Full Judgment Text
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PETITIONER:
L. B. SUGAR FACTORY & OIL MILLS (P) LTD. PILIBHIT
Vs.
RESPONDENT:
C.I.T. U.P., LUCKNOW
DATE OF JUDGMENT26/08/1980
BENCH:
BHAGWATI, P.N.
BENCH:
BHAGWATI, P.N.
SEN, A.P. (J)
VENKATARAMIAH, E.S. (J)
CITATION:
1981 AIR 395 1981 SCR (1) 523
1981 SCC (1) 44
CITATOR INFO :
RF 1987 SC 798 (11)
ACT:
Capital Expenditure and Revenue Expenditure, test of-
Contribution made by the assessee towards the construction
of dam and later on contributing 1/3rd cost towards the
laying down of the road in the area around the factory under
a Sugarcane Development Scheme, whether capital expenditure
and hence deductible expenditure under s. 10(2)(xv) of the
Indian Income Tax Act, 1922.
HEADNOTE:
The appellant, assessee is a private limited company
carrying on business of manufacture and sale of crystal
sugar in a factory situated in Pilibhit in the State of
Uttar Pradesh. During the accounting year ending 30th
September, 1955, the assessee contributed a sum of Rs.
22,332 towards the construction of Deoni dam-Majhala Road at
the request of the Collector and a further sum of Rs.
50,000, being 1/3rd share of the cost of construction of
roads in the area around its factory under a Sugar Cane
Development Scheme, to the State of Uttar Pradesh. These two
sums were claimed by the assessee as deductible expenditure
under s. 10(2)(xv) of the Indian Income Tax Act, 1922 in its
return for the assessment year 1956-57, but disallowed by
the Income Tax Officer. Having lost in appeal before the
Revenue Authorities and in reference before the High Court,
the appellant came up in appeal by certificate.
Allowing the appeal in part, the Court
^
HELD : (1) An expenditure incurred by an assessee can
qualify for deduction under s. 10(2)(xv) of the Indian
Income-tax Act, 1922 only if it is incurred wholly and
exclusively for purpose of his business, but even if it
fulfils this requirement, it is not enough, it must further
be of revenue as distinct from capital expenditure. [526 C]
(2) The test laid down in Atherton’s case for treating
an item of expenditure as capital expenditure is not of
universal application and it must yield where there are
special circumstances leading to a contrary conclusion. If
the advantage consists merely in facilitating the assessee’s
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business operations or enabling the management and conduct
of the assessee’s business to be carried on more profitably
while leaving the fixed capital untouched, the expenditure
would be on revenue account, even though the advantage may
endure for an indefinite future. Further, in cases of this
kind, where the question is whether a particular expenditure
incurred by an assessee is on capital account or revenue
account, the decision must ultimately depend on the facts of
each case. No two cases are alike and quite often emphasis
on one aspect or the other may tilt the balance in favour of
capital expenditure or revenue expenditure. [527 F, 528 C,
530 C]
Commissioner of Taxes v. Nohanga Consolidated Copper
Mines Ltd., [1965] 58 ITR 241; Empire Jute Co. Ltd. v.
C.I.T. [1980] 3 SCR; applied.
524
British Insulated and Helsby Cables Ltd. v. Atherton;
10 Tax Cases 155 p. 189; explained.
(3) In the instant case : (i) The amount of Rs. 22,332
was rightly disallowed as deductible expenditure under s.
10(2)(xv) of the Act. The amount was apparently contributed
by the assessee without any legal obligation to do so purely
as an act of good citizenship and it could not be said to
have been laid down wholly and exclusively for the purpose
of the business of the assessee; and (ii) So far as the
expenditure of the sum of Rs. 50,000 is concerned it was in
the nature of revenue expenditure laid out wholly and
exclusively for the purpose of the assessee’s business and
was, therefore, allowable as a deduction under s. 10(2)(xv)
of the Act. [526 F, 531 A]
Lakshmiji Sugar Mills Co. P. Ltd. v. C.I.T.: 82 I.T.R.
