1990-VIL-531-KAR-DT
Equivalent Citation: [1990] 183 ITR 367, 83 CTR 71, 51 TAXMANN 219
KARNATAKA HIGH COURT
Date: 05.01.1990
COMMISSIONER OF INCOME-TAX
Vs
MYSORE CEMENTS LIMITED
BENCH
Judge(s) : K. SHIVASHANKAR BHAT., S. RAJENDRA BABU
JUDGMENT
The judgment of the court was delivered by
K. SHIVASHANKAR BHAT J.-This is a reference under section 256(1) of the Income-tax Act, 1961, arising out of assessment proceedings for the assessment year 1978-79.
The questions required to be answered by us are :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 4,12,105 incurred on the construction of quarters for its workers is not of capital nature ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee is entitled to depreciation on roads ?"
Learned counsel for the Revenue very fairly and rightly did not pursue the second question before us.
The basis of the first question was a claim of the assessee for deduction of a sum of Rs. 4,12,105 being the sum expended by the assessee towards the construction of the workers' quarters.
The assessee claimed this sum as part of quarry maintenance expenditure, though incurred towards the construction of the quarters for the workers at the quarry. The assessing authority, following the decision of the Appellate Assistant Commissioner (issued under section 144B of the Act), held it to be capital expenditure and hence the claim for deduction was disallowed ; however, he allowed depreciation on it.
The Commissioner of Income-tax (Appeals) accepted the claim of the assessee by following the decision of the Andhra Pradesh High Court in CIT v. Singareni Collieries Co. Ltd. [1980] 121 ITR 466.
The Revenue appealed to the Appellate Tribunal. The Appellate Tribunal held that, (i) the expenditure incurred by the assessee was for the welfare of its employees which was a "normal business expenditure" ; (ii) the assessee did not acquire, any capital assets; consequently, the Tribunal upheld the order of the appellate authority in this regard.
The Revenue, not being satisfied with the order of the Tribunal, sought this reference.
Before proceeding further, it will be useful to refer to an agreement under which those quarters were constructed.
A copy of the agreement was placed before us by learned counsel for the assessee ; the agreement is dated January 28, 1977, and was entered into between the assessee (referred to therein as "the applicant/the applicants") and the President of India (referred to as the "Government"). Broadly, the agreement states that :
For the purpose of constructing tenements for housing persons employed in the limestone/dolomite mining industry, the owners of the mines approached the Central Government for advances for construction of tenements and that the Central Government approved a scheme for construction of low cost housing and for payment of subsidy equivalent to 75% of the estimated total cost of Rs. 6,825 or Rs. 7,925, as the case may be, depending upon the nature of the soil ; if the actual cost of construction is less than the said estimated cost, the subsidy payable by the Government was to be 75% of the actual cost of construction. This cost includes the cost of development, etc., and the type of houses is to be as per the plan attached to the agreement.
The owners were required to construct 100 houses at a total cost not exceeding Rs. 10.3 lakhs on their limestone/dolomite mine premises.
The agreement is to remain in force for a period of 15 years from the date of completion of the house/houses. Provision was to be made for community facilities by the owners in the area of construction. The houses so constructed shall be the property of the Central Government as per clause 10 of the agreement. Provision is made for advance payments of the subsidy. If the owners fail to complete the construction, the Central Government may complete the works and recover the owners' part of the cost in terms of the earlier part of the agreement.
Where miners are not entitled to any house rent allowance, the rent which the applicants may charge to the allottee for occupation of one house shall not exceed Re. 1 per month inclusive of water, light and other charges and this sum is to be utilised for the maintenance and repair of these houses. In case the miners are entitled to house rent allowance, owners are to charge-house rent at the rate to which they are entitled, in which case, 75% of the rent shall be paid to the fund and 25% shall be utilised for the maintenance and repair of the houses.
Thus, it is clear that the ownership of the houses is not vested in the assessee. The payments made by the assessee is not the full cost of construction, but only 26% of the cost. The agreement was Co be in force only for period of 15 years. A substantial part of the cost of construction is met by the Central Government in whom ownership of these houses would vest. The expenditure thus incurred by the assessee does not result in the assessee getting any proprietary interest in these assets. The payments made by the assessee are in the nature of expenditure incurred for a welfare measure. Thus, the expenditure incurred by the assessee is more in the nature of a contribution towards a welfare scheme.
