The ACIT, Circle Morbi, Morbi V. M/s. Vita Granito Pvt. Ltd., Morbi

ITA 126/RJT/2019

AI Insights

The case involves an appeal by the Revenue against the order of the ld.Commissioner of Income Tax(Appeals)-3, Rajkot, which allowed the claim of gas connection charges amounting to Rs.10,70,236/- as a revenue expenditure under section 37 of the Income Tax Act, 1961. The Assessing Officer had initially disallowed this claim, treating it as a capital expenditure. The Tribunal, after considering the arguments and evidence presented, upheld the CIT(A)'s decision, emphasizing that the expenditure was incurred solely to facilitate the supply of gas, which did not result in any enduring benefit or the creation of a capital asset.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 133693 (ITAT-RAJKOT)
• Duration Of Justice: 2 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-08-2019
• Appeal Filed By: Department
• Order Result: DismissedDismissed
• Bench Allotted: DB
• Next Hearing Date: 03-07-2023
• Assessment Year: 2008-2009
• Appeal Filed On: 26-05-2019
• Other Referred Cases: Empire Jute Co. Ltd. vs. CIT, Bombay Steam Navigation Co. (1953) Private Limited vs. CIT, Commissioner Of Income-Tax vs. Panbari Tea Company Limited
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: VIRTUE OF THIS; INCURRING THIS EXPENDITURE. THIS ASPECT
• Keywords: Capital asset; Depreciation; Tax effect; Tax effect; Revenue expenditure; Capital expenditure
• Section: 37; 37(1)

Judgement Text

आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरणआयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण, राजकोट 瀈यायपीठ 瀈यायपीठ瀈यायपीठ 瀈यायपीठ, , , , राजकोट IN THE INCOME TAX APPELLATE TRIBUNAL RAJKOT BENCH, RAJKOT (Conducted Through Virtual Court) BEFORE SMT.ANNAPURNA GUPTA, ACCOUNTANT MEMBER AND SHRI T.R. SENTHIL KUMAR, JUDICIAL MEMBER ITA No.126/RJT/2019 Assessment Year :2008-09 ACIT, Morbi Circle Morbi. Vs. M/s.Vita Granito P.Ltd. B/h. Dariyalal Resort Village-Jambudiya Morbi. PAN : AACCV 4765 A अपीलाथ / (Appellant) यथ /(Respondent) Assessee by : Shri Mehul Ranpura, ld.AR Revenue by : Shri B.D. Gupta, ld.Sr.DR स ु नवाई क तार ख/Date of Hearing : 04/07/2023 घोषणा क तार ख /Date of Pronouncement: 07/07/2023 आदेश/O R D E R PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER Present appeal has been filed by the Revenue against order passed by the ld.Commissioner of Income Tax(Appeals)-3, Rajkot [hereinafter referred to as “Ld.CIT(A)under section 250(6) of the Income Tax Act, 1961 ("the Act" for short) dated 14.3.2019 pertaining to the Asst.Year 2008-09. 2. This is a recalled matter. The appeal of the Revenue was earlier dismissed on account of low tax effect. However, subsequently, the Department filed an MA pleading that the appeal of the Revenue could not be dismissed on account of low tax effect, because, it fell within the exceptions provided in para-8(c) of the Board’s Instruction directing withdrawal of appeals on account of ITA No.126/RJT/2019 2 low tax effect involved. After taking note of this contention of the Department, the Tribunal recalled the impugned order by way of order passed in MA No/26/RJT/2020 dated 28.9.2022, and accordingly, the appeal came to us for deciding the issue on merit. 3. The ground raised by the Revenue in appeal is as under: “Addition of Rs.10,72,236/- was made by disallowing the claim of Gas connection charges u/s.37 of the I.T.Act, 1961 (Tax effect of Rs.3,30,703/-) 4. As is evident from the above, solitary grievance of the Revenue against the order of the ld.CIT(A) relates to allowance of claim of gas connection charges under section 37 of the Act amounting to Rs.10,70,236/-. The order of the Assessing Officer(AO) reveals that the said claim of the assessee made under section 37(1) of the Act had been disallowed treating the same as capital expenditure, holding the assessee as being entitled to depreciation on the same. The order of the AO reveals that reasons for holding so, was that he found that the assessee to have got enduring benefits on account of the said expenditure. The ld.CIT(A), we have noted from para 5.4 of the order, found merit in the contention and explanation of the assessee that the impugned expenditure did not result in any asset coming into existence, and was paid to the gas company only to facilitate uninterrupted supply of gas, which was used as a fuel by the assessee-company being in the business of manufacturing tiles. The contention of the assessee which found favour with the ld.CIT(A) was to effect that neither any asset had come into existence by virtue of this expenditure nor any enduring benefit had accrued to the assessee on account of the said expenditure, since the gas company had utilized this expenditure to lay