S.K. Mal Lodha, J.
1. The Income Tax Appellate Tribunal Delhi Bench, (here in after referred to as the Tribunal) has referred the following question arising from the order of the Tribunal in ITA No. 2583 of 1966-67:
Whether en the facts and in the circumstances of the case the Tribunal was right in holding that the expenditure of Rs. 91,185/- is deductible as a revenue expenditure?
The assessee-respondent is M/s National Tractors, Jodhpur. The assessment year in question is 1962-63. One R. Gangadharappa obtained a lease measuring 450,85 acres together with mines from the Government of Mysore on April 5, 1952. It was for the purpose of obtaining and removing iron-ore and other permissible minerals from the mine situate at Jambunathanaballi in Hoppet Taluka for a period of 30 years commencing from April 5, 1952. The said R. Gangadhrappa obtained necessary mining lease and also permission to work the (sic) in the said area and to extract the minerals specified in the mining lease granted to him by the Mysore Government on April 5, 1952. R. Gangadharappa entered into an agreement on May 30, 1960 with the assessee-respondent for a period often years by virtue of which the assessee was put in possession of the mining area, which he was permitted to use the said land in furtherance of the mining purposes. It was authorised to sink, dive and make such pits, shafts, drifts, tunnels, ropeways, water courses and trenches whether upon or below the surface of the said land and/or execute any work necessary for ventilation of or draining the mine. The assessee was also authorised to make and erect roads, railways, buildings and machinery and other conveyances as may be required for working the mine. The material clauses in the agreement dated May 30, 1960, are Clauses (3), (10) and (23).
2. Clauses (3), (10) and (23) are reproduced herein below:
(3) The contractor will have the power and authority to make and erect roads, railways, building & machinery and other conveyances as may be required for working of the mine.
(10) The Contractor shall take all necessary measures for the safety and to keep the buildings and other works in good repair and shall conform to and observe all the provisions of the Mines and Mineral (Regulation and Development) Act III of 1948 and rules and regulations made thereunder or any other enactments and statutory rules for the time being in force so far as they relate to the working of mines and raising of minerals.
(23) The Mine Owner hereby agrees that the raising Contractor cum Selling Agents shall receive and keep the full proceeds from sale of iron ore raised by them under this contract for having:
(a) Paid the royalty on behalf of the Mine Owner.
(b) Improved the Roads.
(c) Developed the Mines.
(d) Arranged the required transport from the Mine head to Stations or direct to ports as the case may be.
(e) Paid the sum of Rs. 15,500/- to the Mine Owner for the cost of upto Rs. 25,000/- tons of Iron Ore as per year.
(f) Assure the Mine Owner of Payments as set out in clauses twelve and Ninteen and
(g) Paid the cost of Mining.
The assessee closed its account for the first year on November 15,1960. It did not spend any money on the existing Kuchha roads joining the minehead with the main road and the railway station. In the assessment year 1962-63 (relevant previous year ending on November 15, 1961), the assessee spent Rs. 91,185/- for covering the Kuchha unmetalled road into a metalled road. The details pertaining to Rs. 19,185/- are as follows:
(1) Rs. 4725/- in respect of construction of culverts.
(2) Rs. 5,130/- in respect of excavation of catch drain.
(3) Rs. 81,330/- in respect of conversion of Kuchha road into metalled road.
The assessee entered the above expenditure in its books as deferred revenue expenditure and debited 1/10 of the total expenditure to the profit and loss Account. The assessee claimed the dedication of the entire expenditure of Rs. 91,185/- in the computation of income for the year 1962-61. The Income Tax Officer rejected the claim petition on the ground that the expenditure was of a capital nature. On appeal, the Appellate Assistant Commissioner, opined that the amount spent was on conversion of the Kuchha road into a metalled road and for making culverts and excavating catch drains wherever necessary and took the view that by so doing an asset or advantage of an enduring nature had been brought into existence. He, accordingly, affirmed the order of the ITO. Further appeal was filed before the Tribunal. The learned Accountant Member of the Tribunal examined Section 30(a)(ii) of the Income Tax Act, 1961 (Act No. XLIII of 1961) (which will here in after for the sake of brevity be referred to as 'the Act')., and CIT, Delhi v. S.B. Ranjit Singh , Regal theatre v. CIT Delhi (1966) 59 I.T.R. 49, Gotan Line Syndicate v. CIT : 59ITR718(SC) and Hols by Cables Ltd. v. Atherton 10 Tax Cases 155. He also considered Humayan Properties Ltd. v. CIT (5) & CIT v. Mahalukshmi Textiles Mills Ltd. (1956) 56 I.T.R. 256, which were cited on behalf of the Revenue. He upheld the findings of the Revenue authorities that the amount spent by the assessee over the construction of the roads etc. did not amount to repair, that the construction of the roads etc. brought into existence and asset or advantage of an enduring benefit to the assessee's business and, therefore, the item was rightly disallowed as an item of revenue expenditure. The addition was, therefore, upheld by him. The Judicial Member of the Tribunal, however, did not agree with the learned Accountant Member. He held that the expenditure had been incurred in repairing the roads and as it is the assessee firm's liability to do so under the term of the agreement dated May 30, 1960, the expenses would be a permissible deduction under Section 31(1) or Section 30(a)(i). He, therefore, held that the expenditure was of revenue nature and should be allowed as deduction. It would thus be abundantly clear that there was a difference of opinion between the learned Accountant Member and the learned Judicial Member. Under Section 255(4) of the Act, the following point was referred to the third Member:
Whether the sum of Rs. 91,185/- or part thereof is an item of capital expenditure or revenue expenditure?
