TMI Blog1996 (3) TMI 89X X X X Extracts X X X X X X X X Extracts X X X X ..... the employees for the purchase of plots and to build houses on the same. Such advances were repayable in monthly instalments. The sale deed in respect of the property allotted to each employee was executed by the owner of the property, namely, Chinnappa Gounder, in favour of each of the employees. The assessee-company made arrangements for laying roads, constructing water tanks and pumps, drainage, digging wells and such other work in the lands left after allotment to the employees who had constructed buildings in the lands allotted to and purchased by them. It is also a fact that the lands in which roads were laid, water tanks and pump sets constructed, drainage, digging wells and such other works done was transferred by the said Chinnappa Gounder to the Puthusseri Panchayat, For laying down the roads, etc., in the said land, the assessee-company had incurred an expenditure of Rs. 48,524 during the accounting year ended March 31, 1973, and debited the said expenditure to the "workmen and staff welfare expenses" account. For the assessment year 1973-74, the assessee-company filed the return declaring an income of Rs. 26,89,891 and, inter alia, claimed deduction of a sum of Rs. 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision by this court in R. A. No. 109/(Coch) of 1977-78 : " Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that Rs. 40,388 was towards staff welfare expenses and allowing the same as a deduction in computing the income of the year ? " The High Court, by judgment dated December 7, 1979, in I. T. R. No. 159 of 1977, declined to answer the question. While doing so, this court observed that the Tribunal has not approached the consideration of the question from the correct perspective, that there was no discussion by the Tribunal as to whether the expenses were of a capital nature or were of a revenue nature. Its conclusion was that the expenditure should be viewed as staff welfare expenditure in which the assessee had no interest. This court further observed that if the expenditure was not to be considered as a capital expenditure, the Tribunal should address itself to the next question whether the expenditure was incurred wholly and exclusively for the purpose of the business under section 37 of the Income-tax Act, 1961. The Tribunal was directed to consider the matter afresh in the light of the said observations. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of earning profits" and the further observation that it will include expenditure in respect of acts incidental to the carrying on of business the Tribunal held that the expenditure in question had been incurred by the assessee wholly and exclusively for the purposes of its business and that it is an allowable deduction. It is against these findings of the Income-tax Appellate Tribunal in the appellate order that the Department got reference of the question for our answer. As already pointed out earlier, this court in the order of remand, clearly focussed the points to be considered for deciding the said question. The first question, according to this court to be considered, is as to whether the expenses on which the deduction is claimed is of a capital nature or is a revenue expenditure. If it is found that the expenditure is not of a capital nature, this court further observed that the Tribunal should address itself to the next question whether the expenditure was incurred wholly and exclusively for the purpose of the business under section 37 of the Act. For considering the first question, it is necessary to bear in mind the principles governing the determination of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of capital expenditure and if it was part of its circulating capital it would be of the nature of revenue expenditure. " We had also occasion to consider the said question in our judgment in I. T. R. Nos. 2 to 5 of 1991 (CIT v. Polyformalin (P.) Ltd. [1996] 221 ITR 276). In those cases also, we had considered the principles laid down by the Supreme Court in the abovementioned decisions and directed the Income-tax Appellate Tribunal to consider the question involved therein in the light of the principles discussed in our judgment. Now, coming to the order passed by the Income-tax Appellate Tribunal after remand by this court, we find that the Appellate Tribunal had posed the first question as to whether the expenditure incurred by the assessee in the construction of roads, digging of wells and laying pipe lines was of capital expenditure in paragraph 5 of the order and adverted to the respective contentions of the Department and the assessee in paragraph 6 of the said order. As could be seen from the contentions raised by the Departmental representative before the Tribunal, the contention that the expenditure incurred was of a capital nature is made only on the assum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, it cannot be said that wells dug by it, water tanks put up, pump sets and pipelines laid by it and the roads constructed by it belonged to it. As already stated, they have been constructed on the land which has been handed over to Pudussery Panchayat. Therefore, it cannot be said that these works belong to the assessee and hence are its assets." It can be seen from the above discussion by the Tribunal that the only contention of the Department was that the expenditure in question had resulted in the acquisition of certain assets of an enduring character and, therefore, a capital expenditure. It is clear that the Appellate Tribunal had borne in mind the test laid down by the Supreme Court in deciding the question as to whether a particular expenditure is of a capital or revenue nature and that it had rightly come to the conclusion that since the assets brought into existence did not belong to the assessee, there is no question of bringing into existence any asset of an enduring nature. In other words, in order to satisfy the test laid down by the Supreme Court to determine the question as to whether a particular expenditure is an expenditure of a capital nature, it h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the High Court, on reference, held that the appellant obtained an enduring advantage by the construction of the road and, therefore, the amount contributed was capital expenditure. The Supreme Court affirmed the said decision on the facts, that by having the new road constructed for the improvement of its transport facilities, the assessee acquired an enduring advantage for its business and the expenditure incurred by the assessee is of a capital nature. Here, in the instant case, the Department had no case that by the construction of the roads, pipelines, etc., for the benefit of the employees the assessee acquired an enduring advantage for its business nor is there any material to show that, by this, the assessee had obtained any enduring advantage for its business. Thus the decision of the Supreme Court cannot have any application to the facts of the present case. The said decision is distinguishable. In the above circumstances, we are of the view that unless the very asset which has been brought into existence did belong to the assessee, it cannot be said that the assessee acquired an enduring advantage for its business. Regarding the second question to be considered as to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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