1989 (5) TMI 27 - HC - Income Tax

Summary

Issues Involved:
1. Whether the payment of Rs. 1,66,740 to the West Bengal State Electricity Board was a revenue expenditure or a capital expenditure.

Summary:

Issue 1: Nature of Expenditure (Revenue vs. Capital)
In this reference u/s 256(1) of the Income-tax Act, 1961, for the assessment year 1972-73, the core issue was whether the payment of Rs. 1,66,740 made by the assessee to the West Bengal State Electricity Board was a revenue expenditure. The Income-tax Officer initially allowed this payment as revenue expenditure. However, the Commissioner of Income-tax, invoking section 263, held that the payment provided an enduring advantage to the assessee and should be considered capital expenditure.

The Tribunal, after examining the agreement dated June 29, 1961, between the assessee and the Electricity Board, found that the service lines and apparatus remained the property of the Electricity Board. The payment was made to facilitate the supply of electrical energy, which was essential for the assessee's business operations. The Tribunal concluded that the payment was akin to hire charges for securing raw materials (electricity) and thus should be treated as revenue expenditure.

Relevant Agreements and Clauses:
The agreement specified that the service lines and apparatus, although paid for by the assessee, would remain the property of the Electricity Board. The Board was entitled to supply other consumers from these lines and apparatus. The payment arrangement included a monthly fixed sum of Rs. 13,895 over 25 years, with interest at 4 1/2% per annum.

Precedents and Legal Principles:
The Tribunal's decision was supported by precedents such as CIT v. Excel Industries Ltd. and CIT v. Associated Cement Companies Ltd., where similar payments were held to be revenue expenditures. The Supreme Court in Empire Jute Co. Ltd. v. CIT clarified that even if an expenditure results in an enduring benefit, it could still be revenue in nature if it facilitates the business operations without affecting the capital structure.

Conclusion:
The High Court upheld the Tribunal's decision, affirming that the expenditure in question was on revenue account. The payment was necessary for the assessee to carry on its business operations efficiently and did not result in the acquisition of any capital asset. The question was answered in the affirmative, in favor of the assessee, maintaining consistency with previous assessments and judicial decisions. There was no order as to costs.