Govinda Bhat, C.J:— This reference made by the Income-Tax Appellate Tribunal, Bangalore Bench, Bangalore, at the instance of the Assessee under section 256(1) of the Income-Tax Act, 1961, relates to the Assessment year 1966-1967; the relevant previous year is the year ending 31st March 1966.
2. The Assessee is a firm dealing in iron ore. In the return filed for the assessment year 1966-1967, the Assessee has shown its total income as Rs. 65,613. This figure was based on the profit and Loss Account of the firm. Later, it filed a revised return showing a total income of Rs. 20,436 only. This reduction of income from Rs. 65,613 to Rs. 20,436 was primarily due to the fact that in the revised return the Assessee had claimed as revenue expenditure a sum of Rs. 55,146 being the cost of roads laid by the Assessee for transportation of ore, notwithstanding the fact that in its profit and Loss Statement, the said sum had been shown under the head ‘Capital Asset’ in the Balance Sheet as on 31st March 1966 and depreciation amounting to Rs. 11,029 also had been debited.
3. It was claimed before the Income-Tax Officer that there were existing Kutcha roads which had to be repaired and kept under constant repair in order to render them all-weather roads capable of taking the load of heavy lorries carrying iron ore. It was also claimed that out of the aforesaid sum of Rs. 55,145.86, about Rs. 10,000 related to the construction of new branch-roads to the actual working site and the balance related to road repairs. On going through the accounts, the Income-Tax Officer found that the new roads were laid by engaging contractors and the cost of construction of such roads was paid to various contractors. He found that there were no roads in the earlier years and the Assessee had made new roads during the relevant accounting year. Therefore, he rejected the Assessee's claim holding that the said sum of Rs. 55,146 was captial expenditure for construction of new roads.
4. Aggrieved by the said order of the Income-Tax Officer, the Assessee appealed to the Appellate Assistant Commissioner, before whom the case that such roads had existed prior to the year of account was not pressed; it was conceded that although there were no roads existing before, the roads constructed by the Assessee were in the nature of approach roads to the mine heads not owned by the Assessee. It was argued that according to the agreement with the Mine-owner—Dr. (Mrs.) Savathri Bai—the Assessee had agreed to purchase 60,000 tonnes of iron ore per year at pit's mouth; that the roads laid were purely accessory to mining operations and the Assessee had no interest whatsoever in the roads and lit did not derive any enduring benefit from the same.
5. The Appellate Assistant Commissioner rejected all the contentions of the Assessee. He noted that the Assessee was neither a Mine-Owner nor a raising contractor, that the raising contractor was a partner of the Assessee-firm and the raising contractor could not undertake the raising of ore without approach roads and therefore, he came to the conclusion that the construction of the roads was not wholly for the Assessee's own business since it was partly for the business of the raising contractor. The Appellate Assistant Commissioner also observed that there was no proof that the entire stretch of roads was only in the nature of approach roads. Accordingly, he dismissed the Assessee's Appeal.
6. The Assessee then appealed to the Income-Tax Appellate Tribunal. It was urged by the Assessee before the Tribunal that the entire stretch of roads consisted of approach roads. A sketch was produced before the Tribunal in support of that claim. The Tribunal being of the opinion that the sketch was unreliable, rejected the Assessee's claim that the roads were approach roads in the absence of reliable evidence.
7. The second ground urged before the Tribunal was that under the agreement, the Assessee had to lift annually 60,000 tonnes of ore from the mines and that such large quantity of ore could not be raised without approach roads. The Tribunal did not accept this claim made on behalf of the Assessee because the raising contractor was different and the Assessee was required merely to take delivery of the iron ore at the pit's mouth.
8. The third ground urged was that the agreement between the Assessee and the Mine-Owner was only for a period of 5 years and it was not a permanent lease: and that in view of the short duration of the lease, it could not be said that the Assessee derived any enduring benefit. This contention was rejected by the Tribunal.
9. It was next urged before the Tribunal that as the roads were laid on lands belonging to others, no capital asset was brought into existence either and therefore the expenditure cannot be treated in law as capital outlay. This contention was rejected by the Tribunal relying on the judgment of the High Court of Allahabad in Laxmiji Sugar and Oil Mills v. Commissioner of Income-Tax(1).
10. The Tribunal agreed with the Appellate Assistant Commissioner that the expenditure could not be said to be wholly for the Assessee's business since it was as much to facilitate the business of the raising contractor as the Assessee's own. The Tribunal accordingly rejected the claim made by the Assessee for deduction of the cost of construction of roads as revenue expenditure.
