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Commissioner of Income-tax Vs. Anand Gum Industries - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtRajasthan High Court
Decided On
Case NumberD.B. Income-tax Reference No. 46 of 1979
Judge
Reported in(1986)54CTR(Raj)17; [1985]154ITR680(Raj)
ActsIncome Tax Act, 1961 - Sections 256(1) and 256(2)
AppellantCommissioner of Income-tax
RespondentAnand Gum Industries
Appellant Advocate J.L. Daga and; J.P. Joshi, Advs.
Respondent Advocate S.K. Kakkar, Adv.
Excerpt:
.....30, 1978, affirmed the order passed by the aac and held that the expenditure was excludible as revenue expenditure because the same was incurred with a view that the existing set up of the assessee could function more efficiently. 3. the commissioner submitted an application before the tribunal for making a reference to this court, which was rejected by the tribunal by its order dated december 28, 1978, on the ground that the finding recorded by the tribunal, that the expenditure incurred by the assessee in getting the electric installation made it possible for the existing set up of the assessee to function more efficiently, was essentially a finding of fact and no question of law arose out of the order of the tribunal. their lordships held that the high court was justified in..........the various high courts in the country have uniformly taken the view that the expenditure of the nature incurred by the assessee in the present case was one of revenue nature.9. in cit v. mahalakshmi textile mills ltd. : [1967]66itr710(sc) , their lordships of the supreme court held that the introduction of the 'casablanca conversion system' in its spinning plant by the assessee involved replacement of certain roller stands and fluted rollers fitted with rubber aprons to the spinning machinery, removal of ring frames from certain existing parts and introduction of ball-bearing jockey-pulleys. it was held that the expenditure incurred by the assessee in modernising the machinery and plant was an expenditure of revenue nature and was admissible as a deduction.10. in empire jute co. ltd......
Judgment:

Dwarka Prasad, J.

1. This is an application under Section 256(2) of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), praying that the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (for short 'the Tribunal'), may be directed to submit a statement of the case and refer the following question of law arising out of the order of the Tribunal dated June 30, 1978, to this court for its opinion :

'Whether, on the facts and in the circumstances of the case, the ITAT was justified to hold that the sum of Rs. 18,501 pertaining to installation of poles and additional power lines by the R.S.E.B. was admissible as deduction in the computation of the assessee's total income for the assessment year 1974-75 ?'

2. The assessee is a registered partnership firm engaged in the manufacture of guwar gum and pulses used as cattle feed. In the accounting year relevant to the assessment year 1974-75, the assessee incurred an expenditure of Rs. 18,501 in the installation of poles and additional power lines. The assessee was having a 40 H.P. electric connection. On its request, the Rajasthan State Electricity Board sanctioned a load of 290 H.P. to the assessee, in order to cope with the heavy load required for manufacturing purposes. The Board decided to extend the 11 KV line up to the premises of the assessee. On account of the extension of 11 KV line, the assessee was required to pay the aforesaid sum of Rs. 18,501 to the Electricity Board. The installation remained the property of the Electricity Board. The assessee claimed deduction in respect of the expenditure incurred in the installation of poles and additional power line to the extent of Rs. 18,501 as revenue expenditure. The ITO refused to allowthe deduction on the ground that the said expenditure was of capital nature. On appeal, the AAC, Jodhpur, by his order dated April 12, 1977, held that the payment of the aforesaid amount of Rs. 18,501 by the assessee to the Electricity Board for installation of poles and laying of additional power line was in the nature of revenue expenditure, as it provided additional facility to the assessee and did not result in the creation of any new asset. On further appeal by the ITO, the Tribunal, by its order dated June 30, 1978, affirmed the order passed by the AAC and held that the expenditure was excludible as revenue expenditure because the same was incurred with a view that the existing set up of the assessee could function more efficiently.

3. The Commissioner submitted an application before the Tribunal for making a reference to this court, which was rejected by the Tribunal by its order dated December 28, 1978, on the ground that the finding recorded by the Tribunal, that the expenditure incurred by the assessee in getting the electric installation made it possible for the existing set up of the assessee to function more efficiently, was essentially a finding of fact and no question of law arose out of the order of the Tribunal.

4. In this application under Section 256(2), it was urged by the learned counsel appearing for the Revenue, that the question which arose on the facts found proved by the Tribunal, namely, that the expenditure incurred by the assessee was of the nature of revenue expenditure or capital expenditure, was essentially a question of law and the Tribunal committed an error in not referring the aforesaid question to this court for its opinion.

