Lakshmiji Sugar Mills Co. Vs.
Commissioner of Income Tax, New Delhi  INSC 220 (27 August 1971)
CITATION: 1972 AIR 159
D 1977 SC 991 (3,4) R 1981 SC 395 (5,6)
Income Tax Act-Capital or Revenue
The appellant assessee is a private Ltd.
Company carrying on the business of manufacture and sale of sugar. During the
accounting period relating to the assessment year 1956- 57, sums of Rs.
75,000/- and Rs. 37,000/- were paid by the assessee to the Cane Development
Council of the Sugarcane Department of U.P. (under U.P. Sugarcane Regulation
and Sugar and Purchase Act, 1953) by way of contribution for road development
between various sugar cane producing centers and the sugar factories of the
assessee. The roads were originally the property of the Government and remained
so after improvements had been made. The improved roads facilitated the
transportation of cane to the factories of the assessee and the expenditure was
incurred for commercial expediency and for benefit of the day to day business
of the assessee. The Revenue Authorities, the Appellate Tribunal and the High
Court found that these contributions constituted capital expenditure and could
not be allowed as an admissible deduction in computing the total income of the
Assessee. Allowing the appeal,
HELD : In the facts and circumstances of the
case the expenditure was incurred by the assessee for reasons of commercial
expediency apart from statutory compulsion. The development of the roads was
necessarily meant for facilitating the carrying on of the assessee's business
with a view to produce profits. In the absence of any finding by the Tribunal
that the roads were to be altogether newly made and that the assesses would get
an enduring benefit, the expenditure was allowable as an admissible deduction.
[468 H] Assam Bengal Cement Co. Ltd. v. C.I.T. West Bengal, 27 I.T.R. 34, 45;
C. I. T. West Bengal v. Hindusthan Motors Ltd., 68 1. T. R. 301 and C.I.T. West
Bengal v. Royal Calcutta Turf Club, 41 I.T.R. 414, referred to.
CIVIL APPELLATE JURISDICTION : Civil Appeal
No. 1928 of 1968.
Appeal by special leave from the judgment and
order dated February 17, 1967 of the Delhi High Court in Income-tax Re- ference
No. 18 of 1963.
D. K. Bajaj and K. B. Rohatgi, for the
S. T. Desai, P. L. Juneja, R. N. Sachthey and
B. D. Sharma, for the respondent.
The Judgment of the Court was delivered by
Grover, J. This is an appeal by special leave from a judgment of the Delhi High
Court in an Income tax Reference.
The assessee, which is the appellant, is a
private limited company carrying on the business of manufacture and sale of
sugar. it has two sugar mills one at Maholi (Sitapur) and the other at
Raja-ka-Sahaspur (Moradabad). The head office of the assessee is at New Delhi.
During the accounting period relating to 466 the assessment year 1956-57 sums
of Rs. 75,000/- and Rs.
37,500/- were paid by the assessee to the
Cane Development Council of the Sugarcane Department of the Government of Uttar
Pradesh by way of contribution for road development between the various
sugarcane producing centers and the sugar factories of the assessee. The
revenue authorities found that these contributions were intended to be applied
for the construction and development of roads between the sugarcane producing
centres and the sugar mills and held that these amounts constituted capital
expenditure and could not be allowed as an admissible deduction while computing
the total income of the assessee. The Appellate Tribunal upheld the order of
the departmental authorities. On an application being moved the Tribunal
referred two questions of law to the High Court. We are concerned only, in the
present case, with the second question which is as follows:
"Whether the sums of Rs. 75,000 and Rs.
37,500 paid to the Road Development Fund set up by the Government of U.P. were
rightly disallowed as items of capital expenditure ?" The High Court held
that the aforesaid expenditure could not be regarded as revenue expenditure and
the answer was returned against the assessee.
According to the assesses certain facts are
fully esta- blished. These are (1) the expenditure incurred was for the
development of roads and the assessee was under an obligation to make the aforesaid
contributions under the provisions of the U. P. Sugarcane Regulation of Supply
& Purchase Act, 1953; (2) the roads were originally the property of the
government and remained so after the improvement had been made. (3) the sole
reason for which the assessee had made the contribution was that the improved
roads would facilitate the transportation of cane from the cane producing
centres to the premises of the mills and also the flow of supply to and from
the factories of the assessee; and (4) the expenditure was incurred for reasons
of commercial expediency and for the benefit of the day to day business of the
According to the High Court it was admitted
on behalf of the assessee that if expenditure had been incurred by it for
building roads of its own it would be capital expenditure.
