COMMISSIONER OF INCOME-TAX VS VENKATESWARA HATCHERY (PVT.) LTD.
1999 P T D 2183
[227 I T R 116]
[Andhra Pradesh High Court (India)]
Before P. Venkata Rama Reddi and P. Ramakrishnam Raju, JJ
COMMISSIONER OF INCOME-TAX
Versus
VENKATESWARA HATCHERY (PVT.) LTD.
Case Referred No. 125 of 1987, decided on 03/11/1995.
(a) Income-tax---
----Capital or revenue expenditure---General principles---Expenditure on improving roads within factory premises---Revenue expenditure---Indian income Tax Act, 1961, S.37. ----Capital or revenue expenditure---Know-how---Collaboration agreement-- Expenditure in acquiring process know-how---Revenue expenditure---Indian Income Tax Act, 1961, S.37 . ----Investment allowance---Condition precedent---Production of articles or things---Rearing chicks by artificial process amounts to production of things--Rearing entitled to investment allowance---Indian Income Tax Act, 1961,S.32-A. ----Industrial company ---Concessional rate of tax---Company engaged in rearing 'chicks by artificial processes is an industrial company---Indian Finance Act, 1977, S.2(7)(c)---Indian Finance Act, 1979, S.2(7)(c).
There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, 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 ii is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be, on revenue account, even though the advantage may endure for an indefinite future.
In order to claim investment allowance the assessee must produce an article or thing. Sub-clause (iii) of subsection (2)(b) of section 32-A of the Income Tax Act, 1961, referring to manufacture or production of an article or a thing has to be understood in a normal sense and in the manner in which it is generally understood in commercial circles. There is no incongruity in treating the chicks produced by artificial process with the aid of plant and machinery as articles or things within the meaning of section 32-A of the Act.
Once an assessee is considered as an industrial undertaking engaged in the production of articles, it has to be regarded as an industrial company within the meaning of the Finance Acts, 1977 and 1979.
The assessee ran the business of hatchery and manufacture of poultry related commodities including vaccine. It claimed deduction of the expenditure incurred by it in asphalting roads within its premises. It had started a bio vaccine unit and in connection with that, it had entered into a collaboration agreement with a foreign company. According to this agreement, the assessee had to pay $ 50,000 to the foreign company. Out of that, $ 30,000 represented the remuneration paid for know-how. Out . of $ 30,000, $ 16,500 was for trainees and business, which was treated by the assessee itself as capital expenditure. The balance $ 13,500 related to services for running the plant at its maximum productivity and this was claimed as business expenditure. It also claimed investment allowance on plant and machinery installed in its hatchery division and concessional rate of tax as an industrial company. The claims were allowed by the Tribunal. On a reference:
Held, (i) that the expenditure incurred in asphalting of the roads within its premises constituted revenue expenditure. The crucial fact to be noted was that the expenditure was incurred not for laying new roads, but for improving the existing ones.
Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1 (SC) applied.
(ii) that the payment of $ 13,500 for process know-how was deductible as revenue expenditure.
Praga Tools Ltd. v. CIT (1980) 123 ITR 773 (AP) applied.
(iii) that the assessee was entitled to investment allowance on the plant and machinery installed in the hatchery division.
CIT V. Sri Venkateswara Hatcheries (P.) Ltd. (1988) 174 ITR 231 (AP) fol.
(iv) that the assessee was an industrial company within the meaning of the Finance Acts of 1977 and 1979.
CIT v. Sri Venkateswara Hatcheries (P.) Ltd. (1988) 174 ITR .231 (AP) and CIT v. Snit. Sudesh Kumari Soni (1997) 227 ITR 113 (AP) fol.
CIT v. N.C. Budharaja & Co. (1993) 204 ITR 412 (SC); CIT v.
Universal Borewell Agencies (1993) 204 ITR 412 (SC); Deputy Commissioner of Agricultural 1. T. and S. T. v. Palampadam Plantations Ltd. (1969) 24 STC 231 (SC); Longhurst v. Guildford Godalming and District Water Board (1961) 3 All ER 545 (HL); Srinivasulu (K.) v. Deputy Commercial Tax Officer (1975) 35 STC 262 (AP); Venkataramana Hatcheries (P.)' Ltd. v. CTO (1987) 66 STC 154 (AP) and (1987) 4 APSTJ 126 ref.
