M/s. Karnataka Power Transmission Corporation Ltd., Bangalore V. DCIT, Bangalore

ITA 1329/BANG/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 51380 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-12-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 13-12-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 26-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ARCHANA CHOWDHRY CITII
• Assessee Lawyers: A C RAJU
• Keywords: Capital asset; Depreciation; Business expenditure; Revenue expenditure; Capital expenditure
• Section: 143(3)

Judgement Text

PAGE 1 OF 14 ITA NO.1329/BANG/20 10 1 INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES B BEFORE SHRI N K SAINI, ACCOUNANT MEMBER AND SHRI GEORGE GEORGE K, JUDICIAL MEMBER ITA NO.1329/BANG/2010 (ASST. YEAR 2007-08) M/S KARNATAKA POWER TRANSMISSION CORPORATION LTD., 7 TH FLOOR, CAUVERY BHAVAN, K G ROAD, BANGALORE-9. - APPELLANT PA NO.AABCK7281M VS THE DEPUTY COMMISSIONER OF INCOME TAX, (LTU), BANGALORE. - RESPONDENT DATE OF HEARING : 13/12/2011 DATE OF PRONOUNCEMENT : 16/12/2011 APPELLANT BY : SHRI A C RAJU, C.A. RESPONDENT BY : SMT. ARCHANA CHOWDHRY, CIT-II O R D E R PER GEORGE GEORGE K : THIS APPEAL INSTITUTED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE CIT(A)-LTU, BANGALORE DATED 27/09/2010 .. THE RELEVANT ASST. YEAR IS 2007-08. 2. THE ASSESSEE HAS RAISED FOUR GROUNDS OF APPEAL. THE FIRST GROUND IS GENERAL IN NATURE AND REQUIRES NO ADJUDIC ATION AND HENCE, THE SAME IS DISMISSED. PAGE 2 OF 14 ITA NO.1329/BANG/20 10 2 3. THE FOURTH GROUND WAS NOT PRESSED IN THE COURSE OF HEARING. HENCE, THE SAME IS DISMISSED AS NOT PRESSED. 4. THE REMAINING GROUNDS, NAMELY, GROUND NOS. 2 AND 3 READS AS FOLLOWS:- 2) THE LEARNED CIT(A) ERRED IN HOLDING THAT RS.37, 12,129/- AS CAPITAL EXPENDITURE. 3. THE LEARNED CIT(A) HAS FAILED TO APPRECIATE THAT RS.37,12,129/- IS IN THE NATURE OF BUSINESS EXPENDI TURE AND ALLOWABLE AS REVENUE EXPENDITURE. 5. THE FACTS IN RELATION TO THE ABOVE GROUNDS ARE AS FOLLOWS:- THE ASSESSEE IS A COMPANY. IT IS A KARNATAKA STAT E GOVERNMENT UNDERTAKING. IT IS ENGAGED IN THE BUSINESS OF TRAN SMISSION OF ELECTRIC ENERGY. FOR THE CONCERNED ASSESSMENT YEAR, RETURN OF INCOME WAS FILED ON 30.10.2007 DISCLOSING AN INCOME OF RS.38,92,12,664/ -. THE ASSESSMENT WAS COMPLETED VIDE ORDER DATED 11/12/2009 UNDER SECTION 143(3) OF THE ACT. THE ASSESSEE HAD INCURRED AN EXPENDITURE OF RS.37,1 2,129/- TOWARDS IDENTIFICATION, SURVEY AND FEASIBILITY STUDIES OF PR OJECTS. FOR THE REASONS LIKE NON-VIABILITY, NON-FEASIBILITY AND DUE TO DEFECT S IN LOCATION ETC., THE PROJECTS WERE NOT PUT THROUGH. SUCH OF THESE EXPEN SES WERE WRITTEN OFF TO PROFIT AND LOSS ACCOUNT. THE