11. On the above facts, the Tribunal stated a case and referred the following questions of law for the opinion of this Court:
1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenditure of Rs. 55,146 incurred by the Assessee on construction of roads could not be said to have been incurred wholly for the assessee's business?
2. If the answer to the first question is in the negative, whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 55,146 was capital expenditure?
12. It was urged by Sri Sarangan, learned counsel for the Assessee, that the expenditure incurred was wholly and exclusively for purposes of the business of the Assessee and that the Tribunal was in error in holding that the “expenditure cannot be said to be wholly for the Assessee's business, since it was as much to facilitate the business of the raising contractor as the Assessee's own.”
13. It was not possible for us to understand how the Tribunal could legally infer from the material on record that the expenditure cannot be said to be wholly for the Assessee's business and that it was as much to facilitate the business of the raising contractor the Assessee's own. The raising contractor had entered into an agreement with the Assessee for sale of iron ore. The Assessee was to take delivery of the ore at pit's mouth. The roads constructed by the Assessee were for the purpose of connecting the pit's mouth to the public road. There was no material whatever before the Tribunal to hold that the object of constructing the roads was to serve the business of not only the Assessee, but also of others. The ore which was the subject-matter of contract between the Assessee and Dr. (Mrs.) Savithri Bai was iron ore. It is common knowledge that iron ore is extracted not by deep mining as in the case of gold mining; iron ore is extracted by surface mining over large areas of land. Ore is heaped by the raising contractor at convenient localities and it is the business of the purchaser of the ores to load the ore from such places and transport the same. For transportation of the ore, from the pit's mouth to the public roads, requisite roads have to be formed connecting the places of extraction of iron ore to the public roads. Such roads are what are called ‘Access Roads’ constructed primarily and principally for the purpose of providing access to the area of extraction of iron ore.
14. The question is whether a tax-payer is entitled to deduction of the cost of construction of such ‘access roads’ in the mining area. If the expenditure is in the nature of revenue expenditure, the Assessee is entitled to its deduction under Section 37 of the Income-Tax Act; but an item of expenditure though wholly and exclusively laid-out for the purpose of the business, would be inadmissible if it is of a capital nature. Capital expenditure has not been-and indeed, in view of tre breat diversity of the contexts in which the question arises, does not admit of being exhaustively defined.
15. Several tests have been suggested to determine whether a particular out-going represents an outlay of capital or of revenue expenditure. While the tests are generally efficacious, there are, however, twilight areas where the border-line between capital and revenue expenditures is very thin if not altogether tending to disappear and in borderline cases a conclusion one way or the other may, with—equal propriety, be reached. The concept of what is capital and what is revenue is, in the nature of things something which cannot be static and fixed; but must be dynamic to accord with changing patterns of economic life of the community.
16. It is therefore difficult to lay down any general rule so sufficiently accurate and exhaustive as to cover even a great number of conceivable cases. The judicial endeavour,—while abstaining from doing what the Legislature has steered clear of doing in the matter of formulating precise rules in the matter has been to lay down, recognising the wisdom of attempting no more,-certain broad tests which will guide the decision of a particular case on its own facts. The distinguishment between the capital and revenue in law is ‘frequently one of difficulty, just as it is difficult to indicate exactly where darkness ends and dawn begins, or when black and white lose their distinctive features and become neutral.’ (See Walter Strachan Capital and Income under the Income Tax Acts: 29 law Quarterly Review page 163).
17. The earliest of such formulations was by Bowen, L.J, in City of London Contract Corporation v. Styles(2), where it was observed that expenditure in the ‘acquisition of the concern’ would be capital, while expenditure in ‘carrying on the concern’ revenue.
18. Then followed the suggestion of Lord Dunedin in Vallam-brose Rubber Company v. Farmer(3) as ‘not a bad criterian’-though not determinative-one that if the expenditure is ‘going to be spent once and for all’ it is capital and if a thing that is ‘going to recur every year’ it is revenue.
19. What was suggested by Rowlatt, J., in Ounsworth (Survey of Taxes) v. Vickers Limited(4) was essentially the same.
20. The most notable and frequently cited declaration on the subject, however, is that made in the following words by Viscount Cave L.C in British Insulated and Heishy Cables Ltd., v. Atherton(5):
“But when an expenditure is made, not only once and for all, bul with a view to bringing into existence an asset or an advantage for the enduring benefit of 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 capital.”
21. This test, however, when examined only affords a general indication of the approach of any particular case the words in brackets show that each case is to be considered in relation to all relevant facts and that the words ‘once and for all’ are also not decisive.
