ORDER
B.L. Khatri, A.M.
1. This appeal by the Revenue is directed against the order of CIT(A), Udaipur, dt. 20th Feb., 1994, for asst. yr. 1991-92. The appellant-revenue agitated on various grounds which are discussed as under :
2. Ground No. 1 : The learned CIT(A) has erred in deleting the disallowance of Rs. 15,21,30,864 being expenditure on construction of Ghosunda Dam, by holding that the expenditure was of revenue in nature, whereas the expenditure was of capital in nature.
3. The brief facts of the case are that the assessee claimed deduction under Section 37 on account of investment in construction of Ghosunda Dam as revenue expenditure in the revised return. The Ghosunda Dam is located at Appawas village and supplies water to its Chanderia smelter. The AO disallowed the same on ground that the expenditure on construction of Ghosunda Dam was of capital nature. He referred to the judgment of Hon’ble Supreme Court in the case of Devidas Vithaldas & Co. v. CIT (1972) 84 ITR 277 (SC) which laid down the principle that in a case where expenditure is for bringing into existence as asset or an advantage of enduring nature and has made once and for all meaning thereby an expenditure made once and for all for procuring an enduring benefit would be of capital in nature. The CIT(A) held that the company had decided to put up the super smelter which required large availability of water for day-to-day operation. Unless and until water is available, the super smelter would not function and would not be able to produce any items. Therefore, the water was a necessary ingredient of the process. The State Government was requested to identify locations where water would be available at Ghosunda and accordingly the assessee constructed part of the dam. The dam was not an asset owned by the assessee-company but was the asset owned by the State Government. The State Government has constructed the dam initially and the assessee had modified the said construction. The share of the water is also to be decided by the State Government. Under the Constitution only the State Government and Central Government have a right over water and its sources. A host of case laws were relied upon as mentioned at p. 2 of the CIT(A)’s order. Keeping in view that the expenditure made by the assessee facilitated that the business should go on more profitably or to make earning of the profit that would be a revenue expenditure. It does not make any change in the profit-earning structure of the company nor does it bring into existence any asset of capital nature. As such these expenses are treated as revenue expenditure by the CTI(A).
4. The learned Departmental Representative on the basis of the order of AO contended that the assessee has not claimed this expenditure as revenue in nature in the original return and it is also pertinent to mention that in its books of account the assessee has treated the investment as capital expenditure. The learned Departmental Representative referred to the cases reported in 114 ITR 103 (Cal) (sic), CIT v. North Dhemo Co. Ltd. (1977) 106 ITR 592 (Cal), CIT v. Ashok Leyland Ltd. (1969) 72 ITR 137 (Mad), CIT v. Ashok Leyland Ltd. (1972) 86 ITR 549 (SC) and it was contended that the AO has rightly treated the expenditure as in the nature of capital expenditure.
5. The learned authorised representative has submitted that the expenditure was incurred for effecting structural alterations in the Gosunda Dam being constructed by the Government so as to facilitate the inflow of water to the smelter unit of the assessee-company. So far as the construction of the dam is concerned, the entire expenditure incurred thereto has been borne by the State Government. The assessee constructed for structural alterations only so as to make available for the smelter unit, water in an adequate quantity. It is settled with the State Government that the assessee would have no preemptive right over the water and that the manner of sharing and distributing water would be at the discretion of the State Government. Under Constitutional provisions, only State and Central Governments have a right over water resources and their operation. The assessee can be said to have incurred an expenditure that has facilitated or fortified the acquisition of raw material. No capital asset or ownership right has been acquired in the process. Also, no benefit of an enduring nature can be said to have accrued to the assessee through the arrangement nor can the creation of any profit earning capacity be pointed out. In such circumstances, the expenditure incurred on doing business more efficiently, conveniently and economically is necessarily revenue expenditure. The AO was wrong in relying upon the apex Court decision in 84 ITR 277 (sic). He failed to note that the cited decision had been partly reversed in L.G. Sugar Factory & Oil Mills (P) Ltd. v. CIT (1980) 125 ITR 293 (SC). The learned authorised representative has relied upon the following cases:
(1) Lakshmiji Sugar Mills Co. (P) Ltd. (1971) 82 ITR 376 (SC);
(2) Assam Bengal Cement Co. Ltd. v. CIT (1955) 27 ITR 34 (SC);
(3) Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1 (SC);
(4) CIT v. Associated Cement Companies Ltd. (1988) 172 ITR 257 (SC);
(5) Mohanlal Hargovind of Jubbulpore v. CIT (1949) 17 ITR 473 (PC);
(6) 125 ITR 293 (SC) (supra);
(7) National Organic Industries Ltd. v. CIT (1993) 203 ITR 410 (Bom); and
(8) CIT v. Bongaigaon Refinery & Petro-Chemicals (1996) 222 ITR 208 (Gau).
