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October, 20th 2014


                             Date of decision: September 18, 2014

+                         ITA 142/2002

COMMISSIONER OF INCOME TAX                            ..... Appellant

                          Through:     Mr.Balbir Singh,
                                       Sr.Standing Counsel with
                                       Mr.Abhishek Singh Baghel,
                                       Mr.Arjun Harkauli, Advs.


M/S. TRIVENI OIL FIELD SERVICES LTD                ...... Respondent




1.      This appeal under Section 260A of the Income Tax Act, 1961

(Act, in short) by the revenue relates to the Assessment Year 1991-92

and vide order dated 21st October, 2002 stands admitted for hearing

on the following substantial question of law:

              "Whether on the facts and in the circumstances of
         the case the Tribunal was correct in law in holding that

ITA No.142/2002                                         Page 1 of 15
         the expenses of Rs. 38,91,369/- incurred by the
         assessee on payment of salaries were revenue in

2.      The respondent assessee during the period relevant to the

Assessment Year in question was engaged in the business of oil

drilling operations and drilling oil wells. The respondent assessee

owned oil rigs were given to different clients like ONGC, Oil India

Ltd. etc.

3.      The respondent assessee filed their return of income on

31.12.1991 declaring loss of Rs. 3,17,55,920/-, which was revised to

Rs. 3,65,06,041/- on 9.11.1992. The revision was on account of

depreciation claimed.

4.      The Assessing Officer, on the issue in question, in the

Assessment Order dated 10.02.1994 has observed that for the

previous year ending 31.03.1991, an amount of Rs. 3.89 Crores had

been capitalized or kept apart for allocation towards three deep

drilling rigs. Out of the said three rigs, one was commissioned in

February, 1991 and the remaining two were commissioned in the

subsequent year. The Assessing Officer held that the respondent

assessee had capitalized the cost of acquisition and deployment of the

three additional rigs in the books of account but had claimed the

ITA No.142/2002                                       Page 2 of 15
aforesaid expenditure as revenue in nature on the plea that the

expenses incurred were for extension of existing business and not for

setting up of a new business. The Assessing Officer disallowed the

claim and treated the aforesaid amount of Rs. 3.89 Crores as capital

expenditure as it pertained to acquisition of plant and machinery

namely the three rigs.        The aforesaid amount included the

expenditure incurred on salaries paid to the employees which was

treated as capital expenditure on the ground that if the respondent

assessee had employed engineers/workers from an external agency

the amount paid would have been capitalized. The Assessing Officer

observed that it would not make any difference if the assessee had

procured the raw material first and then converted them into plant

and machinery after incurring some expenditure or to reduce his

headache the assessee had brought/purchased a ready to use plant and

machinery from the market.         In either case the principle for

computing the cost of plant and machinery would remain the same.

He further held that in the latter case, it was not material whether the

assessee was assembling the plant and machinery in his own

premises. No part of such expenditure should be debited to profit and

loss account and allowed as a revenue expenditure.

ITA No.142/2002                                        Page 3 of 15
5.      Aggrieved, the respondent assessee preferred an appeal and the

Commissioner of Income Tax (Appeals) (CIT(A), in short) called for

details of expenditure incurred and perused the same. He noticed

that the major expenditure was related to consumption of stores and

spares (Rs. 55,17,748.90) , sub-contract charges (Rs. 18,06,300/-) ,

salaries          (Rs.38,91,263.52),   travelling   and        conveyance

(Rs.32,90,757.35) , loans (Rs.1,66,94,413/-) and other financing

charges (Rs.26,13,851/-). The last two amounts were incurred for the

acquisition of the rigs. He observed that it was not disputed that out

of the three rigs, one had become operational in the previous year,

whereas the other two became operational in the subsequent year.

CIT(A) allowed the interest expenditure of 1,66,94,413/- and

financial charges of Rs. 26,13,851/- as revenue expenditure as they

had been incurred for acquisition of the rigs but the other expenses

i.e. on consumption of stores and spares, sub-contract charges,

salaries, travelling and conveyance were disallowed.

6.      The Income Tax Appellate Tribunal (Tribunal, in short) has

accepted the findings of the CIT (A) relating to consumption of

stores and spares, sub-contract charges etc. as these were direct cost

for the rigs. However, with regard to the salaries, the Tribunal noted

ITA No.142/2002                                           Page 4 of 15
that the salaries could not be treated as direct cost for acquisition of

the rigs and should be treated as a revenue expenses. It was noted

that the salaries computed and attributed at Rs. 38,91,369/- , were the

proportionate amount and not the actual amount which had been

reflected in the books for setting up whole or part of the rigs. The

Tribunal observed that the entries in the book of accounts would not

be definitive on the issue whether the amount should be capitalized

or treated as revenue expenditure.

