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PETITIONER: ARVIND MILLS LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, GUJARAT

DATE OF JUDGMENT21/07/1992

BENCH: RAY, G.N. (J) BENCH: RAY, G.N. (J) MOHAN, S. (J)

CITATION:  1993 AIR  103            1992 SCR  (3) 557  1992 SCC  (3) 535        JT 1992 (4)   330  1992 SCALE  (2)48

ACT:      Income Tax Act, 1961 : Section 37.      Business  expenditure-Capital or  Revenue  expenditure- Test  to determine-Expenditure must have direct  nexus  with day  to  day running of business-Question  of  voluntary  or involuntary   payment   is  not   relevant-Contribution   of betterment charges made by the assessee towards the cost  of Town  Planning  Scheme under the Bombay Town  Planning  Act, 1954-Expenditure held capital in nature-Not deductible  from the income of the assessee.

HEADNOTE:      Under  the  Bombay Town Planning Scheme  the  lands  of different  owners within the Scheme are treated in a  common pool  and various improvements are effected for  the  better enjoyment   of  the  lands  in  question.  Since   by   such improvements  the  value of the land  increases  the  person getting  advantage  of  enhancement  of  value  of  land  in question is required to pay betterment fee under the  Bombay Town Planning Act, 1954.      The appellant-Company made payments towards  betterment charges in ten instalments and claimed deduction of the said payment on the ground that it was a revenue expenditure. The Income  Tax Officer disallowed the claim for  deduction.  On appeal,   the  Appellate  Assistant   Commissioner   allowed deduction of the amount of only one installment paid by  the assessee  for the year of assessment. The Company  preferred an appeal before the Income Tax Tribunal which held that the betterment charge was not revenue expenditure and  therefore no deduction was allowable. On a reference to the High Court of  Gujarat  on  the  question  whether  the  Tribunal   was justified  in disallowing the betterment charges,  the  High Court decided against the Assessee-Company.      In  appeal to this Court it was contended on behalf  of the  appellant-Company  that  because  of  the   improvement effected  under the Town Planning Scheme the running of  the business of the Assessee-Company got                                                        558     improved and thus the betterment fee required to be paid under the scheme had a direct nexus with the running of  the business   of  assessee.  Hence,  such  betterment    charge

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particularly   in   the  context  that  such   payment   was involuntary  and  was in the nature of  compulsory  exaction from the assessee should be held to be a revenue expenditure made for better running of the business.      On  behalf of the revenue it was contended  that  there must be a direct connection with the business activities and the  expenditure  made  and a  remote  connection  with  the business  activities  is  not relevant for  the  purpose  of treating the expenditure as revenue expenditure.      Dismissing the appeal, this Court      HELD 1. In deciding whether an expenditure is a capital expenditure  or  a  revenue  expenditure  the  question   of voluntary and/or involuntary payment becomes immaterial.  It is  the nature of expendure that determines the  issue.  The capital expenditure incurred in connection with the business activities ultimately results in efficiently carrying on the business  and  by that process gives aid in running  of  the day-to-day  business  more efficiently but  simply  on  that score,  the capital  expenditure does not become  a  revenue expenditure. [566A, 565-H]      2. Under the Bombay Town Planning Scheme, the lands  of different  owners  including the land of the  assessee  were treated  as  if  included  in  a  common  pool  and  various improvements have been effected for the better enjoyment  of the  lands under the scheme. For such improvement by way  of laying down roads, making provision for drainage etc.  under the scheme, the owner got the advantage of betterment of the land  in question and there is no manner of doubt  that  the valuation   of  the  land  had  increased  because  of   the improvements  effected on the land. Simply because  by  such improvement  it  has  also  resulted  in   providing  better facilities  for carrying out the business of  the  assessee, the  betterment charge required to be paid by the  assessee, does not become the revenue expenditure. Such payment has no direct  nexus with the day-to-day running of  the  business. [565E-G]      3.  The  High Court rightly held  that  the  betterment charge  on account of increase in the valuation of the  land of the assessee should not be held as a revenue  expenditure although general improvement of the area may have an  impact on better running of the business. [566-F]                                                        559      Mohanlal  Har Govind of Jubbulpore v.  Commissioner  of Income Tax, C.P. & Berar, Nagpur, (1949) 17 I.T.R. p.473 and L.H. Sugar Factory and Oil Mills (P) Ltd. v. Commissioner of Income Tax U.P., (1980) 125 I.T.R. p.293, distinguished.      Dollar Company v. Commissioner of Income Tax,(1986) 161 I.T.R.p. 455 and State of Gujarat v. Shantilal Mangaldas and Ors.,[1969] 3 S.C.R. 341, referred to.      Additional Commissioner of Income Tax, Gujarat v. Rohit Mills Ltd., (1976) 104 I.T.R. p.132, approved.

