E.I.D. Parry (India) Ltd. vs Commissioner of Income Tax Commissioner of Income Tax Vs E.I.D. Parry (India) Ltd.

R. Jayasimha Babu, J.—The assessee wanted to set up a new project for the manufacture of ""methanol"" at Ennore. It incurred an

expenditure on that account over a period of time--all of it prior to the assessment year 1981-82. The amount spent for that project on various

items such as engineering fee, travel expenses, interest, salary for employees working in the project, legal fees, etc., for the period from 1975 to

1978 aggregated to Rs. 37,55,159. The assessee sought to claim these items as deductible items as expenditure for the assessment year 1981-82.

That claim of the assessee was negatived by the Assessing Officer, by the appellate authority as also by the Appellate Tribunal. At the instance

of the assessee, the correctness of the Tribunal''s decision has been called into question.

It is clear from the assessee''s own case that the expenditure was incurred for the purpose of setting up a new project. The expenditure had

been incurred in the years prior to the assessment year in question. The assessee''s case that it subsequently abandoned that project does not on

that score convert what was an expenditure in the nature of capital expenditure into a revenue expenditure. The setting up of a new project was

clearly in the capital field and not in that of revenue. The abandonment of that project is the abandonment of a project on which capital expenditure

had been incurred. The expenditure incurred on that capital project was not something which could be regarded as revenue expenditure laid out

exclusively and wholly for the purposes of business of the assessee as what the assessee was trying to start was a new business for the manufacture

of a new product. The expenditure incurred therein was clearly capital expenditure and not revenue expenditure.

Counsel for the assessee relied on the decision of the Supreme Court in the case of B.R. Limited Vs. V.P. Gupta, Commissioner of Income

Tax, Bombay, . The court there was not concerned with the assessee starting a new industrial project, and subsequently abandoning the same. The

case there concerned a trader who had, while retaining the same management and control of the business, sought to carry forward the losses in the

import business of an earlier year against the profit of the export business of a later year. He was allowed to do so after the court found that the

two businesses, one which had been discontinued and one which was later started, in fact, constituted the same business.

Here, it is evident that the assessee is engaged in the manufacture of other products and wanted to add a new product ""methanol"" and for that

purpose had incurred expenditure by way of entering into a collaboration agreement for purchase of machinery but had abandoned the same. The

fact that the assessee continued to carry on its old business does not on that score render the expenditure incurred by it in the setting up of a new

project for the manufacture of a new product, a revenue expenditure.

The Supreme Court in the case of SWADESHI COTTON MILLS CO. LTD. Vs. COMMISSIONER OF Income Tax, U. P. (NO. 2)., ,

considered the case of an assessee who was carrying on the business of manufacture and sale of cloth and other textile goods and who had

entered into contract for the purchase of textile machinery for the purposes of expanding its factory. The assessee therein subsequently cancelled

the contracts and paid compensation to the contracting parties. The amount so expended by the assessee was held by the Supreme Court to be an

expenditure in the capital field and not revenue expenditure. The ratio of that case is clearly attracted to the facts of the case here. While in the case

of Swadeshi Cotton, payment had been made with the object of avoiding unnecessary investment in capital assets, here the expenditure had been

incurred for the purposes of setting up the project, but that expenditure was unfruitful, as the project was not established but was abandoned. The

abandonment was obviously to avoid any further expenditure being incurred, and to avoid any other adverse effects by reason of incurring of

additional expenditure which the assessee itself thought would no longer be beneficial to pursue. Such expenditure incurred by it for a new project

which was in the nature of capital expenditure remains such, and by claiming it in a subsequent year as revenue expenditure, the assessee cannot

convert what was capital expenditure into revenue expenditure.

The question referred to us as to whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sums of Rs.

5,93,672 and Rs. 31,61,487 incurred by the assessee in connection with the establishment of a new methanol project in the earlier years, which

was ultimately abandoned was not an allowable deduction for the assessment year 1981-82, is therefore answered in favour of the Revenue and

against the assessee.

The other question referred to us is :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the medical expenses reimbursed by the assessee

to its employees would be part of the salary paid to them for purposes of computing the amount disallowable u/s 40A(5)/40(c) of the Income Tax

Act, 1961 ?

This question has to be and is answered in favour of the Revenue in the light of the decision of the Supreme Court in the case of Commissioner

of Income Tax, Bombay, etc. Vs. M/s. Mafatlal Gangabhai and Co. (P) Ltd., , wherein it has been held that the medical expenses reimbursed by

the assessee to its employees would be part of the salary paid to them for the purpose of computing the amount disallowable u/s 40A(5) and

Section 40(c) of the Income Tax Act, 1961.

1.0. At the instance of the Revenue also the questions have been referred to us arising from the assessment for the assessment years 1977-78 and

1981-82. The first of those questions is :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the differential levy price of

cane sugar of Rs. 3,49,898 and Rs. 36,07,388 collected by the assesses during the years should not be treated as revenue receipt and be brought

to tax ?

That question is required to be answered in favour of the assessee as those amounts had been allowed to be collected by the assessee in terms

of the interim orders made by the High Court pending disposal of litigation with regard to the assessee''s right to collect those amounts, and the

assessee had been directed to keep those amounts in a separate account and the amount was kept in deposit subject to the final decision of the

Supreme Court.

During the assessment years litigation continued to be pending and it could not be said that those amounts belong to the assessee and form part

of its trading receipt. Those amounts therefore are not to be treated as revenue receipts of the assessee and brought to tax. In the case of

Commissioner of Income Tax Vs. South India Sugars Ltd., , this court examined a similar question and held that the amounts received by the

assessee being associated with the liability to refund in the event of the assessee not succeeding in the court in the pending litigation, that amount

could not be regarded as a trading receipt.

The other question referred to us at the instance of the Revenue, is as to whether the Tribunal was correct in holding that the assessee is

entitled to higher rate of depreciation on the basis of the certificate obtained from the chemical engineer. The assessee had claimed higher rate of

depreciation at the rate of 15 per cent on certain machinery on the ground that they came into contact with corrosive chemicals.

The Tribunal has merely confirmed the order of the Commissioner (Appeals) who had directed the Income Tax Officer to take the help of an

engineer and to ascertain as to whether the chemicals were corrosive and identify the machinery with which such corrosive chemicals came into

contact. The Commissioner had adopted the right approach and that is in conformity with the decision of this court in Commissioner of Income Tax

Vs. E.I.D. Parry India Ltd., . There is no infirmity in the order of the Tribunal in that regard. That question is answered in favour of the assessee

and against the Revenue.