Arvind
Mills Ltd. Vs. Commissioner of Income Tax, Gujarat [1992] INSC 176 (21
July 1992)
Ray,
G.N. (J) Ray, G.N. (J) Mohan, S. (J)
CITATION:
1993 AIR 103 1992 SCR (3) 557 1992 SCC (3) 535 JT 1992 (4) 330 1992 SCALE (2)48
ACT:
Income
Tax Act, 1961 : Section 37.
Business
expenditure-Capital or Revenue expenditure- Test to determine-Expenditure must
have direct nexus with day to day running of business-Question of voluntary or
involuntary payment is not relevant-Contribution of betterment charges made by the
assessee towards the cost of Town Planning Scheme under the Bombay Town
Planning Act, 1954-Expenditure held capital in nature-Not deductible from the
income of the assessee.
HEAD NOTE:
Under
the Bombay Town Planning Scheme the lands of different owners within the Scheme
are treated in a common pool and various improvements are effected for the
better enjoyment of the lands in question. Since by such improvements the value
of the land increases the person getting advantage of enhancement of value of
land in question is required to pay betterment fee under the Bombay Town
Planning Act, 1954.
The
appellant-Company made payments towards betterment charges in ten instalments
and claimed deduction of the said payment on the ground that it was a revenue
expenditure. The Income Tax Officer disallowed the claim for deduction. On
appeal, the Appellate Assistant Commissioner allowed deduction of the amount of
only one installment paid by the assessee for the year of assessment. The
Company preferred an appeal before the Income Tax Tribunal which held that the
betterment charge was not revenue expenditure and therefore no deduction was
allowable. On a reference to the High Court of Gujarat on the question whether
the Tribunal was justified in disallowing the betterment charges, the High
Court decided against the Assessee-Company.
In
appeal to this Court it was contended on behalf of the appellant-Company that
because of the improvement effected under the Town Planning Scheme the running
of the business of the Assessee-Company got 558 improved and thus the
betterment fee required to be paid under the scheme had a direct nexus with the
running of the business of assessee. Hence, such betterment charge particularly
in the context that such payment was involuntary and was in the nature of
compulsory exaction from the assessee should be held to be a revenue
expenditure made for better running of the business.
On
behalf of the revenue it was contended that there must be a direct connection
with the business activities and the expenditure made and a remote connection
with the business activities is not relevant for the purpose of treating the
expenditure as revenue expenditure.
Dismissing
the appeal, this Court
HELD
1. In deciding whether an expenditure is a capital expenditure or a revenue
expenditure the question of voluntary and/or involuntary payment becomes
immaterial. It is the nature of expendure that determines the issue. The
capital expenditure incurred in connection with the business activities
ultimately results in efficiently carrying on the business and by that process
gives aid in running of the day-to-day business more efficiently but simply on
that score, the capital expenditure does not become a revenue expenditure.
[566A, 565-H]
2.
Under the Bombay Town Planning Scheme, the lands of different owners including
the land of the assessee were treated as if included in a common pool and
various improvements have been effected for the better enjoyment of the lands
under the scheme. For such improvement by way of laying down roads, making
provision for drainage etc. under the scheme, the owner got the advantage of
betterment of the land in question and there is no manner of doubt that the
valuation of the land had increased because of the improvements effected on the
land. Simply because by such improvement it has also resulted in providing
better facilities for carrying out the business of the assessee, the betterment
charge required to be paid by the assessee, does not become the revenue
expenditure. Such payment has no direct nexus with the day-to-day running of
the business. [565E-G]
3. The
High Court rightly held that the betterment charge on account of increase in
the valuation of the land of the assessee should not be held as a revenue
expenditure although general improvement of the area may have an impact on
better running of the business. [566-F] 559 Mohanlal Har Govind of Jubbulpore
v. Commissioner of Income Tax, C.P. & Berar, Nagpur, (1949) 17 I.T.R. p.473
and L.H. Sugar Factory and Oil Mills (P) Ltd. v. Commissioner of Income Tax
U.P., (1980) 125 I.T.R. p.293, distinguished.
