Seth, J.:— At the instance of the Revenue, the following question has been referred by the Income-tax Appellate Tribunal, Delhi Bench ‘E’, Delhi, for the opinion of this court:

“Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 13,254 on account of unsuccessful tube-well expenses was a capital or revenue expenditure?”

2. The assessee is a co-operative society carrying on the business of manufacture and sale of crystal sugar. For the assessment year 1968-69, the assessee claimed a sum of Rs. 13,254 as expenses for boring a tube-well which, however, proved to be unsuccessful.

3. The ITO disallowed the claim on the reasoning that these expenses cannot be said to have been laid out wholly and exclusively for the purpose of the business. The AAC rejected the claim of the assessee on the ground that the expenditure was of a capital nature. On appeal, the Tribunal held that the expenditure was incurred to facilitate the carrying on of the assessee's business better and, consequently, directed that the disallowance of Rs. 13,254 shall stand deleted.

4. The stand taken by the assessee was that it had two tube-wells in the factory premises but supply of water from them for the assessee's business of manufacturing sugar from cane was found inadequate. It was, consequently, decided to bore a new tube-well. The attempt, however, did not prove successful. The expenses incurred in boring the unsuccessful tube-well was claimed as an expense incurred wholly and exclusively for the purpose of its business.

5. The distinction between capital expenditure and revenue expenditure is well marked but sometimes it has posed problems for the courts. The matter came up for consideration before the House of Lords in Atherton v. British Insulated and Helsby Cables, Ltd., [1925] 10 TC 155. Viscount Cave L.C, in the course of his speech, said (p. 192):

“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 a 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.”

6. Romer L.J in Anglo-Persian Oil Co. Ltd v. Dale, [1931] 16 TC 253 (CA), after referring to the aforesaid observation of Viscount Cave L.C, observed (p. 274):

“It should be remembered, in connection with this passage, that the expenditure is to be attributed to capital if it be made ‘with a view’ to bringing an asset or advantage into existence. It is not necessary that it should have that result.”

7. It means that the expenditure is to be attributed to capital if it is made “with a view” to bringing an asset or advantage into existence and it is not necessary that it should have that result. This aspect of the matter came up for consideration in Pyrah v. Annis & Co. Ltd., [1957] 31 ITR 517 (Ch. D). In that case, a company had obtained an “A” licence for four articulated vehicles. In an endeavour to bring the number of articulated vehicles authorised, by its “A” licence up to seven, the company in 1952 incurred certain expenses in applying to the appropriate authorities to vary its licence by the inclusion of a further three articulated vehicles. The application was refused. The company claimed that these expenses might properly be deducted from its trading profits for the purposes of computing its liability to tax. It was held that these expenses could not be so deducted since they were incurred in an attempt to make the company's fleet of lorries more advantageous as income winning assets and were, therefore, attributable to capital expenditure. A similar problem came up for consideration in East India Commercial Co. Private Ltd. v. CIT, [1964] 54 ITR 81 (Cal). In that case, the assessee had taken out on lease a jute mill from a company for a period of five years. On the expiry of the period of the lease the assessee spent a sum of Rs. Rs. 4,680 towards stamp duty in respect of a lease deed for the purpose of renewing the lease for a further period of five years. The directors of the lessor-company took the stand that the document was invalid and ineffective as it was signed by the secretary and treasurer who had no such authority. Thereafter the assessee spent a further sum for a fresh lease deed containing different terms and providing for an enhanced rent. The assessee claimed that the sum of Rs. 4,680 paid towards stamp duty on the ineffective lease deed was an allowable deduction. The Calcutta High Court took the view that the stamp duty paid on the ineffective lease deed was in the nature of capital expenditure and could not be allowed as a deduction in computing the assessee's income. The true test to be applied in such cases appears to be that expenses incurred for the purpose of, or with a view to acquire a capital asset whether it ultimately produces capital or not, must be regarded as in the nature of a capital expenditure.

