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PETITIONER: TRAVANCORE COCHIN CHEMICALS LIMITED

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, KERALA

DATE OF JUDGMENT21/01/1977

BENCH: GUPTA, A.C. BENCH: GUPTA, A.C. KHANNA, HANS RAJ SARKARIA, RANJIT SINGH

CITATION:  1977 AIR  991            1977 SCR  (2) 715  1977 SCC  (2)  20  CITATOR INFO :  D          1981 SC 395  (6)  RF         1989 SC1913  (8)

ACT:             The Income-Tax Act, 1961, s. 37(1), whether construction         of road a permissible deduction under.

HEADNOTE:             The  appellant assessee is a public limited company  who         spent  Rs.26,100/-  for the construction of a new  road  for         improving transport facilities in the area where its factory         is located and sought to deduct this amount from its   total         income  claiming this as revenue expenditure for  the  year.         The  claim was disallowed by the Income-tax Officer and  the         Appellate  Assistant  Commissioner. The  Appellate  Tribunal         held  that the amount could be deducted as revenue  expendi-         ture  but  at the instance of the  respondent  referred  the         matter  to the High Court under s. 256(1) of the Income  Tax         Act, 1961, where it was decided against the appellant.         Dismissing the appeal, the Court,             HELD:  The line of demarcation between capital  expendi-         ture and revenue expenditure has been found to be very thin.         According  to the test suggested in Atherton’s case by  Vis-         count Cave, L.C. by having the new road constructed for  the         improvement  of transport facilities, the assessee  acquired         an  enduring  advantage for its business.   The  expenditure         incurred  was, therefore of  a  capital nature. 1716 F.  717         F-II & 718 D]             Atherton  v.  British Insulated and Helsby  Cables  Ltd.         [1925]  10  Tax Cases 155: Assam Bengal Cement Co.  Ltd.  v.         Commissioner of Income Tax, West Bengal [1955] 27 ITR 34 and         Sitalpur  Sugar Works Ltd. v.  Commissioner  of Income  Tax.         Bihar and Orissa [1963] 49 ITR 160, applied.             Commissioner  of  Income-tax v.  Hindustan  Motors  Ltd.         [1968] 68 ITR 301 and Lakshmiji Sugar Mills Co. (P) Ltd.  v.         Commissioner  of  Income-tax, New Delhi [1971] 82  ITR  376,         distinguished.

JUDGMENT:

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       CIVIL APPELLATE JURISDICTION: Civil Appeal No. 265 of 1972.             From the Judgment and Order dated the 24th August,  1971         of the Kerala High Court in I.T.R.No. 25 of 1969.         G.B. Pai, K.J. John for M/s Dadabhanji & Co., for the Appel-         lant. B.B. ,Ahuja and R.N. Sachthey for Respondent.         The Judgment of the Court was delivered by             GUPTA,  J.--The  question for decision in this  case  is         whether the money contributed by the assessee, public limit-         ed  company, for the construction of a new road in the  area         where its factory is located to improve transport facilities         is capital expenditure or revenue expenditure.   The assess-         ment   year in question is 1964˜65, the relevant  accounting         period  being the financial year ended March 31,  1964.  The         assessee company is engaged in the manufacture of chemicals;         it had been receiving and despatching materials required for         and  produced in its factory through lorries.  The  assessee         along with three,         716         other public undertaking approached the Government of Kerala         for  laying a new road from kalamasseri   to  Udyogamanndal;         this   area where the assessee’s factory is situate was  not         at the material  tune served by pucca roads.   It was agreed         that  the  Government of Kerala would bear the cost  of  the         acquisition  of  the  land and 25 per cent of  the  cost  of         construction.   The total cost to be shared  by   the   four         companies  was Rs. 1,04,550/- and the assessee’s share  came         to  Rs.  26,100/-.   The assessee company sought  to  deduct         this  amount from its total income c/aiming this as  revenue         expenditure  for  the  year in  question.    The  Income-tax         Officer  disallowed  the claim holding that  the  assessee’s         contribution  was capital expenditure.   The  Appellate  As-         sistant  Commissioner  took the same view.    The  Appellate         Tribunal,  mainly relying on the decision of  the   Calcutta         High  Court   in  Commissioner of  Income-tax  v.  Hindustan         Motors  Limited,(1) held that the assessee was  entitled  to         deduct  the amount as revenue expenditure.  At the  instance         of the Commissioner of  Income-tax,  Kerala, Ernakulam,  the         Tribunal  referred the following question to the High  Court         of Kerala under section 256(1) of the Income-Tax Act,1961:                       "Whether,  on  the facts and  in  the  circum-                       stances  of the case, the  Appellate  Tribunal                       was legally justified in allowing the expendi-                       ture  of Rs. 26,100/- being  the  respondent’s                       contribution to government for constructing  a                       road as a permissible deduction under  section                       37(1) 0f the  Income-Tax Act,  1961."           The  High  Court held that the assessee in this  case  ob-         tained  an advantage of an enduring nature by the  construc-         tion of the road and, therefore, the amount contributed  was         capital  expenditure.   The High Court accordingly  answered         the question in negative and against the assessee.   In this         appeal,  brought on a certificate under section 261  of  the         Income-Tax  Act, 1961, the assessee challenges the  correct-         ness of the answer given by the High Court to the question.             The authorities both in this country and in England have         pointed  out the difficulties in formulating  precise  rules         for distinguishing capital expenditure from revenue expendi-         ture.    The line of demarcation has been found to  be  very         thin.   Certain broad tests have however been laid down, and         of  them  the test suggested by viscount Cave,   L.  C.,  in         Atherton  v. British Insulated and Helsby Cables  Limited(2)         appears to have been largely accepted in this country.  This         Court  in Assam Bengal Cement Company  Limited  v.   Commis-         sioner  of Income-tax, West Begnal(3); Sitalpur Sugar  Works         Limited  v. Commissioner of Income-tax, Bihar and  Orissa(’)