down pipeline to facilitate supply of gas to the company, with the ownership of the pipeline remaining with the gas supply company, and therefore, the reasons for paying this expenditure was only to facilitate ITA No.126/RJT/2019 3 uninterrupted supply of gas to the assessee-company; that there was no enduring benefit available to the assessee by virtue of this expenditure for the reason that in the situation of any fall out or disagreement with the gas supply company, the gas supplied to the assessee could be cut off and this expenditure did not ensure uninterrupted supply of gas to the assessee-company; that there was no enduring benefit accrued to the assessee by virtue of this expenditure. The relevant finding of the ld.CIT(A) at para 5.4 of the order in this regard are as under: “5.4 The ground of appeal no. 4 of the appellant is that the Assessing Officer has grievously erred on facts and also in law in disallowing Gas Connection charges of Rs.10,70,236/- u/s 37 of the Act and considered the same as capital expenditure. As per this ground of appeal the disallowance is made in total disregard to the facts of the case and submission made and is totally unjustified on the facts as also in law and deserves to be deleted. With regard to this ground of appeal of the appellant it is mentioned that the Assessing Officer has disallowed the claim of Gas Connection Charges of Rs.10,70,236/- of the appellant by treating the same as capital in nature having enduring benefits to the appellant. The AR of the appellant on the other hand as per his written submission has stated that the appellant during the course of assessment proceedings as per letter dated 12.03.2013 furnished the detailed clarification which has been reproduced by the Assessing Officer at para 3.1 of the Assessment order. As per the AR, the appellant clarified the Assessing Officer that expenditure incurred for getting Gas Connection does not result into acquisition of an asset or right of a permanent nature since the basic ownership still vests in the hands of the Gas company only. As per the AR it was submitted to the Assessing Officer that the expenditure was incurred to avail regular flow of gas. As per the AR however the Assessing Officer did not accept reply of the appellant and disallow this claim of Gas Connection charges of Rs.10,70,2367-. The AR has cited various decisions of Hon'ble court to support the claim that the Gas Connection charges is revenue expenditure as no right is given by the GSPC by way of ownership of service line to the appellant. As per the AR when gas service line is cancelled, the ownership is vested to GSPC Gas company only. The AR in his submission has stated that on identical issue, the Ld. CIT(A)-iv, Rajkot 04/06/2014 in appeal no. CIT(A)-IV/Ol85/10-II in the case of Sona Field Ceramic has deleted the same disallowance. 5 The entire written submission of the AR of the appellant as reproduced in earlier paragraph of this appellant order is found to be tenable and in view of the same it is held that the Assessing Officer is not correct in treating Gas Connection expenses of 10,17,236/- as capital in nature and thereby making disallowance of such expenditure. Again the similar issue in the case of Sona Field Ceramic has been deleted by the Ld. CIT(A)-iv, Rajkot 04/06/2014 in appeal no. CIT(A)-IV/0185/10-11. The case laws as relied upon by the AR of the appellant in his submission have bearing on the ITA No.126/RJT/2019 4 merits of the case. In view of this the addition of Rs. 10,17,236/- as made by the Assessing Officer is hereby deleted. Thus the grounds of appeal no. 3 and 4 of the appellant are allowed.: 5. The arguments of the ld.DR before us was to the effect that Hon’ble Apex Court in the case of Empire Jute Co. Ltd. CIT, 124 ITR 0001 had laid down the tests for determining whether any capital expenditure had been incurredas such expenditure bringing into existence assets or any advantage for enduring benefit of a trade. Our attention was drawn to para-6 of the order as under: “6. The decided cases have, from time to time, evolved various tests for distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all-embracing formula which can provide a ready solution to the problem; no touchstone has been devised. Every case has to be decided on its own facts keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. But a few tests formulated by the courts may be referred to as they might help to arrive at a correct decision of the controversy between the parties. One celebrated test is that laid down by Lord Cave, LC in British Insulated & Helsby Cables Ltd. v. Atherton 10 TC 155 where the learned Law Lord stated: "When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital." This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion and, as pointed out by Lord Radcliffe in CIT v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC), it would be misleading to suppose that, in all cases, securing a benefit for the business would be prima facie capital expenditure "so long as the benefit is not so transitory as to have no endurance at all". There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on 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 sence and it is only where the advantage is 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 enabling the 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, 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 the particular facts and circumstances of a given case. But even if ITA No.126/RJT/2019 5 this test were applied in the present case, it does not yield a conclusion in favour of the revenue. Here, by purchase of loom hours, no new asset has been created. There is no addition to or expansion of the profit-making apparatus of the assessee. The income earning machine remains what it was prior to the purchase of loom hours. The assessee is merely enabled to operate the profit-making structure for a longer number of hours. And this advantage is clearly not of an enduring nature. It is limited in its duration to six months and, moreover, the additional working hours per week transferred to the assessee have to be utilised during the week and cannot be carried forward to the next week. It is, therefore, not possible to say that any advantage of enduring benefit in the capital field was acquired by the assessee in purchasing loom hours and the test of enduring benefit cannot help the revenue. Another test which is often applied is the one based on distinction between fixed and circulating capital. This test was applied by Lord Haldane in the leading case of John Smith & Son v. Moore 12 TC 266 where the learned Law Lord drew the distinction between fixed capital and circulating capital in words which have almost acquired the status of a definition. He said: "Fixed capital is what the owner turns to profit by keeping it in his own possession; circulating capital (is) what he makes profit of by parting with it and letting it change masters." Now so long as the expenditure in question can be clearly referred to the acquisition of an asset which falls within one or the other "of these two categories, such a test would be a critical one. But this test also sometimes breaks down because there are many forms of expenditure which do not fall easily within these two categories and not infrequently, as pointed out by Lord Radcliffe in CIT v. Nchanga Consolidated Copper Mines Ltd. (supra), the line of demarcation is difficult to draw and leads to subtle distinctions between profit that is made "out of" assets and profit that is made "upon" assets or "with" assets. Moreover, there may be cases where expenditure, though referable to or in connection with fixed capita], is nevertheless allowable as revenue expenditure. An illustrative example would be of expenditure incurred in preserving or maintaining capital assets. This test is, therefore, clearly not one of universal application. But, even if we were to apply this test, it would not be possible to characterise the amount paid for purchase of loom hours as capital expenditure, because acquisition of additional loom hours does not add at all to the fixed capital of the assessee. The permanent structure, of which the income is to be the produce or fruit, remains the same; it is not enlarged. We are not sure whether loom hours can be regarded as part of circulating capital like labour, raw material, power, etc., but it is clear beyond doubt that they are not part of fixed capital and hence even the application of this test does not compel the conclusion that the payment for purchase of loom hours was in the nature of capital expenditure.” 6. The ld.counsel for the assessee on the other hand pointed out that the ld.CIT(A) had rightly appreciated that neither any capital ITA No.126/RJT/2019 6 assets had come into existence nor any benefit of enduring nature accrued to the assessee on account of the said expenditure, since the expenditure was only to facilitate supply of gas to the assessee- company by the gas company, which gas was to be used as fuel for manufacturing of tiles by the assessee-company. He drew our attentionto the explanation given by the assessee in this regard, which was appreciated by the ld.CIT(A) at page no.3 & 4 of the assessment order as under: 1) Gas Connection Charges For initial gas connection charges, we would like to submit that these are expenditures incurred by Gas Company to make available us the required