5. There can be no doubt that whether on the facts found proved by the Tribunal, a specific expenditure could be considered to be revenue expenditure or it was of the nature of capital expenditure is a question of law and, ordinarily, the Tribunal should have referred such a question to this court on an application made before it under Section 256(1). But, in cases, where the question of law raised is not substantial or the answer to the question is self-evident or the same has been concluded by a decision of the Supreme Court, the Tribunal is not bound to state the case nor is this court bound to call upon the Tribunal to refer the question, as has been held by their Lordships of the Supreme Court in CIT v. Chander Bhan Harbhajan Lal : [1966]60ITR188(SC) . In that case, their Lordships held that no substantial question of law arose out of the order passed by the Tribunal and observed that the High Court was right in exercising its discretion under Section 66(2) of the Indian I.T. Act, 1922, in rejecting the application for making a reference.

6. The same view was taken by the Supreme Court in CIT v. Indian Mica Supply Co. P. Ltd. : [1970]77ITR20(SC) . In that case, a similarquestion arose before their Lordships of the Supreme Court as has been raised before us, namely, as to whether a particular expenditure incurred by the assessee represented revenue expenditure or was of the nature of capital expenditure. Their Lordships held that the High Court was justified in refusing to direct the Tribunal to state the case and refer the question which was sought to be referred by the Commissioner, because it was perfectly clear that the amount which had been paid by the assessee was an expenditure which was wholly and exclusively incurred for the purpose of carrying on its business. It was observed that the assessee in incurring the expenditure had acted in the interest of and for the purpose of its business and the expenditure was not laid out for any purpose other than that of carrying on the business of the assessee. Their Lordships further observed that the answer was self-evident and the High Court was justified in declining to call for a reference.

7. In CGT v. Smt. Kusumben D. Mahadevia : [1980]122ITR38(SC) , Bhagwati J., speaking for the Supreme Court, observed as under (p. 42);

'It is true that there must be a question of law arising out of the order of the Tribunal before a reference can be made, but it is not every question of law that is required to be referred by the Tribunal to the High Court. Where the answer to the question of law is self-evident or is concluded by a decision of this court, it would be futile to make a reference and in such a case the Tribunal would be justified in refusing to refer the question to the High Court.'

8. It is urged before us by the learned counsel appearing for the assessee that even if a question of law arose in the present case, it is not a substantial question inasmuch as no plausible reason could be advanced in support of the view canvassed on behalf of the Revenue that the expenditure incurred by the assessee was of the nature of capital expenditure and that several decisions of the various High Courts in the country have uniformly taken the view that the expenditure of the nature incurred by the assessee in the present case was one of revenue nature.

9. In CIT v. Mahalakshmi Textile Mills Ltd. : [1967]66ITR710(SC) , their Lordships of the Supreme Court held that the introduction of the 'Casablanca conversion system' in its spinning plant by the assessee involved replacement of certain roller stands and fluted rollers fitted with rubber aprons to the spinning machinery, removal of ring frames from certain existing parts and introduction of ball-bearing jockey-pulleys. It was held that the expenditure incurred by the assessee in modernising the machinery and plant was an expenditure of revenue nature and was admissible as a deduction.

10. In Empire Jute Co. Ltd. v. CIT : [1980]124ITR1(SC) , their Lordships of the Supreme Court drew a distinction between revenue expenditure and capital expenditure in the following terms (p. 12) :

'Now it is true that if disbursement is made for acquisition of a source of profit or income, it would ordinarily, in the absence of any other countervailing circumstances, be in the nature of capital expenditure. But we fail to see how it can at all be said in the present case that the assessee acquired a source of profit or income when it purchased loom, hours. The source of profit or income was the profit-making apparatus and this remained untouched and unaltered. There was no enlargement of the permanent structure of which the income would be the produce or fruit. What the assessee acquired was merely an advantage in the nature of relaxation of restriction on working hours imposed by the working time agreement, so that the assessee could operate its profit-earning structure for a longer number of hours. Undoubtedly, the profit-earning structure of the -assessee was enabled to produce more goods, but that was not because of any addition or augmentation in the profit-making structure, but because the profit-making structure could be operated for longer working hours. The expenditure incurred for this purpose was primarily and essentially related to the operation or working of the looms which constituted the profit-earning apparatus of the assessee. It was an expenditure for operating or working the looms for longer working hours with a view to producing a larger quantity of goods and earning more income and was, therefore; in the nature of revenue expenditure. We are conscious that in law as in life, and particularly in the field of taxation law, analogies are apt to be deceptive and misleading, but in the present context, the analogy of quota right may not be inappropriate. Take a case where acquisition of raw material is regulated by quota system and in order to obtain more raw material, the assessee purchases the quota right of another. Now, it is obvious that by purchase of such quota right, the assessee would be able to acquire more raw material and that would increase the profitability of his profit-making apparatus, but the amount paid for purchase of such quota right would indubitably be revenue expenditure, since it is incurred for acquiring raw material and is part of the operating cost. Similarly, if payment has to be made for securing additional power every week, such payment would also be part of the cost of operating the profit-making structure and hence in the nature of revenue expenditure, even though the effect of acquiring additional power would be to augment the productivity of the profit-making structure.'

