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Commissioner of Income-tax, Vidarbha and Marathwada Vs. Ballarpur Industries Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 263 of 1977
Judge
Reported in[1979]119ITR817(Bom)
ActsIncome Tax Act, 1961 - Sections 37(1)
AppellantCommissioner of Income-tax, Vidarbha and Marathwada
RespondentBallarpur Industries Ltd.
Appellant AdvocateR.J. Joshi, Adv.
Respondent AdvocateD. Pal, Adv.
Excerpt:
.....the income chargeable to tax. 37 that the expenditure incurred not being in the nature of capital expenditure has not been satisfied and the assessee would not be justified in claiming a deduction and the tax authority cannot permit such an item to be deducted even though the incurring of the expenditure may not be doubted. even though such information was called for by the ito, for reasons best known to the assessee, the assessee failed to supply the information. 1,00,000. 14. in the further appeal before the tribunal, it was urged on behalf of the revenue that the assessee failed to comply with the request of the ito for the supply of certain material and had not discharged the burden cast upon him of showing that the expenditure is admissible as a deductible expenditure. in..........for providing economic use of the raw material for production of paper, it should be allowed as revenue expenditure. the ito required the assessee to place before him the following information and material : (a) assessee's letter to industrial aid international by virtue of which the said survey was carried out; (b) whether the survey was asked for relating to any specific wood of any specific jungle; and (c) the report of the industrial aid international. 4. the assessee failed to produce the said material. the ito did not doubt the genuineness of the expenditure but was of the opinion that the result of the survey had created on advantage of enduring nature and lasting benefit to the assessee which will be available to it for all future years to come, as pulp is the basic raw.....
Judgment:

Kantawala, C.J.

1. At the instance of the revenue, the following two questions are referred to us for determination :

'(1) Whether, on the facts and in the circumstances of the case, the amount of liability for payment of gratuity determined on the basis of actuarial valuation in respect of the relevant accounting year is deductible in the assessment years 1970-71 and 1971-72 in accordance with la

(for the assessment year 1971-72)

(2) Whether, on the facts and in the circumstances of the case, the expenditure incurred for the study of utilisation of hard wood for the manufacture of chemical pulp which is a basic raw material for manufacture of paper was a revenue expenditur ?'

2. So far as the first question above referred to is concerned, the facts need not be stated, as, so far as this court is concerned, it has been concluded by the decision in the case of Tata Iron & Steel Co. Ltd. v. D. V. Bapat, ITO : [1975]101ITR292(Bom) . In view of the said decision, we answer the question in the affirmative.

3. The facts, so far as the second question is concerned, may be shortly stated. Ballarpur Industries Ltd., the assessee, is a company carrying on business of manufacture and sale of paper, etc. It keeps its accounts according to the year ended June 30 which is also adopted as the previous year for assessments to income-tax. In the accounts for the year ended June 30, 1970, the assessee debited to the account relating to 'raw materials consumed' a sum of Rs. 1,00,000 being expenditure described by it as 'survey expenses'. The said amount was paid to Industrial Aid International of Trivandrum, which had been entrusted with the work of conducting a survey of providing technical operational data on the utilisation of hardwood for the manufacture of chemical pulp which is a basic raw material for paper manufacture. In the assessment year 1971-72, it claimed a deduction in the sum of Rs. 1,00,000 relating to survey expenses. Before the ITO, it was urged, on behalf of the assessee, that it was utilising hardwood as a substitute for bamboo for the manufacture of paper, that the cost of hardwood as raw material had been found to be comparatively higher than the cost of bamboo, that it was thought desirable to carry out the survey in order to explore the feasibility of reducing the cost of production and that the relevant expenditure having been incurred for providing economic use of the raw material for production of paper, it should be allowed as revenue expenditure. The ITO required the assessee to place before him the following information and material :

(a) Assessee's letter to Industrial Aid International by virtue of which the said survey was carried out;

(b) Whether the survey was asked for relating to any specific wood of any specific jungle; and

(c) The report of the Industrial Aid International.

