MOHAN MEAKIN BREWERIES LTD. VS COMMISSIONER OF INCOME-TAX
1999 P T D 2324
[227 I T R 878]
[Himachal Pradesh High Court (India)]
Before M. Srinivasan C. J. and Kamlesh Sharma, J
MOHAN MEAKIN BREWERIES LTD.
Versus
COMMISSIONER OF INCOME-TAX
Income-tax Reference No-2 of 1982, decided on 17/10/1996.
(a) Income-tax---
----Business expenditure---Licence fee paid to Government for construction and working of distillery---Is capital expenditure but for which assessee could not have established distillery---Not allowable deduction---Indian Income Tax Act, 1961, S.37.
(b) Income-tax---
----Business expenditure---Surtax---Surtax payable under Companies (Profits) Surtax Act, 1964---Not an allowable deduction---Indian Income Tax Act, 1961, S.37.
(c) Income-tax---
----Deduction---Loss---Loss arising as a result of discarding milk plant---Not allowable deduction---Indian Income Tax Act, 1961, S.28.
(d) Income-tax---
----Deduction---Loss---Loss arising in respect of milk plant discarded and written off---Not allowable deduction---Indian Income Tax Act, 1961, S.45.
Section 21 of the Punjab Excise Act, 1914, contemplates imposition of a licence fee for construction and working of a distillery or brewery. Rule 4 of the Punjab Distillery Rules provides that no licence shall be granted unless and until the applicant has deposited a sum of Rs.50,000 in cash as licence fee. Under rule 3, every application for a licence for a distillery shall be in writing in Form No.D-1, under which the applicant applies for a licence to construct and possess a distillery under section 21 of the Punjab Act. Under Form No.D-2 licence is granted to manufacture T country spirit and foreign liquor in the premises specified. Though section 21 of the Punjab Act speaks only of licence for construction and working of distillery or brewery, Form No.D-2 refers to manufacture of the kinds of liquor mentioned therein:
Held, that in the context, Form No.D-2 could be understood only in the light of the language used in section 21 read with rules 3 and 4 alongwith Form No.D-1. Hence, the licence fee paid by the assessee is for the purpose of construction and working of distillery. It is only a capital expenditure but for which the assessee could not have established the distillery. He cannot claim the same to be a revenue expenditure as one having been spent for the business. The sum of Rs.50,000 paid to the Government for obtaining a licence for establishing a distillery for the production of Indian-made foreign liquor could not be allowed as a deduction in computing the total income of the assessee company.
Held further, that the surtax paid under the Companies (Profits) Surtax Act, 1964, was not an allowable deduction under section 37 of the Income Tax Act, 1961.
Smith Kline and French (India) Ltd. v. CIT (1996) 219 ITR 581 (SC) fol.
Held also, that the Tribunal was right in holding that the loss arising as a result of the discarding of the milk plant could not be allowed as a deduction under section 28 of the Income Tax Act, 1961.
Held further, that the Tribunal was right in holding that the loss amounting to Rs.2,97,356 in respect of the milk plant discarded and written off by the assessee during the previous year was not allowable under section 45 of the Income Tax Act, 1961.
CIT v. Bombay Dyeing and Manufacturing Co. Ltd. (1996) 219 ITR 521 (SC); CIT v. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC); CIT v. T. V. Sundaram Iyengat & Sons (P.) Ltd. (1990) 186 ITR 276 (SC) (Note); Hindustan Commercial Bank Ltd., In re: (1952) 21 ITR 353 (All.); L. H. Sugar Factory and Oil Mills (P.) Ltd. v. CIT (1980) 125 ITR 293 (SC); Mohan Meakin Breweries Ltd. v. CIT (No.2) (1979) 117 ITR 505 (HP); Sheikh Rahmat Ali v. CIT (1960) 39 ITR 506 (Pat.); Travancore ?Cochin Chemicals Ltd. v. CIT (1977) 106 ITR 900 (SC) and Travancore Rubber and Tea Co. Ltd. v. Commercial of Agricultural Income-tax (1961) 41 ITR 751 (SC) ref.
K. D. Sood for the Assessee.
Indar Singh for the Commissioner.
