JUDGMENT
P.P. Naolekar, C.J.
1. In response to a notice issued under Sections 143(2) and 142(1) of the Income-tax Act, 1961, the assessee entered appearance. The assessee-company is engaged in the business of manufacture of asbestos sheets. The assessee-company claimed that the transport subsidy being in the nature of capital receipt should be excluded from the total income. The assessee-claimed that the transport subsidy is granted with reference to the cost of transporting raw materials and finished goods to and fro from the backward areas. The Assessing Officer has held the transport subsidy to be a revenue receipt and made it taxable as it has not been exempted under any relevant provision of the Income-tax Act, 1961. The assessee has also claimed the expenditure incurred by him of Rs. 6,93,729, in connection with survey and feasibility report and various technical services for setting up the cement plant, to be a revenue expenditure on the ground that the main business of the assessee is to manufacture the asbestos sheets. The assessee wanted to set up the mini cement plant for feeding the existing need of the asbestos plant and in the process has incurred the expenses in connection with survey and feasibility report and various technical services for setting up the mini cement plant, which of course, would not materialise as the Government has not permitted setting up of the mini cement plant. As per the assessee, the proposed cement plant was completely interconnected with the existing business of manufacture of the asbestos sheets and the two businesses, namely, manufacture of asbestos sheets and the production of cement, which is the main raw material for manufacture of the asbestos sheets, are so interconnected as to treat them as one and the same business of the assessee. The expenditure incurred by the assessee for the ground work to set up the mini cement plant is for the purposes of carrying on the business more usefully and thus should be allowed as a revenue expenditure.
2. The Assessing Officer has held that the expenses incurred for setting up the mini cement plant were not interconnected with the existing plant for manufacture of the asbestos sheets so as to make it a part of the same business. The proposed cement plant was a separate plant which the assessee operated independently and thus it shall be constituted as a separate business distinct from the asbestos sheet manufacturing business which the assessee-company is carrying on for the last so many years. The expenses incurred by the assessee towards various technical services in connection with setting up of the mini cement plant are, therefore, in the nature of capital expenditure and the assessee is not entitled to any deduction of the expenses incurred.
3. Aggrieved by the findings arrived at by the assessing authority the assessee preferred an appeal before.the Commissioner of Income-tax (Appeals). The appellate authority has held that the transport subsidy does not come within the ambit of taxable income and thus it has to be excluded. The appellate authority has accepted the contention of the assessee that the expenses incurred by the company are for prospecting and setting up of a cement plant to enable it to obtain the cement, which is the basic raw material for production of asbestos. Since common funds and common management was involved it can be safely held that the asbestos plant and the mini cement plant would be interconnected, interlinking and interdependent and, therefore, the expenses incurred in that regard should be treated as revenue in nature. The Assessing Officer was directed to verify such expenses and the same be deducted from the total income of the assessee-company.
4. Aggrieved by the order passed by the Commissioner of Income-tax (Appeals), the Revenue preferred appeal before the Income-tax Appellate Tribunal. Considering the question of the transport subsidy it is held by the Tribunal that as has been held by the High Court, subsidy is a generous act of the State, or rather a grant or gift to the assessee for the sole purpose of assisting the assessee for the growth of industries and, therefore, cannot be considered as a trading or revenue receipt liable to be taxed and has confirmed the order passed by the Commissioner of Income-tax (Appeals). Considering the other question as regards the expenditure incurred by the assessee for preparation of the feasibility and technical report of the proposed mini cement plant it was held by the Tribunal that it appears from the record that the assessee has incurred the expenses for searching the site and preparing the feasibility report for setting up a mini cement plant. From the record it appears that the intention for the proposed mini plant was not to sell the cement in the market but was to supply the cement as a raw material to the main plant. So it is to be considered as an ancillary of the main plant. The Tribunal has accepted the finding of the Commissioner of Income-tax (Appeals) that both units were under common management and common funds and common account and so they cannot be treated as a separate business of the assessee. The Tribunal found no infirmity in the order of the Commissioner of Income-tax (Appeals) who had treated the said expenditure as revenue in nature and the order of the Commissioner of Income-tax (Appeals) was upheld. Aggrieved, the Revenue preferred further appeal in the High Court and the following substantial questions of law were framed :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified and correct in law in confirming the order of the first appellate authority that the transport subsidy does not come within the ambit of taxable income ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified and correct in law in holding that transport subsidy cannot be considered either as a trading receipt or as a revenue receipt liable to be taxed ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified and correct in law in upholding the order of the first appellate authority treating the project prospecting expenses incurred by the asses-see as revenue in nature ?”
