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PETITIONER: LAKSHMIJI SUGAR MILLS CO.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, NEW DELHI

DATE OF JUDGMENT27/08/1971

BENCH: GROVER, A.N. BENCH: GROVER, A.N. HEGDE, K.S. HEGDE, K.S.

CITATION:  1972 AIR  159  CITATOR INFO :  D          1977 SC 991  (3,4)  R          1981 SC 395  (5,6)

ACT: Income Tax Act-Capital or Revenue Expenditure-Test

HEADNOTE: The  appellant assessee is a private Ltd.  Company  carrying on  the business of manufacture and sale of  sugar.   During the accounting period relating to the assessment year  1956- 57,  sums of Rs. 75,000/- and Rs. 37,000/- were paid by  the assessee  to the Cane Development Council of  the  Sugarcane Department  of  U.P. (under U.P.  Sugarcane  Regulation  and Sugar  and  Purchase Act, 1953) by way of  contribution  for road  development  between  various  sugar  cane   producing centers and the sugar factories of the assessee.  The  roads were originally the property of the Government and  remained so  after  improvements had been made.  The  improved  roads facilitated  the transportation of cane to the factories  of the assessee and the expenditure was incurred for commercial expediency and for benefit of the day to day business of the assessee.   The Revenue Authorities, the Appellate  Tribunal and   the   High  Court  found  that   these   contributions constituted capital expenditure and could not be allowed  as an admissible deduction in computing the total income of the Assessee.  Allowing the appeal, HELD  :  In  the facts and circumstances  of  the  case  the expenditure  was  incurred by the assessee  for  reasons  of commercial expediency apart from statutory compulsion.   The development   of  the  roads  was  necessarily   meant   for facilitating the carrying on of the assessee’s business with a view to produce profits.  In the absence of any finding by the Tribunal that the roads were to be altogether newly made and  that  the assesses would get an enduring  benefit,  the expenditure  was allowable as an admissible deduction.  [468 H] Assam  Bengal  Cement  Co. Ltd. v. C.I.T.  West  Bengal,  27 I.T.R.  34,  45; C. I. T. West Bengal v.  Hindusthan  Motors Ltd.,  68  1.  T. R. 301 and C.I.T.  West  Bengal  v.  Royal Calcutta Turf Club, 41 I.T.R. 414, referred to.

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JUDGMENT: CIVIL  APPELLATE  JURISDICTION : Civil Appeal  No.  1928  of 1968. Appeal  by special leave from the judgment and  order  dated February 17, 1967 of the Delhi High Court in Income-tax  Re- ference No. 18 of 1963. D.   K. Bajaj and K. B. Rohatgi, for the appellant. S.   T.  Desai,  P.  L. Juneja, R. N.  Sachthey  and  B.  D. Sharma, for the respondent. The Judgment of the Court was delivered by Grover,  J.  This  is  an appeal by  special  leave  from  a judgment of the Delhi High Court in an Income tax Reference. The  assessee, which is the appellant, is a private  limited company carrying on the business of manufacture and sale  of sugar.  it has two sugar mills one at Maholi  (Sitapur)  and the other at Raja-ka-Sahaspur (Moradabad).  The head  office of  the  assessee is at New Delhi.   During  the  accounting period relating to 466 the  assessment  year 1956-57 sums of Rs. 75,000/-  and  Rs. 37,500/-  were paid by the assessee to the Cane  Development Council  of  the Sugarcane Department of the  Government  of Uttar  Pradesh by way of contribution for  road  development between  the  various sugarcane producing  centers  and  the sugar  factories of the assessee.  The  revenue  authorities found  that these contributions were intended to be  applied for  the construction and development of roads  between  the sugarcane  producing  centres and the sugar mills  and  held that these amounts constituted capital expenditure and could not  be allowed as an admissible deduction  while  computing the  total income of the assessee.  The  Appellate  Tribunal upheld  the  order of the departmental authorities.   On  an application being moved the Tribunal referred two  questions of  law  to the High Court.  We are concerned only,  in  the present case, with the second question which is as follows:               "Whether the sums of Rs. 75,000 and Rs. 37,500               paid  to the Road Development Fund set  up  by               the Government of U.P. were rightly disallowed               as items of capital expenditure ?" The High Court held that the aforesaid expenditure could not be  regarded  as  revenue expenditure  and  the  answer  was returned against the assessee. According  to  the assesses certain facts  are  fully  esta- blished.  These are (1) the expenditure incurred was for the development   of  roads  and  the  assessee  was  under   an obligation  to  make the aforesaid contributions  under  the provisions of the U.     P. Sugarcane Regulation of Supply & Purchase Act, 1953; (2)  the   roads  were  originally   the property  of the government and    remained  so  after   the improvement had been made. (3) the sole reason for which the assessee  had  made the contribution was that  the  improved roads  would facilitate the transportation of cane from  the cane producing centres to the premises of the mills and also the  flow  of  supply  to and  from  the  factories  of  the assessee;  and (4) the expenditure was incurred for  reasons of  commercial expediency and for the benefit of the day  to day business of the assessee. According to the High Court it was admitted on behalf of the assessee  that  if expenditure had been incurred by  it  for building  roads of its own it would be capital  expenditure. The  High Court could see no difference if  expenditure  was incurred under compulsion or even without compulsion if  the roads   were  built  for  facilitating  transportation   and improving  the business and the flow of supply to  and  from