22. In Sun Newspapers Limited and Associated Newspapers Limited v. The Federal Commissioner of Taxation(6), Dixon, J., stated:
“The distinction between expenditure and outgoings on revenue, account and on capital account corresponds with the distinction between the business entity, structure, or organization set up or established for the earning of profit and the process by which such an organization operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit or loss. The business structure or entity or organization may assume any of an almost infinite variety of shapes and it may be difficult to comprehend under one description all the forms in which it may be manifested.
??? ??? ??? ??? the deduction from assessable income of all outgoings incurred in gaining or producing assessable income “except to the extent to which they are losses or outgoings of capital” was held to be capital expenditure and therefore not deductible within the meaning of Section 51 Rich, J., observed:
“But in any case I have come to the conclusion that no deduction on account of the expenditure upon the road can be allowed at all. Section 51 expressly excepts from its operation losses and outgoings of capital or of a capital nature. In my opinion the expenditure by the tax payer company is an outgoing of a capital nature. I do not found this opinion in any way on the suggestion that the company constructed the road for a dual or secondary purpose and not simply to enable the timber to be obtained. I accept the position that the road was constructed in pursuance of the agreement and because it was necessary for the purpose of removing the timber. But even so it amounted, as I think, to an outlay of a capital nature. It is not to the point that the outlay was made in connection with the creation of an asset of which the value for the purpose of profitably working the timber or obtaining royalties therefrom would progressively diminish. That happens when capital is spent in acquiring patents, mining leases or concessions limited in point of time. Income tax law may not always be just in the provisions it makes for writing off against assessable income the cost of such wasting or terminating assets. But that does not make their acquisition or creation any the less an affair of capital. The expenditure on the road formed a necessary outlay to obtain the “enduring benefit” of the expected royalties. Lord Cave L.C, in using the phrase “enduring benefit” in British Insulated and Helsby Cables Ltd. v. Atherton 1926) A.C 205 at P. 213, was not thinking of advantages that are permanent. There is a difference between the lasting and the everlasting. The time over which the thing “endures” is a matter of degree and one element only to be considered. Horses in the old days and motor trucks in these are plant and their acquisition for the purpose of transport in business usually involves a capital expenditure. But the horses were not immortal any more than the trucks have proved to be. Another test is that of Lord Dunedin, when Lord President, a test almost as frequently employed as Lord Cave's was, expenditure made “once and for all” (Vallambrosa Rubber Co. Ltd. v. farmer (1910) 5 Tax Cas. 529 at P. 536 that test I think can give only one answer if applied to the case of the road…….”
31. Indeed Division 10-A of the Australian Statute was intended to grant a ‘sinking fund deduction’ in respect of the cost of ‘access roads’ used in timber industry, as the expenditure in that behalf was otherwise not deductible under Section 51.
32. Sri Sarangan urged that the facts of the present case do not attract the principle in Herring's Case(14); but the circumstances of Lakshmiji Sugar Mills Company's Case(12) are in point and apposite. In that case, the assessee, a private Company carrying on the business of manufacture and sale of a sugar paid to the Cane Development Council certain amounts by way of contribution for the construction and development of roads between the various sugar-cane-producing Centres and the sugar factories of the assessee. The expenditure was incurred under U.P Sugar Cane (Regulation of Supply and Purchase) Act, 1953, for the development of roads which were originally the property of the Government and remained so even after the improvement had been done. There was no finding that the roads were altogether newly made or that the assessee would get an enduring benefit from those roads. In these circumstances, the Supreme Court held that the expenditure was not of a capital nature and had to be allowed as an admissible deduction in computing the profits of the assessee's business. This decision, therefore, is clearly distinguishable, and its analogy inapposite.
33. Sri Sarangan next placed strong reliance on B.P Australia's Case, (9) referred to earlier and submitted that the principles enunciated therein are applicable to the facts of the present case. The B.P Australia Case (9) was heard by the same Judges, in a different capacity, who heard the Regent Oil Company's Case(8). The latter was heard before the House of Lords, whilst the former was heard by the same Judges sitting as Members of the Privy Council. In Regent Oil Company's Case(8) the agreements in question provided for a lease of the filling station site by the site owner to Regent for a nominal rent, but in consideration of a permium, and a sub-lease granted on the same day by Regent to the retailer for the whole of the term of lease less a few days. The sub-letting periods ranged from five years to twenty-one years, and the premium varied from £. 2,000 to £. 183.000 The House of Lords held the payments to be of a capital nature.