5. We shall take up questions Nos. 1 and 2 framed by the High Court as they relate to the transport subsidy. The question for determination is whether the transport subsidy is a revenue receipt or a capital receipt and whether the assessee is liable to be taxed treating it as a revenue receipt. We find that the law on subsidy is settled by the apex court in Sahney Steel and Press Works Ltd. v. CIT [1997] 228 ITR 253, wherein it has been held that if payments in the nature of subsidy from public funds are made to the assessee to assist him in carrying on his trade or business, they are trade receipts. The character of the subsidy in the hands of the recipient–whether revenue or capital–will have to be determined, having regard to the purpose for which the subsidy is given. The source of the fund is quite immaterial. However, if the purpose is to help the assessee to set up its business or complete a project the monies must be treated as having been received for capital purposes. When the monies are given to the assessee for assisting him in carrying out the business operations and the money is given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade and the subsidies which are of revenue nature would have to be taxed. When the subsidies were granted only after the setting up of the new industry and commencement of production such subsidies would only be treated as assistance given for the purpose of carrying on of the business of the assessee and the subsidies will be treated as revenue nature and would have to be taxed accordingly. In the present case we do not find that any of the taxing authorities has considered the question of the purpose of the subsidy given to the appellant and how the subsidy has been utilised by the assessee, before determination of the question whether it is capital subsidy or revenue subsidy. In the absence of any decision of any of the taxing authorities on the purpose for which the subsidy is given and utilisation of the subsidy by the assessee, the nature of receipt cannot be ascertained. The decision given by the taxing authorities in the matter of subsidy, is a decision without there being any factual foundation, and thus we feel it necessary to remand the case to the assessing authority to consider the question of subsidy in the light of the decision in Sahney Steel and Press Works Ltd.’s case [1997] 228 ITR 253 (SC).
6. We now propose to take up the second question whether the expenditure incurred towards project prospecting expenses would be a revenue expenditure, for it is necessary for us to determine the nature and the purpose of the expenditure incurred. The apex court in Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 has drawn a fine distinction between revenue expenditure and capital expenditure. It is held that in cases where the expenditure is made for initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. The question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If, on the other hand, it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to producing profits it is revenue expenditure. The aim and object of the expenditure would determine the character of the expenditure whether it is capital expenditure or revenue expenditure. The source or the manner of the payment would then be of no consequence. The apex court further held (page 45) : it has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down a test which would apply to all situations. One has therefore got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter event only it would be a deductible allowance. The question has all along been considered to be a question of fact to be determined by the income-tax authorities on an application of the broad principles laid down above and the courts of law would not ordinarily interfere with such findings of fact if they have been arrived at on a proper application of those principles. From the above authority it is clear that the nature of the expenditure has to be judged taking into consideration the general business factors and the aim and object for which the expenditure was incurred. It is for the taxing authorities to ascertain the nature of expenditure on the basis of the materials placed before it and determination by the taxing authority of the nature of expenditure would be a question of fact and normally shall not be disturbed by the court in appeal.
7. In Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1, the apex court has further elaborated the nature of expenditure incurred by the assessee and said there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, 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 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. What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. The question must be viewed in the larger context of business necessity or expediency. Thus every expenditure incurred for securing advantage of an enduring nature would not, in all cases, be held to be a capital expenditure and it would be considered by the courts keeping the business point of view.
8. Applying the test laid down in the aforesaid decisions we are to consider whether the expenditure incurred by the assessee for preparation of the feasibility and technical report of the proposed mini cement plant would be a capital expenditure or revenue expenditure. The taxing authorities have arrived at the finding that the feasibility report for the proposed mini cement plant was for the purpose of setting up a mini cement plant to make supply of the cement manufactured therein, as raw material to the existing unit of asbestos sheet plant. The taxing authorities have also reached the conclusion that the proposed mini cement plant which would come into existence and the existing plant are both under the common management and common fund and common account. There is complete interconnection, interlacing and interdependence of both the units. This is a finding of fact arrived at by the revenue authorities. Determination of the question of the nature of expenditure has all along been considered to be a question of fact which, will be determined by the authorities. There is no manner of doubt that the expenditure has been incurred for setting up a mini cement plant, which if it comes into existence, is an advantage of enduring benefit. But when the mini cement plant has not come into existence it cannot be said that the expenditure incurred for project report is an expenditure on capital account and it cannot be treated as an expenditure on the revenue account. The feasibility report for the said mini cement plant is for the purpose of finding out the advantage and enabling the management to find out whether the business of the asbestos sheet manufacturing unit can be carried out more efficiently or more profitably by setting up the mini cement plant. It is apparent that the feasibility report has not brought into being new fixed capital, simple preparation of the feasibility report for a mini cement plant would not result in bringing into existence a new capital. Preparation of the feasibility report is to find out the viability Of establishment of a mini cement plant, which in turn would supply and maintain consistent supply of raw material to the already established asbestos plant of the assessee. The endeavour was made so as to find out ways and means to carry on the assessee’s business more profitably and more efficiently, in the world of competition such exercises are required to be undertaken by businessman to withstand competition and would certainly be expenditure incurred to meet business necessity and expediency. The expenses incurred by the assessee for preparation of the feasibility report to bring into existence the mini cement plant would be of revenue nature and, therefore, in our opinion, the assessee is entitled to deduct the expenses incurred. The question is answered accordingly.
9. For the reasons stated above the matter is remanded to the assessing authority to consider the question of subsidy in the light of the decision of the apex court in Sahney Steel and Press Works Ltd.’s case [1997] 228 ITR 253.