Commissioner of Income Tax vs Nizam Sugar Factory Ltd. (No. 2)

S. Obul Reddy, C.J.—The following four questions have been referred to this court for its opinion u/s 256(1) of the I.T. Act, 1961, at the instance of the revenue:

"1. Whether, on the facts and in the circumstances of the case and on a correct interpretation of Rule 7(1) of I.T. Rules, 1962, the Tribunal was correct in holding that the assessee was entitled to deduction of the transportation charges incurred in the transporting of its own sugarcane from farm to factory ?

Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 1,27,687 incurred in installing the data processing machine is allowable as a revenue expenditure for the assessment year 1969-70?

Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 2,46,000 incurred by the assessee for reconditioning of generator is allowable as a revenue expenditure for the assessment year 1969-70 ?

Whether, on the facts and in the circumstances of the case, the bonus payment of Rs. 9,890 for the assessment year 1969-70 and Rs. 4,950 for the assessment year 1970-71 made by the assessee to its employees is allowable as an admissible deduction under the Act ? "

In this reference, we are concerned with two assessment years 1969-70 and 1970-71. The assessee, Messrs. Nizam Sugar factory Ltd., is a public limited company carrying on business in the manufacture and sale of sugar.

So far as the first question is concerned, it is covered by the decision of this court in R. C. No. 60 of 1976 ( Commissioner of Income Tax Vs. Nizam Sugar Factory Ltd., ]. Therefore, having regard to the opinion expressed therein, the answer to this question is in the affirmative and in favour of the assessee.

The facts relevant for determining the second question referred are these : The assessee incurred an expenditure of Rs. 1,27,687 in installing data processing machine. The assessee had taken on hire the data processing machine from IBM and incurred expenditure towards installation of the machine. The ITO disallowed the expenditure as capital in nature in the view that the assessee had an advantage of enduring nature. The AAC allowed the expenditure as an admissible deduction. On appeal to the Tribunal, the Tribunal agreed with the view expressed by the AAC and allowed the expenditure as an admissible deduction. The question now is whether the expenditure incurred by the assessee in installing IBM machine is a business expenditure or capital expenditure. The equipment was hired by the assessee under an agreement. Under the agreement, the supplier was entitled to take back the machine supplied at any time with prior notice of three months. The supplier would also be entitled to take back the machine under the agreement after the expiry of one year from the date of installation. Therefore, on the facts, it cannot be said that the benefit or advantage derived by the assessee in installing the processing machine confers any enduring benefit or advantage to it. Merely for the reason that the installation charges came to Rs. 1,27,687 it does not become a capital expenditure. The expenditure for installation charges was incurred on an asset which did not belong to the assessee. The amount expended is no doubt a big sum but the nature of the machine has also to be taken into account and it is not the case of the revenue that for installation of the IBM machine, an amount of Rs. 1,27,687 is not required. We agree with the Tribunal that the assessee is entitled to deduction on this item of expenditure.

So far as the third question is concerned, we agree with the view expressed by the Tribunal that the expenditure of Rs. 2,46,000 incurred by the assessee for reconditioning of generator is revenue expenditure. The case of the revenue is that by expending an amount of Rs. 2,46,000 the assessee has gained advantage or benefit of enduring nature and, therefore, this expenditure has to be disallowed treating it as capital expenditure. This amount consists of purchases made of six items of replacement. They are:

Rs.

1 . Reduction gear complete 76,002

Starter coil 20,245

Auxiliary oil pump 10,863

Rotar complete 68,306

Spare armature 10,091

Cost of other miscellaneous accessories 60,493

These accessories or spare parts were required, according to the assessee, for proper commissioning of the assessee''s sugar factory. As the generator required repairs or reconditioning, the above items had to be purchased by it. This court in Guntur Merchants Cotton Press Co. Ltd. Vs. Income Tax Officer, A-Ward, observed that if the replacement is effected only to preserve and maintain the existing asset and no new asset was created, the assessee would be entitled to deduction of the expenditure incurred thereon. This is a case of replacement of certain parts so that the factory could be commissioned. The plant, it is not in dispute, costs some crores of rupees. Therefore, an expenditure of Rs. 2,46,000 incurred for replacement of certain parts cannot be said to be an expenditure for the creation of a new asset and that too of an enduring nature so as to disentitle the assessee from claiming deduction. The decision of this court in Guntur Merchants Cotton Press Co. Ltd. Vs. Income Tax Officer, A-Ward, covers the question raised by the revenue. This question, therefore, is answered in the affirmative and in favour of the assessee.

So far as the fourth question is concerned, Mr. Swamy, learned counsel appearing for the assessee, concedes the case of the revenue in so far as the two assessment years in question are concerned. He also makes it clear that the concession made by him is only in respect of this case and the two assessment years involved in this reference. The question, therefore, is answered in favour of the revenue and against the assessee.

In the result, questions Nos. 1, 2, and 3 are answered in favour of the assessee and question No. 4, against the assessee. There will be no order as to costs. Advocate''s fee Rs. 250.