Dollar
Company v. Commissioner of Income Tax,(1986) 161 I.T.R.p. 455 and State of Gujarat v. Shantilal Mangaldas and
Ors.,[1969] 3 S.C.R. 341, referred to.
Additional
Commissioner of Income Tax, Gujarat v. Rohit
Mills Ltd., (1976) 104 I.T.R. p.132, approved.
CIVIL
APPEALLATE JURISDICTION : Civil Appeal No. 1836 (NT) of 1977.
From
the Judgment and Order dated 9th/10.3.77 of the Gujarat High Court in Income
Tax Reference No. 197 of 1976.
H.N.
Salve, P.H. Parekh and U.Sagar for the Appellant.
B.B. Ahuja,
Manoj Arora and Ms. A. Subhashini for the Respondent.
The
Judgment of the Court was delivered by G.N.RAY, J. This appeal arises out of a
Certificate granted by the High Court of Gujarat against its Judgment dated
9/10th March, 1977 in Income Tax Reference No. 197 of 1976. The appellant-Arvind
Mills Ltd. is a Company incorporated under Companies Act and running a textile
mill.
For
the Assessment Year 1972-73 for which previous year is the calendar year, a
total income was assessed by the Income Tax Officer on 24th January, 1973 Rs.
1,30,92,040. The appellant claimed a deduction of Rs.2,02,907 being the
contribution made by the assessee towards to cost of Town Planning Scheme under
Section 66 of the Bombay Town Planning Act, 1954. The aforesaid payment made by
the assessee was described as betterment charges. The Income Tax Officer
disallowed the claim for deduction by his Order dated 25th January, 1974. The
appellant preferred an appeal before the Appellate Assistant Commissioner. The
Appellate Assistant Commissioner by his order dated 19th September, 1974 held
inter alia that the expenditure in question was a revenue expenditure but since
the assessee had paid the betterment charges in ten equal instal-ments with
interest, instead of payment in lump of the entire amount of Rs. 2,02,907, 560
a sum of Rs. 14,434 only since paid by the assessee by way of instalment in the
year of assessment should be deducted from income. The contention of the assessee
that since the method of accounting of the assessee was mercantile, the entire
amount of Rs. 2,02,907 should be deducted and not the yearly instalment of Rs.
14,434, was not accepted. The assessee thereafter preferred a Cross Appeal
against the order of the Appellate Assistant Commissioner before the Income Tax
Tribunal in I.T.A. No. 133 (AHD)/74-75. The Tribunal held inter alia that the
betterment charge was not revenue expenditure. Hence no deduction on account of
the betterment charge was allowable. The Tribunal, however did not interfere
with the deduction of Rs. 14,434 since allowed by the Appellate Assistant
Commissioner.
At the
instance of the assessee, the following question of law was referred by the
Tribunal to the High Court of Gujarat :
"whether
on the facts and circumstances of the case, the Tribunal was justified in
disallowing the betterment charges".
By the
impugned judgment the High Court of Gujarat relying on the decision of the said
High Court in the case Additional Commissioner of Income Tax, Gujarat v. Rohit
Mills Ltd., reported in, (1976) 104 I.T.R.p.132 decided the question against
the appellant-assessee but on an oral application, the High Court granted a
Certificate to the Appellate under Section 261 of the Income Tax Act, 1961.
Mr.
Salve, learned counsel appearing for the appellant- assessee has contended that
the betterment charge payable under the Bombay Town Planning Act was a
compulsory payment and the decision to effect improvement on the lands within
the Town Planning Scheme did not depend upon the volition of the owner of the
land. It was immaterial whether the assessee was intersted or not for the
alleged improvement of the land under the Scheme but the assessee was under an
obligation to make the payment of betterment charge imposed under the Bombay
Town Planning Scheme. Mr. Salve has contended that the Scheme prepared under
the Bombay Town Planning Act becomes final on publication of the Scheme under
Section 51 and the effect of the final Scheme has been provided under Section
53 of the said Act. Section 54 provides for the cost of the Scheme and Section
55 provides for the calculation of the improvement. Mr. Salve has contended
that if various provisions of the Bombay Town Planning Act 561 are referred to,
it will be quite apparent that the betterment charge is nothing but a statutory
exaction and in its reality such betterment charge partakes the character of
imposition of levy. Mr. Salve has strongly relied on the decision of the Madras
High Court in the case of Dollar Company v. Commissioner of Income Tax, (1986)
161 I.T.R. p.455. The assessee-Dollar Company had to make payment towards the
betterment contribution for the lands owned by the Company coming within the
Madras Town planning Scheme.
