Full Judgment Text
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 8
PETITIONER:
ARVIND MILLS LTD.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX, GUJARAT
DATE OF JUDGMENT21/07/1992
BENCH:
RAY, G.N. (J)
BENCH:
RAY, G.N. (J)
MOHAN, S. (J)
CITATION:
1993 AIR 103 1992 SCR (3) 557
1992 SCC (3) 535 JT 1992 (4) 330
1992 SCALE (2)48
ACT:
Income Tax Act, 1961 : Section 37.
Business expenditure-Capital or Revenue expenditure-
Test to determine-Expenditure must have direct nexus with
day to day running of business-Question of voluntary or
involuntary payment is not relevant-Contribution of
betterment charges made by the assessee towards the cost of
Town Planning Scheme under the Bombay Town Planning Act,
1954-Expenditure held capital in nature-Not deductible from
the income of the assessee.
HEADNOTE:
Under the Bombay Town Planning Scheme the lands of
different owners within the Scheme are treated in a common
pool and various improvements are effected for the better
enjoyment of the lands in question. Since by such
improvements the value of the land increases the person
getting advantage of enhancement of value of land in
question is required to pay betterment fee under the Bombay
Town Planning Act, 1954.
The appellant-Company made payments towards betterment
charges in ten instalments and claimed deduction of the said
payment on the ground that it was a revenue expenditure. The
Income Tax Officer disallowed the claim for deduction. On
appeal, the Appellate Assistant Commissioner allowed
deduction of the amount of only one installment paid by the
assessee for the year of assessment. The Company preferred
an appeal before the Income Tax Tribunal which held that the
betterment charge was not revenue expenditure and therefore
no deduction was allowable. On a reference to the High Court
of Gujarat on the question whether the Tribunal was
justified in disallowing the betterment charges, the High
Court decided against the Assessee-Company.
In appeal to this Court it was contended on behalf of
the appellant-Company that because of the improvement
effected under the Town Planning Scheme the running of the
business of the Assessee-Company got
558
improved and thus the betterment fee required to be paid
under the scheme had a direct nexus with the running of the
business of assessee. Hence, such betterment charge
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 8
particularly in the context that such payment was
involuntary and was in the nature of compulsory exaction
from the assessee should be held to be a revenue expenditure
made for better running of the business.
On behalf of the revenue it was contended that there
must be a direct connection with the business activities and
the expenditure made and a remote connection with the
business activities is not relevant for the purpose of
treating the expenditure as revenue expenditure.
Dismissing the appeal, this Court
HELD 1. In deciding whether an expenditure is a capital
expenditure or a revenue expenditure the question of
voluntary and/or involuntary payment becomes immaterial. It
is the nature of expendure that determines the issue. The
capital expenditure incurred in connection with the 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. [566A, 565-H]
2. Under the Bombay Town Planning Scheme, the lands of
different owners including the land of the assessee were
treated as if included in a common pool and various
improvements have been effected for the better enjoyment of
the lands under the scheme. For such improvement by way of
laying down roads, making provision for drainage etc. under
the scheme, the owner got the advantage of betterment of the
land in question and there is no manner of doubt that the
valuation of the land had increased because of the
improvements effected on the land. Simply because by such
improvement it has also resulted in providing better
facilities for carrying out the business of the assessee,
the betterment charge required to be paid by the assessee,
does not become the revenue expenditure. Such payment has no
direct nexus with the day-to-day running of the business.
[565E-G]
3. The High Court 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. [566-F]
559
Mohanlal Har Govind of Jubbulpore v. Commissioner of
Income Tax, C.P. & Berar, Nagpur, (1949) 17 I.T.R. p.473 and
L.H. Sugar Factory and Oil Mills (P) Ltd. v. Commissioner of
Income Tax U.P., (1980) 125 I.T.R. p.293, distinguished.
Dollar Company v. Commissioner of Income Tax,(1986) 161
I.T.R.p. 455 and State of Gujarat v. Shantilal Mangaldas and
Ors.,[1969] 3 S.C.R. 341, referred to.
Additional Commissioner of Income Tax, Gujarat v. Rohit
Mills Ltd., (1976) 104 I.T.R. p.132, approved.
JUDGMENT:
CIVIL APPEALLATE JURISDICTION : Civil Appeal No. 1836
(NT) of 1977.
From the Judgment and Order dated 9th/10.3.77 of the
Gujarat High Court in Income Tax Reference No. 197 of 1976.
H.N. Salve, P.H. Parekh and U.Sagar for the Appellant.
B.B. Ahuja, Manoj Arora and Ms. A. Subhashini for the
Respondent.