ASSESSING OFFICER WHI LE COMPLETING THE ASSESSMENT HAD TREATED THE EXPENDITURE AS CAPITAL I N NATURE AND DISALLOWED THE SAME. 5.1 THE ASSESSING OFFICER WAS OF THE VIEW THAT THE EXPENDITURE WAS INCURRED WITH AN INTENTION TO CREATE A CAPITAL ASSET; THEREFORE, THE PAGE 3 OF 14 ITA NO.1329/BANG/20 10 3 EXPENDITURE WOULD BE CAPITAL IN NATURE INSPITE OF T HE PROJECT BEING DROPPED MIDWAY. THE ASSESSING OFFICER RELIED ON THE FOLLOWI NG JUDGEMENTS:- ASSAM BENGAL CEMENT CO. LTD. V CIT 27 ITR 34 (SC); CIT V BAZPUR COOPERATIVE SUGAR FACTORY LTD. 142 ITR 1 (ALL); FANCY CORPORATION LTD. V CIT 162 ITR 827 (BOM.); EAST INDIA COMMERCIAL CO. P. LTD. V CIT 54 ITR 81 ( CAL.); CIT V DIGVIJAY CEMENT CO. LTD. 159 ITR 253 (GUJ.); TRIVENI ENGINEERING WORKS LTD. V CIT 232 ITR 639 (D EL.); CIT V AMBICA MILLS LTD. 147 ITR 340 236 ITR 921 (GU J.). 5.2 THE ASSESSING OFFICER FINALLY CONCLUDED BY HOLD ING THUS :- CONSIDERING THESE FACTS, I HAVE TO HOLD THAT THE A MOUNT OF RS.37,12,129/- SPENT BY THE ASSESSEE FOR OBTAININ G FEASIBILITY/SURVEY REPORTS AND DEBITED IN THE BOOKS U NDER THE HEAD INFRUCTUOUS CAPITAL EXPENDITURE WRITTEN O FF, IS CAPITAL IN NATURE. ACCORDINGLY, THIS AMOUNT IS DISA LLOWED AND ADDED BACK TO THE INCOME DECLARED. 6. THE ASSESSEE, BEING AGGRIEVED, CARRIED THE MATT ER IN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. 7. THE CIT(A) FOR HER DETAILED REASONING CONTAINED IN PAGES 7 TO 11 OF THE IMPUGNED ORDER, DISMISSED THE APPEAL OF T HE ASSESSEE. 8. THE LEARNED COUNSEL FOR THE ASSESSEE HAD FILED WRITTEN SUBMISSIONS DATED 8/12/2011. IT WAS CONTENDED BY TH E LEARNED AR THAT THE EXPENDITURE INCURRED WAS NOT ON ACCOUNT OF COMMENCE MENT OR CONSTRUCTION OF NEW PROJECT. IT WAS SUBMITTED THAT NO ASSET HAS BEEN BROUGHT INTO EXISTENCE AND NO ENDURING BENEFIT HAS BEEN OBTAINED . IT WAS ARGUED THAT THE ABOVE EXPENDITURE WAS INCURRED TO INCREASE THE PROFIT EARNING CAPACITY PAGE 4 OF 14 ITA NO.1329/BANG/20 10 4 AND NOT TO ACQUIRE ANY CAPITAL ASSET. IT WAS FURTH ER STATED THAT FOR THE ASSESSMENT YEARS 2004-05 TO 2006-07, THE ASSESSEE HA D INCURRED IDENTICAL EXPENSES TO THE TUNE OF RS.7,11,450/-, RS.5,18,091/ - & RS.11,93,859/- RESPECTIVELY AND IN SCRUTINY ASSESSMENT COMPLETED UN DER SECTION 143(3) OF THE ACT, THE ABOVE SAID EXPENSES WERE NOT DISALLOWE D AS BEING CAPITAL IN NATURE. IT WAS ARGUED THAT THE FACTS BEING SIMILAR FOR THE INSTANT CASE TO THAT OF THE ASSESSMENT YEARS 2004-05 TO 2006-07, THE DEVIATION ADOPTED BY THE ASSESSING OFFICER IN TREATING THE ABOVE SAID EX PENSES AS CAPITAL IS NOT WARRANTED AND JUSTIFIED. 9. THE LEARNED DR ON THE OTHER HAND SUPPORTED THE ORDERS OF THE INCOME TAX AUTHORITIES. 