COMMISSIONER OF INCOME TAX Vs. DEEPAK NITRITE LIMITED

JUDGEMENT

(1.) THE following question is referred by the Tribunal for the opinion of this Court :

(2.) TO appreciate the controversy raised and to answer the question referred to us, few relevant facts may now be stated :

(3.) BEING aggrieved by the said order, the assessee approached the Tribunal. It was argued before the Tribunal that the officials visited the USA not for ascertaining the feasibility of setting up a plant to manufacture ammonia. The ITO proposed disallowance of the said expenditure on the ground that it was incurred for manufacturing a new product and for installation of a new plant and, hence, it was capital expenditure. It was contended that the expenditure could not be said to be capital expenditure inasmuch as foreign visit was in the nature of a 'fact finding mission'. It was submitted by the assessee that for manufacturing sodium nitrate, sodium nitrite and nitric acid, it required liquid ammonia which was the main raw material. The assessee was getting the said raw material from Gujarat State Fertilizers Company (GSFC). Disputes arose between the assessee and GSFC regarding price and product which were ultimately settled in arbitration proceedings but in view of disputes between the parties, the agreement was not renewed after the contract period was over and the assessee could not get supply of ammonia from GSFC. The assessee badly required the raw material for its product and uninterrupted supply of the said raw material was absolutely necessary. Facing difficulties in getting raw material from GSFC, the assessee thought of various alternatives and one of the alternatives which was considered proper was to think for the feasibility or otherwise of setting up a new plant for manufacturing ammonia. In order to get continuous supply of raw material by setting up a plant, it was necessary for the assessee to send some of its personnel abroad as a fact finding mission. Thus, according to the assessee, the dominant purpose of the foreign tour was to secure the raw material of manufacturing activity which the assessee was carrying on and to achieve that objective, foreign trips were undertaken. The expenditure, therefore, had no nexus with acquisition of capital asset but was undertaken in order to explore feasibility to get supply of ammonia (raw material) continuously and uninterruptedly and also to explore possibility of setting up of a separate plant. The Tribunal, after considering the rival contentions of the parties and in the light of various decisions cited before it, held that the dominant purpose of the visit was to explore feasibility of obtaining supply of liquid ammonia in view of the likelihood of termination of contract by GSFC and for that purpose, exploratory tour was undertaken to organise the supply of ammonia which was the basic raw material for its products. According to the Tribunal, therefore, it could not be said that the trips were undertaken for setting up of a new product which would result in acquisition of capital and the expenses incurred by the assessee could not be said to be capital expenditure but business expenditure. The Tribunal concluded that the authorities had committed an error of law in holding that the expenditure was not deductible. The Tribunal, therefore, allowed the appeal filed by the assessee.