The assessee-Company
claimed deduction of the above payment on the footing that such payment was a
revenue expenditure.
The
Income Tax Officer, however, disallowed the claim by holding that such payment
was in the nature of capital expenditure. Such decision of the Income Tax
Officer was affirmed by the Appellate Assistant Commissioner and also by the
Income Tax Appellate Tribunal. On a reference, the Madras High Court held inter
alia that on a reading of the various provisions of the Madras Town Planning
Act, it was evident that the betterment contribution was a compulsory levy made
by the Corporation and the precondition for such levy was that consequent upon
making any Town Planning Scheme, the value of the property in the Scheme has
increased or is likely to increase. Hence the payment of betterment
contribution did not result in any increase in the value of the property but
because of the increase in the value of the property as a result of the making
of the Town Planning Scheme, the owner of the property was required to make a
contribution which was called a betterment contribution. Since there was no
direct nexus between the expenditure incurred by the Corporation and the
increase in the value of the property, the expenditure incurred by the assessee
for payment of betterment charge must be held to be revenue expenditure. It has
been further held by the Madras High Court that commercially considered, the
expenditure which has been so incurred for facilities such as roads, drainage
facility etc., for the enjoyment of the property, would be laid out wholly and
exclusively for purposes of the business and the payment of the betterment
contribution was in the nature for a payment of such facility and only its
computation was on the basis of appreciation in value. It was held that
consequently the expenditure incurred by way of the betterment contribution
could not be called as an expenditure of a capital nature and, therefore, such
payment was deductible from the income of the assessee.
Mr.
Salve, relying on the aforesaid decision of the Madras High Court, has
contended that the betterment charges paid by the appellant- 562 assessee
should also be construed as revenue expenditure because there was no direct
nexus between the expenditure incurred by the Corporation and the increase in
the value of the property of the assessee. He has contended that the
improvement effected on the lands included within the Town Planning Scheme,
resulted in more efficiently carrying out the business of the assessee and the
expenditure which had been incurred for such improvement by way of betterment
fee was thus directly connected with the business activities of the assessee.
Since enjoyment of the property improved under the Town Planning Scheme was
directly linked with the carrying on of the business of the assessee and the
payment of betterment contribution was for such facility in carrying out the
business activities more effectively and its computation was only on the basis
of appreciation in value, such betterment contribution was in reality a revenue
expenditure and the High Court of Gujarat erred in holding that it was in the
nature of a capital expenditure. Mr.Salve has submitted that the various
provisions of the Bombay Town Planning Scheme had been considered by this Court
in the case of State of Gujarat v. Shantilal Mangaldas and Ors., reported in
[1969] 3 SCR p. 341. He has contended that under the Scheme, lands of various
owners are treated as lands belonging to a common pool and for better enjoyment
of lands by the residents certain improvements are effected and facilities are
provided under the Scheme. Although by such process, the value of the land is
likely to increase, the involuntary payment of betterment charge has a direct
nexus with the running of the business in a better way because of the
improvement effected and by the process the same becomes a revenue expenditure
as indicated by the Madras High Court.
Mr.
Salve has referred to a decision of the Privy Council in Mohanlal Har Govind of
Jubbulpore v. Commissioner of Income Tax C.P. & Berar, Nagpur, reported in
(1949) 17 I.T.R. p. 473. In consideration of certain sums payable short term licence
was granted to acquire tendu leaves for manufacturing Beedi (country made
cigarette). The Privy Council held that such expenditure was revenue
expenditure and not capital expenditure. Mr. Salve has also referred to a
decision of this Court made in the case of L.H.Sugar Factory and Oil Mills (P)
Ltd. v. Commissioner of Income Tax, U.P., reported in (1980) 125 I.T.R. p. 293.