S. R. Ashok for the Commissioner.
M. J. Swamy and Y. Ratnakar for the Assessee.
JUDGMENT
P. VENKATA RAMA REDDI, J.---On a reference application made under section 256(1) of the Income-tax Act by the Commissioner of Income-tax, Karnataka (Central), Bangalore, the Income-tax Appellate Tribunal referred to following four questions of law arising out of the order of the Tribunal, dated January 10, 1986, in I.T.A. No.372/Hyd. of 1984 for the opinion of this Court:
"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in upholding the order of the Commissioner of Income-tax (Appeals) who held that the expenditure incurred on asphalting of roads constitutes revenue expenditure?
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the payment of $ 13,500 regarding process know-how as revenue expenditure?
(3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in upholding the order of the Commissioner of Income-tax (Appeals) who allowed the investment allowance on the plant and machinery installed in the hatchery division of the assessee company? and
(4) Whether, on the facts and in the circumstances of the case, Appellate Tribunal is right in law in holding that the assessee is an industrial company even though the activities of the company do not amount to manufacture?"
The respondent-assessee runs the business of hatchery and manufacture of poultry-related commodities including vaccine. It has a hatchery at Saroornagar at Hyderabad and another hatchery at Pune. Inter alia, it imports one day old chicks from foreign countries and rears them up in its hatcheries treating them as grand-parent birds. Eggs of such grand parent birds are also reared in hatcheries as parent birds and those parent birds are reared to produce commercial chicks. These facts, we get from the assessment order. The dispute in the present case relates to the assessment year 1980-81.
The first question relates to the admissibility of deduction of Rs.3,31,043 incurred by the respondent as expenditure for asphalting of roads already existing within its premises. During the relevant assessment year, the roads were substantially renovated and improved. Rejecting the Revenue's contention, the Tribunal held that the expenditure incurred is business expenditure and it cannot be treated as capital expenditure. In that view, the appeal preferred by the Revenue against the order of the Commissioner of Income-tax (Anneals) was dismissed. The contention of the Revenue is that it is in the nature of capital expenditure, inasmuch as an enduring benefit resulted to the assessee by developing the roads. We are unable to accept this contention. The finding of the Appellate Authority is that the total area asphalted is 16,000 square meter's covering internal roads connecting different buildings and sheds spread over a vast area of 55 acres. No new roads were laid. It was found that the assessee had merely improved the condition of the existing internal roads by the process of asphalting. The Appellate Authorities found that this was intimately connected with efficient business operations. It was also found that the assessee had not derived any enduring benefit. These are essentially questions of fact and the Tribunal has not adopted a wrong principle. The crucial fact to be noted is that the expenditure was incurred not for laying new roads, but for improving the existing roads. This cannot but be treated as revenue expenditure. Even assuming that there is some enduring benefit on that account, it does not necessarily divest the true character of the expenditure as revenue expenditure. The Supreme Court in Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1 held as follows (headnote):
"There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, 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. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be only revenue account, even though the advantage may, endure for an indefinite future."
It is not disputed that the Supreme Court as well as the various High Courts in the country have taken a consistent view that where there is no creation of a new capital asset but only an improvement or maintenance of the asset is involved, the expenditure is a permissible deduction. In fact, the observations in the above decision of the Supreme Court makes this position fairly clear. We have, therefore, no hesitation in answering the first question supra against the Revenue and in favour of the assessee.
We do not also find any substance in the second question raised by the Revenue. During the assessment year, the respondent had started biovaccine unit and in connection with that, it had entered into a collaboration agreement with a foreign company. According to this agreement, the assessee had to pay $ 50,000 to the foreign company. Out of that, $ 30,000 represented the remuneration paid for know-how. Out of $ 30,000, $ 16,500 was for trainees and business, which was treated by the assessee itself as capital expenditure. The balance $ 13,500 related to services for running the plant at its maximum productivity and for passing on to the assessee (sic). The Tribunal found that there was clinching evidence to show the break up of $ 30,000 and that $ 13,500 related to the services extended by the collaborating company. The Tribunal placed reliance on the Full Bench decision of this Court in Praga Tools Ltd. v. CIT (1980) 123 ITR 773, and various other decisions to come to the conclusion that the amount of $ 13,500 could be treated as revenue expenditure. We do not see any error in the order of the Tribunal. Learned standing counsel could not point out any circumstances which could possibly vitiate the finding of the Tribunal. We, therefore, answer the second question against the Revenue and in favour of the assessee. .
