Prior Period Expense allow ability: A liability, though pertaining to earlier year, is said to accrue when it actually crystallises, is ascertainable and legally enforceable.
ITAT, Jaipur Bench in the case of Wolkem India Ltd. Vs. Deputy Commissioner Of Income Tax has made following key observation which is of very high relevance in day to day business operator.
1. Cost of television installed at employees’ club is a legitimate business expense and is allowable.
2. Consultation fees paid in connection with renewal of mining lease is revenue expenditure. In the present case, the mining lease was already with the assessee, it was merely extending the term and to facilitate the extension, exhaustive technicalities had to be taken care of as is evident from the nature of services the consultants provided. Looked at from the commercial point of view, it was to help the assessee in its already existing business. It was not the case of payment for acquisition of a capital asset nor was it case of paying a premium to the lessor for extending the lease. The facts of the present case drive one to conclude that the expenditure incurred by the assessee was on revenue account and the deduction thereof be allowed.—CIT vs. Cinceita Pvt. Ltd. (1982) 28 CTR (Bom) 250 : (1982) 137 ITR 652 (Bom) and Plantation Corpn. of Kerala Ltd. vs. Commr. of Agrl. IT (1994) 205 ITR 364 (Ker) relied on; CIT vs. New India Mining Corporation (P) Ltd. (1987) 63 CTR (Bom) 93 : (1987) 168 ITR 431 (Bom), H. Dear & Co. Pvt. Ltd. vs. CIT (1966) 60 ITR 546 (SC) and Rajasthan Construction Pvt. Ltd. vs. CIT (1983) 36 CTR (Bom) 222 : (1984) 148 ITR 61 (Bom) distinguished
3. A liability, though pertaining to earlier year, it is said to accrue when it actually crystallizes, is ascertainable and legally enforceable. In the instant case, the liability crystallized only in March, 1988. Hence the ground taken by the AO for disallowance is not tenable. As regards the contention of the CIT(A) that it is a statutory liability and hence falls within the purview of s. 43B, suffice it to say that these are purely electricity charges incurred for the consumption of electricity. Merely because the liability is towards a statutory body, any payment made or to be made to it cannot be termed as a statutory liability. Hence his contention is also rejected. However, as mentioned above, a liability accrues when it is fairly ascertainable. In this case, the liability can be said to have been ascertained only on receipt of the bill and not before that. As the liability does not pertain to the asst. yr. 1988-89 the addition is sustained. Since the bills for disputed electricity charges were issued in March, 1988, the liability accrued to the assessee and hence shall be allowed as a deduction in the year 1989-90. Since electricity bill for an earlier period was received in March, 1988, deduction could be allowed in asst. yr. 1989-90 and not in asst. yr. 1988-89, accounting period of assessee having ended on 31st Dec., 1987.
4. Replacing old electric motors by new ones cannot be termed as substantial replacement of an equipment and the expenditure is allowable.
5. Payment to advocate for consultation about mining lease is revenue expenditure.
The complete order is produced hereunder:
WOLKEM PRIVATE LTD. vs. DEPUTY COMMISSIONER OF INCOME TAX
M.A.A. Khan, J.M. & Pradeep Parikh, A.M.
ITA Nos. 444/Jp/1990 & 957/Jp/1991; Asst. yrs. 1988-89 & 1989-90
Legislation Referred to
These appeals and cross-appeal pertain to two assessment years but as some of the issues are common, they are disposed of by this combined order for the sake of convenience.
(i) Asst. yr. 1988-89
2. The first ground in this appeal relates to the disallowance of Rs. 28,166 being the cost of T.V. installed at the club meant for staff and workers.
3. It is submitted by the learned counsel for the assessee that the mines at which the assessee is working are located in a very hilly and remote area. The workers themselves have set up a club for their own recreation. The assessee, therefore, as a gesture got a T.V. installed there at a cost of Rs. 35,207. The Assessing Officer (AO) treated it as a capital expenditure and disallowed the same. However, he allowed depreciation of Rs. 7,041 on it thereby making a net addition of Rs. 28,166. The learned CIT(A) did not think it fit to interfere with the action of the AO.
4. The learned counsel contended that in present times these are usual welfare expenses which a prudent businessman has to incur in the ordinary course of business and considering the facts of this case in particular, it has to be looked at favorably. Moreover, he submitted that the T.V. has been given away to the club and the ownership does not remain with the assessee. Therefore, not depreciation, but the entire cost should be allowed as staff welfare expenses.
5. The learned Department Representative supported the orders of the lower authorities and relied on the decision of the Hon’ble Rajasthan High Court in the case of Manoj Dyeing Co. vs. CIT (1995) 125 CTR (Raj) 393 : (1995) 212 ITR 299 (Raj).
6. In our opinion, in the case cited by the Revenue, the question did not pertain to staff welfare measure and hence the said decision cannot help the Revenue. The impugned expenses, in our view, are legitimate business expenses and are clearly allowable. We, accordingly, direct that the disallowance so made be deleted.