industrial gas connection. . The Supreme Court in case of Bombay Steam Navigation Co. (1953) Private Limited v. CIT [1965] 56 ITR 52 has given following definition of revenue expenditure. "In considering whether particular expenditure is revenue expenditure or not, one has to consider the nature and the ordinary course of business and the objects for which the expenditure is incurred. The question whether a particular expenditure is revenue expenditure incurred for the purpose of the business must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on or conduct of the business that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition to the carrying on of the business, the expenditure may be regarded as revenue expenditure" In our case also, the expenditure incurred for getting gas connection does not result into acquisition of an asset or right of a permanent nature since basic ownership still vest in the hand of Gas Company only. The same is incurred so that regular flow of gas supply will be available to company. Nevertheless of fact that, the initial expenses incurred would be higher than regular expenses incurred to keep maintaining gas connection available like both preventative & corrective maintenance expenses incurred for gas pipeline, the same is necessary to get connected with gas supply and making it availability flawlessly. We would also like to draw attention to the judgment of Commissioner Of Income-Tax vs. Panbari Tea Company Limited (1985) 151 ITR 726 P H wherein assessee has incurred expenditure for service charges for laying service lines by Assam Electricity Board wherein ownership remains with Assam Electricity Board only held to be revenue in character and accordingly expenditure was allowed. Similarly in our case it is the gas ITA No.126/RJT/2019 7 pipeline which is laid down by Gas Company whose ownership does not remain with us should be considered as revenue expenditure. Hence, in the light of above argument we believe that, the expenses incurred to get connected with gas supply should be allowable as revenue expenses." 7. We have heard both the parties, andhave alsogone through orders of the authorities below. We see no reason to interfere in the order of the ld.CIT(A) holding the gas connection charges, to the tune of Rs.10,70,236/- ,as being revenue in nature as claimed by the assessee. The fact relating to incurrence of expenditure being that these charges were paid to the Gas Company which utilized it to lay down pipelines for supply of gas to the assessee, which gas was tobe used for fuel by the assessee company in manufacturing of tiles and ownership of the pipelines remained with the gas company, is an undisputed fact. It is clear that the purpose of gas connection charges ,as rightly appreciated by the ld.CIT(A), was only to facilitate supply of gas to the assessee-company. No asset had come into existence for the assessee by incurring this expenditure. This aspect has not been controverted by the ld.DR before us. His only contention is that by virtue of this expenditure enduring benefit accrued to the assessee and therefore the expenditure qualified as capital expenditure. We are not in agreement with the ld.DR on this aspect also. We find that he has incorrectly interpreted the decision of the Hon’ble apex court in the case of Empire Jute(supra),referred to by him before us. The Hon’ble apex court in the said case had held that expenditure providing enduring benefit would not invariably qualify as capital expenditure and would do so only when the expenditure results in an advantage in the capital field. In the present case it is not that by incurring this expenditure, the assessee was assured of continuous and uninterrupted supply of gas under all circumstances; the facts remains that the gas ITA No.126/RJT/2019 8 companyreserved its right to cut off the gas supply in any situation as agreed upon, and no right had accrued to the assessee by virtue of incurring this expenditure ensuring continuous supply of gas in all circumstances. Therefore, no advantage in the capital filed could be said to have accrued to the assessee on account of incurrence of this expenditure on gas connection. This contention of the ld.DR is therefore dismissed, and the order passed by the ld.CIT(A) therefore upheld, holding that the expenditure incurred on account of gas connection charges, amounting to Rs.10,70,236/-is revenue in nature allowable under section 37(1) of the Act. The ground raised by the Revenue is rejected. 8. In the result, the appeal of the Revenue is dismissed. Order pronounced in the Court on 7 TH July, 2023 at Ahmedabad. Sd/- Sd/- (T.R. SENTHIL KUMAR) JUDICIAL MEMBER (ANNAPURNA GUPTA) ACCOUNTANT MEMBER Ahmedabad,dated 07/07/2023