The Commissioner of Income tax­-LTU v. Indian Petrochemicals Corporation Ltd
[Citation -2015-LL-0408-15]

Citation 2015-LL-0408-15
Appellant Name The Commissioner of Income tax­-LTU
Respondent Name Indian Petrochemicals Corporation Ltd.
Court HIGH COURT OF BOMBAY
Relevant Act Income-tax
Date of Order 08/04/2015
Judgment View Judgment
Keyword Tags business expenditure • revenue expenditure • business advantage • capital investment • lump sum payment • capital asset • legal entity • tax effect
Bot Summary: Om 8 Mr. Suresh Kumar would submit that the contribution to B various Associations has been made by the assessee company, even though the expenditure in relation thereto was not for the business of the assessee and question no. The assessee pointed out to the Assessing Officer as also the Commissioner that over a period of 9 years from 2003 B 04 to 2011 12, the assessee was obliged to pay in terms of the earlier agreement, minimum Rs.266.76 crores to M/s. Dodsal. In the alternative, the assessee claimed depreciation on capital investment; in the alternative, the assessee claimed deduction of the payments as ig business expenditure or as extra rent for the lease. What advantage did the assessee get by constructing a building which belonged to somebody else and spending money for such construction The assessee got a long lease of a newly constructed building suitable to y its own business at a very concessional rent. Relying upon the second test enumerated above, learned counsel rt for the appellant has submitted that the assessee got enduring benefit of a capital nature by spending the amount because the assessee ou obtained a new building for a period of 39 years. In the present case also, since the asset created by spending the said amounts did not belong to the assessee but the ba 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 expenditure should be looked upon as om revenue expenditure. 13.doc rt 25 As a result of the above discussion, the Appeal is admitted on the following two questions: ou Whether on the facts andin the circumstances of the case and in law, the ITAT was right in holding that notional sales C tax exemption amount of Rs.38,62,33,200/ is a capital receipt not liable to income tax h Whether on the facts and in the circumstances of the case and in law, the ITAT was right in allowing as a revenue ig deduction the contribution of Rs.40,25,388/ made by the Assessee Company to various clubs ran by and meant for the H staff and their families at various places even though such expenditure was not allowable under section 40A(9) of the Income Tax Act y ba 26 The Assessee waives service.


1 901.itxa1169.13.doc sbw IN HIGH COURT OF JUDICATURE AT BOMBAY rt ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.1169 OF 2013 ou Commissioner of Income Tax LTU ..Appellant Versus Indian Petrochemicals Corporation Ltd. ..Respondent C ........... Mr. Suresh Kumar a/w Ms. Padma Divakar for Appellant. Mr. J. D. Mistri, Senior Counsel, a/w Raj Darak & P. C. Tripathi for h Respondent. ........... igCORAM: S. C. DHARMADHIKARI AND A. K. MENON, JJ. H DATE : 8th APRIL, 2015. P.C.: y This Appeal of revenue challenges order passed by ba Income Tax Appellate Tribunal, Bench at Mumbai, dated 29 th June,2012. om 2] Tribunal was dealing with four Appeals and out of which two were filed by assessee and two were filed by revenue. They pertain to two assessment years 2003 04 and 2004 05. B 3] Mr. Suresh Kumar appearing for revenue in support of this Appeal submits that substantial questions of law as proposed and from 1/18 ::: Downloaded on - 17/08/2015 17:22:59 ::: 2 901.itxa1169.13.doc page 7 of paper book arise for determination and consideration in rt admitted factual backdrop. He would submit that company is engaged in business of manufacturing and selling petrochemicals. It ou filed return of income on 29th November, 2003 declaring gross total income of Nil and which was revised later declaring total loss of C Rs.17,56,66,329/ . h 4] Assessing Officer noticed that assessee company had treated ig Rs.38,62,33,200/ as capital receipt on account of sales tax exemption granted by Government of Gujarat, for establishing industries in H backward area of Gandhar. Assessing Officer did not accept contention of assessee company that sales tax exemption was y capital receipt not chargeable to tax and determined this amount as ba revenue receipt. om 5] We need not advert to rival contentions on this point or issue because in all fairness both sides have pointed out that one of B substantial question of law as proposed in present Appeal is already admitted by this Court in Income Tax Appeal No.4157/2009 and between same parties. In such circumstances, there is no difficulty in admitting this Appeal on question no.4(A). 