JUDGMENT
M. SRINIVASAN, C.J.---In this reference, four questions are referred to this Court. They are as follows:
"(1) Whether, on the facts and in the circumstances of the applicant company's case, the Tribunal was right in holding that the loss arising as a result of the discharging of the milk plant cannot be allowed as a deduction under section 28 of the Income Taxi Act, 1961?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the loss amounting to Rs.2,97,356 in respect of the milk plant discarded and written off by the applicant during the previous year is not allowable under section 45 of the Income Tax Act, 1961?
(3)??????? Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the surtax payable by the applicant under the Companies (Profits) Surtax Act, 1964, for the corresponding surtax assessment year cannot be allowed as a deduction in computing its total income?
(4)??????? Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs.50,000 paid to the Himachal Pradesh Government for obtaining a licence for establishing a distillery at Solan for the production of Indian-made foreign liquors cannot be allowed as a deduction in computing the total income of the applicant company?"
As regards question No.3, the Supreme Court has settled the issue in Smith Kline and French (India) Ltd. v. CIT (1996) 219 ITR 581. Hence, that question is answered in the affirmative by holding that the Tribunal was right in taking the view that the surtax payable by the applicant under the Companies (Profit) Surtax Act, 1964, for the corresponding surtax assessment year cannot be allowed as a deduction in computing its total income.
Regarding Questions Nos. l and 2, the Tribunal has discussed them at length in paragraphs Nos. 12 to 15. We have perused the same and we find that there is no error whatever in the discussion or appreciation of the rulings referred to therein. A perusal of sections 28 and 45 shows that neither section will apply in this case and the assessee will not be able to claim the benefit. Its contentions have been rightly rejected by the Tribunal and we answer both the questions in the affirmative by upholding the view taken by the Tribunal.
As regards Question No.4, the order of the Tribunal is one reversing that of the Commissioner of Income-tax, who accepted the contention of the assessee and held that the payment of Rs.50,000 for obtaining the licence for establishing a distillery was revenue expenditure deductible from the total income. The assessee had placed reliance before the Tribunal on the judgments in Hindustan Commercial Bank Ltd., In re: (1952) 21 ITR 353 (All.), Travancore Rubber & Tea Co. Ltd. v. Commissioner of Agricultural Income-tax (1961) 41 ITR 751 (SC) and CIT v. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC). The Tribunal had distinguished those decisions and pointed out that the expenditure of a sum of Rs.50,000 for obtaining the licence will not be covered by those decisions.
Our attention has been drawn to the judgment of the Patna High Court in Sheikh Rahmat Ali v. CIT (1960) 39 ITR 506. The Bench of that Court has taken the view that the amount of licence fee paid by an assessee for carrying on his business is an outgoing and a deduction from the profits of the business and similarly when there is a recoupment by way of refund of the whole or part of the licence fee paid by the assessee for any reason, the amount recouped is also a revenue receipt. In fact, the question which arose before the Bench was only with reference to the amount recouped by the assessee. While dealing with that question, the Bench dealt with the character of the licence fee paid by the assessee earlier.
Reliance is also placed on the following passage from "Kanga and Palkhivala's The Law and Practice of Income-tax, Eighth Edition, Volume I", page 680:
"Licence, permit and monoply.---There are some early English cases on this topic which have to be used with caution. Payment by the lessee of licensed hotel premises to the local authorities as the 'monopoly value' on the grant of a three-year licence was held to be capital expenditure on the ground that the monopoly right of trading for three years as a licensed victualler attained the dignity of a capital asset. Likewise, money expended by a brewery firm in an attempt (successful or unsuccessful) to acquire new licensed premises or by a public carrier to obtain a licence for a larger fleet of vehicles or the price of a licence granted to a carting contractor for a period of eight years to deposit earth, slag, etc., on the land of the licensor, was held to be capital expenditure.
The law has evolved considerably as a result of acceptance of the crucial principle that the distinction between capital and revenue expenditure should be determined from the practical and business view point and in accordance with sound accountancy principles, eschewing the legalistic approach. A licence fee is revenue expenditure, and payments made to the Stale for a licence or permit are nonetheless deductible although the licence or permit may carry with it an exclusive right, where the 'monopoly' or the exclusive character of the right is incidental to the licence or permit. Annual payments made to the State, in lieu of tax on motor vehicles per trip, for the exclusive right to ply buses on a certain route, are revenue disbursements, and so also are royalties paid to the State for a monopoly right to excavate raw materials or stock-in-trade or for an exclusive licence to manufacture sugar."
