V.K.SINGHAL, J. - (1.) THE Tribunal has referred the following question of law under S. 256(1) of the IT Act, 1961, for the asst. year 1982 83 : "Whether, on the facts and in the circumstances of the case, the development charges paid to RIICO is in the nature of capital or revenue ?"
(2.) THE brief facts of the case are that the assessee is carrying on the business of dyeing and tentering of voile on job basis for which the assessee obtained land in the industrial area from RIICO. The development charges of Rs. 5,925 were claimed as revenue expenditure. The ITO found that the assessee has debited a sum of Rs. 3,950 to the P&L account and Rs. 1,975 has been debited under the head "Discount" which has ultimately been adjusted in the processing account. The ITO came to the conclusion that the said amount is the consideration for acquisition of leasehold rights in the plot allotted to the assessee by the RIICO. The assessee by acquiring the leasehold rights certainly acquired an advantage and an asset of enduring nature. The said expenditure was considered as capital in nature and held not admissible. The CIT(A) allowed the appeal and held it to be revenue expenditure. The matter was taken up before the Tribunal and the appeal was allowed following another decision given by the Tribunal in the case of Jaswant Trading Co. In the matter of Jaswant Trading Co., the Tribunal examined the various clauses of the lease for establishment of the factory in the industrial area by RIICO and found that the lease has been executed for a period of 99 years. According to the agreement, the entrepreneur has to make lease charges and the development charges in respect of the land allotted. It is also possible that the development may be made by the intrepreneur himself. The Tribunal came to the conclusion that the development charges are clearly capital in nature. The Full Bench of the Lahore High Court in Benarsidas Jagannath In re (1947) 15 ITR 185 (Lah) (FB) has laid down the following three principles for determining the nature of expenditure as to whether it is capital or revenue : "It is not easy to define the term "capital expenditure" in the abstract or to lay down any general and satisfactory test to discriminate between a capital and a revenue expenditure. Nor is it easy to reconcile all the decisions that were cited before us for each case has been decided on its peculiar facts. Some broad principles can, however, be deduced from what the learned Judges have laid down from time to time. they are as follows : 1. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment : Vide Lord Sands in IRC vs. Granite City Steamship Co. (1927) 13 Tax Cases 1. In City of London Contract Corporation vs. Style (1887) 2 Tax Cases 239, at page 243, Bowen L.J., observed as to the capital expenditure as follows : 'You do not use it 'for the purpose of' your concern, which means, for the purpose of carrying on your concern, but you use it to acquire the concern.' 2. Expenditure may be treated as properly attributable to capital when it 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 : vide Viscount Cave L.C. in Atherton vs. British Insulated and Helsby Cables Ltd. (1925) 10 Tax Cases 155 (HL). If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. Thus, if labour saving machinery was acquired, the cost of such acquisition cannot be deducted out of the profit by claiming that it relieves the annual labour bill, the business has acquired a new asset, that is, machinery. The expression 'enduring benefit' or 'of a permanent character' were introduced to make it clear that the asset or the right acquired must have enough durability to justify its being treated as a capital asset. 3. Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. Fixed capital is what the owner turns to profit by keeping it in his own possession. Circulating or floating capital is what he makes profit of by parting with it or letting it change masters. Circulating capital is capital which is turned over and in the process of being turned over yields profit or loss. Fixed capital, on the other hand, is not involved directly in that process and remains unaffected by it." The above judgment has been approved by the Supreme Court in Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34 (SC). In CIT vs. Mihir Textiles Ltd. (1976) 104 ITR 167 (Guj) and in Addl. CIT vs. Rohit Mills Ltd. (1976) 104 ITR 132 (Guj), it was held that the contribution towards betterment charges levied were against the increased potential value of the lands covered by the scheme and not against the running business of the assessee, and the assessee gained an enduring advantage by payment of the amount and the fact that the payment was under a statutory obligation and not because the assessee desired it, was immaterial. The expenditure was on capital account and not an expenditure for producing profits in the conduct of business.
(3.) IN the present matter the nature of expenditure is in relation to a capital asset, namely, the land which has been allotted by the RIICO to the petitioner. The expenditure is in relation to a fixed capital/asset and not to a circulating capital. The fixed capital is that which the entrepreneur turns into profit by keeping the same in the business. The character of the development charges, therefore, would be in respect of an asset of which enduring benefit has been availed of by the assessee. The development charges make the land in a workable position so that the entrepreneur can establish its unit and such expenditure is once for all. It cannot be considered to be an advantage of limited duration. The nature of the advantage in the commercial sense is in the capital field. Therefore, we are of the view that the Tribunal was justified in coming to the conclusion that the development charges paid by the assessee is an expenditure of capital nature and is not allowable.;