Full Judgment Text
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PETITIONER:
M/s. SITALPUR SUGAR WORKS LTD.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX, BIHAR AND ORISSA
DATE OF JUDGMENT:
10/04/1963
BENCH:
ACT:
Income Tax--Expenditure incurred on dismantling a
factory at one place and setting it up at another--Capital
expenditure and not revenue expenditure--Depreciation on
capital expenditure-Depreciation not allowed on amount
spent for acquiring an advantage--Indian Income-tax Act,
1922 (11 of 1922), s. 10 (2) (vi).
HEADNOTE:
The appellant, a company manufacturing sugar, shifted
its factory from the old site to a new site and incurred a
total expense of Rs. 3,19,766/- on the dismantling of
buildings and machinery, transporting machinery from the
original site to the new site and refitting the same there.
Held that the appellant was not entitled to a deduction
of this expense for income-tax purposes as an expense
incurred for carrying on the concern or in earning profit,
it was an expense incurred m effecting a permanent
improvement in the profit-making machinery and was,
therefore, an expenditure on capital account.
The expense was on capital account also because it was
made, "not only once for all, but with a view to bringing
into existence an asset or an. advantage for the enduring
benefit of a trade" within the dictum of Viscount Cave in
Atherton v. British Insulated and Helsby Cables Ltd. In
order that that dictum may apply it is not necessary that
by the expenditure a material asset or a permanent right in
the nature of capital should be acquired. There may be an
expense incurred on capital account though nothing was
thereby added to the capital value of an asset.
Atherton v. British Insulated and Helsby Cables Ltd. (1925)
10 T.C 155, Assam Bengal Cement Go. Ltd. v. The
Commissioner of Income-tax, West Bengal, [1955] 1 S.C.R.
972, Granite Supply Association Ltd. v Kitton, (1905) 5
T.C. 168 and Bean v. Doncaster Amalgamated Collieries Ltd.
(1945) 27 T.C. 296, referred to.
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An expense would not be on revenue account simply
because it was incurred to turn a losing concern into a
profitable one.
Though the expense incurred by the appellant was of a
capital nature, it was not entitled to any depreciation on
it under s.10 (2) (vi) of the Income-tax Act because no
tangible asset had been acquired by the expenditure which
can be said to have depreciated. Neither was the appellant
entitled to depreciation under part V of the Form of Return
given in the Rules framed under the Act which dealt with a
claim for depreciation and by column 3 required a statement
to be made for "capital cxpenditure during the year for
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additions, alternations, improvements and extensions," for
to be so entitled to deductions under this part there has to
be an improvement of the capital asset or increase in its
value and there is no evidence of any such improvement or
increase. Further, no claim for depreciation on improvement
to capital asset had been made.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 350 of
1962.
Appeal by special leave from the judgment and decree
dated November 30, 1960, of the Patna High Court in
Miscellaneous Judicial Case No. 799 of 1958.
G. S. Pathak and G.G. Mathur, for the appellant.
N. D. Karkhanis and R. N. Sachthey, for the respondent.
1963, April 10. The Judgment of the Court’ was delivered by
SARKAR J.--This case does not seem to us to present any real
difficulty. It arises out of a reference to the High Court
of Patna of two questions both of which were answered by the
High Court against. the assessee, the appellant in this
Court.
The appellant is. a company manufacturing sugar. It
had its factory originally at a place called
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Sitalpur. That place was found to be disadvantageous for
the appellant’s business as sugar cane of good quality was
not available in sufficient quantity in the neighbourhood
and also as it suffered from ravages of flood. With a view
to improve its business the appellant removed its factory
from Sitalpur to another place called Garaul and in the
process of dismantling the building and machinery,
transportation from Sitalpur to Garaul and refitting the
machinery at the latter place, it incurred a total expense
of Rs. 3,19,766/- in the year of account. In the assessment
of its income-tax. it claimed a deduction of these expenses
as revenue expenses. That claim was rejected. The
questions referred concern these expenses.
