1969 (9) TMI 24 - HC - Income Tax

Sums paid as contribution to the Cane Centre Roads Development Fund - contribution was for the purpose of constructing roads for improving transport facilities - contribution made by the assessee brought assets of capital nature into existence - rightly treated as capital expenditure

Summary

Issues:
- Determination of whether certain expenditures made by the assessee qualify as capital expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Analysis:
The judgment pertains to a reference under the Indian Income-tax Act, 1922, involving an assessee who paid two sums of money as contributions to the Cane Central Roads Development Fund during specific assessment years. The primary issue was whether these expenditures could be considered as capital expenditure under section 10(2)(xv) of the Act. The assessee contended that the payments were made wholly and exclusively for the purpose of its business. The key consideration was whether the payments constituted capital or revenue expenditure based on the enduring benefit to the business.

The court examined the distinction between capital and revenue expenditure as established by the Supreme Court in a previous case. It was highlighted that if an expenditure is made to acquire an asset or advantage for the enduring benefit of the business, it is considered capital expenditure. On the other hand, if the expenditure is for running the business to generate profits, it is classified as revenue expenditure. The court applied this test to the case at hand to determine the nature of the payments made by the assessee.

The court specifically analyzed the purpose of the payments, which were contributions to the fund for constructing roads to improve transport facilities. While the assessee relied on a precedent involving road repairs, the court noted a crucial distinction in the present case where the contributions were for constructing new roads. It was emphasized that when new roads are built, a capital asset is created, regardless of land ownership. Consequently, the court concluded that the contributions made by the assessee resulted in the creation of capital assets, thereby classifying the expenditures as capital expenditure.

In light of the above analysis, the court answered the question referred to it in the affirmative, ruling against the assessee. Additionally, the court directed the assessee to pay costs to the Commissioner of Income-tax. The judgment underscores the importance of distinguishing between capital and revenue expenditure based on the nature and purpose of the expenditure in the context of business operations.