Travancore Cochin Chemicals Limited v. Commissioner of Income-tax, Kerala

G, GUPTA, J.-The question for decision in this case is whether the money contributed by the assessee, public limited company, for the construction of a new road in the area where its factory is located to improve transport facilities is capital expenditure or revenue expendi· tura. The assessment year in question is 1964-65, the relevant iccounting period being the financial year ended March 31,. 196~. R The assessee company is engaged in the m.anufactu~e of chemicals; it had been receiving and despatching ma:tenals requrred for ~nd pro­ duced in its factory through lorries. The assessee along with three_ !B 716 SUPREME COURT REPORTS (1977] 2 s.c.R. other public unoertakmg "!li.>fU<tched the Government of Kerala for laymg i1 ut:w w<tu Uvill .l>.ruiil!l<toocn LO Uuyvg<tumnua1; trus area wnt:rc mt: <tbSt:.>bet: s I<i1.:•v1y ll> buUa•e was not at tne macerial tune servea oy pucca roaus. 1t was agreed that the liovernment of Kerala would bear U1e cost of the acqu1Muon of the land and 25 per cent of the cost of construction. The total cost to be shared by the four companies was Rs. 1,04,550/- and the assessee's share came to Rs. 26,100/-. The assessee company sought to deduct this amount from its total income clauning this as revenue expenditure for the year in question. ,The ln~om~-tax Officer disallowed the claim holding that the . assessee s con~1bution was capital expenditure. The Appellate Assistant Commiss10ner took the same view. The Appellate Tribu­ nal, mainly relying on the decision of the Calcutta High Court in Commissioner of Incom_e-tax v. Hindustan Motors Limited,(') hel? that the a~sessee was entitled to deduct the amount as revenue expendi­ ture. At the instance of the Commissioner of Income-tax, Kerala, Ernakulam, the Tribunal referred the following question to the High Court of Kerala under section 256(1) of the Income-Tax Act, 1961 : "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was legally justified in allowing tll1: expenditure of Rs. 26,100/- being the respondent's contri­ bution to government for constructing a road as a permis­ sible deduction under sectioii 3 7 ( 1) of the Income-Tax Act, 1961." The High Court held tllat tlle assessee in this case obtained an a.dvan­ tage of an enduring nature by the construction of the road and, there­ fore, the amount contributed was capital expenditure. The High Court accordingly answered the question in negative and against the assessee. In tllis appeal, brought on a certificate under section 261 of tlle Income-Tax Act, 1961, the assessee challenges the correctness of the answer given by tlle High Court to the question. The authorities both in this country and in England have pointed out tlle difficulties in formulating precise rules for distinguishing; capi­ tal expenditure from revenue expenditure. The line of demarcation has been found to be very thin. Certain broad tests have however been laid down and of them the test suggested by viscount ca,'e, L. C., in Atherto~ v. British Insulated and Helsby Cables Limited( 2 ) appears to have been largely accepted !n. this country. .T~s Court in Assam Bengal Cement Company L11mted v. Co~n~uss101;er of lncome-tax, West Begnal( 3 ); Sitalpur Sugar Works Limited v._ Com­ missioner of Income-tax, Bihar and Orissa(') and a number ol other decisions has adopted the test as laid down in Atherton's case: to refer again to these often quoted lines from Visco~nt Caye's Judgn~en! =. "when an expenditure is made, .......... with a v1~w to b~mgml!; into existence an asset or an advantage for the endurmg beneht of a. •(l) (1968) 68 J.T.R. 301. q3) (1955) 27 I. T.R. 34. (2) (1925) 10 Tax Cases 155. (4) (1963) 49 I.T.R. 160 . r , __ )_ ; T. c. CHEMICALS v, COMM. OF I.T. (Gupta, J.) 717 tJ:ade, I think that _there is very gO?d reason (in the absence of special crrcumstances leadmg to an opposite conclusion) for treatin~ su"h an expendtture as properly attributable not to revenue but to capital". Referring to Atherton's case and certain other authorities on the dis­ tinction between caHital expenditure and revenue expenditure and the tests to be applied, this Court in Assam Bengal Cement Company Limi­ ted v. Commissioner of Income-tax(') observed : "If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business i_t is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital of the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no conse­ quence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capi- tal and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business it would be of the nature of capital expenditure and if it was part of its circulating capital it would be of the nature of revenue expenditure." In the case before us, the High Court applied viscount Cave's test and found that the expenditure made by the assessee brought into existence an advantage for the enduring benefit of the assessee's trade and accordingly held that this was capital expenditure. ·'--, Each case turns on its own facts. It is not disputed here that the correct test has been applied. Did the money spent by the assessee on construction of the new road secure for it an enduring benefit, or was it necessary for running its business? On the facts of the case the position seems to us clear enough not to merit an elaborate consi- deration, that by having the new road constructed for the improve- G ment of transport facilities, the assessee acquired an enduring advan- )..> tage for its business. The High Court rightly pointed out that the decision of the Calcutta High Court in Commissioner of Income-taJG v. Hindustan Motors Ltd.( 2 ) on which the appellate tribunal relied, is clearly distinguish.able on facts; that was a case where the expendi­ ture incurred was for repair of an existing road which is different from the case where a new road is laid out for the purpose of the assessee's H (I) (1955) 27 I.T.R. 34. (2) (1968) 68 I.T.R. 301. business. Mr. Pai, learned counsel for the appellant, has relied on the decision of this Court in Lakshmiji Sugar Mills Company Private Limited v. Commissioner of lncometax, New Delhi('), to contend that even the llxpenditure on the construction of roads could l:e reve­ nue expenditure and not expenditure of a capital nature. In Lakshmiji Sugar Mills case the assessee was a private limited company carrying on the business of manufacture and sale of sugar. Under the provisions of the U. P. Sugarcane Regulation of Supply and Pur­ chase Act, 1953, the assessee company was obliged to contribute cer­ tain amounts for the development of roads which were originally th1e property of the government and remained so even after the improve­ ment had been made. Apart from~ the fact that in this case the expenditure incurred was under a statutory compulsion, there was no finding that the roads were newly made. 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 confiend to the peculiar facts of that case. On the facts of the ·instant case, we have no doubt that the expenditure incurred by the assessee was of a capital nature. The appeal accordingly fails and is dismissed but in the circumstances of the case without any order as to costs. M.R. Appeal dismissed (J) (1971) 82 l.T.R. 376.