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PETITIONER: COMMISSIONER OF INCOME-TAX,BOMBAY CITY-I, BOMBAY

       Vs.

RESPONDENT: ASSOCIATED CEMENT COMPANIES LTD., BOMBAY

DATE OF JUDGMENT04/05/1988

BENCH: KANIA, M.H. BENCH: KANIA, M.H. PATHAK, R.S. (CJ)

CITATION:  1988 SCR  (3) 917        1988 SCC  Supl.  378  JT 1988 (2)   287        1988 SCALE  (1)829

ACT:      Indian   Income-tax   Act,   1922-Whether   expenditure incurred by  assessee in  accounting period  relevant to the assessment period is liable to be allowed as deductible from assessee’s profits under section 10(2) (xv)-Of.

HEADNOTE:      This  was   an  appeal  by  certificate  under  Section 66(A)(ii) of  the Indian Income-tax Act against the judgment of the  Bombay High  Court on  a reference  of the  question whether  expenditure   incurred  by   the  company   in  the accounting period  relevant to  the  assessment  period  was allowable as  deduction in  determining the  profits of  the company for the assessment year.      The assessee  respondent had  a  factory  at  Shahabad. Under a  tripartite agreement  between the  government,  the assessee and  the Municipality of Shahabad, the assessee had undertaken to  supply water  and electricity to Shahabad and to concrete  the  road  from  the  factory  to  the  railway station.  Under   clause  23,   in  consideration  of  these amenities to  be  provided  by  the  assessee  company,  the Government undertook  not to  include any  properties of the company within the limits of Shahabad Municipality, etc. for a period of fifteen years from the date of the agreement.      According to  the  assessee,  certain  expenditure  was incurred  during   the  year   of  account  under  the  said agreement, on  the laying  of pipelines,  installations  and accessories of  which the  Shahabad Municipality  had become the owner  under the  agreement, and this amount was claimed as deduction.  The Income-tax Officer disallowed the amount. On  appeal   by  the   Company,  the   Appellate   Assistant Commissioner allowed the deduction. The Revenue preferred an appeal to  the Incometax Appellate Tribunal, which passed an order, directing  the Incometax  Officer to  scrutinize  the expenditure, and allowed the deduction to the extent that it did not  result in  the company  becoming the  owner of  any asset. The  High Court  in deciding  the reference held that the expenditure  in question was revenue expenditure and was liable to be allowed 918 as deduction,  and answered  the question  referred  in  the affirmative and  in favour of the assessee. Revenue appealed

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to this Court against the decision of the High Court.      Dismissing the appeal, the Court, ^      HELD: Water  supply lines  were laid as a result of the expenditure incurred, but these water pipelines were not the assets of  the assessee but of the Shahabad Municipality and it was  not as  if the expenditure resulted in bringing into existence any  capital  asset  for  the  company.  The  only advantage  derived   by  the   assessee  by   incurring  the expenditure was  that it obtained an absolution or immunity, under normal  conditions, from the levy of certain municipal rates, taxes and charges.[922E]      As observed  by this  Court in  Empire Jute Co. Ltd. v. Commissioner of  Income-tax, [1980]  124 I.T.R.  S.C. p.  1, there may  be cases  where the expenditure, even if incurred for  obtaining   an  advantage   of  enduring  benefit,  may nonetheless be  on revenue  account and the test of enduring benefit may  break  down.  It  is  not  every  advantage  of enduring nature acquired by an assessee that brings the case within the  principles laid  down  in  this  test.  What  is material is  the nature  of the  advantage in  a  commercial sense and  it is  only where the advantage is in the capital field  that   the  expenditure   would  be  disallowable  on application of  this test.  If the advantage consists merely in  facilitating   the  assessee’s   trading  operations  or enabling  the  management  and  conduct  of  the  assessee’s business  to   be  carried   on  more  effectively  or  more profitably while  leaving the  fixed capital  untouched, the expenditure would  be on  revenue account,  even though  the advantage may endure for an indefinite future. [922H;923A-C]      In this  case, the advantage secured by the assessee by making the  expenditure was  the securing  of absolution  or immunity from  liability to  pay municipal  rates and  taxes under normal  conditions for  a period  of fifteen years. If these liabilities  had to  be paid,  the payments would have been on  revenue account and hence the advantage secured was in the  field of revenue and not capital. As a result of the expenditure there  was no  addition to the capital assets of the assessee company and no change in its capital structure. The pipelines  which came  into existence as a result of the expenditure belonged  to the  Municipality. The  expenditure was liable  to be  allowed as  deductible from  the  profits under Section  10(2) (xv)  of  the  Indian  Income-tax  Act. [923F-H;924A] 919      Atherton v.  British Insulated  and Helsby Cables Ltd., [1924] 10  Tax Cases  155, 192  and Empire  Jute Co. Ltd. v. Commissioner of  Income-tax, [1980]  124  I.T.R.  S.C.p.  1, referred to.