10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL ON RECORD. THE NATURE OF EXPENDITURE TERMED AS IN FRUCTUOUS CAPITAL EXPENDITURE AS DETAILED IN THE WRITTEN SUBMISSIONS OF THE ASSESSEE, WHICH HAS NOT BEEN CONTROVERTED BY THE LEARNED DR, IS AS F OLLOWS:- THE ASSESSEE IS ENGAGED IN TRANSMISSION OF POWER TO THE ELECTRICITY SUPPLY COMPANIES. IN THIS PROCESS OF TRANSMISSION, THE ASSESSEE HAD TO TAKE UP THE CONSTRUCTION OF TRANSMISSION LINES AT THE PLACES NO T CATERED SO FAR. THIS IS AN ONGOING PROCESS. THE PROCESS WILL INVOLVE SURVEY, FEASIBILITY STUDIES, INVITING TE NDERS FROM THE CONTRACTORS TO TAKE UP THE CONSTRUCTION WO RK, ENGAGING CONSULTANTS TO ADVISE ON MATTERS RELATING TO SETTING UP OF SUBSTATION, WHICH INVOLVES COST TO TH E KARNATAKA POWER TRANSMISSION CORPORATION LIMITED (KPTCL). DURING THE PROCESS OF SETTING UP OF LINES /NET WORK SOME OF THE PROJECTS WILL BECOME UNSUITABLE DU E TO FAULTS EXISTING IN SOIL CONDITIONS, NON-AVAILABILIT Y OF FOREST PAGE 5 OF 14 ITA NO.1329/BANG/20 10 5 CLEARANCE ETC. THE PROJECTS IN THOSE CASES ARE DR OPPED OR ABANDONED. IF THE PROJECT FRUCTIFIES, THE WHOLE OF THE EXPENDITURE WILL BE IDENTIFIED AS CAPITAL EXPENDITU RE AND WILL BE CAPITALIZED AS THE COST OF THE PROJECT. AS SOME OF THE PROJECTS HAVE TO BE GIVEN UP FOR VARIOUS REASON S, THE EXPENDITURE IS RECOGNIZED AS BUSINESS EXPENDITURE A ND TERMED AS INFRUCTUOUS. THE TERM USED IN ACCOUNTS INFRUCTUOUS CAPITAL EXPENDITURE WRITTEN OFF IS SUGGESTED BY ACCOUNTS MANUAL VOL. III ISSUED UNDER ELECTRICITY SUPPLY ANNUAL ACCOUNTS RULES, 1985. THOU GH IT IS TERMED AS CAPITAL EXPENDITURE IN A REAL SENSE , IT IS NOT AT ALL A CAPITAL EXPENDITURE. THE KPTCL HAS TO NECESSARILY INCUR THESE TYPES OF EXPENDITURES BEFORE SETTING UP OF STATIONS, TRANSMISSION LINES WHICH IS THE MAJOR OBJECT OF THE COMPANY. THE EXPENDITURE INCURR ED IS A NORMAL BUSINESS EXPENDITURE WHICH ANY BUSINESS MAN OBLIGED TO INCUR IN PURSUING THEIR BUSINESS OBJECTS . CALLING IT AS A CAPITAL EXPENDITURE IS A MISNOMER. IN THIS CASE, THE KPTCL HAS NOT STARTED A NEW UNIT OR NEW PROJECT. THE EXPENDITURE IS INCURRED IN FURTHERANC E OF THE BUSINESS AND TO IMPROVE THE PROFIT EARNING CAPA CITY. 10.1 THE DETAILS OF BREAK-UP OF THE INFRUCTUOUS CA PITAL EXPENDITURE CLAIMED ARE AS FOLLOWS:- MAJOR WORKS DIVISIONS TUMKUR :- SL. NO. NATURE OF EXPENDITURE AMOUNT (RS.) 1. 110 KV D/C LINE FROM 220 KV STATION AT ANTHRASANAHAL LY TO SIRA 1,24,482 2. SURVEY CHARGES PROPOSED 220 KV D/C LINE FROM ANCHE PALYA-MANDYA TO TUBINAKERE (LINE) AT FROM SEE/MW @ BANGALORE AT NO.255 /12/1/2004 T.O JV NO.29/31.1.2004. 