Both these appeals by the department are directed against the combined order of the learned Commissioner (Appeals), dated 5-11-1999, for assessment year 1996-97. As a common issue is involved in both the appeals, they are being disposed of together, by this consolidated order for the sake of convenience. Earlier, the department had filed a combined appeal for both the assessees. The Registry of the Tribunal had issued a defect memo stating that separate appeals have to be filed in respect of different assessees. In response to the defect memo the revenue has later filed a separate appeal in the case of Kapoorchand Bansal. Hence, the said appeal is time-barred by 302 days. A petition dated 12-10-2001, has been filed for condoning the delay and explaining the reasons as mentioned above for the delay. Since it is a procedural lapse on the part of the department, the delay is condoned and the appeals are admitted for hearing. In both the appeals the revenue is aggrieved against holding the plot premium paid by the assessee as revenue expenditure instead of capital expenditure.
The assessee are ship breakers. The ships are broken on a plot allotted by Gujarat Maritime Board (GMB). The allotment of plot is for a period of 10 years for which the assessee is required to pay 25 per cent premium in the first year and the balance is to be paid in two instalments within a period of 18 months from the date of allotment.
The assessee claimed deduction of the 26 per cent premium paid by it during the year under consideration. The said 25 per cent premium amounted to Rs. 15,18,750 in both the cases. The assessing officer was of the view that since the allotment of the plot is for 10 years, only 1/10th of premium should be allowed and accordingly he allowed Rs. 6,07,500 only and disallowed the balance premium.
The Commissioner (Appeals) followed his order in the case of these very assessees for 1995-96 and deleted the disallowance.
The learned Departmental Representative referred to certain provisions of the Gujarat Maritime Board Act, 1971 (GMB Act). Our particular attention was drawn to the provisions by virtue of which the assessee could be granted permission to utilise the plot for a period of 10 years. In this connection it was contended that by obtaining the right to use the plot for a period of 10 years, assessee obtained an advantage of enduring nature and hence the premium paid by the assessee was rightly amortized over a period of 10 years by the assessing officer. Our attention was also drawn to the provisions of the GMB Act by virtue of which the assessee could not make use of the said plot for any purpose other than ship breaking activity. By this it was sought to be emphasised that the assessee had got a distinct and unique advantage over the plot and hence the amortization. Strong reliance was placed on the order of the assessing officer.
The learned counsel for the assessee also referred to the various provisions of GMB Act. His submission on the provisions of GMB Act can be summarised as follows : (a) By virtue of obtaining the permission to utilise the plot the assessee did not acquire any right, title or interest in the plot.
(c) Though the allotment was for 10 years, the premium charges to be paid were spread over a period of 18 months. But, under any circumstances, the premium charges paid were not refundable.
(d) The assessee was required to bring specified LDTs of ships in each of the block of these consecutive final years and also in the 10th financial year. Even if the assessee failed to do so, he was nevertheless liable to pay port charges and LDT charges as component of plot charges.
In other words, it was the contention that the liability to pay the premium as scheduled in GMB Act would accrue in the respective financial years and hence deduction thereof had to be allowed. Besides the above submissions, the learned counsel argued that the premium paid by the assessee could not be regarded as capital expenditure because no new capital asset was brought into existence nor any benefit of enduring nature had been accrued by the assessee. Several decisions of the Supreme Court were relied upon. The main decisions relied upon are as follows : The opinions of certain advocates and chartered accountants were also placed on record.
We have given our careful consideration to the rival submissions and the material on record. There is no dispute over the fact that the assessee has obtained permission to use the plot under a statute (GM13 Act, 1981)', promulgated by the Government of Gujarat. The terms and conditions on which the assessee is required to use the plot are clearly spelt out under the GMB Act. Thus, whatever the assessee is supposed to do or not to do is as per the statutory requirements. It is not disputed that permission to use the plot is for a period of 10 years. At the end of the said period, the arrangement automatically terminates without anything being done by the GMB in this regard, unless the arrangement is renewed within 3 months prior to the date or expiry of the permission period. The premium to be paid by the assessee in three instalments is spread over 18 months and the same is as per the provisions of the aforesaid statute. As per the terms in the statute, the assessee is required to pay 25 per cent of the premium in the very first year. It is this payment which has been claimed by the assessee as revenue expenditure which the assessing officer has disallowed and has granted deduction only of 1/10th of the total premium amount. It is not clear from the assessment order as to whether the assessing officer has treated the impugned expenditure as capital expenditure or as deferred revenue expenditure. Whatever may be the case as per the assessing officer, it appears that he has spread the premium amount over a period of 10 years on the principle of matching cost concept. However, the Commissioner (Appeals) has decided the issue by presuming that the assessing officer has treated it as capital expenditure.
Firstly, as regards the matching cost concept, undoubtedly, matching cost concept is one of the fundamental principles of accountancy.
Unless the costs are directly co-related with the revenue it has earned, no true profit can be arrived at. This is absolutely true as regards trading business and manufacturing activities. However, there are certain activities where the costs cannot be directly co-related with the revenue. As an illustration, in case of consultancy firms, at times it becomes difficult to match the cost directly with the revenue.
Consultancy services may spread over more than a year and of a number of projects. There may be certain costs common to all the projects. The efforts put in for various projects may be varying. The revenue earned from such consultancy services may not be directly proportionate to the efforts put in a particular year. Under such circumstances, it becomes difficult to match the cost with the revenue. Similar is the case of a ship breaking activity. Ship breaking activity cannot be equated with a standardised manufacturing process. The breaking of a ship has many ifs and buts and it may spread over in an indefinite period of time. The revenue earning process is also not certain. Therefore, to apply matching cost concept to a ship breaking activity may not be absolutely conductive. Therefore, to disallow part of the premium merely because matching cost concept has to be followed is not justifiable.
Let us now examine whether the expenditure is of capital nature or not.
In both the cases, the assessees were utilising the plot prior to the commencement of the GMB Act. In order to organise the ship breaking activity, the GMB Act was promulgated and for the existing plot holders a special scheme was devised under the Act. Therefore, by obtaining the permission to use the plot for a period of 10 years, what the assessee did was merely preserve and protect his existing facilities for the purpose of his business. By obtaining the permission to use the plot, the assessee has not acquired any capital asset. The permission is for a short period of 10 years. The assessee cannot transfer his right to use the plot to any other person. The assessee cannot carry on any activity other than ship breaking on the said plot. The assessee does not acquire any right, title or interest over the plot. The assessee even is deemed to be not in the possession of the plot. All these factors go to show that by paying the premium the assessee has merely facilitated the operations of his ship breaking business. No advantage of enduring nature is obtained. In this connection, the observation of the Supreme Court in the case of Bombay Steam Navigation Co. (P) Ltd. v. CIT (1965) 56 ITR 52 (SC) are quite pertinent. It has been observed that if the out going or expenditure is so related to the carrying on or conduct of the business that it may be regarded as an integral part of the profit earning process and not for acquisition of an asset or a right of a permanent character, the position of which is a condition to the carrying on of the business, the expenditure may be regarded as revenue expenditure. Therefore, in view of the foregoing discussion and particularly in the light of the provisions of GMB Act, we are of the clear view that the expenditure incurred by the assessee is of revenue nature. It may also be observed that the liability to the assessee accrues as per the terms in the statute and hence the deduction has to be allowed in the year in which the accrual takes place. We uphold the order of the Commissioner (Appeals) deleting the disallowance of Rs. 9,11,250 in both the cases.