SUI NORTHERN GAS PIPELINES LIMITED, AVARI PLAZA, HILTON HOTEL, SHAHRAH-E-QUAID-E-AZAM, LAHORE VS COMMISSIONER OF INCOME-TAX, CENTRAL ZONE, LAHORE
2001 P T D 798
[Lahore High Court]
Before Nasim Sikandar and Jawwad S. Khawaja, JJ
Messrs SUI NORTHERN GAS PIPELINES LIMITED, AVARI PLAZA, HILTON
HOTEL, SHAHRAH-E-QUAID-E-AZAM, LAHORE
versus
COMMISSIONER OF INCOME-TAX, CENTRAL ZONE, LAHORE
P.T.R. No.38 of 1988 (T.R.29 of 1988), heard on 28/09/2000.
Income-tax----
----Capital expenditure---Determination---Requirements---Assessee engaged in the business of transmission and distribution of gas had paid certain amount to the Provincial Irrigation Department for additional protective work built on marginal bund and claimed that transmission pipelines of the assessee laid in immediate vicinity of the barrage were threatened by flood water, therefore, the amount was spent to provide additional protection to .the transmission pipelines---Nature of expenditure---Burden to prove-- Mere desire of the, assessee to ward off a worry of possible damage due to future flood could not fulfil the requirements of law to claim the expense as revenue expense---Principles.
Assessee who was engaged in the business of transmission and distribution of gas had paid to the Sindh Irrigation Department for additional protective works built on Guddu Marginal Bund. It was claimed that transmission pipelines of the assessee laid in immediate vicinity of that barrage and were threatened by flood water. Therefore, that amount was spent to provide additional protection to the transmission pipelines.
The Assessing Officer found the claim to be untenable. In his view the expenditure had secured and prolonged the life of Company's transmission lines and; therefore, the benefit accruing to it from this protective work was available over a number of years. It was noted that admittedly the payment was made "towards the cost of additional safety works required for the protection of Sui gas pipelines at Guddu Barrage left marginal bond". Observing that the expenditure was not directly related to the business of the assessee nor it had either enhanced its earning capacity or as otherwise related to the production process, the claim that the expense was entirely of revenue nature was rejected and in the final analysis it was found that it did not come under the head "normal wear and tear" either.
The nature of expense being a mixed question of law and fact, the evidence produced or the finding of fact recorded -in that regard were of immense importance. In .the present case, like all others of similar nature, it was the evidence produced or relied upon which could sail the point through that the expense was revenue in nature and if not incurred, there was all likelihood that the assessee could not have continued its business. It was the reasonable apprehension of closure, destruction disturbance or immediate discontinuation of business that could validly change the class of expenditure from capital to revenue. Without such evidence and a finding to that effect no case could possibly be made out that an expense which was otherwise capital in nature should be taken to the revenue side. No evidence worth the same was produced in the present case .to support the proposition. In fact no claim was made that incurring of the expense saved the assessee-company from immediate discontinuation of business etc. Mere desire to ward off a worry of possible damage due to future floods could not fulfil the requirements of law to claim the expense as revenue expense.
Before the Assessing Officer it was never established as a fact that there was an immediate threat to the pipelines installation of the assessee company and that it could not carry on business" "in that year" if the expenditure in question had not been undertaken. There was obviously no compulsion from the Government nor the payment was made under any statutory obligation. According to the Assessing Officer the assessee company had "decided" to share the expenditure on the construction of the aforesaid bund with the Provincial Irrigation Department of the Province of Sindh. At no time the assessee-company claimed that there was an imminent threat to their installations which if not addressed swiftly could have thrown the assessee out of business. The costs of additional safety works as incurred by the assessee even did not satisfy the broad principles.
It had also not been the case of the assessee that construction of the marginal bund exclusively benefited the company and that the share made by it could be distinguished from the rest expended and, created by the Provincial Government.
Mere fact that capital assets brought into being did not belong to the assessee or apparently belonged to another person would not by itself derogate from the fact that the assessee made an expense only by way of pre caution and to be on the safer side that in case of floods its installation will be saved from damage or destruction. Expense in question neither resulted into an increase in, production, profit or otherwise made the production of assessee more attractive to the consumer. By making the expense at best the assessee purchased peace of mind that flow of flood or other erosion created by water will not interrupt its supply of gas to the consumers. The situation obviously would have been different if there was direct and imminent threat to the pipelines or if the same had actually been damaged to render the supply to the consumer difficult or impossible. Factually no effect whatsoever was made on the part of the assessee to make its case to support the claim of diverting expense to revenue account.
