1. These are the appeals filed by the Revenue and assessee and Cross Objection by the assessee against the order of ld. CIT(A) dated 27^th February, 2002 for the assessment year 1998-99.
2. First we take the appeal filed by the assessee, in which the A.O.'s action for disallowing expenditure made on railway siding, was confirmed by ld. CIT(A).
3. The facts in brief are that the assessee-Company during the year under consideration constructed railway siding at a cost of Rs. 3.56 crores for quick and easy movement of raw materials and finishing goods and in the books of account the said expenditure was capitalized and was written off over a period of five years. In the income-tax return, the assessee has claimed the entire amount as revenue expenditure. The railway siding was constructed on the land not belonging to the assessee and was meant for facilitating and to procure easy movement of its raw materials and finished goods. The Company has no right on the railway siding. The entire amount was claimed as a revenue expenditure.
The A.O. held that the assessee has acquired the assets of enduring benefit in the shape of railway siding and the same has been brought into existence by incurring expenditure of considerable sum of money.
He further observed that the railway siding were constructed at the place, where no railway siding was inexistence. By constructing railway siding, the assessee enjoyed the benefit of lasting duration. By referring to the various judgments of House of Lords, the A.O. held that the cost of creating, acquiring or enlarging the permanent structure of which income was to be the fruit will be of capital nature. He, therefore, held that the assessee-Company had brought into existence a tangible asset as the expenditure has been incurred for creating and enlarging the profit earning structure of the assessee-company. As per A.O., it is not a case of maintenance of capital or an expenditure incurred for the purpose of merely facilitating the business of the appellant, but a new capital asset in the shape of railway siding has been brought into existence. It is a case of addition to the capital structure of the assessee-company. The A.O. relied on the judgment of the Hon'ble supreme Court in the case of Travancore Cochin Chemical Limited (106 ITR 900) to come to the conclusion that the assessee had acquired an enduring advantage for its business and the expenditure incurred for the railway siding was capital in nature.
4. By the impugned order, the ld. CIT(A) observed that the expenditure incurred by the appellant has brought into existence a tangible asset and the expenditure incurred has gone for creating or enlarging the profit earning structure of the appellant-company. He further observed that the expenditure incurred is not only to run its business more efficiently and advantageously but it has given rise to creation and acquisition of asset enabling the appellant getting the benefit of augmentation of its income. The construction of a railway siding is a new means of access, and, therefore, the expenditure incurred is capital in nature. As per ld. CIT(A), by such expenditure there is an alteration and improvement in the fixed capital assets of the Company and the same has been duly taken into account by way of capitalisation.
Thus the ld. CIT(A) confirmed the action of the A.O. for not allowing the assessee's claim of expenditure on railway siding as revenue expenditure.
5. Aggrieved by the above order of ld.CIT(A), the assessee approached us for further adjudication.
6. It was vehemently argued by the ld.A.R. that the railway siding was constructed on the land not belonging to it and it was only for facilitating quicker and easy movement of its raw materials and finished goods. The Company had no right on the railway siding except its use as long as the owner of the land permitted such use. As per ld.A.R., the facility could be terminated by the owner of the land whenever he likes. The assessee had to treat such expenditure, as deferred revenue expense as per the Companies Act and Accounting Standards 6 and 10 which were mandatory. He further submitted that the A.O. has treated the expenditure as capital and allowed depreciation on the same on the footing that the assessee was the owner of the asset, namely, the land alongwith the railway siding embedded on it. As per ld. A.R., the A.O. had relied on a number of decisions of the House of Lords and the Court of Appeals of England, but he ignored the decision of the Hon'ble Supreme Court in the case of Gajapathy Naidu (53 ITR 114) to the effect that nothing can be gained by trying to constru the Indian Act in the light of English decisions. It is only on fundamental concepts, on which no decision of the Supreme Court is available, the decision of the English Courts may be useful as a guide. He further argued that the assessee's case is squarely covered by the decision of the Hon'ble Gauhati High Court in the case of Bongaigaon Refinery (222 ITR 208) and Hon'ble Supreme Court in the case of L.H. Sugar Factory (125 ITR 293). The ld. A.R, further submitted that the A.O. had relied on the decision of Travancore-Cochin (supra), even though the question of ownership of land was not clear from the facts of that case.