JUDGMENT:      CIVIL APPELLATE JURISDICTION: Civil Appeal No. 512 (NT) of 1975.      From the  Judgment and  Order dated  15.11.1973 of  the Bombay High Court in Income Tax Reference No. 15 of 1964.      S.C. Manchanda,  K.C. Dua and Ms. A. Subhashini for the Appellant.      Harish Salve,  Mrs. A.K.  Verma and  D.N. Misra for the Respondents.      The Judgment of the Court was delivered by      KANIA, J.  This is  an appeal,  on a  certificate given under Section  66(A)(ii) of the Indian Income-tax Act, 1922, against a  judgment and  order of  a Division  Bench of  the

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Bombay  High   Court.  The   appeal  is   preferred  by  the Commissioner of  Income-tax and the assessee, the Associated Cement Companies Ltd. is the respondent.      The judgment  against which  the appeal is directed was rendered on  a reference  under Section  66(1) of the Indian Income-tax Act, 1922. The question referred to the Court for consideration was as follows:           "Whether on  the facts and in the circumstances of           the case,  the expenditure  of Rs.2,09,459, or any           portion thereof,  incurred by  the company  in the           accounting  period   relevant  to  the  assessment           period  1959-60  was  allowable  as  deduction  in           determining the  profits of  the company  for  the           assessment year 1959-60."      The relevant facts are as follows:      The assessee,  the Associated Cement Companies Ltd. has a chain  of factories  manufacturing  cement  all  over  the country. The assessment year in question is the year 1959-60 and the  corresponding previous year was ended on 31st July, 1958. One  of the  factories of the assessee was situated at Shahabad, which is now in the State of Karnataka, but was at the relevant time forming part of the then State 920 of  Hyderabad.   In  September,   1956,  the  Government  of Hyderabad had  decided to include the area on which the said factory at Shahabad was situated within the municipal limits of the  Shahabad Town  Municipality. A  tripartite agreement between the  Government of  Hyderabad, the  assessee company and the  Municipality was  arrived at  on 30th October, 1956 between the  aforesaid three  parties. Under  the agreement, the assessee  undertook to supply water to the Shahabad town and village.  It further  agreed to  put up  a high  tension electric transmission line and to supply electricity for the street lighting  of the  Shahabad town.  It also  agreed  to concrete free  of charge  the existing  main road  from  the factory upto  the railway station via the main bazar. During the relevant  previous year,  the only  work done  was  with respect to  provision of  water supply  to the said town and village. Under  the agreement, the assessee initially agreed to supply  certain quantity of water to the Shahabad town at a concessional  rate and  for the purpose of such supply the assessee company  was to  undertake and  complete at its own cost the  water supply  scheme for  the  town  and  village, involving laying  of the  main water pipelines. The assessee company was  to be the owner of the pipelines, installations and other  accessories pertaining  to the water supply lying within the  company’s premises  and on  the  land  a  little outside the  premises. The  Shahabad Municipal Committee was to  take   over  possession   of  the  remaining  pipelines, installations and  accessories and it was declared to be the owner thereof.  These pipelines,  installations, etc. had to be maintained  by the  Minicipal Committee  in future. Under Clause 23,  in consideration  of the assessee company having agreed to  provide these amenities, supply and services, the Govt. of  Hyderabad undertook  not to  include  any  of  the properties of the company comprising the cement factory, the main  workshop,   the  housing   colony,  quarries  and  the limestone bearing  lands within  the limits  of the Shahabad Minicipality or  the village  panchayat or  like body  for a period of fifteen years from the date of the agreement.      According to  the assessee,  a sum  of Rs.2,09,459  was spent during  the year  of account  under this agreement and this  amount   pertained  to   the  laying   of   pipelines, installations  and   accessories  of   which  the   Shahabad Municipality became  the owner  under the agreement and this