The issue necessarily being a mixed question of law and fact a heavy burden lay upon the petitioner to establish or to fulfil the aforesaid necessary ingredients subject to which an expense could be taken as a revenue expense. On facts no case was attempted to be made out in this regard as the assessee contented itself with mere filing of the claim. To claim an expense under a particular head and to prove that claim are certainly two different things.
Re: Benarsidas Jagannath (1947) 15 ITR 185; C.I.T. v. Messrs Madras Auto Service (Pvt.) Ltd. 1986 PTD 718; (1932) 16 Tax 253; Travancore Titanium Product Ltd. v. Commissioner of Income-tax, Kerala (1966) 60 ITR 277; Southern (H.M. Inspector of Taxes) v. Borax Consolidated Ltd. (1942) 10 ITR (Supplement) 11; Commissioner of Income-tax, Bihar v. Tara Prasad Lodha and others (1975) 99 ITR 173 and Lakshmiji Sugar Mills Co. Ltd. v. C.I.T., New Delhi (1971) 82 ITR 376 distinguished.
Aftab Ahmad Khan and Azhar Maqbool Shah for Petitioner.
Muhammad Ilyas Khan for Respondent.
Date of hearing: 28th September, 2000.
JUDGMENT
NASIM SIKANDAR, J.---The petitioner-company is engaged in the business of transmission and distribution of gas. For the assessment year, 1976-77 a return was filed to declare loss of Rs.42,30,574 (exclusive of B.F unadjusted depreciation) which was subsequently revised to declare a loss of Rs.20,32,618 (exclusive of B.F. unadjusted depreciation). The Assessing Officer, however, on 30-3-1978 framed an assessment at total loss of Rs.3,01,61,421. In the process, inter alia, a sum of Rs.17,20,000 claimed as Guddu Protective Works Maintenance expense was disallowed. That amount was paid to the Sindh Irrigation Department for additional protective works built on Guddu Marginal Bund. It was claimed that transmission pipelines of the Company laid in immediate vicinity of that Barrage and were threatened by flood-water. Therefore, that amount was spent to provide additional protection to the transmission pipelines.
2. The Assessing Officer found the claim to be untenable. In his view the expenditure had secured and prolonged the life of Company's transmission lines and, therefore, the benefit accruing to it from this protective work was available over a number of years. It was noted that admittedly the payment was made "towards the cost of additional safety works required for the protection of Sui gas pipelines at Guddu Barrage left marginal bund". Observing that the expenditure was not directly related to the business of the assessee nor it had either enhanced its earning capacity not was otherwise related to the production process, the claim that the expense was entirely of revenue nature was rejected and in the final analysis it was found that it did not come under the head "normal wear and tear" either.
3. The learned first appellate authority CIT (Appeals) Range-'A', Lahore on 14-6-1980 agreed with the contention put forth by the assessee company that the expense in question was of revenue nature. He was of the view that expenditure did not result in any enduring benefit to the assessee. Also it was agreed that if no alteration was trade in a fixed capital asset, then it was properly attributable to the revenue account being a subsistence matter of maintenance i.e. the maintenance of the capital asset. Accordingly it was found that transmission lines being capital assets of the company these could have been exposed to danger, if no protection of the kind was given to them. It was also opined by the Commissioner (Appeals) that the expense had been incurred to maintain the earning capacity of the pipelines in order to avoid possible damage and consequent reduction in the normal utility and life of these lines. Hence, the claim of Rs.17,20,000 was found to be of a revenue nature and allowed as an expense.
4. A Division Bench of the Income Tax Appellate Tribunal of the Lahore Bench, however, disagreed. After going through the ratio settled in a number of reported judgments, cited at the bar before them, it was concluded that expenditure incurred on construction of. the protection work built on the Guddu Marginal Bund was not a part of the Working expense or of the operational expense under any statutory compulsion 'to take precaution to save the pipelines from any future floods etc. The advantage from the construction of the new protective work was found to enure to the benefit of the company on an enduring basis. Also that the protective work amounted to acquisition of an advantage of an enduring nature for the whole of business.
5. The following question proposed by the company through, an application under section 136(2) of the Income Tax Appellate Tribunal, 1979 was admitted for hearing on 22-8-1988:---
"Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the expense was inadmissible being of capital nature."
