1977 (8) TMI 22 - HC - Income Tax

Assessee's Rs. 20,000 Road Repair Contribution: Revenue vs. Capital Expenditure Decision

The court determined that the contribution of Rs. 20,000 by the assessee-company for repairing an existing road leading to a new project was revenue ... Capital Or Revenue Expenditure, Enduring Nature, Manufacturing Company Issues Involved:1. Whether the expenditure of Rs. 20,000 contributed by the assessee-company to the District Panchayat Board for constructing a road leading to Bhaili Project was capital expenditure or revenue expenditure.Issue-Wise Detailed Analysis:1. Nature of Expenditure: Capital vs. RevenueThe central issue in this case is whether the expenditure of Rs. 20,000 contributed by the assessee-company to the District Panchayat Board for constructing a road leading to the Bhaili Project should be classified as capital expenditure or revenue expenditure.Facts and Circumstances:The assessee, a limited company engaged in manufacturing photo-chemicals, contributed Rs. 20,000 to the Baroda District Panchayat Board for constructing a proper road to Bhaili, where it was setting up a new project. The company claimed this contribution as revenue expenditure. The Income Tax Officer (ITO) disallowed this claim, treating it as capital expenditure. This decision was upheld by the Appellate Assistant Commissioner (AAC) and the Income-tax Appellate Tribunal (Tribunal).Tribunal's Findings:The Tribunal noted that the contribution was for constructing a road leading to the new project and concluded that the expenditure was rightly held as capital expenditure by the lower authorities. The Tribunal also rejected the assessee's miscellaneous application to correct certain observations in its order, stating that any rectification would amount to a revision or review of its own order, which it was not competent to do.Legal Principles and Tests:The court referred to various judicial decisions and tests laid down to determine whether an expenditure is of a capital or revenue nature. The key principles include:- Expenditure for initial outlay or extension of business is capital expenditure.- Expenditure for acquiring or bringing into existence an asset or advantage for enduring benefit is capital expenditure.- Expenditure for running the business or working it to produce profits is revenue expenditure.Assessee's Arguments:The assessee emphasized two facts:1. The company had been in business for over 15 years and was setting up a new project at Bhaili.2. The contribution was for repairing an existing road to provide access to the project.Revenue's Arguments:The revenue argued that the contribution resulted in an enduring benefit by constructing a pukka road, thus classifying it as capital expenditure.Court's Analysis:The court noted that the road was already in existence but needed to be put in proper shape. The expenditure was for remedial purposes, not for acquiring a new asset or advantage. The court distinguished this case from others where new roads were laid out, emphasizing that the expenditure was for repairing an existing road.Relevant Case Law:- CIT v. Coal Shipments P. Ltd. [1971] 82 ITR 902 (SC): The Supreme Court cautioned against treating tests for capital vs. revenue expenditure as exhaustive or universal.- Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC): The Supreme Court laid down broad tests for determining the nature of expenditure.- CIT v. Hindusthan Motors Ltd. [1968] 68 ITR 301 (Cal): The Calcutta High Court held that expenditure for repairing an approach road was revenue expenditure.- Travancore-Cochin Chemicals Ltd. v. CIT [1977] 106 ITR 900 (SC): The Supreme Court distinguished between laying a new road (capital expenditure) and repairing an existing road (revenue expenditure).- Lakshmiji Sugar Mills Co. P. Ltd. v. CIT [1971] 82 ITR 376 (SC): The Supreme Court held that contributions for running the business without gaining any enduring benefit were revenue expenses.Conclusion:The court concluded that the contribution of Rs. 20,000 was for repairing an existing road, not for creating a new asset or advantage of enduring benefit. Therefore, the expenditure was of a remedial nature, aimed at running the business efficiently and conveniently. The court answered the question in the negative, holding that the expenditure was revenue in nature and in favor of the assessee.Result:The question was answered in the negative and in favor of the assessee. The CIT was directed to pay the costs of the reference to the assessee.