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amount was  claimed as  a deduction.  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, namely that it would not have to pay municipal taxes for a  period of fifteen years. On an appeal by the Company, the Appellate Asstt. Commissioner allowed the deduction 921 holding that  the amount  was the payment of a composite sum of the  revenue outgoings  for the  following 15  years. The Revenue preferred  an appeal  to  the  Income-tax  Appellate Tribunal. The  Income-tax Appellate Tribunal passed an order directing  the   Income-tax  officer   to   scrutinize   the expenditure and  allowed the deduction of the expenditure to the extent  that it  did not  result in the company becoming the owner of any asset.      Before the High Court it was contended on behalf of the company that  the entire  amount of Rs.2,09,459 pertained to expenditure on pipelines installations and other accessories which under  the agreement came to ownership of the Shahabad Town Municipality and did not pertain to any increase of the assets of  the company. The Division Bench which decided the reference has  pointed out  that it had not been disputed by the Revenue  before the Tribunal that the entire expenditure concerned was  laid out  for the purpose of business and the only question  was whether  it was  capital  expenditure  or revenue expenditure.  The only  ground on which the claim of the assessee  for deduction  of the  said expenditure  under Section 10(2) (xv) of the Indian Income-tax Act was resisted that  it   was  capital   expenditure.  After   exhaustively considering several  decisions  of  the  Supreme  Court  and several English  decisions, the Division Bench of the Bombay High Court  came to  the conclusion  that the expenditure in question was  revenue  expenditure  and  was  liable  to  be allowed as  deduction. On the basis of these conclusions the Bombay High  Court decided  the question  referred in  their affirmative and in favour of the assessee.      In the  judgment appealed  against the  learned  Judges have referred  to  the  dictum  of  Viscount  Cave  L.C.  in Atherton v. British Insulated and Helsby Cables Ltd., [1924] 10 Tax Cases 155, 192 which runs as follows:           "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."      The Division Bench further pointed out that this dictum was stated  with approval  by this  Court  in  Assam  Bengal Cement Co.  Ltd. v.  Commissioner of  Income-tax, [1955]  27 I.T.R. 34 (S.C.) where this 922 Court inter  alia approved  the decision  of a Full Bench of the Lahore High Court in Banarasidas Jagannath in re 1947 15 I.T.R. 185  (Lah) (F.B.)  holding that  expenditure  may  be treated as  properly attributable to capital when it is made not only  once and for all, but with a view to bringing into existence an  asset or  an advantage for enduring benefit of the trade. If, on the other hand, what is got rid of by lump sum payment is an annual business expense chargeable against revenue, the  lump sum payment should equally be regarded as a business expenses, but if the lump sum payment brings in a capital asset,  then  that  puts  the  business  on  another

