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Commissioner of Income-tax Vs. India Tobacco Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 87 of 1971
Judge
Reported in[1978]114ITR182(Cal)
ActsIncome Tax Act, 1961 - Section 37(1); ;Industrial Disputes Act, 1947 - Section 18(3) and 18(5)
AppellantCommissioner of Income-tax
RespondentIndia Tobacco Co. Ltd.
Appellant AdvocateS. Sen, Adv.
Respondent AdvocatePal and ;Pronab Pal, Advs.
Cases ReferredPeter Merchant Ltd. v. Stedeford
Excerpt:
- sabyasachi mukharji, j.1. the familiar, yet not always easy, question as to whether a particular expenditure is capital or revenue falls for adjudication in this reference under section 256(1) of the income-tax act, 1961.2. the assessee is the india tobacco co. ltd., formerly known as the imperial tobacco co. of india ltd. the relevant assessment year is 1962-63 and the accounting year is the year ending on 31st march, 1962. in the relevant year the assessee had a factory at monghyr in bihar. it had acquired a piece of land and had constructed a hospital thereon. but by the time the hospital was ready, the employees' insurance scheme came into operation. the government of bihar required the hospital in pursuance of this. some negotiations thereafter took place between the.....
Judgment:

Sabyasachi Mukharji, J.

1. The familiar, yet not always easy, question as to whether a particular expenditure is capital or revenue falls for adjudication in this reference under Section 256(1) of the Income-tax Act, 1961.

2. The assessee is the India Tobacco Co. Ltd., formerly known as the Imperial Tobacco Co. of India Ltd. The relevant assessment year is 1962-63 and the accounting year is the year ending on 31st March, 1962. In the relevant year the assessee had a factory at Monghyr in Bihar. It had acquired a piece of land and had constructed a hospital thereon. But by the time the hospital was ready, the Employees' Insurance Scheme came into operation. The Government of Bihar required the hospital in pursuance of this. Some negotiations thereafter took place between the assessee-company, the Government and the workers' union. Eventually, a memorandum of settlement dated the 12th August, 1961, was arrived at under Section 18(3) of the Industrial Disputes Act, 1947. The actual terms and contents of the said memorandum of settlement are, however, not available in the records before us. It appears that the assessee-company had gifted to the Government of Bihar the hospital it had constructed together with the land by a deed of gift dated the 29th January, 1962. Clause 8(d), which was an integral part of the settlement, stipulated that the assessee shouldgive a sum of Rs. 50,000 to the Government for the purpose of purchasing equipment for the workers' hospital built by the assessee when it would be taken over by the Government, The said clause reads as follows ;

' Clause 8(d). Hospital; It is agreed that the company will pay to the Government of Bihar in the Department of Labour and Employment a sum of Rs. 50,000 (rupees fifty thousand) for the purchase of equipment for the workers' hospital built by the company when it is taken over by the Government. The union agrees and confirms that no disputes, matters of demands of whatsoever nature in respect of the workers' hospital, are outstanding between the union and the company on execution of this memorandum of settlement. '

3. It appears, therefore, that the assessee-company had two kinds of employees, those who were governed by the provisions of the Employees' Insurance Scheme, which provided for hospital benefits and also employees who were not covered by the scheme. From the facts recorded by the Tribunal it appears that by making the payment of Rs. 50,000, the employees of the assessee who were not governed by the scheme were entitled to the use of the hospital facilities.

4. The assessee claimed the amount of Rs. 50,000 as a deduction on the ground that the expenditure was incurred out of commercial expediency. The Income-tax Officer disallowed the claim on the ground that the assessee had secured an enduring benefit in the shape of concessional charges for hospitalisation of their employees and, therefore, the expenditure in question was capital in nature. Being aggrieved by the said decision of the Income-tax Officer, the assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner allowed the appeal holding that the payment of Rs. 50,000 was for the purpose of the welfare of the assessee's employees and was not a gift or ex gratia payment on account of any extra-commercial considerations. He, therefore, held that the expenditure arose in the course of the company's normal business.

