C I T KOTA vs. M/S MANGLAM CEMENT LTD

By way of this appeal, the appellant has challenged the judgment and order of the Tribunal whereby Tribunal has allowed

The facts of the case are that the assessee filed original return declaring Income of Rs.1019369668/- on 29.9.2009 for assessement year 2009-10, further assessee revised return of income on 11.02.2011 declaring total income at Rs.1016766056/-. Further case was selected for scrutiny Notice under Section 143 (2) was issued on 29.9.2009 which was duly served. Detailed query letter along with notice under Section 142 (1) was issued on 18.1.2011. Sh. Anil Mandot, Sr. Vice President (Accounts and Taxation) alongwith Sh. Manish Agarwal, Dy. G.M. and Sh. Suresh Chand Gupta, Asst. Manager attended on various

The AO has added income which was further modified by the Tribunal.

This Court while admitting the appeal on 30.7.2015, framed following substantial questions of law:- “1. Whether the Tribunal was legally justified in reversing the order of the CIT(A) and deleting the addition of Rs.13,30,82,204/- by holding that the gain on discharge of deferred sales tax loan was capital receipt and not chargeable to tax in accordance with Section 41(1) being cessation of liability?

Whether the Tribunal was legally justified in reversing the order of the CIT(A) and holding that expenses of Rs.5,02,61,166/- towards installation of Fly Ash Handling System (SILCO) at Kota Super Thermal Power Station (KSTPS) and expenses of Rs.22,80,660/- for common property work at KSTPS were revenue in nature, specially when the property could not be transferred before five years as per the lease agreement and the assessee earned long term benefit from it?”

Counsel for the appellant contended that the issues are decided contrary to the evidence on record and the deletion of Rs.13,30,82,204/- which was shown as capital receipt of sales tax ought to have been charged under Section 41(1) of the Income Tax Act.

On second issue, learned counsel for the appellant contended that the expenses which are ought to have been considered as capital expenses and not as revenue expenses and the view taken by the Tribunal is required to be reversed.

Counsel for respondent contended that in D.B. ITA No.65/2012 decided on 15.5.2017 wherein this Court relying on Bombay High Court reported in [2010] 326 ITR 117 (Bombay), Range 3(3), wherein it has been observed as under :- “7. Section 41(1)(a) of the Act provides as follows: 41. (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first mentioned person) and subsequently during any previous year: (a) the first mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not;

In order that the provisions of Sub-section (1) should be attracted the first requirement is that an allowance or deduction must have been made in the assessment for any year in respect of a loss, expenditure or trading liability incurred by the assessee. The liability of the assessee to pay sales tax is undisputedly a trading liability in respect of which an allowance or deduction had been made under Section 43B. However, under Clause (a) of Sub-section (1) it is inter alia required that the assessee ought to have obtained "some benefit in respect of such trading liability by way of remission or cessation thereof". This postulates that there must be a remission or cessation of the trading liability and that consequently a benefit must enure to the assessee. In the present case, the dispute between the assessee and the Revenue is as to (4 of 18) [ITA-138/2014] whether there was a remission or cessation of the liability on account of sales tax.

The assessee had collected an amount of Rs. 1.79 Crores towards sales tax dues during the period 1 May 1999 and 31 March 2000. Under the package scheme of incentives announced by the Government of Maharashtra in 1993 the sales tax dues had to be paid in five installments commencing from April 2010. SICOM as the implementing agency quantified, according to the assessee, the net present value of the deferred liability of the assessee at Rs. 50.44 lacs which was paid by the assessee to SICOM. However, the sales tax officer while passing the assessment order on 18 March 2004 did not consider the amount paid to SICOM as repayment of the deferred liability of the assessee to the extent of Rs. 1.79 Crores under the Bombay Sales Tax Act, 1959 and Central Sales Tax Act, 1956. The appeals filed by the assessee before the Deputy Commissioner of Sales Tax were dismissed upon which the assessee filed a second appeal before the Maharashtra Sales Tax Tribunal. The Tribunal, by its judgment dated 8 February 2008 upheld the order of the lower authorities of not giving credit of the payment made by the assessee to SICOM. In these proceedings, neither the validity of the order passed by the Sales Tax Tribunal nor for that matter the correctness of the reasons that weighed with the Tribunal can be called into question. The Tribunal observed that though the assessee had made a premature payment of the deferred tax in accordance with the scheme issued by the Department of Industries of the State Government under the package scheme of incentives of 1993, the payment of the net present value was to be made in the challan prescribed under the Sales Tax Act which constituted the lawful mode of making payment and the payment which was made to SICOM would nonetheless have to follow the procedure prescribed under the Act. The Tribunal was of the view that the decision of the assessing authority and of the Deputy Commissioner of Sales Tax not to give credit to the payment made to SICOM would have to be upheld, but left it open to the assessee to procure a valid document under the scheme which would be (5 of 18) [ITA-138/2014] "considered for relevant period for relevant deferred amount".

