Calcutta H.C : Whether, on the facts and in the circumstances of the case and having regard to the agreement dated June 29, 1961, between the assessee and the West Bengal State Electricity Board, the Tribunal was right in holding that the payment of Rs. 1,66,740 was a revenue expenditure ?

Counsel Appeared

S.K. Mitra & R.C. Prasad, for the Revenue : R.N. Bajoria, J.P. Khaitan & A.K. De, for the Assessee

AJIT K. SENGUPTA, J.:

In this reference under s. 256(1) of the IT Act, 1961, for the asst. yr. 1972-73, the following question of law has been referred to this Court :

“Whether, on the facts and in the circumstances of the case and having regard to the agreement dated June 29, 1961, between the assessee and the West Bengal State Electricity Board, the Tribunal was right in holding that the payment of Rs. 1,66,740 was a revenue expenditure ?”

Shortly stated, the facts are that the assessee made a payment of Rs. 1,66,740 to the West Bengal State Electricity Board. In the original assessment, the ITO allowed payment of Rs. 1,66,740 as revenue expenditure. Thereafter, the CIT invoked the provisions of s. 263 of the Act. The assessee contended before the CIT, by referring to the agreement dated June 29, 1961, between the assessee and the Electricity Board, that when the service lines and apparatus remained the property of the Electricity Board, though payment had been made by the assessee for that and when the service lines are maintained by the Electricity Board and that when they were entitled to supply electricity to other consumers on the same line as per cl. 5(3) of the agreement, the payment made by the assessee was for facilitating supply of electrical energy and hence the expenditure is an allowable revenue deduction. The CIT held that as the company would continue to derive benefit having electricity supplied to the plant even after payment of the instalments ceased to be paid after 25 years, there was an enduring advantage to the assessee and hence the payment in question should not be allowed as a revenue deduction.

The assessee contended before the Tribunal that when maintenance of the service lines was the responsibility of the Electricity Board and when default in payment would lead to disconnection of energy and when the meter boxes were the property of the Electricity Board, the expenditure in question would certainly be revenue in nature because, without payment of this amount, the assessee would not have electrical energy to carry on its business. It was contended that the expenditure in question was an integral part of the assessee’s business expenditure. It was further contended that the conditions imposed were similar to those in the case of ordinary consumers and the only difference was that the amount involved was substantial. It was also contended that, at any rate, payment of interest at 4 1/2 per annum was clearly admissible as revenue expenditure. The assessee further contended that when the predominant and main purpose of business was the carrying on of the business, the incidental advantage of that expenditure, which is of some endurance, could not affect its revenue character.

On behalf of the Revenue, it was contended before the Tribunal that when the Electricity Board was entitled to payment of Rs. 25 lakhs from the assessee towards the cost of the service lines and apparatus necessary for laying the line and when the payment had been allowed by instalments, the payment must necessarily be referable to payment of capital expenditure. Reliance was placed upon the order of the CIT. Considering the agreement and the real significance of the transaction, the Tribunal found that all that the assessee secured from the agreement was the guarantee of electric supply on payment of Rs. 25 lakhs. It was allowed to pay it on a deferred basis with interest at 4 1/2 per annum. Thus, the assessee was required to pay Rs. 13,895 per month over a period of 25 years. The guarantee was coupled with an undertaking from the assessee that the service lines may be used by other persons also and that the lines would never become the property of the assessee. The arrangement thus secured by the assessee was hardly distinguishable from the ordinary arrangement for securing raw materials, i.e., electrical which, as the assessee stated at the Bar, forms 30per cent of the cost of production. Thus, the benefit that the assessee got was securing of electricity energy with a mutual commitment from both sides. The charges paid by the assessee were thus in the nature of hire charges, the effect of such expenditure being relatable to routine operations of business. The payment is thus an internal part of the purchase of electricity and should be treated as an expenditure laid out or expended wholly and exclusively for the purpose of its business. The payment was made out of the profits of the company and thus is relatable to its annual profit which flowed from its manufacturing activities and had no relation to the capital value of its assets. The payment was not tied up or related to any fixed purpose for acquisition of assets of the company, because there was no dispute that the service lines were not part of the assets of the assessee.

6. On the aforesaid facts, the question as set out hereinbefore has been referred to this Court. The question is whether the payment in terms of the agreement by and between the assessee and the West Bengal Electricity Board is a revenue expenditure or a capital expenditure. At the hearing, counsel for the parties reiterated the contentions raised before the Tribunal.

