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PETITIONER: M/s. SITALPUR SUGAR WORKS LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX,  BIHAR AND ORISSA

DATE OF JUDGMENT: 10/04/1963

BENCH:

ACT:     Income   Tax--Expenditure  incurred  on   dismantling  a factory  at one place and setting it up at  another--Capital expenditure  and not revenue   expenditure--Depreciation  on capital  expenditure-Depreciation  not  allowed  on   amount spent   for acquiring an advantage--Indian  Income-tax  Act, 1922 (11 of 1922), s. 10 (2) (vi).

HEADNOTE:     The  appellant, a company  manufacturing sugar,  shifted its  factory from the old site to a new site and incurred  a total  expense  of  Rs. 3,19,766/-  on  the  dismantling  of buildings  and machinery,  transporting machinery  from  the original site to the new site and refitting the same there.     Held that the appellant was not entitled to a  deduction of  this  expense  for income-tax purposes  as   an  expense incurred  for carrying on the concern or in earning  profit, it   was  an  expense  incurred  m  effecting  a   permanent improvement   in  the  profit-making  machinery   and   was, therefore,  an expenditure on capital account.     The  expense was on capital account also because it  was made,  "not only once for all, but with a view  to  bringing into  existence an asset or an. advantage for  the  enduring benefit  of a trade"  within the dictum of Viscount Cave  in Atherton  v.  British Insulated and Helsby Cables  Ltd.   In order  that that dictum may apply  it is not necessary  that by the expenditure a material asset or a permanent right  in the nature of capital should be  acquired.  There may  be an expense  incurred  on capital account  though   nothing  was thereby added to the capital value of an asset. Atherton v. British Insulated and Helsby Cables Ltd.  (1925) 10   T.C  155,  Assam  Bengal   Cement  Go.   Ltd.  v.   The Commissioner  of  Income-tax,  West Bengal, [1955] 1  S.C.R. 972,  Granite  Supply  Association Ltd. v Kitton,  (1905)  5 T.C.  168 and Bean v. Doncaster Amalgamated Collieries  Ltd. (1945) 27 T.C. 296, referred to. 18     An  expense  would   not be on  revenue  account  simply because  it  was incurred to turn a losing  concern  into  a profitable one.     Though  the expense incurred by the appellant was  of  a capital  nature, it was not entitled to any depreciation  on it  under  s.10 (2) (vi) of the Income-tax  Act  because  no tangible  asset had been acquired by the  expenditure  which can be  said to have depreciated.  Neither was the appellant entitled to depreciation under part V of the Form of  Return given  in the Rules framed under the Act which dealt with  a claim for depreciation and by column 3 required a  statement to  be  made for "capital cxpenditure during  the  year  for

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additions,  alternations, improvements and extensions,"  for to be so entitled to deductions under this part there has to be  an improvement of the capital asset or increase  in  its value  and there is no evidence of any such  improvement  or increase.  Further, no claim for depreciation on improvement to capital asset had been made.

JUDGMENT:     CIVIL  APPELLATE JURISDICTION: Civil Appeal No.  350  of 1962.     Appeal  by  special leave from the judgment  and  decree dated  November  30,  1960,  of  the  Patna  High  Court  in Miscellaneous Judicial Case No. 799 of 1958. G. S. Pathak and G.G. Mathur, for the appellant. N. D. Karkhanis and R. N. Sachthey, for the respondent. 1963, April 10.  The Judgment of the Court’ was delivered by SARKAR J.--This case does not seem to us to present any real difficulty.  It arises out of a reference to the High  Court of Patna of two questions both of which were answered by the High  Court  against. the assessee, the  appellant  in  this Court.      The  appellant is. a company manufacturing  sugar.   It had its factory originally at a place called 19 Sitalpur.   That place was found to be  disadvantageous  for the  appellant’s business as sugar cane of good quality  was not  available in sufficient quantity in  the  neighbourhood and also as it suffered from ravages of flood.  With a  view to improve  its business the appellant removed its   factory from  Sitalpur  to another place called Garaul  and  in  the process   of   dismantling  the  building   and   machinery, transportation  from  Sitalpur to Garaul and  refitting  the machinery  at the latter place, it incurred a total  expense of Rs. 3,19,766/- in the year of account.  In the assessment of its income-tax. it claimed a deduction of these  expenses as   revenue  expenses.   That  claim  was  rejected.    The questions referred concern these expenses.               The first question was this:                      "Whether  the  expenditure  of  Rs.  3,               19,766/-incurred by the assessee m dismantling               and  shifting  the factory from  Sitalpur  and               erecting the factory and fitting the machinery               at Garaul was expenditure of a capital  nature               and   not  revenue  expenditure   within   the               meaning of section 10 (2) (xv) of the  Income-               tax Act ?" Considering the matter apart from the authorities, it  seems to  us  impossible  that the expenditure  could  be  revenue expenditure.  It was clearly not incurred for the purpose of carrying  on the concern but it was incurred in  setting  up the  concern with a greater advantage for the trade than  it had  m  its.previous  set up.   The  expenditure  was  .not. recurred  m  caring  any profit but  only  for  putting  its factory,  that is, its capital, in better shape so  that  it might produce larger profits, when work.ed.  It really .went towards  effecting  a permanent  improvement in  the  profit making  machinery, that is, in the capital assets.  It  was, therefore,   a  capital   expenditure  and  not  a   revenue expenditure. 20     The   case,  furthermore,  is  completely  governed   by authorities.   We  think it comes clearly within  the  well- known  dictum  of  Viscount  Cave  in  Atherton  v.  British

