Judgment:
S. Muralidhar, J.
1. This appeal under Section 260-A of the Income Tax Act, 1961 ('Act') is directed against the decision dated 16th June, 2006 passed by the Income Tax Appellate Tribunal, Delhi Bench 'C' Delhi ('Tribunal') in ITA No. 3539/Del/1999 for the Assessment Year 1992-93.
2. Admit.
3. The following substantial questions of law arise for consideration:
(a) Whether the Income Tax Appellate Tribunal was correct in law in holding that the payment of Rs.23,21,865/- made by the assessed as an advance to the suppliers for manufacturing tools and dies was a revenue expenditure?
(b) Whether the Income Tax Appellate Tribunal was correct in law in allowing deduction of Rs.41.30 lakh being provision made by the assessed estimating the expenditure on foreign trips by its dealers under the Holiday Incentive Scheme and negativing the contention of the Revenue that this was contingent liability?
4. Printing of paper books is dispensed with. With the consent of learned Counsel for the parties, the appeal is finally heard.
5. The facts relevant to question (a) are that the assessed company manufactures portable generator sets in technical collaboration with Honda Motor Company of Japan. Prior to the assessment year, that is 1992-93, the assessed was amortizing the advances made by it to the manufacturer of tools and dies on the basis of the actual quantity of the components used in the production of generator sets. The case of the assessed is that the payment made as advance ('tooling advance') was non-recoverable and the ownership of the tools and dies remained with the manufacturer. The benefit to the assessed was that it had an indigenous source of supply of tools and dies for the components of the generator sets. The advance was charged to Profit and Loss Account in the year of advance.
6. The Assessing Officer found that for the assessment year in question the assessed had claimed the tooling advance as revenue expenditure but did not produce any evidence to show why it had departed from the past practice of amortization. He accordingly held that the changed method of claiming the amount paid as tooling advance as revenue expenditure was not a standard method and further that the assessed had not showed that the change was bonafide. The Assessing Officer disallowed the deduction and directed that the amount of Rs.23,21,865/- would be added to the income of the assessed. On this aspect, the Commissioner of Tax (Appeals) ['CIT(A)'] rejected the appeal of the assessed concurring with the findings of the Assessing Officer.
7. In the further appeal filed by the assessed, the Tribunal followed the order passed by it in I.T. No. 2852(Del) of 1999 for the assessment year 1995-96 in which it was held that the tooling advance was for facilitating the trading operations of the assessed and further that the tools and dies continued to remain the property of the manufacturer. The Tribunal held this to be revenue expenditure and allowed the assessed's appeal. It directed the Assessing Officer to allow the claim of the assessed as a deduction.
8. Appearing for the Revenue, Ms. Prem Lata Bansal, learned Senior Standing Counsel submits that the expenditures on tools and dies have always been treated as a capital expenditure. The nature and character of such expenditure cannot be changed merely because the tool and dies are not owned by the assessed. She further contends that where the assessed itself amortized the expenditure in the previous assessment year there was no justification for a change in the pattern which resulted in the expenditure being treated as a revenue expenditure.
9. Replying to the submissions, Mr. Ajay Vohra, learned Counsel appearing for the assessed, submitted that even in the earlier years the amount paid towards tooling advance was claimed as revenue expenditure on amortized basis. It was not as if the nature of the expenditure had changed as was sought to be made out by the Revenue. He relied upon the judgment of the Hon'ble Supreme Court in Empire Jute Co. Limited v. Commissioner of Income Tax : [1980]124ITR1(SC) as well as the recent judgment of this Court in Commissioner of Income Tax v. Saw Pipes Limited 268 CTR 476.
10. This Court finds that the factual position of the assessed not being the owner of the tools and dies is not disputed by the Revenue. The question whether the expenditure is of revenue nature or capital nature is no longer rest integra. The test in this regard has been reiterated by the Hon'ble Supreme Court in Bharat Earth Movers v. Commissioner of Income Tax : [2000]245ITR428(SC) and Empire Jute Co. Limited v. Commissioner of Income Tax : [1980]124ITR1(SC) . The recent judgment of this Court in Commissioner of Income Tax v. Saw Pipes Limited follows these decisions. It appears from the above decisions is that in order to treat an item of expenditure as a capital expenditure it will have to be shown that the asset in question, for which the tooling advance has been paid, is actually in the ownership of the assessed.
11. In Saw Pipes Limited this Court noticed that the service line in question had been laid in the assessed's premises to enable it to carry out business more efficiently. It was held that the service line belonged to the Maharashtra State Electricity Board and the ownership of the service line was not with the assessed. In those circumstances it was held that the money paid by the assessed in that case for laying the service line was to be treated as a revenue expenditure. Likewise in Commissioner of Income Tax, Bombay City-IV v. Excel Industries Limited : [1980]122ITR995(Bom) it was held that the service lines laid for the benefit of the assessed, which although owned by the Gujarat Electricity Board, did not mean that the assessed had acquired any capital asset. The amounts spent by the assessed in that case on laying the service line was treated as a revenue expenditure and thereforee, an allowable deduction.