In the view that we have taken it is not necessary for the Court to address itself to the wider issue as to whether the assessee, in paying the net present value of the deferred sales tax liability should be regarded as having obtained any benefit within the meaning of Clause (a) of Sub-section (1) of Section 41. The aforesaid issue is kept open to be adjudicated upon at the appropriate stage in appropriate proceedings.

The Tribunal, in our view, was in error in proceeding on the basis that there was a remission or cessation of liability. The attention of the Tribunal was drawn to the order passed by the Sales Tax Tribunal. The fact that the order of the Sales Tax Tribunal was placed for consideration before the Income Tax Appellate Tribunal emerges from the order of the Tribunal itself. Consistent with the order passed by the Sales Tax Tribunal which continues to hold the field, the ITAT could not have come to the conclusion that there had occurred a remission or cessation of liability during the assessment years in question.”

Learned counsel for appellant has also relied upon in case of Commissioner of Income-tax vs. Bharat Aluminium Co. Ltd. - [2010] 187 Taxman 111 (Delhi), observed as under :- “11. The expenditure incurred by the assessee in making payments to Municipality to lay new cables, which were to belong to Municipality, was treated as business expenditure and not capital expenditure by this Court in Hindustan Times Ltd. (supra). This judgment has been followed in Saw Pipes Ltd. (supra).

Case of Travancore Cochin Chemicals Ltd. (supra) relied upon by the learned Counsel for the Revenue would have no application in the instant case. In that case itself, the Supreme Court clearly opined that each case depends upon its own facts. This judgment has been explained by the Supreme Court itself in its later judgment reported as L.H. Sugar Factory and Oil Mills (P) Ltd., Pilibhit v. CIT,

It is not correct to say that the Tribunal has not given reasons. An pointed out above, the Tribunal has not only referred to the judgments of the Supreme Court and Bombay High Court interpreting the powers of the Tribunal under Section 254 of the Act, it also specifically stated that the issues, which were sought to be raised in the additional grounds arise out of tax proceedings of the assessee for the Assessment Year under consideration and also the facts that were necessary for adjudication on these additional grounds were available on record. In fact, as we notice hereinafter, when the Tribunal dealt with those additional grounds, it took into consideration the facts which were already on record and the issues also related to the Assessment Year under consideration. To (7 of 18) [ITA-138/2014] demonstrate this, it is not necessary to take up for discussion all the additional grounds. Following examples would suffice, as the position in respect of other additional grounds remain the same. One additional ground was in the following terms: That the prior period expenses claimed by the assessee in subsequent year but disallowed by the Assessing Officer on the ground that the expenses did not pertain to that year ought to have been allowed by the Assessing Officer during the year under appeal. It is clear from the above that the assessee had claimed prior period expenses in subsequent year, but in that subsequent year, the Assessing Officer had disallowed it did not pertain in that year. In these circumstances, the plea of the assessee was that since these expenses pertain to the year under question, they should be allowed at least in this year. It was also pointed out that the mistake committed by the assessee was that these expenses of prior period were added back by the assessee in its return of income on the misconceived notion on the part of the Counsel when the return of the income was filed. It was also explained that the assessee follows mercantile system of accounting and as per this system, these expenses did accrue as a liability to the assessee during the previous year and thus allowable as deduction as per law. It is clear from the aforesaid that facts were available on record and the additional ground arose out of tax proceedings for the Assessment Year under consideration. The Tribunal was of the opinion that for proper adjudication of the tax liability of the assessee in accordance with law, the issue needed remand back to the Assessing Officer for fresh consideration. Naturally, this additional ground was allowed after satisfying that it fulfilled the legal requirements for admission ability of such a ground in view of principle laid down in the case of NTPC (supra).

