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TMI Blog1977 (6) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... essee for transportation of ore notwithstanding the fact that in its profit and loss the said sum had been shown under the head " Capital Asset " in the balance-sheet as on March 31, 1966, and depreciation amounting to Rs. 11,029 also had been debited. It was claimed before the Income-tax Officer that there were existing kutcha roads which had to be repaired and kept under constant repair in order to render them all-weather roads capable of taking the load of heavy lorries carrying iron ore. It was also claimed that out of the aforesaid sum of Rs. 55,145.86, about Rs. 10,000 related to the construction of new branch roads to the actual working site and the balance related to road repairs. On going through the accounts, the Income-tax Officer found that the new roads were laid by engaging contractors and the cost of construction of such roads was paid to various contractors. He found that there were no roads in the earlier years and the assessee had made new roads during the relevant accounting year. Therefore, he rejected the assessee's claim holding that the said sum of Rs. 55,146 was capital expenditure for construction of new roads. Aggrieved by the said order of the Income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a permanent lease; and that in view of the short duration of the lease, it could not be said that the assessee derived any enduring benefit. This contention was rejected by the Tribunal. It was next urged before the Tribunal that as the roads were laid on lands belonging to others, no capital asset was brought into existence either and, therefore, the expenditure cannot be treated in law as capital outlay. This contention was rejected by the Tribunal relying on the judgment of the High Court of Allahabad in Lakshmi Sugar & Oil Mills v. Commissioner of Income-tax [1972] 84 ITR 439. The Tribunal agreed with the Appellate Assistant Commissioner that the expenditure could not be said to be wholly for the assessee's business since it was as much to facilitate the business of the raising contractor as the assessee's own. The Tribunal accordingly rejected the claim made by the assessee for deduction of the cost of construction of roads as revenue expenditure. On the above facts, the Tribunal stated a case and referred the following questions of law for the opinion of this court : " 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holdin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing area. If the expenditure is in the nature of revenue expenditure, the assessee is entitled to its deduction under section 37 of the Income-tax Act), but an item of expenditure though wholly and exclusively laid out for the purpose of the business, would be inadmissible if it is of a capital nature. Capital expenditure has not been and indeed, in view of the great diversity of the contexts in which the question arises, does not admit of being exhaustively defined. Several tests have been suggested to determine whether a particular outgoing represents an outlay of capital or of revenue expenditure. While the tests are generally efficacious, there are, however, twilight areas where the borderline between capital and revenue expenditure is very thin if not altogether tending to disappear and in borderline cases a conclusion one way or the other may, with equal propriety, be reached. The concept of what is capital and what is revenue is, in the nature of things, something which cannot be static and fixed, but must be dynamic to accord with changing patterns of economic life of the community. It is, therefore, difficult to lay down any general rule so sufficiently accurate and ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital account corresponds with the distinction between the business entity, structure or organization set up or established for the earning of profit and the process by which such an organization operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit or loss. The business structure or entity or organization may assume any of an almost infinite variety of shapes and it may be difficult to comprehend under one description all the forms in which it may be manifested ...... In the attempt, by no means successful, to find some test or standard by the application of which expenditure or outgoings may be referred to capital account or to revenue account the courts have relied to some extent upon the difference between an outlay which is recurrent, repeated or continual and that which is final or made 'once for all ', and to a still greater extent upon a distinction to be discovered in the nature of the asset or advantage obtained by the outlay. If what is commonly understood as a fixed capital asset is acquired the question answers itself. But the distinction goes further. The result or purpose of the expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to reconcile all the reasons given for them. I think much of the difficulty has arisen from taking too literally statements made in earlier cases and seeking to apply them to a different kind of case, which their author almost certainly did not have in mind--in seeking to treat expressions of judicial opinion as if they were words in an Act of Parliament. And a further source of difficulty has been, a tendency in some cases to treat some one criterion as paramount and to press it to its logical conclusion without proper regard to other factors in the case. The true view appears to me to be that stated by Lord Macmillan in Van den, Berghs Ltd. v, Clark [1935] AC 431, 438, 439 ; 3 ITR (Eng Cas) 17 (HL) : ' While each case is found to turn upon its own facts, and no infallible criterion emerges, nevertheless the decisions are useful as illustrations and as affording indications of the kind of considerations which may relevantly be borne in mind in approaching the problem ........' So it is not surprising that no one test or principle or rule of thumb is paramount. The question is ultimately a question of law for the court, but it is a question which must be answered in light of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for 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 if it was part of its circulating capital it would be of the nature of revenue expenditure." (Underlining is ours). In Sitalpur Sugar Works Ltd. v. Commissioner of Income-tax [1963] 49 ITR 160 (SC), Lakshmiji Sugar Mills Co. Ltd. v. Commissioner of Income-tax [1971] 82 ITR 376 (SC) and in Travancore-Cochin Chemicals Ltd. v. Commissioner of Income-tax [1977] 106 ITR 900 (SC) the enunciation made by the Supreme Court in Assam Bengal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure upon the road can be allowed at all. Section 51 expressly excepts from its operation losses and outgoings of capital or of a capital nature. In my opinion the expenditure by the taxpayer company is an outgoing of a capital nature. I do not found this opinion in any way on the suggestion that the company constructed the road for a dual or secondary purpose and not simply to enable the timber to be obtained. I accept the position that the road was constructed in pursuance of the agreement and because it was necessary for the purpose of removing the timber. But even so it amounted, as I think, to an outlay of a capital nature. It is not to the point that the outlay was made in connection with the creation of an asset of which the value for the purpose of profitably working the timber or obtaining royalties therefrom would progressively diminish. That happens when capital is spent in acquiring patents, mining leases or concessions limited in point of time. Income-tax law may not always be just in the provisions it makes for writing off against assessable income the cost of such wasting or terminating assets. But that does not make their acquisition or creation any the less an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness. This decision, therefore, is clearly distinguishable, and its analogy inapposite. Sri Sarangan next placed strong reliance on B. P. Australia's case [1966] AC 224 (PC) referred to earlier and submitted that the principles enunciated therein are applicable to the facts of the present case. The B. P. Australia's case [1966] AC 224 (PC) was heard by the same judges, in a different capacity, who heard the Regent Oil Company's case [1966] AC 295 ; [1969] 73 ITR 301 (HL). The latter was heard before the House of Lords, whilst the former was heard by the same judges sitting as members of the Privy Council. In Regent Oil Company's case [1966] AC 295 ; [1969] 73 ITR 301 (HL) the agreements in question provided for assessee of the filling station site by the site owner to Regent for a nominal rent, but in consideration of a premium, and a sub-lease granted on the same day by Regent to the retailer for the whole of the term of lease less a few days. The sub-letting periods ranged from five years to twenty-one years, and the premium varied from pounds 2,000 to pounds 183,000. The House of Lords held the payments to be of a capital nature. In B. P. Australia's case [1966] AC 224 (PC), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egent's case [1966] AC 295; [1969] 73 ITR 301 (HL), the sums paid were made for the acquisition of an interest in land and in B. P. Australia's case [1966] AC 224 (PC) there was no question of such interest. But both cases leave unanswered the question as to where the border line between capital and revenue payment is to be drawn, where no leasing arrangements are involved. In B. P. Australia's case [1966] AC 224 (PC), Lord Pearce, referring to the relevant criteria, stated at page 264: " The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a common sense appreciation of all the guiding features which must provide the ultimate answer. Although the categories of capital and income expenditure are distinct and easily ascertainable in obvious cases that lie far from the boundary, the line of distinction is often hard to draw in border line cases; and conflicting considerations may produce a situation where t ..... 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