MANGALAM CEMENT LTD V. ASST COMMISSIONER OF INCOME TAX KOTA

ITA/310/2017

AI Insights

The case involves M/S Mangalam Cement Limited, which appealed against the decision of the Income Tax Appellate Tribunal (ITAT) that treated the expenses incurred for an abandoned clinker grinding unit project as capital expenditure. The main legal question was whether the expenses amounting to Rs. 96.85 lacs, incurred from business funds on an abandoned project, should be disallowed as capital expenditure. The Tribunal had earlier dismissed the appeal of the department and partly allowed the appeal of the assessee, leading to the current appeal in the High Court. The High Court, after considering various precedents and the specific circumstances of the case, decided in favor of the assessee, stating that the expenses were of a revenue nature as no new asset was created and the project was not completed.

• Counselvise Citation: [2018] 140 COUNSELVISE.COM (IT) 750906 (HC-RAJASTHAN)
• Appeal Type: Others
• Pronouncement Date: 09-01-2018
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax vs. Seshasayee Paper and Boards Ltd., Indo Rama Synthetics (I) Ltd. vs. Commissioner of Income Tax, Binani Cement Ltd. vs. Commissioner of Income Tax, Maharaja Shri Umaid Mills Ltd. (No.2) vs. Commissioner of Income Tax, Commissioner of Income Tax-II, Mumbai vs. Rajesh Khanna, Graphite India Ltd. vs. CIT, Jonnshead & Sons (India) Ltd. vs. CIT, Allembic Chemical Works Co. Ltd. vs. CIT, Empire Jute Co. Ltd. vs. CIT, Setabganj Sugar Mills Ltd. vs. CIT, Standard Refinery and Distillery Ltd. vs. CIT, Ashok Leyland Ltd. vs. CIT, Veecumsees vs. CIT, CIT vs. Maneklal Industries Ltd., State Trading Corporation of India vs. CIT, CIT vs. Digvijay Cement Company Ltd.
• Laws Referred To: Income Tax Act
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: PARINITOO JAIN; SHIVA GOYAL
• Assessee Lawyers: SANJAY JHANWAR; ARCHANA
• Keywords: Abandoned project; Capital expenditure; Environment clearance; Revenue expenditure
• Section: 28; 37(1)

Judgement Text

"HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 310 / 2017 M/S Mangalam Cement Limited, Aditya Nagar-326520, Morak, Tehsil Ramganjmandi, Dist. Kota Through Its Senior General Manager (Commercial) Shri Vinay Kumar Jain ----Appellant Versus Asst. Commissioner of Income Tax, Circle-1, Kota ----Respondent _____________________________________________________ For Appellant(s) : Mr. Sanjay Jhanwar with Ms. Archana For Respondent(s) : Ms. Parinitoo Jain with Ms. Shiva Goyal _____________________________________________________ HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Order 09/01/2018 1. By way of this appeal, the appellant has challenged the judgment and order of the Tribunal whereby the Tribunal has partly allowed the appeal of the assessee dismissing the appeal of the department as also in ITA No.425/JP/2014, 616/JP/2016 & 713/JP/2016 dated 29.06.2017. 2. This Court while admitting the appeal on 16.11.2017, framed following substantial question of law:- “a) Whether under the facts and circumstances of the case and in law the ld. ITAT has not erred in sustaining disallowance of expenditure of Rs.96.85 lacs incurred by the petitioner out of the existing business funds on abandoned project?” 3. The Tribunal while considering the matter has discussed in Paras 38.3, 38.4 & 38.5, reads as under: (2 of 23) [ITA-310/2017] “38.3 The company in the meanwhile has incurred expenditure of Rs. 96.85 lacs in connection with the clinker grinding unit at Aligarh, the details of which are as under:- Rates and Taxes Rs. 3,74,757/- Lease Rent Rs. 1,12,852/- MGU Industrial Land Maintenance Rs. 7,38,662/- Security Charges Rs. 7,07,704/- Bill of Gannon Dunkerley & Co. Ltd. For Rs. 184.03 Lacs Rs. 77,51,000/- towards mobilization, setting up of facility and demobilization settled for Rs. 77.51 Lacs 38.4 In view of the said decision of the Board of Directors for abandoning the setting up of the clinker unit at Aligarh, the above expenditure of Rs. 96.85 lacs was charged to P&L A/c and claimed as deduction u/s 37(1)/28 as the expenditure was incurred in course of the business and no new asset was created by incurring such expenditure. However, the AO by relying on the decision of Supreme Court in case of Swadeshi Cotton Mills 63 ITR 65 where the amount paid for breach of contract in respect of purchase of textile machinery was held to be not allowable, disallowed the claim of the assessee. 38.5 The Ld. CIT(A) after relying on the various case laws, confirmed the disallowance by holding that expenses of Rs. 96,84,975/- incurred towards the setting up of the clinker grinding unit at Aligarh cannot be allowed as revenue expenses and are treated as capital in nature. He also did not accepted the alternative claim of assessee that depreciation should be allowed on such expenditure by holding that the project did not come into existence and as such the expenses claimed by the appellant did not result in creation of business asset on which depreciation can be claimed.” (3 of 23) [ITA-310/2017] and ultimately after considering the law has observed Para 38.9, reads as under: “38.9 We have heard rival contentions, perused the material available on record and gone through the orders of the authorities below. We find that the Ld. CIT (A) has given a finding of fact that a new Unit has been established and the expenses incurred in establishing a new Unit are capital in nature and accordingly disallowed the claim of the assessee. The Ld. Counsel for the assessee insisted that it is an extension to the earlier unit. We do not see any merit into the contention of the assessee as admittedly even if the assessee’s new projects are in the same line of business, expenses relating to new projects are capital in nature and not allowable as revenue as held by the Hon’ble Bombay High Court in case of J.K. Chemical Ltd. 80 Taxman 19 (Bom.). We, therefore, find no infirmity in the order of Ld. CIT (A), the same is affirmed. The ground of the assessee is dismissed.” 