34. In B.P Australia Case(9), B.P Company carried on business as supplier of petrol in Australia. In and after 1951, a system of sale through tied garges was introduced by another supplier. B.P were asked by many retailers to remove their pumps. In endeavours to obtain tied stations throughout Australia by means of Solo-site agreement, whereby the B.P would make lumpsum payments, called ‘development allowances’ to retailers for the improvement of service stations, B.P spent in the Tax year ended June 1952 the sum of £. 2,70,569 either in payment direct to the retailers under sole-site agreement or by way of adjustments with the other co-operating companies in respect of such payments made by them. The sole-site-agreement was an exclusivity agreement under which the retailer agreed to resell from his premises only brands of petrol approved by B.P The average duration of a sole-site agreement was five years. The lumpsum expenditure of B.P involved in relation to this sole-site agreement for the year ended 30th June 1952 was disallowed as a deduction in assessing B.P's profits for income-tax on the ground that it was capital expenditure. The Privy Council reversing the majority decision of the Full Court of the High Court of Australia held that these lumpsum payments were expenditure of revenue rather than capital nature. The Privy Council held, inter-alia, that the answer to the question whether the expenditure was of a revenue nature must be reached by a common sense appreciation of all the guiding features; that the character of the advantage secured by solo-site agreement pointed to the expenditure being of a revenue nature as its purpose was to obtain orders for petrol by up-to-date marketing methods, and the lumpsums were prima-facie circulating capital coming back bit-by-bit in orders from retailers; that expenditure incured in making a radical alterations in company's marketing arrangements need not necessarily be capital expenditure; and that, though the duration of the agreement did not point clearly to revenue or capital, yet the facts that the payments were made on the average of five years was a natural factor which gave no conclusive indication in favour of the view that the expenditure was capital.
35. The distinction between the Regent Case(8) and B.P Australia Case (9) would seem to be that in Regent Case (8) the sums paid were made for the acquisition of an interest in land and in B.P Australia Case (9) there was no question of such interest. But both cases leave unanswered the question as to where the border line between capital and revenue payment is to be drawn, where no leasing arrangements are involved. In B.P Australia Case (9), Lord Pearce, referring to the relevant criteria stated at page 264:
The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a common sense appreciation of all the guiding features which must provide the ultimate answer. Although the categories of capital and income expenditure are distinct and easily ascertain me in obvious cases that lie far from the boundary, the line of distinction is often hard to draw in border line cases; and conflicting considerations may produce a situation where the answer turns on questions of emphasis and degree. That answer:
“depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured employed or exhausted in the process”.
Per Dixon, J. in Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation (1946) 72 C.L.R 634, 648. As each new case comes to be argued felicitous phrases from earlier judgments are used in argument by one side and the other. But, those phrases are not the deciding factor, nor are they of unlimited application. They merely crystallisc particular factors which may incline the scale in a particular case after a balance of all the considerations has been taken.”
36. The contention of Sri Sarangan that the Common element of ‘five years’ attracts to the present case the principle in B.P Australia Case (9) that the expenditure was of revenue nature rests on assumptions which are incomplete and unsupportable. Indeed, B.P Australia Case(9) itself lays down that solution to the problem is not to be found by any rigid lest or description; but has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other.
37. The consideration, in the present case which, in our opinion, point so clearly as to dominate the other and vaguer indications to the contrary are those that bear upon the question whether the outlay brings into existence an ‘advantage for the enduring benefit’ of the business and pertains to that aspect of the structure and organisational set-up of the business which corresponds to the profit earning apparatus as distinct from its profit earning process.
38. The out-lay in the present case is on the construction of access roads. The out-lay, undoubtedly, brings into existence an advantage. Whether it is of an enduring nature is essentially a matter of degree. If this out-lay had been made originally before the commencement of the actual work of transportation pursuant to the contract, it would have pertained more to the organisational set up and the profit earning apparatus than to profit earning process. In our opinion, the outlay does not shed this essential element by reason alone of the circumstance that it was made during the performance of the contract of transportation of ore. This is a part, altogether, from the ‘once for ally’ quality of the outlay which is made for construction of the access roads.
39. In our opinion, the outlay does therefore bring into existence an advantage for the enduring benefit of the business—enduring in the sense that it is reasonably expected to extend over the duration of the business-venture under the contract. On an appreciation of the whole set of circumstances and all the guiding features the outlay must be held to belong to the structure and organisational set-up of the business. The outlay must accordingly be held to be of a capital and not revenue nature.
In the result, for the reasons stated herein above, we answer the first question in the negative and in favour of the assessee and against the revenue. We answer the second question in the affirmative and against the assessee and in favour of the revenue.
In the circumstances of the case, we make no order as to costs.