5. Being aggrieved by the said decision of the Appellate Assistant Commissioner, the revenue preferred an appeal to the Tribunal. The Tribunal, on consideration of the facts in the light of the provisions of Section 37(1) of the Income-tax Act, 1961, was satisfied that the expenditure would be admissible as deduction. The Tribunal found that the assessee-company had employees, who were covered by the provisions of the Employees' Insurance Scheme, which provided for hospital benefit, as well as employees who were not so covered by the, scheme. According to the Tribunal, by making the payment of Rs. 50,000 the employees of the assessee, who were not covered by the scheme, were entitled to the use of the hospital facilities. On an application being made to the Tribunal, thefollowing question has been referred to us under Section 256(1) of the Income-tax Act, 1961 :

' Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amount of Rs. 50,000 was an admissible deduction under the provisions of Section 37(1) of the Income-tax Act, 1961 ?'

6. As we have mentioned before, the real controversy before the Tribunal was whether the expenditure should be allowed as a revenue expenditure or it was capital and cannot be allowed. The question will have to be determined in the light of Section 37(1) of the Income-tax Act, 1961, which reads as follows :

'(1) Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ' Profits and gains of business or profession '. '

7. It is well settled that the aforesaid section, which is similar to Section 10(2)(xv) of the Indian Income-tax Act, 1922, enacted affirmatively what was stated in the negative form in the English statute and was substantially in pari materia with the English enactment. Therefore, the courts should consider the English authorities as aid to the interpretation of the said provision, (See the observations of the Supreme Court in the case of Indian Molasses Co. (Pvt.) Ltd. v. Commissioner of Income-tax : [1959]37ITR66(SC) ). It may, therefore, be appropriate to consider the several English decisions to which our attention was drawn. In the case of Rowntree & Co. Ltd. v. Curtis [1924] 8 TC 678, the assessee had claimed as deduction, in computing its profits for income-tax purposes, a lump sum of 50,000, which it had set aside in the hands of trustees as a fund for the relief, out of the income therefrom, of invalidity, etc., amongst its employees. It was held by the Court of Appeal that the sum in question was not an admissible deduction in arriving at the company's profits for assessment to income-tax. It appears that M/s. Rowntree & Co. Ltd. were the well-known firm of cocoa and chocolate makers. They had a very large business, and a very large number of employees. In the particular year with which the Court of Appeal was concerned, the profit of the company was very large and sufficiently large to enable them to take the course of making provision for the invalidity of their work people. It appears that for some time the company had been desirous of establishing a fund, the income of which might be used for the benefit of the employees of the company, both, men and women, in the alleviation of distress, invalidity, misfortune, etc. Therefore, from its profit for that year 1919, the company had set aside 50,000.

8. That sum was handed over to the trustees upon the trusts of a trust deed, and the income of that sura, primarily, was to be used, and in certain unusual circumstances and subject to certain conditions and safeguards the capital might also be used, for the purpose of meeting the claims of what was comprehensively called invalidity. The sum in question, in the context of the value of money in 1919, was considerable but the company was a very large one. Pollock M. R. observed at page 697 of the report that what one really had to attempt was to ascertain as to whether or not from the business point of view the expenditure had been wholly and exclusively laid out in the earning of the profits. Of course so far as the test as to whether the expenditure had been laid out wholly or exclusively for the purpose of earning of the profits, that test, in view of the subsequent pronouncement of the House of Lords and also of the views of the Supreme Court cannot be strictly said to be correct to day. It is not necessary that the expenditure should have been wholly and exclusively laid out for earning profits as such. Even an expenditure which is not for earning of profits as such but indirectly facilitates the carrying on of the business, may, in certain circumstances, as we shall notice later, be considered to be expenditure of revenue nature. The Master of the Rolls observed that where one found that there was a continuous business demand, one might, on business principles, summarize that continuous business and on prudent grounds one might make a payment which covered more than the particular year, then one would be able to show that the sum had been spent prudently in order to obviate the continuous business demand and, hence, that was the sum wholly and exclusively laid out in the earning of the profits. After discussing the relevant authorities the Master of the Rolls observed that the expenditure in question was a capital expenditure and not to be treated as necessary expenditure wholly or exclusively for the purpose of seeking profits and, therefore, upheld the decision of Rowlatt J. Warrington L.J. observed that what the company had really done in that case was to create a permanent charitable fund applicable in the first instance but not exclusively so to the meeting of the claims of their work people in respect of invalidity but applicable also in the circumstances specified in the deed to other charitable purposes.

