Sujata Manohar, J.:— The assessee-company was carrying on the business of manufacture of fertilisers. It had a factory at Wadala, Bombay, where it manufactured a fertiliser known as single super phosphate. The assessee contemplated setting up a unit at Saladipura in Rajasthan for production of a more concentrated type of the same fertiliser known as triple super phosphate. While the single super phosphate had the chemical composition of P2O5 having a concentration of 17 per cent., triple super phosphate has the same chemical composition of P2O5 but has a concentration of 51 per cent.

2. In connection with the setting up of this unit at Saladipura, the assessee obtained a project report from Messrs. Dorr Oliver (India) Ltd. and incurred an expenditure of Rs. 2,50,000. It also obtained, in the same connection, a market survey from Messrs. Fact Engineering and Design Organisation and incurred an expenditure of Rs. 1,2,0,000. This expenditure of Rs. 3,70,000 was disallowed by the Income-tax Officer on the ground that it was capital expenditure. The Appellate Assistant Commissioner and the Tribunal have, however, allowed this expenditure as revenue expenditure. The assessee-company had also entered into an agreement dated November 28, 1961, with Messrs. Nanavati and Co. (P.) Ltd. as sole distributors of certain chemicals manufactured by the assessee. Under the terms of this agreement, the assessees were required to supply to the sole distributors their products on consignment basis for distribution to the various customers to whom sales had been effected by the sole distributors. The bills for such consignments were made out in favour of the sole distributors. The sole distributors prepared their bills in respect of such sales for their customers. The sole distributors were entitled to receive from the assessee-company a rebate of five per cent. of the sale price. The payment in respect of the goods so sold and received by the sole distributors from their customers and the payments of the invoice value was made by the sole distributors to the assessee-company after deducting five per cent. rebate.

3. Under clause 15 of the agreement of November 28, 1961, it was, inter alia, provided that the sole distributors shall book orders subject to confirmation thereof by the manufacturers, that is to say, the assessee-company : “Provided further, that the manufacturers reserve the right in special circumstances to issue directions in writing to the sole distributors as to the quantities and the customers to whom the products covered by this agreement shall be supplied and the sole distributors shall comply with such directions of the manufacturers and in that event the liability for bad and doubtful debts in respect of such supplies shall be solely of the manufacturer”.

4. The assessee-company had directed the sole distributors to supply certain chemicals from time to time to one Messrs. New Kaiser-I-Hind Mill. In respect of supplies so made, Messrs. New Kaiser-I-Hind Mill was liable to pay a sum of Rs. 5,80,403. The New Kaiser-I-Hind Mill went into liquidation some time in April, 1968. The winding up order was upheld by the Supreme Court by its order dated November 20, 1968.

5. By a deed of assignment dated June 30, 1969, Messrs. Nanavati and Co. P. Ltd. assigned and transferred to the assessee-company the debts of Rs. 5,80,403 due and owing from Messrs. New Kaiser-I-Hind Mill in consideration of the agreement of November 28, 1961, and a sum of rupee one. The deed of assignment recited that pursuant to the directions given by the assessee under clause 15 of the agreement, Messrs. Nanavati and Co. P. Ltd. had supplied from time to time to Messrs. New Kaiser-I-Hind Mill the products covered by the said agreement, that the assessee had debited to the account of Messrs. Nanavati and Co. (P.) Ltd., the sum of Rs. 5,80,403 being the net price of the products so supplied to New Kaiser-I-Hind Mill, that New Kaiser-I-Hind Mill had failed to pay the sum of Rs. 5,80,403, that by an order dated November 22, 1968, the Supreme Court had confirmed the order of winding up of the mill-company made by the Bombay High Court on April 26, 1968, that the period of appointment of Messrs. Nanavati and Co. (P.) Ltd. as sole distributors expired on June 30, 1966, that in making up the accounts between the parties, the assessee-company gave credit to Messrs. Nanavati and Co. (P.) Ltd. for the said sum of Rs. 5,80,403 and that the assessee-company had requested Messrs. Nanavati and Co. (P.) Ltd. to assign to it the said debt of Rs. 5,80,403 due and payable to Messrs. Nanavati and Co. (P.) Ltd. by the mill-company.