7,34,085 3. SURVEY CHARGES PROPOSED 66 KV (LL) FROM 66 KV HU LIYURDURGA- DUNDANAHALLY S/C LINE TO PROPOSED 66 KV SS NIDSALE JV NO.29/31.1.2004 BR NO.253/112.9.03 9,843 4. SURVEY CHARGES FOR CONSTRUCTION OF 66/11 KV LINE F ROM H-DURGA TO DUNDANAHALLY JV NO.43/29.3.04 29,591 5. AMOUNT PAID TO GEO-TECH INVESTIGATION CHARGES BR NO.1332/5.1.05 TO JV NO.40/30.7.05 NIDASALE S/S 81,380 6. PREPARATION OF AGENDA NOTE TAC FOR NEW SUB-STATION A ND TD LINE AT HONNAMACHANAHALLY KUNIGEL TQ. SRI S JAGADISH, BR NO.1153 /13.2.06 27,550 PAGE 6 OF 14 ITA NO.1329/BANG/20 10 6 7. PREPARATION OF AGENDA NOTE TAC FOR NEW SUB-STATION AND TR. LINE AT JIDDIGERE KUNIGEL TQ. SRI S JAGADISH BR. NO.1155/13 .2.06 27,550 8. PREPARATION OF AGENDA NOTE TAC FOR NEW SUB-STATION AND TR. LINE AT SAJJEHOSALLY, M-GIRI TQ BR NO.1154/13.2.06 27,550 9. PREPARATION OF AGENDA NOTE TAC FOR NEW STATION AND TR. LINE AT EST.66/11KV S/S AT GUNGURUMALE. 579 TOTAL 10,62,610 (II) MAJOR WORKS DIVISION, MYSORE : SL. NO. NATURE OF THE WORK AMOUNT (RS.) 1. EXTENSION OF 19 KMS OF DC 66 KV FROM KADAKOLA TO LINK M1 M2 LINES AT ALANHALLI, MYSORE. 17,02,529 2. 66/11 KV S/S IN SHIVALLY 67,960 3. 66 KV D/C LINE FROM 220 KV/66 KV S/S AT KADAKOLA TO LINK WITH 66 KV FTS-SFC M2 LINE NEAR ALANAHALLY 73,974 TO TAL 18,44,463 (III) MAJOR WORKS DIVISION, BELGAUM : SL. NO. NATURE OF EXPENDITURE AMOUNT (RS.) 1. 220 KV GHATAPRABHA TO KUDACHI LINE 60,361 2. 220 KV NASRENDRA TO CHIKODI LINE 1,70,630 3. 220 KV GHATAPRABHAS LINE 23,065 TOTAL 2,54,056 (IV) CHIEF ENGINEER ELECTRICITY, TENDERING & PROCUREMENT SL. NO. NATURE OF EXPENDITURE AMOUNT (RS.) 1. CONSULTATION FEES 5,51,000 TOTAL 5,51,000 10.2 IN THE COURSE OF RUNNING A BUSINESS, THERE AR ISE SITUATIONS WHERE EXPENDITURE HAS TO BE INCURRED FOR THE PURPOS E OF THE BUSINESS BUT THE OBJECTIVES ARE NOT FULFILLED. FOR EXAMPLE, EXP ENDITURE MAY BE INCURRED IN PREPARING A PROJECT REPORT FOR A NEW IN DUSTRIAL UNDERTAKING AND SUBSEQUENTLY IT IS DECIDED TO DROP T HE PROJECT. IT COULD ALSO HAPPEN THAT EXPENDITURE MAY BE INCURRED ON FORE IGN TRAVEL FOR NEGOTIATING THE PURCHASE OF RAW MATERIALS OR PLANT AND MACHINERY. PAGE 7 OF 14 ITA NO.1329/BANG/20 10 7 SUBSEQUENTLY, IT MAY BE DECIDED NOT TO IMPORT THE GOO DS. IN ALL THESE CASES, THE EXPENDITURE WOULD PROVE TO BE INFRUCTUOUS AND T HE QUESTION OF ITS DEDUCTIBILITY WOULD THEREFORE ARISE. 10.3 WHEN SUCH EXPENDITURE IS NOT DEDUCTIBLE AT AL L ON THE GROUND THAT IT IS OF A CAPITAL NATURE, THE DEPRECIATION AN D INVESTMENT ALLOWANCES ARE ALSO DENIED AT THE SAME TIME, SINCE THEY ARE AVAILAB LE ONLY IN RESPECT OF A CAPITAL ASSET. THEREFORE, THE EXPENSES ARE TREATED AS A DEAD LOSS AND WOULD HAVE TO BE BORNE ONLY FROM THE AFTER TAX INCOME. T HERE IS A FALLACY BEHIND THE DEPARTMENTS DENIAL OF THE DEDUCTION BY TREATING SUCH INFRUCTUOUS EXPENDITURE AS BEING ON CAPITAL ACCOUNT. IN FACT, THE WORD CAPITAL IS INDISCRIMINATELY USED WITH THE SOLE OBJECT OF DENYING THE BENEFIT OF DEDUCTION TO AN ASSESSEE. 