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Commissioner of Income-tax, Bombay City-iv Vs. Excel Industries Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Application No.226 of 1978
Judge
Reported in(1980)14CTR(Bom)44; [1980]122ITR995(Bom); [1979]4TAXMAN89(Bom)
ActsIncome Tax Act, 1961 - Sections 256(2)
AppellantCommissioner of Income-tax, Bombay City-iv
RespondentExcel Industries Ltd.
Appellant AdvocateR.J. Joshi, Adv.
Respondent AdvocateY.P. Trivedi, Adv.
Excerpt:
.....income tax act, 1961 - respondent entered into agreement with gujarat electricity board (geb) for supply of electricity - geb agreed to provide overhead service line free of cost from nearest mains up to 30 meters - respondent bore cost for length of service line in excess of 30 meters - as per agreement entire service line to remain property of geb - whether payment towards cost of overhead service line by respondent constituted revenue expenditure - by aforesaid contribution respondent never acquired any capital asset - in spite of having incurred expenditure service line remained property of geb - no advantage of any enduring nature accrued to respondent - object of making expenditure was commercial expediency - held, aforesaid payment is in nature of revenue expenditure. - - ..........the amount in question has been paid by the respondent towards the construction of an overhead supply line. this supply line never became an asset of the respondent and always belonged to the gujarat electricity board. the supply was guaranteed under the aforesaid agreement for a minimum period of seven years. notwithstanding the aforesaid contribution made by the respondent towards the cost of the overhead supply line, the respondent had to pay the normal charges for the amount of electricity consumed by it. there is also no doubt that the contribution expediency, namely, for assuring the supply of electricity which was essential for the manufacture of phosphorus. 5. in lakshmiji sugar mills co. p. ltd. v. cit : [1971]82itr376(sc) , the assessee, a private company, was carrying on.....
Judgment:

Kania, J.

1. This is an application under s. 256(2) of the I.T. Act, 1961, for directing the Tribunal to state a case and to refer to this court for determination the following question :

'Whether, On the facts and in the circumstances of the case, the Tribunal was right in law in holding that the payments of Rs. 9,00,000 to the Gujarat Electricity Board towards the cost of overhead service line constituted a revenue expenditure and hence an allowable deduction ?'

2. The relevant facts, Very briefly stated, are as follows :

The case relates to the assessment year 1973-74. The respondent company was incorporated in 1960 and carries on business of manufacture of chemicals. During the year of account ended September 30, 1972, relevant to the aforesaid assessment year, the respondent set up a new unit at Bhavnagar for the manufacture of phosphorus. For the purposes of manufacture of phosphorus, the respondent required for consumption a large quantity of electrical energy which it had to obtain from the Gujarat Electricity Board. For this purpose, the respondent entered into an agreement with the Gujarat Electricity Board under which the said Board agreed to provide an overhead service line free of cost up to 30 metres from the nearest distribution mains. The said agreement provided that for the length of the service line in excess of 30 metres, payment was to be made by the respondent. The agreement provided that notwithstanding that a portion of the cost had been paid for by the consumer, the service line would remain the property of the Gujarat Electricity Board, by whom it was to be maintained. In this connection, the respondent paid a sum of Rs. 9,00,000 to the Board during the period May 4,1970, to March 29, 1972, as its contribution towards the cost of laying the overhead service line. These payments were charged to the respondent company's accounts for the year October 1, 1971, to September 30, 1972, relevant to the assessment year 1973-74. The respondent had to pay to the Gujarat Electricity Board, of course, the normal charges of consumption of electricity from month to month. The ITO took the view that the contribution of Rs. 9,00,000 paid by the respondent to the Gujarat Electricity Board towards the cost of laying the overhead service line was an expenditure of a capital nature, as the said service line had brought to the respondent an advantage of an enduring nature. On an appeal the respondent, the AAC treated the said expenditure as an expenditure of a revenue nature. The department appealed to the Tribunal, which upheld the conclusion of the AAC.

3. It may be mentioned that under the said agreement, it was provided that the period of supply would be for a minimum period of seven years from the date of commencement of the supply.

4. An analysis of the facts set out earlier, shows that the amount in question has been paid by the respondent towards the construction of an overhead supply line. This supply line never became an asset of the respondent and always belonged to the Gujarat Electricity Board. The supply was guaranteed under the aforesaid agreement for a minimum period of seven years. Notwithstanding the aforesaid contribution made by the respondent towards the cost of the overhead supply line, the respondent had to pay the normal charges for the amount of electricity consumed by it. There is also no doubt that the contribution expediency, namely, for assuring the supply of electricity which was essential for the manufacture of phosphorus.

