Dollar Company vs Commissioner of Income Tax

M.N. Chandurkar, C.J.—The assessee carries on the business of manufacture and sale of pharmaceutical products. Its factory is admittedly

situated on a piece of land of an extent of 7 grounds 310 sq. ft. which is covered by Tondiarpet, III Area, Town Planning Scheme. The

Corporation of Madras made a demand on the assessee for payment of betterment contribution commonly called betterment tax of Rs. 2,406.09,

Rs. 3,208.13 and Rs. 4,010-10 for the years 1969-70, 1970-71 and 1971-72 respectively. The contribution was demanded at the rate of 7.5 per

cent. on the difference between the value of the land as fixed by the Arbitrator, namely, Rs. 1,500 per ground and the market value taken for the

above-mentioned three years, namely, Rs. 6,000, Rs. 7,500 and Rs. 9,000 per ground, respectively. On the assessee disputing the quantum of

demand, the Corporation agreed to receive a lump sum payment of Rs. 7,984.67 on the basis of a flat rate of Rs. 1,120 per ground. This amount

was accordingly paid to the Corporation of Madras on July 23, 1975.

In the assessment proceedings for the assessment year 1975-76, the assessee claimed an amount of Rs. 7,985 as deductible being payment of

betterment tax in respect of the land on which its factory was situated on the basis that the liability had accrued during the relevant previous year.

The Income Tax Officer disallowed the deduction holding that the expenditure was of capital nature.

The Appellate Assistant Commissioner, while rejecting the appeal filed by the assessee, held that by reason of the development of the locality in

which the assessee''s land was situated, the value thereof had increased and since the tax in question had been paid in respect of such increase, the

expenditure was only capital expenditure.

The assessee took the matter in appeal to the Income Tax Appellate Tribunal. Before the Tribunal, the assessee pointed out that it had been

carrying on business long before the Corporation started improving the locality, that the roads and drainages had already existed even prior to the

purchase of the land by the assessee and that the assessee''s property had not derived any benefit by reason of the scheme leading to the levy of

betterment tax. The case of the Revenue before the Tribunal was that the betterment tax was levied only because of the increase in the value of the

land due to the development of the area in which it was situate under the Town Planning Scheme and, consequently, the expenditure incurred was

of a capital nature. The Tribunal, after referring to the provisions of sections 23, 24, 25 and 27 of the Madras Town Planning Act, 1920, took the

view that the betterment tax is levied on the basis of a difference in the value of the concerned property as on the date of the notification u/s 10 or

section 12, as the case may be, and as on the first day of each of the financial years after the implementation of the scheme, observing that ""if there

is no increase in the value, there is no question of the levy of betterment tax and that betterment tax is leviable only if there is increase in value"". The

Tribunal took the view that the very fact that betterment tax has been levied shows that the value of the concerned property has increased.

According to the Tribunal, such increase may be due to the improvement in the area in which the land concerned is situate and need not be due to

any specific improvement relating to the particular land. In other words, according to the Tribunal, ""betterment tax is levied under the provisions of

the aforesaid Act against the increase in the potential value of the lands covered by the scheme"" and ""thus, by its very nature, such levy is relatable

to the increase in the value of the relative property and hence payment of such tax can be only of a capital nature"". The Tribunal has relied on the

decision of the Gujarat High Court in Addl. Commissioner of Income Tax, Gujarat Vs. Rohit Mills Ltd., , in which, dealing with the betterment tax

paid under the provisions of the Bombay Town Planning Act, 1954, it took the view that the betterment charges were levied against the increased

potential value of the lands covered by the scheme and not against the running business of the assessee and since the increment in value of land

contemplated by the Town Planning Act was real, the assessee gained an enduring advantage by paying the betterment charges and the fact that

the payment was under a statutory obligation and not because the assessee desired it was immaterial. The Gujarat High Court further held that

even if it were taken that the payment was made to prevent distress sale and to protect the business set up, the expenditure was on capital account

and not an expenditure for producing profits in the conduct of business and was not, therefore, deductible u/s 37 of the Income Tax Act, 1961.

Aggrieved by this view of the Tribunal, the following question has been referred at the instance of the assessee for the opinion of this court u/s

256(1) of the Income Tax Act, 1961 :

Whether, on the facts and in the circumstances of the case, the liability incurred by the assessee to pay Rs. 7,985 as betterment tax in respect of

the land on which its factory is situate during the relevant previous year is of capital nature and hence not allowable in computing its business

income for the assessment year 1975-76 ?

