Punjab & Haryana H.C : The expenses incurred by the assessee on the replacement of membranes is a revenue expenditure or the same can be treated to be the deferred revenue expenditure by spreading over a period of three years and whether the same is allowable as a deduction in the year in which it was incurred

High Court Of Punjab & Haryana

Punjab Alkalies & Chemicals Ltd. vs. CIT

Assessment Year : 2004-05

Section : 37(1)

Adarsh Kumar Goel And Ajay Kumar Mittal, JJ.

IT Appeal Nos. 295, 296 And 297 Of 2010

August 2, 2010

JUDGMENT

Adarsh Kumar Goel, J. – This order will dispose of I.T.A. Nos. 295, 296 and 297 of 2010. All the appeals involve common questions of law.

2. I.T.A. No. 297 of 2010 has been filed by the assessee under section 260A of the Income-tax Act, 1961 (in short “the Act”), against the order dated July 28, 2009, passed by the Income-tax Appellate Tribunal, Chandigarh Bench “A” (hereinafter referred to as “the Tribunal”) in I.T.A. No. 1085/Chd/2008 for the assessment year 2004-05 proposing to raise the following substantial questions of law :

“(i) Whether, on the facts and in the circumstances of the case, the expenses incurred by the assessee on the replacement of membranes is a revenue expenditure or the same can be treated to be the deferred revenue expenditure by spreading over a period of three years and whether the same is allowable as a deduction in the year in which it was incurred ?

(ii) Whether the Income-tax Appellate Tribunal was justified in treating the expenditure incurred on replacement of membranes as a capital expenditure especially when there is no extra capacity generated and the expense incurred is only for replacement of old and worn out membranes ?

(iii) Whether the Income-tax Appellate Tribunal was justified in relying upon the irrelevant fact that the assessee had shown the expenditure incurred on the replacement of membranes in its books of account as deferred revenue expenditure ?

(iv) Whether, on the facts and in the circumstances of the case, the amount of Rs. 18,07,00 due to the assessee from PNFC which has been ordered to be wound up by this hon’ble court by its order dated July 21, 2000, is a ‘doubtful debt’ particularly in view of the fact that on the sale of assets of PNFC by the official liquidator there are absolutely no chances of any unsecured creditor like the assessee to get any amount ?

(v) Whether, on the facts and in the circumstances of the case, the action of the authorities in ordering the initiation of penalty proceedings under section 271(1)(c) of the Income-tax Act against the appellant/assessee are justified ?”

3. The assessee is engaged in manufacture of caustic soda and other inorganic chemicals. It claimed expenditure under the head “Replacement of membrane”. The stand of the assessee was that as per the production technology electrolyzer consists of (1) anode, (2) cathode, (3) membrane and various other separations. There are two compartments. In the first compartment is anode and in the second compartment is cathode. membrane is used as separator between the anode compartment and the cathode compartment. As per the manual and the warranty clause the life of membrane is only three years. The Assessing Officer allowed the said expenditure to the extent of one-third which was the amount written off every year having regard to the life of the item in question. The said finding has been affirmed by the Commissioner of Income-tax (Appeals) as well as by the Tribunal. The claim of the assessee for writing off doubtful debts was not allowed. The debts have not been written off. Penalty proceedings have been initiated but are still pending.

4. The finding recorded by the Commissioner of Income-tax (Appeals) on the issue of replacement of membrane is as under :

“9. I have carefully considered the submissions of the assessee and also perused the assessment order. I find that the Assessing Officer has given a finding that the assessee has changed its method of accounting in the relevant previous year to reduce its profits. The relevant para is reproduced as under :

‘The above reply shows that the assessee has changed its method of accounting in the relevant previous year to reduce its profit as declared by the profit/loss account. The said adjustment has been done by the assessee in computation sheet where full capital expenses related to addition of membranes and the opening balance both are claimed. This claim cannot be accepted as the membranes used by the assessee are capital in nature and have a life of three years as noticed by the auditors. Hence, the expenses in this account is allowable only to the tune of benefits/utilization of the assets. Hence, only one-third of the addition to the membrane is allowed as revenue expense and the balance of the claim is disallowed. The disallowance on this account comes to Rs. 2,09,91,401 (Rs. 2,44,76,754-one-third of Rs.1,04,56,059).’

10. The hon’ble Income-tax Appellate Tribunal, Ahmedabad, has discussed various case law which have also been relied upon by the assessee. So I need not discuss these case law individually. Moreover, there is no single case law which is directly on the facts in the present case. There are the case law pertaining to the facts in individual cases. It is a settled law that the decision is given by the hon’ble courts with reference to the question of law and the facts of that case. There is no case law which has been relied upon by the assessee pertains to the replacement of membrane. I am in agreement with the reasons given by the Assessing Officer because of the following reasons :

(i) The assessee has claimed the said expenditure only in the computation of income.