The Judgment of the Court was delivered by
G.N.RAY, J. This appeal arises out of a Certificate
granted by the High Court of Gujarat against its Judgment
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 8
dated 9/10th March, 1977 in Income Tax Reference No. 197 of
1976. The appellant-Arvind Mills Ltd. is a Company
incorporated under Companies Act and running a textile mill.
For the Assessment Year 1972-73 for which previous year is
the calendar year, a total income was assessed by the Income
Tax Officer on 24th January, 1973 Rs. 1,30,92,040. The
appellant claimed a deduction of Rs.2,02,907 being the
contribution made by the assessee towards to cost of Town
Planning Scheme under Section 66 of the Bombay Town Planning
Act, 1954. The aforesaid payment made by the assessee was
described as betterment charges. The Income Tax Officer
disallowed the claim for deduction by his Order dated 25th
January, 1974. The appellant preferred an appeal before the
Appellate Assistant Commissioner. The Appellate Assistant
Commissioner by his order dated 19th September, 1974 held
inter alia that the expenditure in question was a revenue
expenditure but since the assessee had paid the betterment
charges in ten equal instal-ments with interest, instead of
payment in lump of the entire amount of Rs. 2,02,907,
560
a sum of Rs. 14,434 only since paid by the assessee by way
of instalment in the year of assessment should be deducted
from income. The contention of the assessee that since the
method of accounting of the assessee was mercantile, the
entire amount of Rs. 2,02,907 should be deducted and not the
yearly instalment of Rs. 14,434, was not accepted. The
assessee thereafter preferred a Cross Appeal against the
order of the Appellate Assistant Commissioner before the
Income Tax Tribunal in I.T.A. No. 133 (AHD)/74-75. The
Tribunal held inter alia that the betterment charge was not
revenue expenditure. Hence no deduction on account of the
betterment charge was allowable. The Tribunal, however did
not interfere with the deduction of Rs. 14,434 since allowed
by the Appellate Assistant Commissioner.
At the instance of the assessee, the following question
of law was referred by the Tribunal to the High Court of
Gujarat :
"whether on the facts and circumstances of the
case, the Tribunal was justified in disallowing the
betterment charges".
By the impugned judgment the High Court of Gujarat
relying on the decision of the said High Court in the case
Additional Commissioner of Income Tax, Gujarat v. Rohit
Mills Ltd., reported in, (1976) 104 I.T.R.p.132 decided the
question against the appellant-assessee but on an oral
application, the High Court granted a Certificate to the
Appellate under Section 261 of the Income Tax Act, 1961.
Mr. Salve, learned counsel appearing for the appellant-
assessee has contended that the betterment charge payable
under the Bombay Town Planning Act was a compulsory payment
and the decision to effect improvement on the lands within
the Town Planning Scheme did not depend upon the volition of
the owner of the land. It was immaterial whether the
assessee was intersted or not for the alleged improvement of
the land under the Scheme but the assessee was under an
obligation to make the payment of betterment charge imposed
under the Bombay Town Planning Scheme. Mr. Salve has
contended that the Scheme prepared under the Bombay Town
Planning Act becomes final on publication of the Scheme
under Section 51 and the effect of the final Scheme has been
provided under Section 53 of the said Act. Section 54
provides for the cost of the Scheme and Section 55 provides
for the calculation of the improvement. Mr. Salve has
contended that if various provisions of the Bombay Town
Planning Act
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 8
561
are referred to, it will be quite apparent that the
betterment charge is nothing but a statutory exaction and in
its reality such betterment charge partakes the character of
imposition of levy. Mr. Salve has strongly relied on the
decision of the Madras High Court in the case of Dollar
Company v. Commissioner of Income Tax, (1986) 161 I.T.R.
p.455. The assessee-Dollar Company had to make payment
towards the betterment contribution for 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 expenditure.
The Income Tax Officer, however, disallowed the claim by
holding that such payment was in the nature of capital
expenditure. Such decision of the Income Tax Officer was
affirmed by the Appellate Assistant Commissioner and also by
the Income Tax Appellate Tribunal. On a reference, 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 precondition for such
levy was that consequent upon making any Town Planning
Scheme, the value of the property in the Scheme has
increased or is likely to increase. Hence the payment of
betterment contribution did not result in any increase in
the value of the property but because of the increase in the
value of the property as a result of the making of the Town
Planning Scheme, the owner of the property was required to
make a contribution which was called a betterment
contribution. Since there was no direct nexus between the
expenditure incurred by the Corporation and the increase in
the value of the property, the expenditure incurred by the
assessee for payment of betterment charge must be held to be
revenue expenditure. It has been further held by the Madras
High Court that commercially considered, the expenditure
which has been so incurred for facilities such as roads,
drainage facility etc., for the enjoyment of the property,
would be laid out wholly and exclusively for purposes of the
business and the payment of the betterment contribution was
in the nature for a payment of such facility and only its
computation was on the basis of appreciation in value. It
was held that consequently the expenditure incurred by way
of the betterment contribution could not be called as an
expenditure of a capital nature and, therefore, such payment
was deductible from the income of the assessee.