10.4 CAPITAL EXPENDITURE IS INCURRED IN LAW AND ON ACCOUNTANCY PRINCIPLES ONLY IN THE FOLLOWING CIRCUMSTANCES:- A NEW ASSET IS BROUGHT INTO EXISTENCE; AN ADVANTAGE OR ENDURING BENEFIT IS OBTAINED BY THE ASSESSEE; THE EXPENDITURE RELATES TO THE FIXED CAPITAL AS DIS TINCT FROM THE CIRCULATING CAPITAL; THE EXPENDITURE IS OF AN INITIAL NATURE TO COMMENCE A BUSINESS FOR THE FIRST TIME; THE EXPENDITURE INCURRED IS TO ACQUIRE A CONCERN OR GOODWILL. THUS, IF NONE OF THE AFORESAID CIRCUMSTANCES HAVE M ATERIALIZED, AN EXPENDITURE CANNOT BE TREATED AS BEING ON CAPITAL A CCOUNT MERELY TO PROVIDE AN ALIBI FOR ITS BEING DISALLOWED. THE ONLY CIRCUMS TANCES IN WHICH IT CAN BE DISALLOWED ARE WHERE THE EXPENDITURE IS OF A PERSON AL NATURE OR THE EXPENDITURE IS NOT RELATED TO THE BUSINESS OF THE A SSESSEE. IN RESPECT OF PAGE 8 OF 14 ITA NO.1329/BANG/20 10 8 THE FIRST CIRCUMSTANCE, IT IS NECESSARY THAT ANY EXPE NDITURE INCURRED MUST RESULT IN THE ACQUISITION OF CAPITAL ASSETS AND WOU LD INCLUDE ALL EXPENDITURE INCIDENTALS TO THE ACQUISITION, INSTALLATION AND ER ECTION OF THE CAPITAL ASSET. MOREOVER, THIS GENERAL PRINCIPLE THAT EXPENDITURE O N THE CREATION OF A CAPITAL ASSET IS ON CAPITAL ACCOUNT APPLIES ONLY WHE RE THE CAPITAL ASSET BELONGS TO THE ASSESSEE. 10.5 VIEWED FROM THE ABOVE REASONING, LET US EXAMI NE THE JUDICIAL PRECEDENT, WHICH HAS BEEN CITED BY BOTH THE SIDES. 10.5.1 THE HOUSE OF LORDS POINTED OUT IN I. R. V C ARRON CO. (45 T.C.18) THAT THE MOST RELEVANT POINT IS THE NATURE OF THE A DVANTAGE IN A COMMERCIAL SENSE. IT IS ONLY WHERE THE ADVANTAGE IS IN THE CAP ITAL FIELD THAT THE EXPENDITURE WOULD BE DISALLOWED BY THE APPLICATION O F THE TEST. IF THE ADVANTAGE CONSISTS MERELY IN FACILITATING THE ASSESS EES 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 REVE NUE ACCOUNT EVEN THOUGH THE ADVANTAGE MAY ENDURE FOR THE INDEFINITE FUTURE. THIS IS A VERY IMPORTANT PROPOSITION OF LAW BECAUSE MOST OF THE TR ANSACTIONS ENTERED INTO BY A TRADER ARE MEANT TO FACILITATE HIS TRADING OPER ATIONS AND ENABLE THE MANAGEMENT AND CONDUCT OF THE ASSESSEES BUSINESS T O BE CARRIED ON MORE EFFICIENTLY OR PROFITABLY. FOR EXAMPLE, WHERE AN AS SESSEE ENTERS INTO A FOREIGN COLLABORATION AGREEMENT WHICH IS TO ACQUIRE THE LATEST TECHNIQUES OF MANUFACTURING A PRODUCT OR PERHAPS A DIFFERENT TYPE OF PRODUCT IN THE SAME LINE OF BUSINESS, JUDICIAL DECISIONS HAVE CONSIDERE D THE EXPENDITURE TO BE ON PAGE 9 OF 14 ITA NO.1329/BANG/20 10 9 REVENUE ACCOUNT EVEN WHERE THE PERIOD OF THE AGREEM ENT IS FOR A FAIRLY LONG SPAN OF 15 YEARS. 