12. The Tribunal has referred to the decision of the Hon'ble Supreme Court in Empire Jute Co. Limited to hold that even if the expenditure was incurred for obtaining an advantage or benefit of an enduring nature it might still be a revenue expenditure. In Empire Jute Co. Limited it was held that the test of enduring advantage is not conclusive and should not be blindly followed. A reference may also be made to the decisions of the Hon'ble Supreme Court in Commissioner of Income Tax v. Madras Auto Service (P) Limited : [1998]233ITR468(SC) and of the Madras High Court in Commissioner of Income Tax v. T.V. Sundaram Iyenger & Sons (P) Limited : [1974]95ITR428(Mad) . This Court's decision in Hindustan Times Limited v. CIT : [1980]122ITR977(Delhi) is also on the same lines.
13. Reverting to the facts on hand, we find that learned Counsel for the assessed is right in his submission that at no point of time was such expenditure claimed as a capital expenditure by the assessed. That being the position, there was no justification for the Assessing Officer to disallow the deduction of the tooling advance on the ground that the assessed, though not owing the asset in question, was deriving an enduring benefit from it. The fact that the moulds and dies continue to be remain the property of the manufacturer is decisive in determining the nature of the expenditure. The tooling advance paid to the vendors is also non-refundable. Not only is there an assurance of continued supply of components but as a result of this arrangement there is a price advantage. Earlier these components were imported and now there would be an indigenous source of supply. In these circumstances, the finding of the Tribunal was that the enduring advantage obtained by the assessed is only in the revenue field and not in the capital field cannot be faulted.
14. Question (a) herein is answered in the affirmative, in favor of the assessed and against the revenue.
15. As regards question (b) the facts are that the assessed has a holiday incentive scheme for which, in the assessment year 1992-93, it had made a provision of Rs.41,30,000/-. According to the assessed, this scheme was devised for boosting the sale of generator sets. Depending on the performance of the dealer in relation to sales targets, they were offered different types of holiday incentives. The Assessing Officer disallowed the deduction on the ground that the assessed had failed to disclose details of the holiday incentive scheme as well as the names of the parties who were entitled to the incentive. He also held that the basis of quantification of the incentive was not disclosed and that the assessed had failed to show that the expenditure was a bonafide accrued business liability during the relevant previous year.
16. In the appeal filed by the assessed, the CIT (A) concurred with the AO that the amount constituting the provision for the holiday incentive scheme was not a determined or ascertained liability but only a contingent liability. The CIT (A) noticed that as against the provision of Rs.41,30,000/- the actual expenditure incurred in the next assessment year was only Rs.16,67,929. thereforee, it was held that the expenditure, if at all could be considered only for the assessment year, i.e. 1993-94.
17. The Tribunal on the other hand examined holiday incentive scheme and found that there was an office memo dated 29th April, 1992 from the Marketing Department to the Accounts Department mentioning that the probable liability towards the scheme for the previous year 1991-92 would be in the range of Rs.41,30,000/-. The Tribunal accepted the Explanationn offered by the assessed that holiday incentive scheme was in-built in the sales effected by the dealers and cannot be said to be contingent. It also found that the difference between the provision that is Rs.41,30,000/- and the actual liability of Rs.16,67,929/- incurred in the next assessment year, which worked out Rs.24,62,071, was offered for tax by the assessed in the assessment year 1993-94. In that view of the matter, the Tribunal directed that for the assessment year 1993-94 the deduction of Rs.16,67,929/- allowed in the assessment year 1993-94 should be withdrawn. Since in the assessment year 1992-93 and 1993-94 the assessed had returned a loss and was in fact assessed at a loss, there was no revenue loss and thereforee, no grievance to the Revenue.
18. We are of the view that no ground has been made out by the Revenue for interfering with the impugned order of the Tribunal. It is not possible to hold, in the facts and circumstances of the case, that the provision made for the holiday incentive scheme was not capable of being ascertained with reasonable certainty and it was thereforee a contingent liability. There is nothing to indicate that the assessed was adopting this device for avoiding tax. The system of accounting adopted by the assessed appears to be consistent. Following the decision in Commissioner of Income Tax v. Vinitec Corporation Private Limited : [2005]278ITR337(Delhi) . We are of the view that the claim of the assessed had to be allowed. In that view of the matter, we find no infirmity in the reasoning and the conclusion of the Tribunal. Question (b) is answered in the affirmative, in favor of the assessed and against the revenue.
19. Accordingly, this appeal is dismissed with no order as to costs.