P.N. Khanna, J.
(1) The assessed, the State Trading Corporalion of India Limited, a Government Company, incorporated under the Companies Act, 1956, was engaged during the assessment year 1962-63 for which the previous year ended on March 31, 1962, in amongst its other trading activities, the export of low grade iron ore. Supplies were procured from private mine owners. Some of these supplies were to be procured and shipped from the port of Redi in Maharashtra. The present controversy revolves round the assessed's claim for two of his expenditure items mentioned hereinafter, being allowed as revenue expense. The first item relate to the assessed's proposal to construct a building at Lodi Road, which, however, had to be abandoned as the land meant for the building was acquired by the Government. All the same, the assessed had to pay a sum of Rs. 10,000.00 to Messrs Luc Durrant, Architects, for the preparation of the plan and construction of the building. The assessed claimed this to be revenue expenditure, but the Income-tax officer rejected this claim. The second item relates to the payment by the assessed of a sum of Rs. 2,00,000.00 to the Maharashtra Government as grant for the development of the Port of Redi. This payment was claimed as part of the total expenditure incurred for facilities to labourers, so as to improve the business of the assessed company. The Income-tax Officer disallowed the claim, as he considered the payment to be in the nature of a loan in the beginning and also because he was of the view that it was not for any specific purpose connected with the assessed's business.
(2) In appeal, the Appellate Assistant Commissioner also disallowed the payment to the Architects on the ground that the assessed was not engaged in the business of construction of buildings and that in any case, such an expenditure would be of capital nature. The claim for Rs. 2,00,000.00 was disallowed as the payment was held to be not in any way connected with the business activities of the assessed, nor could it be said to be connected with the purchase of iron ore. The Income-tax Appellate Tribunal in second appeal concurred with the Appellate Assistant Commissioner and disallowed payment to the architects as the amount was expended in connection with and for the construction of a building. The sum of Rs. 2,00,000.00 was said to be an outright grant. The assessed's claim that this was paid to the Maharashtra Government for the development of the Port and as a grant for mine labour amenities and road development and, thereforee, incidental to its business was rejected on the ground that the workers of the port were not employed by the assessed. The Tri bunal was of the view that the amount could not be said to have been expended in connection with the assessed's business, nor was it connected with the price structure of the ore purchased by the assessed or with the quantity exported. The following questions of law arising out of the Tribunal's said order, were then referred to the High Court at the instance of the assessed :
'(I) whether on the facts and in the circumstances of the case. the fee of Rs. 10,000.00 paid by the assessed to Messrs Luc Durrant Architects for the preparation of a plan for construction of a building was an allowable deduction in computing the income under the head 'profits and gains of the business'? and (ii) whether on the facts and in the circumstances of the case, the payment of Rs. 2,00,000.00 by the assessed company to the Maharashtra Government can be said to be an expenditure laid out wholly and exclusively for the purposes of the assessed's business in computing the income chargeable under the head 'profits and gains of the business'?'
(3) A number of authorities have been cited by the counset on both sides in order to indicate the test, which are generally applied for determining whether any particular item of expenditure is in the nature of a Revenue expenditure or an expenditure of capital nature. The Supreme Court in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-fax, West Bengal : [1955]27ITR34(SC) , after examining the case law on the subject, deduced the following principles: (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. As per Bowen L. J., in City of London Contract Corporation v. Styles: 'you do not use it 'for the purpose of your concern, which means, for the purpose of carrying on your concern, but you use it to acquire the concern. (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: vide. Viscount Cave, L.C., in Atherion v. British insulated and Helsby Cables Ltd., (1926) 10 Tc 115. In other words, the asset or the right acquired must have enough durability to justify its being treated as a capital asset; (3) whether for the purpose of expenditure, any capital was withdrawn, or, in other words, whether the object of incurring expenditure was to employ what was taken in as capital of the business. Whethe the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. Fixed capital is what the owner turns to profit by keeping it in his own possession. Circulating or floating capital is what he makes profit of by parting with it or letting it change masters. Circulating capital is capital which is turned over and in the process of being turned over, yields profit or loss. Fixed capital, on the other hand, is not involved directly in that pnocess and remains unaffected by it. The expression 'once and for all' was also held to denote expenditure which is made once and for all for procuring an enduring benefit to the business as distinguished from a recurring expenditure in the nature of operational expenses. These principles were also applied by the Supreme Court in State of Madras v. G. L Coelho : [1964]53ITR186(SC) . (Abo see Commissioner of income-tax. West Bengal, v. Coal Shipments Private Limited, : [1971]82ITR902(SC) ).
(4) According to these principles, thereforee, the fees paid to the architect for the preparation of the plan for the construction of the building could not be allowed as a deduction in computing the profits and gains of the business as it was an expenditure of capital nature. The building that was to be constructed was intended to bring into existence an asset or advantage for the enduring benefit of the assessed's trade. It was for the extension of the business, for the purpose of acquiring a new asset, i.e. the building. The building which was sought to be constructed was fixed capital, which the assessed was to keep in its possession and the profit, which was sought to be made, was not by circulating it or by parting with it or turning it over and over. The expenditure incurred for preparing the plant for its construction, was a part of the total expenditure to be incurred for its Construction. It was, thereforee, an expenditure of a capital nature.