736; Distinguished.
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 298 of
1973.
From the Judgment and Order dated 28-7-1971 of the
Allahabad High Court in Income Tax Ref. No. 335/66.
J. P. Goyal and S. K. Jain for the Appellant.
D. V. Patel, J. Ramamurthy and Miss A. Subhashini for
the Respondent.
The Judgment of the Court was delivered by
BHAGWATI, J.-The dispute in this appeal by certificate
relates to two items of expenditure incurred by the assessee
during the assessment year 1956-57 for which the relevant
accounting year was the year ending on 30th September, 1955.
The assessee is a private limited company carrying on
business of manufacture and sale of crystal sugar in a
factory situated in Pilibhit in the State of Uttar Pradesh.
In the year 1952-53, a dam was constructed by the State of
Uttar Pradesh at a place called Deoni and a road Deoni Dam-
Majhala was constructed connecting the Deoni Dam with
Majhala. It seems that the Collector requested the assessee
to make some contribution towards the construction of the
Deoni Dam and the Deoni Dam-Majhala Road and pursuant to
this request of the Collector, the assessee contributed a
sum of Rs. 22,332 during the accounting year ending 30th
September, 1955. The assessee also contributed a sum of Rs.
50,000 to the State of Uttar Pradesh during the same
accounting year towards meeting the cost of construction of
roads in the area around its factory under a Sugarcane
Development Scheme promoted by the Uttar Pradesh Government
as part of the Second Five Year Plan. It was provided under
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the Sugarcane Development Scheme that one third of the cost
of construction of roads would be met by the Central
Government, one third
525
by the State Government and the remaining one third by Sugar
factories and sugarcane growers and it was under this scheme
that the sum of Rs. 50,000 was contributed by the assessee.
In the course of its assessment to Income-tax for the
assessment year 1956-57, the assessee claimed to deduct
these two amounts of Rs. 22,332 and Rs. 50,000 as deductible
expenditure under Section 10(2)(xv) of the Indian Income-tax
Act, 1922. The Income-tax Officer disallowed the claim for
deduction on the ground that the expenditure incurred was of
capital nature and was not allowable as a deduction under
Section 10(2)(xv). The assessee preferred an appeal to the
Appellate Assistant Commissioner but the appeal failed and
this led to the filing of a further appeal before the
Tribunal. The appeal was heard by a Bench of two members of
the Tribunal and there was a difference of opinion between
them. The Judicial Member took the view that the expenditure
of both the amounts of Rs. 22,332 and Rs. 50,000 was in the
nature of revenue expenditure and was therefore allowable as
a deduction, while the Accountant Member held that this
expenditure was on capital account and could not be allowed
as revenue expenditure. Since there was a difference of
opinion between the two members, the question which formed
the subject matter of difference was referred for
consideration to a third member. The third member did not go
into the question whether the expenditure incurred by the
assessee was in the nature of capital or revenue expenditure
but took a totally different line and held that the
contributions were made by the assessee as a good citizen
just as any other person would and it could not be said that
the expenditure was laid out wholly and exclusively for the
purpose of the business of the assessee. The third member in
this view agreed with the conclusion reached by the
Accountant Member and held that both the amounts of Rs.
22,332 and Rs. 50,000 were not allowable as deductible
expenditure under Section 10(2)(xv). The appeal of the
assessee was accordingly rejected by the Tribunal so far as
this point was concerned. The assessee thereupon sought a
reference to the High Court and on the application of the
assessee, the following question of law was referred for the
opinion of the High Court :
"Whether on the facts and circumstances of the
case the sums of Rs. 22,332 and Rs. 50,000 were
admissible deduction in computing the taxable profits
and gains of the companies business."
