1971 (8) TMI 71 - HC - Income Tax

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was legally justified in allowing the expenditure of Rs. 26,100 being the respondent s contribution to Government for constructing a road as a permissible deduction under section 37(1) of the Income-tax Act, 1961 - road was dedicated to the public does not affect the nature of the payment - therefore, it is a capital expenditure and not deductible u/s 37(1)

Summary

Issues:
Whether the expenditure for constructing a road is a permissible deduction under section 37(1) of the Income-tax Act, 1961 as revenue expenditure or capital expenditure.

Analysis:
The judgment pertains to a reference under section 256(1) of the Income-tax Act, 1961, regarding the allowability of expenditure for constructing a road as a deduction under section 37(1) of the Act. The assessee, a public limited company engaged in manufacturing chemicals, contributed to the construction of a road from Kalamasseri to Udyogamandal. The Government of Kerala and the companies agreed to share the construction costs, with the assessee's share amounting to Rs. 26,100. The Income-tax Officer disallowed the deduction, deeming it as capital expenditure. The Appellate Tribunal, however, allowed the deduction as revenue expenditure, leading to the current reference.

The key issue revolved around determining whether the expenditure on the road construction provided an enduring advantage, thus qualifying it as capital expenditure, or if it was merely a revenue expenditure. The Appellate Assistant Commissioner held that the benefit derived by the company was not temporary, supporting the capital expenditure stance. The Appellate Tribunal, citing precedents such as Commissioner of Income-tax v. Hindusthan Motors Ltd., allowed the deduction, emphasizing commercial expediency as a basis for the decision.

The court extensively discussed various precedents to analyze the nature of expenditure in similar scenarios. Precedents like Bombay Steam Navigation Co. (1953) Pvt. Ltd. v. Commissioner of Income-tax highlighted the importance of considering all facts and circumstances to determine revenue or capital expenditure. Cases like Ganesh Sugar Mills Ltd. v. Commissioner of Income-tax and Dewan Sugar & General Mills Pvt. Ltd. v. Commissioner of Income-tax distinguished between capital and revenue expenditure based on enduring benefits to the business.

Ultimately, the court held that the construction of the road provided the assessee with an enduring advantage, classifying the expenditure as capital expenditure. The court rejected the argument that the road being dedicated to the public negated the enduring benefit obtained by the assessee. The judgment answered the reference question in the negative, against the assessee, emphasizing the enduring nature of the advantage gained through the road construction. No costs were awarded, and a copy of the judgment was to be sent to the Appellate Tribunal for further action.