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Insulated  and  Helsby  Cables  Ltd  (1).   That  "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  test formulated by Viscount Cave  has  been accepted by this Court: see Assam Bengal Cement 6’0. Ltd. v. The  Commissioner of Income-tax West Bengal (2).   Here  the expenditure  produced an enduring advantage in the shape  of transfer  to  a  better factory  site,  an  advantage  which enabled the trade to prosper and an advantage that could be expected  to  last  for ever.  It was  an  expense  properly attributable  to  capital   under  Viscount  Cave’dictum.     Mr.  Pathak did not question the authority of  the  test laid  down in Atherton’s case (1), but said that  that  test had no application in the present case as it would not apply unless by the expenditure a material asset or a covenant  or right  in  the  nature of capital  was  acquired.   We  find neither principle nor authority to support this  contention. If an expenditure incurred, say for acquiring an  additional plant,  is capital expenditure, an expenditure  incurred  in dismantling  and  refitting the existing plant at  a  better site would be equally  capital expenditure. They would  both be  capital  expenditure  because  both  were  incurred  for increasing the capacity of the profit making machine to earn profits  and  neither was incurred for earning  the  profits themselves.  In principle, therefore, there is no reason  to make a distinction .as to the nature of the expense  between an expenditure incurred for acquiring material capital (1) (1925) 10 T.C. 155. 192,      (2) [1955] 1 S.C.R, 972, 21 asset  or  a  legal right in the nature of  capital  and  an expenditure  incurred  for acquiring any other advantage  of an enduring nature for the benefit of the trade.  It is true that  it has been said, as Mr. Pathak pointed out, that  the advantage  acquired by the expenditure must be analogous  to an asset (see Halsbury’s Laws of England, 3rd ed. Vol. XX p. 162.)  but  that  only means advantage of the  nature  of  a capital  asset,  that  is  to  say,  "an  advantage  to  the permanent  and enduring benefit of the trade". see ibid   p. 161.  It is obviously not  necessary for an advantage to  be of  such  a  nature that it must be  the  acquisition  of  a material asset or of a chose in action. As  to  the authorities, they are all against the  view  for which  Mr.  Pathak contends. We propose to refer to  two  of them  only.  First,  there is the  case  of  Granite  Supply Association  Ltd. v. Kitton (1). The assessee was a  company whose  business was to buy and sell granite.  It   found  it necessary to shift to a larger yard and in doing so incurred expenses  for removal  of stones and cranes from the old  to the  new yard and for re-erecting the cranes in  the  latter yard.   It was held that the Company was not entitled  to  a deduction for these expenses.  It was said that the expenses were  of  the  same  kind as those  which  might  have  been incurred in the buying of new cranes. Lord MacLaren said (p. 17IL "I think that the cost’ of transferring plant from  one set  of premises to another more commodious set of  premises ’is not an expense incurred for the year in which the  thing is  done, but for the general interests of the business.  It is  said, no doubt, that this transference does not  add  to the capital ’value of the plant, but I think that is not the criterion."   Lord  MacLaren’s  observation  is   completely against the view advocated by Mr. Pathak that to  constitute