2/18 ::: Downloaded on - 17/08/2015 17:22:59 ::: 3 901.itxa1169.13.doc 6] Mr. Suresh Kumar, however would submit that all questions as rt proposed are substantial questions of law and Appeal, therefore, be admitted on same. ou 7] However, Mr. Mistri, learned Senior Counsel, appearing on C behalf of assessee company would submit that it is not necessary to admit this Appeal as all these questions other than one admitted above h are arising from pure factual findings. In relation to question no. (B) ig Mr. Mistri would invite our attention to discussion in Tribunal s order. He would submit that Tribunal in relation to this question has H done nothing except relying upon earlier orders and for assessment years 2000 01, 2001 02 and 2002 03. Therefore, factual findings in y earlier orders bind revenue. There is no distinction or difference ba pointed out either before Tribunal or this Court. In such circumstances, question no.(B) be not admitted. om 8] Mr. Suresh Kumar, however, would submit that contribution to B various Associations has been made by assessee company, even though expenditure in relation thereto was not for business of assessee and, therefore, question no.(B) is also substantial question of law. 3/18 ::: Downloaded on - 17/08/2015 17:22:59 ::: 4 901.itxa1169.13.doc 9] What we have noted from Tribunal s order and on this point is rt that contribution which was made to various industries came to be computed. There was chart placed before Tribunal giving details of ou donation/contribution. Similar contribution was made for earlier assessment years. Tribunal relied upon certain decisions rendered by C it and High Court of Karnataka. This expenditure was held to be revenue in nature. In that regard, at paragraph 14 of Tribunal s order h (running page 109 and 111) we find that Tribunal has merely ig followed and applied its earlier orders for prior assessment years in case H of this very assessee and on same question. Therefore, such factual findings cannot be termed as perverse and do not rise to any substantial questions of law. Appeal is, therefore, dismissed. More so, when y ba factual position is identical to earlier assessment years and has not undergone any change. om 10] Then, Mr. Suresh Kumar addressed us on question no.(C). He submits that factual position is not in dispute. However what B asssessee company did was to terminate build, own, operate, transfer contract with M/s. Dodsal Ltd. for its Dahej to Vadodra Pipeline Project by making one time payment of Rs.102,03,43,311/ , then, assesse company had purchased commercial right to operate and maintain 4/18 ::: Downloaded on - 17/08/2015 17:22:59 ::: 5 901.itxa1169.13.doc pipeline. Therefore, such asset was clearly capital in nature. Mr. Suresh rt Kumar submits that even question no. (D) is substantial question of law because Tribunal erred in allowing entire expenditure of ou Rs.1,07,02,2000/ incurred by assessee company in respect of registration fees and stamp duty paid on lease transactions entered by C it with ICICI Ltd. This could not have been allowed in first year itself and Assessing Officer had rightly apportioned it. It was spread over h entire lease period of 25 years.ig H 11] In relation to these questions, Mr. Mistri would submit that factual findings of Tribunal are in consonance with law laid down and repeatedly by Hon ble Supreme Court. He relies upon y ba judgment of Hon'ble Supreme Court in case of Commissioner of Income Tax v/s. Madras Auto Service(P.) Ltd. reported in (1998) 233 om ITR 468. He submits that Hon ble Supreme Court has earlier laid down principle as to when expenditure could be said to be capital or revenue in nature. There is no substance in argument of B revenue because assessee has not acquired any such right on one time payment and distinguished from contract which was earlier in force and executed with M/s. Dodsal Ltd. All that has transpired is that pipeline in which appellant claims right to use and for its project was 5/18 ::: Downloaded on - 17/08/2015 17:23:00 ::: 6 901.itxa1169.13.doc subject matter of agreement earlier with M/s. Dodsal Ltd. rt Subsequently, M/s. ICICI Bank has stepped in. assessee has paid minimum agreed amount. This very sum, if paid in terms of earlier ou contractual stipulation can be treated as revenue expenditure. pipeline is not owned by assessee company. pipeline is laid by C other legal entity and what assessee obtained for itself is right to use it. For that purpose, agreement was executed and one of terms h pertain to payment. payment was to be made monthly. Now, ig Assessee has derived some benefit by making lump sum payment and for H entire contractual period. There is no distinction in factual position. Neither nature of rights have been altered nor underlying contract. Therefore, there is no substance in contentions y ba of revenue and judgment of Hon ble supreme Court is fully applicable. That has been rightly applied and point is, thus, covered om against revenue. 