Gujarat H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenditure incurred on testing, exhibiting and designing of scooters was of capital nature ?

Counsel Appeared

J. P. Shah, for the Assessee : B. R. Shah with R. P. Bhatt of M/s R. P. Bhatt & Co., for the Revenue

THAKKAR, J.:

Expenditure incurred after the manufacture of a product but before marketing it in order to test its suitability for marketing, is expenditure of the nature of revenue-so contends the assessee in the present reference. Another question raised by the assessee is that in respect of jigs and fixtures affixed to the machinery, and actually used, depreciation must be allowed not according to the rates fixed by the relevant provisions but in accordance with the assessment of loss of utility value made by its own experts. These questions arise in the circumstances outlined in the next breath.

2. In relation to the assessment for the year 1971-72 pertaining to the applicant assessee (The Gujarat Small Industries Corporation, Ahmedabad), inter alia, two questions arose before the ITO. One was in regard to the claim for deduction of Rs. 30,897 in connection with the expenses incurred on testing of 25 scooters manufactured by the assessee. Expenses on petrol, etc., were incurred in order to ascertain whether the scooters were road worthy and in order to take a decision whether or not to commence commercial production of the scooters. The second dispute pertained to a deduction claimed in respect of a sum of Rs. 86,561 and two other relatively minor items. The deduction was claimed on account of the downward revaluation by the technical expert of the corporation in relation to certain tools, dies, jigs, etc. The ITO disallowed the claim made by the assessee on both the counts. The Appellant Assistant Commissioner, Ahmedabad Range II, Ahmedabad (hereinafter referred to as “the AAC”), upheld the contention of the assessee in so far as the expenditure of Rs. 30,897 in connection with the expenses incurred on testing 25 scooters manufactured by the assessee was concerned, on the ground that it was an expenditure of a revenue nature and not an expenditure of a capital nature as held by the ITO. In regard to the second dispute, the AAC confirmed in appeal the view taken by the ITO. The Income-tax Appellate Tribunal, Ahmedabad Bench ‘B’ (hereinafter referred to as ” the Tribunal”), reversed the decision on the AAC on the first point, but confirmed the decision of the AAC on the second point. Thereupon, at the instance the assessee, three questions have been referred to us for, our opinion.

3. First, we propose to deal with the question as to whether the AAC was right in treating the expenditure of Rs. 30,897 incurred in connection with the testing of the scooters, as revenue expenditure. As we indicated earlier, the Tribunal has reversed the view taken by the AAC and upheld the contention of the Revenue that the expenditure was in the nature of a capital expenditure and no deduction is permissible on the premise that it is revenue expenditure. The question has been framed in the following manner : “Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenditure incurred on testing, exhibiting and designing of scooters was of capital nature ?”

4. The facts are not in dispute. The assessee-Corporation was incorporated some years prior to the assessment year in question (1971-72). It was engaged in several activities and in its return for the assessment year in question the assessee had declared an income of more than Rs. 13 lakhs. Out of the numerous activities carried on by the assessee one was pertaining to the production of scooters. Some 4 scooters were manufactured in 1969 and 21 scooters were manufactured in 1970. These 25 scooters were subjected to rigorous road test in order to take a decision for the commencement of the commercial production of the scooters. The test was necessary because the reputation of the assessee- corporation and the scooters manufactured by it was at stake. Of course the testing took place “after” the scooters were manufactured. The testing involved the incurring of expenditure on petrol, etc., in connection with the testing of the vehicles. The view taken by the Tribunal is that it is an expenditure of a capital nature and that the AAC was in error in upholding the claim of the assessee that it is an expenditure of a revenue nature. The question, therefore, arises as to whether the expenditure was of a capital nature or a revenue expenditure.

5. The following factors must be taken into account. (1) By testing the scooters no advantage of an enduring nature had come into existence. (2) It was not an expenditure incurred “before” the installation of a plant. (3) The assessee-corporation had been doing business for more than 10 years and in fact it had declared an income of more than Rs. 13 lakhs in the relevant assessment years. (4) This was an additional activity commenced by the assessee- corporation since long before the assessment year in question. (5) In the assessment year in question it had already produced 25 scooters. (6) It was not a trial production in the sense of testing of the machinery or plant in order to test whether the plant or the machinery was functioning properly. (7) It was an expenditure incurred in connection with the testing of the product manufactured by the assessee-corporation which was already engaged in several activities. (8) It was not a new plant which produced some goods for the first time.