The learned counsel for the assessee has contended that the Tribunal was not right when it took the view that payment of betterment

contribution was in the nature of capital expenditure. According to the learned counsel for the assessee, undoubtedly roads have been laid around

the factory as part of the development under the Madras Town Planning Act and notwithstanding the fact that the laying of the roads would

facilitate the business of the assessee, the assessee cannot be said to have gained any advantage of enduring benefit. The learned counsel points out

that under the provisions of the Madras Town Planning Act, betterment contribution is required to be made because the development of a

particular locality brings about an increase in the value of lands and that the payment of betterment contribution does not result in increase in the

value of the lands. Therefore, according to the learned counsel, there was no question of payment of betterment contribution resulting in acquisition

of advantage of an enduring nature as a result of the development of the locality. The learned counsel for the Revenue has, however, argued mainly

on the authority of the decision of the Gujarat High Court in Addl. Commissioner of Income Tax, Gujarat Vs. Rohit Mills Ltd., , later on followed

by the same court in Mathurdas Mangaldas Parekh Vs. Commissioner of Income Tax, Gujarat, , that in order that expenditure may be of a capital

nature, it is enough if the expenditure is relatable to a capital asset and that it was not necessary that a tangible or intangible asset should be

acquired as a result of the expenditure incurred by the assessee. The learned counsel for the Revenue contends that betterment contribution is an

expenditure which is incurred for the improvement of the value of the assessee''s property and since the value of the assessee''s property has gone

up, the expenditure must be treated as being of a capital nature.

In order to decide whether the payment of betterment charges is of the nature of capital expenditure, it will be necessary to refer to the

provisions of sections 23, 24 and 25 of the Madras Town Planning Act, 1920. The power to levy betterment contribution is given to the Municipal

Corporation by section 23 of the said Act. That section provides that where by the making of any town planning scheme, the value of any property

has increased or is likely to increase, the municipal council shall, subject to certain conditions, be entitled to recover from the owner of such

property an annual betterment contribution for such term of years and at such uniform percentage of the increase in value not exceeding ten per

centum as may be fixed in the scheme. Section 23, therefore, shows that the power of the Corporation to levy betterment contribution is

dependent upon either the increase in value of any property or if the value of the property is likely to increase, by the making of any Town Planning

Scheme. Section 24 prescribes the manner in which betterment contribution is to be calculated. Section 25 provides that the betterment

contribution shall be a first charge on the property on which it is due, subject to the prior payment of land revenue, if any, due to the Government

thereon, and shall be paid in half-yearly instalments of one-half of the amount fixed for the year. The provisions of sections 23, 24 and 25,

therefore, show that betterment contribution is a compulsory levy made by the Corporation, but the pre-condition for such levy is that consequent

upon the making of any Town Planning Scheme, the value of any property increases or is likely to increase. Therefore, the payment of betterment

contribution does not result in the increase in value of the property but it is because of the increase in the value of the property as a result of the

making of the Town Planning Scheme that the owner of the property is required to make a contribution which is called ""betterment contribution "".

In VE. A. Vairavan Chettiar by Power of Attorney Agent, M.L. S.M. Subramanya Chettiar and Others Vs. Mayuram Municipal Council and

Others, , after considering the scheme of the Madras Town Planning Act, Ramaprasada Rao J., as he then was, pointed out that the Act was

intended to achieve economic and social planning and further orderly, conjoint and co-ordinated development of an ill-developed or

underdeveloped or a developing township or area and observed as follows :

The betterment contribution, therefore, is a contribution or a levy made on the owners of the properties in the scheme for the common purpose of

economic and social development of the inside and outside area. By reason of such a making of the scheme, the market value of the property

within the scheme is bound to increase or, in any event, there is a likelihood of its increase. It is from this unearned increment in the market value of

the properties, a claim is raised by the municipality for betterment contribution in accordance with the various percentages prescribed in the scheme

itself, as provided for in the Act.

