http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 7  

PETITIONER: L. B. SUGAR FACTORY & OIL MILLS (P) LTD. PILIBHIT

       Vs.

RESPONDENT: C.I.T. U.P., LUCKNOW

DATE OF JUDGMENT26/08/1980

BENCH: BHAGWATI, P.N. BENCH: BHAGWATI, P.N. SEN, A.P. (J) VENKATARAMIAH, E.S. (J)

CITATION:  1981 AIR  395            1981 SCR  (1) 523  1981 SCC  (1)  44  CITATOR INFO :  RF         1987 SC 798  (11)

ACT:      Capital Expenditure  and Revenue  Expenditure, test of- Contribution made  by the  assessee towards the construction of dam  and later  on contributing  1/3rd cost  towards  the laying down of the road in the area around the factory under a Sugarcane  Development Scheme, whether capital expenditure and hence  deductible expenditure  under s. 10(2)(xv) of the Indian Income Tax Act, 1922.

HEADNOTE:      The appellant,  assessee is  a private  limited company carrying on  business of  manufacture and  sale  of  crystal sugar in  a factory  situated in  Pilibhit in  the State  of Uttar  Pradesh.  During  the  accounting  year  ending  30th September, 1955,  the assessee  contributed  a  sum  of  Rs. 22,332 towards the construction of Deoni dam-Majhala Road at the request  of the  Collector and  a  further  sum  of  Rs. 50,000, being  1/3rd share  of the  cost of  construction of roads in  the area  around its  factory under  a Sugar  Cane Development Scheme, to the State of Uttar Pradesh. These two sums were  claimed by the assessee as deductible expenditure under s. 10(2)(xv) of the Indian Income Tax Act, 1922 in its return for  the assessment  year 1956-57,  but disallowed by the Income  Tax Officer.  Having lost  in appeal  before the Revenue Authorities  and in reference before the High Court, the appellant came up in appeal by certificate.      Allowing the appeal in part, the Court ^      HELD :  (1) An  expenditure incurred by an assessee can qualify for  deduction under  s.  10(2)(xv)  of  the  Indian Income-tax Act,  1922 only  if it  is  incurred  wholly  and exclusively for  purpose of  his business,  but even  if  it fulfils this  requirement, it is not enough, it must further be of revenue as distinct from capital expenditure. [526 C]      (2) The  test laid down in Atherton’s case for treating an item  of expenditure  as capital  expenditure is  not  of universal application  and it  must yield  where  there  are special circumstances  leading to  a contrary conclusion. If the advantage consists merely in facilitating the assessee’s

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 7  

business operations  or enabling  the management and conduct of the  assessee’s business to be carried on 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. Further, in cases of this kind, where the question is whether a particular expenditure incurred by  an assessee  is on  capital account  or revenue account, the decision must ultimately depend on the facts of each case.  No two  cases are alike and quite often emphasis on one aspect or the other may tilt the balance in favour of capital expenditure  or revenue  expenditure. [527 F, 528 C, 530 C]      Commissioner of  Taxes v.  Nohanga Consolidated  Copper Mines Ltd.,  [1965] 58  ITR 241;  Empire Jute  Co.  Ltd.  v. C.I.T. [1980] 3 SCR; applied. 524      British Insulated  and Helsby  Cables Ltd. v. Atherton; 10 Tax Cases 155 p. 189; explained.      (3) In  the instant case : (i) The amount of Rs. 22,332 was rightly  disallowed as  deductible expenditure  under s. 10(2)(xv) of  the Act. The amount was apparently contributed by the assessee without any legal obligation to do so purely as an  act of  good citizenship  and it could not be said to have been  laid down  wholly and exclusively for the purpose of the  business of  the assessee;  and (ii)  So far  as the expenditure of  the sum of Rs. 50,000 is concerned it was in the nature  of  revenue  expenditure  laid  out  wholly  and exclusively for  the purpose  of the assessee’s business and was, therefore,  allowable as a deduction under s. 10(2)(xv) of the Act. [526 F, 531 A]      Lakshmiji Sugar  Mills Co. P. Ltd. v. C.I.T.: 82 I.T.R. 736; Distinguished.