7. The second ground pertains to the disallowance of Rs. 1,00,000. During the year, the mining lease obtained by the assessee-company was getting over. In order to renew the lease, the assessee engaged the services of M/s Dynamic Consultants Pvt. Ltd. who provided the assistance to prepare the renewal application and attended to other matters pertaining to the renewal of lease. For these services, consultancy fees of Rs. 1,00,000 were paid to the consultants. As per the AO, since by the renewal of lease, the assessee acquired benefit of an enduring nature, treated the impugned expenditure to be of capital nature and hence disallowed the same.
8. The learned CIT(A) also affirmed the expenses to be of capital nature in the light of several decisions.
9. It was contended on behalf of the assessee that the lease was only to excavate the minerals and it did not result into any acquisition of a capital asset. Further, it was contended that the expenses incurred were not for getting a new lease but were for renewal of the lease which was already there. He also relied on several authorities in support of his contentions.
10. We have considered the rival submissions and referred to the authorities cited by both the parties.
11. The facts in the case of CIT vs. New India Mining Corporation (P) Ltd. (1987) 63 CTR (Bom) 93 : (1987) 168 ITR 431 (Bom) cited by the learned Departmental Representative were quite different from the present case. In that case, the Hon’ble Bombay High Court was concerned with “Mining Land Restoration Charges”, whereas in the present case we are concerned with expenses in connection with the renewal of lease. In the case of H. Dear & Co. Pvt. Ltd. vs. CIT (1966) 60 ITR 546 (SC), the additional payment made with a view to persuading the authorities to grant the renewal of the agreement for lease, was held to be capital expenditure as the Supreme Court found that there was no legal obligation to pay those amounts under the agreement. In the case of Rajasthan Construction (P) Ltd. vs. CIT (1983) 36 CTR (Bom) 222 : (1984) 148 ITR 61 (Bom), litigation expenses incurred by the assessee were held to be not deductible as the asset for which the expenses were incurred had never been acquired by the assessee, and also held that if and when the assessee succeeded in acquiring the asset, the litigation expenses would have formed part of the cost of acquiring the capital asset.
12. In CIT vs. Cinceita (P) Ltd. (1982) 28 CTR (Bom) 250 : (1982) 137 ITR 652 (Bom), the assessee had claimed certain legal expenses including advocate’s fees for renewing the lease of a building to be used as business premises of the assessee. These were disallowed by the AO on the ground that it was of capital nature as it gave the assessee a benefit of an enduring nature. The Bombay High Court held that the expenditure claimed by the assessee was for drawing up a proper and effective lease deed and was allowable as revenue expenditure. It also held that the duration of the lease could not be regarded as decisive as to whether the asset or advantage secured was of an enduring nature.
13. In Plantation Corpn. of Kerala Ltd. vs. Commr. of Agrl. IT (1994) 205 ITR 364 (Ker), the assessee had incurred Rs. 39,858 towards stamp duty and registration expenses incurred for the lease deeds executed by it. The Kerala High Court held that the Tribunal had overemphasized the fact that the assessee had acquired an enduring benefit by obtaining long-term lease arrangements. The Court observed that even in a case where expenditure is incurred for obtaining an advantage of enduring benefit, emphasis should be placed on the nature of the advantage in a commercial sense and if the advantage consists merely in facilitating the assessee’s trading operations, the expenditure should be held to be on revenue account, even though the advantage may endure for an indefinite future. It further observed that the test of “enduring benefit” has been held to be not a decisive or conclusive test.
14. If the above cited decisions are analysed, which are in turn based on several other decisions, the crux is that the test of “enduring benefit” is not the ultimate test. In the case before the Supreme Court cited supra, the impugned payment there was on a different footing. It was a payment made to the lessor himself for extending the lease, whereas in the case before us we are dealing with a payment which facilitated the renewal of lease. The Rajasthan Construction’s case (supra) was altogether different where the assessee was defending a title to the property which never belonged to him.
15. In the instant case, the mining lease was already with the assessee, it was merely extending the term and to facilitate the extension, exhaustive technicalities had to be taken care of as is evident from the nature of services the consultants provided. Looked at from the commercial point of view, it was to help the assessee in its already existing business as was the issue in Cinceita’s case and Plantation Corporation’s case (supra) cited supra. It was not the case of payment for acquisition of a capital asset nor was it case of paying a premium to the lessor for extending the lease.
16. Based on the above discussion and after analyzing the various authorities cited at the Bar, the facts of the present case drive us to conclude that the expenditure of Rs. 1,00,000 incurred by the assessee was on revenue account and the deduction thereof be allowed.
17. The third ground pertains to the disallowance of Rs. 1,12,643 charged by the Rajasthan State Electricity Board (RSEB) as electricity charges under s. 43B of the IT Act, 1961 (the Act).
18. These were additional electricity charges raised by the RSEB for the period May, 1982 to April, 1985 vide its bills dt. 7th March, 1988. The AO disallowed the same on the ground that the charges pertained to earlier years and hence could not be allowed as an expenditure in the current year. The learned CIT(A) sustained the addition, although on a different ground, treating the same as statutory payment and thereby applying the provisions of s. 43B of the Act.
