M. R. SHARMA J. - The Income-tax Appellate Tribunal, Chandigarh Bench, has referred the following question of law to us at the instance of the assessee for our opinion under section 256(1) of the Income-tax Act :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the payment of Rs. 6,00,000 was not allowable under section 37(1) of the Income-tax Act, 1961 ?'
M/s. Panipat Co-operative Sugar Mills Ltd., Panipat (hereinafter called 'the assessee'), is an association of person deriving income from the business of manufacture of sugar. For the assessment year commencing on April 1, 1967, the Income-tax Officer, vide his order dated September 17, 1971, assessed the total income of the assessee at Rs. 30,29,850 as against the declared income of Rs. 22,44,150. Out of the amount of Rs. 6,38,637 claimed by the assessee as cane development expenses, the Income-tax Officer disallowed the amount of Rs. 6,00,000 contributed by the assessee to the State Government for being utilised towards the partial cost of construction of 19 approach roads connecting certain villages to the main roads on the ground that the said outgoing was of a capital nature.
The Appellate Assistant Commissioner, while hearing the appeal disallowed the said sum of Rs. 6,00,000 as revenue expenditure under section 37(1) of the Income-tax Act (hereinafter called 'the Act'), but held that the assessee was entitled to the admissible rebate under section 80G of the Act.
In the second appeal filed by the assessee before the Appellate Tribunal it reiterated its claim that the outgoing sum of Rs. 6,00,000 should be treated as revenue expenditure whereas the revenue claimed that this claim should be treated as capital expenditure. The plea raised by the revenue was turned down by the Appellate Tribunal on the ground that it had not come up in appeal against the order of the Appellate Assistant Commissioner. The claim made by the assessee was turned down by the Tribunal by concluding that :
(i) the sum of Rs. 6 lakhs contributed by the assessee for the construction of entirely new roads was of capital expenditure as, because of the construction of these roads, the assessee came to enjoy a benefit of enduring nature, and
(ii) the assessees case is not a case of repair of the existing roads but of construction of new roads.
In other words, this amount of Rs. 6 lakhs was not held to be revenue expenditure and the allowance of rebate to the assessee under section 80G of the Act was affirmed, as the same had not been challenged in appeal by the revenue. Now, the assessee claims the benefit of section 37(1) of the Act, which reads as under :
'37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and section 80VV and not being in the nature of capital expenditure or personal expenses of the assessee), laid out of expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession.'
This benefit can be allowed to it only if -
(i) the expenditure is not in the nature of capital expenditure or personal expenses; or
(ii) the expenditure is expended wholly and exclusively for the purpose of the business.
The term 'capital expenditure' has not been defined in the Act but its nature and scope can reasonably be culled out from the observations made by the learned judges in some of the decided cases.
In Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax : [1955]27ITR34(SC) , their Lordships of the Supreme Court observed as under :
'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 if it was part of its circulating capital it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts to 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, 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 under section 10(2)(xv) Income-tax Act.'
In Commissioner of Income-tax v. T. V. Sundaram Iyengar & Sons (P.) Ltd. : [1974]95ITR428(Mad) the assessee-company purchased some land in the name of the District Collector, Madurai, for the purpose of constructing houses for the companys workers by the Government under the subsidised industrial housing scheme sponsored by the State Government. It claimed the purchase price of the land as a deduction under the head 'revenue expenditure'. The departmental authorities rejected this claim but the Tribunal upheld it on the ground that it was incurred wholly and exclusively for the purpose of the business and the assessee had not acquired any capital assets of an enduring nature. This view was affirmed by a Division Bench of the Madras High Court. The Bench noticed that the Government was proposing to bring in legislation to make the employers contribute a percentage of their wage bill towards the construction of houses for the workers and observed :
'We, therefore, doubt very much whether the assessee in spending the money expected to acquire or bring into existence any advantage for the enduring benefit of his business. Further, in the assessee year in question only the land has been purchased and actually to buildings have been put up in that year. We have to keep in mind that we must consider the question of allowability of the deduction on the facts as existing in the assessment year. The expenditure was incurred more as a matter of commercial expediency in pursuance of the tripartite agreement above referred to. We are, therefore, of the view that the amount in question was permissible deduction as a revenue expenditure incurred wholly and exclusively for the purpose of the assessees business.'
