ITA No. 297 of 2010 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 297 of 2010 Date of Decision: 2.8.2010 Punjab Alkalies & Chemicals Limited ....Appellant. Versus Commissioner of Income Tax, Chandigarh ...Respondent. CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOEL. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. Arun Nehra, Advocate for the appellant. ADARSH KUMAR GOEL, J. 1. This order will dispose of ITA Nos. 295, 296 and 297 of 2010. All the appeals involve common questions of law. 2. ITA No. 297 of 2010 has been filed by the assessee under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against order dated 28.7.2009 passed by the Income Tax Appellate Tribunal, Chandigarh Bench “A” (hereinafter referred to as “the Tribunal”) in ITA No. 1085/Chd/2008 for the assessment year 2004-05 proposing to raise the following substantial questions of law:- (i) Whether in the facts and circumstances of the case the expenses incurred by the assessee on the replacement of membranes is a revenue expenditure or the same can be treated to be ITA No. 297 of 2010 -2- the deferred revenue expenditure by spreading over a period of 3 years and whether the same is allowable as a deduction in the year in which it was incurred? (ii) Whether the Income Tax Appellate Tribunal was justified in treating the expenditure incurred on replacement of membranes as a capital expenditure especially when there is no extra capacity generated and the expense incurred is only for replacement of old and worn out membranes? (iii) Whether the Income Tax Appellate Tribunal was justified in relying upon the irrelevant fact that the assessee had shown the expenditure incurred on the replacement of membranes in its books of account as deferred revenue expenditure? (iv) Whether in the facts and circumstances of the case the amount of Rs.18,07,00/- due to the assessee from PNFC which has been ordered to be wound up by this Hon'ble Court by its order dated 21.07.2000, is a “doubtful debt” particularly in view of the fact that on the sale of assets of PNFC by O.L. there are absolutely no chances of any unsecured creditor like the assessee to get any amount? ITA No. 297 of 2010 -3- (v) Whether in the facts and circumstances of the case the action of the authorities in ordering the initiation of penalty proceedings under Section 271 (1)(c) of the Income Tax Act against the appellant/assessee are justified?” 3. The assessee is engaged in manufacture of Caustic Soda and other inorganic chemicals. It claimed expenditure under the head “Replacement of Membrane”. The stand of the assessee was that as per the production technology electrolyzer consists of (1) Anode, (2) Cathode, (3) Membrane and various other separations. There are 2 compartments. In the first compartment is Anode and in the second compartment is Cathode. Membrane is used as separator between Anode compartment and Cathode compartment. As per the manual and the warranty clause the life of Membrane is only 3 years. The Assessing Officer allowed the said expenditure to the extent of 1/3rd which was amount written off every year having regard to the life of the item in question. The said finding has been affirmed by the CIT (A) as well as by the Tribunal. Claim of the assessee for writing off doubtful debts was not allowed. The debts have not been written off. Penalty proceedings have been initiated but are still pending. 4. The finding recorded by the CIT (A) on the issue of replacement of membrane is as under:- “9. I have carefully considered the submissions of the assessee and also perused the assessment order. I find that the Assessing Officer has given a finding that the assessee has changed its method of ITA No. 297 of 2010 -4- accounting in the relevant previous year to reduce its profits. The relevant Para is reproduced as under:- “The above reply shows that assessee has changed its method of accounting in the relevant previous year to reduce its profit as declared by profit/loss account. The said adjustment has been done by assessee in computation sheet where full capital expenses related to addition of membranes and opening balance both are claimed. This claim cannot be accepted as the membranes used by assessee are capital in nature and have a life of 3 years as noticed by the Auditors. Hence the expenses in this account is allowable only to the tune of benefits/utilization of the assets. Hence only 1/3rd of the addition to membrane is allowed as revenue expense and the balance of the claim is disallowed. The disallowance on this account comes to Rs.2,09,91,401/- (2,44,76,754/- - 1/3rd of 1,04,56,059/-).” 