JUDGMENT:      CIVIL APPELLATE  JURISDICTION : Civil Appeal No. 298 of 1973.      From the  Judgment and  Order dated  28-7-1971  of  the Allahabad High Court in Income Tax Ref. No. 335/66.      J. P. Goyal and S. K. Jain for the Appellant.      D. V.  Patel, J.  Ramamurthy and Miss A. Subhashini for the Respondent.      The Judgment of the Court was delivered by      BHAGWATI, J.-The  dispute in this appeal by certificate relates to two items of expenditure incurred by the assessee during the  assessment year  1956-57 for  which the relevant accounting year was the year ending on 30th September, 1955. The assessee  is  a  private  limited  company  carrying  on business of  manufacture and  sale of  crystal  sugar  in  a factory situated  in Pilibhit in the State of Uttar Pradesh. In the  year 1952-53,  a dam was constructed by the State of Uttar Pradesh  at a place called Deoni and a road Deoni Dam- Majhala  was  constructed  connecting  the  Deoni  Dam  with Majhala. It  seems that the Collector requested the assessee to make  some contribution  towards the  construction of the Deoni Dam  and the  Deoni Dam-Majhala  Road and  pursuant to this request  of the  Collector, the  assessee contributed a sum of  Rs. 22,332  during the  accounting year  ending 30th September, 1955.  The assessee also contributed a sum of Rs. 50,000 to  the  State  of  Uttar  Pradesh  during  the  same accounting year  towards meeting the cost of construction of roads in  the area  around its  factory  under  a  Sugarcane Development Scheme  promoted by the Uttar Pradesh Government as part  of the Second Five Year Plan. It was provided under

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 7  

the Sugarcane  Development Scheme that one third of the cost of construction  of  roads  would  be  met  by  the  Central Government, one third 525 by the State Government and the remaining one third by Sugar factories and sugarcane growers and it was under this scheme that the  sum of Rs. 50,000 was contributed by the assessee. In the  course of  its  assessment  to  Income-tax  for  the assessment year  1956-57, the  assessee  claimed  to  deduct these two amounts of Rs. 22,332 and Rs. 50,000 as deductible expenditure under Section 10(2)(xv) of the Indian Income-tax Act, 1922.  The Income-tax  Officer disallowed the claim for deduction on the ground that the expenditure incurred was of capital nature  and was  not allowable  as a deduction under Section 10(2)(xv).  The assessee  preferred an appeal to the Appellate Assistant  Commissioner but  the appeal failed and this led  to the  filing of  a  further  appeal  before  the Tribunal. The  appeal was heard by a Bench of two members of the Tribunal  and there  was a difference of opinion between them. The Judicial Member took the view that the expenditure of both  the amounts of Rs. 22,332 and Rs. 50,000 was in the nature of revenue expenditure and was therefore allowable as a deduction,  while the  Accountant Member  held  that  this expenditure was  on capital account and could not be allowed as revenue  expenditure. Since  there was  a  difference  of opinion between  the two  members, the question which formed the  subject   matter  of   difference  was   referred   for consideration to a third member. The third member did not go into the  question whether  the expenditure  incurred by the assessee was in the nature of capital or revenue expenditure but  took  a  totally  different  line  and  held  that  the contributions were  made by  the assessee  as a good citizen just as any other person would and it could not be said that the expenditure  was laid out wholly and exclusively for the purpose of the business of the assessee. The third member in this  view   agreed  with  the  conclusion  reached  by  the Accountant Member  and held  that both  the amounts  of  Rs. 22,332 and  Rs. 50,000  were  not  allowable  as  deductible expenditure under  Section  10(2)(xv).  The  appeal  of  the assessee was  accordingly rejected by the Tribunal so far as this point  was concerned.  The assessee  thereupon sought a reference to  the High  Court and  on the application of the assessee, the following question of law was referred for the opinion of the High Court :           "Whether on  the facts  and circumstances  of  the      case the  sums  of  Rs.  22,332  and  Rs.  50,000  were      admissible deduction  in computing  the taxable profits      and gains of the companies business." The High Court observed "that on the finding recorded by the third member  of the  Tribunal and  on the view expressed by the Accountant Member". the expenditure could not be said to have been incurred by the assessee in the ordinary course of its business  and it  could not  be "classified  as  revenue expenditure on the ground of commercial 526 expediency". The view taken by the High Court was that since "the expenditure was not related to the business activity of the  assessee   as  such,  the  Tribunal  was  justified  in concluding that  it was  not wholly and exclusively laid out for the  business and  that the  deduction  claimed  by  the assessee therefore  did not come within the ambit of Section 10(2)(xv)". The High Court accordingly answered the question referred to  it in  favour of  the revenue  and against  the assessee. The assessee thereupon preferred to present appeal in this Court after obtaining the necessary certificate from

