Holding

The expenditure is revenue in nature and deductible under section 10(2)(xv) because the advantage obtained is a revenue benefit and no capital asset was acquired by the assessee.

Summary

Associated Cement Companies Ltd. entered into a tripartite agreement to supply water, electricity and concrete a road in Shahabad, receiving a promise that its properties would not be included within municipal limits for fifteen years. The company spent Rs.2,09,459 on laying water pipelines, which under the agreement became the property of the Shahabad Municipality. It claimed a deduction under section 10(2)(xv) of the Income‑Tax Act, but the Revenue disallowed it as capital expenditure, arguing the exemption from municipal taxes was an enduring benefit. The High Court held the expenditure was revenue in nature and allowed the deduction. The Supreme Court affirmed this, observing that the advantage obtained was a revenue benefit (tax immunity) and the pipelines were not the company's assets, thus the amount is deductible under section 10(2)(xv). The Commissioner’s appeal was dismissed.

Issues considered

Whether the expenditure incurred by the assessee for laying water pipelines, which became the property of the municipality, is capital or revenue expenditure for purposes of deduction under section 10(2)(xv) of the Income‑Tax Act.
Whether the advantage of exemption from municipal taxes for fifteen years constitutes an enduring capital advantage or a revenue advantage.

Legislation cited

Income Tax Act, 1922s. 10(2)(xv), s. 66(1), s. 66(A)(ii)

Subjects

Income TaxDeductionCapital vs Revenue ExpenditureSection 10(2)(xv)Municipal Tax ExemptionSupreme Court of India

Judgment

COMMISSIONER OF INCOME-TAX, A
BOMBAY CITY-I,-BOMBAY
v.
ASSOCIATED CEMENT COMPANIES LTD., BOMBAY

MAY 4, 1988
B
.~·
[R.S. PATHAK, C.J. AND M.H. KANIA, J.]

Indian Income-tax Act, 1922 -Whether expenditure incurred by
assessee in accounting period relevant to the assessment period is liable
to be allowed as deductible from assessee's profits under section
10(2)(xv)-Of. C

This was an appeal by certificate under Section 66(A)(ii) of the
Indian Income-tax Act against the judgment of the Bombay High Court
on a reference of the question whether expenditure incurred by the
company in the accounting period relevant to, the assessment period was
allowable as deduction in determining the profits of the company for the D
assessment year.

The assessee respondent had a factory at Shahabad. Under a tripar-
tite agreement between the government, ·tbe assessee and the Munici-
pality of Shahabad, the assessee had undertaken to supply water and
electricity to Shahabad and to concrete the road from the factory to the E
railway station. Under clause 23, in consideration of these amenities to
be provided by the assessee company, the Government undertook not to
include any properties of the company within the limits of Shahabad
Municipality, etc. for a period of fifteen years from the date of the
agreement .
........ F
\
According to the assessee, certain expenditure was incurred dur-
ing the year of account under the said agreement, on the laying of
pipelines, installations and accessories of which the Shahabad Munici-
pality had become the owner \lnder the agreement, and this amount was
claimed as deduction. The Income-tax Officer disallowed the amount.
On appeal by the Company, the Appellate Assistant Commissioner G
allowed the deduction. The Revenue preferred an appeal to the Income-
tax Appellate Tribunal, which passed an order, directing the Income-
tax Officer to scrutinize the expenditure, and allowed the deduction to
the extent that it did not result in the company becoming the owner of
any asset. The High Court in deciding the reference held that the expen-
diture in question was revenue expenditure and was liable to be allowed H
917
918 SUPREME COURT REPORTS [1988] 3 S.C.R.

A as deduction, and answered the question referred in the affirmative and
in favour of the assessee. Revenue appealed to this Court against the
de9ision of the High Court.