(ii) In the earlier assessment years, the assessee has been claiming the expenditure in the span of three assessment years. This shows that the assessee himself admits that such expenditure has been enduring benefits.

(iii) The ratio of the decision of the hon’ble Income-tax Appellate Tribunal, Ahmedabad, in the case of Amtrex Appliances Ltd. [2005] 94 TTJ 396 (Ahd.) is clearly applicable to the facts of the case. The relevant finding is given in para. 8.8 of the order, which is reproduced as under :

‘8.8 The assessee debited only one-fifth amount of the expenditure in its profit and loss account of the year under consideration and has spread over the said expenditure over a period of five years with a view to avoid presentation of distorted picture of the profits to its shareholders. Such spreading over of the said expenditure over a period of five years was made by the assessee in accordance with the accepted accounting practice which is in no way contrary to any specific provisions contained in the Income-tax Act. On the other hand, such spreading over of the expenditure resulting in enduring benefit is in conformity with the aforesaid principles laid down by the hon’ble Supreme Court in the case of Madras Industrial Investment Corporation [1997] 225 ITR 802 . We, therefore, do not find any infirmity in the order passed by the Commissioner of Income-tax (Appeals) directing the Assessing Officer to allow deduction in respect of the aforesaid amount in the same manner as has been adopted by the assessee for the purpose of debiting the said expenditure in its profit and loss account prepared as per the books of account regularly maintained by the appellant-company.’

(iv) As regards the contention of the assessee that if there are two different views, the view which is in favour of the assessee should be adopted as held by the hon’ble Supreme Court in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC). The same also does not hold good in the present case also. This is for the reason that the issue of replacement of membrane has never come up before any court wherein the hon’ble court has given its definite opinion. Once we see the facts of this particular case, the conclusion is obvious that the assessee has himself claimed the expenditure in its profit and loss account only to the extent of one-third.

(v) It is also pertinent to note the decision of the hon’ble Income-tax Appellate Tribunal, Chandigarh, in I.T.A. No. 273/Chandi/ 2008, assessment year 2004-05 in the case of M/s. Dr. Morepen Ltd., Chandigarh, wherein the hon’ble Income-tax Appellate Tribunal on a similar issue has taken note of the decision of the hon’ble Income-tax Appellate Tribunal, Ahmedabad, Amtrex Appliances Ltd. [2005] 94 TTJ 396 (Ahd). Although the decision in the case of Dr. Morepen Ltd. is decided in favour of the assessee but the relevant observations as given by the hon’ble Income-tax Appellate Tribunal in para. 6 of the order by referring the case of Amtrex Appliances Ltd. [2005] 94 TTJ 396 (Ahd) are reproduced as under :

‘The learned Departmental representative, in the course of his arguments has relied upon the decision of the Ahmedabad Bench of the Tribunal in the case of Amtrex Appliances Ltd. [2005] 94 TTJ 396 (Ahd). In this case, sales promotion expenditure has been held by the Tribunal to be allowable as one-fifth over a period of five years. It is, therefore, submitted by the learned Departmental representative that in the instant case also, the sales promotion expenses be allowed on the same basis as adopted by the Assessing Officer. We have perused the said decision and find the same stands on an altogether different footing. In the case before the Ahmedabad Bench, the assessee himself had debited only one-fifth amount of the expenditure in its profit and loss account of the year under consideration and spread over the entire expenditure over a period of five years. The assessee, however, claimed the expenditure as revenue expenditure in a single year while filing its return of income. The expenditure related to advertisement expenses for launch of new products. The Assessing Officer had disallowed the expenditure on the ground that the expenses incurred in launching a new product was a capital expenditure. The Commissioner of Income-tax (Appeals), however, while upholding the nature of the expenditure as revenue, yet held that the assessee was not justified in claiming the expenditure in the single year by ignoring its own claim made in the profit and loss account. Thus, the Tribunal does not lay down any absolute proposition that the sales promotion expenses are allowable over a period of five years. It is seen that the said decision was rendered on its own peculiar facts and cannot be imported here. Thus, the said decision does not help the Revenue in the instant case.’ (Emphasis supplied).

In the present case also, the assessee himself debited one-third of expenditure in the profit and loss account.