12] In relation to question No.(C), we find from Tribunals order B that arguments of parties have been noted. question was in relation to assessee s agreement with M/s. Dodsal Ltd. Assessing Officer was of view that expenditure on payment of lease rent and maintenance of pipeline as per original BOOT agreement with 6/18 ::: Downloaded on - 17/08/2015 17:23:00 ::: 7 901.itxa1169.13.doc Dodsal Ltd. has resulted in commercial advantage or benefit of enduring rt nature to assessee in form of operation and maintenance of pipeline. Assessing Officer was of view that after termination of ou agreement with M/s. Dodsal Ltd. and making one time payment of Rs.102,03,43,311/ , rights which are vital for operation and C functioning have been acquired. h 13] matter was, therefore, carried by assessee and aggrieved by ig such view of Assessing Officer. assessee was held to be entitled H to only benefit of depreciation at half of eligible rate. balance sum was added back to total income of assessee. Commissioner of Income Tax (Appeals) confirmed order of y ba assessing officer. om 14] aggrieved assessee, therefore, approached Tribunal and Tribunal's attention was invited to judgments of Hon ble Supreme Court right from case of Assam Bengal Cement Co. V/s. CIT (1955) 27 B ITR 34 and equally judgment in case of Madras Auto Service (supra) where very extensive arguments were canvassed. Tribunal found that contract with M/s. Dodsal Ltd. was of December 1995. Pursuant thereto, Dodsal built, maintained and operated Dahej 7/18 ::: Downloaded on - 17/08/2015 17:23:00 ::: 8 901.itxa1169.13.doc Gandhar Vadodara pipeline for approximate distance of 107 kms. rt said pipeline was commissioned in May 1997. assessee company, as per agreement was obliged to pay Rs.2.47 crores per month minimum ou guaranteed amount to Dodsal as charges in terms of agreement. agreement could have been terminated in ordinary course after 15 C years from date of commissioning. It can also be terminated if there was breach of contract or taking over of assets after 5 years of h commissioning based on mutual understanding. Nothing of this nature ig transpired and agreement continued. pipeline was vital for H operations and functions of assessee and, hence, when present assessee company stepped in it decided to take commercial decision. It made lump sum payment of above sum. This payment was made in y ba 3 years, namely, financial year ending 31 st March, 2001, 31st March, 2002 and 31st March,2003. Tribunal held that there is no dispute that om payments were allowed as revenue expenditure in respect of these assessment years. However, assessee pointed out to Assessing Officer as also Commissioner that over period of 9 years from 2003 B 04 to 2011 12, assessee was obliged to pay in terms of earlier agreement, minimum Rs.266.76 crores to M/s. Dodsal. However, payment as per reconstructed agreement comes to Rs.104.45 crores. Tribunal found that even when earlier agreement with M/s. 8/18 ::: Downloaded on - 17/08/2015 17:23:00 ::: 9 901.itxa1169.13.doc Dodsal was in force, assessee had never claimed ownership of rt pipeline. Even after reconstructing of agreement, ICICI Ltd. stepped in. other position has not changed. Now ICICI Ltd. ou claimed ownership rights and assessee only got control of operation and maintenance of pipeline which is stated to be vital for C its operation and functioning. h 15] We find that Tribunal s discussion and reasoning in paras 24 to ig 26 of impugned judgment rightly follows principles laid down in case of M/s. Madras Auto Service(P) Ltd. We are in agreement with H Mr. Mistri that Tribunal's view cannot be termed as perverse. following observations from decision of Hon ble Supreme Court in y M/s. Madras Auto (supra) would reveal as to how Tribunal's reliance ba thereon cannot be termed as misplaced: Under agreement of lease dated 1 2 1966, assessee obtained om from M/s