In the said case, the assessee-a private company was carrying on business in
the manufacture and sale of sugar. During the relevant accounting period the assessee
paid two amounts :
(i) a
contribution of certain sums at the request of the Collector 563 of the
District towards the construction of the Deoni Dam Majhala Road (ii) a
contribution of Rs. 50,000 to the State of U.P. towards meeting the cost of
construction of roads in an area round the factory under a sugarcane
development scheme. Under the said scheme, one third of the cost was to be
borne by the State Government, one third by the Central Government and the
remaining one third by the sugarcane growers and the owners of sugar factories
in the area.
This
Court held in the said decision that the first contribution at the instance of
the Collector towards the construction of Deoni Dam was not deductible
expenditure under Section 10(2)(xv) of the Income Tax Act because the said
amount was contributed long after the construction of the dam and the roads in
question had also been constructed long back and there was nothing to show that
the contribution of the amount had anything to do with the business of the
Company or the construction of the dam or the roads was in any way advantageous
to the assessee's business. So far as the second sum of Rs. 50,000 was
concerned, it has been held by this Court that the said sum was deductible
under Section 10(2)(xv) because the construction of the roads had facilitated
the transport of the sugarcane to the factory and outflow of sugar manufacture
by the factory of the assessee to the market centres. It was indicated that the
construction of the roads had facilitated the business operation of the assessee
and had enabled the management to carry on business more efficiently and profitably.
This Court has noted that it was true that the advantage secured for the
business of the assessee was of a long duration inasmuch as it would last so
long as the roads continued to be motorable but it was not an advantage in the
capital field because no tangible or intangible asset was acquired by the assessee
nor there was any addition to an 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 and making it more
efficient and profitable without the assessee getting an advantage of an
enduring benefit to itself. In the aforesaid circumstances, this Court has held
that such expenditure should be held to be a revenue expenditure and was
deductible.
Mr.
Salve has contended that because of the improvement effected 564 under the Town
Planning Scheme the running of the business of the assessee got improved and
thus the betterment fee required to be paid under the Scheme had a direct nexus
with the running of the business of the assessee. Hence, such betterment charge
particularly in the context that such payment was involuntary and was in the
nature of compulsory exaction from the assessee should be held to be a revenue
expenditure made for better running of the business. He has submitted that
since the construction of the road in and around L.H.Sugar Factory had a nexus
for the running of the business more efficiently and profitably, this Court in
the said Sugar Factory's case has held that a contribution of Rs. 50,000 even
when such contribution was not in the nature of a compulsory payment but a pure
and simple voluntary contribution, was a revenue expenditure and as such it was
deductible from the income of the assessee. Mr. Salve has therefore submitted
that the impugned decision of Gujarat High Court must be held to be erroneous
and the reference should be answered in favour of the assessee by allowing the
betterment charges paid by the assessee-Company as a deductible expenditure.
The
learned counsel appearing for the respondent has, however, contended that
unless it can be demonstrated that the expenditure is exclusively for business
purpose, the same cannot be held to be a revenue expenditure and as such
deductible from the income of the assessee. The learned counsel has contended
that there must be a direct connection with the business activities and the
expenditure made and a remote connection with the business activities is also
not relevant for the purpose of treating the expenditure as revenue
expenditure. He has contended that in L.H.Sugar's case the question of capital
asset did not arise because the road constructed in and around the factory did
not belong to the factory. This Court has specifically held in L.H.
Sugar's
case that the advantage derived from the construction of the road was not in
the capital field because no tangible or intangible asset was acquired by the assessee
nor was there any expansion to the profit making apparatus of the assessee. The
learned counsel for the respondent has stated that under the Bombay Town Planing
Scheme, the lands of different owners within the Scheme are treated in a common
pool and various improvements are effected for the better enjoyment of the
lands in question.
