Calcutta High Court
Indian Aluminium Co. Ltd. vs Commissioner Of Income-Tax on 11 September, 1989
Equivalent citations: [1992]198ITR202(CAL)
Author: Suhas Chandra Sen
Bench: Suhas Chandra Sen
JUDGMENT Suhas Chandra Sen, J.
1. The following question of law has been referred to this court by the Tribunal under Section 256(1) of the Income-tax Act, 1961 ("the Act").
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenditure of Rs. 20,00,598 could not be allowed as a revenue expenditure as it represented an expenditure of capital nature?"
2. The assessment year involved in this reference is the assessment year 1972-73, for which the corresponding period of account is the year ending on December 31, 1971.
3. The facts found by the Tribunal as stated in the statement of case are as under :
Before the Income-tax Officer, the assessee claimed deduction of Rs. 20,00,598 which had been incurred in the construction of a road by the assessee. The Income-tax Officer mentioned in his order that the road was 10 kms. long in the district of Kolhapur, Maharashtra. This road connected the main road with the company's mining area situated in a village named 'Nagarsatavdi'. The Income-tax Officer observed that there was no motorable road linking the main road with the mining area of the assessee-company and that this road was constructed by the assessee-company for the first time by incurring a huge expenditure. According to the Income tax Officer, this was a benefit of enduring nature coming to the assessee and he, therefore, treated it as capital expenditure and did not allow the deduction.
4. Before the Appellate Assistant Commissioner, it was contended that the expenditure had been incurred for more efficient running of the business of the assessee. It was further stated that the land on which the road had been constructed did not belong to the assessee and it was further stated that earlier there was a katcha road which was much longer and that road was replaced by a shorter motorable road. The assessee relied on the decision of the Calcutta High Court in the case of CIT v. Hindusthan Motors Ltd. [1968] 68 ITR 301. The Appellate Assistant Commissioner found that, prior to the construction of this new road, the company was carrying bauxite and stones using a longer existing road but in order to have a direct motorable road, this new road was constructed linking the mining area of the company with the highway. He found that the distance was reduced by 6.35 km. by the construction of this new road. The Appellate Assistant Commissioner was of the view that this was an absolutely new road and that it was not a case of repair covering by metal an already existing road.
5. Before the Tribunal it was contended that the land had been made available to the assessee by the Collector of Kolhapur for the specific purpose of construction of a feeder road from the company's mining area up to the main highway. It was also submitted that the land had been leased out for a period of 30 years and, after the expiry of the lease, the land was to be delivered to the Government. The road was to be maintained and repaired by the assessee. It was contended that though these facts were not stated before the lower authorities, yet the basic fact of the road being constructed to shorten the distance and thus, to remove a permanent inconvenience, had been stated. The Tribunal considered the facts and held that the assessee constructed a new feeder road and this road was not merely an improvement of an already existing road. The earlier road, according to the Tribunal, was discarded and in its place this new motorable road was constructed having a width of 80 ft., costing more than Rs. 20 lakhs. As an absolutely new road was constructed, the Tribunal held that the expenditure was of capital nature.
6. An expenditure of more than Rs. 20 lakhs was incurred for the purpose of constructing the new road. The road was 80 ft. in width and more than 10 km. in length. The road was built on a plot of leasehold land acquired by the assessee for the purpose of constructing the said road. The assessee had to maintain this road. The lease was of 30 years duration and, on expiry of that period, the road had to be handed over to the Government. The road was built to reduce the distance from the main road to the mines owned by the assessee. The assessee's case is that the expenditure incurred was for the purpose of its business and, therefore, must be treated as revenue expenditure.
7. It is not always easy to decide whether an expenditure incurred by a company for the purpose of its business is of capital or revenue nature. But one thing must be borne in mind, viz. that, merely because the expenditure was incurred in connection with the business of the assessee or for the purpose of business of the assessee or was incidental to the business of the assessee, it will not make the expenditure a revenue expenditure. An expenditure for the purpose of business or incidental to the business may also be of capital nature. In the celebrated case of British Insulated and Helsby Cables Ltd. v. Atherton [1925] 10 TC 155 (HL), Lord Cave addressed himself first to the question whether the expenditure was for the purpose of business. Having held that the expenditure was incurred for the purpose of business, he examined the question whether the expenditure was of capital or revenue nature. Lord Cave came to the conclusion that, even though the expenditure was for the purpose of business, it had been "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". From this he came to the conclusion that the expenditure in question in that case was of capital nature.
