PETITIONER:
TRAVANCORE COCHIN CHEMICALS LIMITED
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX, KERALA
DATE OF JUDGMENT21/01/1977
BENCH:
GUPTA, A.C.
KHANNA, HANS RAJ
SARKARIA, RANJIT SINGH
CITATION:
1977 AIR 991 1977 SCR (2) 715
1977 SCC (2) 20
ACT
The Income-Tax Act, 1961, s. 37(1), whether construction
of road a permissible deduction under.
HEADNOTE
The appellant assessee is a public limited company who
spent Rs.26,100/- for the construction of a new road for
improving transport facilities in the area where its factory
is located and sought to deduct this amount from its total
income claiming this as revenue expenditure for the year.
The claim was disallowed by the Income-tax Officer and the
Appellate Assistant Commissioner. The Appellate Tribunal
held that the amount could be deducted as revenue expendi-
ture but at the instance of the respondent referred the
matter to the High Court under s. 256(1) of the Income Tax
Act, 1961, where it was decided against the appellant.
Dismissing the appeal, the Court,
HELD: The line of demarcation between capital expendi-
ture and revenue expenditure has been found to be very thin.
According to the test suggested in Atherton’s case by Vis-
count Cave, L.C. by having the new road constructed for the
improvement of transport facilities, the assessee acquired
an enduring advantage for its business. The expenditure
incurred was, therefore of a capital nature. 1716 F. 717
F-II & 718 D]
Atherton v. British Insulated and Helsby Cables Ltd.
[1925] 10 Tax Cases 155: Assam Bengal Cement Co. Ltd. v.
Commissioner of Income Tax, West Bengal [1955] 27 ITR 34 and
Sitalpur Sugar Works Ltd. v. Commissioner of Income Tax.
Bihar and Orissa [1963] 49 ITR 160, applied.
Commissioner of Income-tax v. Hindustan Motors Ltd.
[1968] 68 ITR 301 and Lakshmiji Sugar Mills Co. (P) Ltd. v.
Commissioner of Income-tax, New Delhi [1971] 82 ITR 376,
distinguished.
JUDGMENT
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 265 of 1972.
From the Judgment and Order dated the 24th August, 1971
of the Kerala High Court in I.T.R.No. 25 of 1969.
G.B. Pai, K.J. John for M/s Dadabhanji & Co., for the Appel-
lant. B.B. ,Ahuja and R.N. Sachthey for Respondent.
The Judgment of the Court was delivered by
GUPTA, J.--The question for decision in this case is
whether the money contributed by the assessee, public limit-
ed company, for the construction of a new road in the area
where its factory is located to improve transport facilities
is capital expenditure or revenue expenditure. The assess-
ment year in question is 1964˜65, the relevant accounting
period being the financial year ended March 31, 1964. The
assessee company is engaged in the manufacture of chemicals;
it had been receiving and despatching materials required for
and produced in its factory through lorries. The assessee
along with three,
716
other public undertaking approached the Government of Kerala
for laying a new road from kalamasseri to Udyogamanndal;
this area where the assessee’s factory is situate was not
at the material tune served by pucca roads. It was agreed
that the Government of Kerala would bear the cost of the
acquisition of the land and 25 per cent of the cost of
construction. The total cost to be shared by the four
companies was Rs. 1,04,550/- and the assessee’s share came
to Rs. 26,100/-. The assessee company sought to deduct
this amount from its total income c/aiming this as revenue
expenditure for the year in question. The Income-tax
Officer disallowed the claim holding that the assessee’s
contribution was capital expenditure. The Appellate As-
sistant Commissioner took the same view. The Appellate
Tribunal, mainly relying on the decision of the Calcutta
High Court in Commissioner of Income-tax v. Hindustan
Motors Limited,(1) held that the assessee was entitled to
deduct the amount as revenue expenditure. At the instance
of the Commissioner of Income-tax, Kerala, Ernakulam, the
Tribunal referred the following question to the High Court
of Kerala under section 256(1) of the Income-Tax Act,1961:
"Whether, on the facts and in the circum-
stances of the case, the Appellate Tribunal
was legally justified in allowing the expendi-
ture of Rs. 26,100/- being the respondent’s
contribution to government for constructing a
road as a permissible deduction under section
37(1) 0f the Income-Tax Act, 1961."
