04 September 2011
In order to know whether plantation expenditure is a capital or revenue in nature, depends up on the fact that the future economic benefits relating to the expenditure should flow to the enterprise year to year and not restricted to a particular year.Hence, at the outset one can say that nothing wrong to capitalize this expenditure other than a company with plantation objective.
But very often these types of expenditure are not treated as capital exp but as a (Deferred) Revenue Expenditure on the ground that the exp is too heavy to go in a single year Profit and loss account which will affect the true and fair view of profit position of that entity.
In the instant case depending the capital base of the company the treatment is done accordingly.
Miscellaneous Civil Case No 42 of 1988, decided on December 13, 1995
IN THE MADHYA PRADESH HIGH COURT - INDORE BENCH
G M Chaphekar and Smt Meena Chaphekar for the assessee
D D Vyas for the Department
JUDGMENT
The judgment of the court was delivered by
A R TIWARI J - In Miscellaneous Civil Case No 81 of 1985 (see [1988] 171 ITR 163), this court had directed the Tribunal on August 19, 1987, to state the case and to refer the undernoted question of law for our opinion (at page 164 :
Whether, on the facts and in the circumstances of the case, the expenditure of Rs 22,650 incurred by the assessee on plantation in the factory premises and residential quarters of the company was allowable as deduction in terms of sub-section (1) of section 37 of the Income-tax Act, 1961 ?
Briefly stated, the facts of the case are that the applicant is a public limited company registered under the Companies Act, 1956, and carries on the business of manufacturing graphite electrodes, graphite anodes and other allied products In the course of its assessment for the assessment year 1979-80, the applicant claimed deduction of Rs 22,643 being expenditure on plantations as business expenses The ITO disallowed the claim on the ground that the expenditure was in the nature of capital expenditure The appeal proved to be vainful and further appeal before the Tribunal did not fluctuate the fortunate Copies of the orders are annexuresA, B andC AnnexureA is the order of the assessment in Case No 2-H/IAC (Asstt) under section 143(3) of the Income-tax Act, 1961 AnnexureB is the order dated October 1, 1982, passed in Appeal No IT-75 of 1982-83 AnnexureC is the order of the Tribunal passed on July 5, 1984, in ITA No 1456/(Ind) of 1982 Aggrieved by the order, the applicant sought reference without success It then filed Miscellaneous Civil Case No 81 of 1985 (see [1988] 171 ITR 163) under section 256(2) of the Income-tax Act, 1961 This court accepted the plea and directed the reference of the aforesaid question of law This is how the Tribunal referred the question
We have hear Shri G M Chaphekar, learned senior counsel, with Smt Meena Chaphekar, for the applicant, and Shri D D Vyas, learned counsel for the Revenue
Shri Chaphekar submitted that the residential quarters are located in the premises of the factory of the applicant and the plantation in the factory premises and around residential quarters in the premises of the factory was done to keep the atmosphere pollution-free He said that this activity was not unrelated to the business of the applicant and as such the expenditure was required to be treated as revenue expenditure He, therefore, urged that the Tribunal committed an error of law in not allowing the deduction in terms of section 37(1) of the Income-tax Act, 1961
Shri Vyas, on the other hand, dubbed the aforesaid contention as non-meritorious and contended that the question deserves to be answered in favour of the Revenue
We find that the Tribunal observed in the order (AnnexureC ) as under :
If the plantation had been of seasonal flowers or of temporary plants like roses, we would have had no hesitation in holding the expenditure to be of a revenue nature
In Zenith Steel Pipes Ltd (No 1) Vs CIT [1990] 185 ITR 126 (Bom), it was held that the expenditure incurred on the wire fencing was allowing able as revenue expenditure
In Teksons (P) Ltd Vs CIT (No 2) [1979] 120 ITR 745 (Bom), it was held that the expenditure incurred by the assessee for preparation of the playground was incidental to the activities of the assessee and was a revenue expenditure allowable under section 37(1) of the Act
The test whether a particular expenditure is a capital expenditure or a revenue expenditure is of no universal application In Kanga and Palkhivala’s The Law and Practice of Income-tax, (Volume I), edition 1990, the learned authors observed as under (at page 669 :
It is not well-settled as a result of numerous cases which have been noted at appropriate places that none of the tests dealt with above for distinguishing between capital and revenue expenditure is paramount or conclusive or of universal application Periodic payments-particularly those which are based on turnover or profit, or which take the form of rent or licence fee-and which are not related to any pre-determined lump sum, may be deductible as revenue expenditure even if they are made for the initiation of a business, or represent consideration for acquiring a capital asset or an advantage of enduring benefit to the business As the Supreme Court held in Gotan Lime Syndicate Vs CIT [1966] 59 ITR 718 ‘It is not the law that, in every case, if an enduring advantage is obtained, the expenditure for securing it must be treated as capital expenditure’ This view has been reaffirmed by the Supreme Court in Empire Jute Co Ltd Vs CIT [1980] 124 ITR 1 Even payments made for plant may be on revenue account
The Income-tax Appellate Tribunal in the case of Hindustan Monark (P) Ltd Vs ITO [1990] 32 ITD 13 (Delhi), held that expenses incurred on planting trees and maintaining a garden in the factory premises and labour quarters in order to avoid pollution of environment and create congenial atmosphere, is allowable as business expenditure
Indisputably the aforesaid expenditure did not result in any gain to the applicant-assessee and did not enhance the value of the establishment The expenditure was intended to make the atmosphere pollution-free The Tribunal did not record any categorical finding that the expenditure was to result in any appreciation of the assets or was unrelated to the business activities of the applicant-assessee It is now popularly voiced that plantation in such factory is necessary to avoid pollution of environment and create a congenial atmosphere The Tribunal disallowed the expenditure on wrong premises and in fact the order is half-hearted The Tribunal held that only plantation of temporary nature would be of a revenue nature This logic is difficult to comprehend
In our view, the expenditure incurred on plantation in the facts and circumstances was not liable to be classified as capital expenditure
Section 37(1) of the Act provides as under :
37 General, - (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ‘Profits and gains of business or profession’
We find that the amount expended was wholly and exclusively connectable with the purposes of the business and was not in the nature of capital expenditure of personal expenses of the assessee That being so, the Tribunal committed an error in not allowing the expenditure as deductive in terms of sub-section (1) of section 37 of the Income-tax Act, 1961
In the result, we answer the question in the affirmative, ie, in favour of the assessee and against the Revenue
The reference is answered accordingly
A copy of this order shall be sent to the Tribunal under the seal of the court and the signature of the Registrar in terms of section 260(1) of the Act
Counsel fee for each side is, however, fixed at Rs 750, if certified
CAclubindia