9. Reliance naturally was placed on behalf of the revenue on the well-known decision in the case of Atherton v. British Insulated & Helsby Cables Ltd. [1925] 10 TC 155 ; [1926] AC 205. There, the assessee-company had claimed as deduction in computing its profits for income-tax purposes a sum of Rs. 31,784 which had to be contributed irrevocably as a nucleus of a pension fund established by trust deed for the benefit of its clerical and technical salaried people, that being the sum actuarially ascertained to be necessary to enable past years of service of the then existing staff to rankfor pension. It was held by a majority decision of the House of Lords that the sum in question was not admissible as deduction in arriving at the company's profits for income-tax purposes. Viscount Cave L.C. at page 191 of the report (Tax Cases), after referring to the decision in the cases of Usher's Wiltshire Brewery Ltd. v. Bruce [1915] AC 433 and Smith v. Incorporated Council of Law Reporting for England and Wales [1914] 3 KB 674, had held that the sum of money expended, not of necessity and with a view to derive any immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency and in order indirectly to facilitate the carrying on of the business, might yet be expended wholly and exclusively for the purposes of the trade and Viscount Cave L.C. found that the expenses in question in that case came within that purview. But then the question which Viscount Cave L.C. posed was whether the expenditure was prohibited by any provision of the income-tax law and there the question that arose was whether the expenditure in question could be considered to be a capital expenditure. In Vallambrosa Rubber Co. Ltd. v. Farmer (Surveyor of Taxes] [1905] 5 TC 529, Lord Dunedin, as Lord President of the Court of Session, had expressed the view that capital expenditure was a thing that was going to be spent once and for all and income expenditure was a thing which was going to recur every year. Viscount Cave L.C. observed further that the criteria suggested by Lord Dunedin could not be a decisive one in every case, for it was easy to imagine many cases in which a payment, though made once and for all, would properly be chargeable against the receipts for a year. But Viscount Cave L.C. further observed that when an expenditure was 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, he was of the view that there was good reason in the absence of any special circumstances leading to an opposite conclusion for treating such an expenditure as properly attributable not to revenue but to capital.

10. In the case of Anglo Persian Oil Co. Ltd. v. Dale (H. M. Inspector of Taxes] [1931] 16 TC 253, there were agreements made in 1910 and 1914 and under the said agreements the assessee-company had appointed another limited company as its agents in Persia and the East for a period of years, upon terms, inter alia, that the agents would be remunerated by commission at specified rates. With the passage of time, the amounts payable to the agents by way of commission increased far beyond the amounts originally contemplated by the company and, after negotiations between the parties, the agreements were cancelled in 1922 and the agents agreeing to go into voluntary liquidation and the company agreeing to pay to the agents 3,00,000 in cash. This sum was in fact paid and the company contended before the Special Commissioners that it was an admissible deduction incomputing the company's profits for the purpose of income-tax and corporation profits tax. The Special Commissioners rejected this contention and the company appealed. It was held by the Court of Appeal that the payment to the agents was an admissible deduction for the purpose of income-tax and corporation profits tax. There, referring to the observations of Cave L.C. in the Athertoris case [1925] 10 TC 155, referred to hereinbefore, Rowlatt J., at page 263 of the report, observed that when Cave L.C. used the expression 'enduring benefit', Cave L.C. meant a benefit which was enduring only in the way that a fixed capital endured; not a benefit that endured in the sense that for a good number of years it relieved one of a revenue payment. It meant a thing which endured in the way that a fixed capital endured. The aforesaid view of Rowlatt J. was endorsed by Romer L.J. of the Court of Appeal at page 274 of the report. Therefore, in order to consider whether an asset or an advantage of enduring benefit has been brought into existence by the expenditure incurred, one has to examine the endurability in the context in which the fixed capital endures.