No doubt, the passage helps the assessee in this case, but one has to look into the facts and circumstances of the case to decide whether the licence fee paid by the assessee is in the nature of revenue expenditure or capital expenditure under section 37 of the Act.
Our attention is also drawn by learned counsel to CIT v. Bombay Dyeing and Manufacturing Co. Ltd. (1996) 219 ITR 521 (SC). The Supreme Court has held in that case that the assessee was entitled to deduction of amounts spent for contribution made by it to the Maharashtra Housing Board towards the construction of tenements for its workers. The Court has also referred to earlier decisions in L. H. Sugar Factory and Oil Mills (P.) Ltd. v. CIT (1980) 125 ITR 293 and CIT v. T. V. Sundaram Iyengar & Sons (P.) Ltd. (1990) 186 ITR 276. The Court distinguished the judgment rendered in Travancore-Cochin Chemicals Ltd. v. CIT (1977) 106 ITR 900 (SC). In our opinion, the ruling of the Supreme Court in CIT v. Bombay Dyeing and Manufacturing Co. Ltd. (1969) 219 ITR 521, will not apply here, in this case as the nature of the licence fee paid by the petitioner would only be in the nature of capital expenditure.
A Bench of this Court has dealt with the question whether the fee paid to the Registrar of Companies for raising the limit of the authorised capital of the company from one crore to five crores is capital expenditure or not. In Mohan Meakin Breweries Ltd. v. CIT (No.2) (1979) 117 ITR 505; (1979) HP 121, the Bench held that it was capital expenditure and cannot be deducted from the total income. That decision may not by itself be applicable to the facts of the present case, but as stated earlier we have to see the nature of the licence fee paid by the assessee to the Government of Himachal Pradesh. Admittedly, the fee was paid under the provisions of the Punjab Excise Act and the Punjab Distillery Rules, which are applicable to the State of Himachal Pradesh. Section 21 of the Punjab Excise Act provides for establishment or licensing of distilleries and breweries. The relevant part of the section reads:
"The Financial Commissioner, subject to such restrictions or conditions as the State Government may impose, may ....
(c) license the construction and working of distillery or brewery."
The section contemplates imposition of a licence fee for construction and working of a distillery or brewery. The relevant rule in the Punjab Distillery Rules is rule 4 which provides that no licence shall be granted unless and until the applicant therefore has deposited a sum of Rs.50,000 in cash as licence fee. Under rule 3, every application for a licence for a distillery shall be in writing in Form No.D-1. Form No. D-1 reads to the effect necessary in this case as follows:
"The undersigned . . . . . . . begs to apply for a licence to (construct and) work and possess a distillery under section 21 of the Punjab Excise Act, 1 of 1914. "
This form is entirely in consonance with the provisions of section 21 of the Act. However, Form No.D-2, reads that:
"Licence is hereby granted to . . . . . . . . under section 21 of the Punjab Excise Act, 1 of 1914, to manufacture---
(a) Country spirit. .
(c) Foreign liquore;
in the premises herein specified. "
Though section 21 speaks only of licence for construction and working of distillery of brewery, Form No.D-2 refers to manufacture of the kinds of liquor mentioned therein. In the context Form No.D-2 can be under?stood only in the light of the language used in section 21 read with rules 3 and 4 alongwith Form No.D-1. Hence, there can be no doubt whatever that the licence fee paid by the assessee in this case is for the purpose of construction and working of distillery. Consequently, it is only capital expenditure but for which the assessee could not have established the distillery. He cannot claim this to be revenue expenditure as one having been spent for the business. It follows that the view expressed by the Tribunal is correct. Question No.4 is, therefore, answered in the affirmative by upholding the view taken by the Tribunal in that the sum of Rs.50,000 paid to the Himachal Pradesh Government for obtaining a licence for establishing a distillery at Solan for the production of Indian-made foreign liquor cannot be allowed as a deduction in computing the total income of the assessee ?company.
The reference is answered accordingly
M.B.A./2061/FC ??????????????????????????????????????????????????????????????????????????????? Reference answered.