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Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
Before: SHRI WASEEM AHMED & SHRI T.R. SENTHIL KUMAR
आदेश/O R D E R
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal has been filed at the instance of the assessee against the order of the Ld. Commissioner of Income Tax (Appeals)-3 (in short the Ld. CIT(A)), Rajkot dated 27/01/2020 arising in the matter of assessment order passed under Section 143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Year 2011-12.
The assessee has raised the following grounds of appeal:
“1. The assessment order u/s. 143(3) of the Act is bad in law. 2. The learned Assessing Officer has erred in law as well as on facts in treating the road expenses of Rs. 11,95,705/- as capital in nature in place of revenue expenditure. The learned CIT(A) has erred in sustaining the decision of A.O.”
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The only issue raised by the assessee is that the learned CIT (A) erred in confirming the order of the AO by treating the expenses incurred on the construction of road for Rs. 11,95,705/- as capital in nature.
The facts in brief are that the assessee in the present case is a private limited company and engaged in the business of manufacturing of detergent soap and powder and transportation. The assessee in the year under consideration has incurred cost of Rs. 11,95,705/- on the construction of road to provide the easy and smooth access from the highway to the factory. As per the assessee, it has been incurring such expenses year after year. As such the life of the road constructed by it is very short in the sense during rainy season, the road gets damaged. Thus, the assessee claimed that such expenses should be treated as revenue in nature or if it is treated as capital in nature then also it should be allowed 100% depreciation of the cost on the construction of such land.
However, the AO disagreed with the submission of the assessee on the reasoning that the benefit out of the impugned road construction expenses was enduring in nature. As such the materials used in the construction of road is long lasting and therefore the same cannot be allowed as deduction by treating the same as revenue in nature. Thus the AO disallowed the claim of the assessee and treated the impugned expenditure as capital in nature by allowing depreciation thereon.
Aggrieved assessee preferred an appeal to the learned CIT (A).
The assessee before the learned CIT (A) besides reiterating the contentions made before the AO further contended that the land on which road was constructed owned by the Government. As such, the ownership of the land and the road does not lie with the assessee even after construction of the road. As such, only the approach road from the main highway to the factory was constructed solely for the smooth and efficient running of business. Thus, the cost
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incurred on the construction of road amounting to Rs. 11,95,705/- cannot be treated as capital in nature.
However, the learned CIT (A) disregarded the contention of the assessee by observing as under: “The issue at hand has been decided by my predecessor CIT(A)-II, Rajkot in assessee's own case for AY 2010-11 wherein the decision cited by the assessee have beenconsidered. The relevant portion of the order of CIT(A)-II, Rajkot in own case for 2010-11 reproduced below:-
"We have perused the records and considered the rival contentions carefully. The dispute is regarding allowability of expenditure on construction roach road to the new Birla Periclase plant at Vaizag in Andhra Pradesh. 9prooch road had been constructed during the year on the land belonging Government and the ownership of the road was not with the assessee. The f the assessee is that new unit was an integral part of the existing business e assessee comprising of several units as there was complete interconnection, interlacing, interdependence and unity of control by existence of common management, common business, organization, common administration, common funds and common place of business. The new unit was Sore part of the existing business and thus the expenditure incurred was for the purpose of business. The expenditure incurred should be allowed as revenue expenditure as the assessee had no advantage in the capital field because the assessee did not own the road. The issue whether the new unit was part of the existing business or a different business has been examined by its in detail while dealing with the next ground where we have held that the new unit was part of existing business and was not a new business. Following the same reasoning therein we accept the claim of theassessee that Birla Periclase unit was the existing business. However each and every expenditure incurred or purpose of business cannot be allowed as revenue expenditure. In the next d we have dealt with the allowability of interest on capital borrowed for up of new unit which has a part of the existing business. The allowability of interest on borrowed funds under section 36(i)(iii) is different as the only requirement of that section is that the capital should be borrowed for purpose of business. The interest is therefore to be allowed once it is found fie capital has been borrowed for the purpose of business irrespective of the fact whether borrowed funds were utilized for acquisition of capital assets or construction of a new unit for the new unit is found to be part of the existing ss. The position is however different in relation to allowability of expenditure other than interest under the provisions of section 37(1)as expenditure under the said section can be allowed as revenue expenditure only if me is not for acquisition of any capital asset.
Whether a particular expenditure incurred/or the pill-poses of business is a capital expenditureor revenue expenditure will depend upon facts and circumstances of each case. Lump sum payments or the test of enduring benefits conclusive in deciding whether a particular expenditure is revenue or 71 in nature as held by Hon'ble Supreme Court in case of Empire Jute Co. (supra). The Hon'ble Supreme Court in the said caseheld that the expenditure incurred is capital if it has resulted into any ac/vantage In the field but if the advantage consisted merely in facilitating the assessee's business or enabling the management and conduct of the business to be carried out carried on more efficiently and more profitability' the expenditure will he revenue in nature. The Hon'ble Supreme Court also held that in case the expenditure incurred was for operation and working of the existing profit
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making apparatus and there is no addition or augmentation of the profit making structure the expenditure would be revenue in nature but in case the expenditure is related to any addition or augmentation to the profit making structure the same will be capital in nature. Therefore Coming to the present case even if the new unit was a pan of existing business and the expenditure on the approach road was incurred for the purpose of business it is required to be seen whether the same was in connection with any addition or augmentation to the profit earning apparatus of the assessee or only for efficient working of the existing profit making apparatus. The existing profit making apparatus of the assessee consisted of the other plants which were already, operating. But the approach road had no connection to the other plants which were operational Therefore it cannot he said that the approach road to the Birla Periclase plant under construction was for efficient working of other plants. As for the Birla Periclase plant, the assessee itself submitted before CIT(A) that it became operational only in February 2008 i.e., long after end of the relevant accounting period which means thatthe plant was still under construction during the relevant period. The plant even if it was integral part of the existing business the construction of the~ new plant did result into addition or augmentation to the profit earning structure of the assessee company. Since the plant was not operational during the year, it could not be said that the approach road was/hr efficient working of the Birla Periclase plant. The approach road was, in our view, connected to the additional profit earning apparatus being built by the assessee at the new, Unit as part of the expansion program. Therefore expenditure incurred on the approach road was in connection with augmentation td the existing profitearning apparatus of the company and hence the expenditure in our view following the principle laid down by the Hon’ble Supreme Court in case of Empire Jute Co. Ltd. (supra) would be capital in nature.
