J.M. Panchal, J.
1. At the instance of the Commissioner of Income-tax, the Income-tax Appellate Tribunal, Ahmedabad Bench 'B' ('the Tribunal', for short) has referred the following five questions of law for the opinion of this court under section 256(1) of the Income-tax Act, 1961 ('the Act', for short) :
'(1) Whether, on the facts and in the circumstances of the case, a sum of Rs. 7,005 paid by the company as interest on instalments of the incremental contribution to the Municipal Corporation is an allowable deduction in computing the taxable profits of the assessee-company ?'
2 to 16 * * * * * * * * *
17. Before answering question No. 1 referred to us, it would be necessary to recapitulate certain facts.
18. The assessee claimed before the Income-tax Officer an allowance of Rs. 72,014 representing payment of betterment charge and interest to the Ahmedabad Municipal Corporation. The assessee had brought to the notice of the Appellate Assistant Commissioner of Income-tax the fact that though the assessee had claimed an allowance of Rs. 72,014, the said sum consisted of two allowances, viz., betterment charge of Rs. 65,009 and interest of Rs. 7,005. At the request of the Appellate Assistant Commissioner of Income-tax, the assessee had furnished the particulars of the municipal bills in connection with the levy of betterment charge by way of production of the notice issued to the assessee. The particulars furnished by the assessee before the Appellate Assistant Commissioner of Income-tax were as under :
------------------------------------------------------------------------Date of bill Incremental Unpaid Interest at the Totallevy previous rate of 4 1/2 perbalance cent. on balanceto be paid infuture------------------------------------------------------------------------Rs. Rs. Rs. Rs.30-8-1973 48,066 - 4,326 52,39230-8-1973 343 - 31 3748-10-1972 1,334 1,814 502 3,6508-10-1973 5,708 7,763 2,147 15,619------------------------------------------------------------------------
19. It may be mentioned at this stage that in this reference, we are concerned with the question as to whether a sum of Rs. 7,005 paid by the company as interest on the instalments of the betterment charge to the Ahmedabad Municipal Corporation is an allowable deduction in computing the taxable profits of the assessee-company. The question whether payment of betterment charges to the Municipal Corporation under the provisions of the Bombay Town Planning Act, 1954, is an allowable deduction in computing the taxable profits of the assessee-company has not been referred to this court for opinion by the Tribunal and, therefore, the said question need not be considered while answering question No. 1 referred to us.
20. At the time of hearing of the reference, it was strenuously urged on behalf of the Revenue that the approach of the Tribunal was wrong, inasmuch as it lost sight of the provisions of section 74(1) of the Bombay Town Planning Act, 1954, which clearly indicated that the Legislature intended that payment of the amount of interest at the rate of 4 1/2 per cent. on the instalments formed part and parcel of the net amount payable under the provisions of the said Act and, therefore, the payment of a sum of Rs. 7,005 by the company as interest on the instalments of betterment charges to the Corporation was not an allowable deduction in computing the taxable profits of the assessee-company. According to the Revenue, the expenditure incurred by way of payment of interest on instalments of betterment charges to the Municipal Corporation was for acquiring or bringing into existence assets or advantage of enduring benefit to the business and it was properly attributed to capital and was of the nature of capital expenditure and, therefore, it was not an allowable deduction in computing the taxable profits of the assessee-company.
21. On behalf of the assessee, these contentions were sought to be repelled by urging that the payment of interest on the instalment of betterment charges to the Ahmedabad Municipal Corporation did not increase the value of the land and the expenditure being incidental to trade, it was an allowable deduction in computing the profits of the assessee-company. It was further submitted that the rate of interest as provided in section 74(1) of the Bombay Town Planning Act, 1954, is much lower than the market rate of interest and, therefore, election of option to pay the amount of betterment charges in instalments together with interest, can be said to have been made out of commercial expediency and as such the said expenditure was an allowable deduction in computing the taxable profits of the assessee-company.
22. In support of the above referred submissions, learned counsel for the assessee placed reliance on the decision of the Supreme Court rendered in the case of India Cements Ltd. v. CIT : [1966]60ITR52(SC) .
23. In the context of the above rival contentions, we are called upon to answer the question referred to us. The relevant provisions relating to payment of betterment charges were contained in sub-section (1) of section 74 of the Bombay Town Planning Act, 1954, which was in force at the relevant time. The provisions of section 74(1), as it was in force at the relevant time, read as under :
'74 (1) The net amount payable under the provisions of this Act by the owner of a plot included in the final scheme may, at the option of the contributor, be paid in one sum or annual instalments not exceeding ten. If the owner elects to pay the amount by instalments, interest at 4 1/2 per cent. per annum shall be charged on the net amount payable. If the owner of a plot fails to elect the option on or before the date specified in a notice issued to him in that behalf by the local authority, he shall be deemed to have elected the option of paying contribution which shall be calculated from the date specified in the notice, being the date before which he was required to make an election as aforesaid.'
A bare look at the above referred provisions makes it clear that an option has been given to an owner of a plot to pay the amount of betterment charges in one sum or annual instalments not exceeding ten. If the owner elects to pay the amount by instalments, interest at the rate of 4 1/2 per cent. is chargeable on the net amount payable. In the case of Addl. CIT v. Rohit Mills Ltd. 0043/1975 : [1976]104ITR132(Guj) this court considered the question as to whether the payment of betterment charges to the Ahmedabad Municipal Corporation under the provisions of the Bombay Town Planning Act, 1954, made by the assessee was allowable as a deduction under section 37 of the Income-tax Act, 1961. Therein, the assessee had made contribution towards the betterment charges assessed on lands in his possession under a Town Planning 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 amount of contribution recovered from the assessee in instalments was claimed by him under section 37 of the Act. After examining the different provisions of the Bombay Town Planning Act, 1954, it has been held as under (headnote) :
'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. The increment in value of land contemplated by the Town Planning Act was real. The assessee 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. 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. The instalment of contribution paid under the Town Planning Act was not deductible under section 37.'
