2001-VIL-347-MAD-DT

Equivalent Citation: [2002] 257 ITR 253, 177 CTR 563

MADRAS HIGH COURT

Date: 08.11.2001

EID. PARRY (INDIA) LTD.

Vs

COMMISSIONER OF INCOME-TAX, COMMISSIONER OF INCOME-TAX

BENCH

Judge(s)  : R. JAYASIMHA BABU., A. K. RAJAN.

JUDGMENT

The judgment of the court was delivered by

R. JAYASIMHA BABU J.-The assessee wanted to set up a new project for the manufacture of "methanol" at Ennore. It incurred an expenditure on that account over a period of time-all of it prior to the assessment year 1981-82. The amount spent for that project on various items such as engineering fee, travel expenses, interest, salary for employees working in the project, legal fees, etc., for the period from 1975 to 1978 aggregated to Rs.37,55,159. The assessee sought to claim these items as deductible items as expenditure for the assessment year 1981-82.

That claim of the assessee was negatived by the Assessing Officer, by the appellate authority as also by the Appellate Tribunal. At the instance of the assessee, the correctness of the Tribunal's decision has been called into question.

It is clear from the assessee's own case that the expenditure was incurred for the purpose of setting up a new project. The expenditure had been incurred in the years prior to the assessment year in question. The assessee's case that it subsequently abandoned that project does not on that score convert what was an expenditure in the nature of capital expenditure into a revenue expenditure. The setting up of a new project was clearly in the capital field and not in that of revenue. The abandonment of that project is the abandonment of a project on which capital expenditure had been incurred. The expenditure incurred on that capital project was not something which could be regarded as revenue expenditure laid out exclusively and wholly for the purposes of business of the assessee as what the assessee was trying to start was a new business for the manufacture of a new product. The expenditure incurred therein was clearly capital expenditure and not revenue expenditure.

Counsel for the assessee relied on the decision of the Supreme Court in the case of B.R. Ltd. v. V.P. Gupta, CIT [1978] 113 ITR 647. The court there was not concerned with the assessee starting a new industrial project, and subse quently abandoning the same. The case there concerned a trader who had, while retaining the same management and control of the business, sought to carry forward the losses in the import business of an earlier year against the profit of the export business of a later year. He was allowed to do so after the court found that the two businesses, one which had been discontinued and one which was later started, in fact, constituted the same business.

Here, it is evident that the assessee is engaged in the manufacture of other products and wanted to add a new product "methanol" and for that purpose had incurred expenditure by way of entering into a collaboration agreement for purchase of machinery but had abandoned the same. The fact that the assessee continued to carry on its old business does not on that score render the expenditure incurred by it in the setting up of a new project for the manufacture of a new product, a revenue expenditure.

The Supreme Court in the case of Swadeshi Cotton Mills Co. Ltd. v. CIT [1967] 63 ITR 65, considered the case of an assessee who was carrying on the business of manufacture and sale of cloth and other textile goods and who had entered into contract for the purchase of textile machinery for the purposes of expanding its factory. The assessee therein subsequently cancelled the contracts and paid compensation to the contracting parties. The amount so expended by the assessee was held by the Supreme Court to be an expenditure in the capital field and not revenue expenditure. The ratio of that case is clearly attracted to the facts of the case here. While in the case of Swadeshi Cotton, payment had been made with the object of avoiding unnecessary investment in capital assets, here the expenditure had been incurred for the purposes of setting up the project, but that expenditure was unfruitful, as the project was not established but was abandoned. The abandonment was obviously to avoid any further expenditure being incurred, and to avoid any other adverse effects by reason of incurring of additional expenditure which the assessee itself thought would no longer be beneficial to pursue. Such expenditure incurred by it for a new project which was in the nature of capital expenditure remains such, and by claiming it in a subsequent year as revenue expenditure, the assessee cannot convert what was capital expenditure into revenue expenditure.

The question referred to us as to whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sums of Rs.5,93,672 and Rs.31,61,487 incurred by the assessee in connection with the establishment of a new methanol project in the earlier years, which was ultimately abandoned was not an allowable deduction for the assessment year 1981-82, is therefore answered in favour of the Revenue and against the assessee.

The other question referred to us is:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the medical expenses reimbursed by the assessee to its employees would be part of the salary paid to them for purposes of computing the amount disallowable under section 40A(5)/40(c) of the Income-tax Act, 1961?"

This question has to be and is answered in favour of the Revenue in the light of the decision of the Supreme Court in the case of CIT v. Mafatlal Gangabhai and Co. P. Ltd. [1996] 219 ITR 644, wherein it has been held that the medical expenses reimbursed by the assessee to its employees would be part of the salary paid to them for the purpose of computing the amount disallowable under section 40A(5) and section 40(c) of the Income-tax Act, 1961.

At the instance of the Revenue also the questions have been referred to us arising from the assessment for the assessment years 1977-78 and 1981-82. The first of those questions is:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the differential levy price of cane sugar of Rs.3,49,898 and Rs.36,07,388 collected by the assessee during the years should not be treated as revenue receipt and be brought to tax?"

That question is required to be answered in favour of the assessee as those amounts had been allowed to be collected by the assessee in terms of the interim orders made by the High Court pending disposal of litigation with regard to the assessee's right to collect those amounts, and the assessee had been directed to keep those amounts in a separate account and the amount was kept in deposit subject to the final decision of the Supreme Court.

During the assessment years litigation continued to be pending and it could not be said that those amounts belong to the assessee and form part of its trading receipt. Those amounts therefore are not to be treated as revenue receipts of the assessee and brought to tax. In the case of CIT v. South India Sugars Ltd. [2001] 248 ITR 92, this court examined a similar question and held that the amounts received by the assessee being associated with the liability to refund in the event of the assessee not succeeding in the court in the pending litigation, that amount could not be regarded as a trading receipt.

The other question referred to us at the instance of the Revenue, is as to whether the Tribunal was correct in holding that the assessee is entitled to higher rate of depreciation on the basis of the certificate obtained from the chemical engineer. The assessee had claimed higher rate of depreciation at the rate of 15 per cent. on certain machinery on the ground that they came into contact with corrosive chemicals.

The Tribunal has merely confirmed the order of the Commissioner (Appeals) who had directed the Income-tax Officer to take the help of an engineer and to ascertain as to whether the chemicals were corrosive and identify the machinery with which such corrosive chemicals came into contact. The Commissioner had adopted the right approach and that is in conformity with the decision of this court in CIT v. E.I.D. Parry India Ltd. [1999] 240 ITR 253. There is no infirmity in the order of the Tribunal in that regard. That question is answered in favour of the assessee and against the Revenue.

 

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