These observations, in our view, with respect, admirably sum up the nature of the betterment contribution. The contribution is in essence a levy

because development of the area has resulted or is likely to result in an increase in the market value of the property. The development itself is not

undertaken with the specified object of increasing the value of the property. The development is a part of the functions of the Corporation as

planning authority under the Town Planning Act. As a result of the development of an area, incidentally the market value of the property adjacent

or within the area developed increases by virtue of development works which are undertaken by the Corporation. It is this incidental rise in the

market value which was made use of by the Legislature for fastening a liability on the owners of properties to contribute to the expenditure incurred

on development and it is this contribution which is known as ""betterment charges"". Therefore, there is no direct nexus at all between the

expenditure incurred by the Corporation and the increase in the value of the property in the sense that the expenditure on development is not

incurred for the purposes of increasing the value of the properties in the area covered by the development. The expenditure is first incurred by the

Corporation and the owners of the properties are then required to compensate the Corporation by making a contribution in the form of betterment

charges. The statutory provision is really a provision to facilitate the computation of the liability of the owner of the property on the basis of the

increase in value. Though the statute relates the levy of contribution to the increase in value as a result of development, what really happens as a

result of development is that additional facilities like roads and drainages for the enjoyment of the property also become available. Commercially

considered, if the expenditure would have been incurred for such facilities, that would have been laid out wholly and exclusively for the purpose of

the business. The true nature or character of the betterment contribution is in essence in the nature of payment for such facilities and only its

computation is on the basis of the appreciation in value.

If that be the true nature of the contribution, it is difficult for us to see how this betterment contribution can be called an expenditure in the

capital field or of a capital nature. Undoubtedly, the Gujarat High Court has taken the view in Addl. Commissioner of Income Tax, Gujarat Vs.

Rohit Mills Ltd., , that a contribution towards the betterment charges assessed on lands in the possession of the assessee under the Town Planning

Act was levied against the increased potential value of the lands covered by the scheme and not against the running business of the assessee and

the assessee had, therefore, gained an enduring advantage by paying the amount and the fact that the payment was under a statutory obligation and

not because the assessee desired it was immaterial. Alternatively, the Gujarat High Court also held that even if it were taken that the payment was

made to prevent distress sale and to protect the business set up, the expenditure was on capital account and not an expenditure for producing

profits in the conduct of business. With respect, we are unable to agree with the view taken by the Gujarat High Court. It has to be remembered

that ""betterment charges"" is a levy in the exercise of a statutory power by the Corporation. It is not a voluntary payment for acquiring any asset or

even for gaining an enduring advantage or a benefit of an enduring nature and this circumstance, in our view, will make all the difference to the

nature of payment apart from the fact that we are also unable to accept the view of the Gujarat High Court that merely because the surrounding

areas are developed by the Corporation by laying of roads and laying of sewerage lines or water pipes, the assessee acquires an advantage of an

enduring nature.

As pointed out by the Supreme Court in L.B. Sugar Factory and Oil Mills (P) Ltd., Pilibhit Vs. Commissioner of Income Tax , U.P.,

Lucknow, , the test enunciated by Lord Cave L. C. in Atherton''s case [1925] 10 TC 155 , is not of universal application and in certain

circumstances, it breaks down and, therefore, must yield to the special circumstances leading to a contrary conclusion. The question which fell for

consideration before the Supreme Court in that case was whether a sum of RS. 50,000 paid by the assessee to the State of Uttar Pradesh during

the 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 Government as part of the Second Five Year Plan was of a revenue character or was a capital expenditure. The

High Court had taken the view that the expenditure was not related to the business activity of the assessee as such and, therefore, the Tribunal was

justified in concluding that it was not wholly and exclusively laid out for the business and the deduction, therefore, did not come within the scope of

section 10(2)(xv) of the Indian Income Tax Act. 1922. The Supreme Court found that the sum of Rs. 50,000 contributed by the assessee was for

the construction of roads in the area around the factory and that it could not be disputed that if the roads 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. On that circumstance, the

Supreme Court took the view that the construction of the roads was, therefore, clearly and indubitably connected with the business activity of the

assessee and it was 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 purpose of the business of the

assessee. The Supreme Court then went on to consider the contention of the Revenue that the expenditure of the amount of Rs. 50,000 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 to 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 - an

argument very much similar to the one that is advanced before us on behalf of the Revenue. After reproducing the classic observations of Lord

Cave L.C. in Atherton''s case [1925] 10TC 155 , the Supreme Court observed as follows (p. 298) : ""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 parenthetical 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 Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd.