8. Section 37(1) of the Act provides :
"General.--(1) Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and Section 80VV and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ' Profits and gains of business or profession'."
9. The section itself recognises that expenditure for the purpose of business may be in the nature of capital expenditure. Such expenditure cannot be allowed as deduction in computing the income chargeable under the head "Profits and gains of business or profession".
10. In the instant case, an asset of enduring benefit has been brought into existence by incurring expenditure of a considerable sum of money. The assessee-company has taken a long lease of a plot of land and has constructed a road connecting its mines to the main road. The finding of the Tribunal is that it is a new road. This is not a case of repair of the road or contribution of funds to the construction of a road by the Government. It has been contended on behalf of the assessee that the company did not have an exclusive right to use this road. But that is a question of fact. The Tribunal has categorically found that the company had acquired the lease and had a duty after the expiry of thirty years to hand over the leasehold property along with the road to the Government. Therefore, the entire property is of the company. Any construction made on the property, unless there is a specific agreement to the contrary, must belong to the company. In fact, the assessee took a plea before the Appellate Assistant Commissioner that depreciation allowance should be allowed on this road. This plea could have been made only on the basis that the company was the owner of the road. This alternative plea was turned down by the Appellate Assistant Commissioner but found favour with the Tribunal. The Tribunal has directed that depreciation allowance be given on this road.
11. No question of perversity has been raised in this case about the finding made by the Tribunal. Therefore, we have to proceed on the footing that the land was a leasehold land of 30 years' duration. The assessee had constructed the road where there was no road in existence. The road was connected with the mines of the assessee. By constructing this road, the assessee would enjoy a benefit of lasting duration. Although it is a vexed question whether an expenditure falls in the category of capital or revenue, certain tests have been evolved for the purpose of determining the character of the expenditure. Lord Radcliffe, in the case of Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 ; [1964] AC 948 (PC), held that the cost of creating, acquiring or enlarging the permanent structure of which income was to be the fruit will be of capital nature.
12. What has happened in this case is that the assessee has acquired a lease of thirty years' duration on a piece of land and has constructed a road thereon thereby facilitating movement of its goods from his mines. The assessee had brought into existence a tangible asset which will endure for at least thirty years. If the test of Lord Radcliffe is applied, this must be treated as an expenditure incurred for creating or enlarging the profit earning structure of the assessee-company.
13. There may be difficulty in deciding whether an expenditure incurred in connection with a purely commercial contract is of capital or revenue nature. But, if a tangible asset has been brought into existence, then, unless the asset is of wasting nature, the expenditure will have to be held to be of capital nature.
14. In the case of Strick (H.M. Inspector of Taxes) v. Regent Oil Co. Ltd. [1965] 43 TC 1 (Ch. D), the question was whether the assessee-company was entitled to deduct certain payments described as premiums paid to proprietors of service stations or whether such payments were of a capital nature. The business of the Regent Oil Co. Ltd. consisted of import of oil and sale to service stations. In that case, the contention made on behalf of the Crown was that if a premium was paid for acquiring an interest in land, it undoubtedly had to go on capital account. The various leases that came to be considered in the case of Strick (H.M. Inspector of Taxes) [1965] 43 TC 1, were of five to twenty years' duration. It was held by the House of Lords that the expenditure was of capital nature. Lord Reid observed (at page 29) :
"Whether a particular outlay by a trader can be set against income or must be regarded as a capital outlay has proved to be a difficult question. It may be possible to reconcile all the decisions, but it is certainly not possible to reconcile all the reasons given for them."
15. Lord Reid again observed (at page 30) :
"The purpose of any commercial account must be to give as fair and accurate a picture as possible of the trader's financial position. But the provisions of the Act as they have been interpreted make that difficult where a wasting asset has been acquired. As explained in Kauri Timber Co. Ltd. v. New Zealand Commissioner of Taxes [1913] AC 771 (PC), it had long been settled that, if capital has been expended in acquiring or producing a wasting asset, it is not permissible to bring into the profit and loss account for tax purposes a part of that capital corresponding to the wasting or depreciation of the asset during the year ; no part of the expenditure can be set off against income in any year. These old cases were dealing with expenditure made to acquire or improve tangible assets and as regards a great many of them, such as machinery, plant, buildings and mines, the severity of this rule has been relaxed by statutory provision for annual and other allowances. But the rule still stands as regards matters not particularly dealt with by the Act. If a trader acquires a rapidly wasting asset not covered by these statutory provisions, he would not generally strike his balance of profits and gains without taking into account the annual wasting or diminution of value of that asset. But, if his expenditure in acquiring it has to be regarded as capital expenditure, he cannot do that for income-tax purposes.