4. Learned counsel for appellant has contended that the Tribunal has seriously committed error in not considering the expenses which are incurred for the purpose of establishing the project which ultimately into project and has been abandoned. Therefore, the capital expenditure has not been established since the project was not over. In that view of matter, all expenses which incurred are of revenue nature. He has relied upon the following decisions: 1. Commissioner of Income Tax vs. Seshasayee Paper and Boards Ltd., [2000] 243 ITR 421 (Madras), wherein it has been observed as under: “5. We have carefully considered the submissions of counsel. We have already set out the facts and circumstances of the case in detail which indicate that the assessee after initially requesting\" for the construction of the second siding decided to abandon the second siding project during the course of construction of the (4 of 23) [ITA-310/2017] second siding by the railways. Accordingly, the assessee wrote to the authorities not to proceed with the project. At that precise point of time, when the railways was informed by the assessee that the project need not be carried on, certain expenses were incurred by the railways. Therefore, when the assessee took the decision to abandon the project, and requested the railways not to proceed with the second siding, the assessee has accepted that it would bear the expenditure incurred till then and since the assessee was maintaining the mercantile system of accounting, the liability towards the expenditure incurred by the railways had accrued on that date. No doubt, it is true that the railways by a letter dated September 26, 1972, had informed the assessee about the quantum of the amount incurred by the railways which the assessee was asked to bear, but it cannot be said that only by virtue of that letter of the railways, the liability to bear the cost had accrued against the assessee. In our opinion, at the point of time, when the assessee took a conscious decision not to proceed with the construction and informed the railways, the assessee had agreed to bear the liability for the expenses involved till then. What was done by the railways subsequently was the quantification of the liability and the railways merely by a subsequent letter informed the assessee the amount of the liability which the assessee had to bear. In other words, the railways, on the basis of the letter of the assessee merely quantified the liability and did not create any new liability which was not agreed to by the assessee earlier. Therefore, we are of the view that the liability has accrued during the previous year relevant to the assessment year 1972-73 and the Tribunal was correct in holding that the assessee was entitled to the deduction of the liability for the assessment year 1972-73 Since we are holding on the facts of the case that the liability has accrued during the previous year for the assessment year 1972-73, it is unnecessary to consider the decision relied upon by counsel for the assessee. We, therefore, hold that the Tribunal was correct in holding that the sum of Rs. 42,512 incurred by the assessee on account of centage and other expenses paid to Southern Railways was laid out for the purposes of business and arose during the assessment year 1972-73 and, accordingly, we answer the first question also in the affirmative, in favour of the assesses and against the Revenue. The assesses (5 of 23) [ITA-310/2017] will be entitled to costs in the sum of Rs. 750 (rupees seven hundred and fifty only).” 2. Indo Rama Synthetics (I) Ltd. vs. Commissioner of Income Tax, [2011] 333 ITR 18 (Delhi), wherein it has been observed as under: “10. We may point out at this stage that this Court in CIT v. Monnet Industries Ltd. (2009) 221 CTR (Del) 266 : (2008) 16 DTR (Del) 307 treated the interest borrowed on capital as business expenditure when the amount was borrowed for setting up a new plant. That was a case where the assessee was already in the business of ferro alloys plant and it had set up sugar plant. Still, the interest paid on borrowed capital was treated as revenue expenditure by applying the test of common management and common funds, in as much as, there was a common board of directors controlling the two plants, which operated from the head office located at New Delhi and funds of the two plants were common. On this basis, it was opined that there was intermingling and interlacing of funds. The fact that the two divisions are located at different sites did not affect the outcome since marketing of the final products of both divisions was carried out under the supervision and control of the same set of executives at the head office. This judgment is an answer to the wrong approach adopted by the authorities below by not treating the expenditure as revenue expenditure only because the unit was to be set up in Karnataka, which was geographically at a distance from the existing unit. 11. We are supported in our view by yet another judgment of the Supreme Court in the case of Veecumsees v. CIT (1996) 133 CTR (SC) 500 : (1996) 220 ITR 185 (SC). That was also a case where the assessee was carrying on jewellery business commencing exhibition of cinematographic films. Capital was borrowed for constructing cinema theatre and interest on borrowed capital was treated as business income (sic-expenditure) deductible under Section 36(1)(iii) of the IT Act, 1961. We, thus, answer question No. 1 in favour of the assessee and against the Revenue. 12. Insofar as the second question is (6 of 23) [ITA-310/2017] concerned, the facts leading to the said question are recapitulated below. 13. The appellant company had engaged the services of McKinsey & Co., an international firm of consultants for carrying out a detailed study on the various aspects relating to the operations of the appellant company and to suggest measures for improving the operational efficiency and profitability of the appellant company. Based on a review of the cost-benefit analysis, the said assignment for carrying out the detailed operational efficiency and profitability study was, however, terminated shortly after the mandate had been given. In respect of the work already done by the said McKinsey & Co. until the date of the termination of the mandate, a sum of Rs. 74,04,128 was paid by the appellant to the said McKinsey & Co. In the previous year relevant to the asst. yr. 2000-01, the said payment was claimed deduction by the appellant. 