7. It is necessary to refer to the agreement. The agreement was entered into by the assessee with the Electricity Board on June 29, 1961. The preamble to the agreement states “Whereas the assessee requested the Electricity Board to provide for supply of electrical energy for use in the assessee’s premises and the Board had agreed to provide such supply of energy upon the terms and conditions contained in the following clauses: “Clause 4(1): The consumer shall begin to take electrical energy from the Board under the conditions of this agreement from the date (hereinafter referred to as the date of commencement of supply) to be mutually agreed upon but not exceeding two months from the date on which intimation is sent in writing to the consumer by the Board that the supply of electrical energy to the full extent of the contract demand is available under this agreement. Clause 5(1) : Unless otherwise agreed upon, the point of supply shall be the outgoing terminals of the oil circuit breaker or cut out of the card installed at the consumer’s premises from which energy is conveyed to the consumer. (2) : The Board shall supply electrical energy to the consumer at the abovementioned point of supply, provided that : (i) : The abovementioned supply point is mutually agreed upon in writing and all requisite way leaves and consents are obtained therefrom. (ii) : The Board shall be entitled to payment by the consumer of Rs. 25 lakhs towards the cost of service lines and apparatus necessary to lay down or place for the purpose of giving supply at the point mentioned hereof and the consumer shall pay to the Board such cost when called upon to do so. (iii) : The Board, however, solely at its discretion may allow the consumer to pay the cost of the service lines and apparatus on an instalment basis provided it agrees in writing to pay, in addition to energy and other charges, per cl. 16 of this agreement, a monthly fixed sum of Rs. 13,895 towards the cost of such service lines and apparatus till such time as the entire amount due in respect of such service lines and apparatus with interest at the rate of 4 1/2per cent per annum hereto is paid. Clause 5(3) : The above service lines and apparatus although paid for by the consumer shall remain the property of and be maintained by the Board. The Board shall also be entitled to supply other consumers from such service lines and/or apparatus fixed in the consumer’s sub-station mentioned in cl. 7 hereof and for that purpose to erect and maintain such additional lines and apparatus as may from time to time be required. Clause 7 : The consumer, if so required by the Board, shall provide and maintain at his/its own expense an accommodation (hereinafter called the “consumer’s sub-station”) of a size and construction to be approved by the Board for the reception of the electric lines and apparatus provided for the purpose of the supply and for accommodation of the apparatus mentioned in cl. 6 above to be installed for the purpose of providing, transforming, controlling and/or metering the supply. Clause 19(1) : The consumer shall not be at liberty, save with the consent of the Board, to determine this agreement before the expiration of twenty-five years from the date of commencement of the supply hereunder.”

8. Mr. Bajoria contended that this question is virtually concluded by a decision of the Bombay High Court where a similar question was considered by that Court in the case of CIT vs. Excel Industries Ltd. (1980) 14 CTR (Bom) 44:(1980) 122 ITR 995. In that case, the assessee paid a sum of Rs. 9,00,000 to the Gujarat Electricity Board towards the cost of laying overhead service line. The question arose whether the expenditure was a revenue expenditure or a capital expenditure. After considering the several decisions cited before that Court, it has been held as follows (at pp. 997, 999): “An analysis of the facts set out earlier shows that the amount in question has been paid by the respondent towards the construction of an overhead supply line. This supply line never became an asset of the respondent and always belonged to the Gujarat Electricity Board. The supply was guaranteed under the aforesaid agreement for a minimum period of seven years. Notwithstanding the aforesaid contribution made by the respondent towards the cost of the overhead supply line, the respondent had to pay the normal charges for the amount of electricity consumed by it. There is also no doubt that the contribution was made by the respondent for the purposes of commercial expediency, namely, for assuring the supply of electricity which was essential for the manufacture of phosphorus.

9. As far as the present case is concerned, as we have already pointed out, by the aforesaid contribution, the respondent has acquired no capital asset, the overhead service line being always the property of the Gujarat Electricity Board. There is no finding that any enduring benefit or advantage has accrued to the respondent- company by reason of the aforesaid contribution made towards the cost of the overhead supply line. The object of the respondent in making the payment was one of commercial expediency, namely, to obtain supply of electricity, without which the business of manufacture of phosphorus in the unit at Bhavnagar could not go on. The payment was really in the nature of a payment made towards the cost of obtaining supply of electricity essential for the manufacturing activities carried on at Bhavnagar.”

10. It appears that the special leave petition against the said judgment was rejected by the Supreme Court which is reported in (1982) 133 ITR (St.) 54.

