Travancore Cochin Chemicals Limited Vs.
Commissioner of Income-Tax, Kerala  INSC 23 (21 January 1977)
KHANNA, HANS RAJ SARKARIA, RANJIT SINGH
CITATION: 1977 AIR 991 1977 SCR (2) 715 1977
SCC (2) 20
D 1981 SC 395 (6) RF 1989 SC1913 (8)
The Income-Tax Act, 1961, s. 37(1), whether
construction of road a permissible deduction under.
The appellant assessee is a public limited
company who spent Rs.26,100/for the construction of a new road for improving
transport facilities in the area where its factory is located and sought to
deduct this amount from its total income claiming this as revenue expenditure
for the year.
The claim was disallowed by the Income-tax
Officer and the Appellate Assistant Commissioner. The Appellate Tribunal held
that the amount could be deducted as revenue expenditure but at the instance of
the respondent referred the matter to the High Court under s. 256(1) of the
Income Tax Act, 1961, where it was decided against the appellant.
Dismissing the appeal, the Court,
HELD: The line of demarcation between capital
expenditure and revenue expenditure has been found to be very thin.
According to the test suggested in Atherton's
case by Viscount Cave, L.C. by having the new road constructed for the
improvement of transport facilities, the assessee acquired an enduring
advantage for its business. The expenditure incurred was, therefore of a
capital nature. 1716 F. 717 F-II & 718 D] Atherton v. British Insulated and
Helsby Cables Ltd.
 10 Tax Cases 155: Assam Bengal Cement
Co. Ltd. v. Commissioner of Income Tax, West Bengal  27 ITR 34 and
Sitalpur Sugar Works Ltd. v. Commissioner of Income Tax.
Bihar and Orissa  49 ITR 160, applied.
Commissioner of Income-tax v. Hindustan
 68 ITR 301 and Lakshmiji Sugar Mills
Co. (P) Ltd. v.
Commissioner of Income-tax, New Delhi 
82 ITR 376, distinguished.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 265 of 1972.
From the Judgment and Order dated the 24th
August, 1971 of the Kerala High Court in I.T.R.No. 25 of 1969.
G.B. Pai, K.J. John for M/s Dadabhanji &
Co., for the Appellant. B.B. ,Ahuja and R.N. Sachthey for Respondent.
The Judgment of the Court was delivered by
GUPTA, J.--The question for decision in this case is whether the money
contributed by the assessee, public limited company, for the construction of a
new road in the area where its factory is located to improve transport
facilities is capital expenditure or revenue expenditure. The assessment year
in question is 1964~65, the relevant accounting period being the financial year
ended March 31, 1964. The assessee company is engaged in the manufacture of
it had been receiving and despatching
materials required for and produced in its factory through lorries. The
assessee along with three, 716 other public undertaking approached the
Government of Kerala for laying a new road from kalamasseri to Udyog amanndal;
this area where the assessee's factory is
situate was not at the material tune served by pucca roads. It was agreed that
the Government of Kerala would bear the cost of the acquisition of the land and
25 per cent of the cost of construction. The total cost to be shared by the
four companies was Rs. 1,04,550/and the assessee's share came to Rs. 26,100/-.
The assessee company sought to deduct this amount from its total income
c/aiming this as revenue expenditure for the year in question. The Income-tax
Officer disallowed the claim holding that the assessee's contribution was
capital expenditure. The Appellate Assistant Commissioner took the same view.
The Appellate Tribunal, mainly relying on the decision of the Calcutta High
Court in Commissioner of Income-tax v. Hindustan Motors Limited,(1) held that
the assessee was entitled to deduct the amount as revenue expenditure. At the
instance of the Commissioner of Income-tax, Kerala, Ernakulam, the Tribunal
referred the following question to the High Court of Kerala under section
256(1) of the Income-Tax Act,1961:
"Whether, on the facts and in the circumstances
of the case, the Appellate Tribunal was legally justified in allowing the
expenditure of Rs. 26,100/being the respondent's contribution to government for
constructing a road as a permissible deduction under section 37(1) 0f the
Income-Tax Act, 1961." The High Court held that the assessee in this case
obtained an advantage of an enduring nature by the construction of the road
and, therefore, the amount contributed was capital expenditure. The High Court
accordingly answered the question in negative and against the assessee. In this
appeal, brought on a certificate under section 261 of the Income-Tax Act, 1961,
the assessee challenges the correctness of the answer given by the High Court
to the question.
