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TMI Blog1973 (11) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... e of its cement factories at Shahabad (situate at present in District Gulbarga in the State of Karnataka) ; at the relevant time, however, it was part of the State of Hyderabad. Some time in September, 1956, the Government of Hyderabad had decided to include the area on which the A.C.C. Factory at Shahabad was situate within the municipal limits of the Shahabad Town Municipality. Thereafter, negotiations ensued between the Government of Hyderabad and the assessee-company, and pursuant to these negotiations a tripartite agreement dated 30th October, 1956, was arrived at ; the three parties to the said agreement were the assessee-company, the Government of Hyderabad and the Shahabad Municipality. Under this agreement the assessee-company undertook to supply water to the Shahabad town and village. It further agreed to put up a high tension electric transmission line and to provide 220v. supply for the street-lighting of the town. Finally, it agreed to concrete free of charge the existing main road from the factory up to the railway station via the main bazar. We have been informed during the course of the arguments that for this assessment year (1959-60), we are only concerned with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any would not have to pay municipal taxes for a period of fifteen years. The company, being aggrieved by this order, thereafter, appealed to the Appellate Assistant Commissioner who decided in its favour, taking the view that the amount did not represent either capital expenditure or create an advantage of an enduring nature, but that it was a payment of a composite sum of revenue outgoings for the following fifteen years. The income-tax department thereafter appealed to the Income-tax Appellate Tribunal. Before the Income-tax Appellate Tribunal it was contended on behalf of the department that all that the assessee obtained was an enduring advantage in the shape of freedom from any obligation to the municipality or the village panchayat for a period of fifteen years. It was further urged that the expenditure could not be said to be a commutation of revenue payments in future. Accordingly, it was submitted that the company was not entitled to a deduction of the said sum of Rs. 2,09,459 under the provision of section 10(2)(xv). On behalf of the assessee-company the same contentions as were urged before the Appellate Assistant Commissioner were urged before the Tribunal. After consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue made the following submissions : (i) that the expenditure was one incurred by the assessee-company for acquiring or bringing into existence the advantage of enduring benefit to the business carried on by the company ; according to him, such enduring benefit need not be of an everlasting character, though it certainly could not be ephemeral or of a transitory nature ; (ii) the advantage which the assessee-company had obtained under the agreement was a concession or exemption from the liability to pay municipal rates and taxes for a period of fifteen years. In the context of the existing facts it was urged that such expenditure cannot be said to be one incurred to get rid of some onerous liability of a business which is chargeable to revenue. According to Mr. Joshi, there was at the time when the expenditure was incurred no existing liability for payment of such rates or taxes, but the expenditure was incurred to ensure that no liability would be imposed in future for a period of fifteen years ; and (iii) the expenditure was one not related to the carrying on of the business and cannot be regarded as an integral part of the profit earning process or operations and, therefore, cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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. " It was observed by Bhagwati J. that Viscount Cave's test had been adopted almost universally in India (see page 43 of the report). The Supreme Court went on in Assam Bengal Cement Co.'s case to approve of certain principles enunciated by a Full Bench of the Lahore High Court in Benarsidas Jagannath, In re. In the Lahore case the opinion of the Full Bench had been delivered by Mahajan J. (as he then was). According to the Lahore High Court, some broad principles can be deduced from what the learned judges had laid down from time to time and that these broad principles were as follows : (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Cave L.C. in Atherton's case came to be considered by the House of Lords in Regent Oil Co. Ltd. v. Strick (Inspector of Taxes). According to Lord Reid, Viscount Cave was dealing with a case where the payment was made literally once and for all and where the asset or advantage was to last as long as the company lasted. According to Lord Reid, Viscount Cave did not have in mind an advantage of a limited duration (see pages 323 and 324 of the report). Lord Reid further considered the question of what kind of asset or advantage Lord Cave's words would cover. According to him : " Broadly it seems to have been accepted that they will not extend to cover a payment to get rid of a handicap or disadvantage." Thus a view seems to have been taken that a payment made to remove the possibility of a recurring disadvantage ought not to be considered as a payment made to acquire an enduring advantage ; and this seems to be the principal basis of a decision on which reliance has been placed by the Tribunal, viz., B. W. Noble Ltd. v. Mitchell. In that case the assessee-company had claimed as a deduction from its profits for income-tax purposes the sum of pound 19,200 payable (by instalments) to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f continuance for fifteen years of the conditions of working which existed before the idea of the extension of the municipal jurisdiction was mooted, and these conditions included freedom from taxes and freedom from regulations. It does not appear to have been disputed that if the factory and other areas of the company had been brought within the jurisdiction of the Shahabad Municipality, such regulations and taxation would almost certainly have followed. It may be mentioned at this juncture that, according to the company, it would have been required annually to pay municipal rates and duties of about Rs. 1,23,000 so that in a period of fifteen years the revenue outgoings would have been about Rs. 18,00,000. The principle applied by the Court of Appeal in B. W. Noble's case appears to have been referred to and approved by the Supreme Court in Commissioner of Income-tax v. Ashok Leyland Ltd. In that case the assessee-company had in 1948 appointed C. B. Ltd. as its managing agents for a period of fourteen years. By an agreement dated 29th January, 1955, it terminated the managing agency on payment of Rs. 2,50,000. It claimed deduction of that amount in computing its profits as a rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Bhor Durbar) was incurred ". Now, a fair reading would indicate that what has been emphasized is the fact that the agreement between the company and the Bhor Durbar had been entered into not after the business of the company had commenced but before it had commenced and it was entered into with a view to start a business. Hence, it could not be said to be expenditure incurred for running the business. This would be made clear from a perusal of the observations at page 400 of the report where the various cases relied on by counsel, who appeared for the assessee-company, have been distinguished on the ground that in all those cases the expenditure was incurred while the business was a running concern. Such, however, was not the case before the Division Bench in the Bhor Industries' case. According to the Division Bench, the liabilities in respect of which deduction was claimed were undertaken before the business had started ; they had been undertaken not for the running of the business but for the purpose of securing certain advantages to the business or a set of favourable circumstances in order to launch the business and, therefore, could not be considered as revenue expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose of running the business or working it with a view to produce profits, it must be held to be revenue expenditure. It has, however, been laid down by the Supreme Court in the case of Commissioner of Income-tax v. Coal Shipments P. Ltd., that the term " enduring " is, in that context, only a relative term and is not synonymous with perpetual or everlasting (at page 909). In the statement of the case before us, it has been stated that, some time in September, 1956, the then Government of Hyderabad had decided to include the area on which the assessee-company's factory was situate within the limits of Shahabad Town Municipality. In my opinion, in the present case, the sum of Rs. 2,09,459 was, under those circumstances, spent by the company to put off for a period of fifteen years the imminent possibility of the recurring disadvantages and taxes to which the company would be subject if the area on which its Shahabad factory was located was included within the municipal limits. In that connection, it must be borne in mind that after the expiration of the period of the agreement it was inevitable that the area would be included within the municipal limits and the assessee-compan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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