1 COMMISSIONER OF INCOME TAX, UDAIPUR VS. M/S. HINDUSTAN ZINC LTD, UDAIPUR. (D.B.INCOME TAX APPEAL NO. 52/02) Date of Judgment :- 30, January,2009. HON'BLE MR.JUSTICE A.M.KAPADIA HON'BLE MR.JUSTICE SANGEET LODHA Mr.K.K.Bissa, for the appellant. Mr. Anjay Kothari, for the respondent. BY THE COURT:-(PER HON'BLE MR.SANGEET LODHA,J.) 1. This appeal under Section 260 A of the Income Tax Act, 1961( in short “the Act of 1961” hereinafter) is directed against order dated 16.10.01 passed by the Income Tax Appellate Tribunal,Jodhpur Bench,Jodhpur ( in short “ITAT” hereinafter) , whereby an appeal filed by the Revenue against the order dated 20.2.94 passed by the Commissioner of Income Tax (Appeal), Udaipur ( in short “CIT(A)” hereinafter) setting aside the order passed by the Assessing Officer( in short “AO” hereinafter) dated 28.10.93 to the extent of disallowing certain expenditure, stands dismissed. 2. The return for the Assessment Year 1991-92 was filed by the assessee on 13.12.91 showing a total income of Rs.3,41,99,319/-. However,a revised return was filed by the assessee on 4.1.93 showing loss of Rs.43,72,27, 027/-. In the 2 revised return , the assessee claimed deduction u/s. 37 of the Act of 1961 on account of investment in construction of Ghosunda Dam as revenue expenditure. The expenditure was incurred by the asessee in construction of part of the Dam inasmuch as, it required large quantity of water for day to day operation of its super smelter located at Chanderia. The AO disallowed the same on the ground that the expenditure incurred in construction of Ghosunda Dam was of capital nature. That apart, the deduction claimed by the assessee in respect of expenditure on the Guest House was also disallowed by the AO. 3. Aggrieved by the aforesaid order passed by the AO , the assessee preferred an appeal before the CIT(A). The CIT(A) arrived at the finding that the expenditure made by the assessee which facilitates that the business should go on more profitably would be a revenue expenditure. The learned CIT(A) opined that it does not make any change in the profit earning structure of the company nor it bring into existence any asset of the capital nature. Accordingly, the expenditure incurred as aforesaid was treated to be allowable revenue expenditure.The expenses claimed by the assessee company in respect of the Guest House were also allowed by the CIT(A) relying upon his own decision in the case of assessee for preceding assessment year. 4. On further appeal by the Revenue, the order passed by the CIT(A) as aforesaid has been confirmed by the ITAT. The ITAT 3 arrived at the finding that the object and effect of the expenditure incurred by the assessee company in construction of the Ghosunda Dam is facilitating the assessee's trade operation and enabling the management to conduct business more efficiently or more profitably, therefore, the same are allowable deductions. Accordingly, the ITAT declined to interfere with the order passed by the CIT(A). Relying upon the decision of the various High Courts, the expenses incurred by the assessee company in respect of the Guest House were also held to be allowable deduction by the ITAT. Hence, this appeal at the instance of Revenue . 5. The appeal was admitted by this Court on the following substantial questions of law arising from the order impugned passed by the learned ITAT:- (1) Whether on the fact and in the circumstances of the case the ITAT was justified in law in upholding the order of CIT(A) deleting the disallowance of Rs.15,21,30,864/- being expenditure on construction of Gosunda Dam holding that the expenditure was of revenue nature ignoring the facts brought on record by the Assessing Officer including the fact that the expenditure in question related to period prior to commissioning of Chandaria Smelter and the judgment of the Supreme Court reported in 84 ITR 277 ? (2) Whether on the facts and in the circumstances of the case the ITAT was justified in law in upholding the order of the CIT(A) reducing the disallowance of Rs.15,40,667/- made by the Assessing Officer in respect of expenditure on guest house to Rs.4,07,522/- even though expenses allowed are not allowable under the specific provisions of Section 37 4 (4) and 37(5) of the Income Tax Act? 6. It is contended by the learned counsel for the Revenue that the assessee has received enduring and lasting benefits out of the investment made by it in construction of the Dam . According to the learned counsel for the Revenue the controversy involved in this appeal stands covered by decision of the Hon'ble Supreme Court in the matter of “M/s. Devidas Vithaldas & Co. vs. CIT”, 84 ITR , 227 wherein it has been categorically held that where expenditure is for bringing into existence a new asset or an advantage of an enduring nature and is made once and for all for procuring enduring benefits shall be treated to be expenditure of capital nature. It is further submitted by the learned counsel that the assessee has not claimed this expenditure as revenue in nature in the original return and that apart, in its book of account , the assessee has treated the investment as capital expenditure therefore, the question of treating the said expenditure as revenue expenditure does not arise. Regarding the Guest House expenses, it is submitted by the learned counsel that the expenditure incurred towards rents, repairs and maintenance of the premises / accommodation used for the purpose of the Guest House of the nature indicated in sub-section (4) of Section 37 are not allowable expenditure. In this regard, the learned counsel has relied upon the decision of the Hon'ble Supreme Court in the 5 matter of “Britannia Industries Ltd. vs. Commissioner of Income Tax & Anr.”, (2005) 278 ITR 546(SC). 