1980 (8) TMI 1 - SC - Income Tax

Sugar manufacturer - Contribution towards part of cost of construction of roads in area around factory - wholly and exclusively laid out for business - Allowable as deduction

Summary

Issues Involved:
1. Whether the sums of Rs. 22,332 and Rs. 50,000 were admissible deductions in computing the taxable profits and gains of the company's business under section 10(2)(xv) of the Indian Income-tax Act, 1922.
2. Whether the expenditures were of a capital or revenue nature.

Detailed Analysis:

1. Admissibility of Deductions under Section 10(2)(xv):

The court first addressed whether the expenditures of Rs. 22,332 and Rs. 50,000 were incurred wholly and exclusively for the purpose of the business of the assessee. The court noted that for an expenditure to qualify for deduction under section 10(2)(xv), it must be incurred wholly and exclusively for business purposes and must be of a revenue nature.

- Rs. 22,332 Contribution:
The court found that this amount was contributed by the assessee long after the Deoni Dam and the Deoni-Dam-Majhala Road were constructed. There was no evidence that this contribution had any connection to the business of the assessee or that it provided any business advantage. The court concluded that this expenditure was made purely as an act of good citizenship and not for business purposes. Therefore, it was not allowable as a deductible expenditure under section 10(2)(xv).

- Rs. 50,000 Contribution:
The court observed that this amount was contributed under the Sugarcane Development Scheme towards the construction of roads around the factory area. These roads facilitated the transportation of sugarcane to the factory and the outflow of manufactured sugar, thus directly benefiting the assessee's business operations. The court concluded that this expenditure was incurred wholly and exclusively for the business of the assessee.

2. Nature of Expenditure: Capital or Revenue:

The court then examined whether these expenditures were of a capital or revenue nature.

- Rs. 22,332 Contribution:
Since the court had already determined that this expenditure was not for business purposes, it did not delve further into whether it was of a capital or revenue nature.

- Rs. 50,000 Contribution:
The court discussed the test for distinguishing between capital and revenue expenditure, referencing Lord Cave L.C.'s test from British Insulated and Helsby Cables Ltd. v. Atherton. The court emphasized that this test is not universally applicable and must yield to special circumstances. The court cited the decision in Empire Jute Co. Ltd. v. CIT, which clarified that even if an expenditure results in an enduring benefit, it could still be on revenue account if it facilitates the business operations without adding to the fixed capital.

The court found that the roads constructed with the help of the Rs. 50,000 contribution belonged to the Government of Uttar Pradesh and not the assessee. The contribution facilitated the assessee's business operations by improving transportation, which is essential for the business's efficiency and profitability. The court concluded that this expenditure was on revenue account, as it did not result in the acquisition of any capital asset or expansion of the profit-making apparatus.

The court also referenced the decision in Lakshmiji Sugar Mills Co. P. Ltd. v. CIT, which had similar facts and supported the view that such expenditures are on revenue account. The court distinguished this case from Travancore-Cochin Chemicals Ltd. v. CIT, noting that the latter must be confined to its peculiar facts.

Judgment:

- Rs. 22,332 Contribution:
The court dismissed the appeal regarding this amount, affirming that it was not allowable as a deductible expenditure under section 10(2)(xv).

- Rs. 50,000 Contribution:
The court allowed the appeal to the extent of this amount, holding that it was revenue expenditure laid out wholly and exclusively for the assessee's business and thus deductible under section 10(2)(xv).

Costs:

The court ordered that each party should bear and pay its own costs throughout, as the assessee had partly won and partly lost the appeal.