11. Our attention has also been drawn to the decision of the Supreme Court in the case of CIT vs. Associated Cement Companies Ltd. (1988) 70 CTR (SC) 28:(1988) 172 ITR 257 (SC). In that case, the assessee-company was running a cement factory at Shahabad. The then Government of Hyderabad included the factory premises within the limits of the Shahabad Municipality. A tripartite agreement was entered into by and between the Government, the municipality and the assesseecompany, whereby the company undertook, firstly, to supply water to the municipality and provide water pipelines and, secondly, to supply electricity for street lighting in the municipality and put up a transmission line therefor, and, thirdly, to concrete the main road from the factory to the railway station. During the previous year relevant to the asst. yr. 1959-60, the assessee spent a sum of Rs. 2,09,459 towards installing water pipelines and accessories outside the factory premises which were to belong to and be maintained by the municipality. Since it was not disputed that the entire expenditure concerned installations and accessories which came to the ownership of the municipality, the High Court held that the expenditure was revenue in nature and deductible in computing the profits of the company. The Supreme Court, affirming the decision of the Bombay High Court, held as follows (at pages 261-263) : “Mr. Manchanda, learned counsel for the appellant, has raised only two contentions before us. The first contention was that since as a result of the expenditure incurred, certain water pipelines were laid which could be regarded as capital assets, the expenditure could only be regarded as capital expenditure. In our view, there is no substance in this contention. It is true that certain water supply lines did come to be laid as a result of the expenditure incurred, but the facts on record, which we have referred to above, clearly show that these water pipelines on which the expenditure in question was incurred were not assets of the assessee, but assets of the Shahabad Municipality and hence it was not as if the expenditure resulted in bringing into existence any capital asset for the company. The only advantage derived by the assessee by incurring the expenditure was that it obtained an absolution or immunity, under normal conditions, from levy of certain municipal rates and taxes and charges. In view of this, the first contention of Mr. Manchanda must be rejected.

The next submission made by Mr. Manchanda was that the advantage of not being liable to pay municipal rates, taxes, etc., which the assessee-company secured by reason of making the expenditure in question was for a period of fifteen years and hence it could be said to be an advantage of an enduring nature, so that the expenditure incurred in acquiring the same would be regarded as capital expenditure. In our view, it is difficult to accept this submission also … What we find is that the advantage which was secured by the assessee by making the expenditure in question was the securing of absolution or immunity from liability to pay municipal rates and taxes under normal conditions for a period of fifteen years. If these liabilities had to be paid, the payments would have been on revenue account and hence the advantage secured was in the field of revenue and not capital. As a result of the expenditure incurred, there was no addition to the capital assets of the assessee-company and no change in its capital structure. The pipelines, etc., which might have been regarded as capital assets and which came into existence as a result of the expenditure incurred did not belong to the assessee-company but to the municipality.”

We have set out the relevant clauses of the agreement. The service lines and apparatus, although paid for by the consumer, i.e., the assessee, shall remain the property of and be maintained by the West Bengal State Electricity Board (hereinafter referred to as “the Board”). Not only that, the Board shall also be entitled to supply other consumers also from the service lines and apparatus fixed in the assessee’s sub-station mentioned in cl. 7 of the agreement. For that purpose, the Board will have the liberty to erect and maintain such additional lines and apparatus as may from time to time be required. The agreement also provides that the Board, solely at its discretion, may allow the consumer to pay the cost of the service lines and apparatus on an instalment basis provided it agrees in writing to pay in addition to energy and other charges a monthly fixed sum of Rs. 13,895 towards the cost of such service lines and apparatus till such time as the entire amount of Rs. 25 lakhs towards the cost of service lines and apparatus with interest is paid. This clause unmistakably points out that, although the cost of service lines and apparatus has been borne by the assessee, the Board is the owner of such service lines and apparatus. By payment of the amount in question, the assessee has acquired the right to use the service lines and apparatus for the purpose of having energy from the Board. By the expenditure in question, the assessee did not acquire any asset. The service lines and apparatus did not belong to the assessee but continued to belong to the Board. An amount spent by the assessee may be deductible as a revenue expenditure even though it results in the acquisition of a capital asset by the third party. In the instant case, the expenditure has been incurred by the assessee only to run its own business more profitably and more advantageously. The expenditure in question has been incurred not in relation to the assets owned by the assessee but in order to obtain electric supply in the business operations of the assessee contributing towards the cost of service lines and apparatus which would remain the property of the Board. The expenditure in question does not create any asset for the assessee.

15. A contention was raised that, as a result of the expenditure, the assessee has, acquired an advantage of enduring nature. This contention cannot be accepted. This word “enduring” has a special significance. It has been described as meaning “enduring in the way that fixed capital endures”. In IRC vs. Carron Company (1968) 45 TC 18, the House of Lords pointed out that what matters is the nature of the advantage in a commercial sense, and it is only where the advantage is in the capital field, that the expenditure would be capital in nature. If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently and profitably, leaving the fixed capital untouched, the expenditure would be on Revenue account even though the advantage may endure for an indefinite future.