6. The Tribunal has held that the sum of Rs. 5,80,403 was deductible as a bad debt for the assessment year 1970–71. In respect of these findings, the following three questions of law have been referred to us under section 256(1) of the Income-tax Act, 1961:

“1. Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 3,70,000 incurred by the assessee-company for preparation of a project report and market survey concerning triple super phosphate was deductible as revenue expenditure under section 37(1) of the Income-tax Act, 1961?

2. Whether, on the facts and in the circumstances of the case, the debt of Rs. 5,80,403 taken over by the assessee-company from Messrs. Nanavati and Co. (P.) Ltd. in terms of the deed of assignment dated June 30, 1969, was deductible as a bad debt for the assessment year 1970–71 in terms of section 36(1)(vii) of the Income-tax Act, 1961?

3. Whether, on the facts and in the circumstances of the case, the aforesaid sum of Rs. 5,80,403 was deductible as a trading loss for the assessment year 1970–71 in terms of section 28(i) of the Income-tax Act, 1961?”

7. The first question relates to an expenditure of Rs. 2,50,000 incurred by the assessee-company for obtaining a project report for setting up a unit at Saladlipura in Rajasthan for the manufacture of triple super phosphate and an expenditure of Rs. 1,20,000 incurred for getting a market survey done in connection with the setting up of the unit at Saladipura in Rajasthan. The question is whether it should be considered as capital expenditure or revenue expenditure.

8. As far back as in 1954, the Supreme Court in the case of Assam Bengal Cement Co. Ltd. v. CIT, [1955] 27 ITR 34, has analysed the difference between capital expenditure and revenue expenditure. Approving the principles laid down by a Full Bench of the Lahore High Court in Benarsidas Jagannath, In re, [1947] 15 ITR 185, the Supreme Court said, while it is not easy to define the term “capital expenditure” in the abstract or to lay down any general and satisfactory test, some broad principles can be borne in mind at the time of evaluating the facts. These are (at page. 44 of 27 ITR):

(1) Outlay is deemed to be a capital expenditure when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment;

(2) Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. The expressions “enduring benefit” or “of a permanent character” are introduced to make it clear that the asset or the right acquired must have enough durability to justify its being treated as a capital expenditure;

(3) Whether, for the purposes of expenditure, any capital is withdrawn, and whether the expenditure incurred is part of the fixed capital of the business, or part of its circulating capital. If, however, the expenditure is made for the running of the business or working it with a view to produce profits, it is a revenue expenditure.

9. The aim and object of the expenditure would, therefore, determine the character of the expenditure, whether it is capital expenditure or revenue expenditure. In this sense, the source or manner of payment would be only of secondary importance and may be considered in order to determine the nature of expenditure incurred. Sounding a note of caution, the Supreme Court has said (at page 45) : “It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations, it is difficult to lay down a test which would apply to all situations. One has therefore got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure….”

10. In the case of CIT v. Shri Digvijay Cement Company Ltd., [1986] 159 ITR 253, the Gujarat High Court was required to consider a case where the assessee-company which carried on the business of manufacture and sale of cement, had incurred expenditure in obtaining a feasibility report for setting up a shipyard. The report was not favourable and no shipyard was, in fact, established. The High Court said that the expenses incurred for the feasibility report were capital in nature. The expenses had been incurred with a view to deciding whether an asset or advantage of almost permanent nature should be brought into existence or not. It was, therefore, capital in nature and not deductible. The court said that one has to look to the reasons for the expenditure and it was not necessary that the expenditure did ultimately produce any. result. The Gujarat High Court also relied upon the decision of the Supreme Court in Assam Bengal Cement Co. Ltd. v. CIT, [1955] 27 ITR 34.

11. In the case of CIT v. Ashok Leyland Ltd., [1969] 72 ITR 137, the Madras High Court also stated that the word “capital” suggests permanency; and capital expenditure is, therefore, closely akin to the concept of securing tangible or intangible property, corporeal or incorporeal rights of a lasting or enduring benefit to the enterprise. Revenue expenditure, on the other hand, is operational in its perspective and solely intended for the furtherance of the enterprise. The Madras High Court also said that this distinction is susceptible to modification under the circumstances of each case. Therefore, basically, the expenditure would be attributable to capital if it is made with a view to bringing a profit-making asset or a business asset or an enduring advantage into existence. We have, therefore, to examine whether the expenditure which is incurred in the present case is capital or revenue in nature.

