Commissioner of Income TaxMadurai v. M/s.Southern Roadways Ltd.,Usilampatti Road,Kochadai, Madurai

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED: 19.06.2007CORAMTHE HON'BLE MR.JUSTICE P.D.DINAKARANANDTHE HON'BLE MR.JUSTICE P.P.S.JANARTHANA RAJAT.C.(A) Nos.700 to 704 of 2007Commissioner of Income TaxMadurai...Appellant inall T.Cs/AppellantVs.M/s.Southern Roadways Ltd.,Usilampatti Road,Kochadai, Madurai..Respondent inall T.Cs/RespondentAppeals under Section 260A of the Income Tax Act, 1961against the order of the Income Tax Appellate Tribunal, Madras'D' Bench dated 30.8.2005 in ITA Nos.793 to 795 and1075/Mds/2002 and 536/Mds/2000, for the assessment years 1995-96 to 1997-98 against the order of the Commissioner of IncomeTax (Appeals) IX Chennai for the Assessment year dated 1993-941994-95 1994-95, 1995-96 1996-97 1997-98 dated 17.1.2000,6.9.2000 and 14.3.2002 in ITA No. 395/95-96 276/96-97 226/97-98,67/98-99 553/99-2000 and 159/2000-01 and against the assessmentorder of the Deputy Commissioner of Income Tax (Special Range I)Madurai and Joint Commissioner of Income Tax Special Range I,Madurai, dated 5.3.98, 19.3.99 & 29.3.2000 in PAN GIR.No.47-016-CX-4060, respectively.For Appellant:Mr.J.Narayanasamy, Jr.SC for IT -----J U D G M E N T(Delivered by P.D.DINAKARAN, J.)The above tax case appeals are directed against the commonorder of the Income-tax Appellate Tribunal dated 30.8.2005 madein ITA Nos.793 to 795 and 1075/Mds/2002 and 536/Mds/2000 for theassessment years 1995-96 to 1997-98. https://hcservices.ecourts.gov.in/hcservices/

2. The Revenue is the appellant. For the assessment years1995-96 to 1997-98, the Assessing Officer disallowed theassessee's claim of expenditure incurred on software packages asrevenue expenditure and for the assessment years 1995-96 and1996-97, he disallowed the claim of expenditure incurred onconstruction of new compound wall removing the existing barbedwires as revenue expenditure. For the assessment year 1995-96,the Assessing Officer disallowed the claim of expenditure onreplacement of UPS and for the assessment year 1996-97, hedisallowed the claim of expenditure incurred on replacement ofprinter and treated the said expenditure as capital expenditure.Aggrieved by the same, the assessee preferred appeals before theCommissioner of income-tax (Appeals), who, partly allowed theappeals. Against the order of the Commissioner, both theassessee and the Revenue preferred appeals before the Income-taxAppellate Tribunal, which, by common order dated 30.8.2005, heldall the issues in favour of the assessee holding the expenditureincurred on software packages, on construction of compound wall,on replacement of UPS and on replacement of printer as revenueexpenditure. Hence, the present tax case appeals by the Revenueraising the following substantial questions of law:-"1. Whether in the facts and circumstances of thecase, the Tribunal was right in holding that theexpenditure incurred on the software package is arevenue expenditure ?2. Whether in the facts and circumstances of the case,the Tribunal was right in holding that expenditureincurred on construction of compound wall in the placeof barbed wire fencing is a revenue expenditure ?3. Whether in the facts and circumstances of the case,the Tribunal was right that the expenditure incurredon replacement on UPS system is a revenueexpenditure ?4. Whether in the facts and circumstances of the case,the Tribunal was right that the expenditure incurredon replacement of printer is a revenue expenditure ?"3.1. The balancing point to answer these substantialquestions of law lies on the celebrated test, as laid down byLord Cave L.C. in Atherton v. British Insulated and HelsbyCables Ltd. [(1925) 10 TC 155, 192 (HL)], whereunder the learnedLaw Lord stated as follows:- https://hcservices.ecourts.gov.in/hcservices/ " .. when an expenditure is made, not only once andfor all, but with a view to bringing into existence anasset or an advantage for the enduring benefit of atrade, I think there is very good reason (in theabsence of special circumstances leading to anopposite conclusion) for treating such an expenditureas properly attributable not to revenue but tocapital."