1971 (7) TMI 19 - HC - Income Tax

Deductions denied for road construction expenses under Income-tax Act

The High Court of Allahabad held that contributions made by the assessee towards road construction were not admissible deductions under section 10(2)(xv) ... Contributions made to Government for construction of roads - not related to the assessee's business - not admissible deductions in computing the taxable profits and gains of the company's business Issues Involved:1. Whether the sums of Rs. 22,332 and Rs. 50,000 were admissible deductions under section 10(2)(xv) of the Income-tax Act, 1922.Issue-wise Detailed Analysis:1. Nature of Expenditure:The primary issue was whether the contributions made by the assessee towards the construction of roads were of a capital nature or revenue nature. The Judicial Member of the Tribunal opined that no asset or advantage of an enduring nature accrued to the assessee, and the expenditure was incurred on the ground of commercial expediency. Therefore, it was neither personal nor capital expenditure and should be allowed as a deduction under section 10(2)(xv). Conversely, the Accountant Member argued that the construction of roads provided an advantage of an enduring nature, making the expenditure capital in nature and not admissible as revenue expenditure.2. Commercial Expediency:The Tribunal had to determine whether the expenditure was incurred wholly and exclusively for the purposes of the business. The President of the Tribunal noted that the contributions were made to avoid displeasing the District Magistrate and the Government, rather than out of a statutory obligation or direct business necessity. The third Member concluded that the contributions were made as a good citizen rather than for business purposes, and thus, the expenditure was not incurred to maintain or facilitate the business.3. Legal Precedents:The Tribunal referred to previous decisions, including Dewan Sugar and General Mills P. Ltd. v. Commissioner of Income-tax and Lakshmi Sugar and Oil Mills Ltd. v. Commissioner of Income-tax, which held that contributions for road construction were capital expenditures. The assessee's counsel argued that these decisions required reconsideration in light of Supreme Court rulings in cases like Bombay Steam Navigation Co. (1953) Private Ltd. v. Commissioner of Income-tax and Commissioner of Income-tax v. Kirkend Coal Co., which emphasized that the nature of expenditure should be determined by its relation to the profit-earning process and not by the acquisition of an asset.4. Tribunal's Conclusion:The Tribunal concluded that the expenditure was not incurred wholly and exclusively for the purposes of the business. It was not related to the business activity of the assessee but was rather an expenditure to keep the district authorities and the State Government favorable. Therefore, the expenditure could not be classified as revenue expenditure on the grounds of commercial expediency.5. High Court's Decision:The High Court upheld the Tribunal's decision, stating that the expenditure was not laid out wholly and exclusively for the purposes of the business. The Court emphasized that for an expenditure to be deductible under section 10(2)(xv), it must be directly related to the business activity and not merely to avoid displeasure of authorities. The Court concluded that the expenditure was not incurred in the ordinary course of business and thus did not qualify for deduction under section 10(2)(xv).Summary:The High Court of Allahabad ruled that the sums of Rs. 22,332 and Rs. 50,000 contributed by the assessee towards road construction were not admissible deductions under section 10(2)(xv) of the Income-tax Act, 1922. The Court held that the expenditure was capital in nature and not incurred wholly and exclusively for the purposes of the business. The decision was based on the Tribunal's findings that the contributions were made to maintain favorable relations with the authorities rather than for direct business purposes. The Court also referred to previous decisions that classified similar expenditures as capital in nature. The question referred to the Court was answered in the negative, favoring the revenue.