M/S. Sitalpur Sugar Works Ltd. Vs.
Commissioner of Income-Tax, Bihar and Orissa [1963] INSC 95 (10 April 1963)
10/04/1963
ACT:
Income Tax--Expenditure incurred on
dismantling a factory at one place and setting it up at another--Capital
expenditure and not revenue expenditure--Depreciation on capital
expenditure-Depreciation not allowed on amount spent for acquiring an
advantage--Indian Income-tax Act, 1922 (11 of 1922), s. 10 (2) (vi).
HEADNOTE:
The appellant, a company manufacturing sugar,
shifted its factory from the old site to a new site and incurred a total
expense of Rs. 3,19,766/- on the dismantling of buildings and machinery,
transporting machinery from the original site to the new site and refitting the
same there.
Held that the appellant was not entitled to a
deduction of this expense for income-tax purposes as an expense incurred for
carrying on the concern or in earning profit, it was an expense incurred m
effecting a permanent improvement in the profit-making machinery and was,
therefore, an expenditure on capital account.
The expense was on capital account also
because it was made, "not only once for all, but with a view to bringing
into existence an asset or an. advantage for the enduring benefit of a
trade" within the dictum of Viscount Cave in Atherton v. British Insulated
and Helsby Cables Ltd. In order that that dictum may apply it is not necessary
that by the expenditure a material asset or a permanent right in the nature of
capital should be acquired. There may be an expense incurred on capital account
though nothing was thereby added to the capital value of an asset.
Atherton v. British Insulated and Helsby
Cables Ltd. (1925) 10 T.C 155, Assam Bengal Cement Go. Ltd. v. The Commissioner
of Income-tax, West Bengal, [1955] 1 S.C.R. 972, Granite Supply Association
Ltd. v Kitton, (1905) 5 T.C. 168 and Bean v. Doncaster Amalgamated Collieries
Ltd.
(1945) 27 T.C. 296, referred to.
18 An expense would not be on revenue account
simply because it was incurred to turn a losing concern into a profitable one.
Though the expense incurred by the appellant
was of a capital nature, it was not entitled to any depreciation on it under
s.10 (2) (vi) of the Income-tax Act because no tangible asset had been acquired
by the expenditure which can be said to have depreciated. Neither was the
appellant entitled to depreciation under part V of the Form of Return given in
the Rules framed under the Act which dealt with a claim for depreciation and by
column 3 required a statement to be made for "capital expenditure during
the year for additions, alternations, improvements and extensions," for to
be so entitled to deductions under this part there has to be an improvement of
the capital asset or increase in its value and there is no evidence of any such
improvement or increase. Further, no claim for depreciation on improvement to
capital asset had been made.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 350 of 1962.
Appeal by special leave from the judgment and
decree dated November 30, 1960, of the Patna High Court in Miscellaneous
Judicial Case No. 799 of 1958.
G. S. Pathak and G.G. Mathur, for the
appellant.
N. D. Karkhanis and R. N. Sachthey, for the
respondent.
1963, April 10. The Judgment of the Court'
was delivered by SARKAR J.--This case does not seem to us to present any real
difficulty. It arises out of a reference to the High Court of Patna of two
questions both of which were answered by the High Court against. The assessee,
the appellant in this Court.
The appellant is. a company manufacturing sugar.
It had its factory originally at a place called 19 Sitalpur. That place was
found to be disadvantageous for the appellant's business as sugar cane of good
quality was not available in sufficient quantity in the neighbourhood and also
as it suffered from ravages of flood. With a view to improve its business the
appellant removed its factory from Sitalpur to another place called Garaul and
in the process of dismantling the building and machinery, transportation from
Sitalpur to Garaul and refitting the machinery at the latter place, it incurred
a total expense of Rs. 3,19,766/- in the year of account. In the assessment of
its income-tax. it claimed a deduction of these expenses as revenue expenses.
That claim was rejected. The questions referred concern these expenses.