11. Respectfully following the decision of the hon’ble Income-tax Appellate Tribunal, Ahmedabad, wherein the hon’ble Income-tax Appellate Tribunal has followed the decision of the hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT[1997] 225 ITR 802 , I hold that the action of the Assessing Officer was justified in making disallowance. The hon’ble Supreme Court has introduced the concept of deferred revenue expenditure to be claimed over a period of years. The contention of the assessee that there is no concept of deferred revenue expenditure does not hold good.”

5. The above finding was affirmed by the Tribunal.

6. We have heard learned counsel for the appellant.

7. The contention raised by learned counsel for the appellant is that the expenditure in question was in the nature of revenue as by the said expenditure no new asset came into existence and the expenditure was of recurring nature necessary for carrying on the business. Reliance has been placed on the following judgments :

(1) Jagat Bus Service, Saharanpur v. CIT [1950] 18 ITR 13 (All.) ;

(2) R.S. Radha Kishan Kapoor v. CIT [1963] 47 ITR 938 (All.) ;

(3) CIT v. Ashok Leyland Ltd. [1969] 72 ITR 137 (Mad.) ;

(4) CIT v. Cominco Binani Zinc Ltd . [1993] 204 ITR 56 (Cal) ; and

(5) Punjab State Industrial Development Corporation Ltd. v. CIT [1997] 225 ITR 792 (SC).

8. On the basis of this, it has been submitted that the entire expenditure should have been allowed as revenue expenditure.

9. We are unable to accept the submission. The assessing authority, the Commissioner of Income-tax (Appeals) as well as the Tribunal held that the expenditure was in the nature of capital expenditure, having regard to the fact that the item in question, i.e., membrane had life of three years and eight years. The item in question is an equipment without which manufacturing is not possible. It is not an expenditure of the nature which is exhausted immediately. There is no single or rigid test for holding an expenditure to be revenue or capital. Generally enduring benefit of an expense, i.e., trade test or new asset test or functional test may be employed for determining the expenditure to be capital or revenue depending upon the nature of the business carried and the nature of expenditure incurred. In the facts and circumstances of the case, the nature of expenditure cannot be held to be of revenue nature. At best, the expenditure to the extent of one-third could be held in the circumstances to be revenue expenditure in the current assessment year and the remaining expenditure could not be treated to be revenue expenditure and allowed under section 37 of the Act as permissible expenditure.

10. Reference is made to the judgments on which reliance has been placed by the learned counsel. The judgments relied upon are distinguishable and do not advance the case of the assessee.

11. In the Jagat Bus Service’s case [1950] 18 ITR 13 (All), the assessee was in the business of running motor buses and lorries and the expenditure in question was incurred for permission to run the motor vehicle, it was observed that the money was spent every year and the same may be in the nature of revenue expenditure. However, in the present case, the expenditure incurred to the extent of one-third thereof relatable to this year, could be held to be in the nature of revenue expenditure.

12. The question arose in R.S. Radha Kishan Kapoor’s case [1963] 47 ITR 938 (All.), regarding payment of amount to one of the retiree brothers by way of goodwill which was held to be in the nature of capital expenditure.

13. The issue in Ashok Leyland Ltd.’s case [1969] 72 ITR 137 (Mad.) was in respect of expenditure incurred for terminating managing agency agreement which was allowed as a revenue expenditure.

14. The Calcutta High Court in Cominco Binani Zinc Ltd.’s case [1993] 204 ITR 56 (Cal), was considering the issue relating to expenditure incurred for re-routing the pipeline connection and to take the pipeline further upstream for getting saline-free water which was held to be in the nature of revenue expenditure in the facts and circumstances of the case therein.

15. In Punjab State Industrial Development Corporation Ltd.’s case [1997] 225 ITR 792 (SC), the apex court held that the fee paid to the Registrar of Companies for expansion of the capital base was capital expenditure

16. In the present case, the concurrent finding recorded by the authorities clearly shows that the entire expenditure was not in the nature of revenue expenditure. Reliance has been placed by the authorities on the judgment of the hon’ble Supreme Court in Madras Industrial Investment Corporation Ltd. v. CIT [1997] 225 ITR 802 , wherein the expenditure was in the nature of discount on debentures part of which was held to be expenditure proportionately as revenue expenditure. It was held that if the expenditure was incurred wholly or exclusively for the purpose of business, the same could be entirely allowed in the year in which it was incurred. But where only part of it could be attributed to the business in the year in question, to that extent only the expenditure could be held to be revenue expenditure.

17. We are of the opinion that in view of the finding recorded by the authorities, the questions raised cannot be held to be substantial questions of law.

18. The appeals are dismissed.

[Citation : 338 ITR 86]

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