7. Per contra, the learned counsel appearing on behalf of the respondent-assessee submitted that admittedly, the super smelter plant established by the assessee company required large quantity of water for its day to day operation. The learned counsel submitted that the Dam is not an asset owned by the assessee company but the same is owned by the State Government. The learned counsel submitted that as a matter of fact, the Dam was initially constructed by the State Government and the assessee company has only modified the said construction. The learned counsel urged that the expenditure as aforesaid has been made by the assessee company just to facilitate that the business should go no more profitably therefore, by all means, the expenditure incurred deserves to be treated a revenue expenditure. In support of his contentions, the learned counsel has relied upon the decisions of the Hon'ble Supreme Court in the matters of “Commissioner of Income Tax , Bombay City -I vs. Associated Cement Companies Ltd.”, (1988) 172 ITR, 257 & “Commissioner of Income Tax vs. Bombay Dyeing and Manufacturing Co.Ltd.”, (1996) 219 ITR, 521 and a decision of this Court in the matter “Commissioner of Income Tax vs. Rajasthan Spinning and Weaving Mills Ltd.”, (2005) 272 ITR, 487. In regard to the guest house expenses, the learned 6 counsel for the respondent assessee also does not dispute that the matter stands covered by the decision of the Hon'ble Supreme Court in Britannia Industries Ltd.'s case (supra). 8. We have considered the rival submissions and perused the material on record. 9. There is no quarrel with the proposition of law advanced by the learned counsel for the Revenue that where expenditure is made for bringing into existence a new asset or an advantage of an enduring nature and is made once and for all for procuring enduring benefits shall be treated to be expenditure of capital nature. The word “capital” connotes permanency and capital expenditure is therefore, closely akin to concept of securing something tangible or intangible property or corporeal or incorporeal right so that they could be of a lasting or enduring benefit to the enterprise in issue. Revenue expenditure on the other hand is operational in its perspective and solely intended for furtherance of the enterprise. This distinction though candid and well accepted, yet is susceptible to modification under peculiar and distinct circumstances. (CIT vs. Ashok Leyland Ltd., (1969) 72 ITR 137. 10. But then, in absence of the statutory definition of the “capital and revenue expenditure” no universal test can be laid down so as to determine the nature of expenditure. As laid down by the Hon'ble Apex Court in the matter of “Empire Jute 7 Company Ltd. vs. CIT” (1980) 124 ITR, 1, there may be cases where expenditure , even if incurred for obtaining an advantage of enduring benefit, may nonetheless be on the 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 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 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 in enabling the management in the 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, 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 particular facts and circumstances of a given case. 11. In Rajasthan Spinning & Weaving Mills Ltd.'s case (supra), the Division Bench of this Court after due consideration of the various decisions of the Hon'ble Supreme Court and High Courts including the decision of the Supreme Court in Associated Cement Companies Ltd.'s case (supra), decision of the Bombay 8 High Court in Bombay Dyeing & Manufacturing Company Ltd.'s case (supra) and the decision of the Hon'ble Supreme Court in the matter of “CIT vs. Madras Auto Service (P) Limited “ (1998) 233 ITR, 468, opined as under:- “From the aforesaid judgments of the Supreme Court, it is apparent that merely because the amount spent has been used for construction of a building or structure of permanent nature is not the decisive test for holding the expenses to be capital outlay or revenue outlay. The two tests emerging from the aforesaid decisions are that firstly where the building or construction of any permanent structure is brought into existence that is by itself not sufficient to hold the expenses to be capital nature invariably. Where such construction does not result in acquisition of any capital assets to the trade of the assessee or the property does not become the property of the assessee, it does not result in acquisition of capital assets of enduring nature by the assessee. Secondly, it is also clearly discernible that if such expenses are incurred for the purposes of business for deriving any benefit whether to preserve the business or to facilitate the running of the business more smoothly or to make the business more profitable or to secure any other advantage for the assessee's business or incurring expenditure by seeking exemption from or reduction in incurring of other expenses which would have been ordinarily allowable as revenue expenditure of the assessee's business, such expenses are to be treated as having been incurred wholly and exclusively for the business of the assessee and revenue expenditure. Such expenses cannot be construed as a capital expenses.” 