6. We have considered the rival submissions. The Ghosunda Dam has been constructed by the State Government. The assessee made payment for alterations of the dam. The assessee is sharing the water with the State
Government without having any right or ownership in the dam or the water. The assessee has only right to share the water. This process will help the assessee in running the smelter and also in earning more profit. It was observed by the Hon’ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT (supra) that there may be cases where expenditure, even if incurred for obtaining an 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 disallowed 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, 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. In this case reference may also be made to the judgment of Hon’ble Supreme Court in the case of Alembic Chemical Works Co. Ltd. v. CIT (1989) 177 ITR 377 (SC). It was observed in this case that the ides of “once for all” payment and “enduring benefit” are not to be treated as something akin to statutory conditions; nor are the notions of “capital” or “revenue” a judicial fetish. What is capital expenditure and what is revenue are not eternal verities but must needs 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.
There is also no single definitive, criterion which, by itself, is determinative whether a particular outlay is capital or revenue. The “once for all” payment test is also inconclusive. 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. In a given case, the test of “enduring benefit” might break down. As regards the plea of the Revenue that the assessee had claimed deduction through revised return and given different treatment in the books of account, it was held by the Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT (1997) 227 ITR 172 (SC) that the accountants might have taken some other view but accountancy practice was not necessarily good law. Keeping in view the facts of the case and the legal position, explained above, we have come to the conclusion that the object and effect of this expenditure is facilitating the assessee’s trade operation and enabling the management to conduct business more efficiently or more profitably. Therefore, we decline to interfere with the order of the learned CIT(A).
7. Ground No. 2 : Disallowance of Rs. 4,07,522 by reducing the disallowance of Rs. 15,40,677 to Rs. 11,33,155 and observing that the rent is allowable expenditure in view of provisions of Section 30.
8. Regarding the guest-house expenses the plea of the authorised representative is that these expenses were covered by provision of Section 37(4) r/w Section 37(1) of the Act. The company’s guest-houses are actually transit accommodation and rest house. The employees stay in this transit house during official tour and they are paid only part D.A. as accommodation is provided by the company. At pp, 2 and 3 of the order, the CIT(A) on the basis of the decision in the earlier year had allowed the claim of the assessee under Section 30 of the Act as under :
Rs.
(1) 80 per cent of Rs. 4,80,340
3,84,272
(2) Rent of guest-house
23,250
4,07,522
These expenses had been allowed on the basis of the decision of the CIT(A) for the asst. yr. 1990-91 through order dt. 12th Feb., 1993. After detailed discussion at pp. 6 to 9 of the order it was held by the CIT(A) that the rent of the guesthouse was an allowable expenditure under Section 30 of the Act.
