Commissioner of Income Tax vs Southern Roadways Ltd.

P.D. Dinakaran, J.—The above tax case appeals are directed against the common order of the Income Tax Appellate Tribunal dated

30.8.2005 made in ITA Nos. 793 to 795 and 1075/Mds/2002 and 536/Mds/2000 for the assessment years 1995-96 to 1997-98.

The Revenue is the appellant. For the assessment years 1995-96 to 1997-98, the Assessing Officer disallowed the assessee''s claim of

expenditure incurred on software packages as revenue expenditure and for the assessment years 1995-96 and 1996-97, he disallowed the claim

of expenditure incurred on construction of new compound wall removing the existing barbed wires as revenue expenditure. For the assessment

year 1995-96, the Assessing Officer disallowed the claim of expenditure on replacement of UPS and for the assessment year 1996-97, he

disallowed the claim of expenditure incurred on replacement of printer and treated the said expenditure as capital expenditure. Aggrieved by the

same, the assessee preferred appeals before the Commissioner of Income Tax (Appeals), who, partly allowed the appeals. Against the order of

the Commissioner, both the assessee and the Revenue preferred appeals before the Income Tax Appellate Tribunal, which, by common order

dated 30.8.2005, held all the issues in favour of the assessee holding the expenditure incurred on software packages, on construction of compound

wall, on replacement of UPS and on replacement of printer as revenue expenditure. Hence, the present tax case appeals by the Revenue raising

the following substantial questions of law:

Whether in the facts and circumstances of the case, the Tribunal was right in holding that the expenditure incurred on the software package is a

revenue expenditure ?

Whether in the facts and circumstances of the case, the Tribunal was right in holding that expenditure incurred on construction of compound wall

in the place of barbed wire fencing is a revenue expenditure ?

Whether in the facts and circumstances of the case, the Tribunal was right that the expenditure incurred on replacement on UPS system is a

revenue expenditure ?

Whether in the facts and circumstances of the case, the Tribunal was right that the expenditure incurred on replacement of printer is a revenue

expenditure ?

3.1. The balancing point to answer these substantial questions of law lies on the celebrated test, as laid down by Lord Cave L.C. in Atherton v.

British Insulated and Helsby Cables Ltd. (1925) 10 TC 155, 192 (HL), whereunder the learned Law Lord stated as follows:

... 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 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.

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

Lord Radcliffe in Commissioner of Taxes 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''.

3.3. Based on the above views expressed by Lord Cave L.C. in the Artherton''s case, and by Lord Radcliffe in the case of Nchanga Consolidated

Copper Mines Ltd., referred supra, the Apex Court in Empire Jute Co. Ltd. Vs. Commissioner of Income Tax, , held that there is no 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. In the said case, the Apex Court

has further held as follows:

... 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 no 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 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, 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 andmechanically without regard to the particular facts and circumstances of a given case.

The Apex Court has further held that there may be cases where expenditure, though referable to or in connection with fixed capital, is nevertheless

allowable as revenue expenditure. An illustrative example would be of expenditure incurred in preserving or maintaining capital assets.

3.4. Reiterating its views expressed in the case of Empire Jute Co. Ltd. Vs. Commissioner of Income Tax, , the Apex Court in Commissioner of

Income Tax, Bombay City-I, Bombay Vs. Associated Cement Companies Ltd., Bombay, , held the expenditure incurred by the assessee-

company for supply of water to the Municipality, for providing water pipelines, for supplying electricity, etc. as deductible expenditure.

3.5. That apart, the Apex Court in Alembic Chemical Works Co. Ltd. : [1989]177ITR377(SC) , after referring to B.P. Australia Ltd. v.

Commissioner of Taxation of the Commonwealth of Australia [1966] AC 224 (PC), held that,

What is capital expenditure and what is revenue are not eternal verities but must need be flexible so as to respond to the changing economic

realities of business. The expression ''asset or advantage of an enduring nature'' was evolved to emphasise the element of a sufficient degree of

durability appropriate to the context.

3.6. The Karnataka High Court, in Commissioner of Income Tax Vs. Mysore Cements Ltd., , following the ratio laid down by the Apex Court in

Empire Jute Co. Ltd. Vs. Commissioner of Income Tax, and Commissioner of Income Tax, Bombay City-I, Bombay Vs. Associated Cement

Companies Ltd., Bombay, , held that the test of enduring nature applied to the purpose for which a particular expenditure is incurred is not a

conclusive test.