Mr. Salve, relying on the aforesaid decision of the
Madras High Court, has contended that the betterment charges
paid by the appellant-
562
assessee should also be construed as revenue expenditure
because there was no direct nexus between the expenditure
incurred by the Corporation and the increase in the value of
the property of the assessee. He has contended that the
improvement effected on the lands included within the Town
Planning Scheme, resulted in more efficiently carrying out
the business of the assessee and the expenditure which had
been incurred for such improvement by way of betterment fee
was thus directly connected with the business activities of
the assessee. Since enjoyment of the property improved under
the Town Planning Scheme was directly linked with the
carrying on of the business of the assessee and the payment
of betterment contribution was for such facility in carrying
out the business activities more effectively and its
computation was only on the basis of appreciation in value,
such betterment contribution was in reality a revenue
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 8
expenditure and the High Court of Gujarat erred in holding
that it was in the nature of a capital expenditure. Mr.Salve
has submitted that the various provisions of the Bombay Town
Planning Scheme had been considered by this Court in the
case of State of Gujarat v. Shantilal Mangaldas and Ors.,
reported in [1969] 3 SCR p. 341. He has contended that under
the Scheme, lands of various owners are treated as lands
belonging to a common pool and for better enjoyment of lands
by the residents certain improvements are effected and
facilities are provided under the Scheme. Although by such
process, the value of the land is likely to increase, the
involuntary payment of betterment charge has a direct nexus
with the running of the business in a better way because of
the improvement effected and by the process the same becomes
a revenue expenditure as indicated by the Madras High Court.
Mr. Salve has referred to a decision of the Privy Council in
Mohanlal Har Govind of Jubbulpore v. Commissioner of Income
Tax C.P. & Berar, Nagpur, reported in (1949) 17 I.T.R. p.
473. In consideration of certain sums payable short term
licence was granted to acquire tendu leaves for
manufacturing Beedi (country made cigarette). The Privy
Council held that such expenditure was revenue expenditure
and not capital expenditure. Mr. Salve has also referred to
a decision of this Court made in the case of L.H.Sugar
Factory and Oil Mills (P) Ltd. v. Commissioner of Income
Tax, U.P., reported in (1980) 125 I.T.R. p. 293. In the said
case, the assessee-a private company was carrying on
business in the manufacture and sale of sugar. During the
relevant accounting period the assessee paid two amounts :
(i) a contribution of certain sums at the request
of the Collector
563
of the District towards the construction of the
Deoni Dam Majhala Road
(ii) a contribution of Rs. 50,000 to the State of
U.P. towards meeting the cost of construction of
roads in an area round the factory under a
sugarcane development scheme. Under the said
scheme, one third of the cost was to be borne by
the State Government, one third by the Central
Government and the remaining one third by the
sugarcane growers and the owners of sugar factories
in the area.
This Court held in the said decision that the first
contribution at the instance of the Collector towards the
construction of Deoni Dam was not deductible expenditure
under Section 10(2)(xv) of the Income Tax Act because the
said amount was contributed long after the construction of
the dam and the roads in question had also been constructed
long back and there was nothing to show that the
contribution of the amount had anything to do with the
business of the Company or the construction of the dam or
the roads was in any way advantageous to the assessee’s
business. So far as the second sum of Rs. 50,000 was
concerned, it has been held by this Court that the said sum
was deductible under Section 10(2)(xv) because the
construction of the roads had facilitated the transport of
the sugarcane to the factory and outflow of sugar
manufacture by the factory of the assessee to the market
centres. It was indicated that the construction of the
roads had facilitated the business operation of the assessee
and had enabled the management to carry on business more
efficiently and profitably. This Court has noted that it
was true that the advantage secured for the business of the
assessee was of a long duration inasmuch as it would last so
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 8
long as the roads continued to be motorable but it was not
an advantage in the capital field because no tangible or
intangible asset was acquired by the assessee nor there was
any addition to an 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 and making it more efficient and profitable
without the assessee getting an advantage of an enduring
benefit to itself. In the aforesaid circumstances, this
Court has held that such expenditure should be held to be a
revenue expenditure and was deductible.