9. The learned authorised representative supported the order of the CIT(A) and relied upon the following case laws as under:
(1) CIT v. Chase Bright Steel Ltd. (1989) 177 ITR 124 (Bom);
(2) Kelvinator of India Ltd. v. Dy. CIT (1996) 56 ITD 251 (Del);
(3) State Bank of Bikaner & Jaipur v. Dy. CIT (1999) 65 TTJ (Jp) 480 : (2000) 74 ITD 203 (Jp); and
(4) CIT v. Expo Machinery Ltd. (1999) 190 ITR 576 (Del).
It was observed in the case of Kelvinator of India Ltd. v. Dy. CIT (supra) that there is no consensus view of various High Courts on the issue of guest-house expenses. The Gujarat High Court in CIT v. Ahmedabad Mfg. & Calico Printing Co. Ltd. (1992) 197 ITR 538 (Guj) and the Bombay High Court in CIT v. Chase Bright Steel Ltd. (supra) have taken the view that the disallowance under Section 37(4) shall the restricted to the expenditure allowable under sub-s. (1) or (3) of Section 37 only and the expenditure admissible under other sections, say Section 30 (rent) or Section 32 (depreciation) is not disallowable under Section 37(4), though the expenditure may be related to a guest-house. On the other hand, the Bombay High Court in CIT v. Ocean Carriers (P) Ltd. (1995) 211 ITR 357 (Bom) has held that such expenditure is disallowable. Thus, it is settled law that when two interpretations are possible, the interpretation favourable to the assessee should be accepted. Accordingly adopting the view favourable to the assessee, rent paid on guest-house was held as allowable deduction. Therefore, Keeping in view the legal position as above, we do not consider it necessary to interfere with the order of the CIT(A).
10. Ground No. 3 : Deletion of disallowance of Rs. 45,26,220 made under Section 43B on account of unpaid royalties. It was contended before the CIT(A) that royalty was neither tax nor duty, hence not covered under Section 43B. The learned Departmental Representative referred to the judgment of Madhya Pradesh High Court in the case of CIT v. Gorelal Dubey (1998) 232 ITR 246 (MP).
11. The learned authorised representative explained that the unpaid royalties have been disallowed under Section 43B by the AO. The learned CIT(A) has rightly allowed the relief on the ground that it is neither a tax nor a duty, neither cess nor fee. The payment does not fall within the prohibition contained in Section 43B. The learned counsel for the assessee relied upon the following case laws :
(1) Ismail & Sons v. ITO (1992) 43 TTJ (Jabalpur) 81 : (1992) 40 ITD 178 (Jabalpur);
(2) N.V. Patel v. ITO (1993) 67 Taxman 167 (Ahd).
12. We have considered the rival submissions. It was held by the Hon’ble Supreme Court in the case of India Cement Ltd v. State of Tamil Nadu (1991) 188 ITR 690 (SC) that royalty on mineral rights is a tax, and as such a cess on royalty being a tax on royalty. Therefore, keeping in view the cases of India Cement Ltd. v. State of Tamil Nadu (supra) and CIT v. Gorelal Dubey (supra), we hold that the royalty or cess or royalty, is tax which falls under the prohibition provided in Section 43B of the IT Act. Therefore, the order of AO is sustained and that of the CIT(A) is reversed.
