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MODELLA WOOLLENS LTD. vs. COMMISSIONER OF INCOME TAX HIGH COURT OF BOMBAY Kantawala, C.J. & Tulzapurkar, J. IT Ref. No. 4 of 1968 Decided on 2nd August, 1977 TC43R.646; TC16R.1370; TC4R.1055; TC25R.1021 SOURCE : 1978 CTR (BOM) 227 : (1979) 120 ITR 726 (BOM): Sections 80J, 37(1), 217, Asst. Year 1963-64 Decision in favour of Revenue Counsel appeared V.P. Mehta with I.M. Munim & S.J. Mehta, for the Assessee : R.J. Joshi with V.J. Pandit, for the Revenue TULZAPURKAR, J.: In this reference made by the Tribunal under s. 256(1) of the IT Act, 1961, the following questions have been referred to us for our determination : "(1) Whether, on the facts and in the circumstances of the case, the sum of Rs. 12,319 was a capital expenditure not allowable under s. 37(1) of the IT Act, 1961 ? (2) Whether, on the facts and in the circumstances of the case, the preliminary expenses and share capital issue expenses were includible in working out capital employed in the undertaking' within the meaning of s. 84 of the IT Act, 1961, r/w r. 19 of the IT Rules, 1962 ? (3) Whether, on the facts and in the circumstances of the case, the moiety of the profits was includible in the capital employed in the industrial undertaking having regard to r. 19 of the IT Rules, 1962 ? (4) Whether, on the facts and in the circumstances of the case, the payment of the advance tax under s. 212(3) of the IT Act, 1961, was made on 1st March, 1963 ?" At the outset it may be stated that out of the aforesaid four questions it is unnecessary to set out in detail the facts concerning question No. 3, inasmuch as, in our view, the answer to that question is covered by two decisions, one of the Gujarat High Court and the other of the Allahabad High Court, the former in CIT vs. Elecon Engineering Co. Ltd. (1976) 104 ITR 510 (Guj) : TC25R.1106 and the latter in Addl. CIT vs. Hind Lamps (P.) Ltd. (1977) 106 ITR 360 (All) : TC25R.1117. Following the principle of adopting uniformity on questions arising under fiscal statutes we would answer the question having regard to the aforesaid two decisions. In view of the said two decisions, the question is answered in the affirmative and in favour of the assessee. Turning to the first question it may be stated that it relates to the sum of Rs. 12,319 which was said to have been spent by the assessee-company on repairs of an approach road to the factory and the question is whether the amount so spent is revenue expenditure or capital expenditure. The short facts giving rise to this question may be stated. The assessee-company was incorporated on 28th July, 1961. It purchased a factory building from the promoters some time in September, 1961. It also took on lease from the promoters the adjoining land for a period of 99 years under an agreement dt. 25th May, 1962, effective from 29th Nov., 1961. The factory went into production on 1st Nov., 1961. The company made up its first accounts for the period 1st Nov., 1961, to 30th June, 1962, having chosen 30th June of the calendar year as the year ending and, therefore, the above period constituted the previous year for the assessment of the company for the year 1963 64. Admittedly, there was an existing kacha road giving access to the factory but that kacha road was found to have become unserviceable for transport of goods to and from the factory. During the relevant year, i.e., 1963-64, the assessee-company spent a sum of Rs. 12,319 on that road to make it serviceable and that amount was claimed by the assessee-company under s. 37(1) of the Act as allowable deduction being in the nature of revenue expenditure. The ITO rejected the claim on the ground that the expenditure had been largely in the nature of initial expenditure for laying down a road and was in the nature of capital expenditure. In the appeal that was preferred by the assessee-company before the AAC the claim for deduction was reiterated and in that behalf reliance was placed upon a decision of the Punjab High Court in the case of CIT vs. S. B. Ranjit Singh (1955) 28 ITR 14 (Punj). The AAC distinguished the ruling on facts and

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he observed that the land or the road obviously did not belong to the assessee-company and that what the assessee had done was to construct a pucca approach road to facilitate the movement of traffic resulting in an enduring benefit to the assessee and, therefore, it could not be treated as revenue expenditure. He thus confirmed disallowance of the amount. The matter was carried by the assessee-company in further appeal to the Tribunal and the Tribunal also confirmed the decision of the AAC principally on two grounds. In the first place, the Tribunal took the view that the decision in Ranjit Singh's case (supra) on which reliance had been placed was clearly distinguishable on the ground that in that case it was the lessor (owner) who had claimed the expenses while in the instant case before it, the assessee was the lessee and