10.5.2 IN CIT V KARNATAKA STATE INDUSTRIAL & INVES TMENT DEVELOPMENT CORPORATION (163 ITR 657), THE ASSESSEE, WHICH WAS ENGAGED IN THE BUSINESS OF PROMOTING AND OPERATING SCHEMES FOR THE INDUSTRI AL DEVELOPMENT OF KARNATAKA, INCURRED EXPENDITURE IN GETTING PROJECT REPORTS AND FEASIBILITY STUDIES PREPARED BY QUALIFIED PERSONS. THE INCOME-T AX DEPARTMENT CONTENDED THAT THE EXPENDITURE INCURRED WAS NOT REV ENUE EXPENDITURE BUT WAS CAPITAL EXPENDITURE. THE KARNATAKA HIGH COURT DISAGREED AND HELD IT TO BE REVENUE EXPENDITURE. 10.5.3 IN ACC VICKERS BABCOCK LTD. V CIT (103 ITR 321), THE COMPANY WAS CARRYING ON BUSINESS AS MANUFACTURERS AND DEALER S IN CEMENT-MAKING MACHINERY AND EQUIPMENTS OF A SIMILAR NATURE. WITHI N 2 YEARS OF ITS INCORPORATION IT ENTERED INTO AN AGREEMENT WITH AN AMERICAN COMPANY WITH A VIEW TO SECURE A LINCECE AND ALL THE NECESSARY KNOW- HOW, DESIGNS, DRAWINGS, ETC. TO MANUFACTURE DIFFERENT TYPES OF MACHINES IN W HICH THE FOREIGN COLLABORATOR SPECIALIZED. THE EQUIPMENT COVERED BY THE AGREEMENT WAS TO BEAR THE NATURE OF THE FOREIGN COLLABORATOR. THE A GREEMENT WAS FOR A PERIOD OF 10 YEARS DURING WHICH THE ASSESSEE WAS REQ UIRED TO KEEP CONFIDENTIAL ALL INFORMATION, DESIGNS AND ENGINEERI NG DATA SUPPLIED BY THE MANUFACTURER. THE BOMBAY HIGH COURT HELD THAT THE FEES PAID TO THE FOREIGN COLLABORATOR WERE SO RELATED TO THE CARRYING ON OF THE BUSINESS THAT THEY WOULD HAVE TO BE REGARDED AS AN INTEGRAL PART O F THE PROFIT MAKING PAGE 10 OF 14 ITA NO.1329/BANG/2 010 10 PROCESS AND THERE WAS NO INDICATION THAT THE PAYMENT S TO BE MADE WERE FOR THE PURPOSE OF ACQUISITION OF AN ASSET OR A RIGHT O F A PERMANENT CHARACTER. 10.5.4 NOW TAKING THE ILLUSTRATION OF ACQUISITION OF MACHINERY, THERE CAN BE NO DOUBT THAT IF AS A RESULT OF INCURRING TH E EXPENDITURE, THE MACHINERY HAD ACTUALLY BEEN ACQUIRED, ALL EXPENDITURE WOULD BE INCLUDED IN THE ACTUAL COST OF THE ASSET. HENCE, NOT ONLY THE P RICE OF THE MACHINERY BUT ALL INCIDENTAL EXPENSES INCURRED TO ACQUIRE IT LIKE TRAVELLING EXPENSES, FREIGHT, INSURANCE AND HANDLING CHARGES FOR BRINGIN G IT TO THE LOCATION, EXPENSES ON INSTALLATION, ERECTION AND COMMISSIONIN G ETC. WOULD ALL BE INCLUDED IN THE ACTUAL COST OF THE ASSET. HOWEVER , WHERE THE BUSINESS MAN DECIDES NOT TO ACQUIRE THE ASSET, THOUGH SOME EXPEN DITURE WAS INCURRED INITIALLY, WE ARE OF THE VIEW THAT IT CANNOT BE SAID THAT SUCH INITIAL EXPENDITURE WHICH HAS NOW PROVED TO BE INFRUCTUOUS, HAS RESULTED IN THE CREATION OF AN ASSET OR BROUGHT AN ENDURING BENEFIT TO THE TAX PAYER. THUS IN THE ABSENCE OF SUCH ACQUISITION OF ASSET OR ENDU RING ADVANTAGE, IT IS DIFFICULT TO UNDERSTAND THE RATIONALE FOR TREATING THE INFRUCTUOUS EXPENDITURE AS BEING ON CAPITAL ACCOUNT. HENCE, U NLESS A