12. The assessee placed emphasis on the fact that the assessee-company was already carrying on the business of manufacturing fertilisers, including single super phosphate. Therefore, its project for se: ting up another unit in Saladipura in Rajasthan for manufacturing triple super phosphate should be viewed only as an expansion of its existing business. The Department, on the other hand, has laid emphasis on the fact that what the assessee-company proposed to manufacture in the unit at Rajasthan was triple super phosphate and not single super phosphate. The Department contends that this is a new item and, therefore, the unit at Rajasthan has to be viewed as undertaking a new business on the part of the assessee. The Department has also emphasised the location of the new project at a place different from the place where the assessee-company has its existing factory.

13. Our attention was drawn to a decision of the Calcutta High Court in the case of Kesoram Industries and Cotton Mills Ltd. v. CIT, [1992] 196 ITR 845, where the assessee had a cement unit in Andhra Pradesh. It incurred miscellaneous expenditure and legal charges in connection with a proposed factory in Rajasthan. The court said that the expenditure related to the feasibility of expanding the assessee's existing business and, therefore, these expenses were deductible as revenue expenditure. In our view, one cannot decide whether the expenditure is capital in nature or revenue in nature simply by relating it to setting up a new business or expanding an existing business. Even for the latter purpose capital expenditure may have to be incurred. Expansion of existing business can be done in several ways. It can be done by improving sales, by improving distribution channels, by advertising, or it can be done by acquiring additional plant and machinery and thereby increasing production. The nature of expansion will determine whether the expenditure incurred is of a capital nature or revenue nature. We, therefore, do not agree with the view taken by the Calcutta High Court in so far as it suggests that all expenditure incurred for expanding existing business would necessarily have to be considered as revenue expenditure. One has to take into account all the circumstances of the case while deciding whether the expenditure can be considered as revenue expenditure or capital expenditure, (vide Assam Bengal Cement Co. Ltd. v. CIT, [1955] 27 ITR 34 (SC). The aim and object of the expenditure would determine the character of the expenditure—whether it is capital expenditure or revenue expenditure.

14. The assessee also placed strong reliance on the case of Alembic Chemical Works Co. Ltd. v. CIT, [1989] 177 ITR 377 (SC). In that case the expenditure incurred for improvement in the penicillin-strains and, for getting a pilot plant from a foreign company for this purpose, was considered as revenue expenditure. This was because it was viewed as having been incurred for running the existing business more efficiently and for improving the quality and production of its existing product. The facts of the present case cannot be compared to the facts of that case.

15. Looking to the circumstances of the present case, in our view, it is not really material to decide whether the project at Rajasthan should be viewed as establishing a new business by the assessee or as an extension of its existing business. This fact may be relevant in the circumstances of a given case, but is not so in the present case, because it is an accepted position that if the assessee were to set up its unit at Rajasthan, it would have to acquire land, plant and machinery and incur capital expenditure in that connection for setting up its unit at Rajasthan. The project report which the assessee obtained from Messrs. Dorr Oliver (India) Ltd. was for the purpose of setting up such a unit at Rajasthan. In other words, the expenditure incurred for the project was incurred by the assessee-com-pany in order to decide whether to acquire some profit-making assets for the purposes of its business which would be of an enduring nature. The expenses incurred for the project report have, therefore, to be viewed as being capital in nature. Simply because the assessee had a running business of manufacturing fertilisers, it cannot be said that the expense for obtaining such a project report was a part of the expenses incurred by the assessee for running its business. It was clearly an expenditure incurred for ascertaining whether to acquire new assets of some durability for the purpose of earning profits.

16. The market survey which was obtained by the assessee from Messrs. Fact Engineering and Design Organisation, at a cost of Rs. 1,20,000, has been described in the statement of the case as a market survey in connection with the project at Rajasthan. The Appellate Assistant Commissioner, in his order, has described this expenditure as “for conducting market survey for demand of fertilisers”. (Paragraph 5 of the Appellate Assistant Commissioner's order dated June 1, 1973). The Tribunal in its order has said that the expenditure incurred by the assessee on project report and market survey relating to the second unit of the same business still constituted revenue expenditure. The nature of the survey which was conducted is not very clear.