Learned counsel for the Revenue and the assessee cited several decisions as to the test to be applied to find out the nature of an expenditure, namely, whether a capital expenditure or a revenue expenditure. The question is not free from difficulty. It has not been possible for any court to enunciate a fixed formula having universal application in this regard. Repeatedly, it has been pointed out that the dividing line between the two concepts is very thin ; if so, a marginal treading into one area from another is inevitable. Though it may be treated as a question of law as to whether particular expenditure, under a given set of circumstances, is revenue expenditure or capital expenditure, the answer to the question has to be found out from the realm of facts in a given case. In K. T. M. T. M. Abdul Kayoom v. CIT [1962] 44 ITR 689 (SC). Justice Hidayatullah (as he then was), speaking for himself and for Kapur J., observed in this regard (at page 703 of 44 ITR):
"Further, none of the tests is either exhaustive or universal. Each case depends on its own facts, and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. In, deciding such cases, one should avoid the temptation to decide cases (as said by Cardozo) (The Nature of the judicial Process, p. 20) by matching the colour of one case against the colour of another To decide, therefore, on which side of the line a case falls, its broad resemblance to another case is not at all decisive. What is decisive is the nature of the business, the nature of the expenditure; the nature of the right acquired, and their relation inter se, and this is the only key to resolve the issue in the light of the general principles which are followed in such cases."
Now, to a few citations made by learned counsel for both sides:
In CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257 (SC) the assessee-company therein agreed to provide water pipe line and electricity facilities to a municipal area ; the company also agreed to concrete free of charge the existing main road from the factory up to the railway station. The assessee was exempted from paying municipal tax for period of 15 years. The works to be effected by the company were to be the property of the municipality. The company claimed expenditure incurred under the agreement as a revenue expenditure. The Supreme Court referred to one of its earlier decisions in Empire jute Co.'s case [1980] 124 ITR I and observed that (at page 262 of 172 ITR):
"There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, 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 to consider is the nature 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 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 indefinite future."
The Supreme Court, on facts, found that the company therein did not acquire any capital assets as a result of the expenditure in question and that there was no change in the capital structure ; the pipelines, etc., though laid down by the company, vested in the municipality. In those circumstances, the expenditure was held to be a revenue expenditure.
The decision of the Bombay High Court in Cooper Engineering Ltd. v. CIT [1988] 169 ITR 66 as summarised in the said law report, reads:
The Maharashtra Housing Board built tenements under the subsidised Industrial Housing Scheme for housing industrial workers of the assessee in accordance with a scheme sanctioned by the Government. A certain amount was required to be deposited by the assessee with the Maharashtra Housing Board as its contribution towards the scheme. The tenements belonged to the State Government. The industrial housing colony wherein the tenements were to be situated was to be run by the State Government. The cost of the services and the maintenance of the quarters were to be met by the State Government. If the occupant of the tenement ceased to be an employee of the assessee, he was required to vacate the tenement and the responsibility of evicting the employee was that of the State Government. During the relevant assessment year, the assessee claimed deduction as revenue expenditure of the contribution made by it to the State Housing Board. The Income-tax Officer rejected the claim for deduction on the ground that the expenditure was of a capital nature. The Appellate Assistant Commissioner and the Tribunal affirmed the order of the Income-tax Officer. On a reference it was held:
"that though the buildings in which the tenements were situated and the land upon which the buildings stood were not owned by the assessee, the assessee obtained by incurring the expenditure an advantage of enduring nature, because, by incurring the expenditure, the assessee secured the advantage of housing its employees in tenements for as long a period as the buildings in which the tenements were situated stood. The buildings would stand for a considerable period. Moreover, when the employees ceased to be in the service of the assessee, they were required to vacate the tenements so that such tenements became available for allotment by the assessee to its other, employees. The assessee by making the contribution to the State Housing Board derived an advantage of an enduring nature and, therefore, the expenditure incurred therefor was of a capital nature and was not deductible."
The High Court distinguished its earlier decision in Associated Cement Co.'s case [1974] 96 ITR 650 (which stood affirmed subsequently by the Supreme Court in [1988] 172 ITR 257, and referred to by us above), by observing that the facts therein were altogether different. The High Court observed that in the case before it (Cooper Engineering Ltd.'s case [1988] 169 ITR 66, the advantage gained by the assessee was "not merely of an enduring nature but is also plainly in the capital field".
