Commissioner of Income Tax vs Punjab Agro Foodgrains Corporation

Ajay Kumar Mittal, J.—This order shall dispose of I.T.A. Nos. 163 of 2009 and 147 of 2011 as the facts and the issue involved are similar. However, the facts are being extracted from I.T.A. No. 163 of 2009. I.T.A. No. 163 of 2009 has been preferred by the Revenue under section 260A of the Income-tax Act, 1961 (in short, "the Act"), against the order dated September 30, 2008, annexure A. 3 passed by the Income-tax Appellate Tribunal, Chandigarh Bench "B" (in short, "the Tribunal") in I.T.A. No. 614/Chandi/2008 for the assessment years 2005-06, claiming the following substantial question of law:

"Whether, on the facts and in the circumstances of the case and in law, the hon''ble Income-tax Appellate Tribunal was correct in holding that the mere fact that the benefit from recurring expenditure shall be available to the appellant in succeeding assessment years cannot be a ground to hold such expenditure as capital expenditure?"

On July 21, 2009, the appeal was admitted to consider the question formulated in the order dated April 28, 2009, which reads thus:

"Learned counsel for the appellant states that only such expenditure incurred on agriculture that results in raising a current crop, can be treated as revenue expenditure, whereas the expenses incurred to reclaim the land must be treated as capital expenditure."

A few facts relevant for the decision of the controversy involved as narrated in I.T.A. No. 163 of 2009 may be noticed. The assessee is a Punjab Government undertaking engaged in the business of contract farming, procurement of food grains, marketing and export, etc. A return declaring income of Rs. 1,50,75,000 was filed by the assessee on October 31, 2005, which was processed under section 143(1) of the Act on March 18, 2006. The case was selected for scrutiny. Notice under section 143(2) of the Act was issued to the assessee on October 26, 2006. Later on, on March 6, 2007, the assessee filed revised return declaring total income of Rs. 5,16,50,282. The assessment was completed under section 143(3) of the Act, vide order dated December 24, 2007, annexure A. 1. The Assessing Officer held that the major expenditure incurred by the assessee-company for the development of the land was capital expenditure. In all, the expenditure of Rs. 4.43 lakhs had been allowed as revenue expenditure and the balance expenses of Rs. 33.74 lakhs were disallowed being in the nature of capital expenses for developing the land. Aggrieved by the order, the assessee filed an appeal before the Commissioner of Income-tax (Appeals) ("the CIT(A)"). Vide order dated April 25, 2008, annexure A. 2, the Commissioner of Income-tax (Appeals) dismissed the appeal holding that the expenditure incurred to make a barren land into fertile land was capital in nature. The assessee filed further appeal before the Tribunal. Vide order dated September 30, 2008, annexure A. 3, the Tribunal allowed the appeal holding that the land was fallow and not barren and the mere fact that the benefit from the expenditure shall be available to the assessee in succeeding assessment years could not be a ground to hold such expenditure as capital expenditure. Hence, the instant appeal by the Revenue.

We have heard learned counsel for the parties and perused the record.

Learned counsel for the Revenue submitted that the expenditure which was incurred by the assessee was of capital nature. Drawing support from the judgment of the apex court in Commissioner of Income Tax, Tamil Nadu II, Madras Vs. Madras Auto Service (P) Ltd., , it was contended that the Tribunal was in error in allowing the same as revenue.

On the other hand, learned counsel for the respondent-assessee on the strength of the judgment of the apex court in Empire Jute Co. Ltd. Vs. Commissioner of Income Tax, submitted that the expenses which were incurred by the assessee were tractor hiring charges; jeep vehicle expenditure, staff welfare, HSD, preparation and renewal of seeds and electricity charges. These expenses were incurred for use in the land which was fallow and not barren. Reliance was placed on the noting of the Punjab Government dated July 28, 2005, wherein it was stated that the land was lying more or less fallow and was not being put to any alternative use. Learned counsel for the assessee, thus, claimed that these expenses rightly been allowed by the Tribunal as revenue expenditure.

After hearing the learned counsel for the parties, we do not find any merit in the appeals.

The core issue that arises for consideration in these appeals relates to whether, in the facts and in the circumstances, the expenditure incurred by the assessee for the development of the land is capital expenditure or revenue expenditure.

