1995-VIL-195-ITAT-
Equivalent Citation: ITD 055, 418,
Income Tax Appellate Tribunal CALCUTTA
Date: 28.02.1995
USHA ALLOYS & STEELS LTD.
Vs
DEPUTY COMMISSIONER OF INCOME-TAX.
BENCH
Member(s) : N. PACHUAU., R. V. EASWAR.
JUDGMENT
Per R.V. Easwar, J.M. - The only issue in this appeal is whether the disallowance of Rs. 1,70,000 is proper or not.
2. The assessee is a public limited company carrying on the business of manufacture and sale of billets and rolled products at its Adityapur (Jamshedpur) and Agra factories respectively. In the return the assessee claimed deduction, inter alia, in respect of fees for the preparation of feasibility report prepared by Development Consultants Pvt. Ltd. with regard to the installation of captive power station at its Jamshedpur factory. The claim was disallowed on the ground that it represented capital expenditure.
3. On appeal, it was contended on behalf of the assessee that due to erratic power supply, the production in Jamshedpur was being adversely affected with the result that the company had to pay the labour wages and overheads even for idle hours when there was no production. The company thought that if it had a captive power station in the factory, such a situation could be avoided. Since the feasibility of installing the captive power station had to be examined first, the company engaged M/s. Development Consultants Pvt. Ltd. and obtained from them a report thereon. After securing the report it was found that the amount required to be invested will not be economical for the company and, therefore, the proposal was dropped. It was contended that under the aforesaid facts, the fees paid for the feasibility report should be allowed as expenditure incidental to the business. It was claimed that no asset of enduring advantage was brought into existence, the proposal having been dropped. It was, therefore, contended that the expenditure cannot be treated as capital expenditure. Various authorities were cited in support of the contention.
4. The CIT (Appeals), however, did not accept the assessee's contentions. According to him, the judgment of the Allahabad High Court in the case of CIT v. Bazpur Co-operative Sugar Factory Ltd. [1983] 142 ITR 1 was applicable to the facts of the case and, therefore, the expenditure should be held to be capital in nature. He, therefore, rejected the assessee's contentions.
5. In the further appeal before us the same contentions were repeated on behalf of the assessee. The following judgments were relied upon :
1. Asiatic Oxygen Ltd. v. CIT [1991] 190 ITR 328 (Cal.)
2. Hindusthan Aluminium Corpn. Ltd. v. CIT [1986] 159 ITR 673 (Cal.).
6. On behalf of the revenue strong reliance was placed on the following decisions :
1. Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC)
2. Scientific Engg. House (P.) Ltd. v. CIT [1986] 157 ITR 86 (SC)
3. CIT v. Peas Industrial Engineers (P.) Ltd. [1994] 205 ITR 447 (Guj.)
4. CIT v. J.K. Chemicals Ltd. [1994] 207 ITR 985 (Bom.).
It was argued on behalf of the department that had the captive power station been installed, it would have been a capital asset in the assessee's hands and, therefore, the expenses on feasibility report should also logically be treated as capital expenditure as forming part of the cost of the unit.