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 7  

the High Court.      Now an  expenditure incurred by an assessee can qualify for deduction under Section 10(2)(xv) only if it is incurred wholly and  exclusively for the purpose of his business, but even if  it fulfils  this requirement,  it is  not enough it must further  be of revenue as distinct from capital nature. Two questions  therefore  arise  for  consideration  in  the present appeal  : one  is whether the sums of Rs. 22,332 and Rs.  50,000   contributed  by   the   assessee   represented expenditure incurred wholly and exclusively for the purposes of the  business of  the assessee  and the  other is whether this expenditure  was in  the nature  of capital  or revenue expenditure. So  far the  first item  of expenditure  of Rs. 22,332  is   concerned,  the   case  does  not  present  any difficulty at  all, because it was common ground between the parties that  this amount  was contributed  by the  assessee long after the Deoni Dam and the Deoni Dam-Majhala Road were constructed and there is absolutely nothing to show that the contribution of  this amount  had anything  to do  with  the business of  the assessee  or that  the construction  of the Deoni Dam  or the  Deoni Dam-Majhala  Road was  in  any  way advantageous to  the assessee’s  business. The amount of Rs. 22,332 was  apparently contributed  by the  assessee without any legal  obligation to  do so,  purely as  an act  of good citizenship, and  it could not be said to have been laid out wholly and  exclusively for  the purpose  of the business of the assessee.  The expenditure  of the  amount of Rs. 22,332 was therefore  rightly disallowed  as deductible expenditure under section 10(2)(xv).      But the  position is  different when  we  come  to  the second item of expenditure of Rs. 50,000. There the assessee is clearly  on firmer  ground. The  amount of Rs. 50,000 was contributed by the assessee under the Sugar-cane Development Scheme towards  meeting the cost of construction of roads in the area  around the factory. Now there can be no doubt that the construction of roads in the area around the factory was considerably advantageous  to the  business of the assessee, because it facilitated the running of its motor vehicles for transportation   of   sugarcane   so   necessary   for   its manufacturing activity.  It is  not as  if the amount of Rs. 50,000 was contributed by the assessee generally 527 for the  purpose of  construction of  roads in  the State of Uttar Pradesh,  but it  was for the construction of roads in the area  around the  factory that the contribution was made and it  cannot be disputed that if the roads are constructed around the factory area, they would facilitate the transport of sugarcane  to the  factory and  the flow  of manufactured sugar out  of the factory. The construction of the roads was therefore  clearly   and  indubitably   connected  with  the business activity  of the  assessee and  it is  difficult to resist  the   conclusion  that  the  amount  of  Rs.  50,000 contributed by  the assessee  towards meeting  the  cost  of construction of  the roads  under the  Sugarcane Development Scheme was  laid out  wholly and exclusively for the purpose of the  business of the assessee. This conclusion was indeed not seriously  disputed on  behalf of  the Revenue  but  the principal contention  urged  on  its  behalf  was  that  the expenditure of  the amount  of Rs.  50,000 incurred  by  the assessee was  in the nature of capital expenditure, since it was incurred  for the  purpose of bringing into existence an advantage  for   the  enduring  benefit  of  the  assessee’s business. The  argument of  the Revenue  was that  the newly constructed roads  though  not  belonging  to  the  assessee brought to  the  assessee  an  enduring  advantage  for  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 7  