(5) Mr. G. C. Sharma contended that the building never came into existence and there was no benefit of enduring nature derived by the assessed. But, the expenditure that was incurred was for deriving a benefit of an enduring nature. The subsequent abandoning of the building project is of no consequence. It is not the result, which is relevant for the purpose of determining the nature of the expenditure incurred. According to the Supreme Court in Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax, Madras : [1967]63ITR207(SC) , the deductibility of expenditure incurred in prosecuting a civil proceeding would depend upon the nature and purpose of the legal proceeding in relation to the assessed's business and would not' be affected by the final outcome of that proceeding. The Supreme Court observed: 'However wrong-headed, ill-advised, unduly optimistic or over-confident in his conviction, the assessed may appear in the light of the ultimate decision, expenditure in starting and prosecuting the proceeding may not be denied admission as a permissible deduction in computing the taxable income, merely because the proceeding had failed, if otherwise the expenditure is laid out for the purpose of the business wholly and exclusively'.
(6) In the present case, there is no suggestion that the proposed building for which the plans were prepared was not for the assessed's business. The said plans were for the assessed's building and the expenditure incurred for preparing them was laid out for the purpose of the business wholly and exclusively. The objection of Mr. Shanna that the building never came into existence and the project was abandoned is, thereforee, ill-founded. The expenditure was incurred in order to acquire a benefit of enduring nature and was, thereforee, clearly of capital nature. Question No. 1, accordingly, is answered in the negative, i.e. in favor of the Revenue and against the assessed.
(7) Taking up the second question, it is necessary to find out the proper connotation of the expression 'for the purpose of business'. This expression occurs in section 10(2) (xv) of the Indian Income-tax Act, 1922, under which while computing the profits of gains of business, profession or vocation^ the expenditure which will be allowed as a permissible deduction, must be laid out or expended wholly or exclusively for the purpose of such business, profession or vocation. According to Mr. Sharma, the learned counsel for the assessed, this expression has a fairly wide import, so as to include any expense, which would have any connection with the business. He relied on Commissioner of Income-tax, Kerala v. Malayalam Plantations Limited. : [1964]53ITR140(SC) , where the Supreme Court held that this expression is wider in scope than the expression 'for the purpose of earning profits'. He submitted that the sum of Rs. 2,00,000.00 was paid to the Maharashtra Government for the development of roads and the Port of Redi, which were seriously damaged during the rains and floods and for providing facilities to the labourers in the village working in the mines, in order to ensure regular supplies of iron ore, which was to be exported by the assessed. The learned counsel also relied upon the State of Madras v. G. 7. Coelho, (1964) 3 Itr 186, where payment of interest on the amount borrowed by the purchaser of the plantation, was held to be closely related to the plantation and. the expenditure was held to be laid out or expended wholly or exclusively for the purpose of the plantation. Mr. Sharma further submitted that if the said payment had not been made, the assessed's business would have suffered not only for want of regular supplies owing to discontentment amongst the village labourers but also on account of the roads and the port not being in a capacity to handle the requisite volume of export. He also pointed out that in subsequent years, the assessed had to pay a levy of fifty paise per tonne for export from this port.
(8) Mr. B. N. Kirpal, on behalf of the Revenue, pointed out, on the other hand, a note made by the Chairman of the assessed Corporation to its Board of Directors on the basis of which the resolution was passed authorities the making of the said grant to the Government of Maharashtra. He contended that the amount had not been given in lieu of any levy on export, but had been given as an outright grant. It was not even connected with the price structure of the ore purchased by the assessed. Even the workers in the village to whom the amenities, according to the assessed, had been provided, were not the workers of the assessed. There was no connection between the said grant and the business carried on by the assessed. He, thereforee, urged that the view of the Tribunal was correct and the said amount should not be regarded as an expenditure laid out wholly and exclusively for the purpose of the assessed's business.