The first question was this:
"Whether the expenditure of Rs. 3,
19,766/-incurred by the assessee m dismantling
and shifting the factory from Sitalpur and
erecting the factory and fitting the machinery
at Garaul was expenditure of a capital nature
and not revenue expenditure within the
meaning of section 10 (2) (xv) of the Income-
tax Act ?"
Considering the matter apart from the authorities, it seems
to us impossible that the expenditure could be revenue
expenditure. It was clearly not incurred for the purpose of
carrying on the concern but it was incurred in setting up
the concern with a greater advantage for the trade than it
had m its.previous set up. The expenditure was .not.
recurred m caring any profit but only for putting its
factory, that is, its capital, in better shape so that it
might produce larger profits, when work.ed. It really .went
towards effecting a permanent improvement in the profit
making machinery, that is, in the capital assets. It was,
therefore, a capital expenditure and not a revenue
expenditure.
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The case, furthermore, is completely governed by
authorities. We think it comes clearly within the well-
known dictum of Viscount Cave in Atherton v. British
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Insulated and Helsby Cables Ltd (1). That "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, I think that 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". The test formulated by Viscount Cave has been
accepted by this Court: see Assam Bengal Cement 6’0. Ltd. v.
The Commissioner of Income-tax West Bengal (2). Here the
expenditure produced an enduring advantage in the shape of
transfer to a better factory site, an advantage which
enabled the trade to prosper and an advantage that could be
expected to last for ever. It was an expense properly
attributable to capital under Viscount Cave’dictum.
Mr. Pathak did not question the authority of the test
laid down in Atherton’s case (1), but said that that test
had no application in the present case as it would not apply
unless by the expenditure a material asset or a covenant or
right in the nature of capital was acquired. We find
neither principle nor authority to support this contention.
If an expenditure incurred, say for acquiring an additional
plant, is capital expenditure, an expenditure incurred in
dismantling and refitting the existing plant at a better
site would be equally capital expenditure. They would both
be capital expenditure because both were incurred for
increasing the capacity of the profit making machine to earn
profits and neither was incurred for earning the profits
themselves. In principle, therefore, there is no reason to
make a distinction .as to the nature of the expense between
an expenditure incurred for acquiring material capital
(1) (1925) 10 T.C. 155. 192, (2) [1955] 1 S.C.R, 972,
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asset or a legal right in the nature of capital and an
expenditure incurred for acquiring any other advantage of
an enduring nature for the benefit of the trade. It is true
that it has been said, as Mr. Pathak pointed out, that the
advantage acquired by the expenditure must be analogous to
an asset (see Halsbury’s Laws of England, 3rd ed. Vol. XX p.
162.) but that only means advantage of the nature of a
capital asset, that is to say, "an advantage to the
permanent and enduring benefit of the trade". see ibid p.
161. It is obviously not necessary for an advantage to be
of such a nature that it must be the acquisition of a
material asset or of a chose in action.
As to the authorities, they are all against the view for
which Mr. Pathak contends. We propose to refer to two of
them only. First, there is the case of Granite Supply
Association Ltd. v. Kitton (1). The assessee was a company
whose business was to buy and sell granite. It found it
necessary to shift to a larger yard and in doing so incurred
expenses for removal of stones and cranes from the old to
the new yard and for re-erecting the cranes in the latter
yard. It was held that the Company was not entitled to a
deduction for these expenses. It was said that the expenses
were of the same kind as those which might have been
incurred in the buying of new cranes. Lord MacLaren said (p.
17IL "I think that the cost’ of transferring plant from one
set of premises to another more commodious set of premises
’is not an expense incurred for the year in which the thing
is done, but for the general interests of the business. It
is said, no doubt, that this transference does not add to
the capital ’value of the plant, but I think that is not the
criterion." Lord MacLaren’s observation is completely
against the view advocated by Mr. Pathak that to constitute
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an enduring benefit a material asset or a right must be
created.
The above case, furthermore, is indistinguishable from
the case in hand. Mr. Pathak sought to
(1) (1905) 5 T.C.160.