When one is dealing with tangible assets, it is generally not very difficult to reach a decision . . ."
16. And in Ounsworth (Surveyor of Taxes) v. Vickers Ltd. [1915] 3 KB 267, Rowlatt J., held that the expenses of making what was in effect a new means of access was capital expenditure.
17. If this test of Lord Reid is applied in the instant case, it will be seen that a tangible asset has come into existence. It is well-settled that an asset, to be of enduring benefit to the assessee, does not have to be permanent. In the instant case, the lease is of thirty years' duration. The road presumably will have a similar life span. As a result of incurring the expenditure, the assessee had acquired an asset of enduring benefit. Rowlatt J., in the case of Ounsworth [1915] 3 KB 267, laid down that, if what was created was in effect a new means of access, the expenditure must be held to be capital expenditure.
18. Another test propounded by Lord Reid was that "if the asset which is acquired is in its intrinsic nature a capital asset, then any sum paid to acquire it must surely be a capital outlay. If this test is applied, it will be seen that what the assessee has produced by incurring this expenditure is in its intrinsic nature a capital asset".
19. In the instant case, a lease of a large plot of land has been taken for thirty years. A road has been constructed where no road had existed hitherto. The road connected the assessee's mines to the main thoroughfare. The plot of land along with the road will have to be handed over to the Government after the lease expires. The leasehold land and the road constructed thereon cannot be regarded as anything but a capital asset of the company.
20. Lord Reid, in the concluding part of his judgment, observed that premiums paid for leases have always been regarded as capital.
21. concurring judgment, Lord Morris observed (at page 38) :
"My Lords, on the facts as found in the stated case I consider that the lump sum payments which were made by the appellants were of a capital and not of a revenue nature. I am of this opinion for two reasons. The first is that each payment was made as the price of acquiring an interest in land which was an asset of a capital nature. . . .
I agree with the view expressed by the learned judge and by the Court of Appeal that the appellants acquired interests in land and that such interests were of a capital nature ; I agree also that in the circumstances of the present case the payments made to acquire those interests must be regarded as being payments of a capital nature ..."
22. It was further observed by Lord Morris (at page 43) :
"In examining the nature of the payments which were made and which are in issue in this case it is important to consider, not so much why the payments were made, but for what they were made. If the motive in making payments is noted or becomes manifest, the more relevant enquiry must be made as to whether some asset or advantage was acquired, and if so what was its nature ..."
23. If this test of Lord Morris is applied, it will be seen that the expenditure was incurred for construction of a road, which is a tangible asset of enduring benefit. The asset that was brought into existence was not a wasting asset. It will not wither away in a few years' time. The fact that other persons may also use this road will not change the character of the capital asset. The nature of the thing that is acquired as a result of the expenditure is a capital asset. The manner in which the capital asset is employed or utilised will not change its character.
24. Lord Upjohn observed (at page 52) :
"How, then, is this problem to be solved ? My Lords, there is one matter upon which counsel on both sides are agreed : that it is the duty of the court to consider every relevant fact, giving it its due weight, and then to reach a conclusion upon the whole matter. I cannot but recall the observation of Sir Wilfrid Greene M.R. in Commissioners of Inland Revenue v. British Salmson Aero Engines Ltd. [1938] 2 KB 482, at page 498, where he said :
'There have been many cases which fall on the borderline. Indeed, in many cases it is almost true to say that the spin of a coin would decide the matter almost as satisfactorily as an attempt to find reasons'.
Somewhat cynical, but true. It is a question of fact and degree and above all judicial common sense in all the circumstances of the case and while no one regrets it more than I, I do not believe it is possible to lay down any principle, when dealing with trading contracts, which would be of any guidance alike to Crown and subject in future cases."
