1971 (8) TMI 13 - SC - Income Tax

Whether the sums of ₹ 75,000 and ₹ 37,500, paid to the Road Development Fund set up by the Government of U.P. were rightly disallowed as items of capital expenditure - answer of the question is in the negative and in favour of the assessee

Summary

Issues:
1. Whether the sums paid to the Road Development Fund were rightly disallowed as capital expenditure?

Analysis:
The case involved an appeal by a private limited company, engaged in sugar manufacturing, against a judgment disallowing contributions made to the Cane Development Council for road development as capital expenditure. The High Court held the expenditure could not be considered revenue expenditure. The assessee argued that the contributions were for commercial expediency to facilitate transportation and improve business operations. The court referred to established principles distinguishing capital and revenue expenditure, emphasizing that if an expenditure is for an asset's enduring benefit, it is capital expenditure. The revenue contended the expenditure aimed at an enduring benefit, while the assessee argued it was for running the business. The court cited a similar case where expenditure for road repair was deemed revenue in nature due to operational necessity. It found that the contributions were for running the business efficiently, not for an enduring benefit, thus qualifying as revenue expenditure.

The court rejected the High Court's reasoning, emphasizing that the expenditure was for commercial expediency and not for an enduring benefit. It compared the case to a precedent involving a turf club's expenditure on training jockeys, where the expenditure was considered necessary for the club's business operations. The court concluded that the contributions made by the assessee were for commercial expediency and operational efficiency, rather than for a lasting advantage. It noted that the roads were not owned by the assessee, and the development facilitated transportation essential for the business. The court found the expenditure to be for running the business and producing profits, warranting it as a revenue deduction. Consequently, the court allowed the appeal, overturning the High Court's decision and ruling in favor of the assessee. The assessee was granted costs for the appeal.