The High Court observed "that on the finding recorded by the
third member of the Tribunal and on the view expressed by
the Accountant Member". the expenditure could not be said to
have been incurred by the assessee in the ordinary course of
its business and it could not be "classified as revenue
expenditure on the ground of commercial
526
expediency". The view taken by the High Court was that since
"the expenditure was not related to the business activity of
the assessee as such, the Tribunal was justified in
concluding that it was not wholly and exclusively laid out
for the business and that the deduction claimed by the
assessee therefore did not come within the ambit of Section
10(2)(xv)". The High Court accordingly answered the question
referred to it in favour of the revenue and against the
assessee. The assessee thereupon preferred to present appeal
in this Court after obtaining the necessary certificate from
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the High Court.
Now an expenditure incurred by an assessee can qualify
for deduction under Section 10(2)(xv) only if it is incurred
wholly and exclusively for the purpose of his business, but
even if it fulfils this requirement, it is not enough it
must further be of revenue as distinct from capital nature.
Two questions therefore arise for consideration in the
present appeal : one is whether the sums of Rs. 22,332 and
Rs. 50,000 contributed by the assessee represented
expenditure incurred wholly and exclusively for the purposes
of the business of the assessee and the other is whether
this expenditure was in the nature of capital or revenue
expenditure. So far the first item of expenditure of Rs.
22,332 is concerned, the case does not present any
difficulty at all, because it was common ground between the
parties that this amount was contributed by the assessee
long after the Deoni Dam and the Deoni Dam-Majhala Road were
constructed and there is absolutely nothing to show that the
contribution of this amount had anything to do with the
business of the assessee or that the construction of the
Deoni Dam or the Deoni Dam-Majhala Road was in any way
advantageous to the assessee’s business. The amount of Rs.
22,332 was apparently contributed by the assessee without
any legal obligation to do so, purely as an act of good
citizenship, and it could not be said to have been laid out
wholly and exclusively for the purpose of the business of
the assessee. The expenditure of the amount of Rs. 22,332
was therefore rightly disallowed as deductible expenditure
under section 10(2)(xv).
But the position is different when we come to the
second item of expenditure of Rs. 50,000. There the assessee
is clearly on firmer ground. The amount of Rs. 50,000 was
contributed by the assessee under the Sugar-cane Development
Scheme towards meeting the cost of construction of roads in
the area around the factory. Now there can be no doubt that
the construction of roads in the area around the factory was
considerably advantageous to the business of the assessee,
because it facilitated the running of its motor vehicles for
transportation of sugarcane so necessary for its
manufacturing activity. It is not as if the amount of Rs.
50,000 was contributed by the assessee generally
527
for the purpose of construction of roads in the State of
Uttar Pradesh, but it was for the construction of roads in
the area around the factory that the contribution was made
and it cannot be disputed that if the roads are constructed
around the factory area, they would facilitate the transport
of sugarcane to the factory and the flow of manufactured
sugar out of the factory. The construction of the roads was
therefore clearly and indubitably connected with the
business activity of the assessee and it is difficult to
resist the conclusion that the amount of Rs. 50,000
contributed by the assessee towards meeting the cost of
construction of the roads under the Sugarcane Development
Scheme was laid out wholly and exclusively for the purpose
of the business of the assessee. This conclusion was indeed
not seriously disputed on behalf of the Revenue but the
principal contention urged on its behalf was that the
expenditure of the amount of Rs. 50,000 incurred by the
assessee was in the nature of capital expenditure, since it
was incurred for the purpose of bringing into existence an
advantage for the enduring benefit of the assessee’s
business. The argument of the Revenue was that the newly
constructed roads though not belonging to the assessee
brought to the assessee an enduring advantage for the
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benefit of its business and the expenditure incurred by it
was therefore in the nature of capital expenditure. The
Revenue relied on the celebrated test laid down by Lord Cave
L.C. in British Insulated and Helsby Cables Ltd. v. Atherson
where the learned Law Lord stated "When an expenditure is
made, not only once and for all, but with a view to bringing
into existence an asset or an advantage for the enduring
benefit of a trade, there is very good reason (in the
absence of special circumstances leading to an opposite
conclusion) for treating such an expenditure as properly
attributable not to revenue but to capital". This test
enunciated by Lord Cave L.C. is undoubtedly a well known
test for distinguishing between capital and revenue
expenditure, but it must be remembered that this test is not
of universal application and, as the parenthetical clause
shows, it must yield where there are special circumstances
leading to a contrary conclusion. The non-universality of
this test was emphasised by Lord Radcliffe in Commissioner
of Taxes v. Nohanga Consolidated Copper Mines Ltd.(2) where
the learned Law Lord said in his highly felicitous language
that 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
transitory as to have to endurance at all". It was also
pointed out by this Court in Empire Jute Co. Ltd. v.