6.5 Respectfully following the above two decisions of the Hon’ble Mumbai High Court as well as Hon’ble ITAT, Mumbai, the expenditure under dispute is held to the capital expenditure. The action of the A.O. is confirmed. This ground of appeal is dismissed.
Respectfully following the above decision of my predecessor CIT(A) in identical facts in assessee’s own case for Asst. Year 2010-11, the contention of the assessee is rejected and the addition is sustained.”
Being aggrieved by the order of the learned CIT (A), the assessee is in appeal before us.
The learned AR before us filed a paper book running from pages 1 to 104 and reiterated the submissions as made before the authorities below. In addition to the above, the learned AR also contended that the impugned expenses were incurred by the assessee year after year and therefore the same cannot be treated as capital in nature.
On the other hand, the learned DR vehemently supported the order of the authorities below.
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We have heard the rival contentions of both the parties and perused the materials available on record. There is no dispute to the fact that the road in dispute was not owned by the assessee. Even the beneficial ownership is not vested with the assessee. It is one of the precondition for claiming the depreciation that the ownership of the asset either whole or part must lie with the assessee. However, in the case on hand, the basic test provided under the provisions of section 32 of the Act has not been satisfied.
In addition to the above, we also note that the Hon’ble Supreme Court in the case of L.H. Sugar Factory & Oil Mills (P.) Ltd vs. CIT reported in 125 ITR 293 in identical facts held as under: “2. The amount of Rs. 50,000 was not contributed by the assessee generally for the purpose of construction of roads, but it was for the construction of roads in the area around the factory and it could not be disputed that if the roads were constructed around the factory area, they would facilitate the transport of sugarcane to the factory and the flow of manufactured sugar out of the factory. The construction of the roads was, therefore, clearly and undisputably connected with the business activity of the assessee and was laid out wholly and exclusively for the purpose of the business of the assessee. If the advantage consists merely in facilitating the assessee's business operations or enabling management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, eyen though the advantage may endure for in indefinite future. In the present case, no doubt the advantage secured for the business of the assessee was of a long duration inasmuch as it would last so long as the roads continued to be in motorable condition, but it was not an advantage in the capital field, because no tangible or intangible assset was acquired by the assessee, nor was there any addition to or expansion of the profit-making apparatus of—the assessee. The amount of Rs. 50,000 was contributed by the assessee for the purpose of facilitating the conduct of the business of the assessee and making it more efficient and profitable and it was clearly an expenditure on revenue account.”
Now the controversy before us relates whether the expenses incurred by the assessee on the road construction amounts to capital expenditure in the given facts and circumstances. There is no ambiguity that the assessee shall gain the benefit out of the road expenses incurred by it. But the benefit is in the nature of smooth and efficient running of the business. As such the benefit to the assessee, though enduring. in nature, but the same is not on capital transaction rather it directly relates to the revenue transaction of the assessee. Thus, the same i.e. road expenses cannot be categorized as capital in nature. Besides the above, we
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also note that there is not coming any fixed assets into existence out of such expenditure. Thus in the absence of any fixed assets, we are of the view that the impugned expenses cannot be treated as capital in nature.
14.1 Besides the above, we also note that the assesse has been incurring such expenditure frequently which can be verified from the details below: Chart Showing Details of Road Expenditure Assessment Year Amount 2012-13 15,40,000 2013-14 6,66,112 2015-16 7,80,000
14.2 Based on the above, it seems to us that the assesse is not enjoying any benefit of enduring nature out of the expenditures discussed above. Hence, we set aside the finding of the learned CIT (A) and direct the AO to delete the addition made by him.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the Court on 23/12/2022 at Ahmedabad.
Sd/- Sd/- (WASEEM AHMED) (T. R. SENTHIL KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated 23/12/2022 Tanmay, Sr. PS TRUE COPY आदेशक���त�ल�प�े�षत/Copy of the Order forwarded to : 1. अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent. 3. संबं�धतआयकरआयु�त/ Concerned CIT 4. आयकरआयु�त(अपील) / The CIT(A) 5. �वभागीय��त�न�ध, आयकरअपील�यअ�धकरण/ DR, ITAT, 6. गाड�फाईल / Guard file. आदेशानुसार/BY ORDER,
उप/सहायकपंजीकार (Dy./Asstt.Registrar) आयकरअपील�यअ�धकरण, अहमदाबाद / ITAT, Ahmedabad