8. The stand taken by the Revenue finds support from the decision of the Supreme Court in A.V Thomas and Co. Ltd. v. CIT, [1963] 48 ITR (SC) 67. In that case, the memorandum of association of the assessee-company authorised it to be interested in, promote and to undertake the formation and establishment of other companies, to make investments and to assist any company financially or otherwise. One of the directors of the assessee-company who was also a director in another private company, which took up the promotion of a textile mill, financed the private company to the extent of Rs. 6,05,000 and odd. The action of the director was approved by the board of directors of the assessee-company who passed a resolution that the amount of Rs. 6 lakhs should be shown in its accounts as an advance for the purchase of shares in the textile mill and the balance amount as sundry advances due from the promoters of the textile mill. The project of promoting the textile mill failed. The private company paid back to the assessee a sum of Rs. 2 lakhs. The assessee wrote off the balance and claimed the balance as a bad debt or alternatively as a business expenditure. The accounts indicated that, to begin with, the amount was shown as an advance for purchase of shares of the textile mill to be promoted. It was also clear that the shares were being acquired by the assessee-company so that it might have the lucrative business of selling agency and similar other agencies from the mill sought to be set up. It was not the business of the assessee-company to buy agencies and sell them. In these circumstances, the Supreme Court observed that it was not an expenditure on the revenue side. The assessee-company intended to acquire a capital asset for itself and for this purpose takes the case of the assessee-company out of s. 10(2)(xv) of the Indian I.T Act because no expenditure can be claimed under that clause which is of a capital nature. The Supreme Court also rejected the claim regarding bad debt but with that we are not concerned. In the present case, the assessee incurred the expenditure in question for boring a new tube-well. If the scheme had succeeded, it would have acquired a capital asset. The mere fact that the attempt failed would not change the capital nature of the expenditure.

9. Learned counsel for the assessee placed reliance on CIT v. Royal Calcutta Turf Club, [1961] 41 ITR 414 (SC). In that case, the business of the assessee, Royal Calcutta Turf Club, was to hold race meetings on a commercial basis. The turf club established a school. In order to avoid the risk of jockeys becoming unavailable, a certain sum was spent on the running of the school and the assessee claimed that amount as a deduction under s. 10(2)(xv) of the Indian I.T Act, 1922. The Supreme Court took the view that the amount spent by the turf club was not in the nature of a capital expense because no asset of an enduring nature was created and as the amount was spent for the preservation of its business it was laid out wholly and exclusively for the purpose of the business of the turf club and was an allowable deduction. Reliance was also placed on Atlas Cycle Industries Ltd. v. Commissioner Of Income-Tax, Patiala., [1982] 134 ITR 458 (P & H). In that case, the assessee-company, which derived its income from the manufacture of cycles and spare parts, constructed a temple primarily and directly for the benefit of its employees. It incurred an expenditure of Rs. 5,500 by giving monthly grants to the management committee of that temple and claimed deduction of that amount under s. 37. The Punjab and Haryana High Court held that since the expenditure of Rs. 5,500 was in the nature of a periodic grant to the management committee of the temple, it was an expenditure laid out or expended wholly and exclusively for the purpose of the assessee's business and hence an allowable deduction. Reference was also made to the decision of the Calcutta High Court in CIT v. Belgachi Tea Co. Ltd., [1975] 99 ITR 99. In that case, the assessee, a tea-grower, claimed under “repairs account” a certain sum as cost of repairs to the fencing of the tea gardens. The ITO took the view that new fencing was fixed with new pillars and, therefore, a major portion of the expenditure was capital expenditure and on that reasoning disallowed a part of the expenditure. The Appellate Tribunal, however, allowed the claim. On a reference by the Commissioner, the Calcutta High Court confirming the view of the Tribunal held that the business of tea-growing could not be carried on unless there were proper fencing. Therefore, incurring of the expenditure was in connection with the carrying on of the business by the assessee. If the predominant and main purpose of incurring the expenditure was carrying on of the business, the incidental advantage of that expenditure, in that the property is secured more and thereby the assessee gains advantage which is of some endurance, cannot affect its revenue character. None of these cases are helpful in determining the nature of the expenditure incurred in the case in hand. As observed earlier, this expenditure was incurred with a view to acquire a capital asset and must be treated as a capital expenditnre. The view taken by the Tribunal does not appear to be justified.

10. Our answer to the question referred is that the expenditure of Rs. 13,254 on account of unsuccessful tube-well expenses was a capital expenditure, Parties shall bear their own costs.