benefit of  its business  and the expenditure incurred by it was therefore  in the  nature of  capital  expenditure.  The Revenue relied on the celebrated test laid down by Lord Cave L.C. in British Insulated and Helsby Cables Ltd. v. Atherson where the  learned Law  Lord stated  "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,  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".  This  test enunciated by  Lord Cave  L.C. is  undoubtedly a  well known test  for   distinguishing  between   capital  and   revenue expenditure, but it must be remembered that this test is not of universal  application and,  as the  parenthetical clause shows, it  must yield  where there are special circumstances leading to  a contrary  conclusion. The  non-universality of this test  was emphasised  by Lord Radcliffe in Commissioner of Taxes  v. Nohanga Consolidated Copper Mines Ltd.(2) where the learned  Law Lord said in his highly felicitous language that it  would be  misleading to  suppose that  in all cases securing a  benefit for  the business  would be  prima facie capital expenditure  "so long  as  the  benefit  is  not  so transitory as  to have  to endurance  at all".  It was  also pointed out by this Court in Empire Jute Co. Ltd. v. 528 C.I.T. that  "there may  be cases where expenditure, even if incurred for  obtaining 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  principle  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 business operations or enabling management  and conduct  of the assessee’s business to be  carried on  more efficiently 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.      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 undoubtedly advantageous  to the business of the assessee as they facilitated  the transport  of sugarcane to the factory and the outflow of manufactured of sugar from the factory to the  market   centres.  There  can  be  no  doubt  that  the construction  of   these  roads   facilitated  the  business operations of  the assessee  and enabled  the management and conduct of  the assessee’s  business to  be carried  on more efficiently and  profitably. It  is no  doubt true  that the advantage secured  for the business of the assessee was of a long duration  in as  much as  it would  last so long as the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 7  

roads continued to be in motorable condition, but it was not an advantage  in the  capital field,  because no tangible or intangible asset  was acquired by the assessee nor was there any addition  to or 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  of the  assessee and  making it more efficient and profitable  and it was clearly an expenditure on revenue account. 529      It was pointed out by Lord Radcliffe in commissioner of Taxes v.  Nothanga Consolidated  Copper Mines  Ltd.  (supra) that "in  considering allocation  of expenditure between the capital and  income accounts,  it is  almost unavoidable  to argue  from   analogy."  There   are  always  cases  falling indisputably on  one or the other side of the line and it is a familiar argument in tax courts that the case under review bears close  analogy to  a case falling on the right side of the line  and must, therefore, decide in the same manner. If we apply this method, the case closest to the present one is that in  Lakshmiji Sugar  Mills Co. P. Ltd. v. C.I.T.(1) The facts of  this case  were very  similar to  the facts of the present case.  The assessee  in this case was also a limited company carrying  on business  of manufacture  and  sale  of sugar in  the State of Uttar Pradesh and it paid to the Cane Development Council  certain amounts  by way of contribution for  the  construction  and  development  of  roads  between sugarcane producing  centres and  the sugar  factory of  the assessee and the question arose whether this expenditure was allowable as  revenue expenditure  under  S.  10(2)(xv).  No doubt, in  this case, there was a statutory obligation under which  the   amount  in  question  was  contributed  by  the assessee, but  this Court  did not  rest its decision on the circumstance  that   the  expenditure   was  incurred  under statutory obligation.  This Court  analysed the  object  and purpose of the expenditure and its true nature and held that it was  of a  revenue and  not capital  nature.  This  Court observed :  "In the  present case, apart from the element 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 contribution for  road development  between the various cane producing centres  and the  mills. The  apparent object  and purpose was  to facilitate the running of its motor vehicles or other  means employed  for transportation of sugarcane to the factory.  From the  business point of view and on a fair appreciation of  the whole situation the assessee considered that the  development of the roads in question could greatly facilitate  the   transportation  of   sugarcane.  This  was essential for  the benefit  of its  business  which  was  of manufacturing  sugar   in  which   the  main   raw  material admittedly consisted  of sugarcane.  These facts would bring it within the second part of the principle mentioned before, namely, that  the expenditure  was incurred  for running the business or  working it  with a  view to produce the profits without the  assessee getting  any advantage  of an enduring benefit to  itself. (Emphasis  supplied) These  observations are directly applicable in the present case and we must hold on the analogy of 530 this decision  that the amount of Rs. 50,000 was contributed by the assessee "for running the business or working it with a view  to produce  the profits without the assessee getting any advantage  of  an  enduring  benefit  to  itself".  This