24. In the case of Arvind Mills Ltd. v. CIT : [1992]197ITR422(SC) the Supreme Court considered the question whether betterment charges required to be paid by the assessee were revenue expenditure deductible in computing the profits of the assessee. Therein the appellant-company which ran a textile mill had to pay a sum of Rs. 2,02,907 during the previous year relevant to the assessment year 1972-73, being its contribution, called betterment charges, towards the Bombay Town Planning Scheme under section 66 of the Bombay Town Planning Act, 1954. Under the scheme, the lands of different owners including the land of the appellant-company were treated as included in a common pool and the various improvements such as laying roads and making provision for drainage were effected for the better enjoyment of the lands under the scheme. Because of such improvements, the owner got betterment of the land and the value of the land increased. Such improvements also resulted in providing better facilities for carrying on the business of the appellant. The question was whether the betterment charges required to be paid by the appellant were revenue expenditure deductible in computing the profits of the appellant. The Appellate Tribunal and the High Court, on a reference, held that the betterment charges were capital expenditure and were not deductible. On appeal, while affirming the decision of the High Court, the Supreme Court has held that since the payment had no direct nexus with the day to day running of the business and, as a result of the payment of the betterment charges, the value of the appellant's land had increased, the betterment charges were capital expenditure. It has been further held that in deciding whether an expenditure is capital or revenue in nature, the question of the payment being voluntary or involuntary is immaterial and merely because the improvements had also resulted in providing better facilities for carrying on the business of the appellant, the betterment charges did not become revenue expenditure.
25. In view of the abovereferred two decisions it becomes clear that the payment of betterment charges has no direct nexus with the day to day running of the business and the payment of betterment charges is a capital expenditure.
26. In the case of India Cements Ltd. : [1966]60ITR52(SC) the appellant had obtained a loan of Rs. 40 lakhs from the Industrial Finance Corporation secured by a charge on its fixed assets. In connection therewith, it spent a sum of Rs. 84,633 towards stamp duty, registration fees, lawyer's fees, etc., and claimed the said amount as business expenditure. While allowing the claim made by the appellant-company, the Supreme Court has held that the amount of Rs. 84,633 spent by the appellant-company was not in the nature of capital expenditure and was laid out or expended wholly and exclusively for the purpose of the assessee's business and was, therefore, allowable as deduction under section 10(2) (xv) of the Indian Income-tax Act, 1922. The Supreme Court has further observed that the act of borrowing money was incidental to the carrying on of a business and the loan obtained was not an asset or an advantage of enduring nature and, therefore, the expenditure having been made for securing the use of money for a certain period, it was allowable as a deduction.
27. The payment of betterment charges under the provisions of the Bombay Town Planning Act, 1954, cannot be equated with obtaining a loan by the assessee and, therefore, in our view, the principles laid down by the Supreme Court in the case of India Cements Ltd. : [1966]60ITR52(SC) are not applicable to the facts of the present case.
28. It is well-settled that expenditure takes colour from the thing on which the expenditure is made. The payment of interest is on annual instalments of betterment charges. As noted above, the Supreme Court as well as this court have taken the view that the payment of betterment charges is capital expenditure. Therefore, payment of interest on annual instalments of the betterment charges will have to be regarded as capital expenditure. Under section 74 of the Bombay Town Planning Act, 1954, the owner had an option to pay the amount of betterment charges in one sum or in annual instalments not exceeding ten. If the assessee had made payment of betterment charges in one sum, the same could not have been allowed as a deduction in computing the taxable profits of the assessee company. So also, the claim for payment of interest on the instalments of betterment charges which is part and parcel of the net amount payable in view of the provisions of section 66 read with section 74(1) of the Bombay Town Planning Act, 1954, is much lower than the market rate of interest and, therefore, the payment of interest by the assessee on the instalments of betterment charges was an election made out of commercial expediency and, therefore, the said payment should be treated as an allowable deduction, has no substance. There is nothing on the record of the case to suggest that the assessee-company had elected to make payment of the betterment charges in instalments because it was short of funds or that because of shortage of funds if the loan had been raised for the purposes of making payment of betterment charges, it would have been required to pay more interest. The payment of betterment charges cannot be said to have been made out of commercial expediency because it has no direct nexus with the day-to-day running of the business of the assessee. So also, the payment of interest on the instalments of betterment charges cannot be treated as revenue expenditure because it has no direct nexus with the day-to-day running of the business of the assessee.
29. As observed earlier, the payment of interest on the instalments of betterment charges forms part of the net amount payable by the owner under the provisions of the Bombay Town Planning Act, 1954, and, therefore, the payment of interest on the instalments of betterment charges was not out of business consideration. In our view, therefore, the Tribunal committed an error in treating the payment of a sum of Rs. 7,005 as interest on the instalments of the betterment charges to the Ahmedabad Municipal Corporation as an allowable deduction in computing the taxable profits of the assessee-company. Question No. 1 referred to us is answered in the negative, i.e., in favour of the Revenue and against the assessee.
30. Order accordingly.