COMMISSIONER OF INCOME TAX vs. M/S KANORIA SUGAR andGENERAL

Judgment 23/05/2017 1 In all these appeals identical questions of law and facts arise

therefore they are decided by the common judgment.

(3 of 17) [ITA-138/2008]

(v) Whether the ITAT was justified in allowing the expenses of Rs. 50,000/-, as Labour Welfare expenses even when the assessee has failed to show that the said amount was wholly and exclusively utilized for business purposes? (iv) Whether the ITAT was justified in deleting the disallowance of Rs. 43,032/-, being 1/5th of depreciation on vehicle, disallowed on account of personal use, even when no justification was provided by the assessee?’’ Appeal No. 129 / 2008 in treating the payment of interest of Rs. 1,50,37,292/-, as revenue expenditure even when the capital borrowed was used for purpose of capital assets? (ii) Whether the ITAT was justified in deleting the addition of Rs. 24,53,779/- being liability in respect of leave and licence fees payable to Kanoria Industries Ltd. Written back by the assessee, inspite of the specific provisions of Section 41(1) and its Explanations? (iii) Whether the ITAT was right and justified in treating the payment of upfront fees to IDBI of Rs.5,51,250/- as revenue expenditure even when the capital borrowed was used for purchase of capital assets?” Appeal No. 137 / 2008 in holding the amount of Rs.24,72,912/-, being incentive received on sugar quota allocated for free sale, as capital receipt ignoring the fact that receipt earned during business operations through higher price sale can only be termed as revenue receipt” (ii) Whether the ITAT was justified in deleting the addition of Rs.1,27,76,000/- and Rs.2,28,08,000/-, being liabilities in respect of interest on sugar and cane price difference respectively, written back by the assessee inspite of the specific provisions of Section 41(1) and its Explanations?”

(4 of 17) [ITA-138/2008]

Appeal No. 91 / 2008 in treating the payment of interest of Rs.22,53,267/- as revenue expenditure even when the capital borrowed was used for purpose of capital assets? (ii) Whether the ITAT was right and justified in treating the payment of Rs. 2,71,87,089/- as revenue expenditure?” These questions if taken in tabular form reads as under: Serial No. Issues

3 Heard learned counsel for the parties.

(5 of 17) [ITA-138/2008]

with the observation and finding on the issue at page no. 6 and 7 of the first appellate order, relevant extract of which are being reproduced hereunder for a ready reference. “………. According to this incentive scheme the incentive was given in sugar projects to make them viable, the repayment of loan has to be by surplus funds generated through higher free sale of levy sugar the extra amount collected is meant to be utilized for repayment of loan. The submission of the appellant is that he is collecting this amount with an obligation to make repayment of term loan advanced by Central Financial Institutions & Cotton Mills P. Ltd. 116 ITR 60 & also in CIT Vs. V.P.J. Chemicals 210 ITR 830. According, to assessee this is an amount which ultimately is to be utilized to encourage the entrepreneur to opt for extension. This similar issue came up for consideration by ITAT, “A” Bench Calcutta in ITA No. 2032 &2033 in case of CIT Vs. Balrampur Chini Mills Ltd. where it was held that realization through additional free sale of sugar quota under the Sampat Incentive Similarly in case of CIT (Spl. Range) Ghaziabad of M/s Simbhaoli Sugar Mill Ltd. the Delhi Bench in a Third member decisions in ITA No. 1439/D/90 also held that incentive by the appellant under the Sampat Incentive Scheme relating to expansion of project was in the nature of capital receipt & the addition made by Ld. AO of Rs. 24,72,912/- is directed to be deleted.” In the case of CIT Vs. Ponni Sugars & Chemicals the Hon’ble Calcutta High Court approved the order of ITAT PB 53 to 60, by holding that concession given for additional capacity either in existing factories or new factories alongwith additional free sale quota under the Sampath Incentive Scheme on condition that realization should be used for repaying loans taken for financial institutions is a capital receipt not liable to tax. In the case of CIT Vs. Maduran Tankan C-operative

(6 of 17) [ITA-138/2008]

Sugar Mills Ltd. (supra) it was held that incentive received by way of rebate on excise duty payable and increased percentage of levy free quota of sugar is not assessable as income of the assessee. We thus uphold the first appellat order. The Ground No. 3 is rejected.”