An expenditure would qualify for deduction under section 37 of the Act if it is incurred wholly and exclusively for the purpose of the business. It should be revenue in nature as distinguished from capital expenditure. There is no standard formula providing for determination of an expenditure to be capital or revenue. Every case is to be adjudicated on its own facts and the expenditure is to be looked from commercial point of view. The Supreme Court in K.T.M.T.M. Abdul Kayoom and Another Vs. Commissioner of Income Tax, noticed that there can be no rule of thumb for determining as to whether a particular expenditure is capital or revenue and that each case has to be decided on its own facts and circumstances. The majority view was expressed as under (page 703):

". . . none of the tests is either exhaustive or universal. Each case depends on its own facts, and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation to decide cases (as said by Cordozo) by matching the colour of one case against the colour of another. To decide, therefore, on which side of the line a case falls, its broad resemblance to another case is not at all decisive. What is decisive is the nature of the business, the nature of the expenditure, the nature of the right acquired and their relation inter se and this is the only key to resolve the issue in the light of the general principles, which are followed in such cases."

The test for categorising a particular expenditure to be revenue or capital has been laid down in Empire Jute Co. Ltd. Vs. Commissioner of Income Tax, as under (page 10):

"The decided cases have, from time to time, evolved various tests for distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all embracing formula which can provide a ready solution to the problem; no touchstone has been devised. Every case has to be decided on its own facts, keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. But a few tests formulated by the courts may be referred to as they might help to arrive at a correct decision of the controversy between the parties. One celebrated test is that laid down by Lord Cave L.C. in Atherton (H.M. Inspectors of Taxes) v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155, 192 (HL), where the learned Law Lord stated:

''. . . when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.''"

A Division Bench of this court in Commissioner of Income Tax Vs. Varinder Agro Chemicals Limited, recorded that there is no rigid rule to determine when expenditure is capital or revenue but generally where advantage is for enduring nature, it would be capital and where the same is for running the business, it would be revenue. The following observations in this regard are relevant (page 274):

"It is well-settled that for claiming deduction, apart from expenditure being for business, the same has to be revenue expenditure. Though, there is no rigid rule to determine when expenditure is capital or revenue, generally acceptable test is where advantage is for enduring nature, it may be capital expenditure, while if the expenditure is for running of the business, it is of revenue nature. Some of the leading judgments of the hon''ble Supreme Court dealing with the issue are: Assam Bengal Cement Co. Ltd. Vs. The Commissioner of Income Tax, West Bengal, , Commissioner of Income Tax, Hyderabad-deccan Vs. Vazir Sultan and Sons, , Empire Jute Co. Ltd. Vs. Commissioner of Income Tax, : [1980] 4 SCC 25 , Alembic Chemical Works Co. Ltd. Vs. Commissioner of Income Tax, Gujarat, and Commissioner of Income Tax, Mumbai Vs. General Insurance Corporation, ."

The Tribunal in view of the pronouncements of the apex court in Alembic Chemicals Works Co. Lid. and Empire Jute Co. Limited''s cases (supra), had rightly culled out the following principles for ascertaining the nature of the expenditure to be capital or revenue:

"(a) There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nevertheless, be on revenue account and the test of enduring benefit may break down.

(b) It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in the enduring benefit test.

(c) If the advantage consists of merely in facilitating the assessee''s trading operations or enabling the management or 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 period.

(d) The test of enduring benefit is not the conclusive test and cannot be applied blindly and mechanically without regard to particular facts and circumstances of a given case.

(e) Outgoings on account of capital or revenue depend on particular and business point of view rather than upon juristic classification of the legal right, if any, secured, employed or exhausted in the process and the question must be viewed in the larger context of business necessity or expediency.

(f) In the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises, it is well nigh impossible to formulate any general rule, even in the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation. However, some broad and general tests have been suggested from time to time to ascertain on which side of the line of outlay in any particular case might reasonably be held to fall. These tests are efficacious and serve as useful servants but as masters they tend to be over exacting.

(g) The idea 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 expenditure are not eternal verities but must need be flexible so as to respond to the changing economic realities of business. The expression ''asset or advantage of an enduring nature'' is evolved to emphasise the element of a sufficient degree of durability appropriate to the context.

(h) 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 outlay and its intended object and effect, considered in a common sense way having regard to the business realities. In a given case, the test of ''enduring benefit'' might break down."

Examining the factual matrix in the present appeals, the Tribunal after examining the file noting of the Punjab Government dated July 28, 2005, which had been annexed to the assessment order recorded a clear finding that the land was lying fallow and was not barren though it was not being put to alternative use. The Tribunal on appreciation of evidence on record had come to the conclusion as under:

"7. A bare perusal of the above notings of the Punjab Government would show that the land leased to the appellant was not a barren land though it is said to be lying fallow and not being put to alternative use. The entire case of the Commissioner of Income-tax (Appeals) is based on the aspect that the assessee has converted a barren land into a fertile land and thus it results in benefit of enduring nature in capital field. There is nothing on record to suggest that the land was barren, hence the order of the Commissioner of Income-tax (Appeals) is unsustainable. The land not being put to alternative use may require a special effort on the part of assessee initially but all such activities are to be viewed having been carried out in the course of farming activity. During the year under consideration, the total land cultivated by the appellant out of the land leased was to the extent of 94 acres in kharif season and 499 acres in rabi season."