Besides, the said case has been disapproved by the Hon'ble Supreme Court in the case of L.H. Sugar (supra). The ld. A.R. relied on the judgment of Alkali Tuticorin (227 ITR 172) in support of the proposition that the Accountants might be constrained to take a different view, but accounting practice is not necessarily good law, for the purpose of Income Tax.
7. On the other hand, the ld. Senior D.R. vehemently argued that the assessee has correctly treated the amount of expenditure incurred on railway tracks as capital expenditure in its books of accounts and the same is in accordance with the accepted principle of Accountancy and asset of enduring benefit has been brought into exsistence by incurring such huge expenditure. He further submitted that the assessee has incurred expenditure in relation to creation of an asset for which the profit making apparatus of the assessee has changed. By such expenditure there is alteration and improvement in the fixed capital asset of the company and the same has been duly taken into account by the assessee-company by way of capitalization. He further relied on 20 reasons given by the ld. CIT(A) while confirming the action of the A.O..
8. We had considered the rival contentions and carefully gone through the orders of the authorities below. We had also deliberated on the case laws relied on by the lower authorities as well as by the ld. A.R.and D.R., in the context of factual matrix of the case. From the record, we find that a sum of Rs. 3.56 crores has been incurred by the assessee-company for constructing a railway siding on the land not belonging to it and it was for facilitating quicker and easy movement of its raw materials and finished goods. There is no dispute to the fact that in the books of accounts the assessee has capitalised the expenditure whereas in the return of income the assessee has claimed this expenditure as revenue. The A.O. has declined the assessee's claim for treating the said expenditure as revenue mainly on the plea that the assessee itself has correctly treated the amount, in question, as capital expenditure in the books of accounts and that the assessee after treating such expenditure as capital, claimed the same as revenue in the return of income and the expenditure is not governed by the judicial expositions on the subject cited by the assessee. The A.O. has also emphasized that in view of the method of accounting consistently followed by the assessee for treatment of such expenditure, it is not open to the assessee to take a different stand for claiming such expenditure as revenue in its return of income. After referring to various judgments, the A.O. finally reached to the conclusion that on the facts and circumstances of the case, the expenditure incurred was capital in nature and, therefore, the assessee was not entitled to claim this expenditure as revenue.
9. Before proceeding to decide the nature of expenditure for the income-tax purpose, we may highlight the policy of Government of India, Ministry of Railways regarding any such expenditure being incurred by the private parties. As per Annexure-1 submitted by the ld. A.R. and which is placed in the record, following are the main guidelines, regarding development of railway sheds/sidings by private investment in railway premises :- (1) Railway will allow investment by private parties in development of goods shed/sidings. Railway would, however, reserve the right to close the goods shed/siding if the same becomes financially or operationally unsustainable at some stage by giving notice of 90 days.
(2) The facilities so created would be used not only by the Parties who have financed them but also by others, and assets so created would belong to the Indian Railways and would be maintained and used as any other Railways assets with absolute authority. The investor(s) would not be eligible for any return/concession in liue of such use of these assets by the Railways or other rail users. The investors) will also not qualify for any preferential treatment in the matter of utilisation of these assets.
(3) The facility (goods shed/siding) and all its equipments and appurtenances will become the property of the railway administration and the investors) will have no claim to these assets. Investment in such assets will not entitle the investors) to any rights what-so-ever with regards to the Railway land on which they are created".
10. It is crystal clear from the above guidelines of Government of India that the facilities so created would belong to the Indian Railways. The investors will not be eligible for any return/concession in Hue of such use of these assets by the Railway. The investors will also not qualify for any preferential treatment in the matter of utilisation of these assets. The facility (goods shed/siding) and all its equipments and appurtenances will become the property of the Railway administration and the investor(s) will have no claim to these assets. Investment in such assets will not entitle the investor(s) to any rights whatsoever with regard to the Railway land on which they are created.
