Satyadev Chambers Pvt. Ltd. vs Commissioner of Income Tax, Gujarat

B.K. Mehta, J.—The following question is referred to us for out opinion:

Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that the amount of Rs. 20,000 contributed by the

assessee-company to the District Panchayat Board for constructing a road leading to Bhaili Project was a capital expenditure ?

A few facts need be noticed in order to appreciate the import of this question and the dispute involved in this reference.

The relevant assessment year with which we are concerned in this reference is 1970-71. The assessee is a limited company carrying on business

of manufacturing photo-chemicals, such as sodium sulphite, sodium bisulphite, etc. The company has been in existence for the last more than 15

years and has established the manufacturing unit at Pratapnagar, Baroda. It appears that the company undertook to set up a new project at village

Bhaili near Baroda. In the course of the construction of this project, the company was required to contribute a sum of Rs. 20,000 to the Baroda

District Panchayat Board by way of pro rata contribution of the expenses of construction of ""a proper road to Bhaili"" where the assessee''s new

project was set up. The assessee-company claimed this contribution as revenue expenditure. However, this claim did not find favour with the ITO,

who held that it partook of capital nature and, therefore, disallowed the claim of the assessee-company with the result that the assessee carried the

matter in appeal before the AAC of Income Tax, who also, on consideration of the relevant facts and circumstances, confirmed the order of the

ITO. The assessee-company, therefore, carried the matter in further appeal before the Income Tax Appellate Tribunal which considered the

relevant decisions of different High Courts and the Supreme Court on the point. The Tribunal referred to the order of the AAC where, according

to the Tribunal, it was clearly brought out that the assessee-company wanted to start a new project at Bhaili, and that for that purpose it had

started construction of a factory building and also installed plant, machinery and other electrical installations. According to the Tribunal, the amount

contributed by the assessee-company to the Baroda District Panchayat Board was for construction of a road leading to this project. According to

the Tribunal, there was no evidence to show that the expenditure was incurred for repairing the existing road. The Tribunal, therefore, reached the

conclusion that the expenditure is question was rightly held as capital expenditure by the authorities below. It is in this context that the aforesaid

question has been referred to us.

It should be noted, before we attempt to give our opinion on the question referred to us, that the assessee-company had made a miscellaneous

application after the Tribunal confirmed the order of the Appellate Commissioner to correct certain observations and findings made by the Tribunal

in its order disposing of the appeal of the assessee-company. The objection was taken on behalf of the assessee-company to the observation of

the Tribunal in its order disposing of the appeal to the effect, that, ""there was no evidence to show that the expenditure was incurred for repairing

the existing road"". This observation of the Tribunal was objected to by the assessee-company as in its submission it was not in consonance with the

facts of the case inasmuch as it was, according to the assessee-company, an admitted position that there was an existing road leading to the village,

Bhaili, which was converted into a pukka road. The Tribunal, however, did not find any compelling reasons to correct the observation made in its

order disposing of the appeal of the assessee-company. The Tribunal observed, while disposing of the application of the assessee-company to

correct certain objected observations and findings, as under:

We have perused the record and examined the contentions canvassed before us in the light of the findings of the authorities below as well as our

own findings. We do not think that any rectification of our order is called for, inasmuch as any attempt to do so would amount to revision or review

of our own order, which in law, we are not competent to do. We, therefore, reject this miscellaneous application.

The question, whether a particular item of expenditure partakes the nature of revenue expenses or capital expenses is always a question

depending on the facts and circumstances of each case. No doubt, courts have from time to time in the context of the facts and circumstances

arising in a given case laid down broadly the different tests for determining whether the expenses objected to by the revenue are in the nature of

capital expenses or revenue expenses.