7.      The findings recorded by the Tribunal make it apparent that the

new rigs purchased by the assessee were financed. The financing

cost was allowed as revenue expenditure. The new oil rigs were a

new capital asset. Thereafter, the rigs had to be installed for the

purpose of making them operational. The assessee had deployed

their workers and technicians to whom salaries were paid to make the

rigs operational.    The business of the respondent assessee was

continuous and ongoing. The business required constant deployment,

installation and re-installation of the rigs, which upon purchase or on

shifting from an location to the other had to be made functional. The

rigs, no doubt, constitute capital asset, but, we do not think, the

expenditure incurred on the salary paid to the employees can be

ITA No.142/2002                                        Page 5 of 15
treated as capital expenditure.

8.      The business undertaken by the assessee, as already

noticed, was oil drilling operations, drilling oil wells and giving

on hire oil rigs to clients. Making the oil rigs operational was the

very business of the assessee. It was this business activity, which

yielded income in the form of earning or even hire charges. The

respondent-assessee      had    employed        salaried   workers        or

technicians for the purpose of its business, i.e., drilling of oil

wells with the help of rigs and carry out drilling operations and

thereafter to give the said oil rigs on hire.

9.      The line between capital or revenue expenditure in-spite the

settled principles is beset with difficulties and an onerous task. In

M.K. Brothers Private Limited versus Commissioner of Income

Tax, (1973) 3 SCC 30, the Supreme Court held that the answer

does not depend upon the fact whether the amount spent is large

or small, paid in lumpsum or in instalment, but upon the purpose

for which the payment was made and the expenditure incurred.

The nature and quality of payment was determinative and

decisive. The test, whether the payment was made to acquire a

capital asset or for running of business and working with a view

ITA No.142/2002                                            Page 6 of 15
to produce profits is helpful.   The principal or the main test

normally applied is that of enduring benefit but the Supreme

Court in Empire Jute Company Limited versus Commissioner of

Income Tax, (1980) 124 ITR 1 (SC) cautioned that in spite of

palpable advantages, the test may break down and what is

material to be considered is the nature of the advantage in the

commercial sense. If the advantage consists of merely facilitating

assets in trading operations or enabling the management to

conduct of business more efficiently, it would amount to ,,revenue

expenditure, even though the advantage may be of indefinite

future.      Earlier in Assam Bengal Cement Company Limited

versus CIT, West Bengal, (1955) 27 ITR 34 (SC) it was observed

that if the expenditure is not for the purpose of bringing into

existence any asset or advantage, but for running of business or

working with it to produce profits, it would be ,,revenue

expenditure. Reference in the said decision was made to Dixon,

J. opinion in Sun Newspapers Limited and Associated

Newspapers Limited versus Federal Commissioner of Taxation,

(1938) 61 CLR 337 wherein distinction between ,,revenue and

,,capital was made by drawing distinction between business

ITA No.142/2002                                       Page 7 of 15
entity, structure or organisation set up or established for earning

of profits on one hand and the process by which an organisation

operates to obtain regular returns on the other, but with a warning

that business structure or entity may assume almost infinite

variety of shapes and, therefore, it may be difficult to


10.     The Delhi High Court in CIT versus J.K. Synthetics

Limited, (2009) 309 ITR 371 (Delhi) after referring to the case

law on the subject had set out the test or principles, which read as


                  "An overall view of the judgments of the
                  Supreme Court, as well as of the High
                  Courts would show that the following broad
                  principles have been forged over the years
                  which require to be applied to the facts of
                  each case :
                  (i) the expenditure incurred towards initial
                  outlay of business would be in the nature of
                  capital expenditure, however, if the
                  expenditure is incurred while the business is
                  on going, it would have to be ascertained if
                  the expenditure is made for acquiring or
                  bringing into existence an asset or an
                  advantage of an enduring benefit for the
                  business, if that be so, it will be in the
                  nature of capital expenditure. If the
                  expenditure, on the other hand, is for
                  running the business or working it with a
                  view to produce profits it would be in the