had taken the land together with the existing kacha road on lease and, therefore, if for the purpose of business which the assessee was about to commence it was necessary to spend the amount of Rs. 12,319 for remaking of the road, the expenditure could not be of revenue nature. Secondly, on facts, the Tribunal took the view that having regard to the nature of work undertaken, which was evident from the bill dt. 13th March, 1962, which had been presented by the contractors and paid by the assesseecompany, it was clear that it was not an ordinary repair that was carried out in respect of the existing road but the expenditure was incurred on nothing short of remaking the road which was in a way altogether a new road. In this view of the matter, the Tribunal held that the expenses were of capital nature and disallowance was justified. At the instance of the assessee, the first question has been referred to us for our determination. Mr. Mehta appearing for the assessee has contended before us that having regard to the fact that there was an existing kacha road being an approach road to the factory, it could be said to have been substantially repaired by the assessee-company by incurring the expenditure in question, and the expenditure ought to be regarded as revenue expenditure. He invited our attention to the copy of the bill dt. 13th March, 1962, which had been marked annex. A' to the statement of case and relying upon the fact that a sum of Rs. 12,318.80 had been spent in respect of the quantity of work to the extent of 10,712 sq. ft. having been done, the expenditure should be regarded not as a capital expenditure but revenue expenditure incurred for the purpose of carrying out repairs to the existing road. In support of this contention, he placed reliance upon two decisions both of the Punjab High Court, one in CIT vs. S. B. Ranjit Singh (supra) and the other in Panipat Co-operative Sugar Mills Ltd. vs. CIT (1977) 108 ITR 111 (Punj). As regards the copy of the bill which has been marked annex. A' to the statement of case, it appears to us that the contention of Mr. Mehta based on that bill seems to be ill-conceived. In fact, the nature of work undertaken by the contractors (National Asphalt Products & Construction Co.) itself clearly shows that it was not the case of undertaking any repair work or even substantial repair work to the existing kacha road. The nature of work has been described in this bill thus : "Road work at your mill premises at Thana : Involving : Excavations, soling, metalling, grouting, carpeting and seal coat as per specification." The total quantity of work done is 10,712 sq. ft. and the total bill thereof came to Rs. 12,318-80 at the rate of Rs. 115 per 100 sq. ft. If the work undertaken by the assessee-company through the contractors involved excavations, soling, metalling, grouting, carpeting and seal cast, it is obvious that it cannot be regarded as work pertaining to repairs to an existing kacha road. It is true that there was an existing road but admittedly it was a kacha road and was found to be unserviceable and the assesseecompany undoubtedly wanted to convert it into pucca road so that it should become serviceable for the purpose of movement of heavy trucks of load thereon and it was for this purpose that the items of excavation, soling, metalling, grouting, carpeting and seal coat were required to be undertaken. The very fact that such was the nature of work undertaken goes to show that after the amount had been expended the kacha road was really converted into a new road and in fact the Tribunal has recorded a finding in these words : "Therefore, the bill itself shows that it was not an ordinary repair that was carried out to an existing road, but it was nothing short of remaking the road which was, in a way, altogether a new road. " In view of this factual finding, which has been recorded by having regard to the nature of work mentioned in the bill which was available on record, it will be difficult to accept Mr. Mehta's contention that by incurring the expenditure in question the assessee-company could be said to have merely undertaken the job of carrying out repairs to the existing road or even substantial repairs to the existing road. Even the rate at which the work done was charged by the contractors to the assessee-company, viz., Rs. 115 per 100 sq. ft. also shows that what was undertaken by the assessee- company could not be regarded as mere work of repairing the existing road. The expenditure, in our view, therefore, cannot be regarded as revenue expenditure but will have to be regarded as capital expenditure incurred by the assessee-company. Moreover, it cannot be disputed that by undertaking this expenditure the assessee- company had secured for itself an enduring benefit. 4. The two decisions on which Mr. Mehta has relied really do not support his contention in view of the facts which are obtaining in the instant case before us. So far as the decision in Ranjit Singh's case (supra) is concerned, the

