COMMISSIONER OF INCOME-TAX VS STEEL COMPLEX LTD.
2001 P T D 310
[238 I T R 1054]
[Kerala High Court (India)]
Before Om Prakash, C. J. and J. B. Koshy, J
COMMISSIONER OF INCOME‑TAX
versus
STEEL COMPLEX LTD.
Income‑tax Reference No. 131 of 1996, decided on 04/08/1998.
Income-tax---
‑‑‑‑Capital or revenue expenditure ‑‑‑Assessee engaged in manufacture of steel‑‑‑Incurring expenditure on installation of water treatment plant and fume extraction plant‑‑‑Resulted in improvement in operation of existing systems with greater efficiency and profitability‑‑‑Installation of fume extraction plant and water treatment plant did not lead to increase in volume of production‑‑‑Fume extraction plant installed to ward off health hazards and in compliance with statutory requirements‑‑‑Expenditure incurred on installation of water treatment plant and fume extraction plant is revenue expenditure.
The assessee‑company, engaged in manufacture of steel, claimed expenditure incurred on installation of water treatment plant and fume extraction plant as revenue expenditure. The Assessing Officer disallowed the claim for deduction on the ground that the expenditure was capital in nature. The First Appellate Authority affirmed the order of the Assessing Officer. On further appeal, the Tribunal found that the assessee installed two plants, that they were for the purposes of improvement in the operation of the existing systems with greater efficiency and profitability, that originally the municipality was supplying water to the assessee for running the factory, that since it was found that the municipality was not supplying sufficient quantity of water, the assessee dug wells, but the well water was found to be salty, that therefore, they installed the water treatment plant for getting pure water with an intention to improve the functioning of the factory, that this did not in any way enhance the production of steel, that the fume extraction plant also did not lead to any increase in the volume of production and it was also installed to ward off the health hazards and in compliance with statutory requirements and that therefore, the expenditure incurred was revenue in nature. On a reference:
Held, affirming the decision of the Tribunal, that the expenditure incurred for the water treatment plant and the fume extraction plant was revenue expenditure and hence an allowable deduction.
Alembic Chemical Works Co. Ltd. v. CIT (1989) 177 ITR 377(SC) applied.
P.K.R. Menon and N.R.K. Nair for the Commissioner.
P. Balachandran for the Assessee.
JUDGMENT
OM PRAKASH, C.J.‑‑‑Heard counsel for the applicant.
At the instance of the Revenue, the Income‑tax Appellate Tribunal referred the following question relating to the assessment year 1986‑‑87 for the opinion of this Court:
"Whether, on the facts and in the circumstances of the case, the expenditure incurred for water treatment plant and fume extraction plant is capital in nature?"
The facts, in brief, are that the assessee‑‑‑a limited company‑‑‑is engaged in the manufacture of steel. For the year relating to the assessment year 1986‑87, the assessee claimed the expenditure incurred on installation of water treatment plant and fume extraction plant as revenue expenditure. The Assessing Officer disallowed the claim holding that the expenditure was capital expenditure. On appeal, the first appellate authority affirmed the order of the Assessing Officer.
On further appeal, the Appellate Tribunal held as follows:
"The assessee installed two plants. They are for the purpose of improvement in the operation of the existing, systems with greater efficiency and profitability. Originally the municipality was supplying water to the assessee for running the factory. Since it was found that the municipality was not supplying sufficient quantity of water the assessee dug wells. But the well water was also found to be salty. Hence they installed the water treatment plant for getting pure water with an intention to improve the functioning of the factory. This did not in any way enhance the production of steel... The fume extraction plant also did not lead to any increase in the volume of production. It was installed to ward off health hazards and in compliance with statutory requirement."
Finding so, the Appellate Tribunal held that the expenditure was revenue in nature.
The question posed herein will not detain us for long, inasmuch as sufficient guideline is given by the Supreme Court in Alembic Chemical Works Co. Ltd. v. CIT (1989) 177 ITR 377. The Supreme Court while laying down certain principles to find out which expenditure is capital or revenue in nature, inter alia, observed as under (page 386):
"What is capital expenditure and what is revenue are not eternal verities but must need be flexible so as to‑respond to the changing economic realities of business. The expression 'asset or advantage of an enduring nature' was evolved to emphasise the element of a sufficient degree of durability appropriate to the context ....
There is also no single definitive criterion which, by itself, is determinative as to whether a particular outlay is capital or revenue. The 'once for all' payment test is also inconclusive. What is relevant is the purpose of the outlay and its intended object and effect, considered in a common sense way having regard to the business realities. In a given case, the test of 'enduring benefit might break down.
In Alembic Chemical Works Co. 'Ltd.'s case (1989) 177 ITR 377 (SC), the appellant entered into an agreement with Meiji ‑‑‑A foreign concern‑‑‑engaged in the manufacture of antibiotics, which under the agreement agreed to supply to the appellant the "subcultures of Meiji's most suitable penicillin producing strains" in a pilot plant, the technical information, know‑how and written description of Meiji's process for fermentation of penicillin alongwith a flow‑sheet of the process in the pilot plant, and the design and specifications of the main equipment in such pilot plant and to arrange for the training of the appellant's representatives in Meiji's plant in Japan at the appellants' expense. Then the question arose whether the payment made under the agreement was capital or revenue in nature. The Supreme Court observed as under (headnote):
"Even after the agreement, the product continued to be penicillin and the agreement with Meiji stipulated the supply of the most suitable subcultures' evolved by Meiji for purposes of augmentation of the yield of penicillin ????The mere improvement in or updating of the fermentation‑process would not necessarily be consistent with the relevance and continuing utility of the existing infrastructure machinery and plant of the appellant.
That the improvisation in the process and technology in some areas of the enterprise was supplemental to the existing, business and there was no material to hold that it amounted to a new or fresh venture...The financial outlay under the agreement was for the better conduct and improvement of the existing business and was revenue in nature and was allowable as a deduction in computing the business profits of the appellant." (emphasis supplied)
Applying the above-stated principles and the aforesaid observations made by the Supreme Court, we are in complete agreement with the view, taken by the Appellate Tribunal that the expenditure incurred for the water treatment plant and fume extraction plant, was revenue expenditure and hence allowable deduction.
In the result, we answer the abovementioned question in the negative; that is, in favour of the assessee and against the Revenue.
M.B.A./190/FC??????????
Reference answered.