The third question is the most debated one. The question is whether, the respondent is entitled to the deduction provided for by section 32A? This point is squarely concluded against the Revenue by the decision of this Court in CIT v. Sri Venkateswara Hatcheries (P.) Ltd. (1988) 174 ITR 231 However, the learned standing counsel for the Revenue has contended that the said decision requires reconsideration in the light of the recent judgment of the Supreme Court in CIT v. N. C. Budharaja & Co. (1993) 204 ITR 412. At the outset, we may mention that a similar attempt made by learned standing counsel before another Division Bench of this Court in R.C. No. 100 of 1986 CIT v. Sint. Sudesh Kumari Soni (1997) 227 ITR 113, the decision in which was brought to our notice at the fag*end of the argument, proved futile. In our considered view, the ratio of the judgment in Budharaja' s case (1993) 204 ITR 412 (SC) has no application to the present case arid there is nothing in that judgment which militates against the view expressed by this Court in Sri Venkateswara Hatcheries case (1988) 174 ITR 231. In Budharaja' s case (1993) 204 ITR 412, the Supreme Court held that construction of a dam, road, bridge and the like cannot be regarded as production of an article or a thing within the meaning of section 32-A. It was observed that sub-clause (iii) of subsection (2)(b) of section 32-A referring to manufacture or production of an article or a thing has to be understood in a normal sense and in the manner in which it is generally understood in commercial circles. The dictionary meanings cannot always be taken as safe guides and the words occurring in the said sub-clause should be construed in the context and setting in which they are used. The Supreme Court referred to the legislative history and held that the words "article or thing" have reference to movable objects but not immovable property. It was further pointed out that in ordinary parlance, no one would say that a dam or bridge was produced. The reasoning does not, in our view, hold good in the case of production of chicks. That the chicks have been produced by the use of plant and machinery cannot be seriously doubted and the argument of learned standing counsel mainly concentrated itself on the connotation to be given to the words "article or thing". It is contended that chicks are neither articles nor goods. Having regard to the judgment of the Supreme Court, it is pointed out that wider construction cannot be placed on the said words, as has been done by the Division. Bench in Sri Venkateswara Hatcheries' case (1988) 174 ITR 231 (AP). We find it difficult to accept this contention. While the Supreme Court categorically held that sub-clause (iii) of clause (b) of subsection (2) of section 32-A does not comprehend within its ambit construction of a dam, a bridge, a building, a road, a canal and other similar constructions, the Supreme Court nevertheless made it clear that goods or movables would fall within the scope and ambit of the said clause.
In Sri Venkateswara Hatcheries' case (19$8) 174 ITR 231 (AP), the Division Bench observed thus (page 238):
"The sum total of all these efforts is, if we may say so, to bring forth into existence the chicks from the eggs and that certainly is production of an article--an article which need not necessarily be an inanimate object but can be a living being."
After referring to the dictionary meaning of the word "produce", the Supreme Court in Deputy Commissioner of Agricultural I.T. and Sales Tax v. Palampadam Plantations (1969) 24 STC 231 observed that the intention in employing the word "produced" in the definition of "dealer" under the Kerala General Sales Tax Act was "to' introduce an element of volition and effort involving the employment of some process for bringing into existence the goods".