25. The observation of Lord Upjohn that it is a question of fact and degree and above all judicial common sense has been quoted in quite a few cases. But some courts on some occasions have lost sight of the expression "judicial common sense" and instead have applied the test of common sense simpliciter. If ordinary common sense is adopted as a yardstick for deciding the nature of an expenditure, then contrary results may follow. What is common sense to one man may not appear to be common sense to another. The result would be decisions without any underlying principle.
26. Lord Upjohn was very careful in his choice of word and used the expression "judicial common sense".
27. In the case of Pitt (H.M. Inspector of Taxes) v. Castle Hill Warehousing Co. Ltd. [1974] 49 TC 638 (Ch D), Megarry J. sounded a note of warning and observed (at page 645) :
"... In other judgments there are references to 'common sense' simpliciter, but the adjective 'judicial' may be useful as indicating that the kind of common sense needed is one that is not at large, but is guided and tutored by the authorities."
28. Therefore, the problem whether an expenditure is of capital nature or not has to be decided by application of "judicial common sense" having regard to the manner in which the problem has been viewed by a large number of decisions and the guidelines laid down in those decisions for deciding the question.
29. The case of Pitt [1974] 49 TC 638 (Ch D) was concerned with a problem very similar to the question that has been raised in this case. In that case, the assessee-company used to provide warehousing space in its own and rented buildings to manufacturers for storage of their products. Access to the company's warehouse in the Sunningdale Estate was through a road, Sunningdale Drive, The residents of that area complained about the disturbances created by heavy lorries entering and leaving the company's property. The municipality of the area, the Lincoln Corporation, had a proposal to build a new ring road near the company's property. The company entered into an agreement with the corporation whereby : (a) the access to the company's property along with Sunningdale Drive was closed ; and a few square feet of the entrance was given to the Lincoln Corporation ; (b) the company was permitted within a prescribed time-limit to construct two lengths of roadway, one of a permanent nature running from the company's premises to the proposed ring road and another of a temporary nature ; (c) on completion of the permanent road it was to be maintained by the Lincoln Corporation to the same standards as if it were a highway. The temporary road was to be eventually merged in the proposed new ring road. The question was whether the expenditure incurred on construction of the new permanent road was revenue expenditure or capital expenditure. It was held by Megarry J. that by incurring the expenditure the company had acquired an easy access and a new road, an asset with enduring qualities, intended to be used indefinitely in the manner of a fixed asset of a capital nature, as appurtenant to the existing fixed asset consisting of the warehouses. The expenditure was clearly incurred on capital account.
30. In Pitt's case [1974] 49 TC 638 (Ch D), it was argued on behalf of the company that the company had acted to preserve its good name. The people of the locality were complaining about the noise created by the lorries. It was further argued that what the company had obtained was no better than it had formerly had. Both the contentions were rejected by Megarry J.
31. The first contention is not relevant to the present case. The manner in which the second contention was dealt with is instructive. After referring to various authorities, Megarry J. observed (at page 644) :
"... It seems to me that these authorities establish that, in determining whether expenditure is incurred on revenue account or on capital account, one must consider at least three elements. First, what is the nature of the payment ? Is there a single non-recurrent lump sum, paid once for all, on the one hand, or are there to be recurrent payments made, for example, for periods commensurate with those payments ? Second, what is to be obtained by the payment ? Is it some asset with lasting or enduring qualities, or is it merely ephemeral, or, indeed, something which cannot be described as an asset, whether tangible or intangible ? Third, in what manner is what is obtained to be used, relied on or enjoyed ? Will it have a quality of recurrence which will point to an income nature, as by providing a flow of orders for goods, or will it bear a static aspect which points to a capital nature ?"
32. The case placed before Megarry J. was "no new capital asset had been created and that the company gave up one road and built another".
33. Megarry J. observed (at page 645) :
"... The first phrase leaves it uncertain which of the elements of the compound phrase they are denying. Are they saying that a capital asset had been created but that it was not new, or that a new asset had been created but that it was not capital, or are they perhaps saying that what had been created was neither new nor capital nor an asset ?"
34. Megarry J, further observed (at page 645) :
"... The things that the company did in this case were to dispose of a tiny piece of its land and so shut itself off from access to a highway, and acquire instead a perpetual easement of way and construct a new road on it which gave access to another part of the same highway. ..."
35. Megarry J. also posed the question " Does common sense, whether judicial or otherwise, dictate any other answer ?"
36. A question was asked--Supposing the company sold the asset, would the company meekly accept the price which it received for the asset as income ?