TANGIBLE ASSET HAS BEEN CREATED OR ACQUIRED THE EXPENDITURE CANNOT BE SAID TO BE ON CAPITAL ACCOUNT. TO PUT IT DIFFERENTLY, THE ACQUISITION OF THE ASSET IS THE CRUCIAL FACTOR FOR CONVERTING AN EXPENDITURE INTO ONE ON CA PITAL ACCOUNT. ON THE OTHER HAND, IF THE EXPENDITURE IS NOT REPRESENTED B Y A CAPITAL ASSET, IT CANNOT BE SAID THAT SUCH EXPENDITURE IS OF A CAPITA L NATURE UNLESS OTHER CIRCUMSTANCES LIKE THE ACQUISITION OF AN ENDURING B ENEFIT HAVE BEEN FULFILLED. PAGE 11 OF 14 ITA NO.1329/BANG/2 010 11 11. THE ASSESSING OFFICER HAS RELIED ON CERTAIN CA SE LAWS. THE CASE LAWS CITED AT PARA NO.4.1 OF THE ASSESSMENT OR DER ARE NOT SIMILAR TO THE CASE ON HAND AND IS DISTINGUISHABLE. WE HEREIN BEL OW DISCUSS THOSE ISSUES : 11.1 ASSAM BENGAL CEMENT CO. LTD. V CIT 27 ITR 34 (SC) MANUFACTURE OF CEMENT LEASE OF LIMESTONE QUARRI ES FOR 20 YRS HALF YEAR RENT AND ROYALTIES PAYABLE IN ADDITION A GREED TO PAY RS.5,000/- AND RS.35,000/- ANNUALLY TOWARDS PROTECTION FEES, T HE COURT HELD THE ADVANTAGE OBTAINED WAS OF ENDURING NATURE THOUGH TH E RECURRING PAYMENT WAS IMMATERIAL. THE ASSET ACQUIRED WAS RIGHT TO CA RRY ON BUSINESS UNFETTERED BY COMPETITION. THIS HAS NO BEARING WITH THE PRESENT CASE ON HAND. THE KPTCL HAS NOT ACQUIRED ANY ASSET OF ENDU RING NATURE OR PERMANENT NATURE. 11.2 CIT V BAZPUR COOPERATIVE SUGAR FACTORY LTD. 14 2 ITR 1 INCURRED EXPENDITURE FOR BORING NEW TUBEWELL. 11.3 FANCY CORPORATION LTD. V CIT 162 ITR 827 INS TALL A BORE WELL AT ITS NEW FACTORY SITE. 11.4 EAST INDIA COMMERCIAL CO. P. LTD. V CIT 54 IT R 81 THE COMPANY HAS SPENT RS.4680 TOWARDS STAMP DUTY IN RESPE CT OF LEASE DEED FOR THE PURPOSE OF RENEWING THE LEASE WHICH HAS BECOME INVALID AND IN-EFFECTIVE. 11.5 IN ALL THE ABOVE CASES, THE COURTS HAVE HELD THAT THE EXPENDITURE IS INCURRED WITH A VIEW TO OBTAIN CAPIT AL ASSET; HENCE, IT IS A CAPITAL EXPENDITURE. THIS IS NOT COMPARABLE TO OUR CASE ON HAND. THE KPTCL PAGE 12 OF 14 ITA NO.1329/BANG/2 010 12 HAS, IN ESSENCE, INCURRED EXPENDITURE TO INCREASE T HE PROFIT EARNING CAPACITY AND NOT TO ACQUIRE ANY CAPITAL ASSET. 11.6 CIT V DIGVIJAY CEMENT CO. LTD. 159 ITR 253 EXPENDITURE IN OBTAINING A FEASIBILITY REPORT FOR SETTING UP A SHIPYARD. THE REPORT WAS NOT FAVOURABLE AND NO SHIP YARD WAS ESTABLISHED. THE TRIBUNAL HELD IT AS A CAPITAL EXPENDITURE. ON A REFERENCE, THE GUJARAT HIGH COURT HAS OPINED THE ASSESSEE COULD NOT SUCCES SFULLY CONTEND THAT THE SHIP BUILDING YARD WAS TO FACILITATE ITS TRADING OPE RATION OR WAS TO ENABLE IT TO MANAGE ITS BUSINESS MORE EFFICIENTLY. THE COURT HELD THAT OBTAINING FEASIBILITY REPORT FOR SETTING UP A SHIPYARD HAVING B EEN INCURRED WITH A VIEW TO BRINGING INTO EXISTENCE AN ADVANTAGE OR ASSET OF AN ALMOST PERMANENT NATURE OR OF AN ENDURING BENEFIT IS CAPITAL EXPENDI TURE EVEN THOUGH NO SHIPYARD WAS ACTUALLY CONSTRUCTED. THE ABOVE CASE HAS NO RELEVANCE IN THE CONTEXT OF THIS CASE,SINCE EXPENDITURE HAS BEEN INCURRED DURING THE COURSE OF THE BUSINESS. 