14. Vide order dt. 31st Dec, 2002 passed by the AO under Section 143(3) of the Act, the AO, being of the view that the appellant had failed to establish that the payment made to M/s McKinsey & Co. was revenue in nature and that since the appellant itself had treated the said expenditure as deferred revenue expenditure, disallowed the said expenditure of Rs. 74,04,128 holding the same to be capital expenditure. 15. Appeals preferred by the appellant before the CIT(A) as well as the Tribunal were dismissed and this is how the appellant has filed the present appeal under Section 260A of the Act raising the aforesaid question of law. 16. The argument of the appellant before the Tribunal, and before us, was that the purpose of the said operational efficiency and profitability study was to improve and enhance the nature and profits of the appellant company. It was also submitted that the said expenditure was not incurred with a view to acquiring any capital asset or enduring advantage in the capital field. The Tribunal, however, rejected this submission of the appellant on the ground that there was no written agreement between the appellant and M/s McKinsey & Co. based on which the (7 of 23) [ITA-310/2017] Tribunal could have ascertained the scope of the study and that it was only in a situation where the assignment had actually been completed and put in practice that the Tribunal could have determined whether the said study, in fact, resulted in enhancing the productivity and profitability of the company. Since the assignment was, in fact, never completed and put into practice, the Tribunal came to the conclusion that the appellant had not been able to prove that the payment of consultancy fee was for enhancing productivity and profitability of the appellant company. The Tribunal, accordingly, concluded that the aforesaid expenditure in respect of consultancy fee paid to M/s McKinsey & Co. could not be treated as revenue expenditure.” 3. Commissioner of Income Tax-II, Mumbai vs. Rajesh Khanna, [2012] 28 taxmann.com 415 (Bombay), wherein it has been observed as under: “3. The ITAT has deleted the disallowance of expenditure made by the assessing officer by relying upon its decision in the assessee’s own case for assessment year 1993-94. Counsel for the revenue states that he has been informed by the concerned officer that no appeal has been filed by the revenue against the decision of the ITAT in the assessee’s own case for assessment year 1993-94. No fault in the decision of the ITAT relating to assessment year 1993-94 is pointed out. In this view of the matter, no fault can be found with the decision of the ITAT in deleting the addition made by the assessing officer. The appeal is accordingly dismissed with no order as to costs.” 4. Binani Cement Ltd. vs. Commissioner of Income Tax, [2016] 380 ITR 116 (Calcutta), wherein it has been observed as under: 11. Following the judgment in the case of Gajapathi Naidu (supra) the question to be asked is when did the expenditure claimed by way of deduction arise? There would have been no occasion to claim the deduction if the work- in-progress had completed its course. Because the project was abandoned the work-in-progress did not proceed any further. The decision to abandon the project was the cause for claiming the deduction. The decision was taken in the relevant year. It can therefore be safely concluded that the expenditure arose in the relevant year. (8 of 23) [ITA-310/2017] 5. Maharaja Shri Umaid Mills Ltd. (No.2) vs. Commissioner of Income Tax, [1989] 175 ITR 72 (Raj.), wherein it has been observed as under: “4. The only surviving question now is question No. (2) quoted above. The assessee carries on a business in textiles. It claimed a deduction of Rs. 90,000 spent by it for obtaining a survey and feasibility report regarding a polythene plant from an expert in the field with a view to set up a polythene plant. However, the assessee's application for permission to set up the polythene plant was rejected by the MRTP authorities so that no further step could be taken in that direction. The assessee claimed deduction on the ground that the proposed polythene plant was to manufacture packing material required for the assessee's products manufactured in the existing business and, that therefore, the expenditure was incurred wholly and exclusively for the purpose of the assessee's business. This claim was disallowed by the Income Tax Officer and thereafter by the Appellate Assistant Commissioner as well as the Tribunal. The aforesaid question No. (2) has been referred at the instance of the assessee in this situation. 5. In our opinion, necessary facts on the basis of which the aforesaid question No. (2) has to be answered have not been determined by any of the lower authorities including the Tribunal. The test to be applied for deciding whether this is an allowable expenditure or not was indicated by the Supreme Court in Setabganj Sugar Mills Ltd. v. CIT [1961]41ITR272(SC) , as under (p. 274) : \"The question whether, on the application of the settled tests, different ventures carried on by an individual or a company form the same business is a mixed question of law and fact. Certain principles are applied to determine whether on the facts found, a legal inference can be drawn that the different ventures constitute separate businesses or viewed together, can be said to constitute the same business. These principles were stated by Rowlatt J. in Scales v. George Thompson and Co. Ltd. [1927] 13 TC 83. The learned judge observed : '. . . the real question is, was there any interconnection, any interlacing, any (9 of 23) [ITA-310/2017] interdependence, any unity at all embracing those two businesses.' The learned judge also observed that what one has to see was whether the different ventures were so interlaced and so dovetailed into each other as to make them into the same business. These principles have to be applied to the facts, before a legal inference can be drawn that a particular business is composed of separate businesses, and is not the same one.