- (1.) The question for decision in this case is whether the money contributed by the assessee, a public limited 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 assessment 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 despatchng materials required for and produced in its factory through lorries. The assessee along with three other public undertakings approached the Government of Kerala for laying a new road from Kalamasseri to Udyogamadal; this area where the assessee' factory is situate was not at the material time 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 Rupees 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 claiming this as revenue from its total income claiming this as revenue expenditure for the year in question. The Income-tax Officer disallowed the claim holding that the assesse's contribution was capital expenditure. The Appellate Assistant Commissioner took the same view. The Appellate Tribunal, mainly relying on the decision of the Calcutta High Court in Commr. of Income-tax v. Hindustan Motors Ltd., (1968) 68 ITR 301 (Cal), 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 circumstances of the case, the Appellate Tribunal was legally justified in allowing the expenditure of Rs. 26,100/- being the respondent's contribution to government for constructing a road as a permissible deduction under Section 37 (1) of the Income-tax Act, 1961." The High Court* held that the assessee in this case obtained an advantage of an enduring nature by the construction 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 correctness of the answer given by the High Court to the question. * 1971 Ker LJ 740
(2.) The authorities both in this country and in England have pointed out the difficulties in formulating precise rules for distinguishing capital expenditure from revenue expenditure. 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 Insulted and Helsby Cables Ltd., (1925) 10 Tax Cas 155 appears to have been largely accepted in this country. This Court in Assam Bengal Cement Co. Ltd, v. Commr. of Income-tax, West Bengal, (1955) 27 ITR 34 = (AIR 1955 SC 89); Sitalpur Sugar Works Ltd. v. Commr. of Income-tax, Bihar, (1963) 49 ITR 160 (SC) and a number of other decisions have 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 expenditure is made ...... 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". Referring to Atherton's case and certain other authorities on the distinction between capital expenditure and revenue expenditure and the tests to be applied, this Court is Assam Bengal Cement Co. Ltd. v. Commr. of Income-tax, (1955) 27 ITR 34 = (AIR 1955 SC 89), 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 if 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 or the income of the concern or whether the 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 expenditure 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 circulating 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 enduring benefit of the assessee's trade and accordingly held that this was capital expenditure.
(3.) 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 us 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 advantage for its business. The High Court rightly pointed out that the decision of the Calcutta High Court in Commr. of Income-tax v. Hindustan Motors Ltd., (1968) 68 ITR 301 (Cal) 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 business. Mr. Pai, learned counsel for the appellant, has relied on the decision of this Court in Lakshmiji Sugar Mills Co. Pvt. Ltd. v. Commr. of Income-tax, New Delhi, (1971) 82 ITR 376 = (AIR 1972 SC 159) 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.;