Hajira Comer and Mrs Rabia Bai Razack lease of premises Nos 64 and 64/1 situated at Sri Narasimharaja Road, Bangalore for period of 39 years commencing from 1 1 1966. Under terms and conditions of lease, lessee (that is to say assessee), had right to demolish at its own expense B existing premises and appropriate to itself all material thereof without paying to lessors any compensation and construct new building thereon to suit purpose of their business as per plan approved by lessors Under clause 2 of lease deed, lessee was required to pay rent of Rs.1,000 per month for first fifteen years, Rs.1,500 per month for next ten years, Rs.1,650 per month for next ten years and Rs.2,000 per month for remaining years. lease deed further provided that new 9/18 ::: Downloaded on - 17/08/2015 17:23:00 ::: 10 901.itxa1169.13.doc construction shall, right from commencement of work, be property of lessors; and upon completion of work of rt construction lessee will have only right to be tenant for period of 39 years under existing lease subject to payment of rent and observation of other terms and conditions of lease. ou lessee shall not be entitled under any circumstances for any compensation whatsoever on account of its putting up new construction in place of old. Acting under lease agreement assessee invested sum of C Rs. 1,62,835 in previous year relevant to assessment year 1968 69 and Rs. 50,937 during succeeding year in constructing new building on said land. assessee claimed before Income Tax Officer expenditure of said sums of Rs.1,62,835 h and Rs.50,937 in relevant assessment years as capital loss. In alternative, assessee claimed depreciation on capital investment; in alternative, assessee claimed deduction of payments as ig business expenditure or as extra rent for lease. In order to decide whether this expenditure is revenue expenditure or capital expenditure, one has to look at H expenditure from commercial point of view. What advantage did assessee get by constructing building which belonged to somebody else and spending money for such construction? assessee got long lease of newly constructed building suitable to y its own business at very concessional rent. expenditure, therefore, was made in order to secure long lease of new and more ba suitable business premises at lower rent. In other words, assessee made substantial savings in monthly rent for period of 39 years by expending these amounts. saving in expenditure was saving in revenue expenditure in form of rent. Whatever om substitutes for revenue expenditure should normally be considered as revenue expenditure. Moreover, assessee in present case did not get any capital asset by spending said amounts. assessee, therefore, could not have claimed any depreciation. Looking to nature of advantage which assessee obtained in commercial sense, expenditure appears to be revenue expenditure. B Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with view to bringing into existence asset or advantage for enduring benefit of trade. If what is got rid of by lump sum payment is annual business expenses chargeable against revenue, lump sum payment should equally be regarded as business expenses, but if lump sum payment brings in capital asset, then, that puts 10/18 ::: Downloaded on - 17/08/2015 17:23:00 ::: 11 901.itxa1169.13.doc business on another footing altogether. Relying upon second test enumerated above, learned counsel rt for appellant has submitted that assessee got enduring benefit of capital nature by spending amount because assessee ou obtained new building for period of 39 years. difficulty, however, in present case, arises from fact that this building was never to belong to assessee. Right from inception, building was of ownership of lessor. Therefore, by spending this money, assessee did not acquire any capital asset. only C advantage which assessee derived by spending money was that it got lease of new building at low rent. From business point of view, therefore, assessee got benefit of reduced rent. High Court has, therefore, rightly considered this as obtaining business advantage. expenditure is, therefore, to h be treated as revenue expenditure. ig All these cases have looked upon expenditure which did bring about some kind of enduring benefit to company as revenue expenditure when expenditure did not bring into existence any capital asset for company. asset which was created belonged H to somebody else and company derived enduring business advantage by expending amount. In all these cases, expense has been looked upon as having been made for purpose of conducting business of assessee more profitably or more y successfully. In present case also, since asset created by spending said amounts did not belong to assessee but ba assessee got business advantage of using modern premises at low rent, thus saving considerable revenue expenditure for next 39 years, both Tribunal as well as High Court have rightly come to conclusion that expenditure should be looked upon as om revenue expenditure. 