1988 (5) TMI 2 - SC - Income Tax

Expenditure held revenue deductible, not capital, where payment secured temporary immunity from municipal rates without creating capital asset

SC dismissed the appeal and held the expenditure deductible as revenue, not capital. The Court found the water pipelines and related assets belonged to ... Expenditure incurred by the assessee on providing water pipelines and electricity facility to municipality - capital expenditure or revenue expenditure - Whether, the expenditure or any portion thereof, incurred by the company in the accounting period relevant to the assessment year 1959-60, allowable as deduction in determining the profits of the company for the assessment year 1959-60 - HELD THAT:- It is true that certain water supply lines did come to be laid as a result of the expenditure incurred, but the facts on record, which we have referred to above, clearly show that these water pipelines on which the expenditure in question was incurred were not assets of the assessee, but assets of the Shahabad Municipality and hence it was not as if the expenditure resulted in bringing into existence any capital asset for the company. The only advantage derived by the assessee by incurring the expenditure was that it obtained an absolution or immunity, under normal conditions, from levy of certain municipal rates and taxes and charges. In view of this, the first contention of. Mr. Manchanda must be rejected. The advantage which was secured by the assessee by making the expenditure in question was the securing of absolution or immunity from liability to pay municipal rates and taxes under normal conditions for a period of fifteen years. If these liabilities had to be paid, the payments would have been on revenue account and hence the advantage secured was in the field of revenue and not capital. As a result of the expenditure incurred, there was no addition to the capital assets of the assessee-company and no change in its capital structure. The pipelines, etc., which might have been regarded as capital assets and which came into existence as a result of the expenditure incurred did not belong to the assessee-company but to the municipality. In these circumstances, applying the principles laid down in Empire Jute Co.'s case [1980 (5) TMI 1 - SUPREME COURT], the expenditure is clearly liable to be allowed as deductible from the profits under section 10(2)(xv) of the Indian Income-tax Act. In the result, the appeal fails and is dismissed with costs. Issues:Interpretation of whether the expenditure incurred by the company is allowable as a deduction in determining profits for the assessment year 1959-60 under the Indian Income-tax Act, 1922.Analysis:The case involved an appeal against a judgment of the Bombay High Court regarding the deductibility of an expenditure of Rs. 2,09,459 incurred by the company, the Associated Cement Companies Ltd., during the relevant accounting period. The expenditure was related to an agreement with the Government of Hyderabad and the Shahabad Municipality for providing water supply, electricity, and road construction. The Income-tax Officer initially disallowed the expenditure as capital expenditure, but the Appellate Assistant Commissioner allowed it as a composite sum of revenue outgoings. The Income-tax Appellate Tribunal directed a scrutiny of the expenditure and allowed the deduction to the extent it did not result in the company becoming the owner of any asset.The main issue before the court was whether the expenditure in question should be treated as capital or revenue expenditure. The Division Bench of the Bombay High Court extensively analyzed various precedents, including the dictum in Atherton v. British Insulated and Helsby Cables Ltd., and the decision in Assam Bengal Cement Co. Ltd. v. CIT, emphasizing the distinction between capital and revenue expenditure based on the enduring benefit to the trade. The High Court concluded that the expenditure was revenue in nature and should be allowed as a deduction under section 10(2)(xv) of the Indian Income-tax Act.In the Supreme Court appeal, the judges rejected the contention that the expenditure resulted in the creation of capital assets for the company, as the assets belonged to the municipality. They also dismissed the argument that the advantage secured by the company, i.e., exemption from municipal rates for fifteen years, constituted enduring benefit justifying capital expenditure treatment. Citing the principle from Empire Jute Co. Ltd. v. CIT, the court held that the advantage obtained was in the revenue field, not capital, as it did not alter the company's capital structure. Consequently, the court upheld the High Court's decision, allowing the expenditure as deductible under the Income-tax Act.In conclusion, the Supreme Court dismissed the appeal, affirming the judgment of the Bombay High Court and holding that the expenditure incurred by the company was revenue in nature and deductible under the relevant provisions of the Indian Income-tax Act.