The High Court held that the assessee in this case ob-
tained an advantage of an enduring nature by the construc-
tion of the road and, therefore, the amount contributed was
capital expenditure. The High Court accordingly answered
the question in negative and against the assessee. In this
appeal, brought on a certificate under section 261 of the
Income-Tax Act, 1961, the assessee challenges the correct-
ness of the answer given by the High Court to the question.
The authorities both in this country and in England have
pointed out the difficulties in formulating precise rules
for distinguishing capital expenditure from revenue expendi-
ture. The line of demarcation has been found to be very
thin. Certain broad tests have however been laid down, and
of them the test suggested by viscount Cave, L. C., in
Atherton v. British Insulated and Helsby Cables Limited(2)
appears to have been largely accepted in this country. This
Court in Assam Bengal Cement Company Limited v. Commis-
sioner of Income-tax, West Begnal(3); Sitalpur Sugar Works
Limited v. Commissioner of Income-tax, Bihar and Orissa(’)
and a number of other decisions has adopted the test as laid
down in Atherton’s case: to refer again to these often
quoted lines from Viscount Cave’s Judgment "when an expendi-
ture is made, .......... with a view to bringing into
existence an asset or an advantage for the enduring benefit
of a
(1) (1968) 68 I.T.R. 301.
(2) (1925) 10 Tax Cases 155.
(3) (1955) 27 I.T.R. 34.
(4) (1963) 49 I.T.R. 160
717
trade, I think that there is very good reason (in the ab-
sence of special circumstances leading to an opposite con-
clusion) for treating such an expenditure as properly at-
tributable not to revenue but to capital". Referring to
Atherton’s case and certain other authorities on the dis-
tinction between capital expenditure and revenue expenditure
and the tests to be applied, this Court in Assam Bengal
Cement Company Limited v. Commissioner of Income-tax(1)
observed:
"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 of
the income of the concern or whether tire
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 ex-
penditure 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 circu-
lating capital it would be of the nature of
revenue expenditure."
In the case before us, the High Court applied viscount
Cave’s test and found that the expenditure made by the
assessee brought into existence an advantage for the endur-
ing benefit of the assessee’s trade and accordingly held
that this was capital expenditure.
Each case turns on its own facts. It is not disputed
here that the correct test has been applied. Did the money
spent by the assessee on construction of the new road secure
for it an enduring benefit, or was it necessary for running
its business? On the facts of the case the position seems to
be clear enough not to merit an elaborate consideration,
that by having the new road constructed for the improvement
of transport facilities, the assessee acquired an enduring
advantage for its business. The High Court rightly pointed
out that the decision of the Calcutta High Court in Commis-
sioner of Income-tax v. Hindustan Motors Ltd.(2) 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
(1) (1955) 27 I.TR 34.
(2) (1968)68 I.T.R. 301.
718
business. Mr. Pai, learned counsel for the appellant, has
relied on the decision of this CoUrt in Lakshmiji Sugar
Mills Company Private Limited v. Commissioner of Income-tax,
New Delhi(1), to contend that even the expenditure on the
construction of roads could be revenue expenditure and not
expenditure of a capital nature. In Lakshmiji Sugar Mills
case the assessee was a private limited company carrying on
the business of manufacture and sale of sugar. Under the
provisions of the U.P. Sugarcane Regulation of Supply and
Purchase Act, 1953, the assessee company was obliged to
contribute certain amounts for the development of roads
which were originally the property of the government and
remained so even after the improvement had been made.
Apart from the fact that in this case the expenditure
incurred was under a statutory compulsion, there was no
finding that the roads were newly made. On the facts of that
case this Court was satisfied that the development of the
roads was meant for facilitating the carrying on of the
assessee’s business. Lakshmiji Sugar Mills(1) case is quite
different on facts from the one before us and must be con-
fined to the peculiar facts of that case. On the facts of
the instant case, we have no doubt that the expenditure
incurred by the assessee was of a capital nature. The appeal
accordingly fails and is dismissed but in the circumstances
of the case without any order as to costs.
M.R.
Appeal dismissed
(1971) 82 I.T.R. 376,
719