S.K Desai, J.:— This is a reference by the Income-tax Appellate Tribunal, Bombay Bench “B”, under section 66(1) of the Indian Income-tax Act, 1922. The Tribunal by the said reference has posed the following question for our consideration:
“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 to the assessment period 1959–60 was allowable as deduction in determining the profits of the company for the assessment year 1959–60?”
2. In order to understand and decide the point involved, a few facts may be stated:
The assessee is the Associated Cement Companies Ltd. owning a chain of factories all over the country manufacturing cement. The assessment year in question is the year 1959–60 and the corresponding previous year is the year ended on 31st July, 1958. The assessee-company has one of its cement factories at Shahabad (situate at present in District Gulbarga in the State of Karnataka); at the relevant time, however, it was part of the State of Hyderabad. Some time in September, 1956, the Government of Hyderabad had decided to include the area on which the A.C.C Factory at Shahabad was situate within the municipal limits of the Shahabad Town Municipality. Thereafter, negotiations ensued between the Government of Hyderabad and the assessee-company, and pursuant to these negotiations a tripartite agreement dated 30th October, 1956, was arrived at; the three parties to the said agreement were the assessee-company, the Government of Hyderabad and the Shahabad Municipality. Under this agreement the assessee-company undertook to supply water to the Shahabad town and village. It further agreed to put up a high tension electric transmission line and to provide 220v. supply for the street-lighting of the town. Finally, it agreed to concrete free of charge the existing main road from the factory up to the railway station via the main bazar. We have been informed during the course of the arguments that for this assessment year (1959-.60), we are only concerned with the provision of water supply to the town and village. Under the provisions of the agreement relating to supply of water the assessee-company initially agreed to supply 75,000 gallons of water per day to the Shahabad town and village, which was to be ultimately increased to 3,00,000 gallons of water; this was to be supplied at a concessional rate as mentioned in the said agreement. For purposes of such supply the 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 pipelines to be laid were indicated on a plan annexed to the agreement. Clauses 8 to 10 of the said agreement contained provisions regarding the ownership of the pipelines, installations and other accessories pertaining to the water supply. Under these clauses the 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 said 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; the committee also had to maintain these pipelines, installations, etc., in future. Clause 23 of the said agreement indicates the advantage to be received by the company for the amenities it had agreed to provide to the Shahabad town and village under the earlier provisions. In consideration of the company having agreed to provide these amenities, supply and services, the Government 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 Municipality or the village panchayat or like body for a period of fifteen years from the date of the agreement. It was provided that this period could be extended further on agreed terms.
3. According to the assessee, a sum of Rs. 2,09,459 was spent during the year of account under this agreement and this was claimed as a deduction from its profits under section 10. The Income-tax Officer disallowed 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, the advantage being that the company would not have to pay municipal taxes for a period of fifteen years. The company, being aggrieved by this order, thereafter, appealed to the Appellate Assistant Commissioner who decided in its favour, taking the view that the amount did not represent either capital expenditure or create an advantage of an enduring, nature, but that it was a payment of a composite sum of revenue outgoings for the following fifteen years. The income-tax department thereafter appealed to the Income-tax Appellate Tribunal. Before the Income-tax Appellate Tribunal it was contended on behalf of the department that all that the assessee obtained was an enduring advantage in the shape of freedom from any obligation to the municipality or the village panchayat for a period of fifteen years. It was further urged that the expenditure could not be said to be a commutation of revenue payments in future. Accordingly, it was submitted that the company was not entitled to a deduction of the said sum of Rs. 2,09,459 under the provision of section 10(2)(xv). On behalf of the assessee-company the same contentions as were urged before the Appellate Assistant Commissioner were urged before the Tribunal. After considering the rival contentions the Tribunal held that the company undertook this expenditure on the express understanding that it would be allowed to continue to carry on its business as before “untrammelled” by the restrictions of the municipality and free from the liability to pay municipal taxes. It went on to observe that if by reason of such expenditure there was an increase in the tangible assets of the company, to that extent the expenditure was undoubtedly of a capital nature. But barring the expenditure incurred on these assets, according to the Tribunal, the balance of the expenditure was undertaken “in order to avoid the difficulty or handicap which threatened to put restrictions on the manner in which the company was to conduct its business”. The Income-tax Appellate Tribunal, therefore, directed the Income-tax Officer to scrutinize the expenditure from the point of view indicated above and allow deduction of the expenditure to the extent that it did not result in the company becoming owner of any assets.
