M/s.EL FORGE Ltd.338, Ambujammal St,Alwarpet, Chennai-18 v. The Deputy Commissioner of Income Tax Special Range-I, Chennai

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED: 01.10.2012CORAM:THE HONOURABLE MRS.JUSTICE CHITRA VENKATARAMANandTHE HONOURABLE MR.JUSTICE K.RAVICHANDRABAABUTax Case (Appeal) No.2146 of 2006M/s.EL FORGE Ltd.338, Ambujammal St,Alwarpet, Chennai-18... AppellantversusThe Deputy Commissioner of Income TaxSpecial Range-I, Chennai... RespondentPRAYER: Tax Case Appeal filed under Section 260A of the Income TaxAct, 1961 as against the order of the Income Tax Appellate Tribunal'A' Bench, Chennai, dated 11.04.2005 in ITA No.1019/mds/99 andagainst the order of the Commissioner of Income Tax(AppealsV) Chennaidated 5.4.1999 made in ITA.No.254/98-99 and against the order of theJoint Commissioner of Income Tax, Special Range - I, Chennai dated23.12.1998 made in PAN GIR No.47-004-C-6891 for the assessment year1996-1997.For appellant:Mr.R.VijayaraghavanFor respondent:Mr.Arun Kurian JosephStanding Counsel for Income TaxJUDGMENT(Judgment of the Court was delivered by K.RAVICHANDRABAABU,J.)The assessee is on appeal in respect of the assessment year 1996-97. The following are the substantial questions of law raised forconsideration at the time of admission of this Tax Case Appeal:1. Whether the Tribunal was right in law in holdingthat expenditure incurred towards consultancycharges is capital in nature?2. Whether the Tribunal was right in law in holdingthat the assessee has acquired an enduringbenefit and hence the payments should be capitalin nature? https://hcservices.ecourts.gov.in/hcservices/

3. Whether the the Tribunal was right in remandingthe matter back to the Commissioner of Income Tax(Appeals) to decide the issue afresh even thoughthe same was decided after proper reasoning?2. The assessee company is engaged in the manufacture offorgings. For the assessment year 1996-97, the assessee filed returnof income, which was processed by the Assessing Officer under Section143(1)(a) and the taxable income was determined after disallowing theclaim for deduction.3. During the course of assessment proceedings, the AssessingOfficer rejected the claim of the assessee in respect of R & Dexpenses for deduction, as the said payment made to one G N SConsultancy for re-engineering was likely to result in enduringbenefit to the assessee. According to the assessee, the saidconsultancy company was paid to cover the study on the followingareas:(a)Business strategy(b)Competition and market needs(c)Customers viz., produce mix viz., volumes(e)Existing financial manufacturing norms(f)Targets for improvement(g)Production method and system including information technology(h)Restructuring and implementation of recommendation(i) Assessment of targets achieved(j) Recommendation for continuous monitoring targets and furtherimprovement. Therefore, deduction was sought for by the assessee, claiming thatthe expenditure was revenue in nature. On the other hand, theAssessing Authority rejected the said claim, holding that the saidexpenditure was in the capital field and consequently, not entitledfor deduction. Aggrieved by the same, the assessee went on appealbefore the First Appellate Authority. 4. The First Appellate Authority concurred with the AssessingAuthority and rejected the claim of the assessee for deduction of theexpenses on consultancy charges. The assessee filed further appealbefore the Tribunal, which remitted the matter to the First AppellateAuthority with a direction to decide the issue afresh by seeing asto whether the assessee derived any enduring benefit by incurringsuch expenditure. Challenging the said order of the Tribunal, theassessee is before us.5. The only question to be decided in this appeal is as towhether the expenditure incurred by the assessee, namely, theconsultancy charges, is revenue or capital in nature. It is the caseof the assessee that the said expenditure was made for the study onthe areas which we have already extracted supra. A perusal of theareas, which the assessee is required to cover by such study and by https://hcservices.ecourts.gov.in/hcservices/ making such expenditure, would only show that expenditure made onsuch areas could be only a revenue expenditure and not a capitalexpenditure, as found by the Assessing Authority. The Tribunalremitted the matter only for the purpose of seeing as to whether theassessee had derived any enduring benefit by incurring suchexpenditure. The very nature of the expenditure for the purpose ofcovering the study of those areas, which we had extracted in theearlier paragraph, would only show that the assessee has made thesaid expenditure only to carry on the business more efficiently ormore profitably. Hence, the intention of bringing the same under thehead "business" is justified and therefore, it has to be treated asbusiness expenditure and not as capital expenditure. 6. As to how the expenditure incurred by the assessee is to beseen in the light of enduring benefit, has been considered by theApex Court in the decision reported in [1965] 58 ITR 241 (PC)(Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd.),wherein, it was observed that if the advantage consists merely infacilitating the assessee's trading operations or enabling themanagement and conduct of the assessee's business to be carried onmore efficiently or more profitably, the expenditure would be revenuein nature, even though the advantage may endure for an indefinitefuture. 7. Likewise, in another decision of the Apex Court reported in[1989] 177 ITR 377 (Alembic Chemical Works Co. Ltd.), it was heldthat the consistent guiding principles in matters of understanding anexpenditure as capital or revenue in nature, is to find out the aimand object of the expenditure and the commercial necessities ofmaking such an expenditure. These two decisions of the Apex Courtwere, in fact, followed by us in another decision made in Tax Case(Appeal) No.244 of 2006 dated 10.09.2012, to hold that theexpenditure made therein was only revenue in nature. 8. By following the decisions of the Apex Court reported in[1965] 58 ITR 241 (PC) (Commissioner of Taxes v. Nchanga ConsolidatedCopper Mines Ltd.) and [1989] 177 ITR 377 (Alembic Chemical Works Co.Ltd.) and also by considering the nature of areas which the assesseewanted to cover by the study and by making the consultancyexpenditure, we have no hesitation in holding that the expenditurereferred to above are to be treated as only revenue expenditure andnot as capital expenditure. 9. It is also to be seen that the items of expenditure said to becovered under the consultancy charges are not disputed by the Revenueand that the Assessing Authority had also made a note of those areasof study. Therefore, in the absence of any dispute with regard tothose areas of study for which the said expenses have been met withby the assessee, we see no reason to hold that this case would callfor a remand. https://hcservices.ecourts.gov.in/hcservices/

10. As we have found that the very nature of the expenditure isonly revenue, and that enduring benefit theory would also support thecase of the assessee in the light of the decisions of the Apex Courtreferred to supra, there is no necessity for remitting the matter tothe First Appellate Authority, as has been done by the Tribunal.Consequently, the order of the Tribunal is set aside and thesubstantial questions of law raised by the assessee are answered infavour of the assessee and against the revenue. Consequently, the TaxCase Appeal stands allowed. No costs.Sd/Asst.Registrar/true copy/Sub Asst.RegistrarksvTo1. The Income Tax Appellate Tribunal (Bench 'A', Chennai).2. The Commissioner of Income Tax (Appeals)-V 121, Nungambakkam High Road, Chennai.3. The Joint Commissioner of Income Tax Special Range-I, Chennai.1 cc To Mr.T.Ravikumar, Advocate, SR.613971 cc To Mr.R.Vijayaraghavan, Advocate, SR.61513Tax Case (Appeal) No.2146 of 2006TRM(CO)SRA(15/11/2012)