(7 of 17) [ITA-138/2008]

of law, but in such cases bilateral act of the parties will be necessary to bring about cessation of liability. According to the Bench, if the recovery had become barred by limitation by operation of law, unilateral expression of intention of the debtor not to treat the amount any more as liability might be sufficient to bring about a cessation of the liability. The Bench also accepted the alternative argument that where an assessee had written off his time barred liability from his accounts and transferred the amount to his profit and loss account thereby treating it as his income, he could not be permitted to turn round when the question of inclusion of such amount in his income under section 41(1) of the act arose. The Bench distinguished the judgment in Kohinoor Mills Co. Ltd. v. CIT, by observing that there was no cessation of liability in that case despite the expiry of period of limitation to enforce the same. The Bench said that the assessee could not get rid of his liability when called upon to meet either by the employees under the Industrial Disputes act or by the government under the Bombay Welfare Fund act on account of the special provisions of those Acts. We are unable to accept the reasoning of the Bombay High Court in that case. Just because an assessee makes an entry in his books of account unilaterally, he cannot get rid of his liability. The question whether the liability is actually barred by limitation is not a matter which can be decided by considering the assessee's case alone but it is a matter which has to be decided only if the creditor is before the concerned authority. In the absence of the creditor, it is not possible for the authority to come to a conclusion that the debt is barred and has become unenforceable. There may be circumstances which may enable the creditor to come with a proceeding for enforcement of the debt even after expiry of the normal period of limitation as provided in the Limitation Act.

(8 of 17) [ITA-138/2008]

by the section.”

“4. It may be noted that the provision was made in the books of account towards purchase tax which was under dispute and the benefit of deduction from business income was availed of in the past years in relation thereto. The same was sought to be reversed by the assessee during the year ending on 31.3.1985 for whatever reason it be. The question is whether the circumstances contemplated by Section 41(1) exists so as to enable the Revenue to take back what has been allowed earlier as business expenditure and to include such amount in the income of the relevant assessment year i.e. 1985-

irrelevant.

v.

Suguli

Sugar

Works(P)

Ltd.: [1999]236ITR518(SC) . We, therefore, find no substance in the contention advanced on behalf of the appellant. Incidentally, we may mention that the controversy relates to the period anterior to the introduction of Explanation 1 to Section 41(1).”

“4. In the first place it is not a universally true proposition that what may be a capital receipt in the hands of the payee must necessarily be capital expenditure in relation to the payer. The fact that a certain payment constitutes income or capital receipt in the hands of the recipient is not material in determining whether the payment is revenue or capital disbursement qua the payer. It was felicitously pointed out by Macnaghten, J. in Race Course Betting Control Board v. Wild 22 TC 182 that a "payment may be a revenue payment from the point of view of the payer and a capital payment from the point of view of the receiver and vice versa. Therefore, the (10 of 17) [ITA-138/2008]

decision in Maheshwari Devi Jute Mills' case (supra) cannot be regarded as an authority for the proposition that payment made by an assessee for purchase of loom hours would be capital expenditure. Whether it is capital expenditure would have to be determined having regard to the nature of the transaction and other relevant factors. But, more importantly, it may be pointed out that Maheshwari Devi Jute Mills' case (supra) proceeded on the basis that loom hours were a capital asset and the case was decided on that basis. It was common ground between the parties throughout the proceedings, right from the stage of the Income-tax Officer upto the High Court, that the right to work the looms for the allotted hours of work was an asset capable of being transferred and this Court therefore did not allow counsel on behalf of the Revenue to raise a contention that loom hours were in the nature of a privilege and were not an asset at all. Since it was a commonly accepted basis that loom hours were an asset of the assessee, the only argument which could be advanced on behalf of the Revenue was that when the assessee transferred a part of its hours of work per week to another member, the transaction did not amount to sale of an asset belonging to the assessee, but it was merely the turning of an asset to account by permitting the transferee to use that asset and hence the amount received by the assessee was income from business. The Revenue submitted that "where it is a part of the normal activity of the assessee's business to earn profit by making use of its asset by either employing it in its own manufacturing concern or by letting it out to others, consideration received for allowing the transferee to use that asset is income received from business and chargeable to income tax". The principle invoked by the Revenue was that "receipt by the exploitation of a commercial asset is the profit of the business irrespective of the manner in which the asset is exploited by the owner in the business, for the owner is entitled to exploit it to his best advantage either by using it himself personally or by letting it out to somebody else." This principle, supported as it was by numerous decisions, was accepted by the court as a valid principle, but it was pointed out that it had no application in the case before the court, because though loom hours were an asset, they could not from their very nature be let out while retaining property in them and there could be no grant of temporary right to use them. The court therefore concluded that this was really a case of sale of loom hours and not of exploitation of loom

(11 of 17) [ITA-138/2008]

hours by permitting user while retaining ownership and, in the circumstances, the amount received by the assessee from sale of loom hours was liable to be regarded as capital receipt and not income. It will thus be seen that the entire case proceeded on the commonly accepted basis that loom hours were an asset and the only issue debated was whether the transaction in question constituted sale of this asset or it represented merely exploitation of the asset by permitting its user by another while retaining ownership. No question was raised before the court as to whether loom hours were an asset at all nor was any argument advanced as to what was the true nature of the transaction. It is quite possible that if the question had been examined fully on principle, unhampered by any pre-determined hypothesis, the court might have come to a different conclusion. This decision cannot, therefore, be regarded as an authority compelling us to take the view that the amount paid for purchase of loom hours was capital and not revenue expenditure. The question is res Integra and we must proceed to examine it on first principle.