37. I have quoted at length from this case because the facts are very similar. In fact, in the case before Megarry )., the assessee's case was stronger. The company had given up a piece of land and existing access to the highway for another portion of the land on which a new road was constructed.
38. In the instant case, the company has given up nothing. The existing access was longer by 6.5 kms. The company had decided to shorten the distance to its mines from the highway by erecting a feeder road which was of permanent nature and which was built for facilitating the access to the mines. A leasehold land was acquired for this purpose. A new road was constructed. The lease had to be surrendered to the Government after thirty years. The expenditure that has been incurred by the company is of a considerable sum of money within the relevant accounting year. That is the nature of the payment. It is not a case of recurring or periodic payment. What has been obtained by the payment is an asset of lasting or enduring quality. A tangible asset has been acquired of at least thirty years' duration. It is well-settled that an asset to be of permanent character need not be perennial. The asset that has been created has a static aspect which points to its capital nature.
39. If the company were to sell its mines and other properties in that area, it is not conceivable that the company will show the sale proceeds of the leasehold or the road constructed on the leasehold as income.
40. Having regard to all aspects of this case, judicial common sense dictates that since a real tangible asset in the form of a new road has been created by the company, the expenditure incurred for the purpose of creation of this asset cannot be properly attributed to revenue account. The purpose of the expenditure was to have a new permanent and a shorter route to the company's mines. The result of the expenditure was the creation of a new real tangible asset of enduring nature. The money was undoubtedly spent for a capital purpose and what resulted from the expenditure was a capital asset of a permanent nature. The expenditure cannot be regarded as anything but an expenditure of a capital sum for a capital purpose.
41. Although the dividing line between revenue and capital expenditure is thin, over the years in both England and in India it has been established that some of the expenditures can clearly be classified as capital expenditure. For example, if any interest in land is acquired, the expenditure incurred will be on capital account. This point was emphasised by the House of Lords in the case of Strick [1965] 43 TC 1. Lord Reid observed that "If the asset which is acquired is in its intrinsic nature a capital asset, then any sum paid to acquire it must surely be capital outlay. And I do not see how it could matter that the payment was made by sums paid annually".
42. Lord Reid further observed that "Premiums paid for leases have always been regarded as capital. ..."
43. Lord Morris, in his judgment, also emphasised that "Payment was made as the price of acquiring an interest in land which was an asset of capital nature. . . . The leases were of considerable value to the appellants."
44. Lord Pearce also observed (at page 46) :
"The acquisition of such an interest in land points strongly to a capital expenditure and, on the facts of these cases, dominates other indications. ..."
45. Lord Upjohn also observed (at page 50) :
"It is plain that the premium or lump sum paid by Regent in order to acquire the lease is a lump sum payment for the acquisition of an asset for the purpose of carrying on a trade thereon and is, therefore, capital."
46. It is, however, to be noted that the result may be different in the case of a man who is a property dealer where the property is his stock-in-trade. In such a case, the purchase price paid by a trader for the acquisition of property for the purpose of trade would be of revenue nature.
47. In the case of Assam Bengal Cement Co. Ltd. v. CIT , a Bench of four judges of the Supreme Court examined the question of business expenditure and capital expenditure. There, after a review of a large number of cases, it was held that consideration paid for acquisition of a leasehold interest in a group of quarries would be of capital nature. It was observed by the Supreme Court that even though it was not a case of lump sum payment and the amount payable was spread over the whole period of a lease, the expenditure had to be treated as capital expenditure. It was observed (at page 47) :
"... The fact, however, that it was a recurring payment was immaterial, because one had got to look to the nature of the payment which in its turn was determined by the nature of the asset which the company had acquired. ..."
48. The second point on which there can be no dispute is that if as a result of the expenditure a new tangible asset of some permanence was brought into existence, then the expenditure must be regarded as capital expenditure.
49. In the case of Avon Beach and Cafe Ltd. v. Stewart (H. M. Inspector of Taxes) [1950] 31 TC 487, it was held by Vaisey )., after referring to a number of cases including the case of British Insulated and Helsby Cables Ltd. [1925] 10 TC 155 (HL), that one of the tests undoubtedly was "Has the expense produced a new tangible asset ? I think that in this case it has. There is the wall, there are the wood piles and there is the brushwood".