Dismissing the appeal, the Court,
B
HELD: Water supply lines were laid as a result of the expendi-
ture incurred, but these water pipelines were not the assets of the asses-
see but of the Shahabad Municipality and it was not as if the expendi·
lure resulted in bringing into existence any capital asset for the com-
pany. The only advantage derived by the assessee by incurring the
expenditure was that it obtained an absolution or immunity, under
c normal conditions, from the levy of certain municipal rates, taxes and
charges. [922E]
•
As observed by this Court in Empire Jute Co. Ltd. v. Commissioner
of Income-tax, [1980] 124 I.T.R. S.C. p. 1, there may be cases where
the expenditure, even if incurred for obtaining an advantage of endur-
D
ing benefit, may nonetheless be on revenue account and the test of
enduring benefit may break down. It is not every advantage of enduring
nature acquired by-an assessee that brings the case within the principles
laid down in this test. What is material is the nature of the advantage in
a commerical sense and it is only where the advantage is in the capital
field that the expenditure would be disallowable on application of this
E
test. If the advantage consists merely in facilitating the assessee's trad-
ing operations or enabling the management and conduct of the asses·
see's business to be carried on more effectively or more profitably while
leaving the rIXed capital untouched, the expenditure would be on re-
venue account, even though the advantage may endure for an indefinite
-
F
future. [922H; '>23A-C] y..
I
In this case, the advantage secured by the assessee by making the
expenditure was the securing of absolution or immunity from liability to
pay municipal rates and taxes under normal conditions for a period of
fifteen years. If these liabilities had to be paid, the payments would have
been on revenue account and hence the advantage secured was in the
G
field of revenue and not capital. As a result of the expenditure there was
no addition to the capital assets of the assessee company and no change
0
>-
in. its capital structure. The pipelines which came into existence as a
result of the expenditure belonged to the Municipality. The expenditure
was liable to be allowed as deductible from the profits under Section
H 10(2) (xv) of the Indian Income-tax Act. [923F-H; n4A]
'C.l.T. v. ASSOCIATED CEMENT [KANIA, l.I 919
I
Atherton v. British Insulated and Helsby Cables Ltd., [1924] IO A
Tax Cases 155, 192 and Empire Jute Co. Ltd. v. Commissioner of
Income-tax, [1980] 124 I.T.R. S.C. p. I, referred to.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 512
(NT) of 1975.
B
From the Judgment and Order dated 15.11.1973 of the Bombay
High Court in Income Tax Reference No. 15 of 1964.

S.C. Manchanda, K.C. Dua and Ms. A. Subhashini for the

l Appellant.

Harish Salve, Mrs. A.K. Verma and D.N. Misra for the
Respondents.
c

The Judgment of the Court was delivered by

KANIA, J. This is an appeal, on a certificate given under D
Section 66(A)(ii) of the Indian Income-tax Act, 1922, against a judg-
ment and order of a Division Bench of the Bombay High Court. The
appeal is preferred by the Commissioner of Income-tax and the asses-
see, the Associated Cement Companies Ltd. is the respondent.

The judgment against which the appeal is directed was rendered · E
on a reference under Section 66(1) of the Indian Income-tax Act, 1922.
The question referred to the Court for consideration was as follows:

"Whether on the facts and in the circumstances of the case,
the expenditure of Rs.2,09,459, or any portion thereof,
incurred by the company in the accounting period relevant F
to the assessment period 1959-60 was allowable as deduc-
tion in determining the profits of the company for the
assessment year 1959-60."

The relevant facts are as follows:
G
The assessee, the Associated Cement Companies Ltd. has a
chain of factories manufacturing cement all over the country. The
assessment year in question is the year 1959-60 and the corresponding
previous year was ended on 31st July, 1958. One of the factories of the ·
assessee was situated at Shahabad, which is now in the State of
Kamataka, but was at the relevant time forming part of the then State H
920 SUPREME COURT REPORTS [1988] 3 S.C.R.

of Hyderabad. In September, 1956, the Government of Hyderabad
A
had decided to include the area on which the said factory at Shahabad
was situated within the municipal limits of the Shahabad Town Munici'
pality. A tripartite agreement between the Government of Hydera-
bad, the assessee company and the Municipality was arrived at on 30th
_October, 1956 between the aforesaid three parties. Under the agree-
B ment, the assess~e undertook to supply water to the Shahabad town
and village. It further agreed to put up a high tension electric transmis-
sion line and to supply electricity for the street lighting of the
Shahabad town. It also agreed to concrete free of charge the existing
main road from the factory upto the railway station via the main bazar.
During the relevant previous year, the only work done was with
C respect to provision of water supply to the said town and village.
Under the agreement, the assessee initially agreed to supply certain
quantity of water to the Shahabad town at a concessional rate and for
the purpose of such supply the assessee company was to undertake and
complete at its own cost the water supply scheme for the town and
village, involving laying of the main water pipelines. The assessee
D company was to be the owner of the pipelines, installations and other
accessories pertaining to the water supply lying within the company's
premises and on the land a little outside the premises. The Shahabad
Municipal Committee was to take over possession of the remaining
pipelines, installations and accessories and it was declared to be the
owner thereof. These pipelines, installations, etc. had to be main-
E tained by the Minicipal Committee in future. Under Oause 23, in
consideration of the assessee company having agreed to provide these
amenities, supply and services, the Govt. of Hyderabad undertook not
to include any of the properties of the company comprising the cement
factory, the main workshop, the housing colony, quarries and the
limestone bearing lands within the limits of the Shahabad Minicipality
F or the village panchayat or like body for a period of fifteen years from I
:ii'
the date of the agreement.