11. The expenditure incurred by the assessee for constructing the railway siding, has to be examined in the perspective of above restrictions of Government of India, imposed on the prospective investors. In the instant case, the Railway Siding so installed by the assessee has no doubt given a long-term right for its use, but the expenditure did not bring any asset to the assessee. It is also clear that the Indian Railway also reserves of the right to close the siding if the same becomes financially or operationally unsustainable at some stage by giving notice of ninety days. Now we have to see whether such right which can be terminated even by giving notice of ninety days can be said to have given any perpetual right to the assessee to enjoy these sidings. These railway sidings were undoubtedly advantageous business to the assessee as they facilitated the transporation of raw materials and finished goods. There can be no doubt that construction of these sheds facilitated the business operation of the assessee and enabled the management and conduct of assessee's business to be carried on more efficiently and profitably. There is also no doubt that the advantage secured for the business of the assessee was of a long duration, inasmuch as, it would last so long as the railway sidings continued to be in motorable condition, subject to the restrictions and guidelines of the Indian Railway as discussed above, but it was not an advantage in the capital field, because no tangible or intangible asset was acquired by the assessee nor was there any addition to or expansion of profit making apparatus of the assessee-company. The expenditure was incurred by the assessee merely for the purpose of facilitating the conduct of the business of the assessee and making it more efficient and profitable and, therefore, it was clearly an expenditure on revenue account. The test of capital or revenue expenditure as discussed by the A.O. is undoubtedly a well known test for distinguising between capital and revenue expenditure, but it must be remembered that this test is not of universal application and, as the parenthetical clause shows, it must yield where there are special circumstances leading to a contrary conclusion. Thus the test relied on by the A.O. is not a universal test.
12. In this case the allowability, of an expenditure as a revenue or capital is not to be judged from the method of accounting adopted by the assessee but it is to be judged as per the provisions of the Income Tax Act, This is not the case of the Revenue that every year the assessee was incurring such type of expenses which has not been capitalised in the books of accounts as per the method of accounting regularly followed by it, but in the year under consideration, the assessee had deviated from the method of accounting for claiming these expenses as revenue expenses. The A.O. has unnecessarily given so much stress on the method of accounting which is not relevant at all for allowing or disallowing such expenses under the Income Tax Act. We could have accepted the stand of the A.O. for compelling the assessee for not deviating from the method of accounting regularly followed by it, if there is any deviation on such method. However, we find that there is no deviation from the accounting treatment given by the assessee in earlier years which is in contrast to the treatment given during the year under consideration. In the instant case, the A.O. has proceeded on the assumption that tangible asset was created, but as per our considered view neither tangible nor intangible asset was created but the expenditure was incurred for getting advantage of long-term nature which was not in the capital field. The Hon'ble Supreme Court in the case of Empire Jute Company Limited (124 ITR 1) has observed that there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application on this case. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and 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 future.
13. While applying the principle laid down by the Hon'ble Supreme Court, we find that in the instant case, even though there is an advantage of enduring benefit, but at the very same time we also find that this addition is not in the capital field but was merely meant for bringing advantage in facilitating the assessee's trade operation and enabling the management and conduct of the business to be carried on more efficiently and profitably while leaving fixed capital untouched.
There is plethoria of judgments in support of the proposition that accenting entry is not decisive for considering the assessee's claim under the Income Tax Act which is a separate code in itself. Thus the Accountancy is not sine-qua-non in determining the taxability or otherwise of an income or deducibility or otherwise of any item of expenditure. As the assessee-company has no right/title on the railway siding, it was to write off the expenditure on constructing the railay siding over a period of five years. As per the guidance note issued by the ICAI, where the capital expenditure is not represented by assets, the company has the option of disclosing the same as capital expenditure or capitalize the expenditure alongwith other assets to be written off over a period of five years and the assessee-company had chosen the later option. The expenditure in question has been undoubtedly incurred not in relation to assets owned by the Company or to acquire any new asset, but in order to facilitate movement of materials for the business operation of the assessee. The expenditure in question, therefore, did not result in acquisition of capital assets. What is material to consider is the nature of advantage in a commercial sense. In the instant case, the advantage obtained by the assessee consisted in facilitating the assessee's business operation or enabling the management and conduct of the assessee's buisiness to be carried on more efficiently and more profitably while leaving the fixed capital untouched. Thus the expenditure are on the revenue account even though the same may endure for a long period. Thus the test of enduring benefit is not a conclusive test and it cannot be applied blindly and mechanicaly without regard to the particular facts and circumstances of the case.
14. In view of the above, we can safely conclude that in the instant case the expenditure had been incurred by the assessee-company only to run its business more efficiently and advantageously and it was not in relation to assets owned by the company or to acquire any new asset but in order to ficilitate movement of materials for the business operation of the assessee-company. Thus the expenditure did not result in acquisition of capital asset and hence, by no stretch of imagination be treated as expenditure for creation of an asset of enduring nature.
