TMI Blog1973 (11) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... ew facts may be stated : The assessee is the Associated Cement Companies Ltd. owning a chain of factories all over the country manufacturing cement. The assessment year in question is the year 1959-60 and the corresponding previous year is the year ended on 31st July, 1958. The assessee-company has one 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment and this was claimed as a deduction from its profits finder section 10. The Income-tax Officer disallowed this amount, holding that it was a capital expenditure on the basis that as a result of this expenditure the company derived an advantage of an enduring nature, the advantage being that the company 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. Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kolah had stated ; but according to his submission, the entire sum of Rs. 2,09,459 could not have been allowed as a deduction under section 10(2)(xv) and it made no difference whether such expenditure had resulted in an increase in the assets of the assessee-company or not. Mr. Joshi on behalf of the revenue 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Helsby Cables Ltd. laid down what has almost universally been accepted as the test for determining what is capital expenditure as distinguished from revenue expenditure. In the last mentioned case Viscount Cave L.C. observed: " But when an expenditure 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, 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 : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o could not be regarded as conferring an enduring benefit. The relevant observations are to be found at pages 909 and 910 of the report. The Supreme Court in the last mentioned case referred to the decision of the Privy Council in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. The test indicated by Viscount 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 ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, might have caused difficulty to their business and whom it was necessary to deal with and settle with at once. " According to Mr. Kolah, the facts found by the Tribunal are very similar to the facts involved in B. W. Noble's case. It has been observed by the Tribunal that under this agreement the company ensured for itself 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al expenditure. In connection with this head of argument he relied upon the judgment of a Division Bench of our High Court in Bhor Industries Ltd. v. Commissioner of Income-tax. We were referred to the observations at page 399 of the report where it has been stated that " no liability existed when the liability (to pay royalty to the 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 whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of applying any other test would arise. If, as laid down by the learned judge, the aim and object of the expenditure was to acquire or bring into existence an asset or an advantage of enduring benefit to the business, it must be held to be in the nature of capital expenditure. If, on the other hand, the expenditure was made for the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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