JUDGMENT:      CIVIL  APPEALLATE JURISDICTION : Civil Appeal No.  1836 (NT) of 1977.      From  the Judgment and Order dated 9th/10.3.77  of  the Gujarat High Court in Income Tax Reference No. 197 of 1976.      H.N. Salve, P.H. Parekh and U.Sagar for the Appellant.      B.B.  Ahuja, Manoj Arora and Ms. A. Subhashini for  the Respondent.      The Judgment of the Court was delivered by      G.N.RAY,  J.  This appeal arises out of  a  Certificate granted  by the High Court of Gujarat against  its  Judgment

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dated 9/10th March, 1977 in Income Tax Reference No. 197  of 1976.   The  appellant-Arvind  Mills  Ltd.  is   a   Company incorporated under Companies Act and running a textile mill. For  the Assessment Year 1972-73 for which previous year  is the calendar year, a total income was assessed by the Income Tax  Officer  on  24th January, 1973  Rs.  1,30,92,040.  The appellant  claimed  a  deduction of  Rs.2,02,907  being  the contribution  made by the assessee towards to cost  of  Town Planning Scheme under Section 66 of the Bombay Town Planning Act,  1954. The aforesaid payment made by the  assessee  was described  as  betterment charges. The  Income  Tax  Officer disallowed  the claim for deduction by his Order dated  25th January, 1974. The appellant preferred an appeal before  the Appellate  Assistant Commissioner. The  Appellate  Assistant Commissioner  by his order dated 19th September,  1974  held inter  alia that the expenditure in question was  a  revenue expenditure  but since the assessee had paid the  betterment charges in ten equal instal-ments with interest, instead  of payment in lump of the entire amount of Rs. 2,02,907,                                                        560 a  sum of Rs. 14,434 only since paid by the assessee by  way of  instalment in the year of assessment should be  deducted from  income. The contention of the assessee that since  the method  of  accounting of the assessee was  mercantile,  the entire amount of Rs. 2,02,907 should be deducted and not the yearly  instalment  of  Rs. 14,434, was  not  accepted.  The assessee  thereafter  preferred a Cross Appeal  against  the order  of  the Appellate Assistant Commissioner  before  the Income  Tax  Tribunal  in I.T.A. No.  133  (AHD)/74-75.  The Tribunal held inter alia that the betterment charge was  not revenue  expenditure. Hence no deduction on account  of  the betterment  charge was allowable. The Tribunal, however  did not interfere with the deduction of Rs. 14,434 since allowed by the Appellate Assistant Commissioner.      At the instance of the assessee, the following question of  law  was referred by the Tribunal to the High  Court  of Gujarat :          "whether  on  the facts and  circumstances  of  the          case, the Tribunal was justified in disallowing the          betterment charges".      By  the  impugned judgment the High  Court  of  Gujarat relying  on the decision of the said High Court in the  case Additional  Commissioner  of Income Tax,  Gujarat  v.  Rohit Mills Ltd., reported in, (1976) 104 I.T.R.p.132 decided  the question  against  the  appellant-assessee but  on  an  oral application,  the  High Court granted a Certificate  to  the Appellate under Section 261 of the Income Tax Act, 1961.      Mr. Salve, learned counsel appearing for the appellant- assessee  has contended that the betterment  charge  payable under the Bombay Town Planning Act was a compulsory  payment and the   decision to effect improvement on the lands within the Town Planning Scheme did not depend upon the volition of the  owner  of  the  land. It  was  immaterial  whether  the assessee was intersted or not for the alleged improvement of the  land  under the Scheme but the assessee  was  under  an obligation to make the payment of betterment charge  imposed under  the  Bombay  Town  Planning  Scheme.  Mr.  Salve  has contended  that  the Scheme prepared under the  Bombay  Town Planning  Act  becomes final on publication  of  the  Scheme under Section 51 and the effect of the final Scheme has been provided  under  Section  53 of the  said  Act.  Section  54 provides for the cost of the Scheme and Section 55  provides for  the  calculation  of the  improvement.  Mr.  Salve  has contended  that  if various provisions of  the  Bombay  Town Planning Act