After going through these decisions of the various Benches of the Tribunal and the schematic intention behind the provisions relating to depreciation contained in the aforesaid provisions, we are inclined to affirm the view taken by the (8 of 18) [ITA-138/2014] Tribunal in the instant case. While doing so, we have in mind the rationale and purpose for which the concept of block asset was introduced by the amendment in the provisions of the Act, as reflected in the Circular dated 23.09.1988 of the CBDT. Intention behind these provisions is apparent. Once the various assets are clubbed together and become block asset within the meaning of Section 2(11) of the Act, for the purpose of deprecation it is one asset. Every time, a new asset is acquired, it is to be thrown into the common hotchpotch, i.e., block asset on meeting the requirement of depreciation allowable at the same rate. The value of the block asset increases and the depreciation is to be given on the aforesaid value, which is to be treated as written down value. Individual assets lose their identity from that very moment it becomes inseparable part of block asset insofar as calculation of depreciation is concerned. Fusion of various assets into the block asset gets disturbed only when eventuality contained in Clause (iii) of Section 32 takes place, viz., when a particular asset is sold, discarded or destroyed in the previous year (other than the previous year in which first brought in use). Even in that event, the amount by which the moneys payable in respect of that particular building, machinery, etc. together with the amount of scrap value is to be deducted from total written down value of the 'block asset'.

Learned counsel for appellant further relied upon in case of Commissioner of Income-tax, Delhi vs. SI Group India Ltd. - [2015] 379 ITR 326, observed as under :- “3. We may note that the main contention of the respondent-Assessee herein before the High Court was that the principal requirement for the applicability of Section 41 of the Act is that the Assessee must obtain a benefit in respect of a trading liability by way of a remission or cessation thereof. He argued that in the present case, there was no cessation of the liability of the Assessee in respect of the payment of the sales tax dues and even if there was such a cessation, no benefit was obtained by the Assessee. This contention was supported by the fact that the issue pertaining to the (9 of 18) [ITA-138/2014] sales tax liability was decided by the Sales Tax Tribunal by its judgment dated February 8, 2008, and the Tribunal has specifically upheld the decision of the assessing authorities declining to grant credit to the Assessee of payment which was made to State Industrial and Investment Corporation of Maharashtra Limited (SICOM) of Maharashtra. This contention is accepted by the High Court in the following manner :- 10. The net result of the order of the Sales Tax Tribunal dated February 8, 2008, is to uphold the decision of the assessing authority declining to grant credit of the payment made by the Assessee to SICOM towards discharge of the deferred sales tax liability. As a matter of fact, on July 22, 2008, a notice of demand was issued Under Section 38 of the Bombay Sales Tax Act of 1959 to the Assessee by the Deputy Commissioner of Sales Tax, Navi Mumbai in the total amount of Rs. 1,33,13,555. Having regard both to the order passed by the Sales Tax Tribunal on February 8, 2008, and the notice of demand issued on July 22, 2008, it is not possible for the court to accept the contention that there was a remission or cessation of liability. Since the record before the court does not disclose that there was a remission or cessation of liability, one of the requirements spelt out for the applicability of Section 41(1)(a) has not been fulfilled in the facts of the present case.

In view of the aforesaid facts, which clearly demonstrate that the Assessee had not been granted the benefit of the said cessation for the assessment years in question, the High Court has rightly held that one of the requirements for the applicability of Section 41(1)(a) of the Act had not been fulfilled in the present case. We thus, do not find any error in the order of the High Court. The appeals lack any merit and are, accordingly, dismissed.”

