Brief of the Case
Bombay High Court held In the case of CIT vs. M/s Manganese Ore India Limited that in the present case, the capital assets has never come into existence and accordingly ITAT has allowed travelling expenses or ore testing charges only as revenue expenditure. The travelling expenses or manganese ore testing charges pertaining to the existing mine allowed by the ITAT in the present facts cannot be directly correlated with the acquisition of any capital asset. Also, it is clear that study undertaken by the foreign company i.e M/s. Seltrust Engineering Company Limited, U.K. was in connection with working of assessee’s existing mines and optimization of the existing product. It did not relate in any way to proposed new plants. Hence, no capital asset comes into existence and accordingly expenses are revenue in nature.
Facts of the Case
The revenue raised 4 substantial questions of laws –
1. Whether on the facts and in the circumstances of the case, the I.T.A.T. was correct in holding that the payments of Rs.86,554/made to D.S. Basu of M/s Dastur & Co., and others is a revenue expenditure ?
2. Whether on the facts and in the circumstances of the case, the I.T.A.T. was correct in holding that the payment of Rs.81,885/ made to Mountain States Research & Development U.S.A. is a revenue expenditure ?
3. Whether on the facts and in the circumstances of the case, the I.T.A.T. was correct in holding that the payment of Rs.8,06,254/made to Seltrust Engineering Co. Ltd. is a revenue expenditure ?
4. Whether on the facts and in the circumstances of the case, the I.T.A.T. was correct in holding that an amount of Rs.29,52,638/incurred in construction of house of labourer is a revenue expenditure ?
Contention of the Assessee
The ld counsel of the assessee submitted that none of the questions referred to this Court allow it to open any findings on facts recorded by the I.T.A.T. He, in this background, submits that when expenditure is found to be incurred in relation to existing project, it has been rightly treated as revenue expenditure. He adds that the fact whether it is for existing project or for a proposed project, is not in dispute before this Court and, hence, the facts or premise on the basis of which the ITAT has proceeded further, needs to be maintained.
Contention of the Revenue
The ld counsels of the revenue submitted that the distinction between an existing project or services, consultation etc. utilized in relation thereto and similar services for the proposed/new project cannot stand on different footing, insofar as nature of expenditure is concerned. The nexus of said expenditure with the object can never be lost site of. Even if the new project cannot be established, the amount spent therefor remains capital expenditure. He points out that in the present facts, the payment of Rs.86,554/to Shri D.S. Basu of M/s. M.N. Dastur & Company ought to have been treated as capital expenditure. He relies upon the facts, which have looked into by the Income tax Officer as also the appellate authority for said purpose.
He also submits that when such expenditure, may be towards traveling is undertaken in relation to new project, question whether such project materializes or not is entirely an irrelevant fact. He, therefore, states that the answers given to remaining to these questions by the appellate authority and by the I.T.A.T., therefore, cannot be sustained. According to him, the erection of residential quarters for its workforce is definitely an investment which is capital in nature and last question should have been answered in favour of the department.
He further relied on judgment of Division Bench of this Court, dated 15/06/2012 in Income Tax Reference No.67 of 1989 to urge that, where the expenditure is incurred for project/ feasibility report in connection with exploring the feasibility of a new business, it is capital in nature. Further in the case of Triveni Engineering Works Ltd. vs. Commissioner of Income tax reported at 232 ITR 639, the Division Bench of Delhi High Court has observed that when expenditure is incurred to bring an asset or advantage into existence, which has enduring benefit, that expenditure is capital expenditure. It has also observed that merely because project did not materialize, the nature of the expenditure would not undergo any change.
Held by CIT (A)
CIT (A) partly allowed the appeal of the revenue. CIT (A) answered question no. 1 & 2 in favour of revenue.
Held by ITAT
ITAT has confirmed the findings of the C.I.T. in relation to consultation charges paid to both viz. M/s. M.N. Dastur & Company and M/s. M.M. Suri Associates as capital expenditure on the ground that the same were for the purposes of establishing a new plant or project. Thus, disallowance of payment of Rs.1,58,000/made up on this account was confirmed by it. However, insofar as the expenditure on travelling expenses of employees of these two concerns are concerned, it held that it cannot be treated as capital Rs.86,560/expenditure and the order of C.I.T. to that extent was found unsustainable. Thus, air fare, cost of foreign change and foreign tour expenses have been treated as revenue expenditure. It has noted that there was no material on record to establish that these expenses by themselves secured for the assessee any benefit of an enduring nature. It found that these tours have not resulted in securing for the assessee any asset or benefit. It has then made reference to judgment of Bombay High Court in the case of Antifriction Bearings Corporation Ltd vs. C.I.T., reported at 114 ITR 335.