11. Thus, the principle is well-settled that expenditure incurred by an assessee for acquiring additional power or facility for running his machinery would be to augment the productivity of the profit-making structure and such expenditure would undoubtedly be of the nature of revenue expenditure. In a number of cases, where payments were made by the assessees for acquiring larger quantity of electricity for its manufacturing activities from the Electricity Board and overhead supply line was constructed or poles and additional power lines was provided by the Electricity Board, such payments made by the assessee to the Electricity Board towards the cost of additional installations for obtaining larger quantity of electricity have always been considered as revenue expenditure because the expenditure was held to have been made on account of commercial expediency. In this context, we may refer to the decisions of the Bombay High Court in CIT v. Excel Industries Ltd. : [1980]122ITR995(Bom) and that of the Gujarat High Court in Sarabhai M. Chemicals Pvt. Ltd. v. CIT : [1981]127ITR74(Guj) and of the Delhi High Court in Hindustan Times Ltd. v. CIT : [1980]122ITR977(Delhi) . In Hindustan Times' case : [1980]122ITR977(Delhi) , the amount was paid to the Municipality to lay down new cables which were to belong to the Municipality, as the supply of direct current electricity was found to be unsatisfactory and change over to alternating current was considered necessary for business expediency. It was held in the aforesaid cases that if the purpose for which the expenditure was incurred was to enable the assessee to receive higher voltage electric power for its manufacturing plant, then it must be treated as revenue expenditure.

12. Similar view was taken by the Allahabad High Court in CIT v. Kanodia Cold Storage : [1975]100ITR155(All) . In that case, the assessee made payment to the Electricity Supply Undertaking towards the cost of transformer and laying down service line for replacing the existing service line so as to enable the assessee to have higher electric power and the expenditure incurred was claimed as an allowable deduction. It was held that there was no creation of a new asset of enduring nature and the productive unit of the assessee remained the same but only a part of it, which had become unsuitable for its use was replaced so as to make it possible for the existing set up to function efficiently and the cost incurred in doing so was held to be revenue expenditure.

13. In view of all the aforesaid decisions, it is clear that there is no possibility of holding two views in the matter like the one before us. The expenditure incurred by the assessee in the installation of poles and laying of additional power lines was part of the cost of operating the profit-earning apparatus or for the purpose of improving the profitability of its existing profit-earning apparatus and to augment better supply of electricity for more efficient running of its installation and for better productivity. As such, the said expenditure was incurred for commercial expediency andmust be held to be of the nature of revenue expenditure. As the principles in this respect have been laid down clearly and explicitly by their Lordships of the Supreme Court in Empire Jute Co.'s case : [1980]124ITR1(SC) and it has been clearly observed that if the payment has been made for securing additional power supply, such payment would be part of the cost of operating the profit-making apparatus and hence is in the nature of revenue expenditure, even though the effect of acquiring additional power would be to augment the productivity of the profit-making structure. In view of the clear enunciation of law by their Lordships of the Supreme Court on the subject, there can be no difficulty in applying the principles laid down by the Supreme Court in this regard to the undisputed facts of the present case. It may be observed that the answer to the question proposed on behalf of the Revenue to be referred to this court is self-evident and further the matter stands concluded by the decision of the Supreme Court in Empire Jute Co.'s case : [1980]124ITR1(SC) . Thus no useful purpose would be served by requiring the Tribunal to make a reference in this case as no substantial question of law arises out of the order of the Tribunal dated June 30, 1978.

14. We, therefore, decline to direct the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, to state the case and make a reference to this court. The application made by the Revenue calling for a reference is dismissed.


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