Case: L. B. Sugar Factory &amp; Oil Mills (P) Ltd. Pilibhit Vs. C.I.T. U.P., Lucknow

The assessee is a private limited company, carrying on business of manufacture and sale of crystal sugar in a factory situated in Pilibhit in the State of Uttar Pradesh. In the year 1952-53, a dam was constructed by the State of Uttar Pradesh at a place called "Deoni" and a road " Deoni-Dam-Majhala" was constructed connecting the Deoni Dam with Majhala. It seems that the Collector requested the assessee to make some contribution towards the construction of the Deoni Dam and the Deoni Dam-Majhala Road and pursuant to this request of the Collector, the assessee contributed a sum of Rs. 22, 332 during the accounting year ending September 30, 1955. The assessee also contributed a sum of Rs. 50, 000 to the State of Uttar Pradesh during the same accounting year towards meeting the cost of construction of roads in the area around its factory under a sugarcane development scheme promoted by the Uttar Pradesh Government as part of the Second Five Year Plan. It was provided under the sugarcane development scheme that one-third of the cost of construction of roads would be met by the Central Government, one-third by the State Government and the remaining one-third by sugar factories and sugarcane growers and it was under this scheme that the sum of Rs. 50, 000 was contributed by the assessee. In the course of its assessment to income-tax for the assessment year 1956-57, the assessee claimed to deduct these two amounts of Rs. 22, 332 and Rs. 50, 000 as deductible expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922. The Income-tax Officer disallowed the claim for deduction on the ground that the expenditure incurred was of capital nature and was not allowable as a deduction under section 10(2) (xv). The assessee preferred an appeal to the Appellate Assistant Commissioner but the appeal failed and this led to the filing of a further appeal before the Tribunal. The appeal was heard by a Bench of two members of the Tribunal and there was a difference of opinion between them. The Judicial Member took the view that the expenditure of both the amounts of Rs. 22, 332 and Rs. 50, 000 was in the nature of revenue expenditure and was, therefore, allowable as a deduction, while the Accountant Member held that this expenditure was on capital account and could not be allowed as revenue expenditure. Since there was a difference of opinion between the two members, the question which formed the subject-matter of difference was referred for consideration to a third Member. The third Member did not go into the question whether the expenditure incurred by the assessee was in the nature of capital or revenue expenditure but took a totally different line and held that the contributions were made by the assessee as a good citizen just as any other person would and it could not be said that the expenditure was laid out wholly and exclusively for the purpose of the business of the assessee. The third Member in this view agreed with the conclusion reached by the Accountant Member and held that both the amounts of Rs. 22, 332 and Rs. 50, 000 were not allowable as deductible expenditure under s. 10(2)(xv). The appeal of the assessee was accordingly rejected by the Tribunal so far as this point was concerned. The assessee thereupon sought a reference to the High Court and on the application of the assessee, the following question of law was referred for the opinion of the High, on the facts and circumstances of the case, the sums of Rs. 22, 332 and Rs. 50, 000 were admissible deduction in computing the taxable profits and gains of the companys business ?"The High Court observed that on the findings recorded by the third Member of the Tribunal and on the view expressed by the Accountant Member, the expenditure could not be said to have been incurred by the assessee in the ordinary course of its business and it could not be classified as revenue expenditure on the ground of commercial expediency. The view taken by the High Court was that since "the expenditure was not related to the business activity of the assessee as such, the Tribunal was justified in concluding that it was not wholly and exclusively laid out for the business and that the deduction claimed by the assessee, therefore, did not come within the ambit of section 10(2) (xv)". (pp. 583 & 584 of 84 ITR). The High Court, accordingly, answered the question referred to it in favour of the revenue and against the assessee. The assessee thereupon preferred the present appeal in this court after obtaining the necessary certificate from the High Court.