In Commissioner of Income-tax v. Associated Cement Companies Ltd. : [1974]96ITR650(Bom) , the case arose out of the following facts. The assessee, a cement factory, was situate outside the municipal limits of a town. The Government decided to include the area on which the factory was situate within the municipal limits. The assessee agreed to provide certain amenities to the town including provision of the water supply and the Government in turn undertook not to include the properties of the assessee within the municipal limits for 15 years so that the assessee would not have to pay municipal taxes for that period. During the accounting period, the assessee spent a sum on installing pipelines, etc., which then became the property of the municipal committee and claimed it as business expenditure. The court held that by incurring the said expenditure the assessee had obtained avoidance of certain disadvantages for a limited period and the expenditure was made for the convenient and economical running of the business for a limited period. The amount spend by the company was allowed as a deduction in determining the profits of the assessee for the assessment year. The Bench particularly emphasised the fact that the pipeline installed and other equipment purchased by the assessee came to vest in the municipal committee and did not continue to belong to the assessee.
In Commissioner of Income-tax v. Ashok Leyland Ltd. : [1972]86ITR549(SC) , the question arose whether, by terminating the services of the managing agents whereby agents whereby the assessee saved the expenses for a number of years, the expenditure incurred should be regarded as capital expenditure or not. The court observed :
'It will not be correct to say that by avoiding certain business expenditure, the company can be said to have acquired enduring benefits or acquired any income yielding asset.'
In Lakshmiji Sugar Mills Co. P. Ltd. v. Commissioner of Income-tax : [1971]82ITR376(SC) , the assessee, a private company carrying on the business of manufacture and sale of sugar, paid to the Cane Develop-Council certain amounts by way of contribution for the construction and development of roads between the various sugarcane-producing centres and the sugar factories of the assessee. The roads were originally the property of the Government and remained so even the improvement had been done. The court observed as under :
'We are satisfied that in the present case the expenditure was incurred by the assessee for reasons of commercial expediency apart from statutory compulsion to which reference has been made before. The development of the roads was necessarily meant for facilitating the carrying on of the assessees business. Furthermore, the Tribunal did not give any finding that the roads were to be altogether newly made and that the assessee would get an enduring benefit from these roads. The expenditure in question should have, therefore, been allowed as an admissible deduction.'
In Commissioner of Income-tax v. Hindusthan Motors Ltd. : [1968]68ITR301(Cal) , the assessee was a motor car manufacturing company. Its factory was located at a short distance away from the main truck road but there was an approach road from the main road to the factory premises of the assessee which belonged to the Government. The said approach road fell into disrepair and began to cause transportation difficulties to the assessee. The Government was not prepared to meet the expenses for the repair of the road. Thereupon, the assessee offered to contribute a sum for that purpose. The sum contributed by the assessee for the repair of the approach road was claimed by the assessee as revenue expenditure. The court held :
'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, that is to say, by not being hampered by slow and possibly dangerous locomotion of cars, produced in the factory while moving on a disrepaired and ill-conditioned road. As a matter of business prudence, there was justification on the part of the assessee to expend this amount.....'
In Ganesh Sugar Mills Ltd. v. Commissioner of Income-tax : [1969]73ITR395(Cal) , the assessee claimed deduction of an amount contributed by it to a co-operative society for the development of roads giving access to the factories of the assessee-company as well as other sugar mills of the locality. The roads were constructed by the co-operative society partly on the land owned by the assessee-company but were meant for common use by the cane growers as well as for transport purposes of the factory owners. The court held that the expenditure brought into existence no new assets, i.e., the roads, the use of which would be of an enduring benefit to the assessees business. It is significant to mention that some of the roads were constructed partly on the land owned by the company and the court distinguished the Hindusthan Motors Ltd.s case : [1968]68ITR301(Cal) on the ground that in that case a public road was already in existence which the assessee and the members of the general public were entitled to use as a matter of right.
