1990 (10) TMI 2 - SC - Income Tax

Payment to Railways for shifting station held revenue expenditure deductible under Income-tax Act, 1961, section 37(1)

SC held that the payment made by the assessee to the Railways for shifting the railway station, yard and buildings was revenue expenditure allowable as ... Nature of Mining Lease - capital or revenue nature - payment made by the assessee to the Northern Railway for shifting the railway station and other constructions - Whether, the Tribunal was right in holding that the payment to the Northern Railway was a revenue expenditure and was a deduction allowable under the Income-tax Act, 1961 - HELD THAT:- The assessee in the instant case never claimed any deduction with regard to the licence fee or royalty paid by it ; instead, the claim related to the amount spent on the removal of a restriction which obstructed the carrying on of the business of mining within a particular area in respect of which the assessee had already acquired mining rights. The payment for shifting of the railway track and railway station was not made for initiating the business of mining operations or for acquiring any right, instead the payment was made to remove the obstructions to facilitate the business of mining. In the instant case, the assessee had been granted a mining lease in respect of 4.27 square miles at Jamsar, under which it had right to win, dig, drive, quarry and extract mineral, i.e., gypsum and in that process, it had a right to dig into the surface of the entire area leased out to him. Clause 3 of Part III of the lease, however, placed a restriction on its right to mining operations from the railway area, but that area could also be operated by it for mining purposes with the permission of the authorities. The assessee had, under the lease, acquired full rights to carry on mining operations in the entire area including the railway area. Under clause 3, it could carry on mining operations only after obtaining the permission of the authorities which had been granted by the railway authorities. There is no dispute that the assessee completed mining operations on the leased land (railway area) within a period of 2 years. In the circumstances, the High Court's view that the benefit acquired by the assessee on the payment of the disputed amount was a benefit of an enduring nature is not sustainable in law. As already observed, there may be circumstances where the expenditure, even if incurred for obtaining an advantage of enduring benefit, may not amount to acquisition of an asset. The facts of each case have to be borne in mind in considering the question having regard to the nature of the business, its requirement and the nature of the advantage in a commercial sense. In considering the cases of mining businesses, the nature of the lease, the purpose for which the expenditure is made', and its relation to the carrying on of the business in a profitable manner should be considered. In the instant case, the existence of the railway station, yard and buildings on the surface of the demised land operated as an obstruction to the assessee's business of mining. The Railway authorities agreed to shift the railway establishment to facilitate the assessee to carry on its business in a more profitable manner and, for that purpose, the assessee paid a sum towards the cost of shifting the railway construction. The payment made by the assessee was for the removal of disabilities and obstacles and it did not bring into existence any advantage of an enduring nature. The Tribunal rightly allowed the expenditure on revenue account. The High Court, in our opinion, failed to appreciate the true nature of the expenditure. We are, therefore, of the opinion that the High Court committed an error in interfering with the findings recorded by the Income-tax Appellate Tribunal. We, accordingly, allow the appeal, set aside the order of the High Court and restore the order of the Tribunal. Issues Involved:1. Whether the payment of Rs. 3 lakhs to the Northern Railway was a revenue expenditure and deductible under the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Nature of Expenditure:The primary issue was whether the payment of Rs. 3 lakhs made by the assessee to the Northern Railway for shifting the railway station and other constructions constituted a capital expenditure or a revenue expenditure. The High Court had held that the payment was a capital expenditure, as it resulted in an enduring benefit to the assessee by acquiring a new asset. However, the Supreme Court analyzed various precedents and principles to determine the nature of the expenditure.Relevant Precedents and Principles:- The Court referred to the test laid down in *Assam Bengal Cement Co. Ltd. v. CIT* [1955] 27 ITR 34, which distinguishes capital expenditure from revenue expenditure based on whether the expenditure was made to acquire an asset or advantage of enduring benefit for the business, or merely to facilitate the running of the business.- In *K. T. M. T. M. Abdul Kayoom v. CIT* [1962] 44 ITR 689, the Court emphasized that the nature of the business, the nature of the expenditure, and the nature of the right acquired must be considered.- The Court also considered *Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT* [1965] 56 ITR 52 (SC), which held that if the expenditure is integral to the profit-earning process and not for acquiring an asset of a permanent character, it is revenue expenditure.- *British Insulated and Helsby Cables Ltd. v. Atherton* [1926] AC 205, 213, was cited where Lord Cave's test for enduring benefit was discussed, but it was noted that this test is not conclusive and must be considered in the context of special circumstances.Application to the Present Case:- The Court noted that the assessee had a mining lease over the entire area, including the railway area, and had the right to extract minerals. The payment of Rs. 3 lakhs was made to remove the obstruction caused by the railway constructions, which hindered the mining operations.- The payment was not for acquiring a new right or asset but for removing an obstacle to facilitate the existing business operations.- The Court distinguished this case from *R. B. Seth Moolchand Suganchand v. CIT* [1972] 86 ITR 647 (SC), where the payment was for acquiring a lease and prospecting rights, which were capital in nature.Conclusion:- The Supreme Court concluded that the payment of Rs. 3 lakhs was a revenue expenditure, as it was made to remove an obstruction to the assessee's business operations and did not result in the acquisition of a new asset or enduring benefit.- The High Court's view that the payment resulted in an enduring benefit was not sustainable in law, as the payment was for facilitating the business and not for acquiring a capital asset.- The appeal was allowed, the High Court's order was set aside, and the order of the Income-tax Appellate Tribunal, which treated the expenditure as revenue expenditure, was restored.Judgment:- The Supreme Court allowed the appeal, set aside the High Court's order, and restored the order of the Tribunal. The appellant was entitled to its costs.- Appeal allowed.