Learned counsel for appellant further relied upon in case of Commissioner of Income-tax vs. Associated Cement Companies Ltd. - [1988] 38 Taxman 110A (SC), observed as under :-

According to the assessee, a sum of Rs. 2,09,459 was spent during the year of account under this agreement and this amount pertained to the laying

Before the High Court it was contended on behalf of the company that the entire amount of Rs. 2,09,459 pertained to expenditure on pipelines installations and other accessories which under the agreement came to ownership of the Shahabad Town Municipality and did not pertain to any increase of the assets of the company. The Division Bench which decided the reference has pointed out that it had not been disputed by the Revenue before the Tribunal that the entire expenditure concerned was laid out for the purpose of business and the only question was whether it was capital expenditure or revenue expenditure. The only ground on which the claim of the assessee for deduction of the said expenditure under Section 10(2)(xv) of the Indian Income-tax Act was resisted that it was capital expenditure. After exhaustively considering several decisions of the Supreme Court and several English decisions, the Division Bench of the Bombay High Court came to the conclusion that the expenditure in question was revenue expenditure and was liable to be allowed as deduction. On the basis of these conclusions the Bombay High Court decided the question referred in their affirmative and in favour of the assessee.

The next submission made by Mr. Manchanda was that the advantage of not being liable to pay municipal rates, taxes, etc. which the assessee company secured by reason of making the expenditure in question was for a period of fifteen years and hence it could be said to be an advantage of an enduring nature, so that the expenditure incurred in acquiring the same would be regarded as capital expenditure. In our view it is difficult to accept this submission either. As observed by the Supreme Court in the decision in Empire Jute Co. Ltd. v. Commissioner of Income-tax [1980]124 ITR 1(SC) that there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principles laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more effectively or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. In that case the appellant, a company carrying on the business of manufacture of jute, was a member of the Indian Jute Mills Association, which was formed with the objects, inter alia, of protecting the trade of its members, including imposing restrictive conditions on the conduct of the trade and adjusting the production of the mills of its members. A working time agreement was entered into between the members restricting the number of working hours per week for which the mills were entitled to work their looms. Clause 4 of the working time agreement provided that no signatory shall work for more than 45 hours per week. Clause 6(b) provided that the signatories shall be entitled to transfer, in part or wholly, their allotment of hours of work per week to any one or more of the other signatories. Under this clause the appellant

Learned counsel for appellant further relied upon in case of Commissioner of Income-tax vs. Associated Cement Companies Ltd. - [1988] 38 Taxman 110A (SC), observed as under :- “3. The facts in Saw Pipes Ltd's case (supra) were that the assessee was engaged in the business of manufacturing pipes. The assessee, for the purposes of its fourth unit, requested the Maharashtra State Electricity Board to set up a service line for supply of electricity. The said State Electricity Board supplied

In Saw Pipes Ltd.'s case (supra), this court observed that though the assessee had spent an amount of Rs. 52 lakhs towards laying of service lines, the cables did not belong to the assessee, but belonged to the Maharashtra State Electricity Board and, therefore, the benefit that the assessee got was of a commercial nature and was in the nature of a business advantage. Consequently, this court held that the expenditure incurred by the assessee ought to be treated as revenue expenditure.

The facts of the present case are no different. The assessee paid the said sum of Rs. 10,64,930 to the State Electricity Board for installing the transformer and LT Lines for supply of electricity to its factory. The ownership of the transformer and the LT Lines remained with the State Electricity Board and the fixed capital structure of the assessee remained untouched. The ratio in the decision of this court in Saw Pipes Ltd.'s case (supra) would be fully applicable. The Tribunal has done exactly this. We find no error in the decision of the Tribunal.”

Learned counsel for appellant has also relied upon in case of Commissioner of Income-tax vs. Madras Auto Service (P) Ltd. - [1998] 99 Taxman 575 (SC), observed as under :- “7. The test for distinguishing between capital expenditure and revenue expenditure in our country was laid down by this Court in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, West Bengal [1955]27ITR34(SC) . In that case, the appellant-company had acquired from the Government of Assam lease of certain lime-stone quarries for a period of 20 years for the purpose of manufacture of cement. The lessee had, inter alia, agreed to pay an annual sum during the whole period of the lease as a protection fee and in consideration of that payment, the lessor undertook not to grant to any person any lease, permit or prospecting licence for lime-stone. This Court examined tests laid down in various cases for distinguishing between capital expenditure and revenue expenditure. One of the standard tests now in use was laid down in the case of Atherton v. British Insulated and Helsby Cables Ltd., (1925) 10 Tax. Cas 155. It said : "When an expenditure is made, not only once and for all but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that mere is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capita." Whether by spending the money any advantage of an enduring nature has been obtained or not will depend upon the facts of each case. Moreover, as the above passage itself provides, this test would not apply if there are special circumstances pointing to the contrary. This Court in the above case summarised the tests as follows :(p. 44) :