11. In the case of Green (H. M. Inspector of Taxes) v. Cravens Railway Carnage & Wagon Co. Ltd. [1951] 32 TC 359, the assessee-company had introduced in 1944 a staff assurance scheme based upon a single assurance policy, the annual premiums of which were paid wholly by the company. In order that a number of employees of long service should benefit fully the company undertook to pay certain additional annual premiums. In 1946, the company paid a lump sum in commutation of these additional premiums. On appeal before the Special Commissioners against assessments to income-tax and profits tax, it was contended for the assessee-company that the payment was a proper deduction in computing its profits. It was, however, contended on behalf of the Crown that the payment was capital expenditure and inadmissible as a deduction. The Commissioners had allowed the appeal. The High Court held that the Commissioners' decision was correct. At page 364 of the report, Donovan J. had pointed out the distinction between the facts of that case and the facts in the case of Atherion [1925] 10 TC 155 and emphasised that Cave L.C. in his speech had indicated that a payment made to secure a contented and efficient staff would, in the absence--of special circumstances pointing to a contrary conclusion, be attributable to capital. But Donovan J. emphasised that in the forefront of Atherton's cas'e [1925] 10 TC 155 was the initial large outlay that was made to establish the fund, a feature which his Lordship thought, was of crucial importance in that case and which was absent entirely in the case before his Lordship. The learned judge further went on to observe that one had only to read the judgments in Atherton's case [1925] 10 TC 155 to see how large a part that initial payment had played inthat decision. Counsel for the revenue in the instant case before us emphasised this aspect of the matter in aid of his submission that the initial large payment to start a scheme which brings in an advantage or a privilege in favour of the company is a factor indicating that the expenditure in question is capital in nature.

12. Our attention was also drawn to the decision in the case of Henrikson (H. M. Inspector of Taxes) v. Grafton Hotel Ltd. [1942] 24 TC 453 ; [1943] 11 ITR (Supp) 10. There, the assessee-company was the tenant of a fully licensed hotel where the lease provided that the tenant should pay all charges imposed in respect of the licences by virtue of the Licensing (Consolidation) Act, 1910. On the renewal of the licences in March, 1934 and in March, 1957, large sums in respect of the monopoly value were imposed, payable in instalments. The assessee-company appealed against the assessments under Schedule D to the English Income-tax Act, for the assessment years 1938-39 and 1939-40, claiming that the instalments of monopoly value should be deducted in computing the-assessments. The Commissioners had allowed the appeal. On further appeal, the Court of Appeal held that instalments were capital sums, that they did not lose their, capital nature because the company had undertaken to pay them under its lease and that these were not admissible deductions for the purpose of income-tax.

