1978 (1) TMI 53 - HC - Income Tax

Summary

Issues Involved
1. Whether the expenditure of Rs. 50,000 incurred by the assessee was capital or revenue in nature.
2. Applicability of section 37(1) of the Income-tax Act, 1961, to the expenditure in question.

Detailed Analysis

1. Nature of Expenditure: Capital or Revenue
The primary issue was to determine whether the expenditure of Rs. 50,000 incurred by the assessee was capital or revenue in nature. The assessee, India Tobacco Co. Ltd., had gifted a hospital to the Government of Bihar and paid Rs. 50,000 for hospital equipment. The Income-tax Officer disallowed the claim, stating that the expenditure was capital in nature as it secured an enduring benefit in the form of concessional charges for hospitalisation of employees. The Appellate Assistant Commissioner allowed the appeal, holding that the expenditure was for the welfare of the employees and arose in the normal course of business, thus treating it as revenue expenditure. The Tribunal upheld this view, allowing the expenditure as a deduction under section 37(1) of the Income-tax Act, 1961.

2. Applicability of Section 37(1) of the Income-tax Act, 1961
Section 37(1) allows deductions for any expenditure not being of a capital nature, laid out or expended wholly and exclusively for the purposes of the business. The Tribunal found that the payment facilitated the use of hospital facilities for employees not covered by the Employees' Insurance Scheme, thus considering it admissible under section 37(1).

Judicial Precedents and Analysis
The judgment extensively analyzed several precedents to determine the nature of the expenditure:

- Rowntree & Co. Ltd. v. Curtis: The Court of Appeal held that a lump sum set aside for employee welfare was not an admissible deduction, emphasizing that the expenditure was capital in nature.

- Atherton v. British Insulated & Helsby Cables Ltd.: The House of Lords held that a sum contributed to a pension fund was capital expenditure, emphasizing that expenditure made once and for all to bring into existence an asset or advantage of enduring benefit is capital in nature.

- Anglo Persian Oil Co. Ltd. v. Dale: The Court of Appeal held that payments to agents for terminating agreements were revenue expenditure, emphasizing the importance of the nature and purpose of the expenditure.

- Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax: The Supreme Court held that protection fees paid to prevent competition were capital expenditure, emphasizing the creation of an enduring benefit.

- Indian Molasses Co. (Pvt.) Ltd. v. Commissioner of Income-tax: The Supreme Court reiterated that capital expenditure cannot be attributed to revenue and vice versa, and a lump sum payment does not necessarily make the payment capital.

- Commissioner of Income-tax v. Malayalam Plantations Ltd.: The Supreme Court observed that the expression "for the purpose of the business" is wider than "for the purpose of earning profits," encompassing various business-related expenditures.

- Commissioner of Income-tax v. Hindusthan Motors Ltd.: The Calcutta High Court held that expenditure for running the business efficiently and conveniently, rather than bringing about an enduring benefit, was revenue expenditure.

Conclusion
The judgment concluded that the expenditure of Rs. 50,000 incurred by the assessee was capital in nature. The payment was not merely for getting rid of recurring annual expenses but also for obtaining an enduring benefit or privilege, i.e., the use of hospital facilities for an indefinite period. This advantage was considered an asset of enduring benefit, akin to fixed capital. Therefore, the expenditure was not admissible as a deduction under section 37(1) of the Income-tax Act, 1961.

The question was answered in the negative and in favor of the revenue, with each party bearing its own costs.