TMI Blog1989 (9) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... cted the main road with the company's mining area situated in village named 'Nagarsatavdi'. The Income-tax Officer observed that there was no motorable road linking the main road with the mining area of the assessee-company and that this road was constructed by the assesseecompany for the first time by incurring a huge expenditure. According to the Income-tax Officer, this was a benefit of enduring nature coming to the assessee and he, therefore, treated it as capital expenditure and did not allow the deduction. Before the Appellate Assistant Commissioner, it was contended that the expenditure had been incurred for more efficient running of the business of the assessee. It was further stated that the land on which the road had been constructed did not belong to the assessee and it was further stated that earlier there was a katcha road which was much longer and that road was replaced by a shorter motorable road. The assessee relied on the decision of the Calcutta High Court in the case of CIT v. Hindusthan Motors Ltd. [1968] 68 ITR 301. The Appellate Assistant Commissioner found that, prior to the construction of this new road, the company was carrying bauxite and stones using a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , viz, that, merely because the expenditure was incurred in connection with the business of the assessee or for the purpose of business of the assessee or was incidental to the business of the assessee, it will not make the expenditure a revenue expenditure. An expenditure for the purpose of business or incidental to the business may also be of capital nature. In the celebrated case of British Insulated and Helsby Cables Ltd. v. Atherton [1925] 10 TC 155 (HL), Lord Cave addressed himself first to the question whether the expenditure was for the purpose of business. Having held that the expenditure was incurred for the purpose of business, he examined the question whether the expenditure was of capital or revenue nature. Lord Cave came to the conclusion that, even though the expenditure was for the purpose of business, it had been " 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 ". From this he came to the conclusion that the expenditure in question in that case was of capital nature. Section 37(1) of the Act provides : "General. - (1) Any expenditure (not being expenditure of the nature des ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Although it is a vexed question whether an expenditure falls in the category of capital or revenue, certain tests have been evolved for the purpose of determining the character of the expenditure. Lord Radcliffe, in the case of Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 ; [1964] AC 948 (PC), held that the cost of creating, acquiring or enlarging the permanent structure of which income was to be the fruit will be of capital nature. What has happened in this case is that the assessee has acquired a lease of thirty years' duration on a piece of land and has constructed a road thereon thereby facilitating movement of its goods from his mines. The assessee had brought into existence a tangible asset which will endure for at least thirty years. If the test of Lord Radcliffe is applied, this must be treated as an expenditure incurred for creating or enlarging the profit earning structure of the assessee-company. There may be difficulty in deciding whether an expenditure incurred in connection with a purely commercial contract is of capital or revenue nature. But, if a tangible asset has been brought into existence, then, unless the asset is of w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ike his balance of profits and gains without taking into account the annual wasting or diminution of value of that asset. But, if his expenditure in acquiring it has to be regarded as capital expenditure, he cannot do that for income-tax purposes. When one is dealing with tangible assets, it is generally not very difficult to reach a decision . . ." And in Ounsworth (Surveyor of Taxes) v. Vickers Ltd. [1915] 3 KB 267, Rowlatt J., held that the expenses of making what was in effect new means of access was capital expenditure. If this test of Lord Reid is applied in the instant case, it will be seen that a tangible asset has come into existence. It is well-settled that an asset, to be of enduring benefit to the assessee, does not have to be permanent. In the instant case, the lease is of thirty years' duration. The road presumably will have a similar life span. As a result of incurring the expenditure, the assessee had acquired an asset of enduring benefit. Rowlatt J., in the case of Ounsworth [1915] 3 KB 267, laid down that, if what was created was in effect a new means of access, the expenditure must be held to be capital expenditure. Another test propounded by Lord Reid wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot change the character of the capital asset. The nature of the thing that is acquired as a result of the expenditure is a capital asset. The manner in which the capital asset is employed or utilised will not change its character. Lord Upjohn observed (at page 52) : " How, then, is this problem to be solved ? My Lords, there is one matter upon which counsel on both sides are agreed : that it is the duty of the court to consider every relevant fact, giving it its due weight, and then to reach a conclusion upon the whole matter. I cannot but recall the observation of Sir Wilfrid Greene M. R. in Commissioners of Inland Revenue v. British Salmson Aero Engines Ltd. [1938] 2 KB 482, at page 498, where he said : `There have been many cases which fall on the borderline., Indeed, in many cases it is almost true to say that the spin of a coin would decide the matter almost as satisfactorily as an attempt to find reasons '. Somewhat cynical, but true. It is a question of fact and degree and above all judicial common sense in all the circumstances of the case and while no one regrets it more than 1, I do not believe it is possible to lay down any principle, when dealing with trading co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bed time limit to construct two lengths of roadway, one of a permanent nature running from the company's premises to the proposed ring road and another of a temporary nature ; (c) on completion of the permanent road it was to be maintained by the Lincoln Corporation to the same standards as if it were a highway. The temporary road was to be eventually merged in the proposed new ring road. The question was whether the expenditure incurred on construction of the new permanent road was revenue expenditure or capital expenditure. It was held by Megarry J. that by incurring the expenditure the company had acquired an easy access and a new road, an asset with enduring qualities, intended to be used indefinitely in the manner of a fixed asset of a capital nature, as appurtenant to the existing fixed asset consisting of the warehouses. The expenditure was clearly incurred on capital account. In Pitt's case [1974] 49 TC 638 (Ch D), it was argued on behalf of the company that the company had acted to preserve its good name. The people of the locality were complaining about the noise created by the lorries. It was further argued that what the company had obtained was no better than it had f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se before Megarry J., the