3.7. Further, this Court, in Commissioner of Income Tax Vs. T.V. Sundaram Iyengar and Sons (P.) Ltd., , held that the amount advanced by the

assessee for construction of houses under a welfare scheme was held to be in the nature of a revenue expenditure. The said view of this Court was

also affirmed by the Apex Court in the same case reported in Commissioner of Income Tax Vs. T.V. Sundaram Iyengar and Sons P. Ltd., .

3.8. The Bombay High Court in Zenith Steel Pipes Ltd. (No. 1) Vs. Commissioner of Income Tax, , where the assessee had put up a barbed wire

fencing at its factory premises in order to stop entry of animals and of outsiders, to regulate the entry of employees and to avoid disputes with

neighbours, accepting the case of the assessee that such wire fencing would not last for many years and the nature of advantage by safeguarding

the asset in the strict sense would merely facilitate the assessee''s trading operations and enable the management to conduct its business in a more

efficient and profitable manner while leaving the fixed capital untouched, held that the expenditure incurred on putting up of barbed wire fencing

was allowable as revenue expenditure.

3.9. That apart, this Court in an unreported decision in T.C. (A) No. 1048 of 2006 [between Commissioner of Income Tax v. Loyal Super

Fabrics], where the assessee claimed the expenditure incurred while shifting his factory premises from Kovilpatti to Cuddalore, as revenue

expenditure, which was disallowed by the Revenue, by judgment dated 21.8.2006, applying the law laid down by the House of Lords in Atherton

v. British Insulated and Helsby Cables Ltd. (1925) 10 TC 155, 192 (HL), referred supra, observed as follows:

... the expression ''enduring advantage'' availed by the respondent/assessee by shifting the factory from Kovilpatti to Cuddalore, is a relative term

with reference to the survival of the factory in the existing premises. Only if and when the survival in the existing place, but for the shifting, is

satisfied, the test of enduring advantage could be applied. If the very survival of the assessee factory in the existing place itself is at stake, the

question of applying the test of enduring benefit does not arise, because capital expenditure and revenue expenditure, being not eternal verities - a

true principle or belief especially one of fundamental importance, must need be flexible so as to respond to the changing economic realities of the

business as well as the survival of the business itself. Therefore, the test of enduring benefit is not a certain and conclusive test and it cannot be

applied blindly and mechanically without regard to the particular facts and circumstances of a given case, as sharply observed in the Artherton''s

case (cited supra).

The proposition that there cannot be any single rigid formula to find out whether a particular expenditure is revenue in nature or capital and that

the expenditure was incurred to obtain a benefit of an enduring nature is not the sole test in every case is, therefore, strongly supported by the

views expressed by the House of Lords in Atherton v. British Insulated and Helsby Cables Ltd. (1925) 10 TC 155, 192 (HL), by the Privy

Council in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. (1965) 58 ITR 241 (PC), by the Apex Court in Empire Jute Co.

Ltd. Vs. Commissioner of Income Tax, , as well as by the decision of several other High Courts, referred to earlier. With this background, we

propose to answer the substantial questions of law raised by the Revenue in the above appeals.

Question No. 1:

Whether in the facts and circumstances of the case, the Tribunal was right in holding that the expenditure incurred on the software package is a

revenue expenditure ?

5.1. For the assessment year 1995-96 to 1997-98, the assessee claimed the expenditure incurred on software packages as revenue expenditure,

but the same was disallowed by the revenue. The concept of enduring benefit must respond to the changing economic realities of the business. The

expenses incurred by installation of software packages in the present computer world, which revolves on the modern communication technology,

enables the assessee to carry on its business operations effectively, efficiently, smoothly and profitably. However, such software itself does not

work on a stand alone basis. It has to be fitted to a computer system to work. Such software enhances the efficiency of the operation. It is an aid

in the manufacturing process rather than the tool itself. Therefore, the payment for such application software, though there is an enduring benefit,

does not result in acquisition of any capital asset and it merely enhances the productivity or efficiency and hence, has to be treated as revenue

expenditure.

5.2. In view of the above, we hold that the Tribunal had rightly held the expenditure incurred on software packages as a revenue expenditure.

Question No. 2:

Whether in the facts and circumstances of the case, the Tribunal was right in holding that expenditure incurred on construction of compound wall in

the place of barbed wire fencing is a revenue expenditure ?

6.1. This issue relates to the assessment years 1995-96 and 1996-97, during which the claim of the assessee with respect to the expenditure

incurred on construction of compound wall in the place of barbed wire fencing as revenue expenditure was disallowed by the Revenue.