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                                                      561 are  referred  to,  it  will  be  quite  apparent  that  the betterment charge is nothing but a statutory exaction and in its reality such betterment charge partakes the character of imposition  of  levy. Mr. Salve has strongly relied  on  the decision  of  the Madras High Court in the  case  of  Dollar Company  v.  Commissioner of Income Tax, (1986)  161  I.T.R. p.455.  The  assessee-Dollar  Company had  to  make  payment towards  the betterment contribution for the lands owned  by the  Company coming within the Madras Town planning  Scheme. The assessee-Company claimed deduction of the above  payment on the footing that such payment was a revenue  expenditure. The  Income Tax Officer, however,  disallowed the  claim  by holding  that  such  payment was in the  nature  of  capital expenditure.  Such  decision of the Income Tax  Officer  was affirmed by the Appellate Assistant Commissioner and also by the  Income  Tax  Appellate Tribunal. On  a  reference,  the Madras  High Court held inter alia that on a reading of  the various  provisions of the Madras Town Planning Act, it  was evident  that the betterment contribution was  a  compulsory levy  made by the Corporation and the precondition for  such levy  was  that  consequent upon making  any  Town  Planning Scheme,  the  value  of  the  property  in  the  Scheme  has increased  or  is likely to increase. Hence the  payment  of betterment  contribution did not result in any  increase  in the value of the property but because of the increase in the value of the property as a result of the making of the  Town Planning  Scheme, the owner of the property was required  to make   a   contribution  which  was  called   a   betterment contribution.  Since there was no direct nexus  between  the expenditure incurred by the Corporation and the increase  in the  value of the property, the expenditure incurred by  the assessee for payment of betterment charge must be held to be revenue expenditure. It has been further held by the  Madras High  Court  that commercially considered,  the  expenditure which  has  been so incurred for facilities such  as  roads, drainage  facility etc., for the enjoyment of the  property, would be laid out wholly and exclusively for purposes of the business and the payment of the betterment contribution  was in  the nature for a payment of such facility and  only  its computation  was on the basis of appreciation in  value.  It was  held that consequently the expenditure incurred by  way of  the  betterment contribution could not be called  as  an expenditure of a capital nature and, therefore, such payment was deductible from the income of the assessee.      Mr.  Salve,  relying on the aforesaid decision  of  the Madras High Court, has contended that the betterment charges paid by the appellant-                                                        562  assessee  should also be construed as  revenue  expenditure because  there was no direct nexus between  the  expenditure incurred by the Corporation and the increase in the value of the  property  of the assessee. He has  contended  that  the improvement  effected on the lands included within the  Town Planning  Scheme, resulted in more efficiently carrying  out the  business of the assessee and the expenditure which  had been incurred for such improvement by way of betterment  fee was thus directly connected with the business activities  of the assessee. Since enjoyment of the property improved under the  Town  Planning  Scheme was  directly  linked  with  the carrying on of the business of the assessee and the  payment of betterment contribution was for such facility in carrying out  the  business  activities  more  effectively  and   its computation was only on the basis of appreciation in  value, such  betterment  contribution  was  in  reality  a  revenue

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expenditure  and the High Court of Gujarat erred in  holding that it was in the nature of a capital expenditure. Mr.Salve has submitted that the various provisions of the Bombay Town Planning  Scheme  had been considered by this Court  in  the case  of State of Gujarat v. Shantilal Mangaldas  and  Ors., reported in [1969] 3 SCR p. 341. He has contended that under the  Scheme,  lands of various owners are treated  as  lands belonging to a common pool and for better enjoyment of lands by  the  residents  certain improvements  are  effected  and facilities  are provided under the Scheme. Although by  such process,  the value of the land is likely to  increase,  the involuntary payment of betterment charge has a direct  nexus with the running of the business in a better way because  of the improvement effected and by the process the same becomes a revenue expenditure as indicated by the Madras High Court. Mr. Salve has referred to a decision of the Privy Council in Mohanlal Har Govind of Jubbulpore v. Commissioner of  Income Tax  C.P. & Berar, Nagpur, reported in (1949) 17  I.T.R.  p. 473.  In  consideration of certain sums payable  short  term licence   was   granted   to  acquire   tendu   leaves   for manufacturing  Beedi  (country made  cigarette).  The  Privy Council  held that such expenditure was revenue  expenditure and not capital expenditure. Mr. Salve has also referred  to a  decision  of  this Court made in the  case  of  L.H.Sugar Factory  and  Oil Mills (P) Ltd. v. Commissioner  of  Income Tax, U.P., reported in (1980) 125 I.T.R. p. 293. In the said case,  the  assessee-a  private  company  was  carrying   on business  in the manufacture and sale of sugar.  During  the relevant accounting period the assessee paid two amounts :          (i)  a contribution of certain sums at the  request          of the Collector                                                        563          of  the  District towards the construction  of  the          Deoni Dam Majhala Road          (ii)  a contribution of Rs. 50,000 to the State  of          U.P.  towards meeting the cost of  construction  of          roads  in  an  area  round  the  factory  under   a          sugarcane  development  scheme.   Under  the   said          scheme,  one third of the cost was to be  borne  by          the  State  Government, one third  by  the  Central          Government  and  the  remaining one  third  by  the          sugarcane growers and the owners of sugar factories          in the area.      This  Court  held in the said decision that  the  first contribution  at the instance of the Collector  towards  the construction  of  Deoni Dam was not  deductible  expenditure under  Section 10(2)(xv) of the Income Tax Act  because  the said  amount was contributed long after the construction  of the dam and the roads in question had also been  constructed long   back  and  there  was  nothing  to  show   that   the contribution  of  the  amount had anything to  do  with  the business  of the Company or the construction of the  dam  or the  roads  was in any way advantageous  to  the  assessee’s business.   So  far  as the second sum  of  Rs.  50,000  was concerned, it has been held by this Court that the said  sum was   deductible   under  Section  10(2)(xv)   because   the construction  of the roads had facilitated the transport  of the   sugarcane  to  the  factory  and  outflow   of   sugar manufacture  by  the factory of the assessee to  the  market centres.   It  was indicated that the  construction  of  the roads had facilitated the business operation of the assessee and  had  enabled the management to carry on  business  more efficiently  and profitably.  This Court has noted  that  it was true that the advantage secured for the business of  the assessee was of a long duration inasmuch as it would last so