Raza Buland Sugar Co. Ltd. v. CIT [1980] 122 ITR 817, is a decision of the Allahabad High Court. There also, a similar scheme and expenditure incurred thereunder came up for consideration. The Government introduced a scheme for construction of workmen's staff quarters. Under it, the employer company was to lease out its land near its factory to the U. P. Housing Board. The Government was to contribute some amount for construction of staff quarters for the factories and the balance was to be contributed by the factory owners and contractors. These quarters were to remain the property of the U. P. Sugar and Power Alcohol Housing Board and they were to be leased out to factory owners on the agreed terms and conditions. The assessee gave out some land and paid Rs. 32,004 towards the, cost of construction of the quarters and secured the quarters for exclusive use by its workers for an unlimited time. The assessee claimed this sum of Rs. 32,004 as business expenditure.
The High Court held that the facts were more akin to the case of Travancore-Cochin Chemicals Ltd. [1977] 106 ITR 900, wherein the Supreme Court held that expenditure incurred for laying out a new road to facilitate the business of the assessee-company was of capital nature.
The cases involving road-building and expenditure incurred in connection therewith are numerous and the decisions are not quite uniform in all those cases, as is clear from the decision of this court in Hindustan Machine Tools Ltd. (No. 3) case [1989] 175 ITR 220, which will be referred to again.
In CIT v. India Tobacco Co. Ltd. [1978] 114 ITR 182, the Calcutta High Court had to consider as to whether the contribution made by the assessee for the hospital taken over by the State Government under an agreement between the workmen's union, the State Government and the assessee was a revenue expenditure or a capital expenditure. The High Court found that though the workers of the assessee got free medical treatment or treatment at a concessional rate, the contribution made by the assessee would be capital in nature, by observing at page 196 : "It appears to us that, broadly speaking, the question should be considered from two aspects, namely, what is got by, spending the money, the nature and type of the asset or the advantage or right that is obtained by the expenditure incurred, and, secondly, the nature and the manner of the payment made. It is the real nature and quality of payment that is important."
Thereafter, the conclusion was arrived at, thus (at page 197):
". . . in this case, not only the company incurred this expenditure for getting rid of the obligation to make recurring annual expenses for meeting the treatment of its workers but also for getting an advantage or privilege which indeed can be considered to be an asset for an indefinite period to have its workers treated at no expense or at concessional expense. If this is an asset or a benefit then, and as it endures for a considerable length of time or for an indefinite time, it can certainly be considered to be an asset or advantage of enduring benefit, enduring in the sense in which fixed capital in modern times endures. If that is the position then by making this one lump sum payment, the assessee-company not only got rid of a liability to make recurring annual payments for the treatment of its workers who are not covered by the State insurance scheme at the hospital of the Government but also obtained this advantage or privilege for an indefinite period."
These cases show the thin line that divides the two concepts and the possibility of crossing the boundary from one area to another, without being guilty of committing trespass.
Palani Andavar Mills Ltd. v. CIT [1977] 110 ITR 742 is another decision of the Madras High Court, wherein the amount spent by the assessee (which was only a part of the total cost) 6n the construction of an elementary school on the land of the Employees' Housing Co-operative Society was held as not an amount spent towards a trading transaction. The court found that the nature as well as The manner in which the same were dealt with in the accounts showed that, the assessee intended only to advance loans to its employees and this circumstance weighed with the court in its ultimate conclusion. The claim of the assessee was based on its writing off of these amounts as not recoverable. The court held that the writing-off of the loans was not relatable to the assessee's trading transaction. This decision is based on its peculiar facts and has no resemblance to the case before us.
The Tribunal, in the instant case, relied on a decision of the Andhra Pradesh High Court in CIT v. Singareni Collieries Co. Ltd. [1980] 121 ITR 466. The Coal Mines Labour Housing Board was constituted for the construction of low cost houses for persons employed in the coal mines. Under the agreement entered into between the assessee (a mine owner) and the said Board, the Board was to pay a maximum sum of Rs. 3,100 per house to the assessee ; the buildings were to be durable for a period of 15 years, but would vest in the Board ; the period of agreement was for 15 years ; the assessee could collect a nominal rent of Re. 1 from the allottees. The assessee claimed the amount spent by it, in excess of the amount paid by the Board, for the construction of the houses, as a revenue expenditure.