11.7 TRIVENI ENGINEERS WORKS LTD. V CIT 232 ITR 63 9 AMOUNT SPENT FOR PREPARING PROJECT REPORT AND SUR VEY REPORT IN CONNECTION WITH MANUFACTURE OF NEW PRODUCT THE CO URT HAS HELD THAT EXPENDITURE IS INCURRED WITH A VIEW TO BRINGING UP AN ASSET OR ADVANTAGE INTO EXISTENCE AND FOR ENDURING BENEFITS IS CAPITAL EXPE NDITURE. ITS NATURE DID NOT CHANGE TO REVENUE MERELY BECAUSE THE PROJECT DID NOT MATERIALIZE. PAGE 13 OF 14 ITA NO.1329/BANG/2 010 13 HERE IN THIS CASE THE COMPANY INTENDED TO MANUFACT URE A NEW PRODUCT ALL TOGETHER BY SETTING UP A NEW ESTABLISHME NT. HENCE, THIS CASE IS ALSO NOT COMPARABLE WITH THE CASE ON HAND. 11.8 AT PARA 4.3, THE ASSESSING OFFICER HAS CITED THAT IN CIT V BRITISH INDIA CORPN. LTD. (165 ITR 51) (SC) AND CIT V KARUNA MICA CO. (167 ITR 292) THAT IT WAS HELD THAT THE AIM AND OBJECT O F THE EXPENDITURE WOULD DETERMINE THE CHARACTER OF THE EXPENDITURE. IN BRI TISH INDIA, IT HAS BEEN HELD THAT RS.50,000/- FIXED AMOUNT PAID TO DISTRIBU TOR FOR ESTABLISHING DISTRIBUTORSHIP IS REVENUE IN NATURE. IN KARUNA MI CA, IT HAS BEEN HELD THAT THERE WAS A NEW CONSTRUCTION AND THE ULTIMATE OBJEC T WAS THE PROTECTION OF MINES AS ALSO THE SAFETY OF THE LABOURERS WAS CAPITA L EXPENDITURE. HENCE THIS CASE IS ALSO NOT COMPARABLE WITH THE C ASE ON HAND. 12. TO SUM UP, THE ABOVE MENTIONED EXPENDITURE HAS TO BE ALLOWED ON THE FACTS OF THIS CASE, SINCE NO NEW ASSET HAS B EEN BROUGHT INTO EXISTENCE AND NO ENDURING BENEFIT HAS BEEN OBTAINED TO THE AS SESSEE. MOREOVER, THE EXPENDITURE INCURRED WAS NOT ON ACCOUNT OF COMMENCE MENT OR CONSTRUCTION OF NEW PROJECT. BEFORE WE PART, IT IS TO BE MENTIO NED THAT FOR THE ASSESSMENT YEARS 2004-05 TO 2006-07, SIMILAR EXPENDI TURE HAS BEEN CLAIMED BY THE ASSESSEE AND ALLOWED IN A SCRUTINY ASSESSMENT COMPLETED UNDER SECTION 143(3) OF THE ACT. WHEN FACTS ARE SIMILAR, A DEVIATION TAKEN FOR THIS ASSESSMENT YEAR BY TREATING THE ABOVE SAID EXPENDITUR E AS CAPITAL IN NATURE IS NOT WARRANTED. HENCE, GROUND NOS. 2 AND 3 ARE ALLOWED. PAGE 14 OF 14 ITA NO.1329/BANG/2 010 14 13. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED AS INDICATED ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 16 TH DAY OF DECEMBER, 2011 SD/- SD/- (N K SAINI) (GEORGE GEORGE K) ACCOUNTANT MEMBER JUDICIAL MEMBER COPY TO:- 1. THE REVENUE 2. THE ASSESSEE 3. THE CIT CONC ERNED 4. THE CIT(A) CONCERNED 5. THE DR 6. GF MSP/- BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.