4. The assessee failed to produce the said material. The ITO did not doubt the genuineness of the expenditure but was of the opinion that the result of the survey had created on advantage of enduring nature and lasting benefit to the assessee which will be available to it for all future years to come, as pulp is the basic raw material in the manufacture of paper. He, accordingly, held that the expenditure of Rs. 1,00,000 was capital expenditure.

5. In an appeal filed by the assessee, the AAC held that it was a normal incidence of business to improvise ways and means of reducing costs and any expenditure incurred thereon was revenue expenditure. He, accordingly, directed that the claim for deduction of Rs. 1,00,000 should be allowed in the assessment for the year 1971-72.

6. In an appeal preferred by the revenue before the Tribunal, the Tribunal found that the genuineness of the expenditure had not been doubted by the ITO, that the expenditure had been incurred with the object of trying to explore the feasibility of reducing the cost of raw material and thereby effecting economy in the cost of production and that, having regard to the nature and purpose of the expenditure, the finding of the ITO that it was in the nature of capital expenditure was not supportable. The contention on behalf of the revenue that the assessee had not supplied certain materials to the ITO, including a copy of the report of the Industrial Aid International, has been dealt with by the Tribunal as without force, that the ITO had not doubted the genuineness of the expenditure and had not questioned the purpose for which the expenditure was incurred. The Tribunal ultimately decided the point in favour of the assessee. It is from this order of the Tribunal that the second question arose for determination.

7. Mr. Joshi, on behalf of the revenue, submitted that, having regard to the provisions of s. 37 of the I. T. Act, 1961, before any expenditure can be allowed in computing the income chargeable under the head 'Profits and gains of business or profession', it is obligatory on the part of the assessee to prove that the expenditure was not of the nature described in ss. 30 to 36 and s. 80VV, that such expenditure was not in the nature of capital expenditure or personal expenses of the assessee and finally the expenditure was expended wholly and exclusively for the purpose of the business or profession. His submission was that before any deduction in tax can be permitted by the taxing authority and the Tribunal all the three ingredients ought to be fulfilled and the onus is on the assessee to establish each one of the said ingredients. In the present case, his contention was that the assessee had failed to discharge the onus that the sum of Rs. 1,00,000 paid to the Industrial Aid International was not in the nature of capital expenditure. His submission was that if such onus was not discharged, then the assessee must fail and he would not be permitted to have the item of expenditure as a permissible deduction in computing the income chargeable to tax. He emphasised that even though the ITO required the assessee to produce certain material, the assessee kept it back from the tax authority and the Tribunal and at no stage, at the time of appeal before the AAC or the Tribunal, any attempt was made by the assessee to produce the material for record. In short, his submission was, in the absence of any material, one of the essential ingredients required by s. 37 that the expenditure incurred not being in the nature of capital expenditure has not been satisfied and the assessee would not be justified in claiming a deduction and the tax authority cannot permit such an item to be deducted even though the incurring of the expenditure may not be doubted.

8. Dr. Pal, on the other hand, on behalf of the assessee, submitted that there is a clear finding of the Tribunal that the object of incurring the expenditure was to explore the feasibility of reducing the cost of raw material and thereby effect economy in the cost of production. He submitted that whenever such is the object of the assessee in incurring any item of expenditure, it automatically follows that the expenditure incurred to carry out such an object is not in the nature of capital expenditure. He emphasised that the finding of the ITO that the survey undertaken by the Industrial Aid International created an advantage of enduring nature and lasting benefit to the assessee had not been upheld by the Tribunal in view of the nature and the purpose of the expenditure. He, therefore, submitted that both the AAC and the Tribunal were right in arriving at the conclusion that the item of expenditure of Rs. 1,00,000 was a permissible deduction. In the alternative, he submitted that in case this court is not persuaded to accept the submission, it should remand the matter to the Tribunal so as to permit the assessee to lead fresh evidence so as to satisfy it that the sum of Rs. 1,00,000 which was admittedly paid to the Industrial Aid International was not an expenditure of capital nature. It should, therefore, remand the matter to the Tribunal with opportunity to the assessee to lead fresh evidence and material on this aspect of the matter.