The authorities both in this country and in
England have pointed out the difficulties in formulating precise rules for
distinguishing capital expenditure from revenue expenditure. The line of
demarcation has been found to be very thin. Certain broad tests have however
been laid down, and of them the test suggested by viscount Cave, L. C., in
Atherton v. British Insulated and Helsby Cables Limited(2) appears to have been
largely accepted in this country. This Court in Assam Bengal Cement Company
Limited v. Commissioner of Income-tax, West Begnal(3); Sitalpur Sugar Works
Limited v. Commissioner of Income-tax, Bihar and Orissa(') and a number of
other decisions has adopted the test as laid down in Atherton's case: to refer
again to these often quoted lines from Viscount Cave's Judgment "when an
expenditure is made, .......... with a view to bringing into existence an asset
or an advantage for the enduring benefit of a (1) (1968) 68 I.T.R. 301.
(2) (1925) 10 Tax Cases 155.
(3) (1955) 27 I.T.R. 34.
(4) (1963) 49 I.T.R. 160 717 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". Referring to Atherton's case and certain
other authorities on the distinction between capital expenditure and revenue
expenditure and the tests to be applied, this Court in Assam Bengal Cement
Company Limited v. Commissioner of Income-tax(1) 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 or advantage but for running
the business or working it with a view to produce the profits it is a revenue
expenditure. If any such asset or advantage for the enduring benefit of the
business is thus acquired or brought into existence it would be immaterial
whether the source of the payment was the capital of the income of the concern
or whether tire payment was made once and for all or was made periodically. The
aim and object of the expenditure would determine the character of the
expenditure whether it is a capital expenditure or a revenue expenditure. The
source or the manner of the payment would then be of no consequence. It is only
in those cases where this test is of no avail that one may go to the test of fixed
or circulating capital and consider whether the expenditure incurred was part
of the fixed capital of the business or part of its circulating capital.
If it was part of the fixed capital of the
business it would be of the nature of capital expenditure and if it was part of
its circulating capital it would be of the nature of revenue expenditure."
In the case before us, the High Court applied viscount Cave's test and found
that the expenditure made by the assessee brought into existence an advantage for
the enduring benefit of the assessee's trade and accordingly held that this was
Each case turns on its own facts. It is not
disputed here that the correct test has been applied. Did the money spent by
the assessee on construction of the new road secure for it an enduring benefit,
or was it necessary for running its business? On the facts of the case the
position seems to be clear enough not to merit an elaborate consideration, that
by having the new road constructed for the improvement of transport facilities,
the assessee acquired an enduring advantage for its business. The High Court
rightly pointed out that the decision of the Calcutta High Court in Commissioner
of Income-tax v. Hindustan Motors Ltd.(2) on which the appellate tribunal
relied, is clearly distinguishable on facts; that was a case where the
expenditure incurred was for repair of an existing road which is different from
the case where a new road is laid out for the purpose of the assessee's (1)
(1955) 27 I.TR 34.
(2) (1968)68 I.T.R. 301.
718 business. Mr. Pai, learned counsel for
the appellant, has relied on the decision of this CoUrt in Lakshmiji Sugar
Mills Company Private Limited v. Commissioner of Income-tax, New Delhi(1), to
contend that even the expenditure on the construction of roads could be revenue
expenditure and not expenditure of a capital nature. In Lakshmiji Sugar Mills
case the assessee was a private limited company carrying on the business of
manufacture and sale of sugar. Under the provisions of the U.P. Sugarcane
Regulation of Supply and Purchase Act, 1953, the assessee company was obliged
to contribute certain amounts for the development of roads which were
originally the property of the government and remained so even after the
improvement had been made.
Apart from the fact that in this case the
expenditure incurred was under a statutory compulsion, there was no finding
that the roads were newly made. On the facts of that case this Court was
satisfied that the development of the roads was meant for facilitating the
carrying on of the assessee's business. Lakshmiji Sugar Mills(1) case is quite
different on facts from the one before us and must be confined to the peculiar
facts of that case. On the facts of the instant case, we have no doubt that the
expenditure incurred by the assessee was of a capital nature. The appeal
accordingly fails and is dismissed but in the circumstances of the case without
any order as to costs.