Further, the expenditure which was incurred by the assessee and claimed to be revenue were tractor hiring charges; jeep vehicle expenditure; staff welfare; HSD; preparation and renewal of seeds and electricity charges. The expenses incurred were for the furtherance of the business objectives. The Tribunal on examination of the entire matter, keeping in view the main objects of the assessee, the activities of the assessee, the nature of expenses incurred and also the legal principles noticed hereinbefore, had concluded that the expenditure was revenue in nature. It was observed as under:

"Applying the above principles to the details of the expenditure incurred, we find that, none of them in any manner can be held to be capital expenditure. Mere fact that the benefit from incurring such expenditure shall be available to the appellant in succeeding assessment year, cannot be a ground to hold that such expenditure is capital expenditure. The details of the expenditure would show that they are tractor hiring charges; jeep vehicle expenditure; staff welfare; HSD; preparation and renewal of seeds and electricity charges. In our considered opinion, none of the expenditure is of a nature of providing an advantage in the capital field, hence, it cannot be held that they are capital expenditure.

Moreover, in this case, we have also perused the main objects of the assessee-appellant company as emerging from the memorandum of association. A perusal of the aforesaid reveals that the appellant company has been set up by the Punjab Government to undertake work of land, development, seed multiplication, processing and its distribution and said Further, the appellant is empowered to undertake, assist and promote operations pertaining to agriculture, horticulture, fisheries, poultry, piggery, sheep and dairy and other related activities/The appellant company is also empowered to process, sale, purchase, import, export) etc., and otherwise, deal in all kinds of produce of agriculture, horticulture/etc. In sum and substance, the main objectives of the appellant company are to undertake, assist and also carry out operations pertaining-to, agriculture. Notably, the objectives of the appellant also relate, to seed multiplication and diversification of crop pattern in the State to go towards high value and less water intensive crops. Evidently, the Punjab Government has provided the land in question to the appellant on lease to carry out seed multiplication programme. In fact, the annual report and accounts of the appellant company pertaining to the previous year relevant to the assessment year under consideration contain a proclamation of the progress in the diversification through contract fanning carried out. It illustrates the new crops promoted and also the increase in the acreage of the crop, so grown. By referring to the aforesaid, we are only trying to point out that the objective of the assessee in putting to use the land in question was for the furtherance of its objects of business. The impugned expenditure has been incurred towards furtherance of the business objectives, clearly, the monies recovered by selling the produce raised on land in question has been accounted for by the appellant in its revenue account. The mere fact that in the initial year the expenses have outweighed the receipts cannot be the determining factor to hold that percentage of expenses are of capital nature. In fact, we have also examined the expenses incurred by the assessee for the next assessment year, i.e., 2006-07 (pertaining to the year ending March 31, 2006) which have been enclosed as an annexure to the assessment order. Here again, we notice that the expenses are, by and large, of similar nature as of those incurred during the year under consideration. Ostensibly, the income by way of produce in the next year stands on a much higher footing. It is quite understandable, for the agriculture operations involve a certain gestation period for incomes to accrue in the hands of an assessee but presence of the gestation period is no ground to treat a portion of the expense as capital in nature. From the aforesaid it is evident that the expenses undertaken by the assessee are expenses for carrying out normal farming activities and no ad hoc basis can be adopted to segregate the expenditure between capital nature and revenue."

The findings recorded by the Tribunal are based on appreciation of evidence and the principles laid down by the apex court in Empire Jute Co. and Alembic Chemical Works Co. Ltd.''s cases (supra). The expenses incurred by the assessee as noticed above cannot be categorised to be falling in the domain of being capital expenditure and are of revenue in nature. In so far as Madras Auto Services (P) Ltd.''s case (supra) relied upon by learned counsel for the Revenue is concerned, suffice it to notice that the legal principles enshrined therein are well recognised but in view of the findings recorded by the Tribunal in the present appeals, it does not advance the case of the Revenue. Learned counsel for the Revenue has not been able to show any illegality or perversity in the findings recorded by the Tribunal. Thus, the substantial question of law is answered against the Revenue. Consequently, the appeals being devoid of merit stands dismissed.