Punjab State Civil Supplies Corporation Ltd. Vs. Commissioner of Income-tax - Court Judgment

Gokal Chand Mital, J.

1. The Punjab State Civil Supplies Corporation Ltd., Chandigarh, the assessee, claimed deduction of the amount spent on purchase of tarpaulins and polythene covers to protect the foodgrains stored by it from rain, dust, storm, etc., as revenue expenditure under Section 37 of the Income-tax Act, 1961 (hereinafter called 'the Act'). The Income-tax Officer did not allow the deduction on the reasoning that these items were not being used for packing the material and considered the expenditure to be of capital nature. On appeal, the Commissioner of Income-tax (Appeals) came to the conclusion that depreciation on the purchase cost to the extent of 10% was allowable. On further appeal, the Income-tax Appellate Tribunal, Chandigarh, agreed with the view taken bythe Income-tax Officer but upheld the order of the Commissioner ofIncome-tax (Appeals) allowing depreciation as no appeal against it wasfiled by the Revenue. This has necessitated the Tribunal to refer the following question for the opinion of this court:

'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the value of the tarpaulin and polythene covers is not allowable as a deduction while computing the income of the assessee in the initial year of their purchases ?'

2. It is undisputed that the assessee is a Punjab State undertaking and is a nominee of the State Government for wholesale distribution of levy sugar and other foodgrains on the notified prices by the Government. In this process, it has to store large quantities of foodgrains and it is also not disputed that sometimes, the permanent storage capacity is found to be short and the foodgrains have to be stored in stacks in the open and if they are left just like that unprotected during rain, dust, storm and sun, they can get spoiled or completely destroyed. Therefore, to save them from destruction, it is the imperative duty of the assessee to cover them properly and in order to cover them, it purchased tarpaulins and polythene covers.

3. We are not impressed with the argument of counsel for the Revenue that such covers would fall within the definition of 'plant' contained in Section 43(3) of the Act and such an expenditure would be in the nature of capital expenditure. In the alternative, an argument was raised that whenever they are replaced, deduction would be allowed under Section 37 of the Act as replacement cost. The Supreme Court in L.H. Sugar Factory and Oil Mills (P.) Ltd. v. CIT : [1980]125ITR293(SC) and CIT v. Associated Cement Companies Ltd. : [1988]172ITR257(SC) has held that for carrying business activity in a profitable way and advantageous to the assessee, if any expenditure is incurred for the construction of water pipe lines and high tension electricity supply lines or construction of roads by the assessee on Government or municipal land, such an expenditure is allowable as revenue expenditure. We are of the opinion that the expenditure incurred on the purchase of tarpaulins and polythene covers to save the very existence of the foodgrains, which is the main business of the assessee, from rain, dust, storm, sun, etc., would certainly be a revenue expenditure.

4. Whether an expenditure is of revenue or capital nature, various tests have to be kept in mind in view of the Supreme Court decisions in Assam Bengal Cement Co. Ltd. v. CIT : [1955]27ITR34(SC) , CIT v. Amalgamated Development Ltd. : [1967]65ITR395(SC) , CIT v. Birla Cotton Spinning and Weaving Mills Ltd. : [1971]82ITR166(SC) and Empire Jute Co. Ltd. v. CIT : [1980]124ITR1(SC) .

5. If an expenditure is incurred for acquiring or bringing into existence an asset or advantage of enduring nature, the expenditure is of a capital nature, but if, for running the business or to produce profits, a recurring expenditure is incurred, which is not of enduring nature, the expenditure is of a revenue nature.

6. The Tribunal had relied upon Askoka Hotels Ltd. v. CIT : [1969]72ITR306(Delhi) , a decision of the Delhi High Court, in deciding the question against the assessee. We have gone through that decision but the same is distinguishable on facts. That decision relates to Ashoka Hotel, Delhi. When the hotel was set up, linen and blankets were purchased and it was held that for setting up a new hotel, the purchase of the aforesaid items was necessary and formed capital expenditure. Counsel for the Revenue was asked that if, later on, linen and blankets wear out and are repurchased, what would be the nature of that expenditure. He agreed that if they are purchased later on, the expenditure would be of revenue nature and would be permissible. Hence, that case has wrongly been applied by the Tribunal to the facts of the present case.

7. On the contrary, the relevant decisions are CIT v. Kirkend Coal Co. : [1966]60ITR537(Patna) and CIT v. Belgachi Tea Co. Ltd. : [1975]99ITR99(Cal) . In the first case, stowing operations were carried on under the directions of the mining department to enable the assessee to extract coal for a score of years and such an expenditure was held to be of revenue nature and was allowed. In the second case, the assessee who was carrying on the business of tea-growing had set up proper fencing to protect the tea gardens and such expenses were allowed considering the same to be of revenue character.

8. The facts of the present case are much better than the facts of the aforesaid decided cases. Here, for keeping the stocks-in-trade intact, covers have to be provided and such an expenditure would be nothing but an expenditure of revenue nature. The Tribunal was not right in disallowing the deduction of the cost thereof as a revenue expenditure.

9. Accordingly, we hold that the entire expenditure incurred by the assessee on the purchase of tarpaulins and polythene covers is allowable as a revenue expenditure and we answer the question in favour of the assessee, in the negative. However, there will be no order as to costs.