2019 (7) TMI 707 - HC - Income Tax

High Court affirms Tribunal: Usgao bridge contribution is revenue expenditure

The Bombay High Court affirmed the Income Tax Appellate Tribunal's decision that a contribution made by the Assessee for the construction of the Usgao ... Nature of expenditure - contribution made by the Assessee towards the construction of the new bridge - revenue or capital expenditure - HELD THAT:- The test laid down by Lord Cave L.C. in British Insulated and Helsby Cables Ltd., [1925] 10 TC 155, 192 (HL) was to the effect that 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, there was very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such expenditure as properly attributable not to revenue, but to capital. The Supreme Court in L.H. Sugar Factory and Oil Mills (P) Ltd [1980 (8) TMI 1 - Supreme Court] held that it was not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. If the advantage consists merely in facilitating the assessee's business operations or enabling management and conduct of the 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. These observations of the Supreme Court (supra) completely cover the controversy in the present case. As rightly held by the ITAT, in the present case, the contribution made by the Assessee towards the construction of the new bridge facilitated the business of the Assessee, enabling its being carried on more efficiently or more profitably and yet, at the same time, the fixed capital of the Assessee was left untouched. In the premises, the expenditure was clearly on revenue account and not on capital account, though it resulted into an advantage of enduring nature for the Assessee. It is difficult to see how EMPIRE JUTE COMPANY LIMITED VERSUS CIT [1980 (5) TMI 1 - SUPREME COURT] assists the Revenue in the present matter. Here, the Assessee, by spending for construction of the new bridge, had not acquired any property or right of permanent character the possession of which was a condition of carrying on its trade at all. What it thereby achieved was reduction of the cost of operating its profit-making apparatus. It was, thus, in the nature of expenditure as part of the process of profit earning, as explained by the Supreme Court in Empire Jute Co. Ltd. (supra). - Decided in favour of assessee. Issues:Treatment of expenditure as 'capital expenditure' or 'revenue expenditure' - Contribution made for construction of Usgao bridge - Benefit to Assessee - Enduring nature of benefit - Principles from British Insulated and Helsby Cables Ltd. vs. Atherton and Empire Jute Co. Ltd. vs. Commissioner of Income-tax - Comparison with similar cases - Interpretation of expenditure nature.Analysis:The Tax Appeal before the Bombay High Court challenged the order of the Income Tax Appellate Tribunal (ITAT) concerning the treatment of a contribution made by the Assessee for the construction of the Usgao bridge as 'capital expenditure' or 'revenue expenditure' during the assessment year 2008-09. The controversy revolved around the enduring nature of the benefit derived by the Assessee from the expenditure. The Revenue contended that the enduring advantage brought the case within the principles laid down in British Insulated and Helsby Cables Ltd. vs. Atherton and Empire Jute Co. Ltd. vs. Commissioner of Income-tax. The ITAT held the expenditure to be entirely revenue expenditure based on the increased efficiency and profitability of the Assessee's business due to the new bridge, referencing judgments in L.H. Sugar Factory and Oil Mills (P) Ltd. vs. CIT and CIT vs. Coats Viyella India Ltd.The Revenue relied on the decision of the Allahabad High Court in Raza Buland Sugar co. Ltd. vs. Commissioner of Income-Tax Central and the case of Empire Jute Co. Ltd. vs. Commissioner of Income-tax to support its argument that the expenditure should be treated as capital expenditure. The Allahabad High Court decision distinguished cases where assets of enduring nature were created, leading to a classification of expenditure as capital. The Supreme Court's ruling in L.H. Sugar Factory and Oil Mills (P) Ltd. emphasized that not every enduring advantage acquired by an assessee constitutes capital expenditure, especially when it facilitates business operations without affecting fixed capital. The ITAT correctly held that the Assessee's contribution for the bridge construction facilitated business efficiency without altering the fixed capital, thus qualifying as revenue expenditure.In the case of Empire Jute Co. Ltd., the Supreme Court distinguished between expenditure for profit-earning apparatus and capital outlay for permanent rights or property. The Court held that expenditure for operational advantages, like relaxation of restrictions, constituted revenue expenditure. This distinction highlighted that expenditure for enhancing profit-making processes without acquiring permanent assets falls under revenue expenditure. The Assessee's expenditure for the bridge construction aimed at reducing operational costs and increasing efficiency, aligning with the concept of revenue expenditure. Consequently, the Bombay High Court dismissed the Appeal, stating no substantial question of law required determination, affirming the ITAT's decision on the nature of the expenditure.