Further with regard to payments made to M/s. Mountain States Research and Development, U.S.A., the I.T.A.T. accepted that these charges were incurred in connection with the assessee’s existing business with the intention of improving its profitability. Expenses on travelling amounting to Rs.86,560/and expenses made to the firm M/s. Mountain States Research and Development, U.S.A. for testing manganese ore amounting to Rs.81,885/totaling to Rs.1,68,445/were liable to be treated as revenue expenditure.
With regard to payments made to M/s. Seltrust Engineering Company Limited, U.K., ITAT held that study undertaken by this foreign company was in connection with working of assessee’s existing mines and also noted finding of the C.I.T. that the report submitted by this company related to optimization of the assessee’s existing product and did not relate in any way to proposed new plants. It has reiterated its finding again and confirmed finding of the C.I.T. that it was a revenue expenditure.
With regard to expenditure on construction of house of laborer, ITAT held that assessee spent that amount on construction of A Type quarters. Total amount spent is Rs.49,44,263/and against it, the assessee received Government subsidy of Rs.19,44,750/. The assessee was under obligation to provide quarters for labour and for that the assessee gave on lease various plots of land in Balaghat, Chikla and Beldongri to the Union of India on long leases. The Government undertook construction of quarters thereon and cost thereof was not to exceed Rs.8,025/to Rs.8,493.75 per unit. The Union of India, however, appointed the assessee as its agent for said purpose. The excess amount over this, if any, was to be borne by the assessee. There is a specific finding that the ownership and title in the structure vested in the Government and the assessee was liable to pay a rent of Rs.2.50/per unit per month to the Government. The assessee was found to be only a lessee and its employees were entitled to occupy the quarters during their tenure as such. In this background, the expenditure has been found to be revenue in nature.
Held by High Court
High Court held that judgment of Supreme Court relied upon by ld counsel of the assessee in the matter of Commissioner of Income Tax vs. Madras Auto Service (P) Ltd., reported at (1998) 233 ITR 468 clinches the controversy. In this case, the apex court held that in order to decide whether this expenditure is revenue expenditure or capital expenditure, one has to look at the expenditure from a commercial point of view. What advantage did he assessee get by constructing a building which belonged to somebody else and spending money for such construction? The assessee got a long lease of a newly constructed building suitable to its own business at a very concessional rent. The expenditure, therefore, was made in order to secure a long lease of new and more suitable business premises at a lower rent. In other words, the assessee made substantial savings in monthly rent for a period of 39 years by expending these amounts. The saving in expenditure was a saving in revenue expenditure in the form of rent. Whatever substitutes for revenue expenditure should normally be considered as revenue expenditure. Moreover, assessee in the present case did not get any capital asset by spending the said amounts. The assessee, therefore, could not have claimed any depreciation. Looking to the nature of the advantage which the assessee obtained in a commercial sense, the expenditure appears to be revenue expenditure.
Further in the case of Ciba of India Ltd. vs. Commissioner of IncomeTax, reported at 202 ITR 1, it was held that assessee was setting up a new plant and expenditure incurred on travel of foreign expert to help the assessee in the matter has been held to be capital expenditure. The facts there show that during the years under consideration, the assessee had set up a new plant at Bhandup for manufacturing additional pharmaceutical goods. Thus, a capital asset there had come into existence & thus expenditure was directly relatable to it. In the present case, the capital assets has never come into existence and accordingly ITAT has allowed travelling expenses or ore testing charges only as revenue expenditure. The travelling expenses or manganese ore testing charges pertaining to the existing mine allowed by the I.T.A.T. in the present facts cannot be directly correlated with the acquisition of any capital asset. We, therefore, do not find anything wrong with said exercise undertaken by the I.T.A.T & its answers to question no. 1 & 2.
In so far as answer to question no. 3 is concerned, it is clear that study undertaken by the foreign company ie M/s. Seltrust Engineering Company Limited, U.K. was in connection with working of assessee’s existing mines and optimization of the assessee’s existing product. It did not relate in any way to proposed new plants. In view of undisputed findings on facts mentioned supra, the above logic also holds good here.
With regard to question no. 4 is concerned, in this situation, when the structure does not vest in the assessee and it has to pay monthly rent thereof to the Government, the expenditure incurred by the assessee thereon has been rightly treated as revenue expenditure.
Accordingly appeal of the revenue dismissed.