Commissioner of Income Tax vs Obli Spinning Mills (P) Ltd.

P.P.S. Janarthana Raja, J.—These tax case references are referred to by the Tribunal, Madras, u/s 256(1) of the Income Tax Act, 1961 at

the instance of the revenue for the opinion of this Court by framing the following question of law:

Whether on the facts and in the circumstances of the case, the Tribunal is right in law in upholding the order of the Commissioner (Appeals) that the

royalty paid by the Assessee for acquiring the right to remove granites from the quarries is revenue deduction ?

The Assessee is a private limited company incorporated under the Companies Act and engaged in carrying on business of cotton spinning. The

relevant assessment years are 1986-87, 1988-89 and 1989-90 and the corRespondent accounting year ended on 31-3-1986, 31-3-1988 and

31-3-1989 respectively. During the relevant assessment years, the Assessee company entered into an agreement for exporting granite stones to

foreign countries in addition to carrying the business of cotton spinning. In respect of the assessment year 1986-87, the Assessee filed a return on

23-9-1986 claiming current loss of Rs. 2,97,177 and the cumulative loss of Rs. 12,04,718 including unabsorbed depreciation and investment

allowance. Later, the assessing officer issued notice u/s 143(2) of the Income Tax Act, 1961 and the assessment was completed u/s 143(3) of the

Act and determined the total income at Rs. 8,97,231. While completing the assessment, the assessing officer disallowed the royalty payment of Rs.

73,200 as capital expenditure. In respect of assessment year 1987-88, the Assessee has filed a return of income on 31-7-1987 showing a current

income of Rs. 2,57,475 and after claiming set off of brought forward losses, the net loss of Rs. 9,47,240 has been shown. The assessing officer

issued notice u/s 143(2) of the Act and later, the assessment was completed u/s 143(3) of the Act and determined the taxable income at Rs.

80,730. While determining the taxable income, the assessing officer disallowed the royalty payment of Rs. 3,29,553 as capital expenditure. In

respect of assessment year 1988-89, the Assessee filed a return of income on 29-7-1988, showing loss of Rs. 5,41,874. Later, the taxable

income at 30 per cent of book profits u/s 115J returned was Rs. 1,08,094. The assessing officer completed the assessment u/s 143(3) and

determined the total taxable income at Rs. 140. While determining the tax, the assessing officer disallowed the royalty of Rs. 2,46,049 as capital

expenditure. Aggrieved by that order of the assessing officer in respect of disallowance of royalty payment, the Assessee has filed an appeal before

the Commissioner (Appeals). The Commissioner (Appeals) allowed the appeal and held that the payment of royalty is allowable expenditure.

Aggrieved by that order, the revenue has filed the appeal before the Tribunal. The Tribunal dismissed the appeal filed by the revenue and held that

the royalty payment made by the Assessee is allowable deduction and hence, the present reference.

The learned Counsel appearing for the revenue submitted that the payment of royalty is a principal condition for acquiring the right of excavation

and the acquisition of said right was of enduring nature and the amount was paid in monthly instalments as consideration and therefore, the

expenditure was capital in nature and the order passed by the Tribunal is not in accordance with law and the same has to set aside.

The notices sent to the Respondent were returned with an endorsement ""no such office is functioning in the given address"". Therefore, this Court

by order dated 22-4-2009 permitted the revenue to cause publication in the newspaper and the same was effected and the name of the

Respondent was also printed in the cause list. In spite of the same, there is no representation for the Respondent.

Heard the learned Counsel appearing for the revenue and perused the materials available on record. M/s Obli Spinning Mills (P) Ltd. entered

the business of quarrying and exporting granite stones to foreign countries. The Assessee has entered into agreement with M/s Obli Granites for

exploitation of granite. But, we do not have the benefit of looking into the said royalty agreement as the same has not been enclosed in the typed

set of papers. On the facts, it is found that the Assessee company entered into an agreement with M/s Obli Granite, sister concern for exploitation

of a portion of the quarry of M/s Obli Granites. According to the agreement between the Assessee and Obli Granites dated 1-9-1985, the