\" 6. This was reiterated in Standard Refinery and Distillery Ltd. v. CIT [1971]79ITR589(SC) . 7. The decisions cited at the bar, including the Gujarat High Court decision relied on by the Tribunal, in reality, apply the above test indicated by the Supreme Court for deciding the question on the facts of that particular casts. It is obvious that the same test has to be applied for answering this question in the present case as well. In other words, it is to bo decided on the facts of this case as to whether the proposed polythene plant was so interconnected or interlaced with the existing textile business of the assessee and the two were so dovetailed into each other as to make them the same business. If that be so, and the answer is in the affirmative, then the assessee could be entitled to the deduction, otherwise not. We do not find the necessary facts being determined by either the Income Tax Officer or the Appellate Assistant Commissioner or the Tribunal on the basis of which this question can be decided by applying the test indicated. This question cannot, therefore, be answered at this stage without necessary facts and the Tribunal will have to decide the same afresh after determin ing the necessary facts giving opportunity, if necessary, to the parties, to adduce further evidence for this purpose.” and contended that since the project has not been materialised it has required to be accepted as revenue expenses. 5. Counsel for respondent has supported the order of the Tribunal and contended that in view of the observations made by the Supreme Court in case of Swadeshi Cotton Mills (10 of 23) [ITA-310/2017] Co. Ltd. vs. Commissioner of Income Tax, [1967] 63 ITR 65 (SC), wherein it has been observed as under: “3. On the facts put forward by the appellant itself and accepted by the Tribunal and the High Court, it is clear that the sum of Rs. 35,000 claimed as deduction under section 10(2)(xv) was really paid for breach of contracts in respect of purchase of textile machinery which would have been a capital asset. The payment was, therefore made to avoid a larger capital expenditure that would not have served the interests of the appellant-company. Such a payment made is clearly in the nature of a capital expenditure and not an expenditure incurred wholly or exclusively for the purpose of the business. The payment was neither made for the purpose of earning profits, nor for the purpose of furthering, protecting or continuing its business which was to be carried on from day to day. The payment was made with the object of avoiding an unnecessary investment in capital assets, and was an amount which was altogether outside the account of profits and gains, in the computation of which deductions are allowable for expenditure incurred wholly and exclusive for earning those profits and gains. It is, therefore, clear that this amount could not have been claimed has a legitimate deduction under section 10(2)(xv) of the Income-tax Act. Our view is supported by the observations of Rowlatt J. in \"Countess Warwick\" Steamship Co. Ltd. v. Ogg. The appeal consequently has no force and is dismissed with costs.” and also the decision of Gujarat High Court in case of Commissioner of Income Tax vs. Shri Digvijay Cement Company Ltd., 1986 ITR 253, wherein it has been observed as under: 13. That takes us to the consideration of question No. 3 which is at the instance of the assessee. We are again faced with the same vexed question which is, as observed by Bhagwati J., in Empire Jute Co. Ltd. v. CIT [1980]124ITR1(SC) present \"a difficult problem and continually baffled the courts, because it has not been possible, despite occasional judicial valour, to formulate a test for distinguishing (11 of 23) [ITA-310/2017] between capital and revenue expenditure which will provide an infallible answer in all situations.\" In spite of it being often said that the line of demarcation has been found to be very thin and each case depends on its own facts and circumstances, it is desirable in order to avoid common pitfalls to remind ourselves of what should be the approach in resolving this question. In Abdul Kayoom v. CIT [1962]44ITR689(SC) , Hidayatullah J., speaking for the majority court, observed as under (p.703) : \"...... none of the tests is either exhaustive or universal. Each case depends on its own facts, and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation to decide cases (as said by Cordozo in The Nature of the Judicial Process, p.20) by matching the colour of one case against the colour of another. To decide, therefore, on which side of the line a case falls, its broad resemblance to another case is not at all decisive. What is decisive is the nature of the business, the nature of the expenditure, the nature of the right acquired, and their relation inter se, and this is the only key to resolve the issue in the light of the general principles, which are followed in such cases.\" 14. Bearing in mind this warning, it would still be advisable to refer to the broad tests which have been enunciated by the Supreme Court as early as in 1955 in Assam Bengal Cement Co. Ltd. v. CIT, where the Supreme Court was concerned with the nature of payment of protection fees for protection of the mining rights in the land leased by the Govt. of Assam, in consideration of which the Govt. undertook not to grant to any person any lease, permit or prospecting licence for limestone in a group of quarries without a condition that the limestone should be used for the manufacture of cement. In that context, the Supreme court, on a conspectus of the entire relevant case law then existing, laid down three tests for determining as to whether the amount of expenses was revenue or capital in nature. These broad tests are as under : 1. Outlay is deemed to be capital when it is made for the initiation of a business, for (12 of 23) [ITA-310/2017] extension of a business, or for a substantial replacement of equipment. 