The revenue has grievance for deletion of disallowance of Rs. 2.26 crores by the ld. CIT(A), in respect of interest paid on borrowed capital for creation of asset which was not used during the relevant accounting period and, therefore, not to be allowed under Section 36(1)(iii) of the I.T. Act. The assessee has filed C.O. just to support the action of the ld. CIT(A) for allowing the assessee's claim of interest under Section 36(1)(iii).
18. The facts in brief are that the assessee-company paid interest of Rs. 2.26 crores on Bank loan and other loans borrowed for the second kiln which commenced production in the next financial year. The interest paid has been capitalised by the assessee in its books of accounts, but the same was claimed as revenue expenditure deductible under Section 36(1)(iii), in the return of income. In the course of assessment, the A.O. held that after capitalisation of interest, the amount of interest has merged into the cost of the assets and has lost its original character. As per A.O., in the final accounts of the assessee-company there is no recognisition of Rs. 2.26 crores paid as interest on borrowing and the same has been recognised as interest capitalised. As per A.O., provision of Section 36(1)(iii) is not applicable in respect of such interest expenditure. The A.O., therefore, held that treatment given by the assessee in respect of interest as an integral part of the cost of assets is in accordance with the accepted principle of accountancy and the assessee is not entitled to claim in its assessment, deduction of these amounts under Section 36(1)(iii) of the Income Tax Act. In the course of assessment, the A.O. has referred to the decision of the Hon'ble Supreme Court in the case of Challapalli Sugar Ltd. (98 ITR 167), wherein it has been held that actual cost would be inclusive of other expenses in accordance with the normal rules of accounting. As per A.O., in the final accounts there is no recognition of the above sum of interest paid on borrowings, as the same has been recognised as interest capitalised. Actual cost means not merely the cost of asset but the cost of asset to the assessee as a whole. Since interest capitalised has merged with the cost of asset, the expenditure is capital in nature. The A.O. distinguished the cases cited by the assessee and relied on certain judgments for reaching to the conclusion that capitalised interest is not to be allowed as a deduction under Section 36(1)(iii) of the Income Tax Act.
19. By the impugned order, the ld. CIT(A) observed that all the ingredients for allowing the assessee's claim of interest under Section 36(1)(iii) have been complied with and, therefore, the assessee is entitled for claim of deduction under Section 36(1)(iii) in respect of interest even though capitalised in the books of accounts. It was also observed by the ld. CIT(A) that interest expenses claimed constituted revenue expenditure incurred in connection with the same business carried on by the assessee-company notwithstanding that it had treated the same as capital expenditure in its books of accounts. As per ld.CIT(A) accounting entries are not sine-quo-non in determining the liability or otherwise of an income or deducibility or otherwise of any item of expenditure.
20. Aggrieved by the above order of the ld. CIT(A), the revenue approached us for further adjudication. It was vehemently argued by the ld. D.R. that the assessee by its own act has treated the interest expenditure as capital in nature, and, therefore, there is no reason for allowing such capitalised interest, as revenue expenditure while computing the assessee's total income as per income Tax Act. He further supported the order of the A.O. and argued that the ld. CIT(A) has not considered the findings recorded by the A.O. at page-17 of his order for disregarding the assessee's claim for capitalised interest.
21. On the other hand, the ld. A.R. supported the orders of the ld.CIT(A) and submitted that so far as the assessee's claim of deduction of interest is concerned, there is no bar under Section 36(1)(iii) for not allowing any claim of interest, when the fund has been deployed for capital asset and not for revenue asset As per ld. A.R., the basic criteria for allowing deduction under Section 36(1)(iii) is that the amount should be borrowed for the purpose of the business, irrespective of its utilisation or acquisition of capital assets or for revenue assets/expenses.
22. We have considered the rival contentions, carefully gone through the orders of the authorities below and deliberated upon the case laws discussed by the A.O. and ld. CIT(A) as well as referred by the ld.D.R. and A.R. in the course of hearing in the context of factual matrix of the case. From the record, we find that during the year under consideration, the assessee-company has undertaken expansion project.