4. It may be stated here that according to Mr. Kolah, the entire amount of Rs. 2,09,459 pertained to the pipelines, installations and other accessories which had become, under the agreement, of the ownership of Shahabad Town Municipality and did not pertain to the increase in any of the assets of the company. He showed us a copy of the letter dated 28th October, 1963, along with its annexure, according to which a sum of Rs. 72,417 (not included in the amount of Rs. 2,09,459) was the expenditure pertaining to the pipelines and installations which had resulted in an increase of the assets of the company. According to Mr. Kolah, the company had treated this expenditure (in respect of the sum of Rs. 72,417) as capital expenditure and had not claimed deduction of the said amount under section 10(2)(xv).
5. Now this letter and its enclosure were subsequent to the statement of the case as submitted by the Tribunal and could not obviously have been dealt with by the Income-tax Tribunal. Mr. Joshi was unable to confirm or deny the correctness of what Mr. Kolah had stated; but according to his submission, the entire sum of Rs. 2,09,459 could not have been allowed as a deduction under section 10(2)(xv) and it made no difference whether such expenditure had resulted in an increase in the assets of the assessee-company or not.
6. Mr. Joshi on behalf of the revenue made the following submissions: (i) that the expenditure was one incurred by the assessee-company for acquiring or bringing into existence the advantage of enduring benefit to the business carried on by the company; according to him, such enduring benefit need not be of an everlasting character, though it certainly could not be ephemeral or of a transitory nature; (ii) the advantage which the assessee-company had obtained under the agreement was a concession or exemption from the liability to pay municipal rates and taxes for a period of fifteen years. In the context of the existing facts it was urged that such expenditure cannot be said to be one incurred to get rid of some onerous liability of a business which is chargeable to revenue. According to Mr. Joshi, there was at the time when the expenditure was incurred no existing liability for payment of such rates or taxes, but the expenditure was incurred to ensure that no liability would be imposed in future for a period of fifteen years; and (iii) the expenditure was one not related to the carrying on of the business and cannot be regarded as an integral part of the profit earning process or operations and, therefore, could not be a revenue expenditure or allowed as a deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922.
7. Section 10(2)(xv) of the Indian Income-tax Act, 1922, provides as follows:
“any expediture (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation.”
8. Now, as far as the third submission made by Mr. Joshi is concerned, it appears to me that it would not be open to the revenue at this stage to urge that the expenditure was not laid out by the assessee for the purpose of a business. This position does not seem to have been disputed by the revenue before the Tribunal which has observed as follows in paragraph 10 of its order dated 14th December, 1962:
“The question is whether the expenditure undertaken in pursuance of the agreement between the company on the one hand and the municipality and the Hyderabad Government on the other hand was capital expenditure or revenue expenditure, because the fact is not disputed before us that the expenditure was laid out for purposes of business…”
9. In my opinion, the only point as far as this expenditure is concerned, which was urged and was in dispute before the Income-tax Appellate Tribunal, was that such expenditure was capital expenditure and was, therefore, not allowable as a deduction under section 10(2)(xv).
10. The line of demarcation between capital expenditure and revenue expenditure is very thin and judges, both in England and India, have from time to time pointed out the difficulties besetting the task of deciding whether a particular expenditure may be properly regarded as capital or revenue expenditure. The approach to be properly adopted by courts came to be considered by the Supreme Court in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax [1955] 27 I.T.R 34 S.C. where N.H Bhagwati J. spoke for the Supreme Court. It was observed that Atherton v. British Insulated and Helsby Cables Ltd. [1924] 10 Tax Cas. 155, 192 C.A. laid down what has almost universally been accepted as the test for determining what is capital expenditure as distinguished from revenue expenditure. In the last mentioned case Viscount Cave L.C observed:
“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 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.”