10. The Hon'ble ITAT, Ahmedabad has discussed various case laws which have also been relied upon by the assessee. So I need not discuss these case laws individually. Moreover, there is no single case law which is directly on the facts in the present case. There are the case laws pertaining to the facts in ITA No. 297 of 2010 -5- individual cases. It is a settled law that the decision is given by the Hon'ble Courts with reference to the question of law and the facts of that case. There is no case law which has been relied by the assessee pertains to the replacement of membrane. I am in agreement with the reasons given by the Assessing Officer because of the following reasons:- (i) The assessee has claimed the said expenditure only in the computation of income. (ii) In the earlier assessment years, the assessee has been claiming the expenditure in the span of 3 assessment years. This shows that the assessee himself admits that such expenditure has been enduring benefits. (iii) The ratio of the decision of Hon'ble ITAT Ahmedabad in the case of Amtrex Appliances Ltd., 94 TTJ 396 (Ahm) is clearly applicable to the facts of the case. The relevant finding is given in Para 8.8 of the order, which is reproduced as under:- “8.8 The assessee debited only 1/5th amount of the expenditure in its P&L a/c of the year under consideration and has spread over the said expenditure over a period of five years with a view to avoid presentation of distorted picture of the profits to its shareholders. Such ITA No. 297 of 2010 -6- spreading over of the said expenditure over a period of five years was made by the assessee in accordance with the accepted accounting practice which is in no way contrary to any specific provisions contained in the IT Act. On the other hand, such spreading over of the expenditure resulting in enduring benefit is in conformity with the aforesaid principles laid down by the Hon'ble Supreme Court in the case of Madras Industrial Investment Corpn. We, therefore, do not find any infirmity in the order passed by the CIT (A) directing the AO to allow deduction in respect of the aforesaid amount in the same manner as has been adopted by the assessee for purpose of debiting the said expenditure in its P&L a/c prepared as per the books of account regularly maintained by the appellant-company.” (iv) As regards the contention of the assessee that if there are two different views, the view which is in favour of the assessee should be adopted as held by Hon'ble Supreme Court in the case of Vegetable Products Ltd. [(1973) 88 ITR 192] (SC). The same also does not hold good in the present case also. This is for the reason that the issue of replacement of membrane has ITA No. 297 of 2010 -7- never come up before any Court wherein the Hon'ble Court has given its definite opinion. Once we see the facts of this particular case, the conclusion is obvious that the assessee has himself claimed the expenditure in its profit & loss account only to the extent of 1/3rd. (v) It is also pertinent to note the decision of Hon'ble ITAT, Chandigarh in ITA/273/Chandi/ 2008, A.Y. 04-05 in the case of M/s Dr. Morepen Ltd., Chandigarh wherein Hon'ble ITAT on a similar issue has taken note of decision of Hon'ble ITAT Ahmedabad (supra). Although the decision in the case of Dr. Morepen Ltd. is decided in favour of the assessee but the relevant observations as given by Hon'ble ITAT in Para-6 of the order by referring the case of Amtrex Appliances Ltd. (supra) are reproduced as under:- “The learned DR, in the course of his arguments has relied upon the decision of the Ahmedabad Bench of the Tribunal in the case of Amtrex Appliances Ltd. (supra). In this case, sale promotion expenditure has been held by the Tribunal to be allowable as 1/5th over a period of 5 years. It is therefore submitted by the learned DR that in the instant ITA No. 297 of 2010 -8- case also, sale promotion expenses be allowed on the same basis as adopted by the Assessing Officer. We have perused the said decision and find the same stands on an altogether different footing. In the case before the Ahmedabad Bench, the assessee himself had debited only 1/5th amount of the expenditure in its Profit and Loss account of the year under consideration and spread over the entire expenditure over a period of 5 years. The assessee, however claimed the expenditure as revenue expenditure in a single year while filing its return of income. The expenditure related to advertisement expenses for launch of new products. The Assessing Officer had disallowed the expenditure on the ground that the expenses incurred in launching a new product was a capital expenditure. The CIT (Appeals) however while upholding the nature of the expenditure as revenue, yet held that the assessee was not justified in claiming the expenditure in the single year by ignoring its own claim made in the Profit and loss account. Thus the Tribunal does not lay down any absolute proposition that sales promotion expenses are allowable over a period of 5 ITA No. 297 of 2010 -9- years. It is seen that the said decision was rendered on its own peculiar facts and cannot be imported here. Thus, the said decision does not help the Revenue in the instant case.” (emphasis supplied). In the present case also the assessee himself debited 1/3rd of expenditure in the profit & loss account. 