DCIT, V. M/s Karnataka Soaps & Detergents Ltd.,

ITA 1820/BANG/2013

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7022 (ITAT-BANGALORE)
• Duration Of Justice: 9 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-10-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 13-10-2014
• Assessment Year: 2010-2011
• Appeal Filed On: 23-12-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: T S N MURTHY CITIDR
• Keywords: Capital asset; Depreciation; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER ITA NO.1820/BANG/2013 ASSESSMENT YEAR : 2010-11 THE DEPUTY COMMISSIONER OF INCOME TAX, LTU, BANGALORE. VS. M/S. KARNATAKA SOAPS & DETERGENTS LTD., SANDAL CITY, P.B. NO.5531, BANGALORE-PUNE HIGHWAY, BANGALORE 560 055. PAN : AAACK 8519K APPELLANT RESPONDENT APPELLANT BY : SHRI T.S.N. MURTHY, CIT-I(DR) RESPONDENT BY : SMT. SHEETAL, ADVOCATE DATE OF HEARING : 13.10.2014 DATE OF PRONOUNCEMENT : 17.10.2014 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS IS AN APPEAL BY THE REVENUE AGAINST THE ORD ER DATED 13.9.2013 OF THE CIT(APPEALS), LTU, BANGALORE RELATING TO ASS ESSMENT YEAR 2010-11. 2. THE EFFECTIVE GROUND RAISED BY THE REVENUE READ AS FOLLOWS:- ITA NO.1820/BANG/2013 PAGE 2 OF 7 2. THE LD. CIT(A) ERRED IN TREATING EXPENDITURE ON ASPHALTING OF ROADS, CONSTRUCTION OF COMPOUND WALL, WATER PROO FING AND PROVIDING CLEAN ROOM AT PROPOSED COSMETIC PLANT AS REVENUE EXPENDITURE AND GIVING RELIEF TO ASSESSEE. 3. THE ASSESSEE IS A 100% OWNED UNDERTAKING OF GOV ERNMENT OF KARNATAKA, ENGAGED IN THE BUSINESS OF MANUFACTURE O F SOAPS, DETERGENTS, SANDALWOOD OILS, ETC. WHILE COMPLETING THE ASSESSM ENT, THE AO TREATED THE FOLLOWING EXPENSES INCURRED BY THE ASSESSEE AS CAPITAL EXPENDITURE:- SL. NO. PARTICULARS LEDGER AMOUNT (IN RS.) 1. ASPHALTING OF ROADS REPAIRS & MAINTENANCE LAND A/C 19,00,000 2. CONSTRUCTION OF COMPOUND WALL R&M (L&B) AND BUILDING NON FACTORY SOAP A/C 7,38,221 3. PROVIDING CLEAN ROOM AT PROPOSED COSMETIC PLANT BUILDINGS COSMETIC (NEW) A/C 5,74,925 4. WATER PROOFING WORK AT TERRACE OF BOARD ROOM, MEETING HALL R&M (L&B) A/C 4,78,214 5. INSTALLATION OF SPLIT AIR CONDITIONERS 6 NOS. AT BANGALORE AND SHIMOGA R&M (L&B)A/C 2,88,000 TOTAL 39,79,360 4. THE CLAIM OF ASSESSEE FOR DEDUCTION OF THE AFOR ESAID SUMS WERE DISALLOWED, BUT DEPRECIATION WAS ALLOWED BY THE AO. ON APPEAL BY THE ASSESSEE, THE CIT(APPEALS) DELETED THE ADDITIONS MA DE BY THE AO FOR THE FOLLOWING REASONS:- ITA NO.1820/BANG/2013 PAGE 3 OF 7 ASPHALTING OF ROADS 5. IT WAS EXPLAINED BY THE APPELLANT THAT THE EXPEN DITURE WAS INCURRED ON AN EXISTING ROAD WITHIN THE FACTORY PRE MISE WHICH HAD DEVELOPED POT HOLES ON ACCOUNT OF USE BY