2. Expenditure may be treated as properly attributable to capital when it 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. The enduring benefit or the permanent character means acquisition of the asset or the right having enough durability to justify its being treated as a capital asset. 3. Whether the expenditure incurred was a part of fixed capital of the business or a part of its circulating capital. 15. The Supreme Court digested these principles from the Full Bench decision of the Lahore High Court in Benarsidas Jagannath, In re MANU/LA/0001/1946. After digesting these tests, the Supreme Court, speaking through Bhagwati J.(as he then was), elaborated as to how these tests are to be applied. This elaboration is in the following terms (p.45 of 27 ITR) : \"In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or the income of the concern is certainly in the nature of capital expenditure. The question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, it is properly attributable to capital and is of the nature of capital expenditure. If, on the other hand, it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce profits, it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the (13 of 23) [ITA-310/2017] business is thus acquired or brought into existence, it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it s a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business, it would be of the nature of capital expenditure and if it was part of its circulating capital, it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner indicated above. It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations, it is difficult to lay down a test which would apply to all situations. One has therefore got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation, the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure...\" 16. It was pointed out by the Supreme Court in Empire Jute Co.'s case [1980]124ITR1(SC) , that each case must necessarily turn on its own facts and no infallible test can be laid down since the tests are useful as illustrations of some general principles. The principle is equally recognised that the test whether expenditure is incurred with a view to obtain an advantage of enduring benefit may break down in certain circumstances. Every advantage of enduring nature acquired by the assessee would not rule out the expenses incurred for gaining this advantage from the category of revenue expenses. What is material to consider in such cases is the nature of advantage in a commercial sense and whether the advantage is in the capital field; it would be only then that the expenditure would be disallowable on an application of the tests. On the other hand, if such advantage consists merely in facilitating the assessee's trading operations or enabling it (14 of 23) [ITA-310/2017] to carry on the business operations efficiently or profitably, the expenditure would be entitled to be treated on revenue account (See Empire Jute Co.'s case [1980]124ITR1(SC) ]. 17. A Division Bench of the Madras High Court in CIT v. Ashok Leyland Ltd. [1969]72ITR137(Mad) , summed up the various tests succinctly as under : \"The word 'capital' connotes permanency and capital expenditure is, therefore, closely akin to the concept of securing something tangible or intangible property, corporeal or incorporeal rights, so that they could be of a lasting or enduring benefit to the enterprise in issue. Revenue expenditure, on the other hand, is operational in its perspective and solely intended for the furtherance of the enterprise This distinction, though candid and well accepted, yet is susceptible to modification under peculiar and distinct circumstances. Thus, the facts of each case, the attendant circumstances revolving round the expenditure, the aim, object and purpose of the same, their impact on the assessee, particularly in matters relating to the future of the assessee's trade and business, whether it could be sustained on ordinary canons of commercial expediency simpliciter, whether it is a step-in-aid of future expansion or prolongation of life of an existing business, whether it is to secure an enduring benefit, whether the expenditure constitutes conceivable nucleus to form the foundation for posterior profit earning, whether the expenditure could be viewed as an integral part of the conduct of the business and to avoid inroads and incursions into its concrete present and potential future, are all some of the main incidents which have a bearing on the decision whether, in a given case, the expenditure is capital or chargeable to revenue. On the whole, an objective application of a judicial mind to the facts of each case is necessary.\" 18. It should also be borne in mind that the expenditure would be attributable to capital if it is made with a view to bringing an asset or advantage into existence and, therefore, it is not necessary that the expenditure should have that result. It is the object that matters. [See Anglo- Persion Oil Co. Ltd. v. Dale [1931] 16 TC 253; CIT v. Maneklal Industries Ltd. [1977]107ITR133(Guj) and State Trading Corporation of India v. CIT (15 of 23) [ITA-310/2017] [1974]94ITR496(Delhi) ]. It is in the background of this settled legal position that we have to consider as to whether the expenses incurred by the assessee-company for obtaining feasibility report for setting up the shipyard at Seeka was in the nature of revenue expenses as claimed by the assessee. Since the Appellate Assistant Commissioner has emphasised that these expenses were entailed with a view to increase the manoeuvrability of the fleet of ships that the assessee company had, it would be a permissible deduction on account of revenue expenses. The Tribunal, on the other hand, held that the impugned expenditure was directly linked with the construction of shipyard with a view to facilitating better manoeuvrability of country crafts and, therefore it was an expenditure incurred with a view to obtain an advantage of enduring nature. As we have to