13. In the case of Strick v. Regent Oil Co. Ltd. [1965] 43 TC 1 ; [1969] 73 ITR 301, the assessee-company's main business consisted of importing oil and Selling it to garages and service stations. In the years 31st March, 1956, and 31st December, 1959, it had entered into agreements with certain retailers who were prepared to sell its products exclusively, in the form that the retailer, in consideration of a large sum of premium based on the amount of oil expected to be sold, leased his filling station to the company for a term of years at a nominal rent, and the company sub-let the station back to the retailer at a nominal rent for the same period less three days. The sub-lease contained covenants binding the retailar to continue to take all his supplies of oil from the company and to continue to carry on his business at the station. On appeal against assessments to income-tax under Case 1 of Schedule D to the English Income-tax Act, for the years 1957-58 and 1960-61, and to profits tax for the corresponding chargeable accounting periods the company had contended that the premiums were properly chargeable to revenue and were deductible in computing the profits for tax purposes The Crown had contended that the premiums were paid for the acquisition of an interest in land and since the company was not a dealer in land, the expenses were of capital nature and not deductible. The Special Commissioners held that the payments were of a revenue nature. On further appeal, the Court of Appeal held that the payments could not be allowed as revenue outgoings. After discussing severalauthorities Lord Reid observed at page 31 of the report that when one comes to intangible assets there was much more difficulty. To help the conduct of his business a trader obtains a right to do something on someone else's property or on an obligation by someone to do or refrain from doing something, or makes a contract which affects the way in which he conducts his business. And the right or obligation or the effect of the contract might endure for a short or a long period of years. The question then arises whether the sum which one pays for that advantage is capital or a revenue expense. At page 35 of the report, Lord Reid observed that there is a good deal of authority on the question of what kind of asset or advantage Lord Cave's words in Atherton's case [1925] 10 TC 155 would cover. Broadly, it seemed to have been accepted that these would not extend to cover any payment to get rid of a handicap or a disadvantage. Counsel for the revenue emphasised that in the instant case before us there was neither any determined or accrued liability which had to be got rid of in order to either begin or carry on business or trade for the assessee-company for the year in question. Furthermore, the benefit or the advantage which the assessee had obtained was for a long if not for an indefinite period and the payment was made once and for all.

14. In the case of Pitt v. Castle Hill Warehousing, Co, Ltd. [1974] 49 TC 638 some of these aspects fell for consideration and Mr. Justice Megarry summarised the effect of many of the English authorities. His Lordship, after referring to some of these authorities, observed at page 644 of the report as follows ;

' It seems to me that these authorities establish that, in determining whether expenditure is incurred on revenue account or on capital account, one must consider at least three elements. First, what is the nature of the payment Is there a single non-recurrent lump sum, paid once for all, on the one hand, or are there to be recurrent payments, made, for example, for periods commensurate with those payments Second, what is to be obtained by the payment? Is it some asset with lasting or enduring qualities, or is it merely ephemeral, or, indeed something which cannot be described as an asset, whether tangible or intangible Third, in what maner is what is obtained to be used, relied on or enjoyed Will it have a quality of recurrence which will point to an income nature, as by providing a flow of orders for goods, or will it bear a static aspect which points to a capital nature In considering all these elements, and in looking at the case as a whole, it is the practical and business point- of view that counts for more than the juristic classification of the legal rights employed or exhausted in the process. As Lord Upjohn said in the Regent Oil Co.'s case [1966] AC 295 : ' It is a question of fact and degree and above all judicial common sense in all the circumstances of the case.' In otherjudgments there are references to 'common sense' simpliciter, but the adjective ' judicial' may be useful as indicating that the kind of common sense needed is one that is not at large, but is guided and tutored by the authorities. '

15. In the background of the aforesaid English decisions it may be relevant to examine the question in the light of the decisions of the Supreme Court in the case of Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax : [1955]27ITR34(SC) , In that case, the assessee-company had acquired from the Government of Assam, for the purpose of carrying on the manufacture of cement, a lease of certain limestone quarries for a period of 20 years for certain half-yearly rents and royalties. In addition to the rents and royalties the assessee company had agreed to pay the lessor annually a sum of Rs. 5,000 during the whole period of the lease as a protection fee and in consideration of that payment, the lessor undertook not to grant to any person any lease, permit, or prospecting licence for limestone in a group of quarries without a condition that no limestone should be used for the manufacture of cement. The assessee had also agreed to pay Rs. 35,000 annually for 5 years as a further protection fee and the lessor in consideration of that payment gave a similar undertaking in respect of the whole district. The question was whether in computing the profits of the assessee the sum of Rs. 5,000 and Rs. 35,000 paid to the lessor by the assessee could be deducted under Section 10(2)(xv) of the Indian Income-tax Act, 1922. The income-tax authorities, the Appellate Tribunal and the High Court in the reference under Section 66(1) had held that the amount was not an allowable deduction under Section 10(2)(xv) of the Act. The Supreme Court on appeal held that the payment of Rs. 40,000 was capital expenditure and it was, therefore, rightly disallowed as a deduction under Section 10(2)(xv) of the Act. The Supreme Court discussed the principles applicable to this kind of expenditure and approved the principles laid down in the Full Bench decision of the Lahore High Court in the case of In re Benarsidas Jagannath : [1955]27ITR34(SC) of the report the principles deduced in the Full Bench decision of the Lahore High Court were thus stated by the Supreme Court;