16] In circumstances, therefore, we do not find that merely making B lump sum payment and in above sum alters factual position. Once undisputed facts and legal principles which have been consistently applied and followed, are being relied upon by Tribunal, then, this question can neither be termed as perverse nor vitiated by any 11/18 ::: Downloaded on - 17/08/2015 17:23:00 ::: 12 901.itxa1169.13.doc error of law apparent on face of record. We do not think that this rt Appeal deserves to be dismissed on this point or question. ou 17] Then, we have question of payment of registration charges and stamp duty. We think that it was difficult for Tribunal to have C sustained revenue s view point. If registration fees and stamp duty are nothing but duty on instrument and not on transaction h covered by instrument, then, there was no necessity to apportion ig expenditure in that behalf. registration fees and stamp duty are on lease transactions entered by assessee with M/s. ICICI Ltd. H expenditure in that regard has been allowed in first year itself and we do not think that Tribunal has in any manner deviated from settled y principles. Tribunal s discussion in that regard from paras 34 to 38 ba and finally holding that this expenditure is revenue in nature and could have been, therefore, allowed in first year itself raises no question of om law. Appeal is, therefore, dismissed even on question no.(D). B 18] In relation to question no.(E) is concerned, Mr. Suresh Kumar submits that this is also substantial question of law simply because assessee company relocated reactor in factory premises and, therefore, acquired new and different advantage and which is of 12/18 ::: Downloaded on - 17/08/2015 17:23:00 ::: 13 901.itxa1169.13.doc optimum user and expenditure of relocating and to tune of Rs.24.87 rt lakhs was capital in nature. ou 19] We are unable to agree with Mr. Suresh Kumar. In paras 40 to 45 of impugned order, Tribunal found that there is absolutely no change C in position and which it noted in para 45. It held that reactor which was installed at new place is existing one. It was procured by h assessee in year 1999. revenue has not disputed fact that ig reactor was located at place where it was originally installed. But it was not functioning for some time. Hence, same reactor was H relocated within factory premises for optimum use. This Court had in case of CIT V/s. Abbott Laboratories (I) Pvt. Ltd. reported in (1993) y 202 ITR 818, judgment which has been relied upon had dealt with ba such issue. That when expenditure is incurred by assessee for rationalizing, better administration and modernization of its machinery om with view to obtain maximum benefit out of existing resources, even that expenditure is allowable in nature. It could not be treated to be B capital one. expenditure was incurred to improve production of existing project, to improve facilities and obtain increase in profitability by use of existing assets and resources. In these circumstances, Tribunal's conclusion while reversing that of 13/18 ::: Downloaded on - 17/08/2015 17:23:00 ::: 14 901.itxa1169.13.doc Assessing Officer cannot be termed as perverse or vitiated by any error of rt law apparent on face of record. We do not think that Appeal raises any substantial question of law in relation to this issue. ou 20] Then, question no.(F) pertains to deduction. That is C contribution of Rs.40,25,388/ made by assessee company to various clubs ran by and meant for staff and their family at various places. Mr. h Suresh Kumar placed reliance upon section 40A(9) of Income Tax Act, ig 1961. He would submit that every expenditure of this nature is not deductible. only expenditure which could be claimed is one H which is stipulated by section 36(1) clause (v) and (va) of Income Tax Act, 1961. Admittedly, making contribution towards club or y association of staff members is not permissible expenditure and on ba basis of which deduction can be claimed. Therefore, and since identical question has been admitted by High Court of Gujarat, then, om this Court should proceed