13. Ground No. 4 : Disallowance of Rs. 1,24,36,000 made by exclusion of interest of Government loan and head office expenses. In Schedule-17 of the annual report, it has been stated that interest on cash credit arrangement on public deposit is recognised as an element of cost with effect from this year on publication of accounting system in December, 1986, this system had decreased the value of inventory by Rs. 124.36 lacs. This issue has been examined by Dy. CIT(Asst) at p. 3 of the assessment order dt. 10th March, 1992, for the asst. yr. 1989-90. The system of valuation of inventory of stock has already been approved in that year and there are no distinguishing facts in this year which would entitle the departure from the views of the AO in 1989-90. Therefore, the CIT(A) has deleted this addition. The learned Departmental Representative has relied on the order of the AO for the year under appeal. The learned authorised representative explained that while evaluating the closing stock, the interest on cash credit arrangement and public deposit was not considered an element of cost. In this way, according to the AO the inventory was undervalued to the extent of Rs. 124.36 lacs. The AO thought that such exercise reduced the profit for the subject year by a like sum. He is wrong in so holding. Stock value is always a plus-minus figure. Any increase or decrease in closing stock will cause corresponding decrease or increase in opening stock for the next year. So at worst, even if the AO’s objections are presumed to have any substance, the figure is purely compensatory and nothing beyond that. If the method adopted in this year has caused a short profit of Rs. 124.36 lacs, to that very extent, in the immediately succeeding year, there is an identical benefit to the Revenue. In circumstances such as these, a myopic view is not proper. The view required to be taken is whether the exercise is in conformity with commercial practice and accounting principles. If that test is applied, the conclusion as reached by the CIT(A) is unassaible. Incidentally, returns of both the years have been assessed at loss. On the issue of inventory valuation, the AO does not dispute the advisability of the method. His only objection is to the timing of the method. Objection has been taken on the ground that such method as now adopted by the assessee ought to have been applied three to
four years earlier when relevant guidelines were actually issued by the Institute of Chartered Accountants of India. The AO failed to note that the assessee is a Government company. Where any alteration or change requires a series of approvals within and outside the organisation, including the Ministry of Mining. It is for this reason that changes have been instituted only in the subject year. This however cannot detract from the merits of the claim. He relied on the following case-laws :
(1) Forest Industries Travancore Ltd. v. CIT (1964) 51 ITR 329 (Ker);
(2) Indo Commercial Bank Ltd. v. CIT (1962) 44 ITR 22 (Mad);
(3) CIT v. Carborandum Universal Ltd. (1984) 149 ITR 759 (Mad); and
(4) Dy. CIT’s order dt. 10th March, 1992 for asst. yr. 1989-90.
14. We have considered the rival submissions. We agree with the objection of
the learned CIT(A) that the AO has not given cogent and sufficient reason for
adopting different method or approach than that adopted by the AO in the
past. The assessee has followed the guidelines issued by the Institute of
Chartered Accountants of India. Therefore, we sustain the impugned order of
the CIT(A) on this issue.
15. Ground No. 5 : Deletion of addition of Rs. 5,16,06,000 made on account of provisions for losses in stores, stock, raw material and finished goods. This issue has been discussed by CIT(A) in the appellate order in Appeal No. 698/1992-93 dt. 28th Feb., 1994, for the asst. yr. 1989-90. The learned Departmental Representative has relied upon the order of AO and the learned authorised representative submitted that the COD has not accorded permission to the Department for pursuing this ground in asst. yrs. 1989-90 and 1990-91. So far as the subject year is concerned, there is an approval by the COD. What is of special significance here is that due to the nature of the manufacturing process and the status of finished goods, at times, an item-by-item physical verification is not possible. Therefore, an empirical method is adopted for valuation, which is always corrected subsequently on the results of physical verification. Such method has consistently been followed year after year. The auditors and also the C&AG have always approved such method. It is for the first time in this year that such an objection has reached the level of the Hon’ble Tribunal. It is submitted that the application of this system is a regular and time-honoured practice of the assessee. In the year 1983-84, the matter was considered in depth and approved by the AO himself. Taking the totality of facts into account, it was submitted that the order of the CIT(A) on this point is correct and valid and requires no interference.
16. We have considered the rival facts. We find that the issue has also been discussed by the learned CIT(A) in appeal No. 273/1992-93, order dt. 7th Sept., 1992, for asst. yr. 1989-90. This issue has been discussed at length from pp. 2 to 7 of the order of CIT(A). Specific reasons had been mentioned from pp. 4 to 7 of the order. Keeping in view the reasons given by CIT(A) for asst. yr. 1989-90, we decline to interfere with the order of the CIT(A) on this ground.
17. In the result, this appeal is partly allowed.