The Commissioner of Income Tax V. M/s.Nagaarjuna Fertilizers AND Chemicals

ITTA/107/2003

AI Insights

The case involves the Commissioner of Income Tax as the appellant and M/s. Nagarjuna Fertilizers and Chemicals Ltd. as the respondent. The dispute centered on whether the expenditure incurred for establishing a Green Belt by the respondent, which was a prerequisite for setting up a fertilizer plant and involved significant costs, should be treated as capital expenditure under the heading of 'plant and machinery' for tax purposes. The Assessing Officer and the Commissioner (Appeals) had initially disallowed the depreciation claimed on this expenditure, but the Tribunal later reversed this decision, leading to the present appeal by the Commissioner of Income Tax. The court's decision clarified the classification of such expenditures in the context of income tax law, separate from other domains like insurance.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 718790 (HC-HYDERABAD)
• Appeal Type: Others
• Pronouncement Date: 17-09-2014
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax vs. Mir Mohd. Ali
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: HIGH COURT
• Department Lawyers: S RAVI
• Assessee Lawyers: S R ASHOK
• Keywords: Capital expenditure; Depreciation; Plant and machinery; Revenue expenditure; Green Belt
• Section: 260-A

Judgement Text

"*THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND *THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM +I.T.T.A.No.107 of 2003 % Dated 17.09.2014 # Commissioner of Income Tax ….Appellant $ M/s. Nagarjuna Fertilizers and Chemicals Ltd. ….Respondent ! Counsel for the appellant : Sri S.R.Ashok ^ Counsel for respondents : Sri S.Ravi < GIST: > HEAD NOTE: ? Cases referred: 1. 53 ITR 165 THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A.No.107 of 2003 JUDGMENT: (Per LNR,J) This appeal under Section 260-A of the Income Tax Act, 1961 is directed against the order, dated 01.08.2002 passed by the Hyderabad Bench ‘A’ of the Income Tax appellate Tribunal in I.T.A.No.572/Hyd/1998, which in turn is referable to the assessment year 1993-94. The respondent established a Fertiliser Plant in the year 1991-92. The construction was concluded on 31.07.1992 and the manufacturing activity commenced immediately thereafter. In the returns submitted by the respondent, for the assessment year 1993-94, the expenditure incurred for establishing Green Belt was shown and the corresponding depreciation under the relevant provisions of law was claimed. The Assessing Officer refused to treat it as capital investment, much less as part of plant and machinery and disallowed depreciation, which was claimed at Rs.6,12,1,2,792/-. Aggrieved by that, the respondent approached the Commissioner (Appeals). Through his order, dated 22.05.1998, the Commissioner confirmed the view taken by the Assessing Officer. Thereupon, the respondent filed the I.T.A. before the Tribunal. Through the order under the present appeal, the Tribunal held that the expenditure incurred for the arrangement of Green Belt answers the description of ‘revenue expenditure’ and since it was incurred before the commencement of production and business, it can be capitalised. However, it proceeded further and directed that the amount so capitalised shall be treated under the heading of “plant and machinery”. The Revenue is in appeal before us feeling aggrieved by the order passed by the Tribunal. Sri S.R.Ashok, learned Senior Standing Counsel for the appellant submits that by no stretch of imagination, the Green Belt, which is arranged in compliance with the norms stipulated by the Pollution Control Board, can be treated as ‘plant and machinery’. He contends that when a building, where plant and machinery is arranged cannot be treated as part of the plant and machinery, the question of the trees, or land, on which they are grown, being treated as part of it does not arise. He further submits that whatever may have been the justification for the Tribunal in holding that the amount spent for the Green Belt can be capitalised, there is absolutely no justification for bringing it under the heading of ‘plant and machinery’. He contends that the view expressed by the Tribunal that the expenditure in question can be capitalised, is opposed to law. Sri S.Ravi, learned senior counsel appearing for the respondent, on the other hand, submits that according to the Law, that governs the establishment of fertiliser factories, arrangement of Green Belt, of a particular area and description is a prerequisite and in that view of the matter, the Green Belt deserves to be treated as part of ‘plant and machinery’. He contends that even if for any reason, the Green Belt