Assessee has to pay royalty to Obli Granites @ Rs. 400 per cu.m. of raw black granite excavated. The Assessee did not pay any other amount for

exploiting and exporting granite stones from the quarry. The authorities have given a categorical finding that the Assessee by virtue of the above

said agreement, did not derive any benefit by paying Rs. 400 per cum. of raw black granite excavated and the payment is in relation to the granite

excavator and also directly linked to the production. By payment, the Assessee did not acquire any permanent advantage and otherwise the

amount paid by the Assessee was for the purchase of black granite for the purpose of exporting to the foreign countries. The finding given by the

Tribunal is that the said agreement did not provide for the acquisition of any permanent advantage by incurring the expenditure in question and also

the Assessee is exporting the same product of the granite as the stock in trade of the Assessee. In view of the factual finding given by both the

authorities below, there is no enduring benefit to the Assessee and the amount is paid for excavation of the granite and therefore, the Tribunal has

come to the correct conclusion that the amount paid is only business expenditure and not capital expenditure. The expenditure is revenue in nature.

In the case of Empire Jute Co. Ltd. Vs. Commissioner of Income Tax, , the Supreme Court has considered the principles determining particular

expenditure as capital or revenue and at p. 10, it has been held as follows:

The decided cases have, from time-to-time, evolved various tests for distinguishing between capital and revenue expenditure but no test is

paramount or conclusive. There is no all embracing formula which can provide a ready solution to the problem; no touchstone has been devised.

Every case has to be decided on its own facts, keeping in mind the broad picture of the whole operation in respect of which the expenditure has

been incurred. But a few tests formulated by the Courts may be referred to as they might help to arrive at a correct decision or the controversy

between the parties. One celebrated test is that laid down by Lord Cave, L.C. in Atherton v. British Insulated and Helsby Cables Ltd. (1925) 10

Tax Cases 155, 192 (HL) where the learned Law Lord stated:

when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit

of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an

expenditure as properly attributable not to revenue but to capital.

This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion and, as pointed out

by Lord Radcliffe in Commr. ofTaxes v. Nchanga Consolidated Copper Mines Ltd. (1965) 58 ITR 241 (PC) it would be misleading to suppose

that in all cases, securing a benefit for the business would be prima facie, capital expenditure so long as the benefit is not so transitory as to have no

endurance at all. There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on

revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature, acquired by an Assessee that

brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial 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 Assessees trading operations or enabling the management and conduct of the Assessees business to be carried on more

efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage

may endure for an indefinite future. The test of enduring benefit is therefore, not a certain or conclusive test and it cannot be applied blindly and

mechanically without regard to the particular facts and circumstances of a given case. But even if this test were applied in the present case, it does

not yield a conclusion in favour of the revenue. Here, by purchase of loom hours no new asset has been created. There is no addition to or

expansion of the profit-making apparatus of the Assessee. The income-earning machine remains what it was prior to the purchase of loom hours.

The Assessee is merely enabled to operate the profit-making structure for a longer number of hours. And this advantage is clearly not of an

enduring nature. It is limited in its duration to six months and, moreover, the additional working hours per week transferred to the Assessee have to

be utilised during the week and cannot be carried forward to the next week. It is, therefore, not possible to say that any advantage of enduring

benefit in the capital field was acquired by the Assessee in purchasing loom hours and the test of enduring benefit cannot help the revenue.

In the case of Alembic Chemical Works Co. Ltd. v. CIT (1989) 177 ITR 377 (SC) the apex court has considered the scope of revenue or

capital expenditure and held that there is also no single definitive criterion which, by itself, is determinative whether a particular outlay is capital or

revenue and further held that what is relevant is the purpose of the outlay and its intended object and effect, considered in a commonsense way

having regard to the business realities and in a given case, the test of ""enduring benefit"" might break down.

Taking into consideration the principles enumerated in the above decisions, the authorities below have given a concurrent finding that the royalty

payment made by the Assessee is revenue expenditure. The finding given by the Tribunal is based on valid materials and evidence. It is a question

of fact. It is not a perverse order. Under these circumstances, we do not find any error or illegality in the order of the Tribunal warranting

interference. The order passed by the Tribunal is in conformity with law and the same is confirmed. Accordingly, we answer the question referred

by the Tribunal in favour of the Assessee/ Respondent and against the revenue and the tax case reference is disposed of accordingly.