In Commissioner of Income Tax, West Bengal II, Calcutta Vs. Coal Shipment (P) Ltd., , Khanna J., speaking for the Supreme Court, raised a

caution in treating these tests as exhaustive or universal. The caution is in the following terms (p.907):

Judicial decisions have, from time to time, laid down some broad principles in order to determine whether an expenditure is of a capital nature or

revenue nature. Despite the enunciation of those principles, it is not always easy to decide the question in the context of the circumstances of an

individual case. Considerable difficulty is experienced in border line cases. It was in this connection that Hidayatullah J. (as he then was) observed

in K.T.M.T.M. Abdul Kayoom and Another Vs. Commissioner of Income Tax, that:

''None of the tests (laid down in various authorities) is either exhaustive or universal. Each case must depend on its own facts, and a close similarity

between one case and another is not enough, because even a single significant detail may alter the entire aspect. In deciding such cases, one should

avoid the temptation to decide cases...by matching the colour of one case against the colour of another.''

The various tests which have been laid down and broadly applied from time to time in the context of different facts and circumstances of every

given case are as under:

In Assam Bengal Cement Co. Ltd. Vs. The Commissioner of Income Tax, West Bengal, , the Supreme Court approved the principles laid down

by the Lahore High Court in (1947) 15 ITR 185 Lahore and culled out in the following terms these broad tests (p.45):

This synthesis attempted by the Full Bench of the Lahore High Court truly enunciates the principles which emerge from the authorities. In cases

where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt

that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its

source whether it is drawn from the capital or the income of the concern is certainly in the nature of capital expenditure. The question however

arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of business or for the

substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of

view of what is the source from which the expenditure is incurred. If the expenditure is made for acquiring or bringing into existence an asset or

advantage for the enduring benefit of the business it 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 or 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 consequence. It is only in those

cases where this test is of no avail that one may go to the test of fixed or circulating capital 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 it was part of its circulating capital it would be of the nature of capital expenditure. These tests are thus mutually exclusive

and have to be applied to the facts of each particular case in the manner above indicated. It has been rightly observed that in the great diversity of

human affairs and the complicated nature of business operations it is difficult to lay down a test which would apply to all situations. One has,

therefore, a got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation

of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter

event only it would be a deductible allowance...

On behalf of the assessee two facts were emphasised. In the first instance, it was urged that the assessee-company was in the business of

manufacturing photochemicals since more than 15 years and had a unit at Pratapnagar, Baroda, though the assessee-company did set up a new

project at Bhaili, a village at short distance from Baroda. In the second place, it was urged that the contribution which the assessee-company was

required to make to Baroda District Panchayat Board was for purposes of repairing the road so as to provide and access to the nearby highway

or, for that matter, the city of Baroda. These two facts, in the submission of the learned advocate for the assessee-company, are very significant

and have a great bearing on the question on which the opinion of this court has been sought for. On behalf of the revenue, it was strenuously urged

that inasmuch as a new advantage of enduring benefit has been secured by laying out of the pukka road, the contribution of expenses by the

assessee-company must be held to amount to capital contribution and the expenses relating thereto must, therefore, be treated as capital expenses.

This case, is, no doubt, one of those border line cases where on application of the well-established tests, courts encounter difficulties and,

therefore, this court has to bear in mind the caution which has been given by the Supreme Court in Commissioner of Income Tax, West Bengal II,

Calcutta Vs. Coal Shipment (P) Ltd., . It would not serve any useful purpose by referring to the various authorities any trying to match their colours

since one or two significant facts here or there would make a great difference in answering the question which has been referred to us. It has been

found as a matter of fact by the Tribunal that during the construction of the project of the assessee-company at village Bhaili, the company

contributed a sum of Rs. 20,000 to the Baroda District Panchayat Board for meeting a part of the expenses of construction of ""a proper road to

Bhaili"" where the assessee''s new project had come. This finding, by necessary implication, indicates that a road leading to village Bhaili was

already in existence when the assessee-company was required to make a contribution. We are fortified about this necessary implication which we

read in the statement of case from the observation of the ITO in his assessment order which is annexure to the statement of the case itself. While

adding this sum of Rs. 20,000 to the income returned by the assessee-company, the ITO has recorded his reason for the addition in the following

terms:

Contribution to District Panchayat Board for repairs of road to Bhaili Project. Apart from the fact that the expenditure is of a capital nature, it

cannot be allowed as a deduction since it pertains to a project which has not year gone into production.

