- (1.) 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 Sugar-cane Development Scheme promoted by the Uttar Pradesh Government as part of the Second Five Year Plan, It was provided under the Sugar-cane Development Scheme that one third of the cost of construction of roads would be met by the Central Government, one third by the State Government and the remaining one third by Sugar factories and sugar-cane 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 is 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 company's 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 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 the present appeal in this Court after obtaining the necessary certificate from the High Court.
(2.) 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 purpose 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).
(3.) 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 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 sugar-cane 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 Sugar-cane 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 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. Atherton (1926) 10 Tax Cas 155 at p. 189 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. Nchanga Consolidated Copper Mines Ltd., (1965) 58 ITR 241 (PC) 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 no endurance at all". It was also pointed out by this Court in Empire Jute Co. Ltd. v. C. I. T. (C. A. No. 1191 of 1974 decided on 9th May, 1980 (reported in AIR 1980 SC 1946) 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.;