Physics, there could be more than one correct answer in the fields of accounting. Even the accounting practices under the overall umbrella of the mercantile system do admit of considerable amount of diversity. In such a situation the question of choice arises and that choice is exercised by a assessee while writing his books of accountant. In other words, it is not the legal position that on identical facts, the same amount of income could be assessable in the cases of all the assessees. The provisions of section 145(1) and the choice conferred upon the assessee would make no sense at all otherwise. 16. As pointed our earlier, income-tax is an annual levy. For the purpose of income-tax, each year is a separate self-contained period of time. As early as in the case of CIT v. P.L.S.M. Concern Minhla [1934] 2 ITR 417, Hon'ble Rangoon High Court emphasised this fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be made in accordance with the method of accounting regularly employed by the assessee as long as the method of accounting is such as income may properly be deduced therefrom. In such a scenario we find it hard to accept the proposition that under the Income-tax Act there is watertight compartmentalisation of expenditure to be either allowed in one single year as revenue expenditure or to be disallowed altogether as capital expenditure. As a matter of fact, the complexities and variety of businesses that assessees do carry on would simply militate against such inflexible approach. There are hundreds of assessments being completed in the cases of builders and construction firms based on 'Project Completion Method'. Under this method, even revenue expenditure incurred by the assessee year after year is simply carried forward as "Work-in-progress" to be finally reckoned with in the year when the project is substantially completed or sales are substantially executed. These cases are standard examples of deferred revenue expenditure. There can be myriad similar situations. Having regard to this, Hon'ble Supreme Court have held in the case of Madras Industrial Investment Corpn. L ..... X X X X Extracts X X X X X X X X Extracts X X X X
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