P.P. Naolekar, C.J.
1. The Arunachal Pradesh Forest Corporation Limited, Itanagar, the respondent herein, is a company, undertaking of the Government of Arunachal Pradesh. The company is engaged in operation of forest and utilisation of forest resources. The company has coffee plantation, tea plantation, rubber plantation, cardamom plantation and cash crop division. The company runs two saw mills in the name of Namphai Saw Mill at Namphai and Banderdewa Saw Mill and Plywood Industries at Banderdewa in Arunachal Pradesh. For the assessment year 1987-88, the company claimed debit from the profit and loss of company the expenditure of Rs. 25,73,082 as generation expenses and Rs. 4,50,939 as maintenance of plantation and an amount of Rs. 1,30,688 which have been spent by the company towards research and development of the plants, amongst other claims made by the company. These two items are the subject matter of dispute before us in the present appeal. The Assessing Officer has held generation expenses and maintenance of plantation as non-agricultural expenses and expenses of capital nature and denied deduction of the same. For the research and development expenses of Rs. 1,30,688 the Assessing Officer was of the view that the expenditure incurred for research and development are capital in nature because the assessee derives enduring benefit out of such research work and as such it cannot be allowed. The assessee's appeal to the appellate authority resulted in its favour. The Tribunal has also held in favour of the assessee and, therefore, the Revenue has come in appeal.
2. It appears from the findings arrived at by the Appellate Tribunal that there was a contract between the State Government and the company under which the State Government has granted a lease of the forest to the company to utilise the timber of the forest in Banderdewa Saw Mill and Plywood Industries as well as for supply of timber to Government quota holding industries or to sell otherwise. The lease appears to be for a period of ten years and under the contract of lease it is obligatory on the company to have new plantation which requires sowing/planting and growing of young plants which in due course of time would replace the trees felled in the area and also for the purpose of maintaining the ecological balance. Thus, it appears that it was necessary as a condition of the lease for the company to have plantation of new trees in place of the trees, which have been removed from the forest for utilisation of the company. The question is when expenses are incurred for regeneration and plantation by the company, whether it would be a capital expenditure or it would be a revenue expenditure.
3. The test for distinguishing between capital expenditure and revenue expenditure in our country was laid down by the apex court in the case of Assam Bengal Cement Co. Ltd. v. CIT : [1955]27ITR34(SC) . In that case the company had acquired limestone quarries for a period of 20 years for the purpose of manufacture of cement from the Government of Assam on lease. The lessee agreed to pay protection fee for the entire lease period and in consideration thereof the State agreed not to grant to any person any lease, permit or prospecting licence for limestone in the area during the period of lease. The question raised was whether the amount paid is a capital expenditure or revenue expenditure and the apex court laid down the following (page 44) :
'1. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment. .
2. Expenditure may be treated as properly attributable to capital when it 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. . . If what is got rid of by a lump sum payment is an annual business expense chargeable against Revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset then that puts the business on another footing altogether. . .
3. Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital ?'
4. The standard test, which has been laid down in the case of Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155 which has been relied in many cases is that (page 192) : '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, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.' Whether by spending the money any advantage of an enduring nature has been obtained or not will depend upon the facts of each case. Moreover, as the above case itself provides, this test would not apply if there are special circumstances pointing to the contrary.
5. In the case of CIT v. Bombay Dyeing and . : [1996]219ITR521(SC) , the company contributed to the State Housing Board certain amounts for construction of tenements for its workers. The tenements remain the property of the Housing Board. It was held that the expenditure was incurred wholly and exclusively on the welfare of the employees and, therefore, constituted legitimate business expenditure. As the assessee-company acquired no ownership rights in the tenements, the court said that the expenditure was incurred merely with a view to carry on the business of the company more efficiently by having a contented labour force.
6. From the aforesaid test, it is apparent that the expenditure incurred with a view to bring into existence an asset or an advantage for the enduring benefit is of the character of capital asset. In a case where the expenditure incurred results in acquiring of the property having right, title and interest therein it will be a capital expenditure but where the resultant expenditure, although securing an advantage for a long duration, is not an advantage in the capital field because no tangible or intangible asset was acquired by the assessee, it would not be called an expenditure incurred for creating the capital asset. From the facts emerging in the present case it is apparent that as a matter of obligation under the lease the regeneration and plantation expenses have to be incurred by the company. The trees grown after the plantation and as a result of regeneration do not become the property of the company. It is a property of the State Government having full right, title and interest over it. This apart this is a matter of common knowledge that the plants planted would not be grown within ten years for utilisation as forest product. Thus, whatever plant regeneration is done by the company the fruits of it will not be available to the company during the lease period. The expenses incurred by the company for regeneration of the plants is not in the nature of capital gains and thus the Tribunal as well as the appellate authority have rightly granted deduction to the company under these heads.
7. It is submitted by learned counsel for the Revenue that research and development expenses have turned into acquisition of knowledge by the assessee and thus the assessee derives enduring benefit out of such research work which can be utilised by the company for its benefit for time to come and, therefore, the authorities should have held it to be an expense incurred for acquisition of the capital asset and as such not deductible.
8. During the 19th century botany of this country was largely confined to exploration, collection and identification of plants. The other branches gradually emerged at the turn of the 20th century. Recent years have witnesses rapid strides in all disciplines including micro-biology, palynology, paleo-botany and plant breeding, etc. Normally, the business in which the company is engaged, research would be directed towards preservation of the flora where they' exist and to prepare new ones where they are wanting. In the business carried out by the company the research is necessary to identify the plant disease and their cures, better understanding of the plant growth, to find out various diseases and whether it is communicable to large areas and remedial measures to prevent it. The expenses incurred in research in these areas do not necessarily create new permanent asset and these areas in which research is directed is normally for the purposes of the maintenance and preservation of the plants standing in that forest, that means, preservation and maintenance of the asset of the company. The research is aimed to save the plants from deterioration or complete destruction, by finding out ways and means in that direction. The study and the research findings are related to the flora found in the particular area and would not be utilised or applied and used in all conditions in all surroundings and in all areas of the forest. The nature of the business carried out by the assessee, the research findings would be normally for maintaining ecological balance and maintaining the forest and to some extent for the growth of the plants, new or old. When the expenses are incurred for research work towards these directions it cannot be said to be a creation of an advantage of enduring nature or creation of the capital asset, which is being used in all surroundings. Besides this, the expenses incurred in the research work may not necessarily result in positive findings or even negative findings to be utilised by the assessee as knowledge in the nature of permanent asset. The research work is an ongoing process and may not end in a finding to be called an asset. In the present case there is no material placed by the Revenue to establish that the research work undertaken by the company has resulted in a definite finding, positive or negative to be treated as an asset or an enduring benefit, which can be utilised by the company. The expenses incurred by the company in the research and development work, in our opinion, cannot be held to be of capital nature in the circumstances of the present case and thus the Tribunal was correct in giving deduction of the amount spent by the assessee.
9. On our aforesaid findings, we do not find any reason to take a different view of the matter than that has been taken by the Tribunal. The appeal is dismissed. However, in the circumstances of the case there shall be no order as to costs.