528
C.I.T. that "there may be cases where expenditure, even if
incurred for obtaining advantage of enduring benefit, may,
nonetheless, be on revenue account and the test of enduring
benefit may break down. It is not every advantage of
enduring nature acquired by an assessee that brings the case
within the principle laid down in this test. What is
material to consider is the nature of the advantage in a
commercial sense and it is only where the advantage is in
the capital field that the expenditure would be disallowable
on an application of this test." If the advantage consists
merely in facilitating the assessee’s business operations or
enabling management and conduct of the assessee’s business
to be carried on more efficiently or more profitably while
leaving the fixed capital untouched, the expenditure would
be on revenue account, even though the advantage may endure
for an indefinite future.
Now it is clear on the facts of the present case that
by spending the amount of Rs. 50,000, the assessee did not
acquire any asset of an enduring nature. The roads which
were constructed around the factory with the help of the
amount of Rs. 50,000 contributed by the assessee belonged to
the Government of Uttar Pradesh and not to the assessee.
Moreover, it was only a part of the cost of construction of
these roads that was contributed by the assessee, since
under the Sugarcane Development Scheme, one third of the
cost of construction was to be borne by the Central
Government, one third by the State Government and only the
remaining one third was to be divided between the sugarcane
factories and sugarcane growers. These roads were
undoubtedly advantageous to the business of the assessee as
they facilitated the transport of sugarcane to the factory
and the outflow of manufactured of sugar from the factory to
the market centres. There can be no doubt that the
construction of these roads facilitated the business
operations of the assessee and enabled the management and
conduct of the assessee’s business to be carried on more
efficiently and profitably. It is no doubt true that the
advantage secured for the business of the assessee was of a
long duration in as much as it would last so long as the
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roads continued to be in motorable condition, but it was not
an advantage in the capital field, because no tangible or
intangible asset was acquired by the assessee nor was there
any addition to or expansion of the profit making apparatus
of the assessee. The amount of Rs. 50,000 was contributed by
the assessee for the purpose of facilitating the conduct of
the business of the assessee and making it more efficient
and profitable and it was clearly an expenditure on revenue
account.
529
It was pointed out by Lord Radcliffe in commissioner of
Taxes v. Nothanga Consolidated Copper Mines Ltd. (supra)
that "in considering allocation of expenditure between the
capital and income accounts, it is almost unavoidable to
argue from analogy." There are always cases falling
indisputably on one or the other side of the line and it is
a familiar argument in tax courts that the case under review
bears close analogy to a case falling on the right side of
the line and must, therefore, decide in the same manner. If
we apply this method, the case closest to the present one is
that in Lakshmiji Sugar Mills Co. P. Ltd. v. C.I.T.(1) The
facts of this case were very similar to the facts of the
present case. The assessee in this case was also a limited
company carrying on business of manufacture and sale of
sugar in the State of Uttar Pradesh and it paid to the Cane
Development Council certain amounts by way of contribution
for the construction and development of roads between
sugarcane producing centres and the sugar factory of the
assessee and the question arose whether this expenditure was
allowable as revenue expenditure under S. 10(2)(xv). No
doubt, in this case, there was a statutory obligation under
which the amount in question was contributed by the
assessee, but this Court did not rest its decision on the
circumstance that the expenditure was incurred under
statutory obligation. This Court analysed the object and
purpose of the expenditure and its true nature and held that
it was of a revenue and not capital nature. This Court
observed : "In the present case, apart from the element of
compulsion, the roads which were constructed and developed
were not the property of the assessee nor is it the case of
the revenue that the entire cost of development of those