HEAVY DUTY VEHICLES DELIVERING RAW MATERIAL IN THE COMPANY PREMISES. TH E SCHEDULED RATES OF THE STATE PWD WERE FURNISHED TO SHOW THAT THE COST OF LAYING A NEW ROAD WAS RS. 1438 PER SQ.MT, WHEREAS T HE COST OF RELAYING OF THE ROAD WAS RS.604 PER SQ.MT. HAD THE APPELLANT LAID A NEW ROAD, AS PER THESE RATES, OVER THE IMPUGNED D ISTANCE IT WOULD HAVE INCURRED AN EXPENDITURE OF RS. 45 LAKH. THE MUCH LOWER EXPENDITURE INCURRED AT RS. 19 LAC CLEARLY IN DICATED THAT IT WAS SPENT ON REPAIR OF EXISTING ROADS. I AM CONVINC ED BY THIS ARGUMENT WHICH CLEARLY INDICATES THAT THERE HAS BEE N NO CREATION/UPGRADATION OF A CAPITAL ASSET IN THIS CAS E AND THE JUSTIFICATION FOR TREATING IT AS A CAPITAL EXPENDIT URE, THEREFORE, DOES NOT EXIST. THE AMOUNT IS DIRECTED TO BE ALLOWED AS REVENUE EXPENDITURE. CONSTRUCTION OF COMPOUND WALL 6. THE APPELLANT EXPLAINED THAT THE KARNATAKA INDU STRIAL AREA DEVELOPMENT BOARD (KIADB) HAD, ON 18.08.2013 ACQUIR ED A PORTION OF THE LAND BELONGING TO THE COMPANY FOR US E OF THE BANGALORE METRO. THIS HAS RESULTED IN DEMOLITION OF THE EXISTING COMPOUND WALL ON THE ACQUIRED LAND. POST SUCH DEMOL ITION, THE COMPANYS PROPERTY HAD TO BE PROTECTED AND THEREFOR E THE GAP IN THE COMPOUND WALL HAD TO BE FILLED. WHILE THE TOTAL LENGTH OF THE COMPOUND WALL ENCLOSING THE COMPANYS PROPERTY IS 1 780 MTS., THE DEMOLISHED PORTION NECESSITATING REBUILDING WAS ONLY 68 MTS. THE VALUE OF THE ORIGINAL COMPOUND WALL HAD BEEN CA PITALISED IN THE RELEVANT YEAR IN THE APPELLANTS BOOKS. I AM CO NVINCED THAT THIS EXPENDITURE IS REVENUE IN NATURE SINCE IT HA S NOT CREATED A NEW ASSET NOR PROVIDED ANY ENDURING BENEFIT TO THE APPELLANT APART, FROM RECTIFYING A GAP IN AN EXISTING ASSET. HENCE, THE EXPENDITURE IS DIRECTED TO BE ALLOWED AS REVENUE EX PENDITURE. WATER PROOFING WORK AT TERRACE, ON BOARD ROOM AND M EETING HALL 7. IT WAS EXPLAINED BY THE AR THAT SINCE THE BUIL DING IN QUESTION WAS QUITE OLD AND HAD DEVELOPED LEAKAGES O N THE TERRACE, THE WATER PROOFING WORK WAS NECESSARY TO ADDRESS TH E PROBLEM. THIS IS CLEARLY IN THE NATURE OF A CURRENT REPAIR W ORK AND THERE IS ITA NO.1820/BANG/2013 PAGE 4 OF 7 NO JUSTIFICATION FOR THE AO TO TREAT IT AS A CAPITA L EXPENDITURE. THE APPELLANTS CLAIM IS, ACCORDINGLY, ALLOWED. PROVIDING CLEAN ROOM AT COSMETIC PLANT 8. THE APPELLANT EXPLAINED THAT THE COMPANY WAS EN GAGED IN THE MANUFACTURE OF TALCUM POWDER UNDER THE BRAND NA ME OF MYSORE SANDAL TALCUM POWDER AND MYSORE SANDAL BA BY POWDER AND THE ACTIVITY WAS BEING CARRIED ON BY OU TSOURCING TO VARIOUS LOCATIONS. WHEN THIS BUSINESS WAS DECIDED T O BE LOCATED AT ITS OWN PREMISES AND CARRIED OUT IN-HOUSE, THE A PPELLANT PREPARED A