Lakshmiji Sugar Mills Co. v. Commissioner of Income Tax, New Delhi

GroYer. J. This is an appeal by special leave from a judgment of the Delhi High Court in an Income tax Reference. The assessee, which is the appellant, is a private limited com­ pany carrying on the business of manufacture and sale of sugar. It has two sugar mills one at Maholi (Sitapur) and the other at Raja-ka-Sahaspur (Moradabad). The head office of the asses­ see is at New Delhi. During the accounting period relating to 466 SUPREME COURT REPORTS [1972) 1 S.C.R. the assessment year 1956-57 sums of Rs. 75,000/- and Rs. 3 7 ,500/- were paid by the assessee to the Cane Development Council of the Sugarcane Department of the Government of Uttar Pradesh by way of contribution for road development between the various sugarcane producing centres and the sugar factories of the assessee. The revenue authorities found that these con­ tributions were intended to be applied for the construction and development of roads between the sugarcane producing centres and the sugar mills and held that these amounts constituted capi­ tal expenditure and could not be allowed as an admissible deduc­ tion while co;pputing the total income of the assessee. The Appellate Tribunal upheld the order of the departmental autho­ rities. On an application being moved the Tribunal referred two questions of law to the High Court. We are concerned only, in the present case, with the second question which is as follows "Whether the sums of Rs. 75,000 and Rs. 37,500 paid to the Road Development Fund set up by the Gov­ ernment of U.P. were rightly disallowed as items of capi­ tal expenditure ?" The High Court held that the aforesaid expenditure could not be regarded as revenue expenditure and the answerr was returned against the assessee. According to the assessee certain facts are fully esta­ blished. These are ( 1) the expenditure incurred was for the development of roads and the assessee was under an obligation to make the aforesaid contributions under the provisions of the U. P. Sugarcane Regulation of Supply & Purchase Act, 1953; ( 2) the roads were originally the property of the government and remained so after the improvement had been made. ( 3) the sole reason for which the assessee had made the contribu­ tion was that the improved roads would facilitate the trarls.; portation of cane from the cane producing centres to the pre­ mises of the mills and also the flow .of supply to and from the factories of the assessee; and ( 4) the expenditure was incur­ red for reasons of commercial expediency and for the benefit uf the day 'to day business of the assessee. According to the High Court it was admitted on behalf of the assessee . that if expenditure had been incurred by it for building roads of its own it would be capital expenditure. The High Court could see no difference if expenditure was incurred under compulsion or even without compulsion if the roads were built for facilitating transportation and improving the business and the flow of supply to and from the factories of the assessee. We are unable to agree with the reasoning or the conclu­ sion of the High Court. The general principles governing the LAKSHMIJI SUGAR MILLS v. c.I.T. (Grover, /.) 467 determination of the question whether an expenditure is in the nature of capital or revenue expenditure are weli known. Where expenditure is incurred while the business is being car­ ried on and not for its extension or for the substantial replace­ ment of its equipment the position would be as follows :- "If the expenditure is made for acqumng or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attribut­ able to capital and is of the nature of capital expendi­ ture. If on the other hand it is made not for the pur­ pose of bringing into existence any such asset or advantage but for running the business or work­ ing it with a view to produce the profits it is a reve­ nue expenditure." (Vide Assam Bengal Cement Ltd. v. Commissioner of Income tax, West Bengal(1) ). The argument on behalf of the revenue is that the expenditure which was incurred by the assessee in the present case was in­ tended for bringing into existence an advantage for the enduring benefit of the business. On the other hand it has been main· tained on behalf of the assessee that the expenditure was pro­ perly attributable to running the! business or working it with a v:i,ew to produce the profits. The Calcutta High Court had occasion. to consider an identical question in Commissloner of Income tax, West Bengal v. Hindustan Motors Ltd.('). There the location of a factory of motor car manufacturing company was a little distance away from the main road. The approach road belonged to the government. It fell into disrepair and began to cause transportation difficulties to the assessee. The Government was not prepared to meet the expenses for the repair of the road. The assessee offered to contribute a certain amount for the improvement. The High Court had no difficulty in coming to the conclusion that the money was spent not so much to bring about any asset or advantage of enduring benefit to itself but it was incurred for its efficient and convenient run­ ning and therefore it was of revenue nature. This case has been sought to be distinguished on behalf of the Revenue on tl1e ground that the expenditure was incurred only to meet the expense of the repair and no asset or advantage of an enduring benefit accrued or resulted to the assessee. This distinction does not appear to be sound because in the diverse nature of business operations it is difficult to lay down a test which would apply to all situations. The criteria has to be annlied from the business point of view and on a fair appreciation of the whole situation. In the present case apart from the element of compulsion the (1) 27 I T.R. 34, 45. •(2) 68 J.T.R. 301. 46~ SUPREME· COURT REPORTS [ 19 72] I S.C.R. roads which were constructed and developed were n<it 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 . deve­ lopment between the various cane producing centres anll the mills. The apparent object and purpose was to facilitate the running of its motor vehicles or other means (j)lllployed 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 road 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 a>sessee getting any- advantage of an enduring benefit to itself. In our judgment the ratio of the decision in Commissioner of Income tax, West Bengal, v. Royal Calcutta Turf Club(') would be applicable to the present case. There the question was whether the expenditure on running a school for training of jockeys by the Royal Cal­ cutta Turf Club could be claimed as a deduction under s. JO (2)(xv) of the Indian Income tax Act 1922. It ''•as pointed out that the business of the club was to run race meetings on a commercial scale for which it was necessary to have rJces of a nigh order. For the popularity of races and to make-its business profitable it was necessary for the club to have jockeys of requisite skill and experience in sufficient numbers. It was for that purpose that the school had been started for training Indian jockeys. If there had not been sufficient number of Indian jockeys the interest of the club would have suffered. There­ fore the expenditure incurred on running the school must be regarded as having been wholly and exclusively laid out for the purpose of the business of the club. Emphasis was laid on the principle that in order to justify a deduction it must be for reasons of commercial expediency a.nd it must be incurred for the assessee's business. We are satisfied that in the present case the expenditure was incurred by the assessee for reasons of commercial expediency apart from statutory compulsion to which reference has been made before. The development of the roads was necessarily meant for facilitating the carrying on of the as>essee's business. Furthermore the Tribunal did not give any finding that the roads were to be altogether newly made and thM the assessee (1) 41 T.T.R. 414. ( LAKSHMIJI SUGAR MILLS v. C.I.T. (Grover, J.) 469 would get an enduring benefit from these roads. The expendi­ ture in question should have, therefore, been allowed as an admissible deduction. For the reasons given above the appeal is allowed and the answer given by the High Court to the question referred is dis- . charged. We would return the answer in the negative and in favour of the assessee. The assessee will be entitled to its costs in this Court. s.c. Appeal allowed. ..