According to the assessee, a sum of Rs.2,09,459 was spent during
the year of account under this agreement and this amount pertained to
the laying of pipelines, installations and accessories of which the
G Shahabad Municipality became the owner under the agreement and
this amount was claimed as a deduction. The Income-tax officer disal-
lowed this amount, holding that it was a capital expenditure on the
basis that as a result of this expenditure the company derived an
advantage of an enduring nature, namely that it would not have to pay
municipal taxes for a period of fifteen years. On an appeal by the
H Company, the Appellate Asstt. Commissioner allowed the deduction
C.I.T. v. ASSOCIATED CEMENT [KANIA, J.[ 921
> holding that the amount was the payment of a composite sum of the A
revenue outgoings for the following 15 years. The Revenue preferred
an appeal to the Income-tax Appellate Tribunal. The Income-tax
Appellate Tribunal passed an order directing the Income-tax officer to
scrutinize the expenditure and allowed the deduction of the expendi-
ture to the extent that it did not result in the company becoming the
).. owner of any asset. B

Before the High Court it was contended on behalf of the c9m-
- pany that the entire amount of Rs.2,09,459 pertained to expenditUre
on pipelines installations and other accessories which under the agree-

-
ment came to ownership of the Shahabad Town Municipality and did
. not pertain to any increase of the assets of !he company. The Division
Bench which decided the reference has pointed out. that it had not
c
been disputed by the Revenue before the Tribunal that the entire
expenditure concerned was laid out for the purpose of business al!d the
only question was whether it was capital expenditure or re'l(enue.
expenditure. The only ground on which. the claim of the assessee for
deduction of _the said expenditure under Section 10(2) (xv) of the D
Indian Income-tax Act was resisted that it was capital expenditure_:
After exhausti.vely considering several decisions of the Supreme Court
and several English decisions, the Division Bench of the Bombay High
Court came to the conclusion that the expenditure in question was
~ revenue expenditure anci was liable to be allowed as deduction. On the
basis of these conclusions the Bombay High .Court decided the ques- E
tion referred in their affirmative and in favour of the assessee.

- In the judgment appealed against the learned Judges h11;ve refer-
red to the dictum of Viscount Cave L.C. in Atherton v. British
Insulated. and Helsby Cables Ltd., [1924] 10 Tax Cases 155, 192 which
··~
. runs as follows: F

"But 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 11 trade. I think that
there is very good reason (in the absence of special circum-
stances leading to an opposite conch!Sion) for treating such G
an expenditure as properly attributable not to revenue but
. -A, to capital."

. The Division Bench further pointed out that this dictum was
stated with approval by this Court in Assam Bengal Cement Co. Ltd. v.
Commissioner of Income.Jax, [1955] 27 I.T.R. 34 (S.C.) where this H
922 SUPREME COURT REPORTS [1988] 3 S.C.R.

A Court inter alia approved the .decision of a Full Bench of the Lahore
High Court in Banarasidas Jagannath in re 1947 15 I.T.R. 185 (Lah)
(F.B.) hplding that expenditure may be treated as properly attribut-
able to capital when it is made not only once and for all, but with a
view to bringing into existence an asset or an advantage for enduring
benefit of the trade. If, on the other hand, what is got rid of by lump
B sum payment is an annual business expense chargeable against
revenue, the lump sum payment should equally be regarded as a busi-
ness expenses, but if the lump sum payment brings in a capital asst:t,
then that puts the business on another footing altogether.

The Division Bench also took into account the fact that the asses-
C see was already running a cement factory at Shahabad and it was not as
if the expenditure incurred was in connection with starting of a new
business.