PROJECT REPORT FOR THE TALCUM POWDER MAN UFACTURING AND PACKING UNIT. THE PROPOSED COSMETIC PLANT WAS S ET UP IN THE EXISTING HALL OF THE COMPANYS FACTORY BUILDING AND IT COMMENCED PRODUCTION IN FY 2009-10. NO NEW MACHINERY WAS REQU IRED FOR THIS PURPOSE. HOWEVER, THE FDA REGULATIONS REQUIRED SETTING UP OF A CLEAN ROOM WHICH WAS PROVIDED BY THE APPELLA NT BY PUTTING UP AN ALUMINIUM PARTITION IN THE EXISTING F ACTORY BUILDING. THE EXPENDITURE OF RS. 5,74,925 INCLUDED COST OF TW O AIR- CONDITIONERS WHICH THE APPELLANT CONCEDED AS CAPITA L EXPENDITURE DURING THE COURSE OF APPEAL PROCEEDINGS. THE BALANC E OF RS. 4,78,925 WAS EMPHASISED AS BEING REVENUE IN CHARACT ER SINCE IT WAS INCURRED FOR AN EXISTING LINE OF BUSINESS OF TH E APPELLANT, ON AN EXISTING ROOM OF THE BUILDING, AND MERELY USED A LUMINIUM PARTITIONS FOR MEETING THE REGULATORY REQUIREMENT O F THE DRUG CONTROL DEPARTMENT OF THE GOVERNMENT OF KARNATAKA. THE AO HAS MENTIONED THAT SINCE THE APPELLANT WAS CONSTRUCTIN G THE ROOM, HE DERIVED AN ENDURING BENEFIT. 9. I HAVE CONSIDERED THE APPELLANTS SUBMISSIONS A ND AM CONVINCED THAT NEITHER WAS THERE ANY EXPANSION OF A N EXISTING BUSINESS NOR THE START OF A NEW BUSINESS IN THIS CA SE. THE SPACE IN QUESTION WAS CREATED THROUGH ALUMINIUM PARTITIONS A ND THERE WAS NO CONSTRUCTION OF A ROOM AS STATED BY THE AO. HENC E, THE INCURRED EXPENDITURE JUSTIFIABLY QUALIFIES TO BE CO NSIDERED AS A REVENUE EXPENDITURE. FOR THE COMPONENT OF THE CAPIT AL EXPENDITURE CONCEDED, THE AO IS DIRECTED TO ALLOW D EPRECIATION. 5. AGGRIEVED BY THE ORDER OF THE CIT(APPEALS), THE REVENUE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. ITA NO.1820/BANG/2013 PAGE 5 OF 7 6. WE HAVE HEARD THE SUBMISSIONS OF THE LD. DR, WHO PLACED RELIANCE ON THE ORDER OF THE ASSESSING OFFICER. THE LD. COU NSEL FOR THE ASSESSEE, APART FROM PLACING RELIANCE ON THE DECISION OF THE CIT(A) ALSO PLACED RELIANCE ON THE FOLLOWING DECISIONS:- CIT V. HINDUSTHAN MOTORS LTD., 68 ITR 301 (CAL) FOR THE PROPOSITION THAT IMPROVEMENTS CARRIED OUT TO APPROA CH ROAD TO A FACTORY WAS A REVENUE EXPENDITURE. LAKSHMI SUGAR MILLS CO. P. LTD. V. CIT, 82 ITR 376 (SC) WHEREIN IT WAS HELD THAT COST OF CONSTRUCTION AND DEVELOPME NTS OF ROADS BETWEEN SUGARCANE FARMS AND SUGAR MILLS WAS REVENUE EXPENDITURE IN CASE OF AN ASSESSEE, WHO HAPPENS TO BE SUGAR MILLS, WHICH INCURRED THE EXPENDITURE. IN THE AFORESAID DECISIONS, THE PRINCIPLE LAID OUT IS THAT IF THE EXPENDITURE IS FOR THE PURPOSE OF ENABLING THE ASSESSEE TO CARRY O N ITS BUSINESS MORE EFFICIENTLY, THE SAME WILL HAVE TO BE CONSIDERED AS REVENUE EXPENDITURE. 7. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE RIV AL SUBMISSIONS. WE FIND THAT EXPENSES INCURRED BY THE ASSESSEE FOR ASP HALTING OF ROADS WAS NOT AN EXPENDITURE FOR LAYING A NEW ROAD, BUT WAS FOR T HE PURPOSE OF LEVELING POTHOLES THAT HAD DEVELOPED IN THE EXISTING ROADS W ITHIN THE FACTORY PREMISES. THE LD. CIT(APPEALS) HAS FOUND THAT COST OF RELAYING THE ROAD INCURRED BY THE ASSESSEE WAS ONLY RS.604/SQ.M., WHE REAS THE ACTUAL COST AS PER THE STATE PWD RATES FOR LAYING NEW ROADS WAS RS.1,438/SQ.M. TAKING THIS FACT INTO CONSIDERATION, THE LD. CIT(A) , IN OUR VIEW, HAS RIGHTLY CONCLUDED THAT EXPENDITURE INCURRED BY THE ASSESSEE FOR THE PURPOSE OF ASPHALTING OF ROADS WAS REVENUE EXPENDITURE. ITA NO.1820/BANG/2013 PAGE 6 OF 7 8. AS FAR AS CONSTRUCTION OF COMPOUND WALL IS CONCE RNED, THE LD. CIT(A) FOUND THAT CONSEQUENT TO ACQUISITION OF A PORTION O F THE LAND OF THE ASSESSEE BY KIADB, 68 MTRS. OF THE TOTAL COMPOUND W ALL OF 1,780 MTRS. HAD TO BE BUILT. IT IS THUS CLEAR THAT THE CONSTRUCTIO N WAS ONLY FOR THE PURPOSE OF FILLING UP THE GAP IN THE COMPOUND WALL THAT OCCURR ED CONSEQUENT TO ACQUISITION OF A PORTION OF THE ASSESSEES PROPERTY BY THE GOVERNMENT. 9. AS REGARDS WATER PROOFING WORK CARRIED OUT AT TH E TERRACE OF THE BOARD ROOM AND MEETING HALL, THESE EXPENSES CREATED NO ENDURING BENEFIT AND WERE IN THE NATURE OF CURRENT REPAIRS AND WAS R IGHTLY HELD TO BE A REVENUE EXPENDITURE BY THE LD. CIT(A). 10. AS FAR AS PROVIDING CLEAN ROOM AT COSMETIC PLAN T IS CONCERNED, THE SAME HAD TO BE CREATED WHEN THE ASSESSEE DECIDED TO CARRY OUT THE BUSINESS OF MYSORE SANDAL TALCUM POWDER AND MYSO RE SANDAL BABY POWDER TO BE CARRIED OUT AT ITS OWN PREMISES. AS PER THE FDA REGULATIONS, A CLEAN ROOM WAS REQUIRED TO BE SET UP. COSMETIC P LANT WAS SET UP IN THE EXISTING HALL OF COMPANY FACTORY BUILDING. CLEAN R OOM WAS PROVIDED BY PUTTING UP AN ALUMINIUM PARTITION IN THE EXISTING F ACTORY BUILDING. EXPENDITURE WAS INCURRED FOR THE EXISTING LINE OF B USINESS AND IN THE EXISTING ROOM OF THE BUILDING BY MERELY USING ALUMI NIUM PARTITION FOR MEETING THE REGULATORY REQUIREMENTS OF THE DRUG CON TROL DEPARTMENT OF GOVT. OF KARNATAKA. IN OUR OPINION, THIS WAS RIGHT LY HELD BY THE LD. ITA NO.1820/BANG/2013 PAGE 7 OF 7 CIT(APPEALS) TO BE REVENUE EXPENDITURE, AS IT DID N OT CREATE ANY ENDURING BENEFIT TO THE ASSESSEE. 11. FOR THE REASONS GIVEN ABOVE, WE CONFIRM THE ORD ER OF THE LD. CIT(APPEALS) AND DISMISS THE APPEAL OF THE REVENUE. PRONOUNCED IN THE OPEN COURT ON THIS 17 TH DAY OF OCTOBER , 2014 . SD/- SD/- ( ABRAHAM P. GEORGE ) ( N.V. VASUDEVA N ) ACCOUNTANT MEMBER JUDICIAL MEM BER BANGALORE, DATED, THE 17 TH OCTOBER, 2014 . /D S/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.