(emphasis supplied)3.2. This test, as a parenthetical clause, must yield wherethere are special circumstances leading to a contrary conclusionand, as pointed out by Lord Radcliffe in Commissioner of Taxesv. Nchanga Consolidated Copper Mines Ltd. [(1965) 58 I.T.R. 241(PC)], it would be misleading to suppose that in all cases,securing a benefit for the business would be prima facie,capital expenditure 'so long as the benefit is not so transitoryas to have no endurance at all'.3.3. Based on the above views expressed by Lord Cave L.C.in the Artherton's case, and by Lord Radcliffe in the case ofNchanga Consolidated Copper Mines Ltd., referred supra, the ApexCourt in Empire Jute Co. Ltd. v. Commissioner of Income-tax[(1980) 124 I.T.R. 1], held that there is no embracing formulawhich can provide a ready solution to the problem; no touchstonehas been devised. Every case has to be decided on its ownfacts, keeping in mind the broad picture of the whole operationin respect of which the expenditure has been incurred. In thesaid case, the Apex Court has further held as follows:-".. There may be cases where expenditure even ifincurred for obtaining advantage of enduring benefit,may nonetheless, be on revenue account and the test ofenduring benefit may break down. It is no everyadvantage of enduring nature acquired by an assesseethat brings the case within the principle laid down inthis test. What is material to consider is the natureof the advantage in a commercial sense and it is onlywhere the advantage is in the capital field that theexpenditure would be disallowable on an application ofthis test. if the advantage consists merely infacilitating the assessee's business to be carried onmore efficiently or more profitably while leaving thefixed capital untouched, the expenditure would be onrevenue account, even though the advantage may endurefor an indefinite future. The test of enduringbenefit is, therefore, not a certain or conclusivetest and it cannot be applied blindly andmechanicallywithout regard to the particular facts andcircumstances of a given case." https://hcservices.ecourts.gov.in/hcservices/ The Apex Court has further held that there may be cases whereexpenditure, though referable to or in connection with fixedcapital, is nevertheless allowable as revenue expenditure. Anillustrative example would be of expenditure incurred inpreserving or maintaining capital assets.3.4. Reiterating its views expressed in the case of EmpireJute Co. Ltd. [(1980) 124 I.T.R. 1], supra, the Apex Court inCommissioner of Income-tax v. Associated Cement Companies Ltd.[(1988) 172 I.T.R. 257], held the expenditure incurred by theassessee-company for supply of water to the Municipality, forproviding water pipelines, for supplying electricity, etc. asdeductible expenditure.3.5. That apart, the Apex Court in Alembic Chemical WorksCo. Ltd. [(1989) 177 ITR 377], after referring to B.P. AustraliaLtd. v. Commissioner of Taxation of the Commonwealth ofAustralia [1966] AC 224 (PC), held that,"What is capital expenditure and what is revenueare not eternal verities but must need be flexible soas to respond to the changing economic realities ofbusiness. The expression 'asset or advantage of anenduring nature' was evolved to emphasise the elementof a sufficient degree of durability appropriate tothe context."3.6. The Karnataka High Court, in Commissioner of Income-tax v. Mysore Cemenats Ltd. [(1990) 183 I.T.R. 367], followingthe ratio laid down by the Apex Court in Empire Jute Co. Ltd. v.Commissioner of Income-tax [(1980) 124 I.T.R. 1] andCommissioner of Income-tax v. Associated Cement Companies Ltd.[(1988) 172 I.T.R. 257], cited supra, held that the test ofenduring nature applied to the purpose for which a particularexpenditure is incurred is not a conclusive test.3.7. Further, this Court, in Commissioner of Income-tax v.T.V.Sundaram Iyengar and Sons P. Ltd. [(1974) 95 I.T.R. 428],held that the amount advanced by the assessee for constructionof houses under a welfare scheme was held to be in the nature ofa revenue expenditure. The said view of this Court was alsoaffirmed by the Apex Court in the same case reported in [(1990)186 I.T.R. 276 (SC)].3.8. The Bombay High Court in Zenith Steel Pipes Ltd.(No.1) v. Commissioner of Income-tax [(1990) 185 I.T.R. 126],where the assessee had put up a barbed wire fencing at itsfactory premises in order to stop entry of animals and of https://hcservices.ecourts.gov.in/hcservices/ outsiders, to regulate the entry of employees and to avoiddisputes with neighbours, accepting the case of the assesseethat such wire fencing would not last for many years and thenature of advantage by safeguarding the asset in the strictsense would merely facilitate the assessee's trading operationsand enable the management to conduct its business in a moreefficient and profitable manner while leaving the fixed capitaluntouched, held that the expenditure incurred on putting up ofbarbed wire fencing was allowable as revenue expenditure.3.9. That apart, this Court in an unreported decision inT.C.