ITA No.142/2002                                             Page 8 of 15
                  nature of revenue expenditure ;
                  (ii) it is the aim and object of expenditure,
                  which would determine its character and not
                  the source and manner of its payment ;
                  (iii) the test of once and for all payment,
                  i.e., a lump sum payment made, in respect
                  of, a transaction is an inconclusive test. The
                  character of payment can be determined by
                  looking at what is the true nature of the
                  asset which is acquired and not by the fact
                  whether it is a payment in lump sum or
                  in an instalment. In applying the test of an
                  advantage of an enduring nature, it would
                  not be proper to look at the advantage
                  obtained, as lasting forever. The distinction
                  which is required to be drawn is, whether
                  the expense has been incurred to do away
                  with, what is a recurring expense for
                  running a business as against an expense
                  undertaken for the benefit of the business as
                  a whole ;
                  (iv) an expense incurred for acquisition of a
                  source of profit or income would in the
                  absence of any contrary circumstance, be in
                  the nature of capital expenditure. As against
                  this, an expenditure which enables the
                  profit-making structure to work more
                  efficiently leaving the source or the profit
                  making structure untouched would be in the
                  nature of revenue expenditure. In other
                  words, expenditure incurred to fine tune
                  trading      operations    to   enable      the
                  management to run the business effectively,
                  effi-ciently and profitably leaving the fixed
                  assets untouched would be an expenditure
                  of a revenue nature even though the
                  advantage obtained may last for an
                  indefinite period. To that extent, the test of
                  enduring benefit or advantage could be

ITA No.142/2002                                               Page 9 of 15
                  considered as having broken down ;
                  (v) expenditure incurred for grant of licence
                  which accords "access" to technical
                  knowledge, as against, "absolute" transfer
                  of technical knowledge and information
                  would ordinarily be treated as revenue
                  expenditure. In order to sift, in a manner of
                  speaking, the grain from the chaff, one
                  would have to closely look at the attendant
                  circumstances, such as :
                       (a) the tenure of the licence.
                       (b) the right, if any, in the licensee
                       to create further rights in favour of
                       third parties,
                       (c) the prohibition, if any, in
                       parting     with     a    confidential
                       information received under the
                       licence to third parties without the
                       consent of the licen-sor,
                       (d) whether the licence transfers the
                       "fruits of research" of the licen-sor,
                       once for all",
                       (e) whether on expiry of the licence
                       the licensee is required to return
                       back the plans and designs obtained
                       under the licence to the licensor
                       even though the licensee may
                       continue to manufacture the
                       product, in respect of which
                       "access" to knowledge was
                       obtained during the subsistence of
                       the licence.
                       (f) whether any secret or process of
                       manufacture was sold by the
                       licensor       to    the     licensee.
                       Expenditure on obtaining access to
                       such      secret    process     would
                       ordinarily be construed as capital in
                       nature ;

ITA No.142/2002                                             Page 10 of 15
                  (vi) the fact that the assessee could use the
                  technical knowledge obtained during the
                  tenure of the licence for the purposes of its
                  business after the agreement has expired,
                  and in that sense, resulting in an enduring
                  advantage, has been categorically rejected
                  by the courts. The courts have held that this
                  by itself cannot be decisive because
                  knowledge by itself may last for a long
                  period even though due to rapid change of
                  technology and huge strides made in the
                  field of science, the knowledge may with
                  passage of time become obsolete ;
                  (vii) while determining the nature of
                  expenditure, given the diversity of human
                  affairs and complicated nature of business ;
                  the test enunciated by courts have to be
                  applied from a business point of view and
                  on a fair appreciation of the whole fact
                  situation before concluding whether the
                  expenditure is in the nature of capital or

11.     In Oracle India Private Limited versus Commissioner of

Income Tax, (2014) 264 CTR 144 (Del) reference was made to

the concept of income, which refers to income generated during

two particular points of time by a person without impoverishing

oneself. It was observed that accounting and reporting standards

are based upon conventions or standards designed to achieve

what are perceived to be the desired objectives of financial

accounting and reporting. Word ,,expense it was elucidated

ITA No.142/2002                                             Page 11 of 15
would include depreciation in form of outflow caused due to

depletion of assets.          Referring to the Framework for the

Presentation and Preparation of Financial Statements published

by the International Accounting Standards Board, the word

,,expense would mean decreases in economic benefits during the

accounting period in the form of outflows and depletions of assets

or incurrence of liabilities. Thus, the word ,,expense will take

into account decreases in future economic benefits relating to an

asset.     Referring to Section 37 of the Act, it was held that

emphasis is placed on business and commercial considerations

rather than pure legal and technical aspects. Thus, primacy is to

be given to practical and business point of view and not on

juristic classification.       The expression ,,capital or ,,revenue

expenditure must be construed in a business sense and by

applying sound accountancy principles unless there is a statutory

mandate to the contrary.