roads was defrayed by the assessee. It only made certain
contribution for road development between the various cane
producing centres and the mills. The apparent object and
purpose was to facilitate the running of its motor vehicles
or other means employed for transportation of sugarcane to
the factory. From the business point of view and on a fair
appreciation of the whole situation the assessee considered
that the development of the roads in question could greatly
facilitate the transportation of sugarcane. This was
essential for the benefit of its business which was of
manufacturing sugar in which the main raw material
admittedly consisted of sugarcane. These facts would bring
it within the second part of the principle mentioned before,
namely, that the expenditure was incurred for running the
business or working it with a view to produce the profits
without the assessee getting any advantage of an enduring
benefit to itself. (Emphasis supplied) These observations
are directly applicable in the present case and we must hold
on the analogy of
530
this decision that the amount of Rs. 50,000 was contributed
by the assessee "for running the business or working it with
a view to produce the profits without the assessee getting
any advantage of an enduring benefit to itself". This
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decision fully supports the view that the expenditure of the
amount of Rs. 50,000 incurred by the assessee was on revenue
account.
We must also refer to the decision of this Court in
Travancore-Cochin Chemicals Ltd. v. C.I.T. (Supra) on which
strong reliance was placed on behalf of the Revenue. The
facts of this case are undoubtedly to some extent comparable
with the facts of the present case. But ultimately in cases
of this kind, where the question is whether a particular
expenditure incurred by an assessee is on capital account or
revenue account, the decision must ultimately depend on the
facts of each case. No two cases are alike and quite often
emphasis on one aspect or the other may tilt the balance in
favour of capital expenditure or revenue expenditure. This
Court in fact in the course of its judgment in Travancore-
Cochin Chemicals Ltd.’s case (supra) distinguished the
decision in Lakshmiji Sugar Mills’ case (supra) on the
ground that "on the facts of that case, this court was
satisfied that the development of the roads was meant for
facilitating the carrying on of the assessee’s business.
Lakshmiji Sugar Mills’ case is quite different on facts from
the one before us and must be confined to the peculiar facts
of that case." We would make the same observation in regard
to the decision in Travancore-Cochin Chemicals’ case (supra)
and say that decision must be confined to the peculiar
facts of that case, because Lakshmiji Sugar Mills’ case
(supra) admittedly bears a closer analogy to the present
case than the Travancore-Cochin Chemicals’ case and if at
all we apply the method of arguing by analogy, the decision
in Lakshmiji Sugar Mills case (supra) must be regarded as
affording us greater guidance in the decision in the present
case then the decision in Travancore-Cochin Chemicals’ case
(supra). Moreover, we find that the parenthetical clause in
the test formulated by Lord Cave L.C. in Antherton’s case
(supra) was not brought to the attention of this Court in
Travancore-Cochin Chemicals’ case with the result that this
Court was persuaded to apply that test as if it were an
absolute and universal test regardless of the question
applicable in all cases irrespective whether the advantage
secured for the business was in the capital field or not. We
would therefore prefer to follow the decision in Lakshmiji
Sugar Mills’ case (Supra) and hold on the analogy of that
decision that the amount of Rs. 50,000 contributed by the
assessee represented expenditure on the revenue account.
531
We accordingly dismiss the appeal in so far as the
expenditure of the sum of Rs. 22,332 is concerned. But, so
far as the expenditure of the sum of Rs. 50,000 is
concerned, we hold that it was in the nature of revenue
expenditure laid out wholly and exclusively for the purpose
of the assessee’s business and was therefore, allowable as a
deduction under Section 10(2)(xv) of the Act and allow the
appeal to this limited extent. Since the assessee has partly
won and partly lost, we think that the fair order of costs
would be that each party should bear and pay its own costs
throughout.
S.R. Appeal allowed in part.
532