cannot be treated as part of ‘plant and machinery’, the expenditure incurred therefor deserves to be capitalised and that the view taken by the Tribunal in that regard warrants no interference. As a measure to control pollution, Laws are enacted ordaining that whenever an industry that has the potential of polluting the air or ground water, are established, the concerned management shall be under obligation to provide a Green Belt of the specified area, as a measure to control the damage or to replenish the loss in terms of pollution of air and atmosphere. It is in this context, that the respondent was required to arrange for a Green Belt of considerable area. The purchase of land and plantation of trees thereon, naturally involves fairly large expenditure. The depreciation to the extent of Rs.6,12,1,2,792/- was claimed by treating the Green Belt as part of plant and machinery. The Assessing Officer did not allow the depreciation and the same view was taken by the Commissioner in appeal. The Tribunal has undertaken extensive discussion regarding the nature of the expenditure that is incurred for arranging the Green Belt. After referring to the relevant provisions and some decisions, may be of the Tribunal itself, the following view was expressed: Thus, the expenditure in question being in the revenue field, cannot be capital expenditure. Once a view is taken that the expenditure in question is not a capital expenditure, the question whether the green belt is ‘plant’ or not become infructuous and hence, need not be gone into. For this reason alone the entire arguments of the ld. Counsel for the assessee that green belt is ‘plant’ fails and all the case law cited become distinguishable. Thus, this revenue expenditure was mandatory and is incurred by the assessee prior to commencement of business. Two things emerge from the order of the Tribunal. The first is that the expenditure incurred for arranging Green Belt does not qualify to be treated as capital expenditure or plant and machinery. The second is that since the expenditure, though revenue in nature, was incurred before the commencement of the business/production, the said amount can be capitalised. The Tribunal did not stop at that. It directed that the same be treated under the heading of ‘plant and machinery’. The relevant paragraph reads: “Keeping in view the factual matrix of this case and the above proposition laid down by the honourable apex court, we are of the considered opinion that the expenditure in question is to be allocated to the asset and capitalised under the ‘plant and machinery’ and depreciation allowed at the admissible rates on the same. Order accordingly.” As regards the first part of the ultimate direction issued by the Tribunal, even the respondent does not have any serious objection, though it has a demur. Once it is not in dispute that the expenditure for arranging Green Belt was incurred before the commencement of production and in the process of creating asset, it deserves to be capitalised. The controversy however is about such amount being treated under the heading of ‘plant and machinery’. The Tribunal, in a way, accepted the contention of the respondent that the Green Belt was treated as plant and machinery in the insurance policies and the same analogy can be adopted in the context of taxation also. In the process, it made an attempt to take assistance from the judgment of the Hon’ble Supreme Court in Commissioner of Income Tax vs. M ir Mohd. Ali[1]. We find that the reason adopted by the Tribunal is a bit far-reaching. The subject matter of the judgment of the Supreme Court was totally unrelated to the context of the present case. When the field of income tax is governed by its own norms, in the form of rules and notifications, if not the provisions of the Act itself, for classification of items of expenditure and the like, there was absolutely no basis to adopt the one, which was indicated in an insurance policy, which has absolutely nothing to do with taxation. We therefore partly allow the appeal, setting aside that part of the order of the Tribunal, which directed that the expenditure incurred for arranging the Green Belt by the respondent be treated under the heading of ‘plant and machinery’. However, it is directed that the said amount shall qualify for capitalisation in the process of creating assets. The miscellaneous petition filed in this appeal shall also stand disposed of. There shall be no order as to costs. ____________________ L.NARASIMHA REDDY, J ________________________ CHALLA KODANDA RAM, J Date: 17.09.2014 Note: L.R.Copy to be marked. JSU THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A.No.107 of 2003 Date: 17.09.2014 JSU [1] 53 ITR 165 "