1993-VIL-663-BOM-DT

Equivalent Citation: [1993] 201 ITR 1036, 112 CTR 328

BOMBAY HIGH COURT

Date: 22.01.1993

COMMISSIONER OF INCOME-TAX

Vs

TATA ENGINEERING AND LOCOMOTIVE CO. LIMITED

BENCH

Judge(s)  : U. T. SHAH., DR. B. P. SARAF 

JUDGMENT

The judgment of the court was delivered by

DR. B. P. SARAF J. -By this reference under section 256(1) of the Income-tax Act, 1961, at the instance of the Revenue, the Income-tax Appellate Tribunal has referred the following two questions to this court for opinion : " 1. Whether, on the facts and in the circumstances of the case, apprentices employed by the assessee in terms of the contract of apprenticeship were in law the assessee's employees and as such the assessee was entitled to initial depreciation at 20 per cent. of the actual cost under section 32(1)(iv) in respect of the apprentice school building and apprentice shop building ?

2. Whether the sum of Rs. 1,73,849 paid by the assessee to Messrs. Harnischfeger Corporation, U. S. A., in terms of the agreement is a admissible revenue deduction for the assessment year 1968-69 ? "

The first question is common to the assessment years 1968-69 and 1969-70, whereas the second question is confined to 1968-69 only.

As is evident from the question set out above, the dispute in the first question pertains to allowability of initial depreciation under section 32(1)(iv) in respect of amounts spent by the assessee on the construction of school and shop buildings for its apprentices. The real controversy is as to whether apprentices can be said to be persons employed in the business of the assessee within the meaning of section 32(1)(iv) of the Act. The dispute raised in the second question relates to the allowability of the amount of royalty paid by the assessee to a foreign company for various technical services provided by it. The admitted position is that the payments of royalty made in pursuance of the very same agreement during the assessment year 1969-70 have already been allowed. The dispute in this case is confined to the payments made during the year 1968-69.

We take up question No. 1 first. The contention of the Revenue is that apprentices are not " persons employed in the business of the assessee " and, as such, the benefit of initial depreciation under section 32(1)(iv) of the Act is not available to the assessee in the case of the school building and shop buildings constructed for their welfare. To put it differently, the contention is that apprentices are merely trainees who receive stipend during the period of apprenticeship ; such apprentices, during the period of apprenticeship, cannot be held to be employees though, on completion of the period of apprenticeship, on being appointed by the employer, they may become so. In that view of the matter, the stand of the Revenue is that the school and shop buildings constructed for the welfare of the apprentices do not meet the requirements of section 32(1)(iv) of the Act.

Learned counsel for the assessee, on the other hand, submits that the words " employed in the business ", used in section 32(1)(iv) of the Act, cannot be given the narrow interpretation as suggested by learned counsel for the Revenue. According to him, this expression is very wide and the words " employed in the business " would only mean all persons engaged in the business. If such a view is taken, then apprentices would definitely fall within the expression " persons engaged in the business ". Reliance is placed in this connection on a decision of the Court of Appeal in Reece v. Ministry of Supply and Ministry of Works and Planning [1945] 1 All ER 239. Reliance is also placed on the decision of the Supreme Court in C. B. D. T. v. Aditya V. Birla [1988] 170 ITR 137.

We have considered the rival submissions. Section 32(1)(iv) of the Act, as it stood at the material time, read as follows :

" 32. (1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of section 34, be allowed-. . . .

(iv) in the case of any building which has been newly erected after the 31st day of March, 1961, where the building is used solely for the purpose of residence of persons employed in the business and the income of each such person chargeable under the head 'Salaries' is seven thousand five hundred rupees or less, or where the building is used solely or mainly for the welfare of such persons as a hospital, creche, school, canteen, library, recreational centre, shelter, rest-room or lunch-room, a sum equal to twenty per cent. of the actual cost of the building to the assessee in respect of the previous year of erection of the building; but any such sum shall not be deductible in determining the written down value for the purposes of clause (ii) of sub-section (1) (emphasis supplied).

From a plain reading of this provision, it is clear that initial depreciation under this clause is allowed in respect of building used solely or mainly as a hospital, creche, school, canteen, library, recreational centre, rest-room or lunch-room. The only condition is that such building should be used solely or mainly for the welfare of persons employed in the business. Apparently, the object of this provision is to encourage the assessees in making investment in such activities which are beneficial to the persons employed in the business. Such a provision has to be considered in the light of its object. It has to be interpreted in a manner which will advance this objective. So interpreted, it is difficult to restrict the expression "persons employed in the business" to persons who are regular employees of the assessee in the strict legal sense of the term. In the context and setting in which it appears, it can only mean "engaged". The word "employed" in this clause, therefore, has to be read as "engaged" in the business of the assessee.

Reference may be made in this connection to an English decision of the Court of Appeal in Reece v. Ministry of Supply and Ministry of Works and Planning [1945] 1 All ER 239, where the point for consideration was as to what amounts to " employment " for the purpose of a scheduled disease. The expression used in the statute was " employed at any time in the processes ". It was held that the word " employed " had no relation to a capacity in which employer had contracted to employ the workman. The word employed was interpreted to mean " engaged ". It was observed (at page 242):

"The words 'employed at any time in the processes' contain latent ambiguity in that the word 'employed' may mean either contractually employed or merely engaged in the processes, that is, working at them. The latter is the true meaning,.....