[1965] 58 ITR 241 , 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, prima facie, capital expenditure `so long as the benefit is not so transitory as to have no endurance at

all''. It was also pointed out by this court in Empire Jute Co. Ltd. Vs. Commissioner of Income Tax, thus :

`There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account

and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired 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 commercial sense and it is only where the

advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in

facilitating the assessee''s trading operations or enabling the management and conduct of the assessee''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''.

After thus pointing out that the test laid down by Lord Cave L.C. must yield where there are special circumstances leading to a contrary

conclusion, the Supreme Court took the view that the roads which are constructed around the factory with the help of the amount of Rs. 50,000

contributed by the assessee belonged to the Government of Uttar Pradesh and not to the assessee and that the amount contributed was only a part

of the cost of construction because 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. Noticing the fact that

these roads were undoubtedly advantageous to the business of the assessee as they facilitated the transport of sugarcane to the factory and the

outflow of manufactured sugar from the factory to the market centres and that there was no doubt that the advantage secured for the business of

the assessee was of a long duration inasmuch as it would last long as the roads continued to be in motorable condition, the Supreme Court

specifically pointed out that it was not an advantage in the capital field because no tangible or intangible asset was acquired by the assessee nor

was there any addition to or expansion of the profit-making apparatus of the assessee. The amount of Rs. 50,000 contributed by the assessee was

thus held to be for the purpose of facilitating the conduct of the business of the assessee and making it more efficient and profitable and it was

clearly an expenditure on revenue account. In our view, this decision is a complete answer to the contentions raised on behalf of the Revenue and

with respect to the Division Bench of the Gujarat High Court, it appears to us that this decision of the Supreme Court creates a serious infirmity in

the decision of the Gujarat High Court.

The learned counsel for the Revenue has referred us to the decisions in Bean (H. M. Inspector of Taxes) v. Doncaster Amalgamated Collieries

Ltd. [1946] 27 TC 296 and in Bradbury (H. M. Inspector of Taxes) v. United Glass Bottle Manufacturers Ltd. [1959] 38 TC 369 . We do not

think that it is necessary to discuses these authorities in detail. On going through them, we are satisfied that those authorities are clearly

distinguishable on facts and, in any case, the matter so far as the present case is concerned appears to us to be squarely covered by the decision of

the Supreme Court in L.B. Sugar Factory and Oil Mills (P) Ltd., Pilibhit Vs. Commissioner of Income Tax , U.P., Lucknow, .

A reference was made to the decision of the Supreme Court in J.K. Cotton Manufacturers Ltd. Vs. Commissioner of Income Tax, Lucknow, .

In that decision, the Supreme Court, after a review of the earlier decisions of the Supreme Court and of different High Courts, culled out several

tests and one of the tests formulated by the Supreme Court was as follows (p. 232) :

An item of disbursement may be regarded as of a capital nature when it is relatable to a fixed asset or capital, whereas the circulating capital or

stock-in-trade would be treated as revenue receipt.

Lord Haldane in John Smith & Sons v. Moore [1921] 12 TC 266 has aptly and adroitly explained the terms `fixed capital'' and `circulating capital''

thus :

`Fixed capital is what the assessee turns into profit by keeping it in his own possession and circulating capital is what he makes profit of by parting

with it and letting it change masters''.

Relying on these observations, it has been contended by the learned counsel for the Revenue that the betterment contribution is related to the

capital asset, namely, the land on which the factory of the assessee is situated and, therefore, according to the learned counsel, in view of the

decisions laid down by the Supreme Court, the payment being related to a fixed asset or capital must be treated as a capital expenditure.

Undoubtedly, the Supreme Court has held that an item of disbursement may be regarded as of a capital nature when it is relatable to a fixed asset

or capital. These observations cannot be read as meaning that every disbursement, however distantly relatable to a capital asset, will necessarily be

classified as capital expenditure though the assessee does not acquire any advantage of an enduring character or advantage and though that

disbursement itself does not directly go to appreciate the value of the capital asset, so that the disbursement can be capitalised. Having regard to

the decision of the Supreme Court in L.B. Sugar Factory and Oil Mills (P) Ltd., Pilibhit Vs. Commissioner of Income Tax , U.P., Lucknow, , we

must, therefore, take the view that the betterment contribution paid by the assessee was not of a capital nature. It was clearly expenditure of a

revenue character because of the additional facilities which became available to the assessee by virtue of the development of the area surrounding

the factory premises.

The question referred to us has, therefore, to be answered in the negative and against the Revenue. The Revenue would pay the costs of this

reference. Costs Rs. 500.