Before the learned Third Member, on behalf of the assessee Commr. of Inc. Tax v. Gajjanand Govind Ram 28 I.T.R. 499, Commr. of Inc. Tax v. Hindustan Motors Ltd. 68 I.T.R. 301, Commr. of Income Tax v. Royal Calcutta Taurf Club 41 I.T.R. 414, were relied on by the assessee. It was pressed by the assessee that the view taken by the learned Judicial Member is correct. On the other hand, the Departmental Representative relied on Lupton Inspector of Tax v. F.A. & A.B. Ltd. 55 I.T.R. 544 and Asian Tool & Plastic Co. v. Commr. of Income Tax Calcutta 75 I.T.R. 392, and canvassed that the opinion expressed by the Accountant Member is justified. Shri N.M. Jhala, Third Member, expressed his agreement with the Judicial Member holding that the expenditure was allowable as expenditure on current repairs. The Tribunal by its order dated November 3,1969, conforming with the majority opinion held that the sum of Rs. 91,185/- represented revenue expenditure and is allowable as a deduction in the assessment, The Tribunal has, thus referred the aforesaid question for our opinion arising out of its order.
3. We have heard Mr. J.P. Joshi, learned Counsel for the Revenue and Mr. H.P. Cupta, learned Counsel for the assessees respondent.
4. We may first consider the relevant provisions of the Act.
5. Section 30 deals with rent-rates, taxes and insurance for building. It is as under:
30. In respect of rent, rates, taxes, repairs and insurance for premises used for the purposes of the business or profession, the following deductions shall be allowed.
(a) Where the premises are occupied by the assessee-
(i) As a tenant, the rent paid for such premises; and further if he has undertaken to bear the cost of repairs to the premises the amount paid on account of such repairs;
(ii) Otherwise than as a tenant, the amount paid by him on account of current repairs to the premises;
(b) Any sum paid on account of land revenue, local rates or municipal taxes;
(c) The amount of any premises paid in respect of insurance against risk of damage or destruction of the premises.
It may be mentioned that the provisions contained in Section 30(a)(i), Section 30(a)(ii), Section 30(b) & Section 30(c) are deleted sections of Section 10(2)(i) and (ii), Section 10(2)(v) Section 10(2)(ix) & Section 10(2)(iv) respectively of the Indian Income-tax Act, 1922 (here in after to be referred as 'the Act of 1922'). Section 31 deals with repairs and insurance of machinery plant and furniture. Section 31(i) and Section 31(ii) are deleted sections of Section 10(2)(v) and Section 10(2)(iv) of the Act of 1922. Section 37 covers the cases of business expenditure. There are catena of cases as to what is capital expenditure and what is revenue expenditure. We do not consider it necessary to refer to all of them.
6. In Assam Bengal Cement Co. v. CIT (1982) 27 I.T.R. 34 which is a leading case on the point, it has been observed:
If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure.
In order to determine whether the expenditure is revenue or capital expenditure, certain principles have to be kept in mind. They were formulated in Assam Bengal Cement Company's case (1982) 27 I.T.R. 34 as under:
1. Cutlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment; vide Lord Sands in Commissioner of Inland Revenue v. Granits City Steamship Co. In City of London Contract Corporation v. Styles Bowen L.J. observed as to the capital expenditure as follows:
You do not use it 'for the purpose of' your concern, which means, for the purpose of carrying on your concern, but you use it to acquire the concern.
2. Expenditure may be treated as property attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade Vide Viscount Cave, L.G. in Atherton v. British Insulated and Heleby Cables Ltd. If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. Thus, if labour saving machinery was acquired, the cost of such acquisition cannot be deducted out of the profits by claiming that it relieves the annual labour bill, the business has acquired a new asset, that is, machinery.
3. Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure recorded was part of the fixed capital of the business or part of its circulating capital. Fixed capital is what the owner burns to profit by keeping it in his own possession. Circulating or floating capital is what he makes profit of by parting with it or letting it change masters. Circulating capital is capital which is turned over and in the process of being turned over yields profit or loss. Fixed capital, on the other hand, is not involved directly in that process and remains unaffected by it.
It was further held by the Supreme Court tint 'one has got to apply these criteria, one after the other from the business point of view and come to the conclusion whether on a far appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter event only it would be deducible allowance under Section 10(2)(xv) of the Indian Income Tax Act, 1922'. The principles laid down in the aforesaid decision were followed by the Supreme Court in State of Madras v. C.J. Coelbo (1953) 64 I.T.R. 186.
7. It was observed by Hidayatullah, J. as he then was, in Abdul Kayoom v. CIT (1962) 44 I.T.R. 68 that none of the tests is either exhaustive or universal. It was ruled as under:
It is not necessary for us to cover the same grounds again. Further, none of the tests is either exhaustive or universal. Each case depends on its own facts, and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation to decide cases (as said by Corodozo) by matching the colour of one case against the colour of another. To decide, therefore, on which said of the line a case falls, its broad resemblance to another case is not at all decisive. What is decisive is the nature of the business, the nature of the expenditure, the nature of the right acquired, and their relation inter se, and this is the only key to resolve the issue in the light of the general principles, which are followed in such cases.
In Gotam Lime Syndicate v. CIT : 59ITR718(SC) their Lordships have mentioned that it is not necessary to review all the cases as after reviewing the relevant cases formulated certain tests in Assam Bengal Cement Co. v. CIT (1982) 27 I.T.R. 34. It is, thus, abundantly clear from the aforesaid decisions of the Supreme Court that in order to classify the expenditure as capital expenditure, the important tests are : (1) Whether it has brought into existence new assets or (2) it would bring into existence advantage or benefit or ensuring nature. The first thing that has to be seen is whether the assessee-respondent had acquired any new assets by spending Rs. 91,185/-. Here, the agreement dated May 30, 1960, which was entered into between R. Gangadharappa and the assessee requires to be considered. R. Gangadharappa has appointed the assessee under the agreement as a raising constractor cum-selling agents No lease has been granted by R. Gangadharappa to the assessee. It may be itated that the tribunal called for the copy of the lease deed of the land in favour of R. Gangadharappa, but the parties did not produce it. The object of appointing the assessee as raising contractor was to safeguard his (R. Ganga-dharappa's) position under the lease-deed, which was granted to him by Mysore Government on April 5,1932. It is clear from the agreement dated May 0,1960 that the assessee-firm was not sub-lessee and status as such was not conferred on it. The document has been described as an agreement and R. Gangadharapi has described himself as mine owner. It is also clear that the assessee was given licence to enter upon the land for the limited purpose of extracting iron ore on behalf of R. Gangadharappa and that the assessee firm bad no right, title or interest what so ever in the mining area. Clause 23 of the agreement, which has been reproduced above, shows that the assessee firm shall receive and keep the full process from sale of iron ore raised by them under the contract for having done the things set out therein. In these circumstances, it cannot be said that it has acquired a new asset in the firm. As the assessee cannot be said to have acquired new asset, the expenditure incurred for the purpose is not capital expenditure.
8. Now, the question is whether the assessee can be said to have acquired any advantage or benefit of enduring nature from its business. This has necessitated us to examine as to what is the meaning of 'advantage or benefit of ensuring nature.'
9. In Assam Bengal Cement Co. v. CIT (1982) 27 I.T.R. 34, the expression 'enduring benefit' has been judicially interpreted. Reference may also be made to State of Madras v. G.J. Goelbo : 53ITR186(SC) wherein it was held that the expression 'enduring benefit' or 'of a permanent character were introduced to make it clear that the asset or the right acquired must have enough durability to justify its being treated as a capital asset.