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long  as the roads continued to be motorable but it was  not an  advantage  in the capital field because no  tangible  or intangible asset was acquired by the assessee nor there  was any addition to an expansion of the profit making  apparatus of  the assessee.  The amount of Rs. 50,000 was  contributed by the assessee for the purpose of facilitating the  conduct of the business and making it more efficient and  profitable without  the  assessee getting an advantage of  an  enduring benefit  to  itself.  In the aforesaid  circumstances,  this Court has held that such expenditure should be held to be  a revenue expenditure and was deductible.      Mr. Salve has contended that because of the improvement effected                                                        564 under  the Town Planning Scheme the running of the  business of  the  assessee got improved and thus the  betterment  fee required to be paid under the Scheme had a direct nexus with the  running of the business of the assessee.   Hence,  such betterment  charge  particularly in the context  that   such payment was involuntary and was in the nature of  compulsory exaction  from the assessee should be held to be  a  revenue expenditure made for better running of the business.  He has submitted  that  since the construction of the road  in  and around L.H.Sugar Factory had a nexus for the running of  the business more efficiently and profitably, this Court in  the said  Sugar Factory’s case has held that a  contribution  of Rs. 50,000 even when such contribution was not in the nature of  a  compulsory payment but a pure  and  simple  voluntary contribution,  was a revenue expenditure and as such it  was deductible  from the income of the assessee.  Mr. Salve  has therefore  submitted that the impugned decision  of  Gujarat High  Court must be held to be erroneous and  the  reference should be answered in favour of the assessee by allowing the betterment  charges  paid  by  the  assessee-Company  as   a deductible expenditure.      The  learned counsel appearing for the respondent  has, however,  contended that unless it can be demonstrated  that the  expenditure  is exclusively for business  purpose,  the same cannot be held to be a revenue expenditure and as  such deductible  from  the income of the assessee.   The  learned counsel has contended that there must be a direct connection with the business activities and the expenditure made and  a remote  connection with the business activities is also  not relevant  for  the purpose of treating  the  expenditure  as revenue  expenditure.  He has contended that in  L.H.Sugar’s case the question of capital asset did not arise because the road constructed in and around the factory did not belong to the  factory.   This  Court has specifically  held  in  L.H. Sugar’s   case   that  the  advantage   derived   from   the construction  of  the  road was not  in  the  capital  field because no tangible or intangible asset was acquired by  the assessee  nor was there any expansion to the  profit  making apparatus  of  the assessee.  The learned  counsel  for  the respondent  has  stated that under the Bombay  Town  Planing Scheme, the lands of different owners within the Scheme  are treated  in  a  common pool  and  various  improvements  are effected for the better enjoyment of the lands in  question. By such improvements, the value of the land increases and it was  in  consideration of such increased  valuation  of  the land,  the  betterment fees are charged.  He  has  submitted that it is immaterial whether the assessee had a desire  for the  improvement of the land in question.  The fact  remains that under the statute, such improve-                                                        565 ment had been effected and the assessee getting advantage of