50. In that case, at a cost of 500, a barrier of wood piles and brushwood and wall were erected for the purpose of providing protection to a cafe at a place on the sea-shore. Lord Vaisey observed that it was hardly necessary to refer to any authority on the matter. "There was brought into existence by the expenditure which is now in question a real tangible fresh asset in the form of this new wall". It was held that this was clearly an expenditure on capital account.
51. In the instant case, a real new tangible asset has come into existence in the shape of a road on leasehold interest acquired by the assessee. It is difficult to see how on principle the expenditure incurred for the purpose of construction of this road can be treated as a revenue expenditure.
52. It is also of interest to note that one of the cases which was cited with approval by the Supreme Court in the case of Assam Bengal Cement Co. Ltd. [1955] 27 ITR 34 is the case of Ounsworth (Surveyor of Taxes) [1915] 3 KB 267 where it was held by Rowlatt J., that the cost of construction of new access road would be of capital nature.
53. In the case of CIT v. Finlay Mills Ltd. (1951] 20 ITR 475, the Supreme Court once again emphasised the applicability of the principles laid down in the cases of British Insulated and Helsby Cables Ltd. [1925] 10 TC 155 (HL), Henriksen (H.M. Inspector of Taxes) v. Grafton Hotel Ltd. [1943] 11 ITR (Suppl) 10 and Southern (H.M. Inspector of Taxes) v. Borax Consolidated Ltd. [1942] 10 ITR (Suppl.) 1 ; [1940] 23 TC 597 (KB). The Supreme Court pointed out that the principles laid down by Lord Cave are a safe test to distinguish capital expenditure from revenue expenditure. The Supreme Court also referred to the principles laid down in Southern (H. M. Inspector of Taxes) case [1942] 10 ITR (Suppl.) 1 ; [1940] 23 TC 597 (KB) that where a sum of money was laid out for acquisition or improvement of a fixed capital asset, it was attributable to capital, but if no alteration was made in the fixed capital asset by the payment, then it was properly attributable to revenue, being in substance a matter of maintenance, the maintenance of the capital structure or the capital asset of the company.
54. In the instant case, a new capital asset has been brought into existence. A thirty years' lease has been taken of a plot of land and a road has been constructed on that land. It is not a case of maintenance of capital or an expenditure incurred for the purpose of merely facilitating the business of the assessee. It is a case of addition to the capital structure of the company. A fixed capital asset of the company has clearly been altered. A new tangible asset has been brought into existence.
55. In the case of Sitalpur Sugar Works Ltd. v. CIT [1963] 49 ITR (SC) 160, at page 164, it was held by the Supreme Court that the cost of shifting of the factory to a new site was capital expenditure. It was held in that case that the expenditure for shifting of the factory to a more advantageous site was not incurred in earning profits but was incurred only for putting its factory in a better shape. In coming to its decision, the Supreme Court relied on the decisions in the case of Bean (H. M. Inspector of Taxes) v. Doncaster Amalgamated Collieries Ltd. [1946] 27 TC 296 (HL), as well as the case of British Insulated and Helsby Cables Ltd. [1925] 10 TC 155 (HL). The Supreme Court, in particular, cited an observation of Viscount Simon in the case of Bean [1946] 27 TC 296 (HL) "the result of the transaction clearly was that the value of the particular coal measures--a capital asset remaining unchanged in character--was increased both for use and exchange. There was therefore, as the result of the transaction, brought into existence, not indeed an asset, but an advantage for the enduring benefit of the trade of the company ".
56. Dr. Pal, however, contended that the Supreme Court, of late, has struck a different note in its decisions. The old rigid classification between capital and revenue expenditure has now been discarded and the Supreme Court has taken a view quite different from the earlier view held by this court and also the English courts and in support of this contention, he has referred to two decisions of the Supreme Court, specifically on the question whether money spent on improvement of a road can be regarded as capital where the Supreme Court specifically held that money spent on road construction was of revenue nature.
57. In the case of Lakshmiji Sugar Mills Co. (P.) Ltd. v. CIT , the assessee used to carry on business of manufacture and sale of sugar. The company paid to the Cane Development Council certain amounts by way of contribution for the construction and development of roads between the various sugarcane-producing centres and the sugar factories of the assessee. The expenditure was incurred under a statutory obligation for the development of roads which were originally the property of the Government and remained so even after the improvement had been done. There was no finding that the roads were altogether newly made or that the assessee would get an enduring benefit from those roads.