By
such improvements, the value of the land increases and it was in consideration
of such increased valuation of the land, the betterment fees are charged. He
has submitted that it is immaterial whether the assessee had a desire for the
improvement of the land in question. The fact remains that under the statute,
such improve- 565 ment had been effected and the assessee getting advantage of
enhancement of value of land in question is required to pay betterment fee. He
has also submitted that in Mohanlal Har Govind's case (supra) the Privy Council
has held the expenditure incurred for obtaining licence to procure tendu leaves
as revenue expenditure because tendu leaves was essential raw material for
manufacturing Beedi and as such the expenditure had a direct nexus with day-to-day
running of the business of manufacturing Beedi. Hence, the said decision of
Privy Council is clearly distinguishable. He has contended in the facts of this
appeal, the Gujarat High Court has rightly held that the expenditure was a
capital expenditure and not revenue expenditure. The learned counsel has
contended that when a capital expenditure is incurred, the said capital
expenditure also ultimately enure to the efficient running of the business but
on that score the expenditure on capital asset does not lose the character of
capital expenditure and does not become a revenue expenditure. He has submitted
that the Madras High Court has failed to appreciate that the expenses incurred
by making payment of betterment fees was in essence an expenditure on account
of increase in the valuation of the land of the assessee and such expenditure
has no direct nexus with the day-to-day running of the business. In the
aforesaid circumstances, the learned counsel for the respondent has submitted
that no interference is called for in this appeal and the same should be
dismissed.
After
considering the respective contentions of the learned counsels for the parties,
it appears to us that under the Bombay Town Planning Scheme, the lands of
different owners including the land of the assessee were treated as if included
in a common pool and various improvements have been effected for the better
enjoyment of the lands under the Scheme. For such improvement by way of laying
down roads, making provision for drainage etc. under the scheme, the owner got
the advantage of betterment of the land in question and there is no manner of
doubt that the valuation of the land had increased because of the improvements
effected on the land. Simply because by such improvement it has also resulted
in providing better facilities for carrying out the business of the assessee,
the betterment charge required to be paid by the assessee., does not become the
revenue expenditure. Such payment has no direct nexus with the day-to-day
running of the business.
In our
view the learned counsel for the respondent is justified in submitting that the
capital expenditure incurred in connection with the business activities
ultimately results in efficiently carrying on the business and by that process
gives aid in running of the day-to-day business 566 more efficiently but simply
on that score, the capital expenditure does not become a revenue expenditure.
In our view, the learned counsel for the respondent is also justified in his
contention that in deciding whether an expenditure is a capital expenditure or
a revenue expenditure, the question of voluntary and/or involuntary payment
becomes immaterial. It is the nature of expenditure that determines the issue.
In L.H. Sugar Factory's case (supra), it has been specifically indicated by
this Court that the assessee did not acquire any tangible or intangible right
on the roads constructed in and around the factory but because of such roads
constructed day-to-day running of the business was improved by minimising the
operational cost in manufacturing sugar. In such circumstances, the expenditure
incurred for improving day-to-day running of the business by way of voluntary
contribution of Rs. 50,000 when such expenditure had no connection with the
increase or in creation of any capital asset or acquiring any tangible or
intangible right in the property in question namely the roads constructed in or
around the factory, was treated as revenue expenditure. The decision of the
Privy Council in Har Govind's case (supra) in holding that the expenditure
incurred for obtaining licences for acquiring tendu leaves for manufacturing beedi
was a revenue expenditure can be easily explained by indicating that such
expense for obtaining licence to procure tendu leaves was an expenditure to
acquire basic raw material for manufacturing beedi. Such expenditure had
nothing to do with any capital asset.
Hence,
the expenditure having a direct nexus with day-to-day running of the business
of manufacturing beedi by procuring basic raw material is certainly a revenue
expenditure. But the facts in the instant appeal are quite different. The
aforesaid aspect is totally absent in the instant case. In our view, the High
Court of Gujarat has rightly held that the betterment charge on account of
increase in the valuation of the land of the assessee should not be held as a
revenue expenditure although general improvement of the area may have an impact
on better running of the business.
We,
therefore, find no reason to interfere with the decision of the Gujarat High
Court by accepting the reasonings of Madras High Court in Dollar Company's case
(supra). The instant appeal, therefore, fails and is dismissed without any
order as to costs.
T.N.A.
Appeal dismissed.
Back