(A) No.1048 of 2006 [between Commissioner of Income-tax v.M/s.Loyal Super Fabrics], where the assessee claimed theexpenditure incurred while shifting his factory premises fromKovilpatti to Cuddalore, as revenue expenditure, which wasdisallowed by the Revenue, by judgment dated 21.8.2006, applyingthe law laid down by the House of Lords in Atherton v. BritishInsulated and Helsby Cables Ltd. [(1925) 10 TC 155, 192 (HL)],referred supra, observed as follows:-"... the expression 'enduring advantage' availed bythe respondent/assessee by shifting the factory fromKovilpatti to Cuddalore, is a relative term withreference to the survival of the factory in theexisting premises. Only if and when the survival inthe existing place, but for the shifting, issatisfied, the test of enduring advantage could beapplied. If the very survival of the assesseefactory in the existing place itself is at stake, thequestion of applying the test of enduring benefit doesnot arise, because capital expenditure and revenueexpenditure, being not eternal verities - a trueprinciple or belief especially one of fundamentalimportance, must need be flexible so as to respond tothe changing economic realities of the business aswell as the survival of the business itself.Therefore, the test of enduring benefit is not acertain and conclusive test and it cannot be appliedblindly and mechanically without regard to theparticular facts and circumstances of a given case, assharply observed in the Artherton's case (citedsupra)."4. The proposition that there cannot be any single rigidformula to find out whether a particular expenditure is revenuein nature or capital and that the expenditure was incurred toobtain a benefit of an enduring nature is not the sole test inevery case is, therefore, strongly supported by the viewsexpressed by the House of Lords in Atherton v. British https://hcservices.ecourts.gov.in/hcservices/ Insulated and Helsby Cables Ltd. [(1925) 10 TC 155, 192 (HL)],by the Privy Council in Commissioner of Taxes v. NchangaConsolidated Copper Mines Ltd. [(1965) 58 I.T.R. 241 (PC)], bythe Apex Court in Empire Jute Co. Ltd. v. Commissioner ofIncome-tax [(1980) 124 I.T.R. 1], as well as by the decision ofseveral other High Courts, referred to earlier. With thisbackground, we propose to answer the substantial questions oflaw raised by the Revenue in the above appeals.Question No.1:" Whether in the facts and circumstances of thecase, the Tribunal was right in holding that theexpenditure incurred on the software package is arevenue expenditure ? "5.1. For the assessment year 1995-96 to 1997-98, theassessee claimed the expenditure incurred on software packagesas revenue expenditure, but the same was disallowed by therevenue. The concept of enduring benefit must respond to thechanging economic realities of the business. The expensesincurred by installation of software packages in the presentcomputer world, which revolves on the modern communicationtechnology, enables the assessee to carry on its businessoperations effectively, efficiently, smoothly and profitably.However, such software itself does not work on a stand alonebasis. It has to be fitted to a computer system to work. Suchsoftware enhances the efficiency of the operation. It is an aidin the manufacturing process rather than the tool itself.Therefore, the payment for such application software, thoughthere is an enduring benefit, does not result in acquisition ofany capital asset and it merely enhances the productivity orefficiency and hence, has to be treated as revenue expenditure.5.2. In view of the above, we hold that the Tribunal hadrightly held the expenditure incurred on software packages as arevenue expenditure.Question No.2 :" Whether in the facts and circumstances of thecase, the Tribunal was right in holding thatexpenditure incurred on construction of compound wallin the place of barbed wire fencing is a revenueexpenditure ?"6.1. This issue relates to the assessment years 1995-96and 1996-97, during which the claim of the assessee with respectto the expenditure incurred on construction of compound wall inthe place of barbed wire fencing as revenue expenditure wasdisallowed by the Revenue. https://hcservices.ecourts.gov.in/hcservices/

6.2. While chalking out the balancing point for decidingthe substantial questions of law raised by the Revenue based onthe ratio laid down by the House of Lords, Privy Council, theApex Court as well as by other High Courts, referred supra, wehave already observed that there cannot be any single rigidformula to find out whether a particular expenditure is revenuein nature or capital and that the expenditure was incurred toobtain a benefit of an enduring nature is not the sole test inevery case. Incidentally, we have also referred to the decisionof the Bombay High Court in Zenith Steel Pipes Ltd. (No.1) v.Commissioner of Income-tax [(1990) 185 I.T.R. 126], wherein ithas been held that putting up of a barbed wire fence was arevenue expenditure.6.3. When an identical question whether the expensesincurred for replacing the old barbed wire fence around thecompound by a compound wall is a revenue expenditure or capitalexpenditure came up for consideration before the Karnataka HighCourt in Commissioner of