12.      Similarly in Commissioner of Income Tax versus Bharti

Hexacom Limited, (2014) 265 CTR 130 (Del) it was held:-

                  "16. ......The nature of advantage has to be
                  considered in commercial sense and only
                  when the advantage was in capital field, the

ITA No.142/2002                                            Page 12 of 15
                  expenditure could be disallowed by
                  applying the enduring benefit test. If the
                  advantage consisted merely facilitating
                  trading operations or enabling the
                  management or conduct of business more
                  efficiently or profitably, while leaving the
                  fixed capital ntouched, the said expenditure
                  would be on revenue account, though the
                  advantage may endure for an indefinite
                  period. Enduring benefit test, therefore, was
                  not conclusive and cannot be mechanically
                  applied without considering the commercial
                  17. The second test which can be applied
                  was fixed and circulating capital test. Fixed
                  capital being what the owner turns to profit
                  by keeping it in his ossession; circulating
                  capital is what the assessee makes profit by
                  parting or letting the product/asset change
                  masters/hands. This test could be applied
                  when the acquisition of asset clearly falls
                  within one of the two categories but the test
                  would breakdown where the expenditure
                  does not fall easily within the specified
                  category. The demarcation line between
                  assets out of which profits were earned and
                  the profit made upon assets or with assets,
                  was thin and difficult to draw in several
                  cases. It was observed that purchase of
                  loom hours was not like circulating capital
                  (labour, raw material, power etc.), but
                  "loom hours" were also not a part of fixed
                  capital. Revenue,,s contention that purchase
                  of loom hours was for acquisition of source
                  of profit or income and, therefore, capital
                  expenditure, was rejected on the ground that
                  source of profit or income was the profit
                  making apparatus which had remained
                  untouched. There was no enlargement of

ITA No.142/2002                                             Page 13 of 15
                  permanent structure or capital assets.
                  Primarily and essentially the expenditure
                  was relating to operation or working of
                  looms, which constituted profit earning
                  apparatus. The Supreme Court, however,
                  added a word of caution that in the field of
                  taxation, analogies could be deceptive and
                  misleading but nevertheless they referred to
                  an example of an assessee acquiring raw
                  material regulated under a quota system to
                  increase his production. Money spent to
                  acquire the quota right, it was observed
                  would entitle the assessee to acquire more
                  raw material to increase profitability of the
                  profit making apparatus and would
                  undoubtedly be revenue expenditure as it
                  was a part of the operating cost. However,
                  the said example relates to already existing
                  or ongoing industry. Outgoing whether it
                  was revenue or capital, it was highlighted,
                  should depend upon practical and business
                  point of view, rather than juristic
                  classification of legal rights. The question
                  should be judged in the context of business
                  necessity or expediency; was the
                  expenditure a part of assessee,,s working
                  expenditure or a part of process of profit
                  earning; whether the expenditure was
                  necessary to acquire a right of permanent
                  character, the possession of which was a
                  condition for carrying on trade etc?"

13.     In the facts of the present case, we notice that the

expenditure was incurred on labour, i.e., wages. Normally, it

would be a ,,revenue expenditure unless there are special or

specific reasons why it should be treated as capital in nature, the

ITA No.142/2002                                             Page 14 of 15
expenditure being akin to raw material. We have already noticed

the factual matrix of the present case that after the oil rigs were

acquired by the assessee as a capital asset, they had to be made

operational and functional. This was the very business or the

activity, which was undertaken by the respondent-assessee. The

said activity required expenditure in the form of salary to

workers. It was in the nature of running expenses. Drilling

operations being the very business of the assessee, expenditure

incurred to make the rig operational would be covered and should

be treated as ,,revenue expenditure, whereas the cost of the rig

would fall and should be treated as a ,,capital expenditure.

14.     Thus, we do not think, the order of the Tribunal requires any

interference. The question of law is accordingly answered against

the appellant-revenue and in favour of the respondent-assessee.

        The appeal is disposed of. No costs.

                                               SANJIV KHANNA, J

                                        V. KAMESWAR RAO, J
SEPTEMBER 18, 2014/akb

ITA No.142/2002                                        Page 15 of 15
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