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the factories of the assessee. We are unable to agree with the reasoning or the  conclusion of the High Court.  The general principles governing the 467 determination  of the question whether an expenditure is  in the  nature  of  capital or  revenue  expenditure  are  well known.  Where expenditure is incurred while the business  is being  carried  on  and not for its  extension  or  for  the substantial replacement of its equipment the position  would be as follows :-               "If  the expenditure is made for acquiring  or               bringing into existence an asset or  advantage               for the enduring benefit of the business it is               properly attributable to capital and is of the               nature  of  capital expenditure.   If  on  the               other  hand it is made not for the purpose  of               bringing  into  existence any  such  asset  or               advantage  but  for running  the  business  or               working it with a view to produce the  profits               it  is  a revenue  expenditure."  (Vide  Assam               Bengal  Cement Ltd. v. Commissioner of  Income               tax, West Bengal(1) The   argument  on  behalf  of  the  revenue  is  that   the expenditure  which  was  incurred by  the  assessee  in  the present  case  was intended for bringing into  existence  an advantage for the enduring benefit of the business.  On  the other hand it has been maintained on behalf of the  assessee that  the expenditure was properly attributable  to  running the  business  or  working it with a  view  to  produce  the profits.   The Calcutta High Court had occasion to  consider an  identical question in Commissioner of Income  tax,  West Bengal  v. Hindustan Motors Ltd.(). There the location of  a factory  of  motor car manufacturing company  was  a  little distance  away  from  the  main  road.   The  approach  road belonged  to  the government.  It fell  into  disrepair  and began to cause transportation difficulties to the  assessee. The Government was not prepared to meet the expenses for the repair  of the road.  The assessee offered to  contribute  a certain  amount for the improvement.  The High Court had  no difficulty  in coming to the conclusion that the  money  was spent  not so much to bring about any asset or advantage  of enduring  benefit  to  itself but it was  incurred  for  its efficient  and  convenient running and therefore it  was  of revenue   nature.    This  case  has  been  sought   to   be distinguished  on behalf of the Revenue on the  ground  that the expenditure was incurred only to meet the expense of the repair  and  no asset or advantage of  an  enduring  benefit accrued or resulted to the assessee.  This distinction  does not  appear  to be sound because in the  diverse  nature  of business operations it is difficult to lay down a test which would  apply  to  all situations.  The criteria  has  to  be applied  from  the  business point of view  and  on  a  fair appreciation  of the whole situation.  In the  present  case apart from the element of compulsion the (1) 27 I. T.R. 34,45.                 (2) 68 I.T.R. 301. 468 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

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appreciation of the whole situation the assessee  considered that  the development of the road 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.   In  our judgment  the  ratio  of  the decision  in  Commissioner of Income tax,  West  Bengal,  v. Royal  Calcutta  Turf  Club(1) would be  applicable  to  the present   case.    There  the  question  was   whether   the expenditure  on running a school for training of jockeys  by the Royal Calcutta Turf Club could be claimed as a deduction under s. 10 (2) (xv) of the Indian Income tax Act 1922.   It ,,,as  pointed out that the business of the club was to  run race  meetings  on  a  commercial scale  for  which  it  was necessary to have races of a high order.  For the popularity of  races  and  to  make  its  business  profitable  it  was necessary  for the club to have jockeys of  requisite  skill and  experience  in  sufficient numbers.  It  was  for  that purpose that the school had been started for training Indian jockeys.  If there had not been sufficient number of  Indian jockeys  the  interest  of the  club  would  have  suffered. Therefore  the  expenditure incurred on running  the  school must be regarded as having been wholly and exclusively  laid out  for the purpose of the business of the club.   Emphasis was  laid  on  the  principle that in  order  to  justify  a deduction  it must be for reasons of  commercial  expediency and it must be incurred for the assessee’s business. We  are satisfied that in the present case  the  expenditure was  incurred  by  the assessee for  reasons  of  commercial expediency   apart  from  statutory  compulsion   to   which reference  has  been made before.  The  development  of  the roads was necessarily meant for facilitating the carrying on of  the assessee’s business.  Furthermore the  Tribunal  did not  give any finding that the roads were to  be  altogether newly made and that the assessee (1) 41 I.T.R. 414. 469 would  get  an  enduring  benefit  from  these  roads.   The expenditure in question should have, therefore, been allowed as an admissible deduction. For  the reasons given above the appeal is allowed  and  the answer  given by the High Court to the question referred  is discharged.  We would return the answer in the negative and’ in favour of the assessee.  The assessee will be entitled to its costs in this Court. S.C.                            Appeal allowed. 470