In Laxmi Sugar and Oil Mills v. Commissioner of Income-tax : [1972]84ITR439(All) , the assessee was carrying on the business of manufacturing sugar. It contributed various sums of money in some assessment years towards the cost of construction of roads under a scheme sponsored by the State Government. It was argued that if an expenditure is related to carrying on the business and does not result in acquisition of an asset or a right of a permanent character, the expenditure must be regarded as revenue expenditure. This contention was repelled by the court. In that case, however, the direct connection of the roads built with the business of the assessee does not appear to have been established.
In L.H. Sugar Factory & Oil Mills (P.) Ltd. v. Commissioner of Income-tax : [1972]84ITR575(All) , the contribution made by the assessee, which was a sugar manufacturer, to the State Government for construction of roads was regarded as capital expenditure. The court observed :
'It was contended on behalf of the assessee that the contribution made by it towards the cost of repairs was actuated because of business expediency. When asked to explain as to why it considered the transaction to be commercially expedient, the assessees representative contended that the contribution was made because as a prudent businessman the assessee could not afford to displease the District Magistrate and the Government in any capacity and, therefore, it had to make the aforementioned contributions. It may be noticed at this stage that it is not the case of the assessee that the scheme under which the contribution were made was a statutory scheme or that the assessee was bound under any law to make that contribution. The claim on behalf of the assessee was based purely on the ground that as a prudent businessman it could not, while carrying on its business, afford to displease either the district authorities or the State Government and, therefore, it agreed to make the contribution for development of roads as required by them.'
Apparently, the contribution was made to please the district authorities or the State Government and the resultant convenience of the assessee inasmuch as the supply of sugarcane to its factory became easier was only incidental.
In Commissioner of Income-tax v. T.C.C. Ltd. : [1973]87ITR66(Ker) , the assessee along with some other companies entered into an agreement withe the State Government to share the cost of acquisition of land and construction of the road leading to the assessee-factory. The amount contributed by the assessee was held to be capital expenditure. The court distinguished the Hindusthan Motors Ltd.s case : [1968]68ITR301(Cal) in the following terms :
'In that case the assessee, which was manufacturing motors cars, had its factory near Uttarpara. There was an approach road connecting the factory to a main trunk road. On account of lack of repairs for a long period the condition of the road had deteriorated and caused transportation difficulties to the assessee. The Government was not prepared to meet the expenses of the repairs of the road unless the assessee had contributed towards the cost of such repairs. The assessee paid a certain amount being the amount of such repairs to the Government, as a consequence of which the road was repaired. The assessee claimed a deduction of the amount under section 10(2)(xv). The court said that the money was spent not so much to bring about an asset or advantage of enduring benefit to the company but to run the business efficiently and conveniently, and, therefore, it was not a capital expenditure. The distinction between the two cases lay in the fact that in the one case an enduring advantage was obtained by the opening up of the new road, whereas no enduring advantage resulted from the repair of the road, in the other case.'
In Additional Commissioner of Income-tax v. Rohit Mills Ltd. 0043/1975 : [1976]104ITR132(Guj) the assessee made a contribution towards the betterment charges assessed on the lands in his possession under a Town Planing Act. The contribution was calculated in proportion to the increased potential value estimated to accrue to the lands as a result of the Town Planning Scheme. The expenditure incurred was held by the court as not revenue expenditure. The case of Lakshmiji Sugar Mills : [1971]82ITR376(SC) was distinguished as under :
'Obviously this decision would be of no help to the assessee in these reference, because, here, the assessee have obtained advantage of enduring benefits to themselves in the form of the enhanced potential value of the lands which they possess. In our opinion, therefore, the Tribunal was not right in relying upon this decision of the Supreme Court for the purpose of deciding these cases.'
To sum up, there is no clear-cut test on the basis of which a capital expenditure may be distinguished from revenue expenditure. The question has to be decided from the practical and business point of view. The court has to pay due regard to the nature of business, its mode of operation in the sense whether it can incur expenditure voluntarily or under the provisions of a statute designed to promote general welfare, the title to the assets acquired, the control which it can exercise over such assets, and last of all, whether advantage gained by incurring the expenditure is of an enduring nature or not.