19. At the outset, an application was moved by the assessee that since the bills pertaining to this demand were raised by the RSEB in March, 1988 and the accounting year of the assessee had closed on 31st Dec., 1987, in case they are not found to be allowable in asst. yr. 1988-89, an additional ground claiming allowance of the impugned expenditure may be allowed to be raised in asst. yr. 1989-90.
20. After hearing the parties, the Tribunal finding it relevant, admitted the claim of the assessee as additional ground for asst. yr. 1988-89.
21. So far as AO’s objection is concerned, we are of the opinion that a liability, though pertaining to earlier year, it is said to accrue when it actually crystallizes, is ascertainable and legally enforceable. In the instant case, the liability crystallized only in March, 1988. Hence the ground taken by the AO for disallowance is not tenable.
22. As regards the contention of the learned CIT(A) that it is a statutory liability and hence falls within the purview of s. 43B, suffice it to say that these are purely electricity charges incurred for the consumption of electricity. Merely because the liability is towards a statutory body, any payment made or to be made to it cannot be termed as a statutory liability. Hence his contention is also rejected.
23. However, as we have mentioned above, a liability accrues when it is fairly ascertainable. In this case, the liability can be said to have been ascertained only on receipt of the bill and not before that. As the liability does not pertain to the assessment year under consideration, the addition is sustained.
24. In the result, the appeal is partly allowed.
(II) Asst. yr. 1989-90
A. Assessee’s appeal (ITA No. 987/Jp/91) :
25. The first ground in this appeal pertains to the computation of profits under s. 80HHC. The contention raised by the assessee in the ground is that depreciation should not be deducted while computing the profits for the purposes of deduction under s. 80HHC.
26. In view of several decisions on this issue being in favor of the Revenue, the ground was not pressed at the time of hearing and hence the same is dismissed as such.
27. As mentioned in the order for asst. yr. 1988-89 above, the assessee had raised an additional ground in respect of additional electricity charges of Rs. 1,12,643 which the Tribunal had admitted.
28. In the above order, we have already held that a liability in respect of electricity charges will be ascertained only when the bills are raised and shall be allowable as an expenditure in the year when the payment falls due.
29. In the instant case, since the bills for disputed electricity charges were issued in March, 1988, the liability accrued to the assessee and hence shall be allowed as a deduction in the year under consideration. Further, we have already held that it is not a statutory liability and hence shall be allowed according to the mercantile system of accounting followed by the assessee.
30. In the result, the appeal is partly allowed.
B. Department’s appeal (ITA No. 1187/Jp/91) :
31. The first ground in the Department’s appeal pertains to the deletion of addition of Rs. 82,534 made by the learned CIT(A).
32. These expenses pertained to the cost of new electric motors in place of old motors in the machinery. The AO did not accept the plea of the assessee that it constituted repairs to machinery. In his opinion, machineries were completely replaced and hence disallowed the claim of the assessee as revenue expenditure.
33. We fail to agree with the contention of the Department. Electric motor is an integral part of a machinery and needs periodical replacement on its obsolescence and without it the machine is defunct. The decision relied upon by the learned Departmental Representative in the case of Manoj Dyeing Co. vs. CIT (supra) is of no avail to the Department as it speaks of substantial replacement of the equipment. Replacing old electric motors by new ones cannot be termed as substantial replacement of an equipment. Thus, we confirm the deletion made by the learned CIT(A).
34. The second ground pertains to the deletion of Rs. 3,250 paid to an advocate for consultation about mining lease. The AO had treated it as capital expenditure and hence disallowed the same. This expenditure had on the same footing on consultancy charges paid to Dynamic Consultants Pvt. Ltd. The expenses incurred in connection with the advocate’s fees merely facilitated the assessee’s business and had no role in bringing about an advantage of enduring nature. In fact while dealing with the issue of fees paid to Dynamic Consultants in ITA No. 44/Jp/1990 above, we have referred to several decisions directly relating to the fees paid to advocates for drafting the lease deed and for other services in connection with the renewal of lease. In all those cases, such expenses have been held to be of revenue nature and we do not have any reason to hold a different view. Therefore, the said deletion made by the learned CIT(A) is also confirmed and the ground raised by the Department is rejected.
35. The third ground pertains to the computation of deduction under s. 80HHC. The learned CIT(A) directed to work out the profit before allowing investment allowance. This ground is allowed as the assessee has conceded the same in view of the several decisions of the Tribunal. Hence, it is directed that profit for the purpose of computing deduction under s. 80HHC be worked out after deducting investment allowance therefrom.
36. The last ground relates as to whether subsidy has to be reduced from the cost of plant and machinery or not for the purpose of calculating depreciation and investment allowance. First, the ground is misconceived insofar as that the learned CIT(A) has directed the AO not to reduce the cost by the amount of subsidy and for that reason alone the ground is liable to be rejected. Otherwise also, if a drafting error is presumed, the issue is settled in favour of the assessee by the Supreme Court in the case of CIT vs. P.J. Chemicals Ltd. (1994) 121 CTR (SC) 201 : (1994) 210 ITR 830 (SC) and, therefore, the ground is dismissed.
37. In the result, the appeal is partly allowed.
38. To sum up, all the three appeals are partly allowed