Mr. Salve has contended that because of the improvement
effected
564
under the Town Planning Scheme the running of the business
of the assessee got improved and thus the betterment fee
required to be paid under the Scheme had a direct nexus with
the running of the business of the assessee. Hence, such
betterment charge particularly in the context that such
payment was involuntary and was in the nature of compulsory
exaction from the assessee should be held to be a revenue
expenditure made for better running of the business. He has
submitted that since the construction of the road in and
around L.H.Sugar Factory had a nexus for the running of the
business more efficiently and profitably, this Court in the
said Sugar Factory’s case has held that a contribution of
Rs. 50,000 even when such contribution was not in the nature
of a compulsory payment but a pure and simple voluntary
contribution, was a revenue expenditure and as such it was
deductible from the income of the assessee. Mr. Salve has
therefore submitted that the impugned decision of Gujarat
High Court must be held to be erroneous and the reference
should be answered in favour of the assessee by allowing the
betterment charges paid by the assessee-Company as a
deductible expenditure.
The learned counsel appearing for the respondent has,
however, contended that unless it can be demonstrated that
the expenditure is exclusively for business purpose, the
same cannot be held to be a revenue expenditure and as such
deductible from the income of the assessee. The learned
counsel has contended that there must be a direct connection
with the business activities and the expenditure made and a
remote connection with the business activities is also not
relevant for the purpose of treating the expenditure as
revenue expenditure. He has contended that in L.H.Sugar’s
case the question of capital asset did not arise because the
road constructed in and around the factory did not belong to
the factory. This Court has specifically held in L.H.
Sugar’s case that the advantage derived from the
construction of the road was not in the capital field
because no tangible or intangible asset was acquired by the
assessee nor was there any expansion to the profit making
apparatus of the assessee. The learned counsel for the
respondent has stated that under the Bombay Town Planing
Scheme, the lands of different owners within the Scheme are
treated in a common pool and various improvements are
effected for the better enjoyment of the lands in question.
By such improvements, the value of the land increases and it
was in consideration of such increased valuation of the
land, the betterment fees are charged. He has submitted
that it is immaterial whether the assessee had a desire for
the improvement of the land in question. The fact remains
that under the statute, such improve-
565
ment had been effected and the assessee getting advantage of
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 8
enhancement of value of land in question is required to pay
betterment fee. He has also submitted that in Mohanlal Har
Govind’s case (supra) the Privy Council has held the
expenditure incurred for obtaining licence to procure tendu
leaves as revenue expenditure because tendu leaves was
essential raw material for manufacturing Beedi and as such
the expenditure had a direct nexus with day-to-day running
of the business of manufacturing Beedi. Hence, the said
decision of Privy Council is clearly distinguishable. He
has contended in the facts of this appeal, the Gujarat High
Court has rightly held that the expenditure was a capital
expenditure and not revenue expenditure. The learned
counsel has contended that when a capital expenditure is
incurred, the said capital expenditure also ultimately enure
to the efficient running of the business but on that score
the expenditure on capital asset does not lose the character
of capital expenditure and does not become a revenue
expenditure. He has submitted that the Madras High Court
has failed to appreciate that the expenses incurred by
making payment of betterment fees was in essence an
expenditure on account of increase in the valuation of the
land of the assessee and such expenditure has no direct
nexus with the day-to-day running of the business. In the
aforesaid circumstances, the learned counsel for the
respondent has submitted that no interference is called for
in this appeal and the same should be dismissed.
After considering the respective contentions of the
learned counsels for the parties, it appears to us that
under the Bombay Town Planning Scheme, the lands of
different owners including the land of the assessee were
treated as if included in a common pool and various
improvements have been effected for the better enjoyment of
the lands under the Scheme. For such improvement by way of
laying down roads, making provision for drainage etc. under
the scheme, the owner got the advantage of betterment of the
land in question and there is no manner of doubt that the
valuation of the land had increased because of the
improvements effected on the land. Simply because by such
improvement it has also resulted in providing better
facilities for carrying out the business of the assessee,
the betterment charge required to be paid by the assessee.,
does not become the revenue expenditure. Such payment has
no direct nexus with the day-to-day running of the business.
In our view the learned counsel for the respondent is
justified in submitting that the capital expenditure
incurred in connection with the business activities
ultimately results in efficiently carrying on the business
and by that process gives aid in running of the day-to-day
business
566
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. It is the nature of expenditure
that determines the issue. In L.H. Sugar Factory’s case
(supra), it has been specifically indicated by this 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
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 8
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. The decision of the Privy Council in
Har Govind’s case (supra) in holding that the expenditure
incurred for obtaining licences for acquiring tendu leaves
for manufacturing beedi was a revenue expenditure can be
easily explained by indicating that such expense for
obtaining licence to procure tendu leaves was an expenditure
to acquire basic raw material for manufacturing beedi. Such
expenditure had nothing to do with any capital asset.
Hence, the expenditure having a direct nexus with day-to-day
running of the business of manufacturing beedi by procuring
basic raw material is certainly a revenue expenditure. But
the facts in the instant appeal are quite different. The
aforesaid aspect is totally absent in the instant case. 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). The
instant appeal, therefore, fails and is dismissed without
any order as to costs.
T.N.A. Appeal dismissed.
567