find out, inter alia, the object of the expenses, we requested the learned advocate for the assessee company to produce the feasibility report for setting up a shipyard at Seeka. The learned advocate called for this report which referred to the agreement between the company and the consultancy firm, M/s. Indopal Limited. He also produced the relevant agreement in this behalf. We have taken the agreement as well as the feasibility report on record with the consent of counsel for the Revenue as well as the learned advocate for the assessee company and collectively marked them as annexure \"F\". The agreement indicates that the consultants were engaged to prepare within the agreed period, a feasibility report for a ship building yard at Seeka in accordance with the scope indicated in enclosure No. 2 with a view to enable the assessee company to arrive at a decision regarding the development of a ship-building yard. Enclosure No. 2 gives broadly the scope of the feasibility report. The scope, inter alia, covers the topics as description of shipyard proposed to be developed, including the vessels to be constructed, stagewise programme of ship-building facilities proposed and the possibility of using these facilities to overhaul materials and equipments necessary for construction, schedule of project execution, description of machinery required to be installed, stagewise financial and economic aspects, cost of project including civil construction, mechanical equipment erection, cost of utilities, (16 of 23) [ITA-310/2017] power, water, etc., recommendation of shipyard management, personnel and technical administration and evaluation of cost of ship production. In pursuance of this agreement, the consultancy firm, M/s. Indopal Limited, submitted a report where they have set out the main points in respect of which the firm was required to prepare the report. The said Points have been listed as under : 1. To find the investment requirement for constructing a shipyard workship for reparing ships of 20,000 DWT capacity when initially the shipyard is equipped with the minimum essential machinery. 2. To find the number of ships that can be repaired in the above shipyard. 3. To find if it is feasible to build ships in this shipyard. 4. If the shipyard is to be altered for shipbuilding purposes, then what would be the cost of investment and its profitability. 5. Up to what extent ship-building and repairs capacity can be expanded and its economics. 6. The maximum size of ships that can be built in future. 19. The report consists of three parts. Part I relates to site condition, Part lI pertains to repair yard and Part III to expansion possibilities. It is not necessary to go into details of these parts. Suffice it for our purposes to bear in mind that the assessee company has called for this detailed report so as to enable it to arrive at a decision regarding the development of ship- building yard at Seeka. The aim and object of the expenses which is in the nature of consulting fees for preparing this feasibility report cannot be said to be clearly for initiation of a business, for extension of a business or for substantial replacement of equipment. In other words, it would not fall within the first test laid down in Assam-Bengal Cement Co.'s case [1955]27ITR34(SC) . The expenses have been incurred while the business of manufacturing cement is going on. It is an admitted position that it is not incurred either for the expansion of business of manufacturing cement or for the substantial replacement of its equipments The (17 of 23) [ITA-310/2017] question, therefore, shall have to be examined from the angle of the second test which has been laid down in Assam-Bengal Cement Co's case [1955]27ITR34(SC) . Such expenditure can be looked at from the pot of view of what is acquired or from the point of view of what is the Source from which the expenditure is incurred. If the expenses are not entailed in running the business or working it with a view to produce profits, but have been entailed with the purpose of bringing into existence an asset or advantage of enduring benefit, the question of the Source of the expenditure would be of no consequence. It is only when the second test fails that we may have to examine as to whether the expenditure incurred was part of the fixed capital or part of the circulating capital. The bone of contention between the parties is that nothing tangible has been achieved or intended to be achieved by calling for the feasibility report. As contended by the assessee, it was only with a view to enable the assessee company to decide whether it should go for setting up of the shipyard that this report has been called for. On the other hand, the Revenue has emphasised that it is of no consequence whether the decision has been taken or, for that matter, the shipyard was, in fact, established. Even if the expenses are entailed with a view to bring into existence an asset or advantage of enduring nature, they are not qualified to be treated as revenue expenses. The learned advocate for the assessee tried to impress upon us that this test of bringing into existence an asset of enduring benefit breaks down under certain circumstances and that test cannot in all situations clinch the issue. The court has to examine this question from the view-point of the commercial expediency, and if the assessee company with an immediate object of increasing the manoeuvrability of the fleet of its crafts called for this feasibility report, with no ultimate view of setting up a shipyard, it cannot be held as was done by the Tribunal, that these expenses were entailed with a view to bring into existence some asset or advantage of enduring nature. The learned counsel for the Revenue, in this connection, invited our attention to the provision contained in section 35D of the Income Tax Act, 1961, which has been inserted by the Taxation Laws (Amendment) Act, 1970, with effect from April 1, 1971. It provides for amortisation of certain preliminary expenses which, inter alia, includes expenses for preparation of feasibility report. The learned (18 of 