9. The material provisions of the Act which may have to be considered to determine the rival contentions of the parties are under s. 37(1) of the Act. Its provisions are as under :

'Any expenditure (not being expenditure of the nature described in sections 30 to 36 and section 80VV and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'.'

10. Having regard to this provision, before any item of expenditure can be allowed in computing the income chargeable to tax, three ingredients are required to be fulfilled :

(1) The item of expenditure must not be of the nature described in ss. 30 to 36;

(2) The item of expenditure must not be of the nature of capital nature or personal expenses of the assessee; and

(3) The expenditure must be laid out and expended wholly and exclusively for the purposes of the business or profession.

11. The onus is upon the assessee to prove each one of the ingredients. Assuming for the purpose of this reference, that so far as the first and the third ingredients are concerned, the same are fulfilled having regard to the materials on record, a question arose whether the second ingredient above mentioned has been fulfilled. It is the settled principle of law that if any deduction is claimed, it is for the assessee to prove that the deduction is legally allowable to him. If he fails to do so, the amount so claimed is liable to be assessed. (See Gopinath Vir Bhan v. CIT ). The onus will, therefore, be upon the assessee to prove that the sum of Rs. 1,00,000 paid to the Industrial Aid International was not an expenditure in the nature of capital expenditure.

12. In the present case, the ITO specifically called upon the assessee to produce the following materials during the course of the assessment proceedings :

(a) Assessee's letter to the Industrial Aid International by virtue of which the survey was carried out.

(b) Whether the survey was asked for relating to any specific wood of any specific jungle.

(c) The report of the Industrial Aid International. Even though such information was called for by the ITO, for reasons best known to the assessee, the assessee failed to supply the information. He took the view that the amount incurred on survey expenses of Rs. 1,00,000 has to be held to be a capital expenditure because he was of the opinion that the result of the survey had created an advantage of enduring nature and lasting benefit to the assessee, which would benefit the assessee for all future years to come.

13. In the appeal, the AAC reversed the finding of the ITO, inter alia, holding that the expenditure incurred on the study undertaken to reduce the manufacturing cost (if hard wood is also used as raw material) does not ipso facto amount to capital expenditure. According to him, it is only a normal incidence of business to improvise ways and means of reducing cost and any expenditure incurred thereon is to be allowed as revenue expenditure. Accordingly, he gave relief to the assessee in the sum of Rs. 1,00,000.

14. In the further appeal before the Tribunal, it was urged on behalf of the revenue that the assessee failed to comply with the request of the ITO for the supply of certain material and had not discharged the burden cast upon him of showing that the expenditure is admissible as a deductible expenditure. That contention on behalf of the revenue was rejected by the Tribunal even though the assessee did not supply to the ITO certain material including a copy of the report of the Industrial Aid International on the ground that the ITO had not doubted the genuineness of the payment nor the purpose for which the expenditure was undertaken. The Tribunal found that it was clear that the expenditure was incurred with the object of trying to explore the feasibility of reducing the cost of the raw material and thereby effecting economy in the cost of production. Since this was the object or the purpose of the expenditure, the Tribunal confirmed the finding of the AAC.

15. It was urged by Dr. Pal that since there is a clear finding of the Tribunal that the object or the purpose of incurring the expenditure was to explore the feasibility of reducing the cost of raw material and thereby effecting economy in the cost of production, a fortiori it follows that the expenditure is in the nature of revenue expenditure and cannot be regarded as a capital expenditure. It is settled position in law that before any item of expenditure can be regarded as expenditure of either a revenue nature or a capital nature, all the facts and circumstances of the case have to be looked at, and the mere object or the idea with which the expenditure is incurred is not decisive. In the present case, it is true that the incurring of the expenditure is not doubted and it has been held by the Tribunal as a matter of fact that the object of incurring the expenditure was not at all doubted. But the mere object of incurring a particular item of expenditure is not decisive of the matter for determining the question whether it is of a revenue or capital nature. In the present case, though a specific request was made by the ITO to provide the relevant material which could have helped the tax authority and the Tribunal to consider the rival contentions of the parties, for reasons best known to the assessee, no attempt to produce the same was made at any stage, either before the ITO or the AAC or the Tribunal. That being the position, we do not know what are the contents of the report that was ultimately submitted by the Industrial Aid International. Placed in such a situation, it is not possible for us to say, as held by the ITO, that the survey undertaken by the Industrial Aid International created an advantage of enduring nature and lasting benefit to the assessee. In the absence of the report, we are equally not in a position to say whether the amount of Rs. 1,00,000 which was spent for the survey was expended as an item of revenue expenditure. Having regard to the provisions of s. 37, above referred to, the onus is upon the assessee, inter alia, to establish that the particular item of expenditure in respect of which deduction is claimed is not of a capital nature. On the material on record, we are unable to say whether the sum of Rs. 1,00,000 that was paid to the Industrial Aid International can, in accordance with the well established principles, be regarded as an item of revenue expenditure or capital expenditure. Since the onus is upon the assessee to prove that the particular item of expenditure claimed by way of deduction is not of a capital nature, having regard to the facts of this case and the language of s. 37 of the Act, the assessee will not be justified in claiming a deduction for the sum of Rs. 1,00,000 paid to the Industrial Aid International.