assessee's case was stronger. The company had given up a piece of land and existing access to the highway for another portion of the land on which a new road was constructed. In the instant case, the company has given up nothing. The existing access was longer by 6.5 kms. The company had decided to shorten the distance to its mines from the highway by erecting a feeder road which was of permanent nature and which was built for facilitating the access to the mines. A leasehold land was acquired for this purpose. A new road was constructed. The lease had to be surrendered to the Government after thirty years. The expenditure that has been incurred by the company is of a considerable sum of money within the relevant accounting year. That is the nature of the payment. It is not a case of recurring or periodic payment. What has been obtained by the payment is an asset of lasting or enduring quality. A tangible asset has been acquired of at least thirty years' duration. It is well-settled that an asset to be of permanent character need not be perennial. The asset that has been created has a static aspect which points to its capital nature. If the company wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the result may be different in the case of a man who is a property dealer where the property is his stock-in-trade. In such a case, the purchase price paid by a trader for the acquisition of property for the purpose of trade would be of revenue nature. In the case of Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC), a Bench of four judges of the Supreme Court examined the question of business expenditure and capital expenditure. There, after a review of a large number of cases, it was held that consideration paid for acquisition of a leasehold interest in a group of quarries would be of capital nature. It was observed by the Supreme Court that even though it was not a case of lump sum payment and the amount payable was spread over the whole period of a lease, the expenditure had to be treated as capital expenditure. It was observed (at page 47) : ". . . The fact, however, that it was a recurring payment was immaterial, because one had got to look to the nature of the payment which in its turn was determined by the nature of the asset which the company had acquired. . . . " The second point on which there can be no dispute is that if as result of the expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0] 23 TC 597 (KB) that where a sum of money was laid out for acquisition or improvement of a fixed capital asset, it was attributable to capital, but if no alteration was made in the fixed capital asset by the payment, then it was properly attributable to revenue, being in substance a matter of maintenance, the maintenance of the capital structure or the capital asset of the company. In the instant case, a new capital asset has been brought into existence. A thirty years' lease has been taken of a plot of land and a road has been constructed on that land. It is not a case of maintenance of capital or an expenditure incurred for the purpose of merely facilitating the business of the assessee. It is a case of addition to the capital structure of the company. A fixed capital asset of the company has clearly been altered. A new tangible asset has been brought into existence. In the case of Sitalpur Sugar Works Ltd. v. CIT [1963] 49 ITR 160 (SC), at page 164, it was held by the Supreme Court that the cost of shifting of the factory to a new site was capital expenditure. It was held in that case that the expenditure for shifting of the factory to a more advantageous site was not incu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urpose of facilitating the running of its motor vehicles and other means employed for transportation of sugarcane to its factories. Grover J., emphasised (at page 379): " In the present case, apart from the clement of compulsion, the roads which were constructed and developed were not the property of the assessee nor is it the case of the revenue that the entire cost of development of those roads was defrayed by the assessee. It only made certain contributions for road development between the various cane producing centres and the mills. " In the case of Travancore-Cochin Chemicals Ltd. v. CIT [1977] 106 ITR 900, a Bench comprising three judges of the Supreme Court once again examined the question of allowability of money spent on road construction as revenue deduction. In that case, the appellant company was engaged in manufacture of chemicals. The factory was situated in an area which was not served by pucca roads. Along with three other public undertakings, the appellant company approached the Kerala Government for laying a new road to that area. The cost of acquisition of land and 25 per cent. of the cost of construction of the road were borne by the Government. The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Supreme Court held that the contribution of Rs. 22,332 at the request of the Collector towards the construction of a dam and a road had nothing to do with the business of the assessee and was not allowable as business expenditure. The payment had been made only as an act of good citizenship. The Supreme Court, however, held that the amount of Rs. 50,000 was allowable as business expenditure. It was observed by Bhagwati J. (at page 298) : " Now it is clear on the facts of the present case that by spending the amount of Rs. 50,000, the assessee did not acquire any asset of an enduring nature. The roads which were constructed around the factory with the help of the amount of Rs. 50,000 contributed by the assessee belonged to the Government of Uttar Pradesh and not to the assessee. Moreover, it was only a part of the cost of construction of these roads that was contributed by the assessee, since under the sugarcane development scheme, one-third of the cost of construction was to be borne by the Central Government, one-third by the State Government and only the remaining one-third was to be divided between the sugarcane factories and sugarcane growers. These roads were undoubte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermining whether the expenditure should be capital expenditure or revenue expenditure. In the judgment of the Supreme Court in the case of L H. Sugar Factory and Oil Mills (P.) Ltd. [1980] 125 ITR 293, justice Bhagwati emphasised the fact that the road was not a new road. It was not an asset of the assessee. The assessee had not paid the total construction cost of the road but it had made a small contribution towards it. The assessee had not acquired any asset, tangible or otherwise. The profit-making apparatus of the company remained unchanged as a result of this expenditure. That is why the expenditure would be of revenue nature justice Bhagwati was not laying down any new principle of law or departing from the well-known principles for distinguishing a revenue expenditure from a capital expenditure. Relying on these principles, it was held that the expenditure in that case was to be treated as revenue expenditure. It will be seen from the judgment of the Supreme Court in the case of Travancore-Cochin Chemicals Ltd. [1977] 106 ITR 900 that Gupta J., considered that the decision given in the case of Lakshmiji Sugar Mills Co. (P.) Ltd. [1971] 82 ITR 376 (SC) must be confined to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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