11. It was observed by Bhagwati J. that Viscount Cave's test had been adopted almost universally in India (see page 43 of the report).
12. The Supreme Court went on in Assam Bengal Cement Co.'s case to approve of certain principles enunciated by a Full Bench of the Lahore High Court in Benarsidas Jagannath, In re3. In the Lahore case the opinion of the Full Bench had been delivered by Mahajan J. (as he then was)-According to the Lahore High Court, some broad principles can be deduced from what the learned judges had laid down from time to time and that these broad principles were as follows:
(1) Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment.
(2) Expenditure may be treated as properly attributable 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 the enduring benefit of a trade (vide Viscount Cave L.C in Atherton v. British Insulated and Helsby Cables Ltd.) If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense; but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether.
(3) Whether, for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business.
13. According to the Supreme Court, this decision of the Full Bench of the Lahore High Court truly enunciated the principles which emerged from the authorities. The Supreme Court went on to observe:
“The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure” (see page 45 of the report).
14. According to Mr. Joshi, by incurring the expenditure of the sum of Rs. 2,09,459 during the year of account, the assessee-company had acquired an advantage for the enduring benefit of its business, and, therefore, the expenditure ought to be regarded as of a capital nature, which would imply that it was not deductible under the provisions of section 10(2)(xv) of the Act. It was further submitted by him that the period of fifteen years was sufficient in order to characterise the benefit or advantage acquired as enduring and that it was not necessary that it should be everlasting or that it should last as long as the business continues. In this connection, he referred us to Cit, West Bengal Ii, Calcutta v. Coal Shipment (P) Ltd. where it was observed by the Supreme Court that an enduring benefit need not be of a perpetual or everlasting character, although it was made clear that it should not be transitory or ephemeral. The Supreme Court went on to hold that an agreement which could be terminated at any time at the volition of any of the parties thereto could not be regarded as conferring an enduring benefit. The relevant observations are to be found at pages 909 and 910 of the report. The Supreme Court in the last mentioned case referred to the decision of the Privy Council in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd.
15. The test indicated by Viscount Cave L.C in Atherton's case came to be considered by the House of Lords in Regent Oil Co. Ltd. v. Strick (Inspector of Taxes) [1969] 73 I.T.R 301 H.L.. According to Lord Reid, Viscount Cave was dealing with a case where the payment was made literally once and for all and where the asset or advantage was to last as long as the company lasted. According to Lord Reid, Viscount Cave did not have in mind an advantage of a limited duration (see pages 323 and 324 of the report). Lord Reid further considered the question of what kind of asset or advantage Lord Cave's words would cover. According to him: “Broadly it seems to have been accepted that they will not extend to cover a payment to get rid of a handicap or disadvantage.”
16. Thus a view seems to have been taken that a payment made to remove the possibility of a recurring disadvantage ought not to be considered as a payment made to acquire an enduring advantage; and this seems to be the principal basis of a decision on which reliance has been placed by the Tribunal, viz., B.W Noble Ltd. v. Mitchell [1927] 11 T.C 372 C.A.. In that case the assessee-company had claimed as a deduction from its profits for income-tax purposes the sum of £ 19,200 payable (by instalments) to a retiring director in the following circumstances: The original directors had been appointed for life so long as they held a qualifying number of shares, subject to dismissal forthwith for neglect or misconduct towards the company. A director so dismissed was only entitled to receive his salary then due and could be required to sell his shares to the other directors at par. He would also have to surrender for cancellation certain notes issued by the company entitling him to participate in surplus profits. Circumstances arose in 1920 and 1921 in which the company might possibly have been justified in dismissing one of the directors. However, in order to avoid injurious publicity, it entered into negotiations with him for his retirement. He claimed £ 50,000 as compensation, but a compromise was arrived at and embodied in an agreement dated 30th December, 1921, under which he agreed to retire from the company, to transfer his three hundred £ 1 shares to the other directors at par value (although they were then worth considerably more) and to surrender his participating notes. The company agreed to pay him £ 19,200 in addition to the sum of £ 300 which was to be paid by the other directors and expressed to be consideration for his shares. The Special Commissioners decided in favour of the company on the question of deduction of the said sum of £ 19,200 and that decision was upheld by Rowlatt J. and the Court of Appeal. In the judgment of the Court of Appeal Lord Hanworth M.R considered Atherton's case but held that on the facts of the case the payment should be treated as a revenue item and not as a capital item. According to him:
“It is a payment made in the course of business, dealing with a particular difficulty which arose in the course of the year, and was made not in order to secure an actual asset to the company but to enable them to continue, as they had in the past, to carry on the same type and high quality of business unfettered and unimperilled by the presence of one who, if the public had known about it, might have caused difficulty to their business and whom it was necessary to deal with and settle with at once.”