Reasoning:
So far as the first item of expenditure of Rs. 22, 332 is concerned, the case does not present any difficulty at all, because it was common ground between the parties that this amount was contributed by the assessee long after the Deoni Dam and the Deoni-Dam-Majhala Road were constructed and there is absolutely nothing to show that the contribution of this amount had anything to do with the business of the assessee or that the construction of the Deoni Dam or the Deoni Dam-Majhala Road was in any way advantageous to the assessees business. The amount of Rs. 22, 332 was apparently contributed by the assessee without any legal obligation to do so, purely as an act of good citizenship, and it could not be said to have been laid out wholly and exclusively for the purpose of the business of the assessee. The expenditure of the amount of Rs. 22, 332 was, therefore, rightly disallowed as deductible expenditure under s.t the position is different when we come to the second item of expenditure of Rs. 50, 000. There the assessee is clearly on firmer ground. The amount of Rs. 50, 000 was contributed by the assessee under the Sugarcane Development Scheme towards meeting the cost of construction of roads in the area around the factory. Now, there can be no doubt that the construction of roads in the area around the factory was considerably advantageous to the business of the assessee, because it facilitated the running of its motor vehicles for transportation of sugarcane so necessary for its manufacturing activity. It is not as if the amount of Rs. 50, 000 was contributed by the assessee generally for the purpose of construction of roads in the State of Uttar Pradesh, but it was for the construction of roads in the area around the factory that the contribution was made and it cannot be disputed that if the roads are constructed around the factory area, they would facilitate the transport of sugarcane to the factory and the flow of manufactured sugar out of the factory. The construction of the roads was, therefore, clearly and indubitably connected with the business activity of the assessee and it is difficult to resist the conclusion that the amount of Rs. 50, 000 contributed by the assessee towards meeting the cost of construction of the roads under the Sugarcane Development Scheme was laid out wholly and exclusively for the purpose of the business of the assesseeNow it is clear on the facts of the present case that by spending the amount of Rs. 50, 000, the assessee did not acquire any asset of an enduring nature. The roads which were constructed around the factory with the help of the amount of Rs. 50, 000 contributed by the assessee belonged to the Government of Uttar Pradesh and not to the assessee. Moreover, it was only a part of the cost of construction of these roads that was contributed by the assessee, since under the sugarcane development scheme, one-third of the cost of construction was to be borne by the Central Government, one-third by the State Government and only the remaining one-third was to be divided between the sugarcane factories and sugarcane growers. These roads were undoubtedly advantageous to the business of the assessee as they facilitated the transport of sugarcane to the factory and the outflow of manufactured sugar from the factory to the market centres. There can be no doubt that the construction of these roads facilitated the business operations of the assessee and enabled the management and conduct of the assessees business to be carried on more efficiently and profitably. It is no doubt true that the advantage secured for the business of the assessee was of a long duration inasmuch as it would last so long as the roads continued to be in motorable condition, but it was not an advantage in the capital field, because no tangible or intangible asset was acquired by the assessee nor was there any addition to or expansion of the profit-making apparatus of the assessee. The amount of Rs. 50, 000 was contributed by the assessee for the purpose of facilitating the conduct of the business of the assessee and making it more efficient and profitable and it was clearly an expenditure on revenue accountThe facts of this case were very similar to the facts of the present case. This decision fully supports the view that the expenditure of the amount of Rs. 50, 000 incurred by the assessee was on revenue accountWe would make the same observation in regard to the decision in Travancore-Cochin Chemicals case1977 106 ITR 900 (SC), and say that that decision must be confined to the peculiar facts of that case, because Lakshmiji Sugar Mills case 1971 82 ITR 376(SC), admittedly bears a closer analogy to the present case than the Travancore-Cochin Chemicals case, and if at all we apply the method of arguing by analogy, the decision in Lakshmiji Sugar Mills case must be regarded as affording us greater guidance in the decision in the present case than the decision in Travancore-Cochin Chemicals case. Moreover, we find that the parenthetical clause in the test formulated by Lord Cave L C. in Athertons case 1925 10 TC 155(HL) was not brought to the attention of this court in Travancore-Cochin Chemicals case with the result that this court was persuaded to apply that test as if it were an absolute and universal test regardless of the question applicable in all cases irrespective of whether the advantage secured for the business was in the capital field or not. We would, therefore, prefer to follow the decision in Lakshmiji Sugar Mills case and hold on the analogy of that decision that the amount of Rs. 50, 000 contributed by the assessee represented expenditure on the revenue, accordingly, dismiss the appeal in so far as the expenditure of the sum of Rs. 22, 332 is concerned. But, so far as the expenditure of the sum of Rs. 50, 000 is concerned, we hold that it was in the nature of revenue expenditure laid out wholly and exclusively for the purpose of the assessees business and was, therefore, allowable as a deduction under s. 10(2)(xv) of the Act and allow the appeal to this limited extent. Since the assessee has partly won and partly lost, we think that the fair order of costs would be that each party should bear and pay its own costs throughout.