'(1) Outlay 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.

(2) Expenditure may be treated as properly 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. If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally beregarded 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.

The expressions ' 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.

(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. '

16. In the case of Indian Molasses Co. (Pvt.) Ltd. v. Commissioner of Income-tax : [1959]37ITR66(SC) , the Supreme Court considered these aspects and at page 75 of the report observed as follows :

' From these cases, there are deducible certain principles of a fundamental character. The first is that capital expenditure cannot be attributed to revenue and vice versa. Secondly, it is equally clear that a payment in a lump sum does not necessarily make the payment a capital one. It may still possess revenue character in the same way as a series of payments. Thirdly, if there is a lump sum payment but there is no possibility of a recurrence, it is probably of a capital nature, though this is by no means a decisive test. Fourthly, if the payment of a lump sum closes the liability to make repeated and periodic payments in the future, it may generally be regarded as a payment of a revenue character [Anglo-Persian Oil Co. Ltd. v. Dale [1931] 16 TC 253] and, lastly, if the ownership of the money whether in point of fact or by a resulting trust be still in the taxpayer, then there is acquisition of a capital asset and not an expenditure of a revenue character.

Side by side with these principles, there are others which are also fundamental. The income-tax law does not allow as expenses all the deductions a prudent trader would make in computing his profits. The money may be expended on grounds of commercial expediency but not of necessity. The test Of necessity is whether the intention was to earn trading receipts or to avoid future recurring payments of a revenue character. Expenditure in this sense is equal to disbursement, which, to use a homely phrase, means something which comes out of the trader's-pocket. Thus, in finding out what profits there be, the normal accountancy practice may be to allow as expense any sum in respect of liabilities which have accrued over the accounting period and to deduct such sums from profits. But the income-tax laws do not take every such allowance as legitimate for purposes of tax. A distinction is made between an actual liability in presentiand a liability de future which, for the time being, is only contingent. The former is deductible but not the latter. The case which illustrates this distinction is Peter Merchant Ltd. v. Stedeford [1948] 30 TC 496 (CA). No doubt, that case was decided under the system of income-tax laws prevalent in England, but the distinction is real. What a prudent trader sets apart to meet a liability, not actually present but only contingent, cannot bear the character of expense till the liability becomes real. '

17. In the case of v, the Supreme Court observed that the expression ' for the purpose of the business' in Section 37(1) of the Income-tax Act, 1961, was wider in scope than the expression ' for the purpose of earning profits '. At page 150 of the report the Supreme Court observed :

' Its range is wide : it may take in not only the day to day running of a business but also the rationalization of its administration and modernisation of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title ; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business.'

18. In the case of Commissioner of Income-tax v. Hindusthan Motors Ltd. : [1968]68ITR301(Cal) , the Calcutta High Court found that the money that was spent was not so much to bring about any asset or advantage of enduring benefit to itself but to run the business efficiently and conveniently. In that case, what happened was that the location of a factory of a motor car manufacturing company was a long distance away from the main trunk road, but there was an approach road from the main trunk road to the factory premises of the assessee, which road belonged to the Government of West Bengal. The said approach road fell into disrepair and began to cause transportation difficulties to the assessee. The Government was not prepared to meet the expenses for the repair of the road. Thereupon, the assessee offered to contribute a sum of Rs. 39,770, for the improvement of the said approach road. The assessee paid the said amount to the Government and claimed the amount as expenditure deductible under Section 10(2)(xv) of the Indian Income-tax Act, 1922. The Income-tax Officer treated the expenditure as capital expense and disallowed the claim for deduction. It was held that the money was spent not so much to bring about any asset or advantage of enduring benefit to itself but to run the business efficiently and conveni-ently and on the facts of the case the sum of Rs. 39,770 spent by the assessee should be treated as wholly and exclusively spent for the assessee's business within the meaning of Section 10(2)(xv) and was an allowable expense under that section.