58. On those facts, the Supreme Court came to the conclusion that the expenditure was not of a capital nature and had to be allowed as an admissible deduction in computing the profits of the assessee's business. The expenditure was incurred for the purpose of facilitating the running of its motor vehicles and other means employed for transportation of sugarcane to its factories.
59. Grover J., emphasised (at page 379) :
"In the present case, apart from the element of compulsion, the roads which were constructed and developed were not the property of the assessee nor is it the case of the revenue that the entire cost of development of those roads was defrayed by the assessee. It only made certain contributions for road development between the various cane producing centres and the mills."
60. In the case of Travancore-Cochin Chemicals Ltd. v. CIT [19771 106 ITR 900, a Bench comprising three judges of the Supreme Court once again examined the question of allowability of money spent on road construction as revenue deduction. In that case, the appellant company was engaged in manufacture of chemicals. The factory was situated in an area which was not served by pucca roads. Along with three other public undertakings, the appellant company approached the Kerala Government for laying a new road to that area. The cost of acquisition of land and 25 per cent. of the post of construction of the road were borne by the Government. The assessee and three other public undertakings bore the balance cost of Rs. 1,04,500 of which the appellant company's contribution was Rs. 26,100. It was held by the Supreme Court in that case that, by having the new road constructed, the appellant had acquired an enduring advantage for its business and the expenditure incurred by the appellant was of a capital nature. It was held that the decision of the Supreme Court in the case of Lakshmiji Sugar Mills Co. (P.) Ltd. must be confined to the peculiar facts of that case.
61. In the case of Lakshmiji Sugar Mills Co. (P.) Ltd. , the assessee-company was obliged to contribute certain amounts for the development of roads which were originally the property of the Government and remained so even after improvements had been made. There was also no finding that the roads were newly made. In the case of Travancore-Cochin Chemicals Ltd. , it was observed by Gupta J. (at page 903) :
"Each case turns on its own facts. It is not disputed here that the correct test has been applied. Did the money spent by the assessee on construction of the new road secure for it an enduring benefit, or was it necessary for running its business ? On the facts of the case, the position seems to us clear enough not to merit an elaborate consideration, that by having the new road constructed for the improvement of transport facilities, the assessee acquired an enduring advantage for its business."
62. The problem of expenditure on road construction was once again examined by the Supreme Court in the case of L.H. Sugar Factory and Oil Mills (P.) Ltd. v. CIT [1980] 125 ITR 293. There a Bench of three judges of the Supreme Court considered the case of a private company which used to carry on business in manufacture and sale of sugar. It made a contribution of Rs. 22,332 at the request of the Collector towards construction of Deoni Dam and the Deoni Dam-Majhala road which had been completed in 1952-53, It also made a contribution of Rs, 50,000 to the State of U. P. towards meeting the cost of construction of roads in the area around its factory under a sugarcane development scheme under which one-third of the cost of construction of roads was to be met by the Central Government, one-third by the State Government and the balance one-third by the sugarcane factories and sugarcane growers. The Supreme Court held that the contribution of Rs. 22,332 at the request of the Collector towards the construction of a dam and a road had nothing to do with the business of the assessee and was not allowable as business expenditure. The payment had been made only as an act of good citizenship.
63. The Supreme Court, however, held that the amount of Rs. 50,000 was allowable as business expenditure. It was observed by Bhagwati J. (at page 298) :
"Now it is clear on the facts of the present case that by spending the amount of Rs. 50,000, the assessee did not acquire any asset of an enduring nature. The roads which were constructed around the factory with the help of the amount of Rs. 50,000 contributed by the assessee belonged to the Government of Uttar Pradesh and not to the assessee. Moreover, it was only a part of the cost of construction of these roads that was contributed by the assessee, since under the sugarcane development scheme, one-third of the cost of construction was to be borne by the Central Government, one-third by the State Government and only the remaining one-third was to be divided between the sugarcane factories and sugarcane growers. These roads were undoubtedly advantageous to the business of the assessee as they facilitated the transport of sugarcane to the factory and the outflow of manufactured sugar from the factory to the market centres. There can be no doubt that the construction of these roads 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. It is no doubt true that the advantage secured for the business of the assessee was of a long duration inasmuch as it would last so long as the roads continued to be in motorable condition, but 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 profit-making apparatus of the assessee."
