M/S. KERALA STATE BEVARAGES (M & M) CORPORATION LTD. v. THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 1(1), TRIVANDRUM

## **IN THE HIGH COURT OF KERALA AT ERNAKULAM** ## **PRESENT** **THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN** **&** **THE HONOURABLE MR. JUSTICE ASHOK MENON** **MONDAY ,THE 24TH DAY OF SEPTEMBER 2018 / 2ND ASWINA, 1940** ## **ITA.No. 11 of 2015** **AGAINST THE ORDER/JUDGMENT IN ITA 66/COCH/2014 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 28.8.2014** ## **APPELLANT/S:/APPELLANT/ASSESSEE** **M/S. KERALA STATE BEVARAGES (M & M) CORPORATION LTD., P.B.2263, SASTHAKRIPA OFFICE COMPLEX, SASTHAMANGALAM, THIRUVANANTHAPURAM695010, PAN-AAACK9431G.** **BY ADVS. SRI.ANIL D. NAIR KUM.SOUMYA PRAKASH SMT.C.S.SULEKHA BEEVI SMT.ROSIE ATHULYA JOSEPH SRI.R.SREEJITH** ## **RESPONDENT/S:/RESPONDENT-REVENUE** **THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 1(1), TRIVANDRUM-695001.** **BY ADVS. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH SC FOR INCOME TAX** **THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 24.09.2018, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:** ITA 11/15 -2- ## J U D G M E N T Ashok Menon, J. The assessee is in appeal against the order dated 28.8.2014 of the Income Tax Appellate Tribunal, Cochin Bench arising out of ITA No.66/COCH/2014 for the assessment year 2010-2011. The following substantial questions of law arise for consideration: “(i) In the facts and circumstances of the case, ought not the Tribunal have held that the expenditure incurred by the appellant for purchasing laboratory equipments as per Government Order No.1740/2008/home dated 31.05.2008 is revenue in nature? (ii) Ought not the Tribunal have allowed the appeal? (iii) Ought not the Tribunal have held that the appellant is allowed to claim deduction under section 37 of the Income Tax Act, 1961?” 2. The assessee-Kerala State Beverages (M&M) Corporation Ltd. is a wholesale trader of Indian Made Foreign Liquor and Beer in the State of Kerala and holds the monopoly in the sale of the aforesaid liquor and Beer. 3. The Assessing Officer (AO) while completing the assessment disallowed expenses incurred by the assessee towards expenses, meant for setting up infrastructure facility in the Excise Division at their ITA 11/15 -3- laboratory for testing and analysing of liquor samples. The AO disallowed the expenses on the ground that it cannot be treated as revenue expenditure and that the expenditure is relating to acquisition of capital assets and also for the reason that the purchase is not in the assessee's name. 4. The appeal filed by the assessee was dismissed by the appellate authority upholding the reasons assigned for the disallowance by the AO. On a challenge before the Tribunal, referring to the decision of the Delhi High Court in (2013) 350 ITR 1 [CIT v. DTTDC] , though not relying upon it, the Tribunal held that the expenses cannot be said to have been incurred for the business or for earning goodwill. 5. We heard the learned counsel for the assessee and the learned Senior Counsel, Government of India (Taxes). 6. The learned counsel for the assessee referred to a Government Order of the State Government No.GO(Rt) No.1740/2008/Home dated 30.5.2008, in which, it is mentioned that the Chief Chemical Examiner has Submitted a proposal with detailed specification of instruments such as gas chromatograph and atomic ITA 11/15 -4- absorption spectrophotometer, which are essential for the speedy and accurate examination of samples received in the Excise Divisions of all the three laboratories at Thiruvananthapuram, Ernakulam and Kozhikode, and hence, administrative sanction for purchase of equipments worth Rs.90 lakhs was granted by the Government, and the assessee was directed to meet the expenses in tune of Rs.90 lakhs for the above purpose and the final bill for payment was to be submitted by the Chief Chemical Examiner to the Managing Director of the assessee for effecting payment. In accordance with the aforesaid Government Order, the assessee paid the amount and allowance was claimed on that ground from the Revenue. The learned counsel for the assessee submits that the articles purchased were installed in the Government Laboratory for the testing not only of the liquor sent for examination by the assessee, but also of any liquor, such as contraband seized under the Abkari Act by the Excise Department and the Police. As the instruments were installed in the Government Laboratory of the Chief Chemical Examiner coming directly under the Government, the assessee cannot claim the expenditure as capital expenditure for the ITA 11/15 -5- purpose of their business. No depreciation on that ground could also be claimed because the articles purchased now belong to the Government and not to the assessee. The learned counsel for the assessee submits that the assessee is entitled to claim exemption as revenue expenditure, since it was for facilitating the business of sale of liquor which requires safe and good quality liquor to be vended in the vending outlets of the assessee. 7. The learned Senior Counsel, GOI (Taxes) relies on a decision of the Honourable Supreme Court in AIR (1993) SC 103 [Arvind Mills Ltd. v. Commissioner of Income Tax, Gujarat] in support of his argument that the expenses cannot be exempted in view of the fact that it is for betterment of the business. Therein, the Honourable Supreme Court has referred to the decision of the Madras High Court in (1986) 161 ITR 455 (Mad) [Dollar Company v. Commissioner of Income Tax] , wherein the Company had to make contribution towards betterment of the lands owned by the Company coming within the Madras Town Planning Scheme. The assessee-Company claimed deduction of the above payment on the footing that such payment was a revenue ITA 11/15 -6- expenditure. But, the AO disallowed that claim. The Madras High Court held inter alia that on a reading of the various provisions of the Madras Town Planning Act, it was evident that the betterment contribution was a compulsory levy made by the Corporation and the levy as such did not lead to an increase in value of land which would be occasioned only upon the implementation of the Town Planning Scheme. The contribution hence had no nexus with the increase in value of the properties within the Scheme and the levy was one essentially for better facilities of roads drainage etc., which would be laid out for the business. Hence, the payment of betterment contribution did aid the business but not as a capital expenditure and surely as revenue expenditure. The Hon'ble Supreme Court did not find favour with the above reasoning. 