16. That takes us to the alternative contention of Dr. Pal that the matter should be remanded to the Tribunal with a view to enable the assessee to produce the relevant material so that a proper finding may be given by the Tribunal on the question whether the sum of Rs. 1,00,000 which was admittedly paid to the Industrial Aid International was an item of expenditure of capital or revenue nature. Reliance was placed by him upon the decision of the Supreme Court in the case of CIT v. Indian Molasses Co. P. Ltd. : [1970]78ITR474(SC) . In that case, the question that arose for consideration before the Supreme Court was whether a particular item of expenditure was such that the requirements of s. 10(2) (xv) of the Indian I. T. Act, 1922, were satisfied. Dr. Pal has relied upon the observations made by the Supreme Court at page 482. On the facts before the Supreme Court, the Supreme Court took the view that two courses were open to them, either to call for a supplementary statement of the case from the Tribunal or to decline to answer the question raised by the Tribunal and to leave the Tribunal to take appropriate steps to adjust its decision under s. 66(5) in the light of the answer of the court. It was also felt by the Supreme Court that if it directed the Tribunal to submit a supplementary statement of the case, the Tribunal, according to the several decisions referred to therein, would be restricted to the evidence on the record and may not be entitled to take additional evidence. That, according to the Supreme Court, might result in injustice. On the facts of the case, the Supreme Court felt it appropriate to decline to answer the question on the ground that the Tribunal had failed to consider and decide the question whether the expenditure was laid out or expended wholly and exclusively for the purpose of the business of the company and had not considered all appropriate provisions of the statute applicable thereto. Certain aspects of the matter in that case were not considered by the Tribunal and the court's reason was that it was reluctant to do so. That was the view taken by the Supreme Court having regard to the particular facts of the case.

17. In the present case, right from the inception the ITO, inter alia, required the assessee to produce the assessee's letter to the Industrial Aid International by virtue of which the survey was carried out as well as the report of the Industrial Aid International. For reasons best known to the assessee, it declined to produce the same. Even the same grievance was made by the counsel who appeared on behalf of the revenue before the Tribunal and in fact it was urged on behalf of the revenue that since the assessee failed to comply with the request made by the ITO for production of materials, it did not discharge the burden cast upon it by showing that the expenditure is admissible as a deduction. Even at this stage no attempt appears to have been made by the assessee to produce the relevant materials that were asked for, which could assist the taxing authority and the Tribunal to decide the question. When such is the position, we have to decide the question on such material as has been produced by the assessee before the taxing authority and the Tribunal and we see no reason why the case should be remanded to the Tribunal for taking additional evidence as, according to us, the onus that lies upon the assessee of showing that the particular item of expenditure claimed by way of deduction is not of a capital nature has not been discharged. The sum of Rs. 1,00,000 paid to the Industrial Aid International cannot be regarded as a permissible deduction.

18. Accordingly, our answer to question No. 2 is as under.

19. Having regard to the observations made in the judgment, the assessee will not be entitled to the deduction in the sum of Rs. 1,00,000 as an item of expenditure under s. 37 of the Act.

20. The assessee shall pay the costs of the revenue.


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