High Court Of Madhya Pradesh
Gwalior Rayon Silk Manufacturing (Weaving) Co. Ltd. vs. CIT
Asst. Year 1964-65, 1965-66
G.G. Sohani & R.K. Verma, JJ.
M.C.C. No. 186 of 1984
11th November, 1987
Desai with K.N. Puntembekar, for the Assessee : R.C. Mukati, for the Revenue
G.G. SOHANI, J.:
As directed by this Court, the Tribunal has referred the following questions of law to this Court for its opinion :
” (1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amount of Rs.1 lakh contributed by the assessee to the Government of Kerala for construction of a road in each of the asst. yrs. 1964-65 and 1965-66 was in the nature of capital expenditure and in not allowing deduction of such expenditure on that ground?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amount of Rs. 5,125 and Rs. 3,481 contributed by the assessee to the Government of Kerala towards the cost of construction of tubewells in the asst. yr. 1965-66 was in the nature of capital expenditure and in not allowing the deduction of such expenditure on that ground ? “
2. The material facts giving rise to this reference, briefly, are as follows : The assessee is a public limited company. In the returns filed by the assessee for the asst. yrs. 1964-65 and 1965-66, the assessee claimed deduction of Rs. one lakh in each year paid by the assessee to the State Government of Kerala as the contribution of the assessee for metalling and blacktopping of a kacha road from Mavoor to Calicut railway station. According to the assessee, a new pulp factory was set up by the assessee at Mavoor, but as the road between Mavoor and Calicut railway station was kacha and not motorable during the rainy season, the factory of the assessee was almost cut off from other parts of the area. The assessee, therefore, approached the Government of Kerala which agreed to metal and blacktop the road subject to the assessee making a contribution of Rs. 2,00,000 towards the work. The assessee accordingly paid its contribution of Rs. one lakh during each of the two assessment years in question. The assessee also claimed deduction on account of contribution made by the assessee to the State Government for construction of tubewells in the vicinity of its factory. Both these deductions were disallowed by the ITO on the ground that the expenditure was of a capital nature. On appeal, the AAC and, on further appeal, the Tribunal upheld the finding of the ITO. The assessee, therefore, submitted an application for making a reference to this Court but as that application was rejected , the assessee submitted an application under s. 256(2) of the Act before this Court. That application was allowed and that is how the aforesaid questions of law have been referred to this Court for its opinion.
3. Having heard learned counsel for the parties, we have come to the conclusion that this reference has to be answered in the negative and in favour of the assessee. The Tribunal has disallowed the expenditure incurred in connection with construction of road and tubewells on the sole ground that the expenditure was in the nature of capital expenditure. Therefore, the only question for consideration is whether the expenditure in question was in the nature of capital or revenue expenditure. The Tribunal has relied on the decision of the Supreme Court in Travancore-Cochin Chemicals Ltd. vs. CIT 1977 CTR (SC) 148 : (1977) 106 ITR 900 (SC). But as held by the Supreme Court in L.H. Sugar Factory & Oil Mills (P.) Ltd. vs. CIT (1980) 19 CTR (SC) 185 : (1980) 125 ITR 293 (SC), the decision in (1977) 106 ITR 900 (SC) must be confined to the peculiar facts of that case. In Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC), the Supreme Court observed as follows (p. 10): ” 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 be 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.”
The decision in Empire Jute Co. Ltd.’s case (supra) was reaffirmed by the Supreme Court in L. H. Sugar Factory & Oil Mill’s case (supra) and it was held that where construction of a road had facilitated the business operations of the assessee and enabled the management and conduct of the assessee’s business to be carried on more efficiently and profitably, though the advantage secured for the business of the assessee was of a long duration, it was not an advantage in the capital field because no tangible or intangible asset was acquired by the assessee nor was there any addition to or expansion of the profitmaking apparatus of the assessee. Following the test laid down in L.H. Sugar Factor & Oil Mill’s case (supra), it must be held that the Tribunal was not justified in holding that the expenditure incurred by the assessee in connection with the construction of the road and tubewells was of a capital nature.
Our answer to the two questions referred to this Court is, therefore, in the negative and in favour of the assessee. In the circumstances of the case, parties shall bear their own costs of this reference.
[Citation : 172 ITR 131]