1971 (7) TMI 18 - HC - Income Tax

Amount paid by sugar manufacturer for developing roads to facilitate transport of sugar - whether such expenditure can be treated as revenue expenditure

Issues Involved:
1. Whether the payment of Rs. 14,333 is an expense allowable under section 10(1) or section 10(2)(xv) of the Indian Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Allowability of the Expense under Section 10(1) or Section 10(2)(xv):

The assessee, engaged in the business of manufacturing sugar, contributed Rs. 14,333 towards the cost of constructing roads under a scheme sponsored by the Government of India and the Government of Uttar Pradesh. The assessee claimed this expense as a deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922, arguing that the expense was incurred in furtherance of its trade, as its business depended on the development and transportation of sugarcane.

Previous Tribunal Decisions:
The Income-tax Appellate Tribunal had previously rejected similar claims for the assessment years 1957-58 to 1959-60, and subsequently, for the assessment year 1961-62, following its earlier decision.

High Court's Previous Ruling:
This court, in a judgment dated November 4, 1969, held that payments made for road development brought assets of a capital nature into existence, classifying the expenditure as capital expenditure, which is not permissible under section 10(2)(xv). The court also ruled that such capital expenditure cannot be an allowable deduction in the computation of business profits under section 10(1).

Assessee's Argument for Reconsideration:
The assessee's counsel contended that the criteria for determining capital versus revenue expenditure, as laid down by the Supreme Court in cases like Bombay Steam Navigation Co. (1953) Private Ltd. v. Commissioner of Income-tax and Commissioner of Income-tax v. Kirkend Coal Co., were not considered in the previous judgments. The counsel argued that if these criteria were applied, the expenditure should be regarded as revenue expenditure.

Supreme Court's Criteria:
The Supreme Court in Bombay Steam Navigation Co. stated that expenditure related to the carrying on of the business, integral to the profit-earning process, and not for acquiring a permanent asset or right, should be considered revenue expenditure.

Court's Analysis:
The court examined whether the expenditure incurred by the assessee was for acquiring an asset or an advantage of enduring benefit. Referring to the Privy Council's observation in Tata Hydro-Electric Agencies Ltd. v. Commissioner of Income-tax, the court noted that expenditure for acquiring an income-earning asset, even if intangible, should be classified as capital expenditure.

Enduring Benefit:
The court highlighted that expenditure resulting in an enduring benefit for the trade, such as improved transportation facilities, should be considered capital expenditure. The court disagreed with the assessee's argument that the expenditure did not result in a tangible asset owned by the assessee, emphasizing that even intangible benefits could classify as capital expenditure.

Conclusion:
The court concluded that the expenditure incurred by the assessee facilitated the transportation of sugarcane, providing an enduring advantage to the business. Thus, it was not an integral part of the profit-earning process but rather an expenditure for securing an advantage for the business as a whole.

Final Judgment:
The court upheld its previous decision, ruling that the payment of Rs. 14,333 was capital expenditure and not allowable under section 10(1) or section 10(2)(xv) of the Indian Income-tax Act, 1922. The question was answered in the negative, in favor of the revenue, with costs assessed at Rs. 200.

Question Answered:
The question referred was answered in the negative, confirming that the payment was not an allowable expense under the cited sections of the Act.

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