Heard the learned counsel for the parties. Both of them have repeated their stances and arguments which were earlier, put forth before the Tribunal. It needs to be pointed out in the first instance that principles of accounting as to the nature of an expense, capital or revenue are well-defined and settled. It is only for the purpose of income tax that distinction at times appears unclear. Secondly, there is hardly any doubt that the question if an amount is deductible to capital or revenue account is necessarily a' mixed question of law and fact and, therefore, no hard and fast rule can be laid down for that purpose. Thirdly, the fact that assessee had claimed expense under a particular head is neither conclusive nor the revenue authorities are bound by the statement of accounts so drawn and presented before them. The broad principles laid down by the Court in the larger Bench decision reported as re: Benarsidas Jagannath (1947) XV ITR 185 have already been reproduced in the order of the Tribunal and therefore, do not need to be repeated. Mehr Chand Mahajan, J. while adding his separate note to the said judgment observed that '"in order to distinguish between a revenue expenditure (i.e. an expenditure which should properly form an item of debit in the profit and loss account of a manufacturer) which is deductible in assessing income tax and a capital expenditure which is not so deductible, one must carefully consider the nature of the concern, the ordinary course of business usually adopted by a manufacturer in that concern and the object with which an expense is incurred by him and then decide the category under which. it falls."
7. According to their Lordships of the Madras High Court in re: CIT v. Messrs Madras Auto Service (Pvt.) Ltd. (1986 PTD 718), the principle on which an expenditure could be allowed as revenue item perhaps came up for the first time for consideration in the case of re: Anglo-Persian Oil. Company case reported as (1932) 16 Tax 253. In that case the assessee oil company under an agency agreement paid a lump sum of 3,00,000 pounds in cash to their agent and had the agency contract cancelled after it was concluded that his entitlement to commission under the arrangement was much more than what was originally expected. The payment was made by the company by way of annual commission and claimed as a revenue expense. Rowlatt, J. agreed that the aforesaid payment was not capital expenditure but a revenue outgoing. He was of the view that payment was made in lieu of future payment of commissions and that it was to redeem the future payments. His view that the payment made "compressed" the future payments was upheld by the Court of appeal. The Hon'ble Judges of the Madras High Court in that case also repeated the principle that whatever substitutes, or surrogates a revenue expenditure is also revenue expenditure. They found that surrogate expenditure may be a lump sum payment and be laid out at any stage. Further that if it saved the tax payer from incurring in the very year or in other years other revenue payments either in whole or in part then the expenditure had to qualify as revenue expenditure.
8. The Tribunal has referred to a number of judgments from Indian Jurisdiction which need not be repeated again. To support the general parameters the judgment of the Supreme Court of India in re: Travancore Titanium Product Ltd. v. Commissioner of Income Tax Kerala (1966) LX ITR 277 needs to be mentioned. In that case their Lordships were considering the issue if the amount of wealth tax paid by an assessee was a permissible deduction under section 10(2)(vx) of the Indian Income-tax Act, 1922. It was held that while determining if an amount expended was deductible under the said provisions of the Act nature of expenditure or outgoing must be adjudged in the light of accepted commercial practice and trading principles. Further that expenditure must be incidental to the business and must be necessitated or justified by commercial expediency. In the view of their Lordships an expense to qualify for deduction "must be directly and intimately connected with the business and must be laid out by the taxpayer in his character as a trader. To be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business i.e. between the expenditure and the character of the assessee as a trader and not as owner of assets, even if they are assets of the business.
9. Learned counsel for the petitioner has repeatedly referred to the English case reported as re: Southern (H.M. Inspector of Taxes) v. Borax Consolidated, Ltd. (1942) 10 ITR (Supplement) 11. However, we are of the view that earlier the learned Tribunal fairly dealt with the issue and distinguished its facts from those found in the present case. Also we find that most of the cases relied upon by the learned counsel for the petitioner before the Tribunal as well as before us pertain to expenditure by an assessee on construction and development of roads. These cases in our view do not clinch the controversy in hand. Also the cases relied upon re: Commissioner of Income Tax Bihar v. Tara Prasad Lodha and others (1975) 99 ITR 173 is distinguishable. In that case the assessee who owned collieries was required by the Coal Board to dig out a trench so that the fire which had broken out in the adjoining seam, might not extend to the seams in question. The assessee claimed the expenditure as revenue expenditure under the head "protection charge". The Appellate Tribunal allowed the claim and Patna High Court maintained the same. However, while doing so it was observed that expenditure in question was incurred for the purpose of the protection of the capital assets without which the assessee could not carry on the business in question "in the year concerned". It will be noted that their Lordships placed stress on the fact that expense was made in order to save capital asset and that had the same not been incurred the assessee could not carry on his business "in the year concerned." The necessity and urgency of the making of expense was therefore, found to be the relevant criterion to categorize the expense. At the cost of repetition it is stated that the nature of expense being a mixed question of law and fact, the evidence produced or the finding of fact recorded in that regard are of immense importance. In the present case, like all others of similar nature, it was the evidence produced or relied upon which could sail the point through that the expense was revenue in nature and if not incurred, there was all likelihood that the company could not have continued its business. It is the reasonable apprehension of closure, destruction, disturbance or immediate discontinuation of business that could validly change the class of expenditure from capital to revenue. Without such evidence and a finding to that effect no case can possibly be-made out that an expense which is otherwise capital in nature should be taken to the revenue side. No evidence worth the same was produced in this present case to support the proposition. In fact no claim was made that incurring of the expense saved the assessee-company from immediate discontinuation of business etc. mere desire to ward off a worry of possible damage due to future floods could not fulfil the above requirements of law to claim the expense as revenue expense.