This observation of the ITO, therefore, lends support to the view which we are taking in the matter that the road was already in existence, but

was to be put in proper shape. It is for that reason that the Tribunal as well the AAC have stated that the assessee-company was required to make

contribution for meeting a part of the expenses of the construction of ""a proper road to Bhaili"". In other words, therefore, though the road was

there in existence, it was in such a state that unless it was put in proper shape, it was not motorable or such that it could not be used for the

purposes of the project of the assessee-company which was coming up at Bhaili. It is no doubt true that the assessee-company had, after its

appeal was dismissed, made an application for correcting certain findings made in the appellate order of the Tribunal. The corrections were sought

for the assessee-company for bringing out clearly and for showing that the expenditure was incurred for repairing the existing road. This application

was also rejected by the Tribunal since in the opinion of the Tribunal the rectification was not called for because it was correctly found as a matter

of fact that the contribution was required to be made by the assessee-company for purposes of construction of ""a proper road to Bhaili"". The

Tribunal has, therefore, rightly not exercised its discretion to make any rectification as required by the assessee-company since the finding of fact

which was made about the contribution being necessary for the construction of ""a proper road to Bhaili"" was not at all against the evidence. The

Tribunal has not made any positive finding of fact that a new road was laid out by the Baroda District Panchayat Board for purposes of this project

of the assessee-company. No doubt, it has made a negative observation that there is no evidence to show that the expenditure was incurred for

repairing the existing road which, however, is contrary to the finding of the ITO extracted above. In the circumstances, therefore, we do not

transgress our limits of jurisdiction in reading in this order of the Tribunal that a road was in existence and the assessee-company was required to

make the contribution for putting it in proper shape. In the context of these facts, therefore, we have to answer the question, whether the

contribution of expenses by the assessee-company is in the nature of capital expenses or revenue expenses.

It is common case that no new asset has been brought into existence by the assessee when it made the contribution to the Baroda District

Panchayat Board for purposes of putting the road in its proper shape. The attempt of the revenue is to impress upon us that by making the

contribution for contribution for construction of a proper road an advantage of enduring benefit to the assessee-company has come into existence

and, therefore, the expenses related to such an advantage must be treated as capital expenses. We are unable to agree with this submission made

on behalf of the revenue because the expenses which have been made are expenses of remedial nature. They are expenses made for purposes of

putting the existing road in proper shape. The aim and object of the expenses would, therefore, clearly be more for running the business efficiently

and conveniently inasmuch as the new unit at village Bhaili would be served by the transport of the company or other transport which would not be

hampered by slow and possibly dangerous state of the road which must be lying in disrepair and ill-condition. These expenses cannot be said to be

made for acquiring or bringing into existence an asset or advantage for enduring benefit of the business though the road after being put in proper

shape would certainly serve the new project of the assessee-company at Bhaili as well as the other people who would be entitled to use the same,

it being a public road.

The Calcutta High Court had in COMMISSIONER OF Income Tax, WEST BENGAL Vs. HINDUSTHAN MOTORS LTD., , similar

facts, where the assessee was a manufacturer of motor cars having a factory within the territorial limits of Kotrang Municipality which was situated

at a little distance away from Main Trunk Road and which was joined by an approach road. The said approach road fell into disrepair and since

the Government was not prepared to meet the expenses for the repairs of the road, the assessee in the case contributed a sum of Rs. 39,770 the

amount necessary for improvement of the said approach road. Since the expenses were held to be of capital nature by the Tribunal, the assessee

sought reference to the High Court. The Calcutta High Court held that the money was spent not so much to bring about any asset or advantage of

enduring benefit to itself but to run the business efficiently and conveniently and, therefore, answered the question referred to it in favour of the

assessee by holding that the nature if expenses was revenue expenses. This decision of the Calcutta High Court was distinguished by the Supreme