6. If the expenditure was incurred before the commencement of the production, the matter might have stood on a different footing. The combined effect of these factors impels one to the conclusion that the expenditure was in the nature of revenue. The assessee- corporation was carrying on numerous activities for about 10 years and the expenditure incurred was not in connection with the testing of the plant established for the manufacture of the scooters, but was an expenditure incurred in connection with the trial of the scooters. The trial revealed that the scooters had stood up the test satisfactorily and in subsequent years Commercial production was commenced. Under the circumstances, the expenditure incurred in testing the scooters must be treated as expenditure of a revenue nature. It is difficult to conceive how it can be said to be an expenditure of a capital nature, for, it has not brought into existence any capital asset or advantage of an enduring nature. Counsel for the assessee placed reliance on CIT vs. Alembic Glass Industries Ltd. (1976) 103 ITR 715 (Guj), in support of his contention that where the assessee- company was already engaged in manufacturing activities and had started a new branch of manufacturing activities, the expenditure incurred could be treated as revenue expenditure and not as capital expenditure. In that case, the assessee-company had established an altogether new unit at a different centre, namely, Bangalore, and all the expenditure incurred in this connection was treated as revenue expenditure by reason of the fact that it could not be considered to be a new business undertaking. The reasoning which found favour with the Court was that the production of both the units was considered the production of the assessee- company itself and that both the lines of business constituted the “same business” of the assessee-company. In the present case, it is not necessary to go that far. The assessee-company was already engaged in manufacturing activities and it had started only a new line of production, namely, production of scooters, and the expenditure incurred was not in connection with the plant or machinery established in order to produce the scooters. It was incurred in con nection with the testing of the product and not in connection with the testing of the machinery or plant installed in order to manufacture the product. The decision in CIT vs. Saurashtra Cement & Chemical Industries Ltd., (IT Ref. No. 26 of 1973 decided on August 25, 1975—(1981) 127 ITR 47 (Guj)) will not, therefore, come to the rescue of the Revenue in the facts and circumstances of the present case. In that case, the expenditure was incurred “before” a new plant commenced production. It was in that context that the Court took the view that it was an expenditure of a capital nature having regard to the fact that it was a part of the actual cost incurred in order to bring into existence the cement plant which was to produce the cement. It may be mentioned that the expenditure incurred was in connection with the electricity charges paid in the Course of the trial run for the plant before the plant commenced commercial production. Since it was a new plant and the cost bad entered into the cost of the plant and machinery having regard to the fact that it was incurred in order to test the machinery which was to produce the cement, the Court understandably took the view that it was added to the actual cost of the plant as laid down by the Supreme Court in Challapalli Sugars Ltd. vs. CIT 1977 CTR (SC) 309 (1975) 98 ITR 167 (SC). The principle laid down in the aforesaid decision is that as per accepted accountancy principle all expenditure incurred in order to bring into existence a capital asset and put it in working condition would form a part of the fixed assets. We may again emphasise that, here, the expenditure was not incurred in connection with the testing of the plant and machinery which was installed in order to produce the scooters. The expenditure was incurred in connection with the testing of the product, namely, the scooters manufactured at the plant. The conclusion is, therefore, inescapable that the expenditure incurred is of the nature of revenue expenditure and the AAC was Tight in upholding the claim of the assessee. The Tribunal committed an error in reversing the view taken by the AAC. This question must, therefore, be answered in the negative and against the Revenue.

7. In regard to the remaining two questions, they require to be discussed along with each other because, in a way, they are interlinked. These two questions, referred to us, are as under:

“(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in disallowing the claim of (a) Rs. 4,555, (b) Rs. 8,540, and (c) Rs. 86,561 based on revaluation of (i) tools, (ii) dies, (iii) jigs and fixtures, respectively, at figures lower than their earlier book value?”

” (3) Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that the depreciation on jigs and fixtures was allowable only at the general rate of 10per cent ?”

8. The ITO, the AAC and the Tribunal have concurrently taken the view that in respect of tools, dies, jigs and other fixtures, the assessee is entitled to claim depreciation at the general rate of 10per cent. The contention of the assessee is that the amounts Rs. 86,561, Rs. 8,540 and Rs. 4,555 could be claimed by way of deduction on account of downward revaluation of these tools, fixtures, etc. made by its own technical expert. In our opinion, the Tribunal was perfectly justified in taking the view that these jigs and fixtures were part of the plant and machinery and that, under the Circumstances, nothing more than a depreciation at the general rate of 10per cent can be allowed. The contention of the counsel is that, in fact, the Tribunal was not right in proceeding on the footing that the jigs and fixtures were parts of the plant and machinery. In the first place, whether or not the jigs and fixtures form part of the plant and machinery, is a question of fact and it cannot be treated as a question of law which can be referred to us. Besides, in our opinion, the Tribunal was perfectly justified in taking the view that these jigs and fixtures form part of the plant and machinery. In the earlier years, depreciation was claimed at the general rate of 10per cent by the assessee-corporation itself. In respect of the assessment year in question a deduction was claimed for the first time on the basis of a downward revaluation made by the technical expert justifying a claim for deduction to the aforesaid extent. The question must of necessity arise in what context the revaluation is made. The facts are not clear. Counsel for the assessee is not able to contend that the revaluation has anything to do with the fall in the value of the tools. The main basis of his argument was that these tools were of such a nature that they were losing their utility fast. If such was the case, the claim of the assessee would amount to a claim of depreciation on account of its user. If the deduction is claimed for diminution in the utility value of the tools in question then it amounts to a claim for depreciation. The rate of depreciation cannot be fixed by the expert of the assessee-company. The depreciation can be claimed only on the basis of the prescribed rate. And, counsel for the assessee is unable to contend that if it is treated as a part of the plant and machinery, depreciation, at a higher rate could have been claimed. The depreciation claimed on the revaluation basis is, in fact, altogether impermissible in the context of the contention that the utility value of the artiles was reduced. It must be mentioned that if the jigs, fixtures and tools in question were lying unused in the store room there was no question of a claim for deduction on account of reduction in utility value. In that event, the claim can arise in connection with the revaluation on the basis of fluctuation in the value of the articles in question. Such is not the basis of the claim. The basis of the claim is that the jigs, fixtures, tools, etc., were actually used in the course of the manufacturing activity. If that is so, they form part of the machinery and depreciation can be claimed at the prescribed rate. In that event, it is not permissible for an assessee to make its own assessment of the extent of the depreciation by user and to claim it on the basis of the assessment made by its own expert. The view taken by the Tribunal is, therefore, unexceptionable. Both these questions, therefore, must be answered in the affirmative and against the assessee.

9. In the result, the questions referred to us are answered as under: Question No. 1. In the negative and against the Revenue. Question No. 2. In the affirmative and against the assessee. Question No. 3. In the affirmative and against the assessee.

10. There will be no order as to costs.

[Citation : 142 ITR 35]