12. Adverting to the facts of the present case, admittedly, the assessee's super smelter plant requires adequate quantity of water for its operation and unless and until, water is available , the super smelter plant would not function and would not be able to produce any items. Admittedly, the Ghosunda Dam has been 9 constructed by the State Government and the assessee has made expenditure for its alteration so as to ensure sharing of the water with the State Government without having any right or ownership in the Dam or the water. Even, the assessee's share of water is also determined by the State Government. Thus, the expenditure incurred by the assessee for commercial expediency relates with carrying on of business and falls within such expenditure as prudent businessman may incur for the purpose of the business. The operational expenses incurred by the assessee solely intended for furtherance of the enterprise can be no means be treated as expenditure of capital nature. 13. Keeping in view the object and purpose of the expenditure and totality of the facts and circumstances of the case noticed above, in our considered opinion, the benefit received by the assessee company on account of the expenditure incurred cannot be said to be an advantage in the capital field. We are in agreement with the view taken by the CIT(A) and affirmed by the learned ITAT that the object and effect of the expenditure made by the assessee is to facilitate it trade operation and enable the management to conduct business more efficiently or more profitably. Therefore, the question no. 1 (supra) deserves to be answered in affirmative i.e. in favour of the assessee and against the Revenue. 14. Regarding the Guest House expenses, it is the common 10 ground between the parties that the matter is squarely covered by the decisions of the Hon'ble Supreme Court in Britannia Industries Ltd.'s case (supra). In the said case, the Hon'ble Supreme Court while considering the question as to whether the expression “premises & buildings” referred to in Section 30 and 32 and used for the purposes of business operation would include within its scope and ambit , the expression “residential accommodation in nature of guest house” used in sub-sections (3), (4) and (5) of Section 37 of the Act of 1961, observed as under:- “While the two expressions can be similarly interpreted, a distinction has been sought to be introduced for the purposes of section 37 by specifying the nature of building to be a guest-house. In our view, the intention of the Legislature appears to be clear and unambiguous and was intended to exclude the expenses towards rents, repairs and also maintenance of premises/accommodation used for the purposes of a guest-house of the nature indicated in sub-section(4) of section 37. When the language of a statute is clear and unambiguous, the courts are to interpret the same in its literal sense and not to give it a meaning which would cause violence to the provisions of the statute. If the Legislature had intended that deduction would be allowable in respect of all types of buildings/accommodations used for the purposes of business or profession, then it would not have felt the need to amend the provisions of section 37 so as to make a definite distinction with regard to buildings used as guest-houses as defined in sub-section(5) of section 37 and the provisions of sections 31 and 32 would have been sufficient for the said purpose.” 15. In this view of the matter, the question no. 2 deserves to be decided in favour of the Revenue and against the assessee. 11 Accordingly, it is held that the CIT(A) was not justified in reducing the Guest House expenses disallowed by the AO from Rs.15,40,667/- to Rs.4,07,522/-. 16. In the result, the appeal preferred by the Revenue is partly allowed. The order passed by the ITAT treating the expenditure incurred by the assessee in construction of the Ghosunda Dam as revenue expenditure is affirmed. However, the order passed by the CIT(A) reducing the guest house expenses disallowed by the AO from Rs.15,40,667/- to Rs.4,07,522/- affirmed by the learned ITAT is set aside and the order passed by the AO in this regard is restored. Consequently, the guest house expenses claimed by the assessee at Rs. 15,40,667/- shall stand disallowed. No order as to costs. (SANGEET LODHA),J. (A.M.KAPADIA),J. Aditya/-