VADILAL INDUSTRIES LTD. V. ASSTT. COMMISSIONER OF INCOME TAX

TAXAP/31/2005

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Vadilal Industries Ltd. appealed against the decision of the Income Tax Appellate Tribunal, which had upheld the Assessing Officer's decision treating certain expenditures as capital in nature. These expenditures, amounting to Rs.30,56,000, were incurred for the expansion of the company's existing business operations at Dharampur, Valsad, involving the deployment of individually Quick Frozen (IQF) technology. The primary legal contention was whether these expenditures should be treated as capital or revenue for tax purposes. The court examined precedents and statutory provisions, particularly focusing on the interpretation of Sections 32 and 50 of the Income Tax Act, and the impact of the deletion of the first proviso to Section 32(1)(ii) by the Finance Act, 1996.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 695911 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 03-11-2014
• Assessment Year: misc
• Other Referred Cases: Deputy CIT vs. Core Healthcare Limited, M. Raghavan vs. ACIT, Nectar Beverages P. Ltd. vs. Deputy Commissioner of Income-Tax
• Laws Referred To: Income Tax Act
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: VARUN PATEL
• Assessee Lawyers: S N SOPARKAR; SWATI SOPARKAR
• Keywords: Capital expenditure; Expansion of business; Income Tax; Pre-operative expenditure; Revenue expenditure
• Section: 143(2); 50; 32(1)(ii)

