TMI Blog1977 (1) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee as cane development expenses, the Income-tax Officer disallowed the amount of Rs. 6,00,000 contributed by the assessee to the State Government for being utilised towards the partial cost of construction of 19 approach roads connecting certain villages to the main roads on the ground that the said outgoing was of a capital nature. The Appellate Assistant Commissioner, while hearing the appeal, disallowed the said sum of Rs. 6,00,000 as revenue expenditure under section 37(1) of the Income-tax Act (hereinafter called " the Act "), but held that the assessee was entitled to the admissible rebate under section 80G of the Act. In the second appeal filed by the assessee before the Appellate Tribunal it reiterated its claim that the outgoing sum of Rs. 6,00,000 should be treated as revenue expenditure whereas the revenue claimed that this claim should be treated as capital expenditure. The plea raised by the revenue was turned down by the Appellate Tribunal on the ground that it had not come up in appeal against the order of the Appellate Assistant Commissioner. The claim made by the assessee was turned down by the Tribunal by concluding that : (i) the sum of Rs. 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d determine the character of the expenditure whether it is a capital expenditure 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 circulating capital it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated. It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down a test which would apply to all situations. One has, therefore, got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the municipal limits for 15 years so that the assessee would not have to pay municipal taxes for that period. During the accounting period, the assessee spent a sum on installing pipelines, etc., which then became the property of the municipal committee and claimed it as business expenditure. The court held that by incurring the said expenditure the assessee had obtained avoidance of certain disadvantages for a limited period and the expenditure was made for the convenient and economical running of the business for a limited period. The amount spent by the company was allowed as a deduction in determining the profits of the assessee for the assessment year. The Bench particularly emphasised the fact that the pipeline installed and other equipment purchased by the assessee came to vest in the municipal committee and did not continue to belong to the assessee. In Commissioner of Income-tax v. Ashok Leyland Ltd. [1972] 86 ITR 549, 554 (SC), the question arose whether, by terminating the services of the managing agents whereby the assessee saved the expenses for a number of years, the expenditure incurred should be regarded as capital expenditure or not. The court observed : " It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as justification on the part of the assessee to expend this amount......." In Ganesh Sugar Mills Ltd. v. Commissioner of Income-tax [1969] 73 ITR 395 (Cal), the assessee claimed deduction of an amount contributed by it to a co-operative society for the development of roads giving access to the factories of the assessee-company as well as other sugar mills of the locality. The roads were constructed by the co-operative society partly on the land owned by the assessee-company but were meant for common use by the cane growers as well as for transport purposes of the factory owners. The court held that the expenditure brought into existence no new assets, i.e., the roads, the use of which would be of an enduring benefit to the assessee's business. It is significant to mention that some of the roads were constructed partly on the land owned by the company and the court distinguished the Hindusthan Motors Ltd.'s case [1968] 68 ITR 301 (Cal) on the ground that in that case a public road was already in existence which the assessee and the members of the general public were entitled to use as a matter of right. In Laxmi Sugar and Oil Mills v. Commissioner of Income-tax [1972] 84 ITR 439 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quisition of land and construction of the road leading to the assessee-factory. The amount contributed by the assessee was held to be capital expenditure. The court distinguished the Hindusthan Motors Ltd.'s case [1968] 68 ITR 301 (Cal) in the following terms : " In that case the assessee, which was manufacturing motor cars, had its factory near Uttarpara. There was an approach road connecting the factory to a main trunk road. On account of lack of repairs for a long period the condition of the road had deteriorated and caused transportation difficulties to the assessee. The Government was not prepared to meet the expenses of the repairs of the road unless the assessee had contributed towards the cost of such repairs. The assessee paid a certain amount being the amount of such repairs to the Government, as a consequence of which the road was repaired. The assessee claimed a deduction of the amount under section 10(2)(xv). The court said that the money was spent not so much to bring about an asset or advantage of enduring benefit to the company but to run the business efficiently and conveniently, and, therefore, it was not a capital expenditure. The distinction between the two c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which would come via kutcha roads and would take more time to reach. Recovery of sugar from fresh sugarcane is always more when it is put to the cane carrier at the earliest possible time. More recovery means more yield of sugar from sugarcane. Therefore, the said expense of Rs. 6 lakhs which has been incurred in the usual course of business for the purpose of business and gain more yield is naturally an expense which should be allowed under the provisions of the Income-tax Act, 1961. Further, it may also be brought to your kind notice that the roads do not belong to us and we are not the owners. The enduring benefits, if at all, go to the owners of the roads, i.e., the State Government. " Along with this letter the assessee filed a statement showing the supply of sugarcane to it from the various villages, which were connected with the main road. The Appellate Tribunal noticed that the assessee's mill was approachable by a kutcha road and the only vehicle which could pass through this kutcha road to bring sugarcane was the bullock-cart and observed : "........... And the assessee had also placed before us details to indicate and establish that before the contribution of Rs. 6 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... early distinguishable. In Dewan Sugar and General Mills Pvt. Ltd. v. Commissioner of Income-tax [1970] 77 ITR 572 (All), the contribution made by the assessee, a sugar mill, to the Cane Centre Roads Development Fund was held to be capital expenditure not for repairing old roads but for constructing new roads. In H. R. Sugar Factory (P.) Ltd. v. Commissioner of Income-tax [1970] 77 ITR 614 (All) the court merely assumed that the kutcha roads converted into pucca roads were likely to be a permanent benefit to the assessee without going into the question whether such a conversion fell within the meaning of the word " repair " or not. Lakshmi Sugar and Oil Mills Ltd. v. Commissioner of Income-tax [1970] 77 ITR 690 (All) was decided on the basis of Dewan Sugar Mills' case [1970] 77 ITR 572 (All), and in that case also contribution was made to the Cane Centre Roads Development Fund, which appears to be concerned with the construction of new roads. For the reasons given above, we answer the above-mentioned question in favour of the assessee and against the revenue. We further order that the revenue should pay the costs of the assessee, which are assessed at Rs. 250. - - TaxTMI - TMIT ..... X X X X Extracts X X X X X X X X Extracts X X X X
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