19. Keeping the aforesaid principles in mind in the facts of the present case, we have to examine the question posed before us in the light of judicial common sense, in the apt words of Justice Megarry. The cases mentioned above only illustrate the application of the principles that the courts from time to time have laid down for determination of the question whether a particular expense should be treated as revenue expenditure or capital expenditure. It appears to us that, broadly speaking, the question should be considered from two aspects, namely, what is got by spending the money, the nature and type of the asset or the advantage or right that is obtained by the expenditure incurred, and, secondly, the nature and the manner of the payment made. It is the real nature and quality of payment that is important.

20. In the instant case, it is apparent from the facts found by the Tribunal that the assessee-company was getting the advantage to have its workers treated at the hospital which was being established by the Government. The equipments to be purchased with the money given by the assessee-company would enure for the benefit of the treatment of the workers of the assessee-company. There is no doubt, in this case, that the expenditure in question was incurred for commercial purposes, that is to say, for the purpose of meeting liability, liability not strictly perhaps legal or contractual, but liability for running of the business and for the benefit of the workers. But, at the same time, the assessee-company obtained an advantage or a benefit or a privilege. That benefit or the privilege or the advantage was that its workers, who were not covered by the State insurance scheme, would be entitled to the benefit of treatment at the hospital run by the Government at no rate or perhaps at concessional rate, which one, is not clear from the facts as found by the Tribunal. But it is apparent that the workers of the assessee-company would get that benefit and on the basis of this benefit the workers union agreed to the settlement which was arrived at under the provision of Section 18(3) of the Industrial Disputes Act, 1947, referred to hereinbefore. It is true that if the annual sums had to be spent for meeting the workers' expenses for treatment at the hospital, the same would have merited deductions as revenue expenditure. From that point of view, it is true that by incurring this expenditure of Rs. 50,000 the company was getting rid of the liability or the obligation to make recurring annual payments. If this was the only aspect of the matter, then on the principles discussed in the aforesaid decisions, it might have been possible to hold that the expenditure incurred, in theinstant case, was a revenue expenditure. But, in this case, not only the company incurred this expenditure for getting rid of the obligation to make recurring annual expenses for meeting the treatment of its workers but also for getting an advantage or a privilege which indeed can be considered to bu an asset for an indefinite period to have its workers treated at no expense or at concessional expense. If this is an asset or a benefit then, and as it endures for a considerable length of time or for an indefinite time, it can certainly be considered to be an asset or advantage of enduring benefit, enduring in the sense in which fixed capital in modern times endures. If that is the position then by making this one lump sum payment, the assessec-company not only got rid of a liability to make recurring annual payments for the treatment of its workers who are not covered by the State insurance scheme at the hospital of the Government but also obtained this advantage or privilege for an indefinite period. It is also to be emphasised that there is no finding that there was any incurred liability to the workers as such, clearance in respect of which was necessary either for carrying on of the business or for facilitating the business of the assessee-company. It has also to be borne in mind that this was an initial payment or payment to get the scheme started. In this background of the aforesaid features of this expenditure, we are, therefore, of the opinion that the expenditure in question was capital in character not admissible for deduction under the provision of Section 37(1) of the Income-tax Act, 1961.

21. In the premises, the question is answered in the negative and in favour of the revenue.

22. In the facts and circumstances of this case, each party will pay and bear its own costs.

Guha, J.

23. I agree.


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