Mr. Manchanda, learned counsel for the appellant has raised
only two contentions before us. The first contention was that, since, as
D a result of the expenditure incurred, certain water pipelines were laid
which could be regarded as capital assets the expenditure could only
be regarded as capital expenditure. In our view, there is no substance
in this contention. It is true that certain water supply lines did come to
be laid as a result of the expenditure incurred, but the facts on records,
which we have referred to above, clearly show that these water pipe-
E lines on which the expendiiure in question was incurred were not
assets of the assessee, but assets of the Shahabad Municipality and
hence it was not as if the expenditure resulted in bringing into exist- •
ence any capital asset for the company. The only advantage derived by
the assessee by incurring the expenditure was that it obtained an
absolution or immunity, under normal conditions, from levy of certain
F municipal rates and taxes and charges. In view of this the first conten-
tion of Mr. Manchanda must be rejected.

The next submission made by Mr. Manchanda was that the advan-
tage of not being liable to pay municipal rates, taxes, etc. which the
assessee company secured by reason of making the expenditure in ques-
G tion was for a period ·of fifteen years and hence it could be said to be an
advantage of an enduring nature, so that the expenditure incurred in ,;.
acquiring the same would be regarded as capital expenditure. In our view
it is difficult to accept this submission either. As observed by the Supreme
Court in the decision in Empire Jute Co. Ltd. v. Commissioner of Income-
tax, [1980] 124 I.T.R. SC p. 1 that there may be cases where expenditure,
H even if incurred for obtaining an advantage of enduring benefit, may, none
C.l.T. v. ASSOCIATED CEMENT [KANIA. J.J 923

the less, be on revenue account and the test of enduring benefit may A
break down. It is not ev.ery advantage of enduring nature acquired by
an assessee that brings the case within the principles laid down in this
test. What is material to consider is the natur.e of the advantage in a
commercial sense and it is only where the advantage is in the capital
field that the expenditure would be disallowable on an application of
,>. this test. If the advantage consists merely in facilitating the assessee's B
trading operations or enabling the management and conduct of the
assessee's business to be carried on more effectively or more profitably
while leaving.the fixed capital untouched, the expenditure would be on
revenue account, even though the advantage may endure for an indefi-
nite future. In that case the appellant, a company carrying on the
business of manufacture of jute, was a member of the Indian Jute Mills
Association, which was formed with the objects, inter alia, of protect-
c
ing the trade of its members, including imposing restrictive conditions
on the conduct of the trade and adjusting the production of the mills of
its members. A workin3 time agreement was entered into betweel) the
members restricting the number of working hours per week for which
the mills were entitled to work their looms. Clause 4 of the working D
time agreement provided that no signatory shall work for more than 45
hours per week. Clause 6(b) provided that the signatories shall be
entitled to transfer, in part or wholly, their allotment of hours of work
\.. per week to any one or more of the other signatories. Under this clause
r the appellant purchased "looms hours'.' from four other mills for the
aggregate sum of Rs.2,03,255 during the previous year relevant to the E
assessment year 1960-61 and claimed to deduct that amount as revenue
expenditure. The Tribunal held that the expenditure incurred by the
appellant was revenue in nature and hence deductible in computing
the appellant's profits. The High Court reversed this decision, but on
....U appeal, the Supreme Court allowed expenditure as deductible expen-
""':. diture on the basis of the principle set out earlier. If this principle is F
applied to the facts of the case before us, what we find is that the
advantage which was secured by the assessee by making the expendi-
ture in question was the securing of absolution or immunity from liabi-
lity to pay municipal rates and taxes under normal conditions for a
period of fifteen years. If these liabilities had to be paid, the payments
would have been on revenue account and hence the advantage secured G
....._ was in the field of revenue and not capital. _As a result of the expendi-
. ture incurred, there was no addition to the capital assets of the asses-
see company and no change in its capital structure. The pipelines, etc.
which might have been regarded as capital assets and which came into
existence as a result of the expenditure incurred did not belong to the
assessee company but to the municipality. In these circumstances, H
924 SUPREME COURT REPORTS [1988] 3 S.C.R. -\

A applying the principles laid down in Empire Jute Co. 's case the expen-
diture is clearly liable to be allowed as deductible from the profits
under Section 10(2) (xv) of the Indian Income-tax Act. In the result,
the appeal fails and is dismissed with costs. ·

S.L. Appeal dismissed.
B -(

•
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