10. Learned Counsel for the Revenue was right in not disputing the tests laid down by the Supreme Court for determining whether the particular expenditure is capital or revenue one. He, however, submitted that in the facts and circumstances of the case, the expenditure was capital expenditure and, therefore, it is not deductible expenditure as revenue. He has placed reliance on Humayun Properties Ltd. v. CIT (1964) 44 I.T.R. 73. In that case, the assessee carried on business as cinema exhibitors. It was the owner of two cinema houses. During the accounting year in question, in addition to spending the sum of Rs. 81,799/- under the separate head of account repairs, the assessee incurred expenses amounting to Rs. 2,41,312/-. These expenses were termed renovation expenses. The ITO found that the primary purpose of renovation was to make the halls more attractive and comfortable to the public and, therefore, designed to increase their value and running capacity, that the bulk of the amount of renovation expenses was expenditure of a capital nature e.g. for replacement of furniture and sanitary fittings and new electrical installations He, therefore, allowed only 10% of the renovation expenses and treated 90% as capital expenses. The question arose whether the balance of 90% of the renovation expenses amounting to Rs. 2,17,182/- was allowable under Section 10(2)(xv) of the Act of 1922 as expenditure for current repairs. It may be stated that this decision has no bearing on the case before us.
11. Learned Counsel for the Revenue referred to CIT v. Mahalakshmi Textiles Mills : 66ITR710(SC) . Learned Judges of the Madras High Court have observed as follows:
A repair is effected for the purpose of preserving or maintaining an existing asset and not to bring a new asset into existence or to obtain a new or fresh advantage. If the purpose of bringing a new asset into existence or a new advantage for the business, then such an expenditure would be of capital nature.
The principle laid down in the aforesaid case, was affirmed in CIT v. Mahalakshmi Textiles Mills : 66ITR710(SC) by the Supreme Court. The other ruling on which reliance was placed by the learned Counsel for the Revenue is L.H. Sugar Factories and Oil Mills Ltd. : 21ITR325(All) . The case is clearly distinguishable. In that case, the assessee owing a sugar factory and an oil mill business claimed that the expenditure incurred by it in the re-roofing of Labourer's quarters by using new Khaprails (tiles) in place of old ones was a revenue expenditure and was, therefore, an allowable deduction. It was held that the expenditure incurred was neither a revenue expenditure nor an expenditure in respect of current repairs and it was, therefore, not an allowable deduction.
12. On behalf of the assessee, various decisions were cited, but, we shall refer to only those decisions, which are nearer home.
13. In CIT v. S.B. Ranjit Singh the assessee who bad leased out his hotel complete with furnishings and fittings for 20 years on an annual rent of Rs. 50,000/- claimed that the expenditure of Rs. 24,904/- incurred by him in resurfacing with concrete the approach road which had fallen into a bad state, was an allowable deduction. It was held that the expense incurred was in respect of current repairs and was, therefore, an allowable deduction. It was observed therein that a sum can be allowed as a cost of the repairs and can be held not to be a capital expenditure even though the expenditure in a particular year is heavy on account of the fact that it is undertaken to remedy the effect of several years of wear and tear or neglect and also in spite of the fact that such expenditure may not be necessary for several years to come after the repairs had been effected.
14. In Panipat Cooperative Sugar Mills Ltd. v. CIT , the assessee spent Rs. 6,00,000/- for the conversion of the Kuchha approach roads to its mills into metalled roads. A contention was raised that the expenditure had been incurred mainly to ensure that the sugarcane supplied to its mills were fresh. On the question whether the expenditure was allowable as revenue expenditure, it was observed:
The question which deserves to be considered is whether the new roads which were constructed in the instant case can really be regarded as new roads or not. Admittedly, kutcha roads were already in existence some expenditure was incurred for improving the quality of these roads. The word 'repair' is denned in the Shorter Oxford Dictionary as 'restoration of some material thing or structure by the renewal of decayed or worn out parts, by refixing what has become loose or detached.' May be, by metalling, a road becomes comparatively more permanently restored, but the conversion of a kutcha road into a metalled one does not necessarily tantamount to the construction of a new road. Even a metalled road does not last for ever and has to be repaired after some interval. The kutcha roads which were already in existence and which were converted into metalled roads did not belong to the assessee nor could it have any control over them. The assessee being a co-operative society registered under the Punjab Co-operative Societies Act, 1961, can, with the sanction of the Registrar, contribute a part of its profits towards any purpose connected with the development of co-operative movement or charitable purposes. The more advantageous execution of its business, because of the metalling of the kutcha roads, was by itself expected to give an impel us to the cooperative movement. The contribution made by the assessee in the peculiar circumstances of this case does not procure an enduring or a lasting benefit to it. The expenditure was incurred on account of business expediency, namely, the effort to get fresh sugarcane, which yields higher percentage of sugar, to the gates of the factory. The existence of kucha roads was a permanent inconvenience and the expenses incurred by the assessee to get rid of this inconvenience cannot be held to have brought to it a lasting advantage. We are clearly of the opinion that the metalling of the roads in the instant case amounted to their repair and the expenditure incurred on this item should be regarded as revenue expenditure as laid down by their Lordships of the Supreme Court.