Income-tax v. B.V.Ramachandrappa andSons [(1991) 191 I.T.R. 34], applying the well settledprinciples laid down by the House of Lords, Privy Council, ApexCourt as well as by the decision of several other High Courts,referred supra, the Karnataka High Court held as follows:-" .. The purpose of the fence around the businesspremises was to prevent trespassers and thieves fromentering into the business premises; the dominantpurpose was to safeguard the property in the premises.The materials in the premises were part of thebusiness assets of the assessee. In this context, thecompound wall could not be treated in isolation. Itwas part of the business premises and when only a partof the premises was replaced, prima facie, it would bea case of repair. The identity of the entire asset asa whole was not affected at all. The works carried outcontributed to the better and safer utilisation of theexisting business premises asset. The works effected,when considered in proportion to the entire businesspremises, did not result in significant replacement soas to alter the character of the business premises.Therefore, the Tribunal was right in holding that theexpenditure incurred on replacement of thatched roofwith asbestos sheets and barbed wire fence withcompound wall was revenue expenditure."6.4. Of course, our attention was brought to anotherdecision of the Karnataka High Court in Senapathy SynampsInsulations (P) Ltd. v. Commissioner of Income-tax [(2001) 248 https://hcservices.ecourts.gov.in/hcservices/ I.T.R. 656], where the assessee replaced the existing compoundwall with a new foundation and claimed the expenditure incurredon the construction of the wall as revenue expenditure. In thesaid case, the Karnataka High Court held that the Revenue hadrightly treated the expenditure as capital expenditure becausethe compound wall had been built to provide enduring safety tothe assessee. But, we find that the ratio laid down by theHouse of Lords, Privy Council, Apex Court as well as by otherHigh Courts, referred supra, were not brought for considerationby the Karnataka High Court while deciding the question raisedin the said case. 6.5. Therefore, since the decision of the Karnataka HighCourt in Commissioner of Income-tax v. B.V.Ramachandrappa andSons [(1991) 191 I.T.R. 34], is fully supported by the ratiolaid down by the House of Lords, Privy Council, Apex Court aswell as by other High Courts, referred supra, in our consideredopinion, in the case on hand, the Tribunal has rightly held thatthe expenditure incurred on the construction of the compoundwall in the place of barbed wire fencing is a revenueexpenditure. Question Nos.3 and 4 :" Whether in the facts and circumstances of thecase, the Tribunal was right that the expenditureincurred on replacement on UPS system is a revenueexpenditure ?"" Whether in the facts and circumstances of thecase, the Tribunal was right that the expenditureincurred on replacement of printer is a revenueexpenditure ?"7.1. The reasons that weighed this Court in deciding theissue whether the expenditure incurred for replacement ofsoftware packages as revenue expenditure as discussed inquestion No.1 above, are applicable in all fours to questions 3and 4 also.7.2. That apart, this Court in Commissioner of Income-taxv. Southern Roadways Ltd. [(2006) 282 ITR 379], applying theratio laid by the Apex Court in the case of Alembic ChemicalWorks [(1989) 177 ITR 377], cited supra, held that upgradationof computers by changing certain parts, thereby enhancing theconfiguration of the computers for improving their efficiency,but, without making any structural alterations is not of anenduring nature and hence, the expenditure incurred by theassessee has to be treated as revenue expenditure. The saidview was again followed by this Court in Commissioner of Income-tax v. Southern Roadways Ltd. [(2007) 288 ITR 15]. https://hcservices.ecourts.gov.in/hcservices/

7.3. In view of the above settled proposition, we hold thatthe Tribunal has rightly held the expenditure incurred onreplacement of UPS and printer as a revenue expenditure. For the foregoing reasons, we find no question of law muchless substantial question of law that arises for ourconsideration in these appeals. Accordingly, the tax caseappeals stand dismissed. Consequently, M.P.Nos.1 of 2007 inT.C.(A) Nos.701 to 704 of 2007 are also dismissed.sraSd/Asst.Registrar/true copy/Sub Asst.RegistrarTo1.The Assistant Registrar,Income Tax Appellate TribunalMadras Bench "C".2.The Secretary, Central Board of Direct Taxes, New Delhi.3.The Commissioner of Income-Tax (Appeals) I, Madurai.4.The Deputy Commissioner of Income-tax, Company Circle-1,Madurai-2.5. The Joint Commissioner of Income Tax Special Range I,Madurai.+ 1 cc to Mrs. Pushya Sitaraman, Advocate SR No. 36065NSM(CO)SR/17.7.2007TC (A) Nos.700 to 704of 2007