Judgement Text

"O/TAXAP/31/2005 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 31 of 2005 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE KS JHAVERI Sd/- and HONOURABLE MR.JUSTICE K.J.THAKER Sd/- ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? Yes 2 To be referred to the Reporter or not ? Yes 3 Whether their Lordships wish to see the fair copy of the judgment ? No 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? No 5 Whether it is to be circulated to the civil judge ? No ================================================================ VADILAL INDUSTRIES LTD.....Appellant(s) Versus ASSTT. COMMISSIONER OF INCOME TAX....Opponent(s) ================================================================ Appearance: MR SN SOPARKAR, Ld. SENIOR COUNSEL with MRS SWATI SOPARKAR, ADVOCATE for the Appellant(s) No. 1 MR.VARUN K.PATEL, ADVOCATE for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERI and Page 1 of 9 O/TAXAP/31/2005 JUDGMENT HONOURABLE MR.JUSTICE K.J.THAKER Date : 03/11/2014 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE K.J.THAKER) 1.The assessee who is the original appellant before the Income Tax Appellate Tribunal is before us challenging the order passed by the Income Tax Appellate Tribunal, Ahmedabad Bench “A” for the year 1996-1997. 2.The brief facts of the case are that returns of income was filed on 30.11.1996 where the total income declared was nil. However, there was a notice issued under Section 143(2) of the Income Tax Act. It is an admitted position that the appellant – assessee is a Public Limited Company manufacturing ice cream and other food products. There was a total turnover of Rs.52,27,22,000/- and the profit disclosed is Rs.13,71,53,000/-; hence, the profit disclosed came to 26.22% against 22.56%. Therefore, the assessee claimed pre-operative expenditure for expansion of its Dharampur plant. 3.The assessee vide their note claimed that in view of the fact that expansion and existing business are inter linked, inter connected, Page 2 of 9 O/TAXAP/31/2005 JUDGMENT inter dependent in respect of business operations, management (units of control) and finance, the expenditure incurred in connection with extension of existing business and accordingly are claimed as revenue expenditure though for accounts purpose they are shown as 'pre-operative expenses to be capitalised. 4.The assessee was therefore, asked to explain why Rs.30,56,000/- treating it as a capital expenditure in view of recent judgment of Supreme Court in the case of Brooke Bond India Ltd. 5.The assessee vide their reply dated 26.03.1999 contended that Rs.30,56,000/- has been incurred for the expansion of existing business. It is admissible as revenue expenditure. The contention of the assessee is inter-alia as under :- The company is engaged in the business of frozen foods and vegetables at Dharampur, Valsad. Heither to the company was doing the work of frozen foods and vegetables with blasting process. Now, the company envisaged deployment of individually Quick Frozen (IQF) technology for production of Frozen Foods and Vegetables in consumer and bulk packs. There is nothing but an expansion of existing line Page 3 of 9 O/TAXAP/31/2005 JUDGMENT of business. During the year company has incurred expenditure as under :- Particulars Amount (Rs.) a. Legal & Professional 5,74,370 b. Financial Charges 11,02,743 c. Employees Exp. 6,80,099 d. Travelling Exp. 5,54,710 e. Misc. Exp. 1,43,996 Total 30,55,918 ========== The details of above expenditure has been given in Annexure “N” to the letter dated 25.01.1999. From the details it can be observed that Legal & Professional Exp. has been incurred on consultancy charges, retainership, etc. The expenditure of Rs.11,02,743/- for raising of loans from the financial institutions, Banks, interest expenditure and bank guarantee. The other Expenses are of a revenue nature relating to personnel working in the PF for doing the work of raising of loan and necessary follow upwork with the financial institutions and banks. In books of accounts the same has been considered as a pre-operative expenditure pending capitalisation to the assets. However, in income tax return the same has been considered as a revenue expenditure in view of the fact that expansion and the Page 4 of 9 O/TAXAP/31/2005 JUDGMENT existing business are interlinked, interconnected, inter-dependent, inter-lacing in respect of business operations, management (unit of control) and finance. 6.However, the authorities below relying on the decision of Deputy CIT vs. Core Healthcare Limited reported in 2001 257 Income Tax Reports 61 (Gujarat) disallowed the revenue expenditure and the Appeal was partly allowed. 7.Being aggrieved by the said order, the present appellant preferred an Appeal before the Income Tax Appellate Tribunal, Ahmedabad Bench “A”. The action of the Assessing Officer was upheld and relying on the solitary decision of the Madras High Court being in the case of M. Raghavan vs. ACIT reported in 226 Income Tax Reports 145, the Assessing Officer had assessed the same to Tax by applying the provisions of Section 50 of the Act and the said order came to be confirmed. 8.This Tax Appeal came to be admitted on 14.02.2005 on the following question of law :- “Whether, on the facts and in the circumstances of the case, the Page 5 of 9 O/TAXAP/31/2005 JUDGMENT Tribunal was right in law in holding that the sale proceeds received on sale of assets, whose actual cost was allowed as a deduction under the first proviso to Section 32(1) of the Act, are taxable under Section 50 of the Act?” 9.Section 32(1)(ii) of the Act reads as follows :- “32. Depreciation – (1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of section 34, be allowed - (i) [omitted]; (ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed : Provided that where the actual cost of any machinery or plant does not exceed five thousand rupees, the actual thereof shall be allowed as a deduction in respect of the previous year in which such machinery or plant is first put to use by the assessee for the purposes of his business or profession.” 10. Section 50 of the Income Tax Act reads as under :- “6[Special provision for computation of capital gains in case of depreciable assets. 50. Nothwithstanding anything Page 6 of 9 O/TAXAP/31/2005 JUDGMENT contained in clause (42A) of section 2, where the capital asset is an asset forming part of a block of assets8 in respect of which depreciation has been allowed under this Act or under the Income Income tax Act, 1922 (11 of 1922), the provisions of sections 48 and 49 shall be subject to the following modifications :- (1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the fully value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amounts, namely :- (i) expenditure incurred wholly and exclusively in connection with such transfer or transfers; (ii) the written down value of the block of assets at the beginning of the previous year; and (iii) the actual cost of any asset falling within the block of assets acquired during the previous year, such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets; (2) where any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down Page 7 of 9 O/TAXAP/31/2005 JUDGMENT value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short- term capital assets.]” 11. Learned Senior Counsel Mr. S.N. Soparkar for the appellant has placed reliance on the decision of the Apex Court in the case of Nectar Beverages P. Ltd. vs. Deputy Commissioner of Income-Tax reported in (2009) 314 Income Tax Reports 314 (SC). 12. It is further submitted that the said decision will enure for the benefit of the assessee and the issue is covered against the revenue. He has taken us to Paragraph 12 of the said decision which reads as under :- “At the outset, it may be noted that, by the above Finance Act, the first proviso to section 32(1)(ii) stood deleted, with effect from April 1, 1996. Consequently, bottles, crates and cylinders whose individual cost did not exceed Rs.5,000 also came to be included in the block of assets.” 13. Learned Senior Counsel has further submitted that the purchases were made prior to the year 1995 and hence, the findings of Page 8 of 9 O/TAXAP/31/2005 JUDGMENT the authority arrived at Paragraph 4, therefore, cannot be sustained. 14. In light of the above explanation and the decision in Nectar Beverages P. Ltd. (supra), the appeal preferred by the assessee is allowed and therefore, the assessee is entitled to deduction as claimed for. The issue is answered likewise. Sd/- (K.S. JHAVERI, J.) Sd/- (K.J. THAKER, J) CAROLINE Page 9 of 9 "