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taxing authorities as well as the Tribunal have brought out distinguishing features which distinguish that case from the facts obtaining in the instant case before us. In the first place, it was a case which dealt with the expenditure incurred by the lessor himself who owned the land over which the road had been repaired and what had been done by the assessee in that case was that he had incurred an expenditure of Rs. 24,904 in resurfacing with concrete the approach roads fallen into a bad state and he claimed the same as allowable deduction. The ITO held that the expenditure should be spread over 10 years and allowed a deduction of about 1/10th of the sum spent, while on appeal no deduction was allowed by the AAC on the ground that the expenditure was capital expenditure. On further appeal, the Tribunal took the view that the case fell under s. 12(4) r/w s. 10(2)(v) and allowed the entire claim. On a reference, the Tribunal's view was upheld by the High Court. The High Court took the view that the income from the lease of the hotel was assessable under s. 12(4) and the expense incurred was in respect of "current repairs " to the hotel premises and was, therefore, an allowable deduction under s. 12(4) r/w s. 10(2)(v). The High Court observed that the sum could be allowed as the cost of repairs could be held not to be a capital expenditure even though the expenditure in a particular year was heavy on account of the fact that it was undertaken to remedy the effect of several years of wear and tear or neglect and also in spite of the fact that such expenditure may not be necessary for several years to come after the repairs had been effected. The position in the instant case is entirely different and, therefore, that decision cannot avail Mr. Mehta. In the second decision of the Punjab High Court reported in Panipat Co-operative Sugar Mills Ltd. vs. CIT (supra), the facts were that the assessee, the Panipat Co-operative Sugar Mills, had spent Rs. 6 lakhs on the conversion of the kacha approach roads to its mills into metalled roads and contended that the expenditure had been incurred mainly to ensure that the sugarcane supplied to its mills were fresher. On the question whether the expenditure was allowable as revenue expenditure, the Punjab High Court took the view that though a road became comparatively more permanently restored by metalling, the conversion of a kacha road into a metalled one did not amount to the construction of a new road, that the roads did not belong to the assessee nor could it have any control over them, that the expenditure was incurred on account of business expediency, namely, the effort to get fresh sugarcane which yielded higher percentage of sugar, that the kacha road was a permanent inconvenience and the expense incurred by the assessee to get rid of this inconvenience could not be held to have brought to it a lasting advantage. On the facts which obtained in that case, the Court took the view that the metalling of the roads in that case amounted to their repair and the expenditure incurred was revenue expenditure allowable under s. 37(1) of the Act. As a general proposition the High Court observed that the question had to be decided from the practical and business point of view. It may be stated that the Punjab High Court has referred to a number of decided cases dealing with the question whether a particular expenditure should be regarded as revenue expenditure or capital expenditure and, on the facts which obtained before it, took the view that the expenditure had been incurred by the assessee on account of business expediency, namely, the effort to get fresh sugarcane which yielded higher percentage of sugar, to the gates of the factory and having regard to this aspect of the matter it held that the metalling of the roads in that case amounted to their repair and the expenditure incurred on that item should be regarded as revenue expenditure. We have pointed out earlier that in the instant case before us having regard to the nature of work undertaken by the assesseecompany it is difficult to take the view that what was done by the assessee-company was merely the repair work done to the existing kacha road. In fact by the nature and type of work undertaken by the assessee-company in the instant case, it must be said that the assessee-company had really remade the road which was altogether a new road for its factory. It cannot be regarded as a case where the expenditure was incurred merely for improving the quality of the road. We may point out that the word "repair" is defined in the Shorter Oxford Dictionary as "restoration of some material thing or structure by the renewal of decayed or worn out parts, by refixing what has become loose or detached". If this is the meaning of the expression "repair", what has been done by the assessee-company in the instant case by no stretch of imagination could be regarded as restoration of the kacha road to its original state or merely improving the quality of kacha road. Factually, the Tribunal has recorded a finding of fact that the what the assessee had done was to remake the road which in a sense was a new road made for its purpose. In our view, therefore, neither of the two decisions on which reliance was placed by Mr. Mehta really helps the assessee. Having regard to the above discussion we are clearly of the view that the expenditure incurred by the assessee-company referred to in question No. 1 will have to be regarded as capital expenditure and not revenue expenditure and, therefore, disallowance thereof was perfectly justified and the first question will have to be answered in the affirmative and against the assessee. 