to admit this Appeal. Reliance is placed specifically on language of two provisions. B 21] Mr. Mistri would not dispute that High Court of Gujarat at Ahmedabad has admitted similar question and in assessee in case. However, Mr. Mistri relied upon judgment of Division Bench of this 14/18 ::: Downloaded on - 17/08/2015 17:23:00 ::: 15 901.itxa1169.13.doc Court in case of Commissioner of Income Tax V/s. Bharat Petroleum rt Corporation Ltd. (2001) 252 ITR 43. Mr. Mistri submits that distinction will have to be made when expenditure is in nature of ou reimbursement of certain expenses incurred. He would submit that view taken by Division Bench of this Court in Bharat Petroleum C Corporation Ltd. binds us. This is nothing but claim for deduction towards staff sports and welfare expenses. staff has incurred these h expenses and for avowed object. employees of Corporation and ig companies like assessee take part in various tournaments and cultural or H sports activities. Therefore, this is matter completely covered by view taken in Division Bench judgment. Tribunal, therefore, did not err in following it. This question is not substantial question of law. y ba 22] In relation to this question, we find that it is assessee company which raised issue and of deduction. deduction was of certain om expenses incurred. assessee submitted before Tribunal that these are not matters where it could be said to be incurring any expenses but B merely reimbursing staff association. In that regard, what Tribunal has relied upon is contribution of Rs.40,25,388/ to various clubs ran by and meant for employees at Dodsal and other stations and sums were paid as employer and which are not allowable. 15/18 ::: Downloaded on - 17/08/2015 17:23:00 ::: 16 901.itxa1169.13.doc stand of assessee was that this expenditure was incurred to facilitate rt management of various activities of employees or their family. Tribunal considered arguments and particularly that in earlier ou assessment years very issue was considered by it and that Commissioner merely relied upon this view in allowing assessee's C claim. Tribunal has not rendered any independent conclusion but followed and applied its earlier view. It held that there is no difference in h facts and circumstances. ig 23] However, we are of prima facie view that once two legal H provisions having been pointed out to us, this view taken by Tribunal and on facts will not bind revenue. It would not definitely bind this y Court in not entertaining and admitting this Appeal on said point. In ba light of rival contentions, Appeal deserves admission even on this point. It is therefore, admitted. om 24] As far as question no.(G) is concerned, we are of considered B view that bearing in mind, tax effect and only in sum of Rs.2.66 lakhs that this question does not deserve to be admitted. negligible and in any event minimal tax effect, thus, would prevail over this Court in not entertaining Appeal and admitting on question no.(G). 16/18 ::: Downloaded on - 17/08/2015 17:23:00 ::: 17 901.itxa1169.13.doc rt 25] As result of above discussion, Appeal is admitted on following two questions: ou (1) Whether on facts andin circumstances of case and in law, ITAT was right in holding that notional sales C tax exemption amount of Rs.38,62,33,200/ is capital receipt not liable to income tax? h (2) Whether on facts and in circumstances of case and in law, ITAT was right in allowing as revenue ig deduction contribution of Rs.40,25,388/ made by Assessee Company to various clubs ran by and meant for H staff and their families at various places even though such expenditure was not allowable under section 40A(9) of Income Tax Act? y ba 26] Assessee waives service. 27] Registrar (Judicial)/Registrar, High Court, Original Side, om Bombay to ensure that original record in relation to this Appeal is summoned from Tribunal and offered for inspection of parties. B This paper book is treated sufficient for purpose of admission of this Appeal. However, Registry must further ensure preparation of complete paper book in accordance with Rules. Registry in first instance must send intimation of admission of this Appeal enclosing 17/18 ::: Downloaded on - 17/08/2015 17:23:00 ::: 18 901.itxa1169.13.doc therewith copy of this order so as to enable Tribunal to act rt accordingly. ou (A. K. MENON, J.) (S. C. DHARMADHIKARI, J.) C h ig H y ba om B 18/18 ::: Downloaded on - 17/08/2015 17:23:00 ::: TheCommissionerofIncometax-LTU v. IndianPetrochemicalsCorporationLtd
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