Case: Arvind Mills Ltd Vs. Commissioner of Income Tax, Gujarat

This appeal arises out of a certificate granted by the High Court of Gujarat against its judgment dated March 9, 10, 1977, in Income-tax Reference No. 197 of 1976. The appellant, Arvind Mills Ltd., is a company incorporated under the Companies Act and is running textile mill. For the assessment year 1972-73 for which the previous year is the calendar year, the total income was assessed by the Income-tax Officer on January 24, 1973, at Rs. 1, 30, 92, 040. The appellant claimed deduction of Rs. 2, 02, 907 being the contribution made by the assessee towards the cost of Town Planning Scheme under section 66 of the Bombay Town Planning Act, 1954. The aforesaid payment made by the assessee was described as betterment charges. The Income-tax Officer disallowed the claim for deduction by his order dated January 25, 1974. The appellant preferred an appeal before the Appellate Assistant CommissionerThe Appellate Assistant Commissioner, by his order dated September 19, 1974, held, inter alia, that the expenditure in question was a revenue expenditure but, since the assessee had paid the betterment charges in ten equal instalments with interest, instead of payment in a lump sum of the entire amount of Rs. 2,, a sum of Rs. 14, 434 only since paid by the assessee by way of instalment in the year of assessment should be deducted from income. The contention of the assessee that, since the method of accounting of the assessee was mercantile, the entire amount of Rs. 2, 02, 907 should be deducted and not the yearly instalment of Rs. 14, 434, was not accepted. The assessee thereafter preferred a cross appeal against the order of the Appellate Assistant Commissioner before the Income-tax Appellate Tribunal in I.T.A. No. 133 (AHD) of 1974-75. The Tribunal held, inter alia, that the betterment charge was not a revenue expenditure. Hence no deduction on account of the betterment charge was allowable. The Tribunal, however, did not interfere with the deduction of Rs. 14, 434 since allowed by the Appellate Assistant CommissionerAt the instance of the assessee, the following question of law was referred by the Tribunal to the High Court of, on the facts and circumstances of the case, the Tribunal was justified in disallowing the betterment chargesthe impugned judgment, the High Court of Gujarat relying on the decision of the said High Court in the case of CIT (Additional) v. Rohit Mills Ltd. 1976 (104) ITR 132 , decided the question against the appellant assessee but, on an oral application, the High Court granted a certificate to the appellant under section 261 of the Income-tax, Act, 1961

Reasoning: After considering the respective contentions of learned counsel for the parties, it appears to, us that under the Bombay Town Planning Scheme, the lands of different owners including the land of the assessee were treated as if included in a common pool and various improvements have been effected for the better enjoyment of the lands under the Scheme. For such improvements by way of laying down roads, making provision for drainage, etc., under the scheme, the owner got the advantage of betterment of the land in question and there is no manner of doubt that the value of the land had increased because of the improvements effected on the land. Simply because such improvement has also resulted in providing better facilities for carrying on the business of the assessee, the betterment charge required to be paid by the assessee does not become revenue expenditure. Such payment has no direct nexus with the day-to-day running of the business. In our view, learned counsel for the respondent is justified in submitting that the capital expenditure incurred in connection with the business activities ultimately results in efficiently carrying on the business and, by that process, gives aid in the running of the day-to-day business more efficiently but, simply on that score, capital expenditure does not become a revenue expenditure. In our view, learned counsel for the respondent is also justified in his contention that, in deciding whether an expenditure is a capital expenditure or a revenue expenditure, the question of voluntary and/or involuntary payment becomes immaterial. It is the nature of the expenditure that determines the issue. In L. H. Sugar Factorys case 1980 (125) ITR 293 (SC), it has been-specifically indicated by this court that the assessee did not acquire any tangible, or intangible right on the roads constructed in and around the factory but because of such roads constructed the day-to-day running of the business was improved by minimising the operational cost in manufacturing sugar. In such circumstances, the expenditure incurred for improving the day-to-day running of the business by way of voluntary contribution of Rs. 50, 000 when such expenditure has no connection with the increase or in creation of any capital asset or acquiring any tangible or intangible right in the property in question, namely, the roads constructed in or around the factory, was treated as revenue expenditure. The decision of the Privy Council in Mohanlal Hargovinds case 1949 (17) ITR 473, in holding that the expenditure incurred for obtaining licences for acquiring tendu leaves for manufacturing beedis was a revenue expenditure can be easily explained by indicating that such expense for obtaining a licence to procure tendu leaves was an expenditure to acquire a basic raw material for manufacturing beedis. Such expenditure had nothing to do with any capital asset. Hence, the expenditure having direct nexus with the day-to-day running of the business of manufacturing beedis by procuring a basic raw material is certainly a revenue expenditure. But the facts in the instant appeal are quite different. The aforesaid aspect is totally absent in the instant case. In our view, the High Court of Gujarat has rightly held that the betterment charge on account of increase in the value of the land of the assessee should not be held to be revenue expenditure although general improvement of the area may have an impact on the better running of the business.