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footing altogether.      The Division Bench also took into account the fact that the  assessee  was  already  running  a  cement  factory  at Shahabad and  it was  not as if the expenditure incurred was in connection with starting of a new business.      Mr. Manchanda,  learned counsel  for the  appellant has raised only  two contentions before us. The first contention was that,  since, as  a result  of the expenditure incurred, certain water pipelines were laid which could be regarded as capital assets  the expenditure  could only  be regarded  as capital expenditure.  In our  view, there is no substance in this contention.  It is true that certain water supply lines did come to be laid as a result of the expenditure incurred, but the  facts on  records, which we have referred to above, clearly  show  that  these  water  pipelines  on  which  the expenditure in  question was incurred were not assets of the assessee, but  assets of the Shahabad Municipality and hence it was  not as  if the expenditure resulted in bringing into existence any  capital  asset  for  the  company.  The  only advantage  derived   by  the   assessee  by   incurring  the expenditure was  that it obtained an absolution or immunity, under normal  conditions, from  levy  of  certain  municipal rates and  taxes and  charges. In  view of  this  the  first contention of Mr. Manchanda must be rejected.      The next  submission made by Mr. Manchanda was that the advantage of not being liable to pay municipal rates, taxes, etc. which  the assessee company secured by reason of making the expenditure  in question  was for  a period  of  fifteen years and  hence it  could be  said to be an advantage of an enduring  nature,   so  that  the  expenditure  incurred  in acquiring the same would be regarded as capital expenditure. In our  view it  is  difficult  to  accept  this  submission either. As  observed by the Supreme Court in the decision in Empire Jute  Co. Ltd.  v. Commissioner  of Incometax, [1980] 124  I.T.R.   SC  p.   1  that  there  may  be  cases  where expenditure, even  if incurred for obtaining an advantage of enduring benefit, may, none 923 the less,  be on  revenue account  and the  test of enduring benefit may  break  down.  It  is  not  every  advantage  of enduring nature acquired by an assessee that brings the case within the  principles laid  down  in  this  test.  What  is material to  consider is  the nature  of the  advantage in a commercial sense  and it  is only  where the advantage is in the capital field that the expenditure would be disallowable on an  application of  this test.  If the advantage consists merely in  facilitating the assessee’s trading operations or enabling  the  management  and  conduct  of  the  assessee’s business  to   be  carried   on  more  effectively  or  more profitably while  leaving the  fixed capital  untouched, the expenditure would  be on  revenue account,  even though  the advantage may  endure for an indefinite future. In that case the  appellant,  a  company  carrying  on  the  business  of manufacture of  jute, was  a member of the Indian Jute Mills Association, which  was formed with the objects, inter alia, of protecting  the trade  of its members, including imposing restrictive conditions  on the  conduct  of  the  trade  and adjusting the  production of  the mills  of its  members.  A working time  agreement was entered into between the members restricting the  number of  working hours per week for which the mills were entitled to work their looms. Clause 4 of the working time agreement provided that no signatory shall work for more  than 45  hours per week. Clause 6(b) provided that the signatories  shall be  entitled to  transfer, in part or wholly, their allotment of hours of work per week to any one

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or more  of the  other signatories.  Under this  clause  the appellant purchased  "looms hours" from four other mills for the aggregate  sum of  Rs.2,03,255 during  the previous year relevant to  the assessment  year  1960-61  and  claimed  to deduct that amount as revenue expenditure. The Tribunal held that the  expenditure incurred  by the appellant was revenue in nature  and hence deductible in computing the appellant’s profits. The  High Court  reversed  this  decision,  but  on appeal, the  Supreme Court allowed expenditure as deductible expenditure on  the basis  of the principle set out earlier. If this principle is applied to the facts of the case before us, what  we find is that the advantage which was secured by the assessee  by making  the expenditure in question was the securing of  absolution or  immunity from  liability to  pay municipal rates  and taxes  under normal  conditions  for  a period of  fifteen years.  If these  liabilities had  to  be paid, the  payments would  have been  on revenue account and hence the  advantage secured was in the field of revenue and not capital.  As a result of the expenditure incurred, there was no  addition to  the  capital  assets  of  the  assessee company  and   no  change  in  its  capital  structure.  The pipelines, etc.  which might  have been  regarded as capital assets and  which came  into existence  as a  result of  the expenditure incurred  did not belong to the assessee company but to the municipality. In these circumstances, 924 applying the  principles laid down in Empire Jute Co.’s case the  expenditure   is  clearly   liable  to  be  allowed  as deductible from  the profits under Section 10(2) (xv) of the Indian Income-tax  Act. In  the result, the appeal fails and is dismissed with costs. S.L.                                  Appeal dismissed. 925