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Zenith Steel Pipes Ltd. (No. 1) (Now Zenith Ltd.) v. Commissioner Of Income-Tax.
Factual and Procedural Background
The assessee, a company, incurred Rs. 20,246 in putting up barbed wire fencing at its factory premises at Khopoli and claimed it as a revenue expenditure for assessment year 1972-73. The Income-tax Officer disallowed the claim as capital in nature. The Appellate Assistant Commissioner allowed the claim, finding the fencing served to prevent animal entry, theft, regulate employee passage and avoid disputes, and noting the fencing's short life (one to two years). The Department appealed to the Tribunal, which held the expenditure conferred an advantage of enduring nature and disallowed immediate deduction, permitting only replacement when worn out. The matter was referred to the court on questions posed by the assessee.
Legal Issues Presented
- Whether, on the facts and circumstances of the case, the expenditure of Rs. 20,246 incurred by the assessee on barbed wire fencing is an allowable/revenue expenditure of the assessee for the accounting period relevant to the assessment year 1972-73?
- If the answer to question No. 1 is in the negative, whether the assessee is entitled to any depreciation on the cost incurred by the assessee in raising the said barbed wire fencing?
Arguments of the Parties
Assessee's Arguments (Shri Toprani)
- Relied on Supreme Court decision in Empire Jute Co. Ltd. v. Commissioner Of Income Tax ([1980] 124 ITR 1) to submit that not every advantage of enduring nature converts expenditure into capital; focus must be on the commercial nature of the advantage.
- Argued that if the advantage merely facilitates trading operations or improves business efficiency without adding to fixed capital value, the expenditure is revenue even if enduring.
- Contended the wire fencing was to preserve company assets and facilitate business and did not add to the value of capital assets.
- Also relied on Commissioner Of Income-Tax, Delhi v. New Garage Ltd. ([1981] 129 ITR 122) as supporting authority.
Department's Arguments (Dr. Balasubramanian)
- Relied on this court's decisions in CIT v. Caltex Oil Refining (I.) Ltd. ([1976] 102 ITR 260), Commissioner Of Income-Tax, Bombay City I v. Colour-Chem Ltd. ([1977] 106 ITR 323), and Commissioner Of Income-Tax v. Borosil Glass Works Ltd. ([1986] 161 ITR 286) to support the Tribunal's view that the fencing conferred an advantage of enduring nature.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Empire Jute Co. Ltd. v. Commissioner Of Income Tax, [1980] 124 ITR 1 (SC) | Principles relating to the question whether an expenditure is of revenue or capital nature. | The court applied these principles as the governing test and used them to assess the nature of the fencing expenditure. |
| Commissioner Of Income-Tax, Delhi v. New Garage Ltd., [1981] 129 ITR 122 | Payment in settlement of landlord suit held to be for continuance of tenancy right and not acquisition of an asset or enduring advantage. | Relied upon by the assessee to show payments conferring no enduring capital advantage can be revenue in nature. |
| CIT v. Caltex Oil Refining (I.) Ltd., [1976] 102 ITR 260 (Bom) | Whether expenditure on wall/fencing formed part of the building/plant; fencing as a condition for carrying on business. | The court noted this case dealt with whether fencing formed part of building/plant and held it was part thereof; it was found not applicable to the present facts. |
| Commissioner Of Income-Tax, Bombay City I v. Colour-Chem Ltd., [1977] 106 ITR 323 (Bom) | Whether roads/roadways within factory premises should be regarded as building within section 10(2)(vi) of the Indian Income-tax Act, 1922. | Referenced to show differing factual and legal issues; the court found it inapplicable to the present case. |
| Commissioner Of Income-Tax v. Borosil Glass Works Ltd., [1986] 161 ITR 286 (Bom) | Facts similar to Colour-Chem Ltd.; issues concerning characterization of works within factory premises. | Found to have similar factual matrix to Colour-Chem and likewise not applicable to the present case. |
Court's Reasoning and Analysis
The court reviewed the authorities cited by both parties. It held that the Bombay decisions relied on by the Department (Caltex, Colour-Chem, Borosil) were not apposite because they addressed distinct questions (whether fencing or internal works formed part of building/plant or were buildings under a statutory provision) rather than the capital-versus-revenue character of expenditure. The court identified Empire Jute as laying down the governing principles on revenue versus capital expenditure. Applying those principles, and noting (a) the fencing could not last for many years and (b) the Appellate Assistant Commissioner’s finding that the expenditure facilitated the smooth and efficient running of the business, the court concluded that, given the nature and purpose of the expenditure, it was revenue in character.
Holding and Implications
Holding: The expenditure of Rs. 20,246 on barbed wire fencing is held to be a revenue expenditure and allowable for the assessment year 1972-73 (answered in the affirmative in favour of the assessee).
Implications: The Tribunal's opposite view was rejected; the Income-tax Officer's disallowance is effectively overturned. The second question regarding entitlement to depreciation was returned unanswered as it did not survive the court's primary finding. The opinion records no order as to costs and does not purport to lay down any broader departure from established principles beyond applying Empire Jute to the facts.
T.D Sugla, J.:— The questions of law referred to us at the instance of. The assessee are:
“(1) Whether, on the facts and circumstances of the case, the expenditure of Rs. 20,246 incurred by the assessee on barbed wire fencing is an allowable/revenue expenditure of the assessee for the accounting period relevant to the assessment year 1972-73?