17. If one bears in mind the fact that the assessee was already carrying on the business of manufacturing fertilisers, a market survey relating to the demand for fertilisers including single super phosphate which the assessee was already manufacturing, and triple super phosphate which was proposed to be manufactured, can be looked upon as a market survey for the more efficient conduct of the assessee's existing business. The expenses incurred in connection with such a market survey can be considered as revenue expenditure. If, on the other hand, the market survey was entirely for the purpose of determining the marketability of triple super phosphate, which the assesses proposed to manufacture, then this market survey would form an integral part of the proposed project. The expenses for such a market survey would form an integral part of the expenses incurred for the purpose of deciding whether to set up the project at Rajasthan or not for the manufacture of triple super phosphate. The expenditure for such a market survey, carried out exclusively for determining the marketability of triple super phosphate, would therefore constitute capital expenditure. But a market survey of a more general nature can be looked upon as revenue expenditure for the purpose of better conduct of the assessee's existing business.

18. In this connection a reference may be made to a decision in the case of CIT v. Ananda Bazar Patriha (P.) Ltd., [1990] 184 ITR 542 (Cal). In that case the asses see published a newspaper. The assessee: conducted a market survey to obtain information about the circulation of the newspaper at a given point of time. The Calcutta High Court said that any market survey gives an assessee a better knowledge of the market and the assessee may employ his profit-making apparatus to a better advantage with the knowledge derived from the market survey. The expenditure incurred for market survey was incidental to the carrying on of the business of the assessee. The expenditure cannot be said to have brought into existence anything of enduring benefit to the assessee in the same sense that a capital asset endures. The court held the expenditure to be revenue expenditure.

19. A number of other cases have been cited before us. A list of such cases is appended to this judgment*. We have only referred to those cases which afford some guidelines in the present case.

20. In the light of the above discussion, question No. 1 is answered as follows:

The expenditure of Rs. 2,50,000 incurred for the preparation of the project report constitutes capital expenditure. In respect of the expenditure of Rs. 1,20,000 for the market survey, the matter is referred back to the Tribunal for decision in accordance with the ratio laid down by us above depending upon the examination of facts as may be found by the Tribunal. If the market survey was carried out exclusively to determine the marketability of triple super phosphate, its expenses would be capital in nature. If it were a general market survey regarding the products manufactured by the assessee, its expense would be revenue in nature.

21. Question No. 2: The facts relating to question No. 2 have already been set out. Under clause 15 of the agreement dated November 28, 1961, the assessee-company had undertaken liability for bad and doubtful debts in respect of supplies made by the sole distributors at the instance of the assessee-company. Although clause 15 requires the assessee-company to give such directions for sale in writing, this is a provision for avoiding any dispute between the assessee and the sole distributor. There is no dispute as between the assessee and the sole distributor that the supplies made to Messrs. New Kaiser-I-Hind Mill were at the instance of the assessee-company. It is also clear from the facts that income from the sales made to New Kaiser-I-Hind Mill was included in the accounts of the assessee-company as income of the assessee-company. In view of this position, when under the deed of assignment dated June 30, 1969, the debt of Rs. 5,80,403 was taken over by the assessee-company in consideration of obligations incurred under the agreement dated November 28, 1961, and Re. 1, the debt was recoverable by the assessee-company as its own debt. The circumstances set out earlier show that the assessee was justified in treating it as a bad debt. In these circumstances, especially in view of the fact that income from the sales to Messrs. New Kaiser-I-Hind Mill was shown as the income of the assessee-company in its accounts, the debt arising as a result of nonpayment of the sale price to the assessee has to be considered as a bad debt deductible by the assessee-company for the assessment year 1970–71 in terms of section 36(1)(vii) of the Income-tax Act, 1961. Question No. 2 is, therefore, answered in the affirmative and in favour of the assessee.

22. Question No. 3: In view of our answer to question No. 2, it is not necessary for us to answer question No. 3, and we decline to answer the same. The questions referred to us are answered accordingly. No order as to costs.