5. In Lakshmiji Sugar Mills Co. P. Ltd. v. CIT : [1971]82ITR376(SC) , the assessee, a private company, was carrying on business of manufacture and sale of sugar, and paid to the Cane Development Council certain amounts by way of contribution for the construction and development of roads between the various sugarcane producing centres and the sugar factories of the assessee. This expenditure was incurred under a statutory obligation for the development of roads which were originally the property of the Government and remained so even after the improvement had been done. There was no finding that the roads were to be altogether newly made or that the assessee would get an enduring benefit from these roads. It was held by the Supreme Court that the expenditure was not of a capital nature and had to be allowed as an admissible deduction in computing the profits of the assessee's business. The expenditure was incurred by the assessee for the purpose of facilitating the running of its motor vehicles and other means employed for transportation of sugarcane to its factories and was, therefore, incurred for running the business or working it with a view to producing profits without the assessee gaining any advantage of an enduring benefit to itself.

6. In CIT v. T. V. Sundaram Iyengar & Sons (P.) Ltd. : [1974]95ITR428(Mad) , the assessee-company purchased land in the name of the District Collector, Madurai, for the purpose of constructing houses for the company's workers by the Government under the subsidised industrial housing scheme sponsored by the State Government and claimed a sum of Rs. 39,696 being the purchase price as a deduction under s. 10(2)(xv) of the Indian I.T. Act, 1922, as being in the nature of welfare expenses. It was held by the Madras High Court that the expenditure was incurred wholly and exclusively for the purpose of the business of the assessee-company, that the assessee-company had not acquired for itself any capital asset and that as the assessee- company would not have any interest in the buildings to be built on the land and their obligation would be over by contributing their share towards the scheme, it could not be said that the assessee-company in spending the money expected to acquire or bring into existence any advantage for the enduring benefit of the business but the expenditure was incurred more as a matter of commercial expediency in pursuance of an agreement. It was further held that the amount in question was a permissible deduction as a revenue expenditure incurred wholly and exclusively for the purpose of the assessee's business.

7. In IRC v. Carron Company [1968] 45 TC 18, the facts, very briefly, were that the respondent-company was incorporated by a charter in 1773, which remained virtually unaltered until 1963. By 1950, many of the features of the charter had become archaic and unsuited to modern conditions and the company's commercial performance was suffering a progressive decline. The company petitioned for a supplementary charter in December, 1959, but proceedings were suspended pending the outcome of an action by a shareholder threatened to raise a further action on new grounds which would once more indefinitely postpone consideration of the petition. Consequently, the company settled the action on the terms, inter alia, that the company should but out a part of the holding of the said shareholder and the whole holding of another shareholder, her nephew, who had for many years been at variance with the company. A supplementary charter was granted in January, 1963, substantially in the form proposed; the company's affairs were then reorganised and its commercial performance improved. The company, Inter alia, claimed that the amounts paid to the two dissenting shareholders in respect of their shares were liable to be deducted in computing the income for the purposes of income-tax for the year 1964-65. It was held by the House of Lords that the objects of the new charter being to remove obstacles to profitable trading, anything in it beyond that could be disregarded and since the supplementary charter facilitated the day-to- day trading operations of the company, the expenditure was on income account. Lord Reid stated in his speech in that case [1968] 45 TC 68 as follows :

'The main argument for the Crown was that by obtaining the new charter the company obtained an enduring advantage in the shape of a better administrative structure. Of course, they obtained an advantage : companies do not spend money either on capital or income account unless they expect to obtain an advantage. And money spent on income account, for example on durable repairs, may often yield an enduring advantage. In a case of this kind what matters is the nature of the advantage for which the money was spent. This money was spent to remove antiquated restrictions which were preventing profits from being earned. It created no new asset. It did not even open new fields of trading which had previously been closed to the company. Its true purpose was to facilitate trading by enabling the company to engage a more competent manager and to borrow money required to finance the company's traditional trading operations under modern conditions.'

8. Certain observations from Lord Wilberforce's speech may also be quoted. Lord Wilberaforce has observed at page 74 as follow :

'The starting point here, in may opinion, is to be found in the decision of the Special Commissioners that the expenditure was incurred for the purposes of the company's trade, most significantly, in their opinion, in connection with the management and conduct of the business. The predominant purpose, indeed, and the effect of the changes was to put the company in a position to recruit efficient managerial staff with freedom of action to develop the company's trading in an efficient and modern manner. No decided precedent in this field can ever be decisive, but comparison, however approximate, is the best tool that we have.'

9. As far as the present case is concerned, as we have already pointed out, by the aforesaid contribution the respondent has acquired no capital asset, the overhead service line being always the property of the Gujarat Electricity Board. There is no finding that any enduring benefit or advantage has accrued to the respondent-company by reason of the aforesaid contribution made towards the cost of the overhead supply line. The object of the respondent in making the payment was one of commercial expediency, namely, to obtain supply of electricity, without which the business of the manufacture of phosphorus in the unit at Bhavnagar could not go on. The payment was really in the nature of a payment made towards the cost of obtaining supply of electricity essential for manufacturing the activities carried on at Bhavnagar.

10. In these facts and circumstances, and in view of the decisions which we have referred to earlier, the question sought to be referred, in our opinion, could only be answered in favour of the assessee and against the department and no useful purpose would be served by directing the Tribunal to state a case and to refer the said question for our determination.

11. Rule is, Therefore, discharged with costs.

12. Rule discharged.


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