1975 (11) TMI 31 - HC - Income Tax

Betterment charges not deductible as business expense

The court held that the payment of betterment charges under Section 66 of the Bombay Town Planning Act, 1954, constitutes capital expenditure and is not ... Capital Or Revenue Expenditure Issues Involved:1. Admissibility of betterment charges as a deduction under Section 37 of the Income-tax Act, 1961.2. Nature of betterment charges under the Bombay Town Planning Act, 1954.3. Whether betterment charges constitute capital or revenue expenditure.Issue-wise Detailed Analysis:1. Admissibility of Betterment Charges as a Deduction under Section 37 of the Income-tax Act, 1961:The primary issue is whether the payment of betterment charges to the Ahmedabad Municipal Corporation under the provisions of the Town Planning Act, 1954, made by the assessee, is allowable as a deduction under Section 37 of the Income-tax Act, 1961. The assessee argued that these charges are revenue expenditures incurred wholly and exclusively for the purpose of running their business. However, the revenue contended that these charges are capital expenditures as they are levied based on the estimated increment in the value of the land covered by the town planning scheme and have nothing to do with the business operations.2. Nature of Betterment Charges under the Bombay Town Planning Act, 1954:The court examined the relevant provisions of the Bombay Town Planning Act, 1954, to understand the nature of the betterment charges. Section 66 of the Act requires the cost of the scheme to be met wholly or partly by a contribution levied by the local authority on each plot included in the final scheme, calculated in proportion to the increment estimated to accrue in respect of such plot. The increment is defined in Section 65 as the amount by which the market value of a plot included in the final scheme, estimated on the assumption that the scheme has been completed, exceeds its market value without reference to the improvements contemplated in the scheme. The court noted that the betterment charges are levied against the increased potential value of the lands covered by the scheme and not against the running business of the assessees.3. Whether Betterment Charges Constitute Capital or Revenue Expenditure:The court considered the arguments presented by the assessees, who contended that the charges were necessary to keep the business running and should be treated as revenue expenditure. However, the court found these contentions to be unsustainable. The court emphasized the distinction between payments made for acquiring or preserving a right to conduct a business (capital expenditure) and those made for producing profits in the conduct of a business (revenue expenditure). The court concluded that the betterment charges were paid for the enduring benefit which the lands received as a result of the finalization of the scheme, and thus, constituted capital expenditure. The court referenced several decisions, including those of the Supreme Court and English courts, to support its conclusion that the betterment charges should be treated as capital expenditure.Conclusion:The court held that the payment of betterment charges under Section 66 of the Bombay Town Planning Act, 1954, constitutes capital expenditure and is not allowable as a deduction under Section 37 of the Income-tax Act, 1961. The references were disposed of with the respondent-assessees ordered to bear their own costs and pay the costs of the department.