10. The other case relied upon by the petitioner re: Lakshmiji Sugar Mills Co Ltd. v. CIT New Delhi (1971) 82 ITR 376 is also distinguishable inasmuch as the expenditure in that case was incurred by the assessee under the statutory obligation for the development of roads which were originally the property of the Government and remained so even after the improvement had been done. Their Lordships of the Supreme Court of India reversed the affirmative answer returned by the Delhi High Court on the question in various sums paid to road development fund set up by the Government of U.P. were rightly disallowed as item of "capital expenditure". According to the Hon'ble Court the expenditures were incurred for the purpose o facilitating the running of its major vehicles and other means o transportation of sugarcane to its factories and, therefore, were incurred to running the business or working it with a view to producing profits without the assessee gaining any advantage of an enduring benefit to itself. The very fact that the amount was incurred under the statutory obligation distinguishes it from the case of the present petitioner. Also the factor of expected increase in the profits in the year in which expenditure was incurred is absent in to case of the present assessee.
11. It will be seen that before the Assessing Officer it was nevi established as a fact that there was an immediate threat to the pipeline installation of the assessee-company and that it could not carry on business in that year if the expenditure in question had not been undertaken. There was obviously no compulsion from the Government nor the payment w made under any statutory obligation. According to the Assessing Officer to assessee-company had "decided" to share the expenditure on the construction of the aforesaid bund with the Provincial Irrigation Department of the Province of Sindh. At no time the assessee-company claimed that there was an imminent threat to their installations which if not addressed satisfy could have thrown the assessee out of business. The costs additional safety works as incurred by the assessee even did not satisfy I three broad principles laid down by this Court in re: Benarsidas Jaganri (Supra).
12. Learned counsel for the petitioner has also attempted to argue case from the angle, which apparently was never done earlier. It is that since the assets which came into existence on account of incurring of expenditure did not belong to the assessee it could not claim depreciation thereupon. Therefore, according to the learned counsel this fact alone nee to be considered to allow the expenditure as revenue expenditure. However, we are not persuaded. Firstly, such an issue was never mooted before revenue as well as the Tribunal. Secondly in the facts of the present case the revenue had rejected the claim primarily on the ground that the assessee was to receive an enduring benefit as a result of the expenditure; that objection of the revenue has not been answered nor it was claimed that the expense in question could not be avoided. It has also not been the case of the assessee-company that construction of the marginal bund exclusively benefited the company and that the share made by it could be distinguished from the rest expended and created by the Provincial Government. The findings of the learned First Appellate Authority that expense incurred by the assessee-company could be taken to be in nature of maintenance of capital assets of the company are also not proved on the record nor in fact it has been the case of the assessee-company before the Assessing Officer or thereafter before the Tribunal and even before us. The view of the Tribunal that expenditure at least brought an advantage of an enduring benefit to the assessee-company has not been seriously challenged. Mere` fact that capital assets brought into being did not belong to the company or apparently belonged to another person will not by itself derogate from the fact that the company made an expense only by way of precaution and to be on the safer side that in case of floods its installation will be saved from damage or destruction. Also we are in agreement with the learned counsel for the revenue that expense in question neither resulted into an increase in production, profit or otherwise made the production of assessee-company more attractive to the consumer. By making the expense at best the assessee-company purchased peace of mind that flow of flood or other erosion created by water will not interrupt its supply of gas to the consumers. The situation obviously would have been different if there was direct and imminent threat to the pipelines or if the same had actually been damaged to render the supply to the consumer difficult or impossible. Factually no effect whatsoever was made on the part of the assessee to make its case to support the claim of diverting expense to revenue account.
As observed earlier the issue necessarily being a mixed question of law and fact, a heavy burden lay upon the petitioner to establish or to fulfil the aforesaid necessary ingredients subject to which an expense could be taken as a revenue expense. On facts no case was attempted to be made out in this regard as the company contented itself with mere filing of the claim. To claim an expense under a particular head and to prove that claim are certainly two different things.
Therefore, being in agreement with the findings of the Tribunal we will answer the questions in the affirmative.
M.B.A./S-126/LQuestion answered.