High Court Of Kerala (Full Bench)
CIT vs. Glen View Rubber Co. (P) Ltd.
Section 37(1)
Asst. Year 1991-92
K.S. Radhakrishnan, ACTG. C.J.; K. Balakrishnan Nair & M.N. Krishnan, JJ.
IT Appeal No. 119 of 2001
30th January, 2007
Counsel Appeared
P.K.R. Menon & George K. George, for the Appellant : T.M. Mohammed Yousuff, Smt. Aysha Yousuff, Smt. Molly Jacob & Smt. Rabia Beegam T.K., for the Respondent
JUDGMENT
K.S. Radhakrishnan, ACTG. C.J. :
This matter has been placed before us on a reference made by the Division Bench after having doubted the correctness of the Bench decision of this Court in CIT vs. Steel Complex Ltd. (1998) 150 CTR (Ker) 677 : (1999) 238 ITR 1054 (Ker) wherein this Court has taken the view that the expenditure incurred on the installation of water treatment plant and fume extraction plant is revenue expenditure and not capital expenditure. Referring Bench opined that the asset created is of a durable nature and its maintenance and operating cost only could be called revenue expenditure while the investment could only be capital.
2. The assessee is a private limited company engaged in the business of manufacture of latex and such other rubber products. During the financial year 1991-92 assessee installed a water pollution treatment plant spending an amount of Rs. 4,31,017 in due compliance with the direction of the Kerala State Pollution Control Board. For the year ended 31st March, 1991, relevant to the asst. yr. 1991-92, return of income was furnished by the assessee on 30th Dec., 1991 showing a net income of Rs. 4,28,840. Assessee had stated that it expended an amount of Rs. 4,31,017 for installation of water treatment plant and claimed it as revenue expenditure. Assessing authority took the view that water treatment plant is an asset of permanent nature and has come into existence with enduring advantage to the assessee and the amount expended for the same is in the nature of capital expenditure. Further it is also noticed that IT Rules prescribed certain conditions for depreciation on water treatment plant and air pollution control equipments thereby granting certain percentage of depreciation to such plants and machinery acquired or installed by the assessee. Aggrieved by the order of the assessing authority, assessee took up the matter in appeal before the CIT(A). CIT(A) allowed the appeal placing reliance on the decision of the Tribunal, Cochin Bench in Steel Complex Ltd. vs. Dy. CIT, Special Range in ITA No. 792/Coch/1989 dt. 26th June, 1991 and the assessing authority was directed to treat the expenditure as revenue expenditure. Aggrieved by the order of the CIT(A), Revenue took up the matter in appeal before the Tribunal, Tribunal placing reliance on the Bench decision of this Court in Steel Complex Ltd.’s case (supra), held that the expenditure incurred for the establishment of water treatment plant is revenue expenditure and hence an allowable deduction. Appeal filed by the Revenue was therefore dismissed against which this appeal has been preferred. Sri George K. George, standing counsel appearing for the Revenue, submitted that the Tribunal has committed an error in holding that the expenditure incurred for installation of water treatment plant is revenue expenditure. Counsel submitted that the principle laid down by the apex Court in Alembic Chemical Works Co. Ltd. vs. CIT (1989) 77 CTR (SC) 1 : (1989) 177 ITR 377 (SC) was not correctly applied by this Court while arriving at that conclusion. Counsel submitted that water effluent plant is of a permanent nature with an enduring advantage to the assessee and the fact that due to installation of the plant the production or manufacture has not been increased is not a relevant consideration but the question is whether the expenditure incurred for installation of the same derives any enduring benefit to the assessee. Counsel also placed reliance on the decision of the Rajasthan High Court in Jaswant Trading Co. vs. CIT (1995) 125 CTR (Raj) 403 : (1995) 212 ITR 293 (Raj) and submitted that payment for water treatment plant is a capital expenditure.
Counsel appearing for the assessee, Smt. Molly Jacob on the other hand contended that installation of water treatment plant has not in any way enhanced the production of centrifuged latex and it has not contributed any improvement in the quality of product and it cannot be said that the expenditure incurred for installation of the plant is capital in nature. Counsel submitted that the principle laid down by the apex Court in Alembic Chemical Works Co.’s case (supra) has been correctly applied in Steel Complex Ltd.’s case (supra) warranting no interference and the SLP (Civil) C.C. 8802 of 1998 filed against that judgment by the CIT, Cochin was dismissed by the apex Court. Counsel submitted that this Court has correctly applied the principle laid down in the above judgment and have come to the correct conclusion that the expenses incurred for installation of effluent treatment plant is revenue expenditure. The question whether a particular expenditure incurred by the assessee is of capital or revenue in nature is always a complex and intricate issue and that it is not surprising that no one test or principle or rule of thumb is paramount in deciding such issues. Such a question has to be answered in the light of all the circumstances which are reasonable to take into account and the weight which must be given to a particular circumstance in a particular case must depend rather on common sense than on strict application of any single legal principle. The apex Court in CIT vs. Associated Cement Companies Ltd. (1988) 70 CTR (SC) 28 : (1988) 172 ITR 257 (SC) held that there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may breakdown. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principles laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test.
In Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34 (SC) the apex Court laid down a simple test for determining the nature of the expenditure and held as follows : “If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If, on the other hand, it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits, it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure.” All the same the Court observed it is difficult to lay down a test which would apply to all the situations. One has therefore to apply the criteria from the business point of view in order to determine whether on a fair appreciation of the whole situation the expenditure incurred for a particular matter is in the nature of capital expenditure or revenue expenditure. Again in K.T.M.T.M. Abdul Kayoom vs. CIT (1962) 44 ITR 689 (SC) the apex Court reiterated that each case depends on its own facts and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. The Court observed that what is decisive is the nature of the business, the nature of the expenditure, the nature of the right acquired and their relation inter se, and this is the only key to resolve the issue in the light of the general principles which are followed in such cases. In Bombay Steam Navigation Co. (1953) (P) Ltd. vs. CIT (1965) 56 ITR 52 (SC), the apex Court basing on the facts and circumstances of the case held that the assessee’s claim was not admissible, as the expenditure was related to the acquisition of an asset or a right of a permanent character the possession of which was a condition for carrying on the business. Relying on the various decisions of the apex Court as well as that of the English Courts, the apex Court in Alembic Chemical Works Co. Ltd.’s case (supra) held as follows : “In the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises, it is well nigh impossible to formulate any general rule, even in the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation. However, some broad and general tests have been suggested from time to time to ascertain on which side of the line the outlay in any particular case might reasonably be held to fall. These tests are generally efficacious and serve as useful servants; but as masters they tend to be over exacting.”
In Alembic Chemical Works Co. Ltd.’s case (supra), the question examined by the apex Court was whether the assessee engaged in the manufacture of antibiotics and penicillin has acquired the know-how to produce higher yield and sub-culture of high yielding strain of penicillin and whether the expenditure incurred for that is revenue expenditure or capital expenditure. The Court held that there was no material for the Tribunal to hold that the area of improvisation was not a part of the existing business or that the entire gamut of the existing manufacturing operations for the commercial production of penicillin in the assessee’s existing plant had become obsolete or inappropriate in relation to the exploitation of the new sub-cultures of the high yielding strains supplied by Meiji. The apex Court held that the expenditure incurred is revenue expenditure and not capital expenditure. Apex Court in Bikaner Gypsums Ltd. vs. CIT (1990) 89 CTR (SC) 176 : (1991) 187 ITR 39 (SC) held where the assessee has an existing right to carry on a business, any expenditure made by it during the course of business for the purpose of removal of any restriction or obstruction or disability would be on revenue account, provided the expenditure does not acquire any capital asset.
6. This Court in Steel Complex Ltd.’s case (supra) upheld the view of the Tribunal that the installation of water treatment plant for getting pure water with an intention to improve the functioning of the factory and that did not in any way enhance the production of steel and that the fume extraction plant also did not lead to any increase in the volume of production and was installed to ward off health hazards and in compliance with statutory requirements, The Division Bench held applying the principles laid down by the Supreme Court in Alembic Chemical Co. Ltd.’s case (supra) that the expenditure incurred on installation of water treatment plant and fume extraction plant is revenue expenditure. Facts we get in the instant case are entirely different. Facts of this case would show that the water treatment plant was installed in compliance with statutory requirements and is of a permanent nature. We hold that the ratio laid down by the Division Bench in Steel Complex Ltd.’s case (supra) cannot be of universal application and each case has to be decided on the facts and circumstances of that case. We are of the view that the CIT (A) as well as the Tribunal has committed an error in following the decision in Steel Complex Ltd.’s case (supra) in the instant case. We are of the view, when water treatment plant is installed permanently in compliance with the statutory requirement, the same would attain the character of capital expenditure. Installation of water treatment plant of the permanent nature has come into existence with enduring advantage to the assessee. Water treatment plant is a chargeable asset installed to prevent pollution. The question as to whether by installation of this plant, production of centrifuged latex has been increased or not is immaterial. Failure to comply with the statutory requirements of installation of water treatment plant would lead to closure of the factory and hence there is no question of any increase in the manufacture or production in the plant. The water treatment plant installed by the assessee consists of various chambers namely equalisation tank, primary settling tank, mixing channel, aeration tank, secondary settling tank and drying bed. The plant installed is a permanent tangible asset of enduring advantage to the assessee, of a free pollution-free atmosphere and environment. Benefit/ advantage derived by the assessee is not only for the year under consideration but for all succeeding assessment years. Expenditure spent for its operating and maintenance costs may be revenue, but the expenditure spent for installation of plant which is of an enduring nature is always capital.
We therefore allow this appeal and restore the order of the assessing authority and hold that the expenditure incurred by the assessee for installing water treatment plant is a capital expenditure and not revenue expenditure and we find ourselves unable to agree with the reasoning of the Division Bench in Steel Complex Ltd.’s case (supra), which in our view cannot be of universal application and is confined to the facts of that case.
[Citation : 291 ITR 1]