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distinguish the present case from the Granite Supply
Association Ltd. case (1), on the ground that there the
business was not running at a loss in the old yard and the
expenses were incurred only to enlarge the business and
hence were on capital account. We find it difficult to.
appreciate this distinction. Whether an expense is on
capital account or not would not depend on whether it was
incurred for earning larger profits than before nor would an
expenditure be on revenue account because it was incurred
for turning a losing concern into a profitable one.
The other case to which we will refer is Bean v.
Doncaster Amalgamated Collieries Ltd.(2). The Colliery
Company was required by a statute to incur expenses for
remedial works necessary tO obviate loss of efficiency in an
existing drainage system due to subsidence caused by the
Company’s workings. The Drainage Board formed a general
drainage improvement scheme and the Company paid a part of
the expenses of the new drainage constructed under the
scheme. As a result of the new drainage the Company was
enabled to work its seams without incurring the liability
under the statute as the new drainage system had been so
constructed as to remain unaffected by the Company’s
workings. It was contended by the company that the
payment for the new drainage was a revenue expenditure
as it had not resulted in the acquisition of any-capital
asset, but this contention was rejected and it was held that
the expenditure was on capital account and no deduction for
it was allowable. Viscount Simon said (p. 312), that the
expenses had been incurred "to secure an enduring advantage
within the proper application of Lord Cave’s phrase in
Atherton v. British Insulated and Helsby Cables
Ltd. (10 T.C. 155, at page 192)". He also quoted (p.312)
with approval the observation of Uthwatt J. in the Court of
Appeal that, "The result of the transaction
(1) (1905) 5 T.C. 168. (2) (1946) 27 T.C. 296,
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clearly was that the value of the particular coal
measures--a capital asset remaining unchanged in
character--was increased both for use and exchange. There
was, therefore, as the result of the transaction,brought
into existence, not indeed an asset, but an advantage for
the enduring benefit of the trade of the Company."
Obviously, therefore, there can be an enduring advantage
acquired without an addition to or increase in the value of
any capital asset.
It is no doubt true that the distinction between revenue
expenditure and expenditure on capital is very fine and
often it is difficult to decide under which class an
expenditure properly falls. No such difficulty, however,
arises in the present ease. We think, for the reasons
earlier mentioned, that the present is a plain ease and we
feel no doubt that the expenses for shifting and re-erection
were incurred on capital account. The first question
referred was clearly correctly answered by the High Court.
The appellant’s ease is even weaker with regard to
the other question which was this:
"Whether the assessee was entitled to claim
depreciation on the said expenditure of
Rs. 3,19,766/-?"
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This question was raised presumably on the basis that if in
respect of the first question it was held that the
expenditure was on capital account, then depreciation should
be payable on the amount of the expenditure in the same way
as depreciation is allowed on capital. The claim for
depreciation was made under s. 10 (2) (vi) of the Income-
tax Act. But as the High Court rightly pointed out, no such
depreciation could be claimed because no tangible asset had
been acquired by the expenditure which could be said to have
depreciated.
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Mr. Pathak, therefore, put the case of the appellant
from a slightly different point of view. He referred us to
Part V of the Form of Return given in the Rules framed under
the Act. That Part deals with a claim for depreciation.
Column 3 of this Part requires a statement to be made for
"Capital expenditure during the year for additions,
alternations, improvements and extensions". Mr. Pathak
contended that this Part showed that depreciation is
allowable on capital expenditure for improvements, and
that in view of our answer to question No. 1. the appellant
would be entitled to depreciation on the expense as capital
expenses incurred for improvement. This is an obviously
fallacious argument. In order to be entitled to deduction
on account of depreciation under this Part of the Form,
there has to be an improvement of the capital asset, an
increase in its value. All that we have here is an expense
incurred for acquiring an advantage for the trade. That may
or may not be an improvement in the capital assets. The
appellant cannot claim depreciation on the amount spent for
acquiring an advantage. Whether it could claim
depreciation on improvements effected to capital assets
is not a question referred to the Court. The second
question, therefore, was also correctly answered in the
negative by the High Court.
This appeal is dismissed with costs.
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