8. In (1980) 125 ITR 293 (SC) [L.H.Sugar Factory and Oil Mills (P) Ltd. v. Commissioner of Income Tax] , it was held by the Honourable Supreme Court that the construction of roads for which the assessee had contributed, had facilitated the transport of the sugarcane to the factory and outflow of sugar manufactured by the assessee to the market centers. ITA 11/15 -7- The construction of roads had facilitated the business operation of the assessee and had enabled the management to carry on business more efficiently and profitably and that the advantage secured for the business of the assessee was of a long duration and therefore the amount of Rs.50,000/- contributed by the assessee was for the purpose of facilitating the conduct of the business and making it more efficient and profitable without the assessee getting an advantage of an enduring benefit to itself and therefore, the expenditure should be held to be revenue expenditure and was deductible. 9. On considering the aforesaid decisions, in Arvind Mills Ltd. (supra) , the Honourable Supreme Court held thus: “Capital expenditure incurred in connection with business activities ultimately results in efficiently carrying on the business and by that process gives aid in running of the day-to-day business more efficiently; but simply on that score, the capital expenditure does not become a revenue expenditure. In our view, the learned counsel for the respondent is also justified in his contention that in deciding whether an expenditure is a capital expenditure or a revenue expenditure, the question of voluntary and/or involuntary payment becomes immaterial, and it is the nature of expenditure that determines the issue. In L.H.Sugar factory's case (supra) , it was ITA 11/15 -8- specifically indicated by the Apex Court that the assessee did not acquire any tangible or intangible right on the roads constructed in and around the factory but because of such roads constructed, day-to-day running of the business was improved by minimising the operational cost in manufacturing sugar. In such circumstances, the expenditure incurred for improving day-to-day running of the business by way of voluntary contribution of Rs.50,000/- when such expenditure had no connection with the increase or in creation of any capital asset or acquiring any tangible or intangible right in the property in question namely the roads constructed in or around the factory, was treated as revenue expenditure.” 10. Distinguishing the two decisions referred to above, the Honourable Supreme Court further held thus: “In our view, the High Court of Gujarat has rightly held that the betterment charge on account of increase in the valuation of the land of the assessee should not be held as a revenue expenditure although general improvement of the area may have an impact on better running of the business. We, therefore, find no reason to interfere with the decision of the Gujarat High Court by accepting the reasonings of Madras High Court in Dollar Company's case (supra).” 11. In the instant case, the amounts incurred by the assessee was for installation of equipments in the Government Laboratory to facilitate examination of the samples received by the laboratory, which also includes samples of the assessee. The assessee's business is thus benefited; but, at the same time, the assessee has ITA 11/15 -9- no ownership over the equipments purchased and hence it is not a capital investment. That apart, for getting the samples examined by the laboratory, the assessee would need to pay examination fees as is required by any other agency which sends samples for examination. In the circumstances, the findings of the AO to disallow the claim of revenue expenditure, upheld by the Appellate Authority and the Tribunal on the premise that the expenditure incurred will not be a revenue expenditure entitled for deduction, cannot be upheld. We cannot agree with the findings of the Tribunal in this regard. The testing equipments aid the business of the assessee and in purchasing it for a governmental agency the assessee was discharging its business obligations. Especially when the assessee has been conferred with a monopoly of dealing in liquor and testing of the same and ensuring its quality is expedient to its business and the money expended for providing the facilities to an independent government agency, without any acquisition by itself is a revenue expenditure. The questions of law are answered in favour of the assessee and against the revenue. The Income Tax Appeal is therefore, allowed and the ITA 11/15 -10- assessee is entitled to treat the expenses, incurred by them for upgrading of infrastructure in the government laboratory, as per the directions of the Government, which owns the Corporation, as revenue expenditure. No order as to costs. ## **Sd/-** **K.VINOD CHANDRAN JUDGE** **Sd/ASHOK MENON JUDGE** ## **APPENDIX** ## **PETITIONER'S/S EXHIBITS:** **ANNEXURE - A TRUE COPY OF ASSESSMENT ORDER DATED 25/02/2013 FOR THE AY 2010-11 ISSUED TO THE APPELLANT. ANNEXURE - B TRUE COPY OF THE APPELLATE ORDER DATED 16/01/2014 FOR THE AY 2010-11. ANNEXURE - C TRUE COPY OF THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL IN ITA NO.66/COCH/2014 DATED 28/08/2014.** **//TRUE COPY//** **PS TO JUDGE.** jg