Holding

The betterment charge is a capital expenditure and therefore not deductible as revenue expenditure under Section 37 of the Income Tax Act, 1961.

Summary

Arvind Mills Ltd., a textile mill, paid betterment charges under the Bombay Town Planning Act, 1954 as part of a town‑planning scheme and claimed a deduction under Section 37 of the Income Tax Act, 1961, arguing that the payment was a revenue expense. The Income Tax Officer disallowed the deduction; the Appellate Assistant Commissioner allowed deduction of only the instalment paid in the assessment year, and the Income Tax Tribunal held the charge to be capital in nature, a view affirmed by the Gujarat High Court. The Supreme Court examined whether the nature of the payment (voluntary or involuntary) and its connection with the day‑to‑day running of the business could convert a capital outlay into a revenue expense. It held that the character of the expenditure, not the voluntariness of the payment, determines its classification and that the betterment charge, being linked to an increase in land value, had no direct nexus with ordinary business operations. Consequently, the charge was classified as capital expenditure and was not deductible. The appeal was dismissed.

Issues considered

The betterment charge under the Bombay Town Planning Act, 1954 is a capital or revenue expenditure for income‑tax purposes.
Whether the voluntariness or involuntary nature of a payment affects its classification as capital or revenue expenditure.
Whether a direct nexus with the day‑to‑day running of the business is required for an expense to be treated as revenue expenditure.

Legislation cited

Bombay Town Planning Act, 1954s. 51, s. 53, s. 54, s. 55, s. 66
Income Tax Act, 1961s. 10(2)(xv), s. 261, s. 37

Subjects

Income Taxcapital expenditurerevenue expenditurebetterment chargeBombay Town Planning ActSection 37direct nexusvoluntary payment

Judgment

-r ARVIND MILLS LTD. A
v.
COMMISSIONER OF INCOME TAX, GUJARAT

JULY 21, 1992

[S. MOHAN AND G.N. RAY, JJ.] B

~ Income Tax Act, 1961 : Section 37.

Business expenditure-Capital or Revenue expenditure-Test to deter-

....
mine-Expenditure must have direct nexus with day to day running of busi-
ness-Question of voluntary or involuntary payment is not relevant
c
-Contribution of bemennent charges made by the assessee towards the cost
of Town Planning Scheme under the Bombay Town Planning Act, 1954-Ex-
....), penditure held capital in nature-Not deductible from the income of the
assessee.
D
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 ques-
tion. Since by such improvements the value of the land increases the
- -( person getting advantage of enhancement of value of land in question is E
I
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 disal-
lowed the claim for deduction. On appeal, the Appellate Assistant Com- F
;Jo., missioner allowed deduction of the amount of only one instalment paid by
the assessee for the year of assessment. The Company prefe~d 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
G
_._, Court dedded 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 Plan-
ning Scheme the running of the business of the Assessee-Company got H
557
558 SUPREME COURT REPORTS [1992] 3 S.C.R.

A improved and thus the betterment fee required to be paid under the y
'

scheme had a direct nexus with the running of the business of the assessee.
Hence, such betterment charge particularly in the context that such pay-
ment was involuntary and was in the nature of compulsory exaction from
the assessee should be held to be a revenue eA-penditure made for better
running of the business.
B
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
purpos~ of treating the expenditure as revenue expenditure.

c 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 ,l_
payment becomes immaterial. It is the nature of expendure that deter-
D mines 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-HJ
)--
E 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,
F 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 improv~ments effected on the land. Simply because by such improve.:
ment it has also resulted in providing better facilities for carrying out the
business of t~e assessee, the betterment charge required to be paid by the
G assessee, does not bt;eome 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
H have an impact on better running of the business. (566-FJ
ARVIND MILLS v. C.I.T. [RAY, J.) 559

Mohan/al Har Govind of Jubbulpore v. Commissioner of Income Tax, A
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., [19691 3 S.C.R. B
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.
C

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. D

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 E
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 incorported under the 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 F
24th January, 1973 at Rs. 1,30,92,040. The appellant claimed a deduction
of Rs.2,02,907 being the contribution made by the assessee towards the 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 G
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, H
560 SUPREME COURT REPORTS (1992] 3 S.C.R.

A 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 asssesee there-
after preferred a Cross Appeal against the order of the Appellate Assistant
B Commissioner before the Income Tax Tribunal in LT.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 Commis-
C sioner.