5. Turning to the second question it may be stated that the question really turns upon the proper interpretation of s. 84 of the 1961 Act and r. 19 of the IT Rules, 1962. It appears to us that the assessee-company had incurred

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preliminary expenses and share capital issue expenses amounting to Rs. 1,27,412 and, according to the assessee, in working out "capital employed in the industrial undertaking'' in accordance with the provisions of s. 84 r/w r. 19, these expenses ought not to have been excluded. It may be stated that s. 84 confers certain benefits to an assessee in respect of a newly established industrial undertaking and in working out such benefits the capital employed in the new industrial undertaking is required to be calculated as laid down in r. 19 of the IT Rules, 1962. Sec. 84 reads thus : "Sec. 84. (1) Save as otherwise hereinafter provided, income- tax shall not be payable by an assessee on so much of the profits or gains derived from any industrial undertaking or hotel to which this section applies as do not exceed six per cent per annum on the capital employed in the undertaking or hotel, computed in the prescribed manner''. Rule 19 prescribes the method of computation of capital employed in an industrial undertaking and that rule runs as follows : "19. Computation of capital employed in an industrial undertaking or a hotel.(1) For the purposes of s. 84, the capital employed in an undertaking or a hotel to which the said section applies shall be taken to be (a) in the case of assets acquired by purchase and entitled to depreciation (i) if they have been acquired before the computation period, their written down value on the commencing date of the said period, (ii) if they have been acquired on or after the commencing date of the computation period, their average cost during the said period; (b) in the case of assets acquired by purchase and not entitled to depreciation (i) if they have been acquired before the computation period,their actual cost to the assessee; (ii) if they have been acquired on or after the commencing date of the computation period, their average cost during the said period; (c) in the case of assets being debts due to the person carrying on the business, the nominal amounts of those debts; (d) in the case of any other assets, the value of the assets when they became assets of the business : Provided that if any such asset has been acquired within the computation period, only the average of such value shall be taken in the same manner as average cost is to be computed. Explanation.For the purposes of cls. (a) and (b) of this sub-rule, the value of any building, machinery or plant or any part thereof which having been previously used for any purpose is transferred to the undertaking or hotel at the time of its formation shall not be taken into account for computing the capital employed in cases to which the Explanation to s. 84 applies.." 6. The assessee had spent the sum of Rs. 1,27,412 as preliminary expenses and share capital issue expenses and the assessee wanted to include these expenses in the figure of "capital employed in the industrial undertaking." The ITO negatived the claim on the ground that the expenses regarding formation of a company and the issuance of share capital had nothing to do with the industrial undertaking. This view of the ITO was uphed by the AAC by observing: The preliminary expenses and share capital issue expenses do not represent any tangible asset, and are in the nature of a fictitious asset. They have been correctly kept out in the computation of capital invested in the industrial undertaking''. "The Tribunal also rejected the contention of the assessee. On behalf of the assessee two decisions of the Supreme Court one in the case of India Cements Ltd. vs. CIT (1966) 60 ITR 52 (SC) and the other in the case of CIT vs. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC)were relied upon to support the claim. The Tribunal clearly pointed out that those two decisions did not really decide the point at issue before it but the only question involved was whether the particular type of expenditure was capital expenditure or revenue expenditure. The Tribunal felt that the issue that had been raised by the assessee was not whether the preliminary expenses and share capital issue expenses were capital expenditure and not revenue expenditure but was whether the expenses being of capital nature were includible in the "capital employed in the industrial undertaking" or not. The Tribunal considered the scheme of s. 84 of the Act allowing the benefit of exemption of profits to the new industrial undertaking as well as the provisions of r. 19 and it took the view that whether it was the interpretation of the section or the interpretation of the rule, the expression "capital employed " could never be said to take in any asset represented by a capital expenditure which was not instrumental in producing profits. Since the expenditure in question, though of a capital nature had nothing whatever to do or could not be regarded as being instrumental in producing profits, the exclusion of the amount of Rs. 1,27,412 from the capital computation was justified. At the instance of the assessee the second question set out above has been referred to us for our opinion. 7. Mr. Mehta appearing for the assessee-company has contended before us that usually in the balance-sheet these expenses, viz., preliminary expenses and the share capital issue expenses, appear on the assets side and as such must be regarded as assets which should be included in the computation of capital employed in the industrial undertaking under r. 19 of the IT Rules, 1962. According to him, the method or manner of computation of capital employed in the industrial undertaking had been prescribed by r. 19 whereunder it has been provided that for the purpose of s. 84 : "the capital employed in an undertaking to which the said section applies shall be taken to be.."

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and then follows items of assets which have been specified in cls. (a), (b), (c) and (d) of sub-r. (1) of r. 19 and, according to him, since the preliminary expenses and share capital issue expenses had appeared on the assets side of the balance-sheet and in fact did appear on the assets side of the assessee-company for the relevant year in question, such assets would fall under cl. (d) of r. 19(1) and as such the same could be liable to be included in the capital computation. It is not possible to accept this connection of Mr. Mehta for more than one reason. In the first place, though it is true that according to accountancy practice such preliminary expenses and share capital issue expenses are shown on the assets side of the balance-sheet of the company, such assets on the assets side of the balance-sheet will have to be regarded as nominal or theoretical assets appearing in the balance-sheet. It has to be on the assets side for the purpose of drawing a proper balance-sheet, but it is common knowledge that whenever a company starts earning profits and profits become available these expenses which are shown on the assets side are written off, partly or wholly, depending upon availability of profits and in this behalf we may point out that in the very first report of the directors and balance-sheet and profit and loss account of the assesseecompany for the year ended 30th June, 1962, such preliminary expenses have been actually written off partially. In the directors' report a part of the surplus of Rs. 2,23,825 (profits) is recommended to be utilised for writing off preliminary expenses to the extent of Rs. 54,824 and the item of "miscellaneous expenditure" as particularised in Sch. 7 is indicated after deducting the portion that has been so written off. Therefore, ordinarily, such assets by way of preliminary expenses and share capital issue expenses which are invariably thus written off when profits are available cannot be regarded as real assets which can be taken into account for the purpose of computing "capital employed" in an industrial undertaking. Secondly, it is difficult to say that these types of expenses which appear on the assets side of the balance-sheet would fall under cl. (d) of r. 19(1), for cl. (d) in terms refers to: "in the case of any other assets, the value of the assets when they became assets of the business". These particular types of expenses which are shown on the assets side being in the nature of expenses incurred by the company at the time of its formation cannot be said to possess any value as such that is spoken of by cl. (d) of r. 19(1). In fact, the value of such expenses would be nil and from this angle also it will be difficult to include this nominal or theoretical type of asset which appears on the assets side of the balance-sheet in the computation of capital employed in an industrial undertaking. Thirdly, both s. 84 as well as r. 19 speak of "capital employed in an industrial undertaking'', and since the benefit contemplated to be conferred by s. 84 is an exemption of a certain percentage of profits (viz., 6%) it is clear that such profit must have some relation to the "capital employed in an industrial undertaking " and, therefore, it is clear that the expression "capital employed'' must mean such capital as is instrumental in earning profits and surely the expenses in question which have been incurred by the assessee at the time of formation of a company cannot be regarded as capital or assets that are instrumental in earning profits of the company. In this view of the matter, it is difficult to accept Mr. Mehta's contention that the expenditure in question, viz., the preliminary expenses and share capital issue expenses, form part of the share capital employed in the industrial undertaking of the assessee-company. The second question is, therefore, answered in the negative and against the assessee. 