In its letter dated December 21, 1970, addressed to the Income-tax Officer, the assessee, inter alia, stated :
'This in fact is a revenue expenditure and not capital. Reference is made to the enclosed ruling of the Calcutta High Court (annexure E). It is an expense for improvement of existing approach roads from various villages to the main road. In case the roads are improved, the carts from these villages will arrive in the mill premises at the earliest possible time, and the sugarcane will not become stale and dry, as such the recovery of sugar from such sugarcane thus arrived at the mill premises will be more than that sugarcane which would come via kutcha roads and would take more time to reach. Recovery of sugar from fresh sugarcane is always more when it is put to the cane carrier at the earliest possible time. More recovery means more yield of sugar from sugarcane. Therefore, the said expenses of Rs. 6 lakhs which has been incurred in the usual course of business for the purpose of business and gain more yield is naturally an expenses which should be allowed under the provisions of the Income-tax Act, 1961. Further, it may also be brought to your kind notice that the roads do not belong to us and we are not the owners. The enduring benefits, if at all, go to the owners of the roads, i.e., the State Government.'
Along with this letter the assessee filed a statement showing the supply of sugarcane to it from the various villages, which were connected with the main road. The Appellate Tribunal noticed that the assessees mill was approachable by a kutch road and the only vehicle which could pass through this kutch road to bring sugarcane was the bullock-cart, and observed :
'......... And the assessee had also placed before us details to indicate and establish that before the contribution of Rs. 6 lakhs was made there were kutch roads and because of the construction and after the contribution entirely new roads were constructed.'
The question which deserves to be considered is whether the new roads which were constructed in the instant case can really be regarded as new roads or not. Admittedly, kutcha roads were already in existence. Some expenditure was incurred for improving the qualify of these roads. The word 'repair' is defined in the Shorter Oxford Dictionary as 'restoration of some material thing or structure by the renewal of decayed or worn out parts, by refixing what has become loose or detached'. May be, by metalling, a road becomes comparatively more permanently restored, but the conversion of a kutcha road into a metalled one does not necessarily tantamount to the construction of a new road. Even a metalled road does not last for ever and has to be repaired after some interval. The kutcha roads which were already in existence and which were converted into metalled roads did not belong to the assessee nor could it have any control over them. The assessee being a co-operative society registered under the Punjab Co-operative Societies Act, 1961, can, with the sanction of the Registrar, contribute a part of its profits towards any purpose connected with the development of co-operative movement or charitable purposes. The more advantageous execution of its business, because of the metalling of the kutcha roads, was by itself expected to give an impetus to the co-operative movement. The contribution made by the assessee in the peculiar circumstances of this case does not procure an enduring or a lasting benefit to it. The expenditure was incurred on account of business expendency, namely, the effort to get fresh sugarcane, which yielded higher percentage of sugar, to the gates of the factory. The existence of kutcha roads was a permanent inconvenience and the expenses incurred by the assessee to get rid of this inconvenience cannot be held to have brought to it a lasting advantage. We are clearly of the opinion that the metalling of the roads in the instant case amounted to their repair and the expenditure incurred on this item should be regarded as revenue expenditure as laid down by their Lordships of the Supreme Court in Lakshmiji Sugar Mills Co. (P.) Ltd.s case : [1971]82ITR376(SC) .
The case relied upon by the Tribunal are clearly distinguishable. In Dewan Sugar and General Mills Pvt. Ltd. v. Commissioner of Income-tax : [1970]77ITR572(All) , the contribution made by the assessee, a sugar mill, to the Cane Centre Roads Development Fund was held to be a capital expenditure not for repairing old roads but for constructing new roads. In H.R. Sugar Factory (P.) Ltd. v. Commissioner of Income-tax : [1970]77ITR614(All) the court merely assumed that the kutcha roads converted into pucca roads were likely to be a permanent benefit to the assessee without going into the question whether such a conversion fell within the meaning of the word 'repair' or not. Lakshmi Sugar and Oil Mills Ltd. v. Commissioner of Income-tax : [1970]77ITR690(All) was decided on the basis of Dewan Sugar Mills case : [1970]77ITR572(All) , and in that case also contribution was made to the Cane Centre Roads Development Fund, which appears to be concerned with the construction of new roads.
For the reasons given above, we answer the above-mentioned question in favour of the assessee and against the revenue. We further order that the revenue should pay the costs of the assessee, which are assessed at Rs. 250.