1988 (5) TMI 2 - SC - Income Tax

Expenditure incurred by the assessee on providing water pipelines and electricity facility to municipality - capital expenditure - Whether, the expenditure of Rs. 2,09,459, or any portion thereof, incurred by the company in the accounting period relevant to the assessment year 1959-60 was allowable as deduction in determining the profits of the company for the assessment year 1959-60

Summary

Issues:
Interpretation of whether the expenditure incurred by the company is allowable as a deduction in determining profits for the assessment year 1959-60 under the Indian Income-tax Act, 1922.

Analysis:
The case involved an appeal against a judgment of the Bombay High Court regarding the deductibility of an expenditure of Rs. 2,09,459 incurred by the company, the Associated Cement Companies Ltd., during the relevant accounting period. The expenditure was related to an agreement with the Government of Hyderabad and the Shahabad Municipality for providing water supply, electricity, and road construction. The Income-tax Officer initially disallowed the expenditure as capital expenditure, but the Appellate Assistant Commissioner allowed it as a composite sum of revenue outgoings. The Income-tax Appellate Tribunal directed a scrutiny of the expenditure and allowed the deduction to the extent it did not result in the company becoming the owner of any asset.

The main issue before the court was whether the expenditure in question should be treated as capital or revenue expenditure. The Division Bench of the Bombay High Court extensively analyzed various precedents, including the dictum in Atherton v. British Insulated and Helsby Cables Ltd., and the decision in Assam Bengal Cement Co. Ltd. v. CIT, emphasizing the distinction between capital and revenue expenditure based on the enduring benefit to the trade. The High Court concluded that the expenditure was revenue in nature and should be allowed as a deduction under section 10(2)(xv) of the Indian Income-tax Act.

In the Supreme Court appeal, the judges rejected the contention that the expenditure resulted in the creation of capital assets for the company, as the assets belonged to the municipality. They also dismissed the argument that the advantage secured by the company, i.e., exemption from municipal rates for fifteen years, constituted enduring benefit justifying capital expenditure treatment. Citing the principle from Empire Jute Co. Ltd. v. CIT, the court held that the advantage obtained was in the revenue field, not capital, as it did not alter the company's capital structure. Consequently, the court upheld the High Court's decision, allowing the expenditure as deductible under the Income-tax Act.

In conclusion, the Supreme Court dismissed the appeal, affirming the judgment of the Bombay High Court and holding that the expenditure incurred by the company was revenue in nature and deductible under the relevant provisions of the Indian Income-tax Act.