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an  enduring  benefit a material asset or a  right  must  be created.     The  above case, furthermore, is indistinguishable  from the case in hand.  Mr. Pathak sought to (1) (1905) 5 T.C.160. 22 distinguish  the  present  case  from  the  Granite   Supply Association  Ltd.  case (1),  on the ground that  there  the business  was not running at a loss in the old yard and  the expenses  were  incurred only to enlarge  the  business  and hence  were  on capital account.  We find it  difficult  to. appreciate  this  distinction.   Whether an  expense  is  on capital  account or not would not depend on whether  it  was incurred for earning larger profits than before nor would an expenditure  be on revenue account because it  was  incurred for turning a losing concern into a profitable one.     The   other  case  to  which we will refer  is  Bean  v. Doncaster  Amalgamated  Collieries  Ltd.(2).  The   Colliery Company   was required by a statute to  incur  expenses  for remedial works necessary tO obviate loss of efficiency in an existing  drainage system due to subsidence  caused  by  the Company’s  workings.   The Drainage Board formed  a  general drainage  improvement scheme and the Company paid a part  of the  expenses  of the  new drainage constructed  under   the scheme.   As  a result of the new drainage the  Company  was enabled to work its seams  without  incurring the  liability under  the statute as the new  drainage system had  been  so constructed   as  to  remain  unaffected  by  the  Company’s workings.  It    was   contended  by the  company  that  the payment  for the new drainage  was  a  revenue   expenditure as it had not resulted  in  the  acquisition  of any-capital asset, but this contention was rejected and it was held that the expenditure was on capital account and no deduction  for it  was allowable.  Viscount Simon said (p. 312),  that  the expenses had been incurred "to secure an enduring  advantage within  the  proper  application of Lord  Cave’s  phrase  in Atherton  v.  British    Insulated    and    Helsby   Cables Ltd.  (10  T.C. 155, at page 192)". He also  quoted  (p.312) with approval the observation of Uthwatt J. in the Court  of Appeal that, "The result of the transaction (1) (1905) 5 T.C. 168.           (2) (1946) 27 T.C. 296, 23 clearly   was  that  the  value  of  the   particular   coal measures--a    capital   asset   remaining   unchanged    in character--was  increased both for use and  exchange.  There was,  therefore,  as the result of  the  transaction,brought into  existence, not indeed an asset, but  an advantage  for the  enduring  benefit  of  the  trade  of   the   Company." Obviously,  therefore,  there can be an  enduring  advantage acquired without an addition to  or increase in the value of any capital asset.     It is no doubt true that the distinction between revenue expenditure  and  expenditure on capital is  very  fine  and often  it  is  difficult  to decide  under  which  class  an expenditure  properly falls.  No such  difficulty,  however, arises  in  the  present ease.  We think,  for  the  reasons earlier  mentioned, that the present is a plain ease and  we feel no doubt that the expenses for shifting and re-erection were  incurred  on  capital  account.   The  first  question referred was clearly correctly answered by the High Court.     The  appellant’s ease  is  even weaker  with  regard  to the other question which was this:                  "Whether the assessee was entitled to claim               depreciation   on  the  said  expenditure   of               Rs. 3,19,766/-?"

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This question was raised presumably on the basis that if  in respect  of  the  first  question  it  was  held  that   the expenditure was on capital account, then depreciation should be payable on the amount of the expenditure in the same  way as  depreciation  is  allowed on  capital.   The  claim  for depreciation  was  made under s. 10 (2) (vi) of the  Income- tax Act.  But as the High Court rightly pointed out, no such depreciation could be claimed because no tangible asset  had been acquired by the expenditure which could be said to have depreciated. 24     Mr.  Pathak, therefore,  put the case of  the  appellant from  a slightly different point of view. He referred us  to Part V of the Form of Return given in the Rules framed under the  Act.   That Part deals with a claim  for  depreciation. Column  3 of this Part requires a statement to be  made  for "Capital   expenditure  during  the  year   for   additions, alternations,  improvements  and  extensions".   Mr.  Pathak contended  that  this  Part  showed  that  depreciation   is allowable   on  capital  expenditure  for improvements,  and that in view of our answer to question No. 1. the  appellant would be entitled to depreciation on  the expense as capital expenses  incurred for improvement.  This is  an   obviously fallacious argument.  In  order to be entitled  to deduction on   account  of depreciation under this Part of  the  Form, there  has  to be an improvement of the  capital  asset,  an increase in its value.  All that we have here is an  expense incurred for acquiring an advantage for the trade.  That may or  may  not be an improvement in the capital  assets.   The appellant cannot claim depreciation on the amount spent  for acquiring   an   advantage.    Whether   it   could    claim depreciation   on improvements  effected to  capital  assets is  not   a  question referred to  the  Court.   The  second question,  therefore, was  also correctly answered  in   the negative by the High Court.           This appeal is dismissed with costs. 25