working full loom hours. But a provision was made in Clause 6(b) of the working time agreement that the whole or a part of the working hours per week could be transferred by one mill to another for a period of not less than six months and if such transfer was approved and registered by the Committee of the Association, the transferee mill would be entitled to utilise the number of working hours per week transferred to it in addition to the working hours per week allowed to it under the working time agreement, while the transferor mill would cease to be entitled to avail of the number of working hours per week so transferred and these would be liable to be deducted from the number of working hours per week otherwise allotted to it. The purchase of loom hours by a mill had therefore the effect of relaxing the restriction on the operation of looms to the extent of the number of working hours per week transferred to it, so that the transferee mill could work its looms for longer hours than permitted under the working time agreement and increase its profitability. The amount spent on purchase of loom hours thus represented consideration paid for being able to work the loom for a longer number of hours. It is difficult to see how such payment could possibly be regarded as expenditure on capital account.

(13 of 17) [ITA-138/2008]

Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 I.T.R. 241 it would be misleading to suppose that in all cases, securing a benefit for the business would be prima facie capital expenditure "so long as the benefit is not so transitory as to have no endurance at all." There may be cases where expenditure, even if incurred for obtaining 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 assesses that brings the case within the principle 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 efficiently or more profitably white leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is therefore not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. But even if this test were applied in the present case, it does not yield a conclusion in favour of the Revenue. Here, by purchase of loom hours no new asset has been created. There is no addition to or expansion of the profit making apparatus of the assessee. The income earning machine remains what it was prior to the purchase of loom hours. The assessee is merely enabled to operate the profit making structure for a longer number of hours. And this advantage is clearly not of an enduring nature. It is limited in its duration to six months and, moreover, the additional working hours per week transferred to the assessee have to be utilised during the week and cannot be carried forward to the next week. It is, therefore, not possible to say that any advantage of enduring benefit in the capital field was acquired by the assessee in purchasing loom hours and the test of enduring benefit cannot help the Revenue. Another test which is often applied is the one based on distinction between fixed and circulating capital. This test was applied by Lord Haldane in the leading case of John Smith & Son v. Moore 12 TC 266 where the learned law Lord draw the distinction between

(14 of 17) [ITA-138/2008]

fixed capital and circulating capital in words which have almost acquired the status of a definition. He said : "Fixed capital (is) what the owner turns to profit by keeping it in his own possession; circulating capital (is) what he makes profit of by parting with it and letting it change masters." Now as long as the expenditure in question can be clearly referred to the acquisition of an asset which falls within one or the other of these two categories, such a test would be a critical one. But this test also sometimes breaks down because there are many forms of expenditure which do not fall easily within these two categories and not infrequently, as pointed out by Lord Radeliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. (supra), the line of demarcation is difficult to draw and leads to subtle distinctions between profit that is made "out of" assets and profit that is made "upon" assets or "with" assets. Moreover, there may be cases where expenditure, though referable to or in connection with fixed capital, is never-the-less allowable as revenue expenditure. An illustrative example would be of expenditure incurred in preserving or maintaining capital assets. This test is therefore clearly not one of universal application. But even if we were to apply this test, it would not be possible to characterise the amount paid for purchase of loom hours as capital expenditure, because acquisition of additional loom hours does not add at all to the fixed capital of the assessee. The permanent structure of which the income is to be the produce or fruit remains the same; it is not enlarged. We are not sure whether loom hours can be regarded as part of circulating capital like labour, raw material, power etc., but it is clear beyond doubt that they are not part of fixed capital and hence even the application of this test does not compel the conclusion that the payment for purchase of loom hours was in the nature of capital expenditure.

(15 of 17) [ITA-138/2008]

and the amount spent on purchase of this source of profit or income therefore represented expenditure of capital nature. 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 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 (16 of 17) [ITA-138/2008]

productivity of the profit-making structure. On the same analogy payment made for purchase of loom hours which would enable the assessee to operate the profit-making structure for a longer number of hours than those permitted under the working time agreement would also be part of the cost of performing the income earning operations and hence revenue in character.”

“12. The precise question, therefore is, as to whether in the present case, any subsequent information, or material have come to the notice of the AO, to enable him to form a requisite belief, that any particular income has escaped assessment, which was liable to be assessed, and apart from the fact, that as found by the learned CIT(A), and the learned Tribunal, that there was no subsequent information, or fresh material, we again pointedly asked the learned Counsel for the Revenue to point out, as to how these findings are wrong, and to show even to us, if there is any material, which might have come to the notice of the AO subsequently, but the learned Counsel for the Revenue could not point out any one.

proceedings.

under Section 143(1)(a). Thus, we do not find any force in the appeal, and the same

is,

therefore,

dismissed.”

(17 of 17) [ITA-138/2008]

hence, require no interference.