L.B. SUGAR FACTORY & OIL MILLS (P) LTD. PII.IBHIT v. C.l.T. U.P., LUCKNOW August 26, 1980 [P. N. BHAGWATI, A. P. SEN AND E. S. VENKATARAMIAH, JJ.] Capital Expenditure and Revenue Expenditure, test of-Contribution made lby 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 ur.der oa Sugarcane Development Scheme,
whether capital expenditure and hence .deductible expenditure under s. 10(2)(xv) of the Indian Income Tax Act, 1922. The appellant, assessee· is a private limited company carrying on business <>f 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, c
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 <>f 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. Alfowing the appeal in part, the Court
HELD : (1) An expenditure incurred by an assessee can aualify flJr deduc- tion under s. 10(2)(xv) of the Indian Income-tax Act, 1922 onlYo if it i~ 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 CJ
(2) The test laid down in Atherton's case for treating an item of expen~iture as capital expenditure is not of universal application and it must yield where there aw spedal circumstances leading to a contrary conclusion. If the. ad-
-vantage consists rperely in facilitating the assessee"s business operations or enabl- ing 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 parti- ·cular 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. · 1527 F, 528 C, 530 CJ Commissioner of Taxes v. Nohanga Consolidated Copper Mines Ltd, [1965] :58 ITR 241; Empire Jute Co. Lta. v. C.1.T. [1980] 3 SCR; applied. f 1981] 1 S.C.R.
British Insulated and Helsby Cable'S Ltd. v. Atherton; 10 Tax Cases 155 p • . 189; explained. c (3) In the instant case : (i) The amount of Rs. 22,332 was rightlyi dis- allowed 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 sium 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 deduc- tion iunder s. 10(2)(xv) of the Act.
[526 F, 531 A] Lakshmi;; Sugar Mills Co. P. Ltd. v. C.l.T.; 82 I.T.R. 736; Distinguished. 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. Subhaslrini for the Res- , pondent. The Judgment of the Court was delivered by BHAGWATI, J.~ The tlispute in this appeal by certificate relates to two items of expenditure incurred by the assessee during the assess- ment year 1956-57 for which the ~elevant 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 Co11ector requested the assessee to make some contribution towards the con- struction of the Deoni Dam and the Deoni Dam-MajhaTa Road and pursuant to this request of the Collector, the assessee contributed a sum of Rs. 22,332 dufing the accounting year ending 3'0th September, 1955. The assessee also contributed a sum of Rs. 50,000 to the State of Uttar Prad1~sh 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 Gov- ernment as part of the Second Five Year Plan. It was provided under the Sugarcane Development Scheme that one thkd of the cost of con- struction of roads would be met by the Central Go\iernment, one third1 L. B. SUGAR FACTORY v. c. I. T. U.P. LUCKNOW (BhtJgwati, J.) 52 5
by the State Government and the remaining one third by Sugar facto- ries 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 as~essment .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 Mem- ber 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 sub- .ject 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 Memoer and held that both the amounts of Rs. 22.332 and Rs. 50.000 were not allowable as deductible expendi- ture under Section 10(2)(xv ).
The appeal of the assessee was accord- ingly 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 com- puting the taxable profits and gains of the companies business." c
·D 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 nave 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 13-647 S. C. Jndia/80
c 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 Sec- tion 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 the High Court. Now an expenditure incurred by an assessee can qualify for deduc- tion 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 contri- buted by . the assessee represented expenditure incurred wholly and D· 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 contri- buted by the assessee long after the Deoni Dam and the Deoni Dam- Majhala Road w::re 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 contri- · buted 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 buS'iness of the assessee. The expenditure of the amount of Rs. 22,332 was therefore rightly disailowed 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 ·-r 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 ::issessee generally ·L." B. SUGAR FACTORY V. C. 1. T. U.P. LUCKNOW (Bhagwati, J.) for the purpose of construction of roads in the State of Uttrtr 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 –r
mads 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 -0f 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 pmpose of the business of the assessee. This conclusion was indeed not seriously disputed on behalf of the Reve- .J-
nue 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 t-0 the assessee an enduring advantage for the 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. Afherson(1) 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 drcumstances 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 parenthetic.al 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 Com- .missioner of Tq.xes v. Nohu,nga Consolidated Copper Mines Ltd.(2) .. 'T
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 prinz(f; facie capital expenditure "so long as the benefit is not so transitory as to have no endurance at ;all". It was also pointed ou.t by this Court in Empire Jute Co. Ltd. v. (1) 10 Tax Cases 155 p. 189.