17. According to Mr. Kolah, the facts found by the Tribunal are very similar to the facts involved in B.W Noble's case. It has been observed by the Tribunal that under this agreement the company ensured for itself continuance for fifteen years of the conditions of working which existed before the idea of the extension of the municipal jurisdiction was mooted, and these conditions included freedom from taxes and freedom from regulations. It does not appear to have been disputed that if the factory and other areas of the company had been brought within the jurisdiction of the Shahabad Municipality, such regulations and taxation would almost certainly have followed. It may be mentioned at this juncture that, according to the company, it would have been required annually to pay municipal rates and duties of about Rs. 1,23,000 so that in a period of fifteen years the revenue outgoings would have been about Rs. 18,00,000.
18. The principle applied by the Court of Appeal in B.W Noble's case appears to have been referred to and approved by the Supreme Court in Commissioner of Income-tax v. Ashok Leyland Ltd. In that case the assessee-company had in 1948 appointed C.B Ltd. as its managing agents for a period of fourteen years. By an agreement dated 29th January, 1955, it terminated the managing agency on payment of Rs. 2,50,000. It claimed deduction of that amount in computing its profits as a revenue expenditure. It was held that the compensation paid for termination of the services of the managing agents was a payment made with a view to save business expenditure in the accounting period as well as a few subsequent years, and that it was not made for acquiring any enduring benefit or income-yielding asset. In the result, the expenditure was held to be of a revenue nature and an allowable deduction in computing the profits of the assessee-company. At page 554 of the report, Hegde J., who spoke for the court, after referring to B.W Noble's case observed:
“A payment made to remove the possibility of a recurring disadvantage cannot be considered as a payment made to acquire an enduring advantage.”
19. On that basis the compensation paid was held to be expenditure not made for acquiring any enduring benefit or income-yielding asset.
20. According to Mr. Joshi, the conclusions in the above case should be restricted to the facts which had come up for consideration and that the principle enunciated in B.W Noble's case and in Commissioner of Income-tax v. Ashok Leyland Ltd. should be restricted to payment made to employees, agents, directors or managing agents. In my view the principle enunciated is much wider and it appears to have been held that a payment made or expenditure incurred to remove the possibility of a recurring disadvantage (as is the case before us) cannot be considered as payment made to acquire an enduring advantage in the sense that it would be within the test laid down by Viscount Cave L.C in Atherton's case.