Court in Travancore-cochin Chemicals Ltd. Vs. Commissioner of Income Tax, Kerala, . In the case before the Supreme Court, the assessee-

company along with three other public undertakings approached the Government of Kerala for laying a new road from Kalamasseri to

Udyogamandal where the assessee''s factory was situated and which was not served by pukka road. It was agreed that the government of Kerala

would bear the cost of acquisition of the land 25% of the cost of construction. The total cost was to be shared by the four companies including the

assessee-company before the Supreme Court which had approached the Government and the assessee-company''s share came to Rs. 26,100.

The Tribunal, following the decision of the Calcutta High Court in COMMISSIONER OF Income Tax, WEST BENGAL Vs. HINDUSTHAN

MOTORS LTD., , allowed the claim of the assessee-company and treated it as revenue expenses. At the instance of the CIT, a reference was

made to the Kerala High Court which upheld the contention of the revenue that the expenses were in the nature of capital expenses. The assessee,

therefore, appealed to the Supreme Court. The Supreme Court, while agreeing with the view of the Kerala High Court, distinguished the decision

of the Calcutta High Court in COMMISSIONER OF Income Tax, WEST BENGAL Vs. HINDUSTHAN MOTORS LTD., :

The High Court rightly pointed out that the decision of the Calcutta High Court in COMMISSIONER OF Income Tax, WEST BENGAL Vs.

HINDUSTHAN MOTORS LTD., , on which the Appellate Tribunal relied, is clearly distinguishable on facts; that was a case where the

expenditure 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 business.

In other words, the Supreme Court recognised the distinction between an existing road. The learned Government pleader appearing on behalf

of the revenue made a very strenuous attempt to impress upon us that even in the case before the Supreme Court the contribution of the expenses

was for laying out a pukka road which is also the case here before us. We do not think that the reading of the learned Government pleader is

correct since from the facts deduced from the statement of case in the appeal before the Supreme Court it is clear that the Government of Kerala

agreed to bear proportionate cost of acquisition of land and also 25% of the cost of construction. It is, therefore, clear that the road was not in

existence at all since the land was to be acquired for laying down the new road. On behalf of the assessee-company reliance is placed on the

decision of the Supreme Court in Lakshmiji Sugar Mills Co. P. Ltd. Vs. Commissioner of Income Tax, New Delhi, , where also there was no

positive finding that the roads were newly laid out and in that context the Supreme Court held that the contribution towards expenses by the

assessee-company before it was made for running the business or working it with a view to producing profits without the assessee gaining any

advantage of enduring benefit to itself.

The learned Government pleader, on behalf of the revenue, relied heavily on the decision of a Division Bench of this court in Addl. Addl.

Commissioner of Income Tax, Gujarat Vs. Rohit Mills Ltd., , where the court was concerned about the nature of expenses of betterment charges

paid by the assessee-company before the Division Bench on the finalisation of the Town Planning Scheme in the area in which the mill-company

was situated. The Division Bench, on consideration of the relevant provisions of the Bombay Town Planning Act, 1955, which, on a scheme being

finalised, required the Corporation to provide, inter alia, new roads, schools, civic centres, etc., found that there was an accrual of advantage of

permanent benefit to the lands of the mill-company in the form of an enhanced potential value and, therefore, held that the expenses in the nature of

betterment charges were capital expenses. We have not been able to appreciate how the ratio of this decision can be of any assistance to the

cause of the revenue since the facts in the present case with which we are concerned indicate that the expenses were of remedial nature.