Relying upon the second test enumerated above, learned counsel for the appellant has submitted that the assessee got enduring benefit of a capital nature by spending the amount because the assessee obtained a new building for a period of 39 years. The difficulty, however, in the present case, arises from the fact that this building was never to belong to the assessee. Right from inception, the building was of the ownership of the lessor. therefore, by spending this money, the assessee did not acquire any capital asset. The only advantage which the assessee derived by spending the money was that it got the lease of a new building at a low rent. From the business point of view, therefore, the assessee got the benefit of reduced rent. The High Court has, therefore, rightly considered this as obtaining a business advantage. The expenditure is, therefore, to be treated as revenue expenditure.

Although there are a number of cases dealing with this question, we will limit ourselves to examining a few cases where the assessee, by expending money, created an asset of an enduring nature. However, the asset so created did not belong to the assessee. In such a situation the courts have held that the expenditure was for better carrying on of the business of the assessee and could be allowed as revenue expenditure, looking to the circumstances of each of those cases. Thus in Lakshmiji Sugar Mills Co. P. Ltd. v. Commissioner of Income-tax, New

In the case of L.H. Sugar Factory and Oils Mills (P) Ltd. v. Commissioner of Income-tax, U.P. [1980]125ITR293(SC) , the assessee was carrying on the business of manufacture and sale of sugar. It has its factory in U.P. The assessee paid a contribution towards meeting the cost of construction of roads in the area around its factory under a sugarcane development scheme. The question was whether this amount was deductible in computing the assessee's profits. The Court held that it was. Because although the advantage secured was of long duration, it was not an advantage in the capital field because no tangible or intangible asset was acquired by the assessee; nor was there any addition to or expansion of the profit making apparatus of the assessee. The amount was contributed for the purpose of facilitating the business of the assessee and making it more efficient and profitable. It was, therefore, revenue expenditure.

In the case of Commissioner of Income-tea, Bombay City-I v. Associated Cement Companies Ltd. [1988]172ITR257(SC) the respondent-company entered into an agreement to supply water to the municipality and provide water pipelines as also to supply electricity for street lighting and put up a transmission line for that purpose. The assessee also agreed to concrete the main road from the factory to (17 of 18) [ITA-138/2014] the railway station. The amounts expended for these, purposes were held to be revenue expenditure since the installations and accessories were the assets of the municipality and not of the assessee. The expenditure, therefore, did not result in creating any capital asset for the company. The advantage secured by the respondent was immunity from liability to pay municipal rates and taxes for a period of 15 years. This Court said that had these liabilities been paid, the payments would have been on revenue account. Therefore, the advantage secured was in the field of revenue and not capital.

In the case of CIT v. Bombay dyeing & Mfg. Co. Ltd. [1996] 219 ITR 521/85 Taxman 396 (sc), the company contributed to the state Housing Board certain amounts for construction of tenements for its workers. The tenements for its workers. The tenements remained the property of the Housing Board. It was held that the expenditure was incurred wholly and exclusively on the welfare of the employees and, therefore, constituted legitimate business expenditure. As the assessee-company acquired no ownership acquired no ownership rights in the tenements, this court said that the expenditure was incurred merely with a view to carry on the business of the company more efficiently by having a contended labour force.

All these cases have looked upon expenditure which did bring about some kind of an enduring benefit to the company as a revenue expenditure when the expenditure did not bring into existence any capital asset for the company. The asset which was created belonged to somebody else and the company derived an enduring business advantage by expending the amount. In all these cases, the expense has been looked upon as having been made for the purpose of conducting the business of the assessee more profitably or more successfully. In the present case also, since the asset created by spending the said amounts did not belong to the assessee but the assessee got the business advantage of using modern premises at a low rent, thus saving considerable revenue expenditure for the next 39 years, both the Tribunal as well as the High Court have rightly come to the conclusion that the (18 of 18) [ITA-138/2014] expenditure should be looked upon as revenue expenditure.”

We have heard counsel for both sides.

We are in complete agreement with the view taken by the Tribunal.

The issue is answered in favour of the assessee and against the department.

The appeal stands dismissed. (VIJAY KUMAR VYAS)J. (K.S.JHAVERI)J. Chouhan/73