7. On a consideration of the rival contentions, we are of the view that the disallowance should be deleted and the expenditure should be allowed as revenue expenditure. We may straightway state that the judgments of the Calcutta High Court relied upon on behalf of the assessee before us are not applicable to the facts of the case and they are distinguishable in Hindusthan Aluminium Corpn. Ltd's case. The expenditure was incurred for prospecting and searching bauxite mines. The assessee in that case was engaged in the production of aluminium and bauxite constituted the raw material. On these facts, it was held that the expenditure enabled the assessee to prospect and search for the stock-in-trade which is only a revenue expenditure. The judgment of the Calcutta High Court in the case of Asiatic Oxygen Ltd is also distinguishable since in that case also the feasibility report related to the raw material for the assessee's projects. Thus, the assessee before us cannot succeed on the basis of these two decisions. That, however, is not to say that the assessee cannot succeed at all. The expenditure has not brought into existence any asset of an enduring advantage to the assessee. This is clear from the fact that due to the huge cost involved the proposal to instal the power unit was dropped. The question of considering the expenditure as part of the cost of the unit as per the Challapalli Sugars Ltd.'s case would have arisen only if the power unit had come into existence. On the facts as they stand, in the assessee's case, the expenditure was not incurred with a view to bringing into existence any capital asset. The immediate object of the expenditure was not to bring into existence the captive power plant but the object was only to explore or examine the feasibility of installing a captive power plant. The step was necessitated only because of frequent interruption in the power supply in the Jamshedpur factory which resulted in loss of production as well as payment to workers even for idle time. The object for which the feasibility report was prepared must be viewed in this broader context. in the judgment of the Bombay High Court relied upon by the ld. D.R. the project report was in respect of setting up a new unit for manufacture of a more concentrated type of fertiliser.In that case the assessee was engaged in the manufacture of fertilisers. On these facts, the Bombay High Court held that the expenditure on the project report was capital expenditure. The High Court held that there was an enduring benefit to the assessee inasmuch as the expenditure was incurred in order to decide whether to acquire some profit-making assets for the purpose of its business which would be of an enduring nature. It is also noteworthy that while coming to this conclusion, the Bombay High Court dissented from the judgment of the Calcutta High Court in the case of Kesoram Industries & Cotton Mills Ltd. v. CIT [1992] 196 ITR 845. Therefore, the judgment of the Bombay High Court cannot assist the revenue in the present case. The facts are also clearly distinguishable inasmuch as in the present case there was no acquisition of any profitmaking asset for the purpose of the assessee's business which would be of an enduring nature. As already seen, the installation of the captive power plant would have merely ensured uniterrupted and continuous supply of power with the result that the assessee would have saved on idle time payments as well as loss of production. The judgment of the Supreme Court in the case of Empire Jute Co. Ltd v. CIT [1980] 124 ITR 1 directly applies in favour of the assessee. In that case the Supreme Court held that it is not every advantage of enduring nature acquired by the assessee that brings the expenditure for disallowance and that it was material to consider the nature of the advantage in a commercial sense and only where the advantage is in the capital field it can be disallowed. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management to conduct the assessee's business more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be revenue expenditure, even though the advantage may endure for an indefinite future. The Supreme Court cautioned that the test of enduring benefit is not a conclusive test and should not be applied blindly or mechanically without regard for the particular facts of a given case.These observations apply to the expenditure concerned in the present case. It must be remembered that the feasibility report by itself does not bring into existence the captive power plant. It merely tells the assessee whether a captive power plant can be installed or not. The cost of the power plant would undoubtedly be capital expenditure but it does not logically follow therefrom that the expenditure on feasibility report should also be treated as capital expenditure, for, it brought into existence nothing. On the other hand, the expenditure was incurred with a view to ensuring an uninterrupted power supply which would save the losses. The expenditure, therefore, has to be treated as revenue expenditure, incurred wholly or exclusively for the purpose of the assessee's business. The judgment of the Gujarat High Court relied upon by thelId. D.R. followed the Supreme Court's judgment in Challapalli Sugars Ltd.'s case and the Supreme Court judgment in CIT v. Elecon Engg. Co. Ltd [1987] 166 ITR 66. It was held that travelling expenses incurred in connection with acquisition of technical know-how may be capitalised and treated as actual cost of the know-how. This decision lays down an entirely different proposition and does not assist the revenue in the present case. So also, the judgment of the Supreme Court in the case of Scientific Engg. House (P.) Ltd where the Supreme Court held that drawings and designs acquired by the assessee by incurring expenditure would be eligible for depreciation.
9. For the aforesaid reasons, we are of the view that the expenditure of Rs. 1,70,000 incurred on obtaining the feasibility report is to be allowed as revenue expenditure. We delete the disallowance and allow the appeal.
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