6.2. While chalking out the balancing point for deciding the substantial questions of law raised by the Revenue based on the ratio laid down by the

House of Lords, Privy Council, the Apex Court as well as by other High Courts, referred supra, we have already observed that there cannot be

any single rigid formula to find out whether a particular expenditure is revenue in nature or capital and that the expenditure was incurred to obtain a

benefit of an enduring nature is not the sole test in every case. Incidentally, we have also referred to the decision of the Bombay High Court in

Zenith Steel Pipes Ltd. (No. 1) Vs. Commissioner of Income Tax, , wherein it has been held that putting up of a barbed wire fence was a revenue

expenditure.

6.3. When an identical question whether the expenses incurred for replacing the old barbed wire fence around the compound by a compound wall

is a revenue expenditure or capital expenditure came up for consideration before the Karnataka High Court in Commissioner of Income Tax Vs.

B.V. Ramachandrappa and Sons, , applying the well settled principles laid down by the House of Lords, Privy Council, Apex Court as well as by

the decision of several other High Courts, referred supra, the Karnataka High Court held as follows:

... The purpose of the fence around the business premises was to prevent trespassers and thieves from entering into the business premises; the

dominant purpose was to safeguard the property in the premises. The materials in the premises were part of the business assets of the assessee. In

this context, the compound wall could not be treated in isolation. It was part of the business premises and when only a part of the premises was

replaced, prima facie, it would be a case of repair. The identity of the entire asset as a whole was not affected at all. The works carried out

contributed to the better and safer utilisation of the existing business premises asset. The works effected, when considered in proportion to the

entire business premises, did not result in significant replacement so as to alter the character of the business premises. Therefore, the Tribunal was

right in holding that the expenditure incurred on replacement of thatched roof with asbestos sheets and barbed wire fence with compound wall was

revenue expenditure.

6.4. Of course, our attention was brought to another decision of the Karnataka High Court in Senapathy Synams Insulations (P.) Ltd. Vs.

Commissioner of Income Tax, , where the assessee replaced the existing compound wall with a new foundation and claimed the expenditure

incurred on the construction of the wall as revenue expenditure. In the said case, the Karnataka High Court held that the Revenue had rightly

treated the expenditure as capital expenditure because the compound wall had been built to provide enduring safety to the assessee. But, we find

that the ratio laid down by the House of Lords, Privy Council, Apex Court as well as by other High Courts, referred supra, were not brought for

consideration by the Karnataka High Court while deciding the question raised in the said case.

6.5. Therefore, since the decision of the Karnataka High Court in Commissioner of Income Tax Vs. B.V. Ramachandrappa and Sons, , is fully

supported by the ratio laid down by the House of Lords, Privy Council, Apex Court as well as by other High Courts, referred supra, in our

considered opinion, in the case on hand, the Tribunal has rightly held that the expenditure incurred on the construction of the compound wall in the

place of barbed wire fencing is a revenue expenditure.

Question Nos. 3 and 4:

Whether in the facts and circumstances of the case, the Tribunal was right that the expenditure incurred on replacement on UPS system is a

revenue expenditure ?

Whether in the facts and circumstances of the case, the Tribunal was right that the expenditure incurred on replacement of printer is a revenue

expenditure ?

7.1. The reasons that weighed this Court in deciding the issue whether the expenditure incurred for replacement of software packages as revenue

expenditure as discussed in question No. 1 above, are applicable in all fours to questions 3 and 4 also.

7.2. That apart, this Court in Commissioner of Income Tax v. Southern Roadways Ltd. (2006) 282 ITR 379, applying the ratio laid by the Apex

Court in the case of Alembic Chemical Works : [1989]177ITR377(SC) , cited supra, held that upgradation of computers by changing certain

parts, thereby enhancing the configuration of the computers for improving their efficiency, but, without making any structural alterations is not of an

enduring nature and hence, the expenditure incurred by the assessee has to be treated as revenue expenditure. The said view was again followed

by this Court in Commissioner of Income Tax Vs. Soutehrn Roadways Ltd., .

7.3. In view of the above settled proposition, we hold that the Tribunal has rightly held the expenditure incurred on replacement of UPS and printer

as a revenue expenditure.

For the foregoing reasons, we find no question of law much less substantial question of law that arises for our consideration in these appeals.

Accordingly, the tax case appeals stand dismissed. Consequently, M.P. Nos. 1 of 2007 in T.C.(A) Nos. 701 to 704 of 2007 are also dismissed.