Though chicks are living beings, we do not find any incongruity in treating the chicks produced by artificial process with the aid of plant and machinery as articles or things within the meaning of section 32-A. By enlarging the amplitude of-the expressions "articles or things", to embrace within their scope chicks which are marketed for consumption, we will not be doing violence to the normal o: commercial understanding of the said expressions. Chicks are undoubtedly articles of merchandise just as goods marketed for consumption purposes. In Budharaja' s case (1993) 204 ITR 412 (SC), it was laid down in unequivocal terms that movables/movable objects are articles or things within the meaning of section 32-A of the Income-tax Act. At page 424, it was observed that expressions "manufacture" and "produce" are normally associated with movable---articles and goods, big and small. In Black's Law Dictionary, one of the classifications of "things" shown is "things personal or movable, comprehending goods and chattels". It is not uncommon to refer to chick or a pet animal as a "thing" in common language. In Venkataramana Hatcheries (P.) Ltd. v. CTO (1987) 66 STC 154 (AP), the question that arose was whether the expression "goods" in clause (12) of Article 366 comprehends chicks. It was answered in the affirmative. Lakshmana Rao, J., as he then was, speaking for the Division Bench, observed that "chicks being the tangible movable things produced by the petitioners for the purpose of sale, the law authorising levy of tax on the sale or purchase of such goods is quite legal and valid". The learned Judges referred to the decision in K. Srinivasulu v. Deputy Commercial Tax Officer (1975) 35 STC 262 (AP), wherein Lakshmaiah, J., took the view that the expression "all kinds of movable property" is comprehensive enough to include within its ambit both animate as well as inanimate kinds of movable properties. He came to the conclusion that livestock is movable property and, therefore, comes within the expression of "goods" as defined in the A. P. General Sales Tax Act as well as Article 366(12) of the Constitution. Thus, the usage in commercial or normal sense as well as the judicial decisions reinforce our view that there is no difficulty in bringing chicks within the sweep and ambit of the dual expression "articles or things" occurring in sub clause (iii) of clause (b) of section 32-A(2) of the Income-tax Act.
Learned counsel for the Revenue has drawn our attention to the penultimate paragraph in the aforementioned judgment of the Supreme Court dealing with Civil Appeal No.4882 of 1993 CIT v. Universal Borewell Agencies (1993) 204 ITR 412. Their Lordships held (page 435):
"Special Leave Petition No. 16839 of 1992 is preferred against the judgment of the Karnataka High Court extending the benefit of section 32-A to the new machinery employed in digging borewells. For the reasons given hereinabove, leave is granted and the appeal is allowed. "
On the basis of the decision relating to the digging of borewells, it is contended that the efficacy of the reasoning of this Court in Sri Venkateswara Hatcheries case (1988) 174 ITR 231, is lost. We are unable to agree. We do not understand the decision of the Supreme Court as having taken the view that water which is brought to surface by digging a borewell is not an article or thing. On the other hand, their Lordships cited the House of Lords' decision in Longhurst v. Guildford Godalming and District Water Board (1961) 3 All ER 545 were in it was held that water which was filtered and chlorinated and put under pressure in the-pump house is an article. As their Lordships of the Supreme Court did not give a separate reasoning in the appeal concerning borewells, the ratio of the decision seems to be that the digging of a borewell stands on the same footing as construction of a dam or a road or a bridge, meaning thereby that a borewell cannot be said to have been "produced". We cannot. therefore, apply the analogy of digging a borewell to the production of chicks by an artificial process. We are fortified in our view by a recent decision of this Court in R. C. No. 100 of 1986 CIT v Smt. Sudesh Kumari Soni (1997) 227 ITR 113, dated March 22, 1995. The Division Bench consisting of Syed Shah Mohammed Quadri, J. and T. N. C. Ranganaian, J. reaffirmed the decision in Sri Venkateswara Hatcheries' case (1988) 174 ITR 231 (AP) notwithstanding the decision of the Supreme Court in Budharaja' s case (1993) 204 ITR 412, cited before them. The very same contention that the view taken in Sri Venkateswara Hatcheries' case (1988) 174 ITR 231 (AP) required reconsideration in the light of the Supreme Court's judgment, was not accepted by the Division Bench.
As far as the fourth question is concerned, it is agreed by both sides that the answer to this question depends on the answer to the third question. In the case of the very same assessee---Sri Venkateswara Hatcheries' case (1988) 174 ITR 231 (AP), this Court observed that once an assessee is considered as an industrial undertaking engaged in the production of articles, it has to be regarded as an industrial company within the meaning of the Finance Acts of 1977 and 1979. Therefore, this question has to be answered against the Revenue and in favour of the assessee.
The referred case is accordingly disposed of by answering all the questions against the Revenue and in favour of the assessee. No costs.
M.B.A./2043/FC Order accordingly.