Commissioner Of Income-Tax, Bombay City-I v. Hingir Rampur Coal Co. Ltd.

S.K Desai, J.:— A very short point arises for determination with regard to the question referred to us by the Income-tax Appellate Tribunal, Bombay Bench ‘C’. The question referred to us is as under:

“Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 59,183 claimed by the assessee as deduction is allowable under section 37(1) of the Income-tax Act, 1961?”

2. The assessee is the Hingir Rampur Coal Co. Ltd. It had its registered office in Bombay but owned a colliery in Orissa. In the assessment year 1967-68 it claimed as deduction under s. 37(1) of the I.T Act, 1961, a sum of Rs. 59,183 which it put under the head “Staff welfare expenses”. This amount was spent by the company by way of expenditure incurred on the construction of 100 tenements for its workers and staff at the colliery. It would appear that an agreement dated 18th November, 1966, was executed between the assessee-company and the Coal Mines Labour Housing Board (hereinafter referred to as “the Board”) constituted under the Coal Mines Labour Welfare Fund Act, 1947. A copy of the said agreement is annex. A to the statement of case. The agreement was to remain in force for a period of 15 years from the date of the completion of the houses. The assessee was to purchase or otherwise acquire at their own cost certain pieces of land. Thereafter, they were to construct in a substantial and workmanlike manner the houses. The material to be employed for the construction of the houses was to be of the quality approved by the Board. The staff of the Board was to inspect the construction daring all its stages and even thereafter. The assessee was to complete the construction of the houses as early as possible but within nine months of the date of the agreement. The Board was to give a subsidy of the entire cost of construction of each house, but this was subject to a maximum of Rs. 1,600. According to cl. 10 of the agreement:

“10. The house(s) so constructed including the land(s) on which they stand shall belong to and vest in the Board and shall remain the property of the Board even after the determination of this agreement.”

3. The assessee was further, during the period of agreement, at his own cost, to keep the tenements in good and substantial repair and also the sewers, drains, fences, paths, etc., connected with the said tenements. The rules relating to the allotment of the tenements to the labour employed in the coal mining industry are also appended to the said agreement. We also find an appended copy of the agreement to be signed by the allottee. It was further provided by the said agreement that the rent which the employer could recover from the allottee was not to exceed Re. 1 per month. This was also the lease amount payable by the assessee-company to the Board.

4. According to the ITO, the assessee secured by this agreement a right to house its staff in the quarters for which the assessee contributed its share. This was an amount paid once and for all for which certain rights had been secured. In his view, therefore, the expenditure was of a capital nature. The assessee was held not entitled also to depreciation because the houses vested in the Board.

5. When the matter was carried in appeal to the AAC, he concurred with the ITO. In his opinion this expenditure brought into existence an advantage of enduring benefit to the business of the assessee and was, therefore, required to be treated on capital account.

6. When the assessee carried the matter to the Tribunal, the Tribunal upheld the submissions of the assessee. The Tribunal found that this expenditure was in the nature of a revenue expenditure and observed:

“In the present case the expenditure in question was incurred to provide quarters for the workers and staff under the low cost housing scheme. The object would appear to be to have a contented labour force to ensure punctuality of attendance for better production and also to have good relations with labour. This evidently is a purpose for carrying on the colliery in a more efficient manner. Therefore, applying principle No. 1, it will be a revenue expenditure. The fact that it is not of an enduring benefit or of a permanent character is borne out by the other facts and circumstances of the case. Under the agreement entered into between the assessee-company and the Housing Board, the assessee-company lost the ownership of the land which by virtue of clause 10 vested in the Board and it became a lessee of the land and the superstructure at the rate of Re. 1 per mensem per tenement for 15 years. It would certainly not be a benefit of a permanent character. All that we see in this transaction is ‘give and take’ between the assessee-company and the Housing Board to provide certain amenities to the labourers and to have good relations between the employer and the workers so that the work of the colliery is carried on more efficiently and with the better production results. This is, as already stated, for the purpose of carrying on the assessee's concern efficiently. We have, therefore, no hesitation in holding that it is a revenue expenditure.”

7. The learned advocate for the Commissioner has submitted that the decision of the Tribunal is erroneous and has relied on the decision of the Allahabad High Court in Raza Buland Sugar Co. Ltd. v. CIT, [1980] 122 ITR 817 (All). In that case an amount of Rs. 32,004 had been spent by the company as payment towards the cost of construction of certain quarters under a scheme for construction of workmen's staff quarters introduced by the Uttar Pradesh Government. According to the Allahabad High Court, the quarters were freshly built and were to be exclusively used by the assessee-company. According to the Allahabad High Court, although the company was not the owner it was entitled to its exclusive user for an unlimited period of time. The view of the High Court was that the assessee had thus acquired an advantage of an enduring nature and hence the amount was in the nature of capital expenditure.

8. It has to be borne in mind that under the agreement between the assessee before us and the Coal Mines Labour Housing Board the agreement was to remain in force for a period of 15 years only and hence the assessee would not have a legal right to allow the quarters to its staff beyond this period. Mr. Sajnani on behalf of the Revenue fairly drew our attention to CIT v. Singareni Collieries Co. Ltd., [1980] 121 ITR 466, where the High Court of Andhra Pradesh had taken a view contrary to that of the Allahabad High Court. The Andhra Pradesh High Court was considering an almost identical agreement save and except that the maximum ceiling for the Board's contribution for each quarter was Rs. 3,100 in the agreement being considered by the Andhra Pradesh High Court as compared with Rs. 1,600 in our case. The High Court of Andhra Pradesh found in favour of the assessee and repelled the contention of the Revenue that by providing the quarters to its workmen the assessee-company had secured an advantage of an enduring character. In its view, the expenditure was incurred mainly for the welfare of the employees of the assessee. It made no difference, according to the Andhra Pradesh High Court, whether the expenditure was incurred on account of a statutory obligation or on a voluntary basis out of the assessee's desire to provide extra facilities to its employees. In the view of the said High Court, it was more than clear that the assessee incurred the expenditure not for the purpose of bringing into existence an enduring benefit for its business but for carrying on its business better and more efficiently. Accordingly, the Andhra Pradesh High Court allowed as revenue expenditure the sum of Rs. 1,06,333 for the assessment year 1964-65 and the sum of Rs. 2,55,103 for the assessment year 1965-66. The agreement and the circumstances in the case before us are almost identical with those before the Andhra Pradesh High Court. In our opinion, the Andhra Pradesh High Court has applied the proper test and the decision of the Allahabad High Court is clearly distinguishable. We are, therefore, of the opinion that in the present case the Tribunal was not in any error in upholding the assessee's contention. We answer the question accordingly as follows:

In the affirmative and in favour of the assessee.

9. The Commissioner to pay the costs of this reference to the assessee.