The first question was this:
"Whether the expenditure of Rs. 3,
19,766/-incurred by the assessee m dismantling and shifting the factory from
Sitalpur and erecting the factory and fitting the machinery at Garaul was
expenditure of a capital nature and not revenue expenditure within the meaning
of section 10 (2) (xv) of the Income- tax Act ?" Considering the matter
apart from the authorities, it seems to us impossible that the expenditure
could be revenue expenditure. It was clearly not incurred for the purpose of
carrying on the concern but it was incurred in setting up the concern with a
greater advantage for the trade than it had m its.previous set up. The
expenditure was .not.
recurred m caring any profit but only for
putting its factory, that is, its capital, in better shape so that it might
produce larger profits, when work.ed. It really .went towards effecting a
permanent improvement in the profit making machinery, that is, in the capital
assets. It was, therefore, a capital expenditure and not a revenue expenditure.
20 The case, furthermore, is completely
governed by authorities. We think it comes clearly within the well- known
dictum of Viscount Cave in Atherton v. British Insulated and Helsby Cables Ltd
(1). That "when an expenditure 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, I think that there is very good reason (in the
absence of special circumstances leading to an opposite conclusion) for
treating such an expenditure as properly attributable not to revenue but to
capital". The test formulated by Viscount Cave has been accepted by this
Court: see Assam Bengal Cement 6'0. Ltd. v. The Commissioner of Income-tax West
Bengal (2). Here the expenditure produced an enduring advantage in the shape of
transfer to a better factory site, an advantage which enabled the trade to
prosper and an advantage that could be expected to last forever. It was an
expense properly attributable to capital under Viscount Cave'dictum.
Mr. Pathak did not question the authority of
the test laid down in Atherton's case (1), but said that that test had no
application in the present case as it would not apply unless by the expenditure
a material asset or a covenant or right in the nature of capital was acquired.
We find neither principle nor authority to support this contention.
If an expenditure incurred, say for acquiring
an additional plant, is capital expenditure, an expenditure incurred in
dismantling and refitting the existing plant at a better site would be equally
capital expenditure. They would both be capital expenditure because both were
incurred for increasing the capacity of the profit making machine to earn
profits and neither was incurred for earning the profits themselves. In
principle, therefore, there is no reason to make a distinction .as to the
nature of the expense between an expenditure incurred for acquiring material
capital (1) (1925) 10 T.C. 155. 192, (2) [1955] 1 S.C.R, 972, 21 asset or a
legal right in the nature of capital and an expenditure incurred for acquiring
any other advantage of an enduring nature for the benefit of the trade. It is
true that it has been said, as Mr. Pathak pointed out, that the advantage
acquired by the expenditure must be analogous to an asset (see Halsbury's Laws
of England, 3rd ed. Vol. XX p. 162.) but that only means advantage of the
nature of a capital asset, that is to say, "an advantage to the permanent
and enduring benefit of the trade". see ibid p. 161. It is obviously not
necessary for an advantage to be of such a nature that it must be the
acquisition of a material asset or of a chose in action.
As to the authorities, they are all against
the view for which Mr. Pathak contends. We propose to refer to two of them
only. First, there is the case of Granite Supply Association Ltd. v. Kitton
(1). The assessee was a company whose business was to buy and sell granite. It
found it necessary to shift to a larger yard and in doing so incurred expenses
for removal of stones and cranes from the old to the new yard and for
re-erecting the cranes in the latter yard. It was held that the Company was not
entitled to a deduction for these expenses. It was said that the expenses were
of the same kind as those which might have been incurred in the buying of new
cranes. Lord MacLaren said (p.
17IL "I think that the cost' of
transferring plant from one set of premises to another more commodious set of
premises 'is not an expense incurred for the year in which the thing is done, but
for the general interests of the business. It is said, no doubt, that this
transference does not add to the capital 'value of the plant, but I think that
is not the criterion." Lord MacLaren's observation is completely against
the view advocated by Mr. Pathak that to constitute an enduring benefit a
material asset or a right must be created.
The above case, furthermore, is
indistinguishable from the case in hand. Mr. Pathak sought to (1) (1905) 5
T.C.160.