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enhancement of value of land in question is required to  pay betterment fee.  He has also submitted that in Mohanlal  Har Govind’s  case  (supra)  the  Privy  Council  has  held  the expenditure incurred for obtaining licence to procure  tendu leaves  as  revenue  expenditure because  tendu  leaves  was essential  raw material for manufacturing Beedi and as  such the  expenditure had a direct nexus with day-to-day  running of  the  business of manufacturing Beedi.  Hence,  the  said decision  of Privy Council is clearly  distinguishable.   He has contended in the facts of this appeal, the Gujarat  High Court  has rightly held that the expenditure was  a  capital expenditure  and  not  revenue  expenditure.   The   learned counsel  has  contended that when a capital  expenditure  is incurred, the said capital expenditure also ultimately enure to  the efficient running of the business but on that  score the expenditure on capital asset does not lose the character of  capital  expenditure  and  does  not  become  a  revenue expenditure.   He has submitted that the Madras  High  Court has  failed  to  appreciate that the  expenses  incurred  by making  payment  of  betterment  fees  was  in  essence   an expenditure  on account of increase in the valuation of  the land  of  the assessee and such expenditure  has  no  direct nexus  with the day-to-day running of the business.  In  the aforesaid   circumstances,  the  learned  counsel  for   the respondent has submitted that no interference is called  for in this appeal and the same should be dismissed.      After  considering  the respective contentions  of  the learned  counsels  for the parties, it appears  to  us  that under  the  Bombay  Town  Planning  Scheme,  the  lands   of different  owners  including the land of the  assessee  were treated  as  if  included  in  a  common  pool  and  various improvements have been effected for the better enjoyment  of the lands under the Scheme.  For such improvement by way  of laying down roads, making provision for drainage etc.  under the scheme, the owner got the advantage of betterment of the land  in question and there is no manner of doubt  that  the valuation   of  the  land  had  increased  because  of   the improvements  effected on the land.  Simply because by  such improvement  it  has  also  resulted  in  providing   better facilities  for carrying out the business of  the  assessee, the betterment charge required to be paid by the  assessee., does  not become the revenue expenditure.  Such payment  has no direct nexus with the day-to-day running of the business. In  our  view  the learned counsel  for  the  respondent  is justified   in  submitting  that  the  capital   expenditure incurred   in  connection  with  the   business   activities ultimately  results in efficiently carrying on the  business and  by that process gives aid in running of the  day-to-day business                                                        566 more  efficiently  but  simply on that  score,  the  capital expenditure  does not become a revenue expenditure.  In  our view,  the  learned  counsel  for  the  respondent  is  also justified  in  his contention that in  deciding  whether  an expenditure   is   a  capital  expenditure  or   a   revenue expenditure,  the question of voluntary  and/or  involuntary payment becomes immaterial.  It is the nature of expenditure that  determines  the issue.  In L.H. Sugar  Factory’s  case (supra),  it has been specifically indicated by  this  Court that the assessee did not acquire any tangible or intangible right on the roads constructed in and around the factory but because of such roads constructed day-to-day running of  the business was improved by minimising the operational cost  in manufacturing sugar.  In such circumstances, the expenditure incurred for improving day-to-day running of the business by

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way  of  voluntary  contribution of  Rs.  50,000  when  such expenditure  had  no  connection with  the  increase  or  in creation  of any capital asset or acquiring any tangible  or intangible  right  in the property in  question  namely  the roads  constructed in or around the factory, was treated  as revenue  expenditure.  The decision of the Privy Council  in Har  Govind’s case (supra) in holding that  the  expenditure incurred  for obtaining licences for acquiring tendu  leaves for  manufacturing  beedi was a revenue expenditure  can  be easily  explained  by  indicating  that  such  expense   for obtaining licence to procure tendu leaves was an expenditure to acquire basic raw material for manufacturing beedi.  Such expenditure  had  nothing  to do  with  any  capital  asset. Hence, the expenditure having a direct nexus with day-to-day running of the business of manufacturing beedi by  procuring basic raw material is certainly a revenue expenditure.   But the  facts in the instant appeal are quite  different.   The aforesaid aspect is totally absent in the instant case.   In our  view, the High Court of Gujarat has rightly  held  that the  betterment  charge  on  account  of  increase  in   the valuation of the land of the assessee should not be held  as a  revenue expenditure although general improvement  of  the area  may have an impact on better running of the  business. We, therefore, find no reason to interfere with the decision of  the  Gujarat High Court by accepting the  reasonings  of Madras  High  Court in Dollar Company’s case  (supra).   The instant  appeal, therefore, fails and is  dismissed  without any order as to costs. T.N.A.                                     Appeal dismissed.                                                        567