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 7  

decision fully supports the view that the expenditure of the amount of Rs. 50,000 incurred by the assessee was on revenue account.      We must  also refer  to the  decision of  this Court in Travancore-Cochin Chemicals  Ltd. v. C.I.T. (Supra) on which strong reliance  was placed  on behalf  of the  Revenue. The facts of this case are undoubtedly to some extent comparable with the  facts of the present case. But ultimately in cases of this  kind, where  the question  is whether  a particular expenditure incurred by an assessee is on capital account or revenue account,  the decision must ultimately depend on the facts of  each case.  No two cases are alike and quite often emphasis on  one aspect or the other may tilt the balance in favour of  capital expenditure  or revenue expenditure. This Court in  fact in  the course of its judgment in Travancore- Cochin  Chemicals  Ltd.’s  case  (supra)  distinguished  the decision in  Lakshmiji Sugar  Mills’  case  (supra)  on  the ground that  "on the  facts of  that case,  this  court  was satisfied that  the development  of the  roads was meant for facilitating the  carrying on  of the  assessee’s  business. Lakshmiji Sugar Mills’ case is quite different on facts from the one before us and must be confined to the peculiar facts of that  case." We would make the same observation in regard to the decision in Travancore-Cochin Chemicals’ case (supra) and say  that   decision must  be confined  to the  peculiar facts of  that case,  because Lakshmiji  Sugar  Mills’  case (supra) admittedly  bears a  closer analogy  to the  present case than  the Travancore-Cochin  Chemicals’ case  and if at all we  apply the method of arguing by analogy, the decision in Lakshmiji  Sugar Mills  case (supra)  must be regarded as affording us greater guidance in the decision in the present case then  the decision in Travancore-Cochin Chemicals’ case (supra). Moreover,  we find that the parenthetical clause in the test  formulated by  Lord Cave  L.C. in Antherton’s case (supra) was  not brought  to the  attention of this Court in Travancore-Cochin Chemicals’  case with the result that this Court was  persuaded to  apply that  test as  if it  were an absolute and  universal  test  regardless  of  the  question applicable in  all cases  irrespective whether the advantage secured for the business was in the capital field or not. We would therefore  prefer to  follow the decision in Lakshmiji Sugar Mills’  case (Supra)  and hold  on the analogy of that decision that  the amount  of Rs.  50,000 contributed by the assessee represented expenditure on the revenue account. 531      We accordingly  dismiss the  appeal in  so far  as  the expenditure of  the sum  of Rs. 22,332 is concerned. But, so far  as  the  expenditure  of  the  sum  of  Rs.  50,000  is concerned, we  hold that  it was  in the  nature of  revenue expenditure laid  out wholly and exclusively for the purpose of the assessee’s business and was therefore, allowable as a deduction under  Section 10(2)(xv)  of the Act and allow the appeal to this limited extent. Since the assessee has partly won and  partly lost,  we think that the fair order of costs would be  that each  party should bear and pay its own costs throughout. S.R.                                 Appeal allowed in part. 532