22 distinguish the present case from the
Granite Supply Association Ltd. case (1), on the ground that there the business
was not running at a loss in the old yard and the expenses were incurred only
to enlarge the business and hence were on capital account. We find it difficult
to.
appreciate this distinction. Whether an
expense is on capital account or not would not depend on whether it was
incurred for earning larger profits than before nor would an expenditure be on
revenue account because it was incurred for turning a losing concern into a
profitable one.
The other case to which we will refer is Bean
v. Doncaster Amalgamated Collieries Ltd.(2). The Colliery Company was required
by a statute to incur expenses for remedial works necessary tO obviate loss of
efficiency in an existing drainage system due to subsidence caused by the
Company's workings. The Drainage Board formed a general drainage improvement
scheme and the Company paid a part of the expenses of the new drainage
constructed under the scheme. As a result of the new drainage the Company was
enabled to work its seams without incurring the liability under the statute as
the new drainage system had been so constructed as to remain unaffected by the
Company's workings. It was contended by the company that the payment for the
new drainage was a revenue expenditure as it had not resulted in the
acquisition of any-capital asset, but this contention was rejected and it was
held that the expenditure was on capital account and no deduction for it was
allowable. Viscount Simon said (p. 312), that the expenses had been incurred
"to secure an enduring advantage within the proper application of Lord
Cave's phrase in Atherton v. British Insulated and Helsby Cables Ltd. (10 T.C.
155, at page 192)". He also quoted (p.312) with approval the observation
of Uthwatt J. in the Court of Appeal that, "The result of the transaction
(1) (1905) 5 T.C. 168. (2) (1946) 27 T.C. 296, 23 clearly was that the value of
the particular coal measures--a capital asset remaining unchanged in
character--was increased both for use and exchange. There was, therefore, as
the result of the transaction, brought into existence, not indeed an asset, but
an advantage for the enduring benefit of the trade of the Company."
Obviously, therefore, there can be an enduring advantage acquired without an
addition to or increase in the value of any capital asset.
It is no doubt true that the distinction
between revenue expenditure and expenditure on capital is very fine and often
it is difficult to decide under which class an expenditure properly falls. No
such difficulty, however, arises in the present ease. We think, for the reasons
earlier mentioned, that the present is a plain ease and we feel no doubt that
the expenses for shifting and re-erection were incurred on capital account. The
first question referred was clearly correctly answered by the High Court.
The appellant's ease is even weaker with
regard to the other question which was this:
"Whether the assessee was entitled to
claim depreciation on the said expenditure of Rs. 3,19,766/-?" This question
was raised presumably on the basis that if in respect of the first question it
was held that the expenditure was on capital account, then depreciation should
be payable on the amount of the expenditure in the same way as depreciation is
allowed on capital. The claim for depreciation was made under s. 10 (2) (vi) of
the Income- tax Act. But as the High Court rightly pointed out, no such
depreciation could be claimed because no tangible asset had been acquired by
the expenditure which could be said to have depreciated.
24 Mr. Pathak, therefore, put the case of the
appellant from a slightly different point of view. He referred us to Part V of
the Form of Return given in the Rules framed under the Act. That Part deals
with a claim for depreciation.
Column 3 of this Part requires a statement to
be made for "Capital expenditure during the year for additions,
alternations, improvements and extensions". Mr. Pathak contended that this
Part showed that depreciation is allowable on capital expenditure for improvements,
and that in view of our answer to question No. 1. the appellant would be
entitled to depreciation on the expense as capital expenses incurred for
improvement. This is an obviously fallacious argument. In order to be entitled
to deduction on account of depreciation under this Part of the Form, there has
to be an improvement of the capital asset, an increase in its value. All that
we have here is an expense incurred for acquiring an advantage for the trade.
That may or may not be an improvement in the capital assets. The appellant
cannot claim depreciation on the amount spent for acquiring an advantage.
Whether it could claim depreciation on improvements effected to capital assets
is not a question referred to the Court. The second question, therefore, was
also correctly answered in the negative by the High Court.
This appeal is dismissed with costs.
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