High Court Of Patna
CIT vs. Bharat Agrico Co.
Asst. Year 1978-79, 1979-80, 1980-81
S.N. Jha & Aftab Alam, JJ.
Tax Cases Nos. 51 to 53 of 1984
15th January, 1997
K.K. Vidhyarthi and S.K. Sharan, for the Revenue : L.K. Bajla, for the Assessee
AFTAB ALAM, J. :
These cases have come on references made as directed by this Court under s. 256(2) of the IT Act, 1961, at the instance of the Revenue. These cases relate to the asst. yrs. 1978-79, 1979-80 and 1980-81. The three appeals arising for the aforesaid assessment years were disposed of by the Tribunal by a common order. Three reference cases were, therefore, filed in this Court though they involved a common question of law. According to the Courtâs direction, the Tribunal, Patna Bench, Patna, made a statement of the case and referred the following common question of law for the opinion of this Court :
“Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the expenditure incurred on payment of interest to partner and dealings in raw materials should be capitalised as pre-operative expenses for the purpose of allowing depreciation ?”
The material facts can be briefly stated as follows. At the material time, the assessee-firm was engaged in the business of manufacture and sale of Fawrah (udal). The account for the preoperative period was closed on 6th Dec., 1997, and a fresh account was started from 7th Dec., 1977, the date from which the firm commenced its business. In its first account for the asst. yr. 1978-79, the assessee claimed depreciation on a sum of Rs. 6,12,070 being the cost of machinery. On scrutiny, the AO found that the actual cost of machinery amounted to Rs. 5,72,004 over which a sum of Rs. 40,066 was added as “pre-operative expenses”. A further examination of the “preoperative expenses” disclosed that it included a sum of Rs. 25,226 as interest paid to the partners, as also expenses connected with the dealings in raw materials for the period prior to the start of the business. The ITO deducted an estimated sum of Rs. 30,000 from the account of pre-operative expenses shown by the assessee and allowed only the sum of Rs. 10,066 to be added as preoperative expenses to the actual cost of machinery for the purpose of allowing depreciation at 10 per cent. According to the ITO, the interest of partners and expenses connected with the dealings in raw materials were not in a real sense pre-operative expenses incurred for installation of machinery.
On appeal, the AAC upheld the assessment order passed by the ITO. The assessee took the matter before the Tribunal, Calcutta Bench “R”. Before the Tribunal, it was contended on behalf of the assessee that all the expenses incurred for the setting up of the business were capital expenditure on which the assessee was entitled to depreciation and in that view the ITO was not justified in disallowing the claim of the assessee to the extent of Rs.30,000. Upholding the assesseeâs contention, the Tribunal held that the expenditure incurred prior to the setting up of the business cannot be allowed as revenue expenditure and the same is necessarily to be capitalised. The claim of the assessee was consequentially upheld and the ITO was directed to capitalise the amount claimed by the assessee and to allow the consequential depreciation. In support of its view, the Tribunal relied upon the decisions in Western India Vegetable Products Ltd. vs. CIT (1954) 26 ITR 151 (Bom) : TC 13R.1131 and Travancore Cochin Chemicals (P.) Ltd. vs. CWT (1967) 65 ITR 651 (SC) : TC 67R.1155. I am unable to see how those decisions help the assessee in this case. The decisions cited by the Tribunal examined the question and laid down the law on the question as to when a business is set up. The controversy involved in these cases is not with respect to the date when the assesseeâs business was set up. The question is whether all expenses, regardless of their nature, incurred before the commencement of the business must necessarily be capitalised. In this regard, it is indeed true that broadly speaking outlay is deemed to be capital when it is made for the initiation of the business, for extension of a business, or for a substantial replacement of equipment. However, this test must be applied with great circumspection, because expenses for the initiation or extension of a business can also be on revenue account. It is now well settled, by a number of decisions that none of the tests to distinguish capital from revenue expenditure is conclusive or of universal application.
In these cases, no material has been brought to our notice to justify the finding that the payment of interest to the partners had any nexus direct or indirect with the setting up of the business or the installation of the machinery. In the facts and circumstances of the case, I am rather inclined to accept the contentions of the Revenue that the so- called expenditure by way of payment of interest to the partners was not an expenditure or investment at all but it was simply appropriation and allocation of available funds between the partners themselves. I am, therefore, of the view that so far as the amount of Rs. 25,206 is concerned, the AO and the appellate authority rightly did not allow it to be added to the actual cost of the machinery for capitalisation and for claiming depreciation of the rate of 10 per cent Similarly, I am unable to see how expenditure connected with dealings in raw materials for the period prior to the start of business can be said to be capital expenses.
For the reasons stated, I answer the question in the negative, that is to say, against the assessee and in favour of the
S.N. JHA, J. :
[Citation : 233 ITR 643]