64. Therefore, the special features of the case which were emphasised by Bhagwati J. were : (1) by spending the amount of Rs. 50,000 the assessee had not acquired any asset of an enduring nature. The road belonged to the Government of Uttar Pradesh and not to the assessee ; (2) the assessee paid only a small part of the cost of construction ; (3) the construction of these roads facilitated the business operations of the assessee ; and (4) 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 profit-making apparatus of the assessee.
65. In the instant case, the assessee has acquired a leasehold property and has constructed a road on that property. The road belongs to the assessee. The assessee has acquired an asset of enduring value. The asset is a tangible asset. The road is a new motorable road having a width of 80 ft. The assessee spent Rs. 20 lakhs on the construction of the road. The assessee was responsible for the maintenance of the road. In my judgment, such an expenditure has to be regarded as of capital nature.
66. I am unable to uphold the contention of Dr. Pal that, in view of these three decisions of the Supreme Court, it can be said that the Supreme Court has departed from the well established principles for distinguish-ing capital expenditure from revenue expenditure. On the contrary, in all the three judgments of the Supreme Court, an attempt has been made to extract the principles from the well-known cases and apply the principles in determining whether the expenditure should be capital expenditure or revenue expenditure.
67. In the judgment of the Supreme Court in the case of L.H. Sugar Factory and Oil Mills (P.) Ltd. [1980] 125 ITR 293, Justice Bhagwati emphasised the fact that the road was not a new road. It was not an asset of the assessee. The assessee had not paid the total construction cost of the road but it had made a small contribution towards it. The assessee had not acquired any asset, tangible or otherwise. The profit-making apparatus of the company remained unchanged as a result of this expenditure. That is why the expenditure would be of revenue nature. Justice Bhagwati was not laying down any new principle of law or departing from the well-known principles for distinguishing a revenue expenditure from a capital expenditure. Relying on these principles, it was held that the expenditure in that case was to be treated as revenue expenditure.
68. It will be seen from the judgment of the Supreme Court in the case of Travancore-Cochin Chemicals Ltd. [1977] 106 ITR 900 that Gupta J., considered that the decision given in the case of Lakskmiji Sugar Mills Co. (P.) Ltd. must be confined to the peculiar facts of that case. Similarly, Bhagwati J., in the case of L.H. Sugar Factory and Oil Mills (P.) Ltd. considered that the judgment delivered in the case of Travancore-Cochin Chemicals Ltd. must be confined to the peculiar facts of that case. In fact, when a question of capital or revenue expenditure arises, the question has to be decided by carefully considering every aspect of the case. It was observed by Hidayatullah J., in the case of K. T. M. T. M. Abdul Kayoom v. CIT :
"Each case depends on its own facts, and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation to decide cases (as said by Cordozo) by matching the colour of one case against the colour of another. To decide, therefore, on which side of the line a case falls, its broad resemblance to another case is not at all decisive. What is decisive is the nature of the business, the nature of the expenditure, the nature of the right acquired, and their relation inter se, and this is the only key to resolve the issue in the light of the general principles, which are followed in such cases."
69. In that case, the Supreme Court considered that the yearly rent of Rs. 6,111 paid to the Government for the three years' lease of a specified area with liberty to fish for and take and carry away all chank shells was capital expenditure.
70. Lastly, one more point has to be noted. Dr. Pal has argued that the assessee could not be treated to be the owner of the road. In the facts of this case, I fail to see how the assessee can deny being the owner of the road. The assessee took the land on lease for construction of the road. The road was constructed by the assessee on that piece of land. The upkeep and maintenance of the road were the responsibility of the assessee. Some other persons occasionally may use the road ; but that will not prevent the assessee from being the owner of the road.
71. The assessee has himself put the matter beyond doubt by claiming depreciation allowance on this road. This was negatived by the Appellate Assistant Commissioner but was allowed by the Tribunal. The claim for depreciation could be made by the assessee only on the basis that the road was owned by the assessee and was used for the purpose of its business.
72. Therefore, in my judgment, on the facts of this case, the Tribunal has correctly come to the conclusion that the expenditure of Rs. 20,00,598 incurred by the assessee on the construction of the road was not allowable as business expenditure.
73. Therefore, the question is answered in the affirmative and in favour of the revenue.
74. There will be no order as to costs.
Bhagabati Prasad Banerjee, J.
75. I agree.