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       and a number of other decisions has adopted the test as laid         down  in  Atherton’s  case: to refer again  to  these  often         quoted lines from Viscount Cave’s Judgment "when an expendi-         ture  is  made,  ..........  with a view  to  bringing  into         existence an asset or an advantage for the enduring  benefit         of a         (1) (1968) 68 I.T.R. 301.         (2) (1925) 10 Tax Cases 155.         (3) (1955) 27 I.T.R. 34.         (4) (1963) 49 I.T.R. 160         717         trade,  I think that there is very good reason (in  the  ab-         sence  of special circumstances leading to an opposite  con-         clusion)  for treating such an expenditure as  properly  at-         tributable  not  to revenue but  to capital".  Referring  to         Atherton’s  case and certain other authorities on  the  dis-         tinction between capital expenditure and revenue expenditure         and   the  tests to be applied, this Court in  Assam  Bengal         Cement  Company  Limited v.  Commissioner  of  Income-tax(1)         observed:                       "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.   If  any   such                       asset or  advantage for  the enduring  benefit                       of  the business is thus acquired  or  brought                       into existence it would be immaterial  whether                       the  source of the payment was the capital  of                       the  income  of the concern  or  whether  tire                       payment was made once and for all or was  made                       periodically.    The  aim and  object  of  the                       expenditure  would determine the character  of                       the  expenditure whether it is a  capital  ex-                       penditure  or  a  revenue  expenditure.    The                       source or the manner of the payment would then                       be  of  no  consequence.   It is only in those                       cases where this test is of no avail that  one                       may  go  to the test of fixed  or  circulating                       capital  and consider whether the  expenditure                       incurred was part of the fixed capital of  the                       business  or part of its circulating  capital.                       If  it  was part of the fixed capital  of  the                       business it would be of the nature of  capital                       expenditure  and if it was part of its  circu-                       lating capital it would be of the  nature   of                       revenue expenditure."         In   the  case before us, the High  Court  applied  viscount         Cave’s  test  and  found that the expenditure  made  by  the         assessee brought into existence an advantage for the  endur-         ing  benefit  of the assessee’s trade and  accordingly  held         that this was capital expenditure.             Each  case  turns on its own facts. It is  not  disputed         here  that the correct test has been applied. Did the  money         spent by the assessee on construction of the new road secure         for it an enduring benefit, or was it necessary for  running         its business? On the facts of the case the position seems to         be  clear  enough not to merit an  elaborate  consideration,         that by having the new road constructed for the  improvement         of  transport facilities, the assessee acquired an  enduring

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       advantage  for its business. The High Court rightly  pointed         out that the decision of the Calcutta High Court in  Commis-         sioner  of Income-tax v. Hindustan Motors Ltd.(2)  on  which         the  appellate tribunal  relied, is clearly  distinguishable         on facts; that was a case where the expenditure incurred was         for  repair of an existing road which is different from  the         case  where  a new road is laid out for the purpose  of  the         assessee’s         (1) (1955) 27 I.TR 34.         (2) (1968)68 I.T.R. 301.         718         business.   Mr. Pai, learned counsel for the appellant,  has         relied  on  the decision of this CoUrt  in  Lakshmiji  Sugar         Mills Company Private Limited v. Commissioner of Income-tax,         New Delhi(1),  to  contend that even the expenditure on  the         construction of roads could be revenue expenditure  and  not         expenditure of  a capital nature.   In Lakshmiji Sugar Mills         case the assessee was a private limited company carrying  on         the  business of manufacture and sale of sugar.   Under  the         provisions  of the U.P. Sugarcane Regulation of  Supply  and         Purchase  Act,  1953, the assessee company  was  obliged  to         contribute  certain  amounts for the  development  of  roads         which  were  originally the property of the  government  and         remained so even after the improvement had been made.             Apart  from the fact that in this case  the  expenditure         incurred  was  under a statutory compulsion,  there  was  no         finding that the roads were newly made. 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(1) case is quite         different  on facts from the one before us and must be  con-         fined  to the peculiar facts of that case. On the  facts  of         the  instant  case, we have no doubt  that  the  expenditure         incurred by the assessee was of a capital nature. The appeal         accordingly fails and is dismissed but in the  circumstances         of the case without any order as to costs.         M.R.                                                    Appeal dismissed         (1971) 82 I.T.R. 376,         719