8. The last question arises out of the following facts : The ITO without mentioning anything in his assessment order had charged penal interest of Rs. 1,470.32, presumably under s. 216(a) of the Act. The levy of penal interest was challenged by the assessee before the AAC and the contention of the assessee was that the provisions of s. 212(3) alone were applicable to its case. It was urged that the assessee had duly furnished an estimate of advance tax payable by it on 25th Feb., 1963, and had paid the advance tax on the estimated figure of Rs. 2,04,229 on 1st March, 1963. That contention was negatived by the AAC and when the matter was carried to the Tribunal, the Tribunal ultimately considered the question of charging the penal interest from the point of view of s. 217 of the Act On behalf of the assessee, it was contended that an estimate of advance tax was filed by it on 25th Feb., 1963, and tax with reference to that estimated income had been paid by the assessee-company on 1st March, 1963. The assessee-company actually produced the discharged cheque in that behalf which had been issued on 28th Feb., 1963, for payment of advance tax for inspection of the Tribunal. Even so the Department's representative did not accept the payment as having been made on 1st March, 1963, as according to the counterfoil of the challan received from the Reserve Bank at which the payment was made the date of payment was shown to be 4th March, 1963, and not 1st March, 1963. The Tribunal, however, found that although the cheque could be said to have been presented for payment on the first occasion on 1st March, 1963, it was actually paid out in the clearing on 2nd March, 1963, and, therefore, the earliest date on which the payment could be said to have been made by the assessee and received by the Government bankers was 2nd March, 1963. In that view of the matter, the Tribunal held that the assessee-company was liable to pay the penal interest under s. 217 of the Act. Mr. Mehta appearing

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for the assessee produced before us the challan on which there were two rubber stamps indicating receipt of the cheque, one under date 1st March, 1963, and the other under date 4th March, 1963, and relying on these two rubber stamps which appeared on the challan Mr. Mehta contended that at least one of the rubber stamps did show that the payment had been made by the assessee-company on 1st March, 1963, and as such the penalty could not be said to be justified. It is not possible to accept Mr. Mehta's contention in this behalf for the simple reason that one is not quite sure about the genuineness or authenticity of the rubber stamp bearing the date 1st March, 1963, for that rubber stamp noting receipt of payment does not bear the signature of any officer whereas the rubber stamp which bears the date 4th March, 1963, is authenticated by the signature of the officer concerned. Mr. Mehta contended that having regard to the fact that there were two rubber stamps appearing on the challan and having regard to the fact that the date of clearance on the reverse of the cheque was 2nd March, 1963, the benefit of doubt should be given to the assessee- company and it should be held that the payment must have been made on 1st March, 1963. It is not possible to accept even this contention. In the first place, as pointed out earlier, the rubber stamp indicating payment on 1st March, 1963, does not appear to be genuine or authenticated whereas the rubber stamp indicating receipt of payment on 4th March, 1963, bears the signature of the officer concerned and there is no scope for entertaining any doubt merely on account of two rubber stamps appearing on the challan, but what is more important in the date of clearance which is admittedly 2nd March, 1963, which must be regarded as the date on which the payment could be said to have been made by the assessee-company and received by the Government bankers and as such the payment could not be regarded as having been made on or before 1st March, 1963. In this view of the matter, the levy of penal interest appears to us to be proper and justified. Question No. 4 is, therefore, answered in the negative and against the assessee-company. The assessee-company will pay the costs of the reference to the Revenue.

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