11. Respectfully following the decision of Hon'ble ITAT Ahmedabad wherein Hon'ble ITAT has followed the decision of Hon'ble supreme Court in the case of Madras Industrial Investment Corpn, 225 ITR 802 (SC), I hold that action of the Assessing Officer was justified in making disallowance. The Hon'ble Supreme Court has introduced the concept of 'deferred revenue expenditure to be claimed over a period of years. The contention of the assessee that there is no concept of deferred revenue expenditure does not hold good.” 5. The above finding was affirmed by the Tribunal. 6. We have heard learned counsel for the appellant. 7. Contention raised by learned counsel for the appellant is that the expenditure in question was in the nature of revenue as by the said expenditure no new asset came into existence and the expenditure was of recurring nature necessary for carrying on the business. Reliance has been placed on the following judgments:- ITA No. 297 of 2010 -10- 1. The Jagat Bus Service, Saharanpur v. Commissioner of Income Tax, U.P. (1950) 18 ITR 13; 2. R.S. Radha Kishan Kapoor v. Commissioner of Income Tax, U.P. , (1963) 47 ITR 938; 3. Commissioner of Income Tax, Madras v. Ashok Leyland Ltd., (1969) 72 ITR 137; and 4. Commissioner of Income-Tax v. Cominco Binani Zinc Ltd., (1993) 204 ITR 56. 5. Punjab State Industrial Development Corporation Ltd. v. Commissioner of Income-Tax, (1997) 225 ITR 792. 8. On the basis of this, it has been submitted that the entire expenditure should have been allowed as revenue expenditure. 9. We are unable to accept the submission. The Assessing Authority, CIT (A) as well as the Tribunal held that expenditure was in the nature of capital expenditure, having regard to the fact that the item in question, i.e. membrane had life of 3 years and 8 years. The item in question is an equipment without which manufacturing is not possible. It is not an expenditure of the nature which is exhausted immediately. There is no single or rigid test for holding an expenditure to be revenue or capital. Generally enduring benefit of an expense, i.e. trade test or new asset test or functional test may be employed for determining the expenditure to be capital or revenue depending upon the nature of the business carried and the nature of expenditure incurred. In the facts and circumstances of the case, the nature of expenditure cannot be ITA No. 297 of 2010 -11- held to be of revenue nature. At best, expenditure to the extent of 1/3rd could be held in the circumstances to be revenue expenditure in the current assessment year and the remaining expenditure could not be treated to be revenue expenditure and allowed under Section 37 of the Act as permissible expenditure. 10. Reference is made to judgments on which reliance has been placed by the learned counsel. The judgments relied upon are distinguishable and do not advance the case of the assessee. 11. In the Jagat Bus Service's case (supra), the assessee was in the business of running motor buses and lorries and the expenditure in question was incurred for permission to run the motor vehicle, it was observed that the money was spent every year and the same may be in the nature of revenue expenditure. However, in the present case, the expenditure incurred to the extent of 1/3rd thereof relatable to this year, could be held to be in the nature of revenue expenditure. 12. The question arose in R.S. Radha Kishan Kapoor's case (supra), regarding payment of amount to one of the retiree brothers by way of goodwill which was held to be in the nature of capital expenditure. 13. Issue in Ashok Leyland Ltd's case (supra), was in respect of expenditure incurred for terminating managing agency agreement which was allowed as a revenue expenditure. 14. Calcutta High Court in Cominco Binani Zinc Ltd's case (supra), was considering the issue relating to expenditure incurred for re-routing the pipeline connection and to take the pipeline further ITA No. 297 of 2010 -12- upstream for getting saline-free water which was held to be in the nature of revenue expenditure in the facts and circumstances of the case therein. 15. In Punjab State Industrial Development Corporation Ltd's case (supra), the Apex Court held that fee paid to the Registrar of Companies for expansion of the capital base was capital expenditure. 16. In the present case, the concurrent finding recorded by the authorities clearly shows that the entire expenditure was not in the nature of revenue expenditure. Reliance has been placed by the authorities on the judgment of the Hon'ble Supreme Court in Madras Industrial Investment Corporation Ltd. v. Commissioner of Income- tax, 225 ITR 802 (SC), wherein the expenditure was in the nature of discount on debentures part of which was held to be expenditure proportionately as revenue expenditure. It was held that if the expenditure was incurred wholly or exclusively for the purpose of business, the same could be entirely allowed in the year in which it was incurred. But where only part of it could be attributed to the business in the year in question, to that extent only the expenditure could be held to be revenue expenditure. 17. We are of the opinion that in view of the finding recorded by the authorities, the questions raised cannot be held to be substantial questions of law. 18. The appeals are dismissed. (ADARSH KUMAR GOEL) JUDGE August 2, 2010 (AJAY KUMAR MITTAL) gbs JUDGE