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TMI Blog1977 (8) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... turing unit at Pratapnagar, Baroda. It appears that the company undertook to set up a new project at village Bhaili near Baroda. In the course of the construction of this project, the company was required to contribute a sum of Rs. 20,000 to the Baroda District Panchayat Board by way of pro rata contribution of the expenses of construction of " a proper road to Bhaili " where the assessee's new project was set up. The assessee-company claimed this contribution as revenue expenditure. However, this claim did not find favour with the ITO, who held that it partook of capital nature and, therefore, disallowed the claim of the assessee-company with the result that the assessee carried the matter in appeal before the AAC of Income-tax, who also, on consideration of the relevant facts and circumstances, confirmed the order of the ITO. The assessee-company, therefore, carried the matter in further appeal before the Income-tax Appellate Tribunal which considered the relevant decisions of different High Courts and the Supreme Court on the point. The Tribunal referred to the order of the AAC where, according to the Tribunal, it was clearly brought out that the assessee-company wanted to start ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture of revenue expenses or capital expenses is always a question depending on the facts and circumstances of each case. No doubt, courts have from time to time in the context of the facts and circumstances arising in a given case laid down broadly the different tests for determining whether the expenses objected to by the revenue are in the nature of capital expenses or revenue expenses. In CIT v. Coal Shipments P. Ltd. [1971] 82 ITR 902, Khanna J., speaking for the Supreme Court, raised a caution in treating these tests as exhaustive or universal. The caution is in the following terms : " Judicial decisions have, from time to time, laid down some broad principles in order to determine whether an expenditure is of a capital nature or revenue nature. Despite the enunciation of those principles, it is not always easy to decide the question in the context of the circumstances of an individual case. Considerable difficulty is experienced in border line cases. It was in this connection that Hidayatullah J. (as he then was) observed in Abdul Kayoom v. Commissioner of Income-tax [1962] 44 ITR 689, 703 (SC) that: 'None of the tests (laid down in various authorities) is either exhaustiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business it would be of the nature of capital expenditure and it was part of its circulating capital it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated. It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down a test which would apply to all situations. One has, therefore, got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bout this necessary implication which we read in the statement of case from the observation of the ITO in his assessment order which is annexure to the statement of the case itself. While adding this sum of Rs. 20,000 to the income returned by the assessee-company, the ITO has recorded his reason for the addition in the following terms: " Contribution to District Panchayat Board for repairs of road to Bhaili Project. Apart from the fact that the expenditure is of a capital nature, it cannot be allowed as a deduction, since it pertains to a project which has not yet gone into production." (emphasis supplied by us) This observation of the ITO, therefore, lends support to the view which we are taking in the matter that the road was already in existence, but was to be put in proper shape. It is for that reason that the Tribunal as well the AAC have stated that the assessee-company was required to make contribution for meeting a part of the expenses of the construction of " a proper road to Bhaili ". In other words, therefore, though the road was there in existence, it was in such a state that unless it was put in proper shape, it was not motorable or such that it could not be used fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mission made on behalf of the revenue because the expenses which have been made are expenses of remedial nature. They are expenses made for purposes of putting the existing road in proper shape. The aim and object of the expenses would, therefore, clearly be more for running the business efficiently and conveniently inasmuch as the new unit at village Bhaili would be served by the transport of the company or other transport which would not be hampered by slow and possibly dangerous state of the road which must be lying in disrepair and ill-condition. These expenses cannot be said to be made for acquiring or bringing into existence an asset or advantage for enduring benefit of the business though the road after being put in proper shape would certainly serve the new project of the assessee-company at Bhaili as well as the other people who would be entitled to use the same, it being a public road. The Calcutta High Court had in CIT v. Hindusthan Motors Ltd. [1968] 68 ITR 301, similar facts, where the assessee was a manufacturer of motor cars having a factory within the territorial limits of Kotrang Municipality which was situated at a little distance away from Main Trunk Road and wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epair of an existing road which is different from the case where a new road is laid out for the purpose of the assessee's business. " In other words, the Supreme Court recognised the distinction between expenses made for laying out a new road and expenses made for repairing an existing road. The learned Government pleader appearing on behalf of the revenue made a very strenuous attempt to impress upon us that even in the case before the Supreme Court the contribution of the expenses was for laying out a pukka road which is also the case here before us. We do not think that the reading of the learned Government pleader is correct since from the facts deduced from the statement of case in the appeal before the Supreme Court it is clear that the Government of Kerala agreed to bear proportionate cost of acquisition of land and also 25% of the cost of construction. It is, therefore, clear that the road was not in existence at all since the land was to be acquired for laying down the new road. On behalf of the assessee-company reliance is placed on the decision of the Supreme Court in Lakshmiji Sugar Mills Co. P. Ltd. v. CIT [1971] 82 ITR 376, where also there was no positive finding th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re not words expressive of a clear contrast', and ' repair is restoration by renewal or replacement of subsidiary parts of a whole. Renewal as distinguished from repair, is reconstruction of the entirety, meaning by the entirety not necessarily the whole but substantially the whole subject-matter under discussion'. The periodical renewal by sections of the rails and sleepers of railway line as they wear out by use is in no sense a reconstruction of the whole railway and is an ordinary incident of railway administration. The fact that the wear although continuous is not and cannot be made good annually does not render the work of renewal when it comes to be effected necessarily a capital charge. The expenditure here in question was incurred in consequence of the rails having been worn out in earning the income of previous years on which tax had been paid without deduction in respect of such wear and represented the cost of restoring them to a state in which they could continue to earn income. It did not result in the creation of any new asset; it was incurred to maintain the appellants' existing line in a state to earn revenue." In this connection reference to a decision of the Hou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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