(2) (1965) 58 I.T.R. 241. c c il98ll 1 S.C.R. C.l.T.(1) that "there may be cases where expenditure" even if in~urred" for obtaining advantage of enduring benefit, may, nonetheless, be ort revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature· acquived 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 commer• cial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an applicatfon of this test." If the advantage consists merely in facilitating
the assessee's -4 business operations or enabling management and conduct of the asses- , see'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.
-l 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 Giovernment of Uttar Prad'esh 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 out-· flow 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 roads continued to be in motorabk condi- tion, but it was not an advantage in the capital field, because no tangi- ble or intangible asset was acquired by the assesse"e 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 clear!}! an expenditure on revenue account.
(I) [1980] 3 SCR 1370. '.L. B. SUGAR FACTORY"· c. I. T. U.P. LUCKNOW (Bhagwati, J.) It was pointed out by Lord Radcliffe in Commissi.:mer of Taxes v. Nohanga Consoliclated Copper Mines Ltd. (supra} that "in consider- ing allocation of expenditure between the capital and income accounts, 1'" it is almost unavoidable to argue from analogy." There are always cases falling indisputably on one or the othe~ side of the line, and it is a familiar argument fa tax courts that the case under review bears close analogy 'to a case falling on the right side of the line and must, therefore, deeide in the same manner. If we apply this method, the c. ase 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 ihe. facts uf 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 io the Cane Development Coun- cil certain amounts by way of contribution for the construction and development of roads between sugarcane producing centres and 1the '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 obligati0n.
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 ihat the entire cost of deve- t lopment 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 ihe business point of view and on a fair appreciation of the whole situa- tion the assessee considered that the development of the roads in question could greatly facifitate the transportation of sugarcane. This was essential for the benefit of its business which was of manufac- turing sugar in which the main raw material admittedly eonsisted of . ._,.,
sugarcane. These facts wou1d bring it within the second part of, the principle mentioned before, namely, ihat the expenditure was in- curred for running the business or working it with a view to produce the profits without the assessee getting any advantage of an enduring – benefit !o itself. (Emphasis supplied) These observations are directly ·applicable in the present case and we must hold on the analogy of ,(I) 82 I.T.R. 376.
c c this decision that the amount of Rs. 50,000 was contributed by the assessee "for running the business or working it wi1h a view to produce the profits without the assessee getting any· advantage of an enduring benefit to itself". !This 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 un-
doubtedly 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 qui1e 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 Chemical-s Ltd.'s case (supra) distinguished the decision in Lak$hmiji Sugar Mills' case (supra) on the ground that "on the facts of that case, this court was satisfied •t!hat the developmeJllv of the roads .was meant for facilitating the carrying on of the assessee's business.
Lakshmiji Sugar Mills' case. fa quite different on facts from the one before us and must be con- fined 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 that decision must be confined to the peculiar facts of that case, because Lakshmiji Sugar Mills' case (supra) admit- ~ tedly 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 Antherron's case (supra) was no.t 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 T 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.
L. B. SUGAR FACTORY v. c. I. T. U.P. LUCKNOW (Bhagwati, J.) 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 pur- pose 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 Jost, we think that the fair order of costs would be that each party should bear and pay its own costs throughout.
Appeal allowed in part. S.R: c