(9) While considering the true connotation of the expression, for the purpose of business, the Supreme Court in the case of Malayalain plantations (supra) examined the case law on the subject, both in England and in India. Broadly, the true tests applied by the English Courts were found to be: (i) whether the expenditure was incurred for the purpose of carrying on of the business and for removing obstacles and impediments in the conduct of the business; and (ii) whether the assessed paid the amount in his capacity as businessman or in his personal capacity. Examining the Indian decisions of the Supreme Court, reference was made, amongst other cases, to Tata Sons Ltd. v. Commissioner of Income-tax, (1959) 18 Itr 460 , where the share of bonus voluntarily paid by a company not to its own officers, but to some of the officers of a managed company was held to be a permissible deduction, as the object was said to be to increase the profits of the managed company and thereby increase its own share of the commission. Another case considered was, Commissioner of Income-tax v. Royal Calcutta Turf club, : [1961]41ITR414(SC) where expenditure incurred by a race club for training its jockeys was allowed as a deduction as it was held to be wholly and exclusively for the purpose of club's business, because if the supply of jockeys of efficiency and skill failed, the business could no longer be possible. Reference was also made to Haji Au^ and Abdul Shakoor Bros. v. Commissioner of Income-tax, : 1983ECR1942D(SC) where disallowing deduction of penalty amount paid to release a consignment confiscated by the customs authorities on the ground that such penalty could not be said to be a commercial loss falling on the assessed as a trader, the test laid was that expenses which enabled a person to carry on trade for making profits in the business are permitted, but not if they are merely connected with the business. Summing up in Malayalam Plantations' case, the Supreme Court observed: 'The expression 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits'. Its range is wide: it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation. coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However, wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessed shall incur it in his capacity as a person carrying on the business.' Bombay Steam Navigation Co. (1953) Private Limited v. Commissioner of Income-tax, Bombay, : [1965]56ITR52(SC) , was another case cited before is, where the Supreme Court was of the view that the transaction of acquision of assets was closely related to the commencement and carrying on of the assessed's business and interest paid on the unpaid balance of the consideration for the assets acquired had, in the normal course, to be regarded as expended for the purpose of the business which was carried on in the accounting periods. In Indian Steel and Wire Products Ltd. v. Commissioner of Income-fax : [1968]69ITR379(Cal) , the Calcutta High Court disallowed the contribution made by the assessed to the Indian National Congress, which was a political party in power, for seeking its patronage for the preservation and furtherance of their business. The connection between expenditure and the business, even if any, was considered to be too remote.
(10) In Orissa Cement Limited v. Commissioner of Income-tax, Delhi : [1969]73ITR14(Delhi) , this court allowed the legal charges incurred for obtaining a loan from the Industrial Finance Corporation, as permissible expenditure on the ground that it was irrelevant to consider the object with which the loan was obtained. It was observed that expenditure incurred need not directly benefit the business, yet it must be incidental to the business and must be necessitated or justified by commercial expediency. It must be directly or intimately connected with the business and must be laid out by the taxpayer in his character as a trader. An expenditure remotely connected with the trade was held to not qualify for permissible deduction. In Commissioner of income-tax v. Bhanna Mall and Co. P. Ltd. : [1971]82ITR138(Delhi) , the expenses incurred towards salary of pujari for invoking the blessing of gods for the benefit of the assessed were not considered by this court as incurred for carrying on the business of the assessed.
(11) According to the tests laid down in the aforesaid judgments, the expenditure incurred by the assessed in paying the grant to the Maharashtra Government cannot be said to have been laid out wholly or exclusively for the purpose of the assessed's business. This amount according to the tribunal had been given to the Government as an outright grant. The Tribunal has found that this amount was not connected at all with the price structure of the ore purchased by the assessed or the quantity exported. The workers who were said to be benefited by the amenities sought to be provided were not the employees of the assessed. There is no finding or even suggestion that the road development in the village was in respect of any road leading from the assessed's premises or from where the ore was to be obtained to the Port or as to how otherwise the said development could be of any benefit to the assessed's business. This payment was found by the Tribunal to have been made as a result of a note by the Chairman to the Board of Directors of the assessed Corporation, who had passed a resolution on the basis thereof, authorising the grant of Rs. 2,00,000 to be made to the Maharashtra Government. According to the said note, the Chief Minister of Maharashtra requested that 'in view of the serious damage suffered by the Konkon region due to the recent floods and heavy rains the Stc should extend its most sympathetic consideration. After some discussion the Chief Minister agreed to a sum of Rs, 2,00,000 being given by the Stc as outright grant and not to press the matter further.' This note brings out the 'sympathetic considerations' which prevailed with the assessed while making the grant. The payment thus had no connection with the business of the assessed. The Tribunal did notice that the assessed's argument that its business would have suffered if this payment had not been made by it. But, the Tribunal did not notice any material to support it and was unable to give a finding to that effect. The provision of amenities to the labour not of the assessed Corporation, but in the village in general and the development of the port and of the roads in the village were not found to have a connection with the assessed's business. In any case, even if there might have been a connection, it was too remote to be considered as relevant turn our purpose. This expenditure, in no case, can be said to be wholly and exclusively laid out for purpose of the assessed's business. Even an incidental connection between it and the assessed's business has not been brought out on record. Nor can this expenditure be said to be laid out by the assessed in its character as a trader. The Tribunal, thereforee, was right in holding that the payment of Rs. 2,00,000 was not an expenditure laid out wholly or exclusively for the purpose of the assessed's business. The answer to question to No. 2, thereforee, is in the negative, i.e. in favor of the Revenue and against the assessed. In view of the peculiar circumstances of the case, there shall, however, be no order as to costs.