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
D 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 of Additional Commissioner of
Income Tax, Gujarat v. Rohit Mills Ltd., reported in, (1976) 104 l.T.R.p.
132 decided the question against the appellant-assessee but on an oral
E
,. 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
F Planning Act was a compulsory payment and the decision to effect im-
provement 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
G 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
Secion 53 of the said Act. Section 54 provides for the cost of the Scheme
and Section 55 provides for the calculation of the imptovement. Mr. Salve
H has contended that if various provisions of the Bombay Town Planning Act
ARVIND MILLS v. C.l.T. [RAY, J.] 561

are referred to, it will be quite apparent that the betterment charge is A
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-Dol-
lar Company had to make payment towards the betterment contribution
for the lands owned by the Company coming within the Madras Town
B
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
C

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 D
Town Planning Scheme, the value of the property in the Scheme has
increased or is likely to increase. Hence the payment of betterment con-
tribution 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 contribu- E
tion. Since there was no direct nexus between the expenditure incurred by
the Corporation and the increase in the value of the property, the expen-
diture 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 considererd, the expenditure which has been F
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 of a payment for 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 G
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- H
562 SUPREME COURT REPORTS (1992) j S.C.R.

A 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 busi-
ness of the assessee and the expenditure which had been incurred for such
B 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 busine5s activities more
c effectively and its computation was only on the basis of apprecation 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
L
D in the case of State of Gujarat v. Shanti/al 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 ef-
fected and facilities are provided under the Scheme. Although by such
process, the value of the land is likely to increase, the involuntary payment
E of betterment charge has a direct nexus with the running of the business
in a better way because of the improvement effected and by that process

F
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 Mohan-
/al 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 leave~ 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,
G 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:

H (i) a contribution of certain sums aHhe request of the Collector -
ARVIND MILLS v. C.I.T. [RAY, ,J.) 563

of the District towards tile construction of the Deoni Dam A
Majhala Road

(ii) a contribution of Rs. 50,000 to the State of U.P. towards
meeting the cost of construcion of roads in an area round the
factory under a sligarcane development scheme. Under the said B
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 C
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 w:as nothing to show that the contribution of the amount had anything D
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 E
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 profitab-
ly. 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 F
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 con-
tributed by the assessee for the purpose of facilitating the conduct of the
business and making it more efficient and profitable without the assessee G
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 H
564 SUPREME COURT REPORTS · (1992) 3 S.C.R.

A under the Town Planning Scheme the running of th~ business of the
assessee got ~proved 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
B 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
C 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
D as a deductible expendiiure.

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
E 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
---
F 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 Plan-
G ning 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
H land in question. The fact remains that under the statute, such improve-
ARVIND MILLS v. C.I.T. [RAY, J.) 565

ment had been effect~d and the assessee getting advantage of enhancement A
of value of land in question is required to pay betterment fee. He has also
submitted that in Mohan/al 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. B
Hence, the said decision of Privy Council is clearly distingilishable. 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 ex-
pem;liture is incurred, the said capital expenditure also ultimately enure to
c
- 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 D
has no direct nexus \\ith the day-to-day running of the business. In the
aforesaid circumstances, the learned counsel for the respondent has sub-
mitted that no interference is called for in this appeal and the same should
be dismissed.

After considering the respective contentions of the learned counsels E
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 F
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 facilites for carrying out the business of the assessee, the betterment
charge required to be paid by the assessee, does not become the revenue G
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 connec;tion
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 H
566 SUPREME COURT REP.ORTS (1992) 3 S.C.R.

A more efficiently but simply on that score, the capitar 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
a
expenditure is a capital expenditure or 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
B 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 con-
structed day-to-day running of the business was improved by minimising
the operational cost in manufacturing sugar. In such circumstances, the
c expenditure incurred for improving day-to-d~y 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.
D 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 manufac-
turing beedi. Such expenditure had nothing to do with any capital asset.
E 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
olir view, the High Court of Gujarat has rightly held that the betterment
F 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, fmd no reason to interfere with the decision of the Gujarat High
Court by accepting t:he reasonings of Madras High Court in Dollar
Company's case (supra). The instant appeal, therefore, fails and is dis-
G missed without any order as to costs.
T.NA. Appeal dismissed. ,~