(2) If the answer to question No. 1 is in the negative, whether the assessee is entitled to any depreciation on the cost incurred by the assessee in raising the said barbed wire fencing?”
2. The assessee is a company.
3. The proceedings relate to its assessment for the assessment year 1972-73. The assessee had claimed revenue expenditure which included an expenditure of Rs. 20,246. These expenses were incurred for putting up a barbed wire fencing at the assessee's factory premises at Khopoli. The Income-tax Officer disallowed the claim observing that it was of capital nature. The Appellate Assistant Commissioner accepted the assessee's claim and held that the barbed wire fencing was done with a view to stop (i) entry of animals inside the factory premises and damaging lawns, gardens, etc.; (ii) easy entry of outsiders and to avoid theft of company's goods : (iii) entry of the employees from any point and to regulate a normal passage for coming in, and going out from, the factory; and (iv) to avoid any dispute with persons having lands in the neighbouring areas. He also accepted the assessee's claim that the life of wire-fencing was hardly one to two years and that the expenditure thereon was, therefore, not of enduring nature. Accordingly, he held that the expenditure was of revenue nature and that the Income-tax Officer was not justified in disallowing the expenses. The matter was carried to the Tribunal by the Department. Having regard to the departmental representative's submission that the expenditure on wire-fencing was incurred for the first time and that the advantage of fencing was to last for a number of years, the Tribunal held that the expenditure incurred by the assessee was to secure an advantage of enduring nature. The Tribunal further held that since wire fencing was not an asset in the strict sense of the word though it was certainly an advantage or benefit, which could not be allowed, only replacement could be allowed as and when the fencing was completely worn out.
4. Shri Toprani, learned counsel for the assessee, relied on the Supreme Court decision in the case of Empire Jute Co. Ltd. v. Commissioner Of Income Tax , [1980] 124 ITR 1 and stated that it was not every advantage of enduring nature which brought an expenditure within the meaning of capital expenditure. The material thing to consider was the nature of the advantage in a commercial sense and it was only where the advantage was in the capital field that the expenditure would be disallowable. If, on the other hand, the advantage consisted merely of facilitating the assessee's trading operations or enabled the management to conduct its business in a more efficient and profitable manner while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage might endure for an indefinite future. It was reiterated that the wire fencing was done in order to preserve the assets of the company and facilitate the carrying on of its business. The wire fencing certainly did not add to the value of the capital assets. Shri Toprani also placed reliance on the Delhi High Court's decision in the case of Commissioner Of Income-Tax, Delhi v. New Garage Ltd., [1981] 129 ITR 122.
5. In this case, the landlord of the premises had filed a suit for eviction of the assessee-tenant. Ultimately, however, the suit came to be compromised and the assessee agreed to pay a sum of Rs. 10,000 to the landlord. The question arose whether the payment of Rs. 10,000 was or was not revenue expenditure. It was held by the court that the amount was paid for the continuance of the tenancy right already existing and the assessee had not acquired any asset or enduring advantage.
6. Dr. Balasubramanian, on the other hand, relied on this court's decisions in CIT v. Caltex Oil Refining (I.) Ltd., [1976] 102 ITR 260, Commissioner Of Income-Tax, Bombay City I v. Colour-Chem Ltd., [1977] 106 ITR 323 and Commissioner Of Income-Tax v. Borosil Glass Works Ltd., [1986] 161 ITR 286, in support of the Tribunal's order.
7. We have gone through the judgments relied upon by Dr. Balasubramanian. In our view, these judgments are not applicable to the facts of the case before us. In CIT v. Caltex Oil Refining (I.) Ltd., [1976] 102 ITR 260 (Bom), the question was not whether an expenditure was of capital or revenue nature. The pertinent question was whether the amount spent on wall/fencing in that particular case formed part of the building. The fencing in that case was a condition for the assessee's carrying on its business, and it was for that reason that this court held that the fencing was a part of the building or plant of the assessee. In Commissioner Of Income-Tax, Bombay City I v. Colour-Chem Ltd., [1977] 106 ITR 323 (Bom), the question was whether the roads or roadways laid out by the assessee-company for the purpose of linking several factory buildings within the factory premises should be regarded as building within the meaning of section 10(2)(vi) of the Indian Income-tax Act, 1922. The facts in Commissioner Of Income-Tax v. Borosil Glass Works Ltd., [1986] 161 ITR 286 (Bom) are also similar to those in Colour-Chem Ltd.'s case, [1977] 106 ITR 323 (Bom).
8. The position, thus, is that the principles relating to the question whether an expenditure is of revenue or capital nature are laid down by the Supreme Court in Empire Jute Co. Ltd.'s case, [1980] 124 ITR 1 (SC). We have to see whether and to what extent these principles are applicable in this case one way or the other. The assessee admittedly incurred an expenditure of Rs. 20,246 on wire fencing of its factory boundaries. The wire fencing cannot certainly last for many years. As found by the Appellate Assistant Commissioner, the expenditure facilitated smooth and efficient running of its business. Having regard to the nature of the expenditure and the purpose for which it was incurred, we hold that the expenditure was of revenue nature.
9. Accordingly, the first question referred to us is answered in the affirmative and in favour of the assessee. In view of our answer to the first question, the second question does not survive and is returned unanswered.
10. No order as to costs.
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