21. Mr. Joshi then fell back on his second submission and urged that this approach may be followed only where expenditure was incurred in order to obviate future outgoings in respect of an existing liability, but that the same principle could not be applied where the liability was one which was not existing but may come into being in future. According to Mr. Joshi, such payment where there is no existing liability would be payment said to be made to get some concession and must be properly regarded as capital expenditure. In connection with this head of argument he relied upon the judgment of a Division Bench of our High Court in Bhor Industries Ltd. v. Commissioner of Income-tax. We were referred to the observations at page 399 of the report where it has been stated that “no liability existed when the liability (to pay royalty to the Bhor Durbar) was incurred”. Now, a fair reading would indicate that what has been emphasized is the fact that the agreement between the company and the Bhor Durbar had been entered into not after the business of the company had commenced but before it had commenced and it was entered into with a view to start a business. Hence, it could not be said to be expenditure incurred for running the business. This would be made clear from a perusal of the observations at page 400 of the report where the various cases relied on by counsel, who appeared for the assessee-company, have been distinguished on the ground that in all those cases the expenditure was incurred while the business was a running concern. Such, however, was not the case before the Division Bench in the Bhor Industries' case. According to the Division Bench, the liabilities in respect of which deduction was claimed were undertaken before the business had started; they had been undertaken not for the running of the business but for the purpose of securing certain advantages to the business or a set of favourable circumstances in order to launch the business and, therefore, could not be considered as revenue expenditure. This aspect of the matter has been very succinctly brought out by Lord Reid in Regent Oil Co. Ltd. v. Strick, where it is stated that “what a person spends to set up a business must be capital, as there cannot be a revenue expense until trading commences.” In these circumstances, it is not possible to accept Mr. Joshi's submission that even if expenditure incurred to get rid of an existing liability can perhaps be regarded as revenue expenditure, expenditure incurred for saving an assessee from possible future liabilities can never be regarded as revenue expenditure but must be considered as acquisition of an advantage or benefit of an enduring character. In my view the assessee-company had by incurring this expenditure obtained the avoidance of certain disadvantages for a limited period, viz., for fifteen years. It will not be correct to equate this with the acquisition of an advantage or benefit of an enduring character to make it fall within the test laid down in Atherton's case by Viscount Cave L.C for holding the expenditure as of a capital nature. In my view the Tribunal was correct in holding that such part of the expenditure as cannot be related to the increase in the assets of the assessee-company must be allowed as a deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922.
Vimadalal, J.:— In my opinion, the mere application of the-legal principles laid down by the Supreme Court in the three different cases which have been referred to by my brother, Desai J., is sufficient to answer the question referred to us in favour of the assessee-company. N.H Bhagwati J., delivering the judgment of the Supreme Court in the case of Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, after exhaustively reviewing the earlier case law, laid down that, primarily, it is the aim and object of the expenditure that would determine whether its character was of capital expenditure or revenue expenditure. The learned judge further laid down that it is only in those cases where that test was of no avail that the question of applying any other test would arise. If, as laid down by the learned judge, the aim and object of the expenditure was to acquire or bring into existence an asset or an advantage of enduring benefit to the business, it must be held to be in the nature of capital expenditure. If, on the other hand, the expenditure was made for the purpose of running the business or working it with a view to pro duce profits, it must be held to be revenue expenditure (at page 45). It has, however, been laid down by the Supreme Court in the case of Cit, West Bengal Ii, Calcutta v. Coal Shipment (P) Ltd. that the term “enduring” is, in that context, only a relative term and is not synonymous with perpetual or everlasting (at page 909). In the statement of the case before us, it has been stated that, some time in September, 1956, the then Government of Hyderabad had decided to include the area on which the assessee-company's factory was situate within the limits of Shahadad Town Municipality. In my opinion, in the present case, the sum of Rs. 2,09,459 was, under those circumstances, spent by the company to put off for a period of fifteen years the imminent possibility of the recurring disadvantages and taxes to which the company would be subject if the area on which its Shahabad factory was located was included within the municipal limits. In that connection, it must be borne in mind that after the expiration of the period of the agreement it was inevitable that the area would be included within the municipal limits and the assessee-company would have to suffer all the disadvantages attendant thereon and to be bound to pay all municipal taxes. The aim and object of the agreement was, therefore, only, to use a popular expression, “to put off the evil day” and that cannot be said to be an “enduring” benefit, even in a relative sense. Moreover, it has very recently been held by the Supreme Court in the case of Commissioner of Income-tax v. Ashok Leyland Ltd., that a payment made to remove the possibility of a recurring disadvantage cannot be considered as a payment made to acquire an enduring advantage (at page 554). That would be so, a fortiori, where, as in the present case, the payment is made only to postpone the impact of recurring disadvantages which are ultimately inevitable, as pointed out by me above. Such expenditure was clearly made for the more convenient and economical running of the business for the period of the agreement.
22. Applying the principles laid down by the Supreme Court in these three cases, it must, therefore, be held that the sum of Rs. 2,09,459 expended by the assessee-company was revenue expenditure allowable as a deduction in determining the profits of the assessee-company for the assessment year. 1959–60, and the question referred to us must be answered accordingly.
By the court
23. The question is answered in the affirmative and in favour of the assessee.
24. The Commissioner to pay costs of the reference to the respondent.
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