The High Court could see no difference if
expenditure was incurred under compulsion or even without compulsion if the
roads were built for facilitating transportation and improving the business and
the flow of supply to and from the factories of the assessee.
We are unable to agree with the reasoning or
the conclusion of the High Court. The general principles governing the 467
determination of the question whether an expenditure is in the nature of
capital or revenue expenditure are well known. Where expenditure is incurred
while the business is being carried on and not for its extension or for the
substantial replacement of its equipment the position would be as follows :-
"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 or advantage but for running the business or working it with a view to
produce the profits it is a revenue expenditure." (Vide Assam Bengal
Cement Ltd. v. Commissioner of Income tax, West Bengal(1) The argument on
behalf of the revenue is that the expenditure which was incurred by the
assessee in the present case was intended for bringing into existence an
advantage for the enduring benefit of the business. On the other hand it has
been maintained on behalf of the assessee that the expenditure was properly
attributable to running the business or working it with a view to produce the
profits. The Calcutta High Court had occasion to consider an identical question
in Commissioner of Income tax, West Bengal v. Hindustan Motors Ltd.(). There
the location of a factory of motor car manufacturing company was a little
distance away from the main road. The approach road belonged to the government.
It fell into disrepair and began to cause transportation difficulties to the
The Government was not prepared to meet the
expenses for the repair of the road. The assessee offered to contribute a
certain amount for the improvement. The High Court had no difficulty in coming
to the conclusion that the money was spent not so much to bring about any asset
or advantage of enduring benefit to itself but it was incurred for its
efficient and convenient running and therefore it was of revenue nature. This
case has been sought to be distinguished on behalf of the Revenue on the ground
that the expenditure was incurred only to meet the expense of the repair and no
asset or advantage of an enduring benefit accrued or resulted to the assessee.
This distinction does not appear to be sound because in the diverse nature of
business operations it is difficult to lay down a test which would apply to all
situations. The criteria has to be applied from the business point of view and
on a fair appreciation of the whole situation. In the present case apart from
the element of compulsion the (1) 27 I. T.R. 34,45. (2) 68 I.T.R. 301.
468 roads which were constructed and
developed were not the, property of the assessee nor is it the case of the
Revenue that the entire cost of development of those roads was defrayed by the
assessee. It only made certain contribution for road development between the
various cane producing centres and the mills. The apparent object and purpose
was to facilitate the running of its motor vehicles or other means employed for
transportation of sugarcane to the factory. From the business point of view and
on a fair appreciation of the whole situation the assessee considered that the
development of the road in question could greatly facilitate the transportation
of sugarcane. This was essential for the benefit of its business which was of
manufacturing sugar in which the main raw material admittedly consisted of
sugarcane. These facts would bring it within the second part of the principle
mentioned before, namely, that the expenditure was incurred for running the
business or working it with a view to produce the profits without the assessee
getting any advantage of an enduring benefit to itself. In our judgment the
ratio of the decision in Commissioner of Income tax, West Bengal, v. Royal
Calcutta Turf Club(1) would be applicable to the present case. There the question
was whether the expenditure on running a school for training of jockeys by the
Royal Calcutta Turf Club could be claimed as a deduction under s. 10 (2) (xv)
of the Indian Income tax Act 1922. It ,,,as pointed out that the business of
the club was to run race meetings on a commercial scale for which it was
necessary to have races of a high order. For the popularity of races and to
make its business profitable it was necessary for the club to have jockeys of
requisite skill and experience in sufficient numbers. It was for that purpose
that the school had been started for training Indian jockeys. If there had not
been sufficient number of Indian jockeys the interest of the club would have
Therefore the expenditure incurred on running
the school must be regarded as having been wholly and exclusively laid out for
the purpose of the business of the club. Emphasis was laid on the principle
that in order to justify a deduction it must be for reasons of commercial
expediency and it must be incurred for the assessee's business.
We are satisfied that in the present case the
expenditure was incurred by the assessee for reasons of commercial expediency
apart from statutory compulsion to which reference has been made before. The
development of the roads was necessarily meant for facilitating the carrying on
of the assessee's business. Furthermore the Tribunal did not give any finding
that the roads were to be altogether newly made and that the assessee (1) 41
469 would get an enduring benefit from these
roads. The expenditure in question should have, therefore, been allowed as an
For the reasons given above the appeal is
allowed and the answer given by the High Court to the question referred is
discharged. We would return the answer in the negative and' in favour of the
assessee. The assessee will be entitled to its costs in this Court.
S.C. Appeal allowed.