In Rhodesia Railways Ltd. v. Income Tax Collector, Bechuanaland Protectorate [1933] 1 ITR 227 , the assessee-railway-company in its

return of income claimed a deduction of pounds 2,52,174 on account of renewals of permanent way. The Income Tax authorities disallowed the

deduction. The renewals were made in 1930 when new rails had been put over a large part of the track with new sleepers so as to bring the track

back to normal condition but did not render the line capable of giving more service. Lord Macmillan answering the question whether the outgoing

was of a capital nature and whether the work was one of reconstruction and not of repair observed as under (p.231):

...The sum in question was within the meaning of paragraph (a) and outgoing ''not of capital nature'' and was ''expended for the repairs of property

occupied for the purpose of trade or in respect of which income is receivable'' within the meaning of paragraph (b)...... ''""Repair"" and ""renew"" are

not words expressive of a clear contrast'', and ''repair is restoration by renewal or replacement of subsidiary parts of a whole. Renewal as

distinguished from repair, is reconstruction of the entirety, meaning by the entirety not necessarily the whole but substantially the whole subject-

matter under discussion''. The periodical renewal by sections of the rails and sleepers of railway line as they wear out by use is in no sense a

reconstruction of the whole railway and is an ordinary incident of railway administration. The fact that the wear although continuous is not and

cannot be made good annually does not render the work of renewal when it comes to be effected necessarily a capital charge. The expenditure

here in question was incurred in consequence of the rails having been worn out in earning the income of previous year on which tax had been paid

without deduction in respect of such wear and represented the cost of restoring them to a state in which they could continue to earn income. It did

not result in the creation of any asset; it was incurred to maintain the appellants'' existing line in a state to earn revenue.

In this connection reference to a decision of the House of Lords in Bean v. Doncaster Amalgamated Collieries Ltd. [1946] 27 TC 296 would

be appropriate. A colliery company in that case was required by a local Drainage Act to execute or pay for works (""remedial works"") necessary

to obviate or remedy any loss or efficiency in a drainage system due to subsidence caused by the company''s working. At a certain stage in the

mining of a particular seam, subsidence which would cause damage to the drainage system was inevitable if mining continued. So workings ceased.

After some years, in 1937, the company in that case investigated the possibility of continuing the working and prepared a scheme of remedial

work, which would involve considerable expenditure, to enable this to be done. Before this could be worked out in detail the drainage board

concerned put forward a general drainage improvement scheme for the district, the effect of which was, inter alia, to eliminate the necessity for the

remedial works contemplated by the company, and proposed that the company should bear a proportion of the cost approximately equivalent to

the cost of the works it would have carried out independently. After negotiation the company in that case agreed by an agreement dated

September 28, 1939, to pay the drainage board a certain sum towards the cost of the general scheme by sixty half-yearly instalments. The

company on these facts contended that the payments made under the agreement were in respect of the statutory obligation and that no capital asset

had been acquired and that the payments were admissible deduction in computing its profit for the purposes of Income Tax. The crown contended

that the payments were not made in respect of remedial expenditure or in discharge of the company''s statutory obligation but were contributions

towards a general scheme of drainage improvement and resulted in acquisition of capital asset. In these facts Scott L.J., held that the expenditure

incurred by the company procured two enduring advantages. The first was in effect a large new acquisition of workable coal, for the company''s

proprietary rights had no commercial reality, unless the surface drainage was maintained in accordance with the Acts. The second was permanent

immunity from all the continuing expenditure entailed by the obligations of these Acts, and, therefore, held that the expenses amounted to that of

capital nature. This decision, therefore, throws light that if the expenses are expenses of remedial nature, they may not amount to capital expenses

since by incurring those expenses the person making the expenses does not procure any advantage of permanent benefit and it should be held that

the expenses are for permanent benefit.

Our attention has been drawn on behalf of the assessee to a decision of the Punjab High Court in PANIPAT CO-OPERATIVE SUGAR

MILLS LTD. Vs. COMMISSIONER OF Income Tax, PATIALA., , where the Punjab High Court has also taken a similar view but for some

different reasons. In the circumstances, therefore, we answer the question referred to us in the negative and in favour of the assessee that the

contribution of expenses of Rs. 20,000 for laying out the proper road was in the nature of revenue expenses.

In the result, the question in answered in the negative and in favour of the assessee. The CIT shall pay costs of this reference to the assessee.