16. Viscount Cave L. C. in Atherton (H. M. Inspector of Taxes) vs. British Insulated and Helsby Cables Ltd. (1925) 10 TC 155 (HL), stated (at p. 192) : “But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.”

17. This passage from the speech of Lord Cave has been explained by the Supreme Court in Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113: (1980) 124 ITR 1. Bhagwati J. (as he then was), speaking for the Supreme Court, has pointed out (at page 10) : “This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion and, as pointed out by Lord Radcliffe in CIT vs. Nchanga Consolidated Copper Mines Ltd. (1965) 58 ITR 241 (PC), it would be misleading to suppose that in all cases, securing a benefit for the business would be prima facie capital expenditure ‘so long as the benefit is not so transitory as to have no endurance at all’. There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on Revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would e disallowable on an application of this test. If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on Revenue account, even though the advantage may endure for an indefinite future.”

18. Even assuming that the assessee-company obtained an advantage of enduring nature, in view of the principles laid down by the Supreme Court in Empire Jute Co. Ltd.’s case (supra), even if securing electric energy for the business is a benefit of enduring nature, if the advantage consisted in facilitating the assessee’s business operations and enabling the assessee to conduct his business more efficiently and more profitably, then the expenditure would still be on revenue account and not on capital account. It cannot be said that the expenditure, in the commercial sense, brought an advantage in the capital field with monthly payment towards the cost of an asset which did not belong to the assessee. Even otherwise, such payment is attributable to the user of service lines and apparatus for continued supply of energy by the Board to enable the assessee to carry on its business operations. Such payment must be held to be on revenue account.

On the facts and in the circumstances of this case and in view of the principles laid down by the aforesaid decisions, we are of the view that the expenditure in question is on revenue account and must be allowed.

We may add that, for the asst. yrs. 1962-63 to 1970-71, such expenditure was disallowed in the assessments reopened under s. 147 of the Act, but the AAC allowed the expenditure as revenue expenditure and the Tribunal affirmed the order of the AAC. The reference application under s. 256(1) of the IT Act, 1961, was rejected by the Tribunal in view of the rejection, by the Supreme Court, of the special leave petition in the case of CIT vs. Excel Industries Ltd. (1982) 133 ITR (St.) 54 but no application under s. 256(2) of the Act was filed by the Revenue against the said order of rejection by the Tribunal. Similarly, for the asst. yr. 1971-72, the ITO disallowed the expenditure hereas the AAC allowed the expenditure as revenue expenditure which was confirmed by the Tribunal. But the Tribunal, however, made a reference under s. 256(1) of the IT Act, 1961. This reference is also being heard along with the present reference.

For the asst. yr. 1972-73, the expenditure was disallowed by the CIT. The Tribunal held that the expenses are in the nature of revenue and deleted the addition made by the CIT. The Tribunal allowed the reference under s.256(1) of the IT Act, 1961, which is the instant reference.

For the asst. yrs. 1973-74 and 1974-75, the ITO disallowed the expenditure in the assessments reopened, under s.

147. The first appellate authority reversed the order of the ITO. The Tribunal held that it is a revenue expenditure and also allowed the reference application under s. 256(1) of the IT Act.

22. Similar is the case for the asst. yrs. 1975-76 and 1976-77, where the ITO disallowed the expenditure and the CIT (A) reversed the order of the ITO. The Tribunal confirmed the orders of the CIT (A). In this case also, the Tribunal made a reference under s. 256(1).

For the asst. yrs. 1977-78 to 1979-80, the Tribunal had confirmed the orders of the CIT (A) who allowed the expenditure as revenue expenditure, reversing the orders of the ITO on this point. But the Department did not prefer any application under s. 256(1) of the Act on this issue.

For the asst. yrs. 1980-81 to 1982-83, the ITO disallowed the expenditure and, thereafter, on appeal, the CIT (A)

allowed the expenditure as revenue expenditure but the Revenue did not take up the matter to the Tribunal. From the asst. yr. 1983-84 onwards, the ITO did not make any disallowance at all.

In other words, the ITO has allowed the expenditure as revenue, expenditure. We have noted this fact only to emphasise that consistency in the view taken by the authorities on an identical issue must be maintained. In our view, the Tribunal has all throughout taken the right stand and allowed the expenditure as revenue expenditure.

In that view of the matter, the question in this reference is answered in the affirmative and in favour of the assessee.

There will be no order as to costs.

BHAGABATI PRASAD BANERJEE, J.:

I agree.

[Citation :182 ITR 497]