The word [employed] has no relation to the capacity in which the employer contracts to employ the workman. The whole emphasis of the legislation is on the nature of the process on which the man is in fact engaged, because of the risk to health which it involves. Had the word used been 'engaged' that meaning would have been apparent ; but one of the meanings of the word 'employed' is 'engaged', and we have no doubt that that is the true meaning of the word 'employed' in these schemes. "

In CBDT v. Aditya V. Birla [1988] 170 ITR 137, the Supreme Court also had occasion to consider the meaning of the word " employer" in the context of section 80RRA of the Act. It was held that the word " employer is used in that section not in any technical sense but as meaning a person who uses or employs the services of another person. It was further held that the word "employ" means the use of services of any person : it comprehends a wholetime servant or a part-time engagee.

We are, therefore, of the clear opinion that the word "employed" used in section 32(1)(iv) is a very wide expression and takes within its ambit not only the persons who are contractually employed in the strict sense of the term, but all persons engaged in the business of the assessee it has no relation to the capacity in which the assessee contracts to employ them. What is required is that such persons should be so "engaged" in the business that one can say that they are "employed". That being so, an apprentice will clearly fall within the expression "persons employed in the business". Reference may also be made in this connection to the apprenticeship agreement in this case which also clearly goes to show that the apprentices were engaged in the various trading activities of the assessee as specified in the agreement as any other employee. The assessee is, therefore, entitled to initial depreciation under section 32(1)(iv) of the Act in respect of the apprentice school building and the apprentice shop building, The first question is, therefore, answered in favour of the assessee.

We now turn to the second question. Counsel for the assessee submits that the dispute in this question is restricted to the claim for allowance of royalty during the relevant year. According to counsel, the controversy is as to whether the amount became due and payable during the relevant year or not. The Tribunal has arrived at the finding of fact that it became due and payable during the relevant previous year corresponding to the assessment year 1968-69 and, in that view of the matter, it is a pure finding of fact and no question of law arises for consideration. According to counsel for the Revenue, the question is whether the amount paid by the assessee in the instant case by way of technical fees is revenue or capital expenditure which is a question of law. We have considered the question from both the angles.

Prima facie, it appears that the Appellate Assistant Commissioner disallowed the claim for deduction of this amount on the ground that it was not due and payable during the relevant year. The assessee went in appeal to the Tribunal which came to a finding that the amount was allowable as a deduction inasmuch as it fell due and payable in the relevant year. That being so, it will be a question of fact. However, even on merits, we do not find any force in the submissions of counsel for the Revenue. We have perused the relevant agreement between the parties which shows that the various services rendered by the foreign company were connected with the manufacturing and selling of the products manufactured by the assessee on a more efficient basis. It was payable at 21/2 per cent. of the net sale prices of the goods produced by the assessee and the payment was to be made for every complete unit of the said product manufactured and despatched by the assessee after completion of the first 250 complete units. Evidently, the payment was a revenue expenditure. There is nothing to show to the contrary. The submission of counsel for the Revenue that the assessee derived some " enduring benefit " does not have much force in view of the facts and circumstances of the present case.

It is a well-accepted legal position that no test of universal application can be laid down to determine the question whether an expenditure incurred by the assessee is revenue expenditure or capital expenditure. It will depend on the facts and circumstances of each case and on the application of the proper principles of law. One of the guiding factors should be the aim and object of the expenditure. The question, however, will have to be decided by looking at the overall facts and circumstances of the case from the point of view of a practical and prudent businessman rather than from the angle of a tax gatherer, upon strict juristic classification of the legal rights, if any, secured in the process. In other words, in order to arrive at a just and proper conclusion, one must look at the type, nature and character of the advantage in a commercial sense (with out giving undue emphasis to the form thereof or the terminology used) in the light of the surrounding circumstances and in the larger context of necessity and expediency. If the expenditure is so related to the carrying on or conduct of the business that it may be regarded as an integral part of the profit-making process and not for acquisition of an asset or a right of permanent character, the expenditure may be regarded as revenue expenditure even though the advantage may endure for some indefinite future. What is relevant is the purpose of the outlay and its intended object and effect, considered in a commonsense way, having regard to the business realities. In a given case, the test of "enduring benefit" might break down. (See Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 (SC), at 391 ; Empire Jute Co. Ltd. v. CIT [1980] 124 ITR I (SC) ; CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257 (SC)).

As observed by the Supreme Court in Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377, the idea of " once for all " payment and enduring benefit " are not to be treated as something akin to statutory conditions nor are the notions of " capital " or " revenue " a judicial fetish. What is capital expenditure and what is revenue are not eternal verities. It has to be flexible so as to respond to the changing economic realities of business.

The Supreme Court in the above case made it clear beyond all doubt that (at page 390 it would be unrealistic to ignore the rapid advances in research .... and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in the fast-changing area of . . . . science". It was observed (at page 390 ) :

"The state of the art in some of these areas of high priority research is constantly updated so that the know-how cannot be said to be the element of the requisite degree of durability and non-ephemerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeon-holing an outlay such as this as capital. The circumstance that the agreement in so far as it placed limitations on the right of the assessee in dealing with the know-how and the conditions as to non-partibility, confidentiality and secrecy of the knowhow incline towards the inference that the right pertained more to the use of the know-how than to its exclusive acquisition. "

This judgment has thus given a new dimension to the concept of " enduring benefit ". The approach now is more realistic and practical. The " purpose of the outlay ", " its intended object and effect ", considered in a commonsense way, having regard to the business realities, are more relevant factors for determining whether a particular outlay is capital or revenue. In a given case, if the situation so requires, the test of " enduring benefit " might even break down under the weight of these considerations.

Applying the above principles to the facts of the present case, it is difficult to hold that the payment of Rs. 1,73,849 made to Messrs. Harnischfeger Corporation, U. S. A., was not revenue expenditure.

In that view of the matter, the second question referred to us is also answered in favour of the assessee.

In the result, both the questions referred to us are answered in the affirmative, that is, in favour of the assessee and against the Revenue.

No order as to costs.

 

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