The High Court held that, in deciding whether an expenditure is of capital or revenue nature, each case has to be decided on its own merits mainly with reference to the aim, object and result of the expenditure. While negativing the contention of the Revenue that the work of the workmen to whom the houses are allotted would result in extra profit or benefit to the assessee, the Bench held, at page 475 :
"What is necessary to classify the expenditure as capital in nature is that it should have been incurred once and for all and for bringing into existence an enduring benefit. 'Enduring benefit' is a relative term of contextual interpretation. In the light of the possible and probable long span of the company's life, the indirect profit which the assessee-company may derive through contented workmen for a limited period of just 15 years cannot constitute such a lasting benefit as to classify the expenditure as capital in-nature. The expenditure was incurred primarily for the welfare of the employees of the assessee. Whether the expenditure was incurred on account of a statutory obligation as in the case of Lakshmiji Sugar Mills Co. P. Ltd. v. CIT [1971] 82 ITR 376 (SC) or on a voluntary basis because of the assessee's desire to provide facilities to its employees on account of its expectations of better work from them, would not make any difference. The assessee was merely acting as an agent of the Board in the construction of the quarters. If the assessee had constructed the quarters, within the maximum amount prescribed by the board, the assessee would not have incurred any expenditure from its funds. The extra expenditure had to be incurred as the assessee could not construct the quarters according to the specifications of the Board with the amount allotted by the Board. Under the circumstances, it is 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 profitably."
In CIT v. Hingir Rampur Coal Co. Ltd. [1983] 140 ITR 73, the Bombay High Court had to consider the question involving almost similar facts as in the instant case. Under the agreement with the Coal Mines Labour Housing Board, the assessee which owned a colliery spent a certain sum of money on the construction of 100 tenements for its workers and staff at the colliery. The agreement was to be in force for. 15 years from the date of completion of the houses ; the houses constructed were to vest in the Board ; the rent recoverable by the assessee from the allottee was not to exceed Re. 1 per month. The Board was to subsidise the entire cost of construction of each house, subject to a maximum of Rs. 1,600 per house. The clauses relating to maintenance and repair also were similar to the terms of the agreement involved in the case before us.
The Bombay High Court held that, having regard to the agreement, which limited its period of operation only for 15 years, and the amounts spent by the assessee, being towards the welfare of the workmen, the expenditure should be treated as a revenue expenditure and agreed with the decision of the Andhra Pradesh High Court in Singareni Collieries Co. Ltd. [1980] 121 ITR 466 ; the Allahabad High Court view expressed in Raza Buland Sugar Co. Ltd. [1980] 122 ITR 817 was held to be distinguishable.
Before concluding, it is necessary to refer to one more decision of this court in Hindustan Machine Tools Ltd. (No. 3) v. CIT [1989] 175 ITR 220, wherein the assessee contributed towards the formation of an approach road which resulted in greater facility to its business/industrial activities. This court upheld the assessee's claim that the amount contributed for road-making was a business expenditure. It was held that (at pp. 229, 233 and 230):
"The test of enduring benefit is not a conclusive test and it cannot be-applied in a mechanical way without regard to the particular facts and circumstances of the case on hand.
In the circumstances and facts of the instant case : (a) the construction of the road which is not the property of the assessee is undoubtedly connected with and advantageous to the business activity of the assessee ; (b) the contribution of Rs. 3,61,236 made by the assessee is for the construction of the road under the scheme sponsored by the State Government ; (c) the cost of construction has been partly met by the assessee along with the Bangalore Development Authority and Bharat Electronics Ltd. ; (d) though it conferred upon the assessee an enduring advantage for the benefit of its business, it did not secure to the assessee any tangible or intangible asset and further the enduring advantage gained by the assessee is chiefly to facilitate the assessee's business operations with greater efficiency and profitability without touching the fixed capital of the assessee ; (e) there is no addition to, or expansion of, the profit-making apparatus.
Following the ratio in L. H. Sugar Factory and Oil Mills (P.) Ltd. v. CIT [1980] 125 ITR 293 (SC), held that the expenditure incurred by the assessee for the formation of the road, not belonging to the assessee, is an admissible revenue expenditure."
It is thus clear that the test of enduring nature applied to the purpose for which a particular expenditure is incurred is not a conclusive test ; it is only one of the several factors to be considered while answering the question. Expenditure incurred which does not result in the acquisition of permanent asset may indicate that the expenditure incurred was of revenue nature. An expenditure attributable to a welfare scheme resulting in a permanent benefit under a given set of circumstances may be a capital expenditure, while, under another set of circumstances where the welfare scheme is of a limited duration, it will be a revenue expenditure. We are in respectful agreement with the approach adopted by the Andhra Pradesh High Court in Singareni Collieries Co.'s case [ 1980] 121 ITR 466 and of the Bombay High Court in Hingir Rampur Coal Co.- Ltd.'s case [1983] 140 ITR 73 having regard to the facts of those cases, which, in our opinion, should equally govern the instant case.
Consequently, we are of the opinion that the deduction claimed by the assessee has to be allowed as a revenue expenditure.
The answer to the question referred to us is in the affirmative and against the Revenue.
The reference is answered accordingly.
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