23) [ITA-310/2017] counsel for the Revenue, therefore, urged that since in some cases, this expenditure which is in the nature of capital may not be permissible and would be treated for all purposes as personal expenses, the Legislature has provided for writing off capital expenditure of such a nature over a period of years. Having regard to the scope of agreement between the assessee company and the consultancy firm which was assigned the work of preparing the feasibility report for setting up the shipyard at Seeka, we are of the opinion that the assessee company intended to bring into existence an asset which is of a permanent or at least an enduring nature. It cannot be gainsaid that the expenses incurred for preparation of feasibility report is with a view to bring this asset into existence. The only short question which is to be answered is, does the test of bringing the asset or advantage of enduring nature break down in the circumstances ? As pointed out by Bhagwati J., in Empire Jute Co.'s case [1980]124ITR1(SC) , what is material to consider is the nature of the advantage in a commercial sense 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. The factual context before the Supreme court in Empire Jute Co.'s case [1980]124ITR1(SC) , was that the assessee company had purchased loom hours from four different jute manufacturing concerns for a sum of Rs. 2,03,255 during the previous year relevant to the assessment year 1960-61, and claimed to deduct the said amount as revenue expenses. The Tribunal held that the expenses were revenue in nature and hence qualified for permissible deduction. The High Court held that the amount paid by the assessee company was in the nature of capital expenditure and, therefore, not a permissible deduction. In that background, the Supreme Court ruled that by the purchase of the loom hours no new asset was created and there was no addition to or expansion of the profit-making apparatus of the appellant and the acquisition of additional loom hours did not add to the fixed capital of the appellant; the permanent structure of which the income was the product or fruit (19 of 23) [ITA-310/2017] remained the same; it was not enlarged nor did the appellant acquire a source of profit or income when it purchased the loom hours. The expenditure incurred for the purpose of operating the looms for longer working hours was primarily and essentially related to the operation or working of the looms which constituted the profit-making apparatus of the appellant and was expenditure laid out as part of the process of profit-earning. It is no doubt true that the Supreme Court in Empire Jute Co.'s case [1980]124ITR1(SC) , did say that the test of enduring benefit is not an immutable and a certain test since it may break down under certain circumstances. We have not been able to appreciate how this ruling can be pressed into Service on behalf of the assessee company for purposes of establishing that he test has, in fact, broken down under the facts and circumstances of the case. It is no doubt, as stated above, not a certain and conclusive test, but none the less it is one of the tests which has to be applied and what the court has to bear in mind is that in the ultimate analysis what is the aim and object of the expenses. The learned advocate for the assessee company was at great pains to persuade us that no capital asset has come into existence, nor was it intended to bring a capital asset into existence. The feasibility report is nothing else but an exploratory exercise for purposes of taking a decision whether a shipyard should be established or not and, therefore, on the facts of the case, the test of bringing an asset or advantage of enduring benefit into existence would not apply. That, in our opinion, is a separate argument by itself. That would not be tantamount to saying that the test has broken down. We have, therefore, to find out as to what was the precise purpose of calling for the feasibility report. On a mere reading of clause 1.2 of the agreement, we are of the opinion that it was for the purpose of enabling the assessee company to decide regarding the development of ship-building yard. The relevant clauses of the said agreement are clauses 1.1. and 1.2, which read as under : \"1.1. The consultant shall within a period of 6(six) months from the date hereof work out a feasibility report for a ship-building yard at Seeka, in accordance with the scope indicated in the Enclosure No. 2 annexed hereto. (20 of 23) [ITA-310/2017] 1.2. The consultants shall within the said period submit the feasibility report to the clients to enable the clients to arrive at a decision regarding development of the ship-building yard.\" 20. It is no donubt true that a decision for development of the ship-building yard was to be taken on the basis of the feasibility or otherwise in the report that was to be submitted by the consultancy firm. None the less, the sole purpose which prompted the assessee company to call for such a report is with a view to decide as to whether they should or should not establish and develop a shipbuilding yard. In other words, the expenses have been entailed with a view to decide as to whether the advantage or asset of an almost permanent nature or of an enduring benefit should be brought into existence or not. If that is the aim and purpose of the expenses which cannot be disputed, the fact that the feasibility report did not indicate favourably the establishment of ship-building yard or the fact that there was infrastructure facility for developing the site into a ship building yard, or that yard was established and developed in fact, cannot be of much assistance to the assessee. As Bowen L.J. remarked in City of London Contract Corporation Ltd. v. Styles [1887] 2 TC 239 (CA), \"You do not use for the purposes of your concern which means for the purposes of Carriage on your concern, but you use it to acquire another concern\" or with a view to bring into existence an asset or advantage of permanent or enduring nature. In Anglo-Persian Oil Co. Ltd. v. Dale [1931] 16 TC 253 CA), Viscount Cave