The project cost was Rs. 80 crores out of which Rs. 55 crores was arranged from Banks and various other financial institutions. The project was completed and commenced in the next financial year following the guidelines of accounting standard the interest of Rs. 2.26 crores was capitalised by the assessee-company in its books of accounts, and was added to the cost of expansion project which was not commissioned on 31-3-1998. The assessee claimed such interest as admissible deduction in computation of taxable income as per provision of Section 36(1)(iii). There is no dispute to the fact that the impugned expenditure was incurred in connection with the expansion of the existing business of the assessee and it did not constitute a new and separate business but the same business as could be seen from the unity, interlacing, inter-dependence, interconnection of management, finance, administration and production aspects, amongst the old and the new units. It constituted the same business and the expenses incurred for expansion are, therefore, claimed as a deduction under Section 36(1)(iii). There is also no dispute to the fact that the assessee-company has extended their business in the same premises in the same place under the same management and in the same line, i.e.
manufacturing and sale of Sponge Iron. There is also no dispute to the fact that business organisation, administration and funds of both the units are inter-connected. The same management has overall control of business including expansion project. The expansion was not a new business but only the expansion of the existing business of the assessee for which interest expenditure was claimed as deduction under Section 36(1)(iii).
23. It is settled legal position that for allowing claim under Section 36(1)(iii), the interest paid/payable has to be in respect of capital borrowed for the purpose of business. The section nowhere stipulates that such borrowing has to be only on revenue account. The distinction sought to be drawn by the A.O. that even though the business might have commenced such interest could be claimed as revenue deduction only provided the asset, in question, has been put to use, does not flow from the main language of the provision. The only requirement is that interest must have been incurred for the purpose of capital borrowings made for the purpose of business. There is an inherrent indication in the Act that any expenditure which is in the nature of capital expenditure could not be allowed as a deduction while computing the income chargeable under the head "profit & gains of business or profession" as laid down in Section 37, but in the same section the portion in parenthesis lays down that such expenditure has to be "not being expenditure of the nature described in Sections 30 to 36.
Therefore, there is a specific provision dealing with interest paid/payable in respect of borrowings incurred for the purpose of business and hence, the general provision viz. Section 37 cannot come into play. The concept and meaning of "actual cost" which is a definition laid down in Section 43(1), is for a limited purpose viz. at the point of time when deduction is to be granted for the purpose of wear and tear (Section 32) or an incentive for the purpose of setting up a specified industry (Section 32A. The term "actual cost" is applicable only in relation to an asset as against the fresh capital borrowed used in Clause (iii) of Section 36(1). The term capital borrowed in the said provision is of much wider import than the phrase 'actual cost'. The contention of the A.O. to the effect that by virtue of Explanation-8 below Section 43(1), any interest which is paid for a period prior to asset first being put to use has always necessariloy to be capitalised does not flow from the plain reading of the section, and that the legislature has provided that in a situation where an asset is acquired out of borrowed funds, interest relatable to such borrowings if it is paid or payble after the asset has been first put to use, shall not form part of actual cost The Explanation-8 nowhere provides that interest pertaining to a period prior to first put to use, will not be allowed as a deduction under Section 36(1)(iii). Even if assuming for the sake of argument, the contention of the A.O. that interest paid for borrowings before an asset is put to use is required to be capitalised, there is nothing in Explanation-8 below Section 43(1), so as to disentitle the assessee from making claim of deduction under Section 36(1)(iii).
24. Regarding treatment given by the assessee in its books of accounts by capitalising the interest, does not disentitle the assessee from its claim of deduction under the Income Tax Act. The judgments of the Hon'ble Supreme Court in the case of Kedarnath Jute Manufacturing Co.
(82 ITR 363) and Indian Discount Co. (75 ITR 191) support the proposition that accounting entries are not sine-quo- non in determing the taxability or otherwise of an income or deductibility or otherwise of any item of expenditure. The interest expenditure incurred on expansion of the same business and when there is unity of control, management, finance, etc., the Court have unilaterally held that such expenditure is to be allowed as revenue expenditure. In this regard, the judgments of HMT Limited (175 ITR 212), Alembic Glass Industrial Ltd.(103 ITR 715), Prem Spinning & weaving Mills Co. Ltd. (98 ITR 20), Indian Telephone Industries Ltd. (175 ITR 215) can be referred to.
There is also no dispute that all the conditions for allowing deduction under Section 36(1)(iii) have complied with. We, therefore, do not find any justification on the part of the A.O. for disallowing the assessee's claim for payment of interest under Section 36(1)(iii) of the Income Tax Act.
25. In the result, the Revenue's appeal is dismissed and the Cross objection filed by the assessee is allowed.