In CIT v. Excel Industries Ltd. : 122ITR995(Bom) , the question was whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the payment 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? After referring to Lakshmiji Sugar Mills v. CIT : 82ITR376(SC) it was held that by contribution the respondent has acquired no capital asset, the overhead service line being always the property of the Gujarat Electricity Board and 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.
15. It was pointed out in Empire Jute Co. Ltd. v. CIT : 124ITR1(SC) as follows:
There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future.
In L.H. Sugar Factory & Oil Mills v. CIT : 125ITR293(SC) , the assessee company carrying on business in manufacture and sale of sugar, had its factory in U.P. During the accounting period relevant to the assessment year 1956-57, the assessee paid two amounts : (1) a contribution of Rs. 22,332/- at the request of the Collector towards the construction of the Deoni Ram and the Deoni-Dam Majhala road which had been completed in 1952-53; and (ii) a contribution of Rs. 50,000/- towards meeting the cost of construction of roads in the area around its factory under a sugarcane development scheme under which one-third of the cost of construction of roads was to be met by the Central Government, one third by the State Government and one-third by Sugar factories and sugarcane growers. The question was whether these two amounts were deductible in computing the assessee's profits under Section 10(2)(xv). Regarding Rs. 50,000/- it was held that it was deductible expenditure under Section 10(2)(xv). It was observed as follows:
The roads under the scheme were undoubtedly advantageous to the business of the assessee as they facilitated the transport of sugarcane to the factory and the outflow of manufactured sugar from the factory to the market centres. The construction of these roads facilitated the business operations of the assessee and enabled the management and conduct of the assessee's business to be carried on more efficiently and profitably. It was true that the advantage secured for the business of the assessee was of long duration in as much as it would last so long as the roads continued to be in motorable condition, but it was not an advantage in the capital field, because no tangible or intangible asset was acquired by the assessee nor was there any addition to or expansion of the profit-making apparatus of the assessee. The amount of Rs. 50,000/- was contributed by the assessee for the purpose of facilitating the conduct of the business of the assessee and making it more efficient and profitable without the astessee getting an advantage of an enduring benefit to itself and was an expenditure on revenue account; and was laid out wholly and exclusively for the purpose of the assessee's business.
In the case on hand, the road which was existing before the assessee undertook the raising contract was not an absolutely unserviceable road. A perusal of the order oft the ITO shown that in the first year of contract relevant to this assessment year 1961-62, the total sales accounted for movement of 52327 tons as against 46,049 tons accounted for in the relevant accounting year in dispute. It could not, therefore, be suggested that the condition of the road before the assessee undertook the repairs was such as rendered it completely unless for the assessee's business. The expenditure incurred by the assessee was not such as could bring about a radical transformation in the condition of the road. The major item of expenditure which is challenged related to excavating rocks and forming road with the help there of and the rate quoted was Rs. 50/- per 1000 cb. ft. and at this rate 14,80,000 cb. ft. of material was spread out. From these facts, it was not possible to say that at this rate of expenditure spread over such a large area condition of the road could be so improved as to completely change the aspect of the road and bring into existence an advantage of an enduring character which did not exist before at all. This is to be remembered that ordinarily the repairs would restore the asset to its original condition of working but in actual life and especially while running a business it was not possible to restore the asset to the condition identical with the condition in which it was found before it was first put in use. When a road is repaired by putting culverts which were not before or to fix up catch drains, it cannot be said that the essential nature or advantage of the road has been changed. The assessee was only a raising contractor, with an agreement. The agreement was good for ten years. It provided for assessee's leaving the contract under certain circumstances; the business also was of a speculative character in the sense that it was not possible to estimate with certainty the out-turn from the mines and there was every possibility of the mine turning out barren and unprofitable. Before entering into the agreement, there was a road, which was in working condition. He repaired the road so as to make it as workable as possible in the circumstances with the less possible amount of outlay, and failure to repair the road would have brought the business to a stand still. It was only on account of the expenditure, which he has incurred that he could carry on the business. The assessee had incurred the expenditure not with an object to acquire any income earning apparatus or for acquiring any benefit or advantage of enduring nature but only as a measure of economically and efficiently running its business of excavation and sale and transport of iron ore and for the facility of conveniently carrying on the said business. Thus it cannot be said that the assessee had acquired any advantage or benefit of enduring nature from its business. Taking into consideration the above circumstances, we are of the opinion that the expenditure was allowable as a revenue expenditure and it should be allowed to be deducted.
16. In view of what has been stated above, we answer the question referred to this Court in the affirmative and in favour of the assessee.
17. In the circumstances the case, there will be no order as to costs of this reference.