emphasised that the expenditure would be attributable to capital if it is made with a view to bringing an asset or advantage into existence, and it is not at all necessary that the expenditure should have that result. It is the object alone that counts. It cannot be successfully contended that the shipbuilding yard was to facilitate the assessee's trading operation or was to enable the assessee to conduct and manage their business more efficiently or to earn more profits without touching their capital asset. The possibility of a shipping yard resulting, if at all, for greater manoeuvrability of the fleet of crafts of the company is so remote that it is travesty of language to say that it is an integral part of the business or profit-earning apparatus. We are, (21 of 23) [ITA-310/2017] therefore, of the Opinion that on the matter of principle as well as authority, it would be difficult for us to agree with the learned advocate for the assessee that these expenses qualify themselves to be revenue expenses and therefore, permissible deduction. There is an additional reason in support of the view which we are inclined to take and that is the insertion of a new provision in section 35D in the Income Tax Act, 1961, which of course permits the amortisation of capital expenditure, inter alia, for preparation of feasibility report under specified conditions. In other words, the Legislative development indicates that under the specified conditions, the Legislature has thought it fit to permit the set- off of capital expenses against revenue receipts over a number of years. It is not intended to supersede any other provision in the Income Tax law under which the expenditure is allowable as deduction against profits. We are emphasising it for a limited purpose to indicate as to how the Legislature has tried to intervene and see that such nature of expenses may not be treated as virtually personal expenses, if certain conditions are specified. In that view of the matter, therefore, we have to answer question No. 3 in the affirmative, i.e., in favour of the Revenue and against the assessee. Having regard to the facts and circumstances of this case, there would be no order as to costs. 6. The cause of abandonment of project was un- fulfillment of statutory requirement as environment clearance was not received from the Central Government. 7. We have heard counsel for both the sides. 8. Taking into account, the observations made by Delhi High Court in Indo Rama Synthetics’s case (supra) while considering the specific Supreme Court judgment and judgment of Jharkhand High Court in Commissioner of Income Tax, Ranchi vs. Tata Robins Fraser Ltd., [2012] 26 taxmann.com 15 (Jhar.), wherein it has been observed as under: (22 of 23) [ITA-310/2017] 13. The company's contention was that the company had entrusted the study and design, detail working and drawings of a multi-storied (12 storied) building to a party named Acme Compartments (P) Ltd., Calcutta. After the preliminary work was undertaken, the project was to be abandoned due to adverse soil and other adverse conditions at the proposed site. The assessee company had to incur some expenditure on preliminary work. It was said that all designs, drawings etc. became useless and that was why the expenditure was written off. After narrating the detail facts in respect of the above expenditure, it has been claimed that it may be treated to be abortive expenditure. The AO rejected the claim of the assessee as misconceived on the ground that it is a case of capital expenditure. The CIT(A) also upheld the said finding but the Tribunal has reversed the finding. 14. In the case of Indo Rama Synthetics (I) Ltd. vs. CIT (2009) 32 DTR (Del) 322 it has been held that if expenditure has been incurred for setting up a new unit which was subsequently abandoned, then the aforesaid expenditure will be treated as revenue in nature as no new industrial asset came in existence. 15. The Tribunal has relied upon the judgment of the Calcutta High Court delivered in the case of CIT vs. Graphite India Ltd. (1997) 137 CTR (Cal) 123 : (1996) 221 ITR 420 (Cal) and decision of the Hon'ble Supreme Court in the cases of Jonnshead & Sons (India) Ltd. vs. CIT (1997) 138 CTR (SC) 283 : (1997) 224 ITR 342 (SC) and Allembic Chemical Works Co. Ltd. vs. CIT (1989) 77 CTR (SC) 1 : (1989) 177 ITR 377 (SC) and held that in view of the ratio of above judgments, if the expenditure is incurred for acquisition of an asset which gives or renders enduring benefit to the assessee, naturally it is to be considered as capital expenditure otherwise revenue expenditure. 16. Substantially this is also a question of fact whether an expenditure incurred by the assessee was revenue in nature or it was a capital expenditure. However, in view of the fact that question has been framed and we have narrated the facts of the case including the break-up of the expenditure which includes the fee of Rs. 2,57,335 paid to the architect and some expenses of Rs. 46,379 incurred on old capital (23 of 23) [ITA-310/2017] work-in-progress which was abandoned and cost of damaged cabinets and that too, amounting to Rs. 12,776, total expenditure including all three of the heads is Rs. 3,16,490. It is not in dispute that the project could not be accomplished because of the reason that the place where it was to be undertaken had a poor quality of soil and all the construction already damaged. The other articles bought by the assessee also got damaged and, therefore, in that fact-situation, the Tribunal was fully justified in holding that such expenditure which may be pre-operational expenditure for a project can be treated to be a revenue expenditure actually and not a capital expenditure.” 9. We are of the considered opinion that the contention raised by the assessee that it was required to be abandoned because of non-clearance by the environment department, the expenditure are required to be considered as revenue expenses. 10. The issue is answered in favour of assessee and against the department. 11. The appeal stands allowed. (VIJAY KUMAR VYAS)J. (K.S.JHAVERI)J. Chouhan/69 "